CH. 13 Income Producing Entities.

14:34:00
(information from BizOrg notes)

08/06/2011

THE SOLE PROPRIETORSHIP: Definition: Owned by one individual Formation: No filing Duration: sole proprietor determines Liability: sole proprietor has full and unlimited liability; Management: sole proprietor has full control; the owner is the biz you basically do what you want to do Taxation: Not a taxable entity; pass through taxation Biggest advantage: you are in total control Biggest Disadvantage: your business AND your personal assets are at risk all control and all the liability

GENERAL PARTNERSHIP Formation: no filing required (oral K Ok) Default business form sharing of profits is a presumption of partnership Can create a partnership without even knowing even if you say in the K that you are not creating a partnership, the court looks to the economic reality and may find a partnership No limitations on how many partners can have Individuals or entities can be partners Need at least two people Dont need a partnership agreement but its best if not one, then the UPA governs One man one vote; profits split evenly per the UPA Duration: upon dissolution for a number of possible reasons Liability: Partners have unlimited liability jointly and severally liable

Management: ea partner has equal voice unless otherwise specified Tax Issues: Not a taxable entity! Pass through taxation!

LIMITED PARTNERSHIP: Formation: Must file with the state (filing fee) UPA formation is @ the time of filing certificate of LP! Need one General Partner (who is fully liable for the debts and obligations of the partnership) and however many Limited Partners (who are only liable for their investment limited partners are passive investors!) The Risk for Limited Partners: If limited partner takes too much control in the biz, the limited partner can become a general partner A Limited partner is NOT liable for the obligations of the limited partnership UNLESS: He is also a general partner, OR In addition to his rights and powers as a limited partner, he participates in the control of the business. However, when he participates in the control of the business, he is liable only to persons who transact biz with the partnership reasonably believing based on the limited partners conduct that the limited partner is a general partner A limited partner who knowingly permits his name to be used in the LP name is liable to creditors who extend credit to the partnership without actual knowledge that the limited partner is not a general partner Management: General Partner controls the biz Taxation: Pass through taxation Variation LP with a Corporate General Partner

LIMITED LIABILITY PARTNERSHIP Formation: Need to file with state (filing fee) Taxation: Pass through taxation Liability: Each partner is liable for own acts and acts of those under his direction and control BUT NOT typically liable for the debts of the LLP Generally old partnership convert to LLPs and not LLC because it is simpler to do so LLP mainly used for law partnerships Note: no need for general partner like for LPs!

LIMITED LIABILITY COMPANIES Formation: Must file Articles of Organization with the Secretary of State (filing fee)

Need Operating Agreement preferably in writing; specifies how the organization will be managed Under MI law can have an LLC with only one member! not all states though; note: even when only one member only the assets of the LLC are at stake Separate legal entity Liability: limited liability for all participants whether or not they are active in the management of the biz Operation and management: very flexible! Can be member-managed (default) or manager-managed Taxation: check the box can be taxed however you would like

C CORPORATION: Formation: filing of Articles of Incorporation with the Secretary of state existence begins upon the filing! Bylaws the corporate governance doctrine; the law of the corporation; Shareholder Agreement K among the SHs (like OA) New legal entity! Can buy, sell, sue, etc Must follow statutory procedures; formal meetings etc Types: Publicly held shares on public market Closely held no public shares Duration: perpetual Can have a single person corporation Individual and entities can have shares in the corporation Liability: Shareholders are NOT personally liable for the debts of the corp only their capital investment is at risk Management board of directors who are elected by the SHs Three layers: o shareholders: owners who elect the board; o board of directors: run the corps affairs and select the officers; and o officers: act for the corp to implement the decisions of the directors

Taxation: double taxation! Corporation profits are taxed to the corporation AND taxed once more when they are distributed to the SHs as dividends o Zeroing-out describes the common income tax strategy in C-Corps of reducing taxable income to zero by paying out all earnings in the form of taxdeductible pmts to the SHs

S CORPORATION: Formation: Filing of Articles of Incorporation with the state Eligibility for S-Corp status requirements: Domestic corporation Must not be ineligible corp (i.e ins. Co.) No more than 100 SHs Must not have a SH who is not an individual Must not have more than one class of stock, etc Everything is the same as regular C-Corp except that if the above requirements are met, then there is pass-through taxation!! Takes care of the problem of double taxation

Check the Box Taxation: you can choose which way you would like your business to be taxed you check the box and let the IRS know An unincorporated entity (LLC, partnership, limited partnership) may elect the form of taxation can elect to be taxed as a partnership (pass through) or as a corporation (double taxation). HOWEVER, a corporation must be taxed as a C-corp (double taxation) UNLESS it meets the requirements of S-Corp!!!!! Class Note: o With pass through taxation, the members of an LLC (for example) are taxed EVEN IF the LLC does not pay out dividends Minimum distribution clause the organization agrees that it will distribute to the members the minimum amount needed to pay tax liabilities