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4 Considerations for a Business

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Ability to raise capital, how easy it is to form, tax considerations, and liability

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Sole Proprietorship

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One owner, owner is the business.

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Sole Proprietorship Advantages

answer

Simplest form of business, very easy to form. 2/3 of all American businesses are this, no strict liability. Complete autonomy (all mine, all profits belong to owner), easy and inexpensive to form and operate, single tax business, and it's a pass-through entity

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Sole Proprietorship Disadvantages

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Limited life (If owner dies, business dies), limited ability to raise capital, unlimited personal liability (exempts property)

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Pass-Through Entity

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All profits pass through the business to owner, then the owner has to pay taxes on profits

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General Partnership

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Two or more persons by agreement, expressed or implied, carrying on business for a profit

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Essential Elements of a Partnership

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A sharing of profits or losses, a joint ownership of the business, and an equal right to be involved in management of the business

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Source of Law in Partnership Law

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Common Law

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Agency Law

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Concerned with any "principle-agent" relationship in which one person has legal authority to act for another

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Fiduciary

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An individual whom another has places the utmost trust and confidence to manage and protect property to money. The relationship wherein one person has an obligation to act for another's benefit. Putting the interest of the business ahead of personal gain

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Written Partnership Agreement Issues

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No authority unless all partners agree, distribute partnership equally, how is control distributed, limit of authority, what the initial capital contribution is, profits and losses, and how the business is divided and distributed

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Advantages of a Partnership

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Extended life, increased ability to raise capital, and taxation

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Partnership Taxation

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General partnerships are taxed through the pass-through system (advantage)

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Partnership Liability

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General partnerships face unlimited personal liability (disadvantage)

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Partnership Rights of Partners

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Proportionate interest in the property, equal management, compensation for profits---not for services, full accounting of business transactions, tenancy in partnership: own an undivided percentage of the property, creditors of an individual partner cannot seize partnership assets to answer for he debts of an individual partner, each partner is a fiduciary

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Fiduciary (duty of care/trust and the duty of loyalty)

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Putting the interest of the business ahead of personal gain

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Contract Action

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Basic Joint liability

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Tort Liability

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Joint and several liability

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Limited Liability Partnership (LLP)

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A hybrid form of business designed mostly for professionals who normally do business as partners in a partnership. Provided by STATE law. including LLP in the name of the business is important to let the public know

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Joint and Several Liability

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third party has the option to sue all of the partners together (jointly) or one or more of the partners separately (severally)

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Dissociation

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occurs when a partner ceases to be associated in the carrying on of the partnership business

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Joint Liability

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third party must sue all partners as a group, but each partner can be held liable for the full amount

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LLP Taxation

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Allows partnership to continue as a pass-through entity for tax purposes but limits the personal liability of the partners

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LLP Formation

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Must be formed and operated in compliance with state statutes. The appropriate form must be filed with a central state agency, usually the secretary of state's office. Business name must include LLP and must file an annual state report

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LLP Liability

answer

Allows professionals, such as attorneys, to avoid personal liability for the malpractice of other partners

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Limited Partnership (LP)

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Consists of at least one general partner and one or more limited partners. General partner assumes full management authority and personal liability and at least one limited partner assumes no management authority and limited liability

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LP and LLP Document Requirements

answer

An formal filing must be filed at the secretary of state's office. Name of business, partners, mailing & physical address of place of business and registered agent for service of process are required

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Registered Agent for Service of Process

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Person or company designated to receive legal correspondence on behalf of the business entity within the state which the agents address is located. Can be a company officer to a third party

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Limited Liability Company (LLC)

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A hybrid that combines the limited liability aspect of a corporation and the tax advantages of a partnership. Quickly replaces general partnerships, created by state statues, generally has two members, responsible for its own obligations, formed through articles of organizations, name must include LLC for public notice

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Formation of LLC

answer

Articles of Organization must be filed through the central state agency

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Advantages of LLC

answer

limited liability, taxation is flexible (taxed as a partnership), Member-management & Manager-management

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Member- Management

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every member participates in management and decisions are made by majority vote

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Manager- Management

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chosen from 3 types- all members, no members, or a blend of the two participate in management and make decisions

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Disadvantages of LLC

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NONE!

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Fiduciary Responsibilities

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If member-management then the responsibility is to the LLC, if manager-management then the responsibility is to the LLC & fellow members

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Operating Agreement

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Should be in writing and normally includes; how management's decided, how to divide profits & losses, how membership is transferred, if disassociation is a cause to terminate the LLC or not, will there be a formal annual meeting or not, if voting rights are distributed equally or divisional, and a statement of capital contribution

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Requirements for All business forms

answer

Business name registration, occupational licensing, state tax registration, health and environmental permits, zoning and building codes, and import/export regulations

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Corporation

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an artificial being, a legal entity created and recognized by state law. This business entity can have one or more owners (called shareholders), and it operates under a name distinct from the names of its owners. The owners may be individuals, or natural persons (as opposed to the artificial legal person of the corporation), or other businesses.

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Nature and classifications of corps.

answer

ownership is represented through shareholders who purchase stock (equity ownership), shareholders own an undivided percentage of the whole, owners can be persons or artificial beings, corps are entitled to constitutional protection w/ exception to the 5th amendment (right to remain silent)

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Corporate Personnel

answer

shareholders elect board of directors, strategic planners set long range goals, board of directors hire and choose employers, officers are responsible for day-to-day operations

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Corporate advantages

answer

limited liability, & has perpetual life, can exist as long as the corp is profitable

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Corporate Earnings

answer

retained earning and corporate dividends and profits are distributed among shareholders. Earnings are subject to double taxation.

