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BEC - Chapter 1

BEC - Chapter 1

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Published by: jingy1107 on May 28, 2010
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Becker 2010
BEC Page 1
Chapter 1
Sole Proprietorship:
 
The sole proprietor is not considered an entity separate prom the business
 
The sole proprietor is personally liable for all obligations of the business
 
A sole proprietorship cannot exist beyond the life of the sole proprietor
 
Profits & losses from the business flow through to the sole proprietor
 
A sole proprietor is free to transfer his interest at will
 
File for bankruptcy personally under the Bankruptcy Code
Joint Venture:
 
Is an association of persons or entities with the intent of engaging in a single business venture ora related series of transactions or projects for profit
 
Treated as partnerships in most important legal aspects
General Partnership:
 
At least two persons
 
Agree to carry on as co-owners
 
A business for profit1.
 
Advantages:a.
 
Profits & losses of a partnership flow through to the parnersb.
 
Not recognized for federal income tax purposes as separate taxable entities2.
 
Disadvantages:a.
 
Partners are personally liable for obligations of the partnershipb.
 
Limited life of entityc.
 
A partner cannot transfer his interest without the unanimous consent of the other partners3.
 
Nature of a general partnershipa.
 
All partners are general partnersb.
 
All partners share in management4.
 
Formation of a general partnershipa.
 
An individual, a corporation or a partnership can be a partner; a minor can be a partner, butthe partnership would be voidable at the option of the minorb.
 
A general partnership agreement need not be in writing.
Exception:
if the partners want toenforce an agreement to remain partners for
longer than one year 
, a writing is required.5.
 
Operation of a general partnershipa.
 
All partners have
equal rights
to manage the partnership business regardless of thecontribution differences unless specific agreement made otherwiseb.
 
Examples of areas requiring unanimous consent of all partners include:i.
 
Admitting new partnersii.
 
Confessing a judgment (admitting liability in a lawsuit) or submitting a claim toarbitrationiii.
 
Making a fundamental change in the partnership business (e.g., the sale of apart
nership’s goodwill)
 iv.
 
Changing the partnership agreementv.
 
Assigning partnership property to othersc.
 
Agency law governs: a principal can be bound by the acts of its agent acted with actual orapparent authority
 
Becker 2010
BEC Page 2
i.
 
Actual authority includes all authority that a principal expressly gives to an agentplys any authority that can reasonably be implied from the express grantii.
 
Apparent authority as a result of being named a partner. It cannot be limited byresolutions or instructions of which the third party is unawared.
 
A p
artnership may expand or curtail a partner’s authority to enter into transactions on
behalf of the partnership by filing a statement of authority with the secretary of state
*The filing of a limitation does not give third parties constructive knowledge of the limitation
6.
 
Terminationa.
 
Dissociation: does not necessarily cause a dissolution and winding up of the business of thepartnershipi.
 
Wrongful partner is liable for damages cause by the dissociationii.
 
Actual authority ends, but apparent authority ends until third parties are givennoticeiii.
 
Dissociated partner’s power to bind partnership continues for 2 year unless notice
has been giveniv.
 
Dissociated partner is liable for debts incurred prior to dissociation unless releasedby the creditors; is not liable for debts incurred after dissociation if notice filed withstate. *
 An incoming partner is not personally liable for debts incurred by the partnership before he became a partner, but any financial contribution the incoming partner made to partnership property may be used to satisfy old debts
 b.
 
Dissolution: business is wound up and then the entity is terminatedOrder of distribution of assets:1.
 
Liquidated assets2.
 
Pay creditors/split losses3.
 
Return of capital/split losses4.
 
Divide profits7.
 
All partners have
equal rights
to share in the profits of the partnership unless an agreementprovides; the partners share losses in the same manner as they share profits8.
 
Rights of partners:a.
 
Rights in partnership property: the partner has
no right to possess or transfer 
(through sale,will,
etc.) except for partnership purposes. The property is not subject to personal creditors’claims or alimony. It is subject to a surviving partner’s survivorship interest
 b.
 
Rights in partnership interest: a transfer of partnership interest does not make the assigneea partner (that can be done only with the consent of all of the partners). The transferee has
no power to manage the partnership, inspect the partnership’s
books and records, vote, etc.
the assignee’s only
right is to get whatever distribution the assignor would have gotten. *
thesame rule applies to a creditor with a charging order and an heir who receives a deceased 
 partner’s interest 
 9.
 
Duties and legal obligations of partners:a.
 
Each partner personally liable for all partnership obligations within the scope of the business
and even if you didn’t personally authorize it.
 b.
 
The partners’ liability is
 joint and several (individual)
, whether the obligations arise incontract o tort. Each partner is personally and individually liable for the entire amount of allpartnership obligations.
Limited Liability Partnership (LLP):
 
The partners are not personally liable for acts of fellow partners, employees or agents; notpersonally liable for debts and contractual obligations
 
Becker 2010
BEC Page 3
 
The partners are liable for their negligence and negligence of those under their direct control
 
Must file with the state
 
No double taxation
Limited Partnership (LP):
 
At least one GP who has personal liability for all partnership debts and manages and at least oneLP whose personal liability for partnership debts generally is limited to their capital
contributions and who doesn’t manage
 
 
Limited life1.
 
General partners:a.
 
Personally liable for all partnership debtsb.
 
May also be a limited partner at the same timec.
 
May be a secured or unsecured creditor of the partnership2.
 
Limited partners:a.
 
Liability is limited to his investment and unpaid caital contributionsb.
 
Names cannot be identified with the businessc.
 
Must not participate in management, or the lose their limited liability status (
in someinstances, such as approving of new general or limited partners, the limited partners may vote
)d.
 
Is a LP is also a GP, the partner does not have the limited liability of a LPe.
 
A new partner can be added only upon the consent of all partnersf.
 
Does not owe a fiduciary duty to the limited partnership or to the GPs3.
 
Formation of a LPFiling with the state is required4.
 
Operation of a LP
 
GP runs day-to-day affairs and has the same right to manage the partnership as partners in aGP
 
LP does not manage and is not an agent5.
 
Termination of a LPa.
 
A LP may be dissolved by:i.
 
The occurrence of the time or event stated in the partnership agreementii.
 
Written consent of all partnersiii.
 
Withdrawal or death of a GPiv.
 
Judicial decreeb.
 
Death of a LP doesn’t cause dissolution
 c.
 
Order of distribution of assets:i.
 
Creditors (secured and preferred)ii.
 
Former partnersiii.
 
Partnersd.
 
If there is a loss, GPs are personally liable for all partnership debts6.
 
Profits and losses
are allocated based on GP and LP’s capital contributions unless agreement
provides
Limited Liability Company (LLC):
 
Not personally liable for the obligations of the company, like corporations
 
Profits and losses from an LLC flow through the company to its members unless the memberschoose to have the LLC taxed like a corporation

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