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Basic Business Organizations
Class 5
Starting a Business
The first question:– What form should the business take?
• Sole proprietorship• Partnership• Corporation• Limited liability company
Choosing the FormConsider
– Formation issues • Filing requirements? Name restrictions?
– Liability protection• Protection from personal liability?
– Management structure• Centralized control? Full participation in
management?
– Taxation considerations– Exit strategies/transferability of interests
Sole ProprietorshipThe most common form of business
organization.– One (sole) owner (or – in Wash. – a married
couple)– Business does not have to be registered with the
secretary of state (although it may have to be licensed)
– Profits and losses are the personal profits and losses of the owner and are taxed as such
– Personal assets of owner are available to satisfy debts of the business
AdvantagesOwner is in complete control & receives all
profitsFlexibilityEase of creation; maintenance
DisadvantagesOwner is personally liable for all
torts/contractsLacks continuity after deathDifficult to raise financing
An ExampleChild care provider
– Wants to work out of her house – How does she form this business? – What legal process is required?
http://www.access.wa.gov/business/index.aspx
PartnershipThere are three kinds of partnership
– General Partnership– Limited Partnership– Limited Liability Partnership
Uniform ActWashington has adopted the Revised
Uniform Partnership ActThe statute governs to
– Determine whether a partnership exists– Fill in the missing terms of a partnership
agreement
PartnershipAssociation of 2 or more persons to carry
on as co-owners of a business for profit.– More than one common owner– Terms of the partnership are governed by
contract– Profits and debts are shared by the partners
under the terms of the partnership agreement– The partners share in the management of the
business
AdvantagesEasy to create and maintainFlexible, informalPartners share profits and losses equally
DisadvantagesPartners are personally liable for all
torts/contractsDissolved upon death of any one partnerDifficult to raise financing
Creation of PartnershipA partnership is usually created by contract
– Oral (but remember the Statute of Frauds)– Written
However, a partnership may be created by “operation of law”
General Partnership In a general partnership the partners share
the profits, rights and liabilities of the business equally
Partnership RightsEqual management rightsEqual (or as otherwise agreed) sharing in
profitsEqual right to inspect the partnership booksRight to an accountingEqual (or as otherwise agreed) property
rights
Partnership ResponsibilitiesPartners have a fiduciary duty to the
partnership and each other.– Are liable to the partnership for intentional
misconduct or gross negligence– Cannot compete with the partnership– May not take an advantage from the partnership
without consent of the partners– In case of conflict of interest, partnership profits
must be given to the partnership
Joint LiabilityBecause a general partnership is considered
a single business entity, the partners are all liable for the acts of any partner.– This includes debt– It includes negligence
Personal property of each partner may be used to satisfy the debts of the partnership
Termination
Dissolution by Acts of the Partners– Withdrawal of any partner from the partnership– Agreement of the partners
Dissolution by Operation of Law– Death of a partner
Dissolution by Judicial Decree
Notice of DissolutionEach partner must have notice (constructive
or actual) of the intent to dissolve or to with draw.
To avoid liability for obligations incurred after dissolution, all affected third persons must have notice (actual, in the case of a creditor).
Winding UpAfter dissolution and notice, partners
complete transactions begun and not finished (but they can create no new obligations).
Partnership assets are collected, debts are paid, the values of partners’ interests in the partnership are accounted for, and profits and losses distributed.
An ExampleChild care providers
– Two friends decide to rent a duplex and make one of the duplexes a child care center
– What steps do they need to take?
Limited Partnership In a limited partnership, at least one of the
partners does not share in the right to manage the business
The limited partner invests money, but has no decision-making authority
The liability of the limited partner is limited to his or her investment in the business
Limited Liability Partnership
An LLP is a kind of general partnership that is governed by statute.– The difference between general and limited
liability partnerships is that in an LLP the partners are not liable for the debts of the partnership.
– Clients or customers of the LLP must be informed of the limited liability.
Limited Liability Partnership
Primary difference between a general partnership and an LLP, in terms of formation, is that LLPs require the filing of a registration; and payment of the filing fee.
The LLP provides limited liability for partners, whether arising in tort or contract or otherwise. They are liable for their own malpractice.
LLPsLLP is designed for professionals who
normally do business as a partnership (e.g., lawyers and accountants).
LLP allows partnership to limit personal liability of the partners but allows “pass through” tax advantages.
CorporationsA business entity formed by shareholdersThe corporation is a “person” for the
purpose of conducting a business and can– Own property– Enter into contracts– Sue and be sued
AdvantagesThe liability of shareholders (the owners) of
a corporation is limited to the individual’s investment
The business has a perpetual existence
DisadvantagesTakes a lot of attention at the formation
stageRequires ongoing efforts – reporting
requirements, annual meetings
Limited Liability Co.A form of business ownership that permits
small business owners to limit their liability to the amount of their investments– These are governed by statute
• RCW 25.15
LLC AgreementOperating agreement is analogous to
corporation’s bylaws.Operating agreements may be oral and
contain provisions relating to management, dividends, meetings, transfer of membership interests, and other significant issues.
Generally, if the operating agreement is silent, courts will apply partnership principles.
LLCs - HistoryLLCs were created by statute in
Washington in 1994. They may carry on any activity – other than
banking and insurance.
AdvantagesMember liability is limited to amount of
investment. Can be treated as a “pass through” entity for
tax purposes (like partnership).Profits can be distributed to members
without the double taxation of a corporation. Members pay personal income tax on received dividends.