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Corporate Taxation

answer

(Primary disadvantage) profits are subject to income tax by various levels of government. Failure to pay taxes can lead to severe consequences. The state can suspend the entity's corporate status until the taxes are paid or even dissolve the corporation for failing to pay taxes.

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Corporate Responsibilities

answer

contract liability, tort liability, and criminal liability

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Classifications of Corps.

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Location, purpose, and ownership

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Location of corps.

answer

Corps can be referred to as a domestic, foreign, or alien corp.

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Domestic Corp.

answer

Corp in its home state (the state in which it incorporates).

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Foreign Corp.

answer

Corp that does business outside of its home state but within the county

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Alien Corp.

answer

Corp that does business internationally

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Purpose of corps.

answer

can be public or private.

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Public purpose of corp.

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created by government for government use; ex: post office, FDIC, Amtrack

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Private purpose of corp.

answer

created for profit

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Non-profit corps

answer

Corps that are charitable (religious, medical, etc.)

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Close Corporation

answer

very small, single owner, usually family businesses, a lot like LLC, single taxation, pass-through entity, shield of protection, must act like a corp, and co-mingle funds

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Sub Chapter "S" Corps

answer

can have up to 100 members, single taxation & limited liability, formed by filing articles of incorporation

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Articles of incorporation

answer

primary document needed to incorporate a business. Article includes the name of corp, number of authorized issued shares, name and address of registered agent and office, name and office of each incorporator

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Formation of Incorporation

answer

establish the purpose, duration, and number of shares intended to issue. Organize a meeting. Elect a board of directors. Adopt bylaws- (internal rules of management adopted by the corporation)

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Steps to Adopt Bylaws

answer

states the date of the annual meeting, set fiscal year, choose board of directors that match qualifications, set the terms for the board of directors (usually 3 years & every year replace 1/3 of the board), number of shares issued and the initial offering, and QUAREM- (minimum number required to transact business)

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De Jure Corp (of the law)

answer

(Rightful & Lawful) If a corporation has substantially complied with all conditions precedent to incorporation. If there is a minor defect, like a wrongly printed date, the court may overlook the mistake and declare De Jure on that corp

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De Facto Corp (of the facts)

answer

MS recognizes these but most states do not. Courts will treat a corporation as a legal corporation despite the defect in its formation if it meets these three requirements; 1. A state statute exists under which the corporation can be validly incorporated. 2. The parties have made a good faith attempt to comply with the statute. 3. The parties have already undertaken to do business as a corporation.

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Corporate Powers- Expressed

answer

U.S. Constitution, State constitutions, state statues, articles of incorporation, bylaws, and resolution of the board of directors

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Corporate Powers- Implied

answer

perform all acts reasonably necessary to accomplish its corporate purposes. For this reason, a corporation has the implied power to borrow funds within certain limits, lend funds, and extend credit to those with whom it has a legal or contractual relationship.

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Debt Financing

answer

(ordinary debt), borrowed money

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Corporate bonds

answer

represented long term debt (20-30 years). Individual investors purchase these bonds, twice a year they get an interest payment.

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Secured Debt

answer

Debt that is represented by personal property (NOT REAL PROPERTY)

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Collateral

answer

the personal property of a corporation that represents secured debt

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Indenture Bonds

answer

shorter term life (5-10 years). represents unsecured debt, there is no asset in place of bond

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Stocks

answer

Represent ownership, no fixed payments, dividends not guaranteed, stockholders in management help elect board of directors, corps must issue stocks, shareholders participate in property distribution if corp dissolves

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Bonds

answer

represent debt, must always be paid, no voice in corp management, discretionary and don't have to be issued, has claims on property if corp dissolves, has higher preference over shareholders

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Common Stock

answer

(voting stock) true owners who participate in management, corps MUST have common stock.

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Preferred Stock

answer

(non-voting stock) receive a preference in dividends and property

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Valuation of Stock

answer

market value, book value, value of the corp-assets & liabilities

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Directors

answer

ultimate authority in corp. strategic planners, hire exec and review finance reports. must be educated, experienced, and a community leader

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Removal of directors/ board

answer

For cause (must be a reason), removed by the shareholders as recommended by the board. EX: reasons; not coming to meetings, incompetence, bankruptcy, disability.

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Duty of Care

answer

act in good faith, exercise the appropriate care for the situation, and doing what is in the best interest of the corp. (Duty to act on informed decisions, duty to exercise reasonable supervision, voice your dissent (if you disagree))

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Business Judgement Rule

answer

1. took reasonable steps to become informed 2. has a rational basis for decision. 3. Did not have a conflict of interest between personal interest and the corps interest

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Duty of Loyalty

answer

Faithfulness to one's obligations and duties. Fiduciary responsibilities

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Avoiding conflicts of interest

answer

anything that interferes with the putting the corporation first. Must inform the director of the conflict and not participate in the decision regarding said conflict

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Director Liabilities

answer

contract liability, tort liability, and personal liability if a wrong is committed

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Officers

answer

take care of day to day operations, hire and fire employees

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Shareholders

answer

Corps owners. Participate in annual meetings, approve strategic changes, amend bylaws and articles of incorporation, participate in mergers of acquisitions of other companies and dissolving of corporations

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Shareholders rights

answer

hold a stock certificate to show ownership, sell/give away stock (restrictions must be written on certificate), receive dividends provided by board, inspect all financial records, right to preemptive

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The right to preemptive

answer

current shareholders have the right to purchase newly issued stock

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Quorum

answer

when shareholders holding more than 50 percent of the outstanding shares are present, but state laws often permit the articles of incorporation to set higher or lower quorum requirements

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