1. The basic business forms.
a. Sole Proprietor: is a business owned and operated by a single person. The sole proprietor has the right to manage the business, unlike the owners of a corporation who must act through intermediaries. Avoids double taxation. The owner is entitled to all profits and, likewise, is responsible for all the debts. The sole proprietorship is most useful to a person starting out who will be financing the business personally or be using limited personal assets as collateral.
b. Partnership: composed of two or more person. A person may include a corporation. Each general partner has unlimited liability for all the obligations of the general partnership and is entitled to participate in management of its affairs. No filing necessary for this business form to exist. This is the default form a business takes. A general partner avoids double taxation associated with the corporate format.
c. Limited Partnership (Uniform Partnership Ac):
1. Exclusively a creature of statute, in absence of statute, they will be general partners regardless of their private understanding. Thus, no common law of limited partnership, as there is for general partnership.
2. It must have at least one general partner and at least one limited partner who does not have a personal liability for the obligations of the partnership.
3. Limited partner contributes capital and shares in profits but cannot take part in running the business. Must remain passive investors and cannot lose more than she invested.
ii. Limited partnership can fail:
1. Limited partner is not liable for the obligations of a limited partnership unless he is also a general partner or, in addition to the exercise of his rights and powers a limited partner, he participates in the control of the business. However, if the limited partner participates in the control of the business, he is liable only to person who transact business with the limited partnership reasonably believing, based upon the limited partner’s conduct, that the limited partner is a general partner.
2. A limited partner who knowingly permits his name to be used in the name of the limited partnership is liable to creditors who extend to the limited partnership without actual knowledge that limited partner is not a general partner.
d. Limited Liability Partnership: it is like general partnership except that the statute provides that partners have no personal liability for firm obligation that exceeds the assets of the general partnership. Partners in a LLP, however, have a
over the basic decisions made by B. Profits divided equally after B paid a salary. They shake hands on the deal w/o consulting a lawyer.
i. Did they create a limited partnership? No b/c AB did not file a document w/a state official (in CA, the Sec.of State) including the name of the Limited Partners, list of general partners, if you don’t file it, you don’t have an LP.
ii. LLC? No, b/c AB didn’t file for a certificate of LLC w/Sec of State. Includes company name, purpose of company, agent for service of process
iii. LLP? NO. they didn’t file necessary documents
iv. Corporation? NO, didn’t file articles of incorporation
v. GENERAL Partnership-yes, it is what they have (by default)
2. Advantage of incorporation over partnership or sole proprietorship
a. Limited Liability for Shareholders of the corporation:
General partners are personally liable for tort judgments against employees and for business debts. Corporations’ assets are always subject to liability, but shareholders are not personally liable.