Chapter 15 The Entrepreneur’s Options. What are the major forms of business organizations used by entrepreneurs in the U.S.? What are the advantages

Chapter 15The Entrepreneur’s

Options

Chapter 15The Entrepreneur’s

Options

What are the major forms of business organizations used by entrepreneurs in the U.S.?

What are the advantages and disadvantages associated with each form?

Why have LLC’s and LLP’s become popular?What is a joint venture? What are other special

business forms?What is a franchise and how is it created?

What are the major forms of business organizations used by entrepreneurs in the U.S.?

What are the advantages and disadvantages associated with each form?

Why have LLC’s and LLP’s become popular?What is a joint venture? What are other special

business forms?What is a franchise and how is it created?

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

Introduction Introduction

Entrepreneurs wishing to start a new business must be aware of advantages and disadvantages of various business entities for their endeavor. Consider:Ease of creation.Owners’ liability.Tax considerations.Need for Capital.

Entrepreneurs wishing to start a new business must be aware of advantages and disadvantages of various business entities for their endeavor. Consider:Ease of creation.Owners’ liability.Tax considerations.Need for Capital.

Advantages DisadvantagesOwner is in complete control & receives all profits

Owner is personally liable for all torts/contracts

Flexibility Lacks continuity after death

Ease of creation; maintenance Difficult to raise financing

Sole ProprietorshipsSole Proprietorships The owner is the business; anyone who does

business without creating a separate business organization has a sole proprietorship.

The owner is the business; anyone who does business without creating a separate business organization has a sole proprietorship.

PartnershipsPartnerships(General) Partnership is an association of two or more persons to carry on a business as co-owners for profit. (UPA).

Advantages DisadvantagesEasy to create and maintain Partners are personally

liable for all torts/contracts

Flexible, informal Dissolved upon death

Partners share profits and losses equally

Difficult to raise financing

Rights Among Partners Rights Among Partners In the absence of a partnership

agreement (oral or written) state statutes govern the rights among partners: Management: equal, each one vote, majority

wins; need unanimous consent for some actions.

Partnership Interest: equal profits, losses shared as profits shared.

In the absence of a partnership agreement (oral or written) state statutes govern the rights among partners: Management: equal, each one vote, majority

wins; need unanimous consent for some actions.

Partnership Interest: equal profits, losses shared as profits shared.

Duties and Liabilities of Partners


Fiduciary Duties: Partners are fiduciaries and general agents of one another and the partnership.

Authority of Partners: Partners have implied authority to conduct ordinary partnership business but need unanimous consent to sell assets or donate to charity.

Joint Liability for Contracts. If Partner is sued for Partnership debt, Partner has right to insist that other partners be sued with her.

Fiduciary Duties: Partners are fiduciaries and general agents of one another and the partnership.

Authority of Partners: Partners have implied authority to conduct ordinary partnership business but need unanimous consent to sell assets or donate to charity.

Joint Liability for Contracts. If Partner is sued for Partnership debt, Partner has right to insist that other partners be sued with her.

Joint and Several Liability for Torts. JSL means 3rd party can sue either one or all

partners. 3rd party may collect against personal assets of all partners.

Liability of Incoming Partner & Outgoing Partner. New admitted partner has no personal liability for existing partnership debts and obligations.

Joint and Several Liability for Torts. JSL means 3rd party can sue either one or all

partners. 3rd party may collect against personal assets of all partners.

Liability of Incoming Partner & Outgoing Partner. New admitted partner has no personal liability for existing partnership debts and obligations.



Limited Partnership Limited Partnership Agreement of two or more persons to

carry on a business for profit with at least one general partner and one limited partner.

Limits the liability of some of its owners (the limited partners) to their investment.

LP is a creature of state statute. Filing a certificate with the Secretary of State is required.

Agreement of two or more persons to carry on a business for profit with at least one general partner and one limited partner.



LP – Rights and Liabilities LP – Rights and Liabilities

The General partner assumes all management and personal liability.

Limited Partner contributes cash but has no management rights. Liability is limited to the amount of investment. A limited partner can forfeit this “veil” of immunity by taking part in the management of the LP.

Case Miller v. Dept of Revenue (1998).




LP -- Rights and LiabilitiesLP -- Rights and Liabilities

General partners are personally liable to 3rd parties for breach of contract and tort liability. However, a corporation (or an LLC) can be a general partner and have limited liability.

Limited partners have the right to inspect the LP’s books and be informed of the LP’s business.



CorporationsCorporations

Creature of statute.Separate legal “person.”Owned by shareholders with limited

liability up to the investment.Directors are elected by shareholders.Officers are hired by Directors.Double Taxed.

Creature of statute.Separate legal “person.”Owned by shareholders with limited

liability up to the investment.Directors are elected by shareholders.Officers are hired by Directors.Double Taxed.

Limited Liability Companies

Limited Liability Companies

Like corporations, LLC’s are creatures of state law. The owners are called “members” (not shareholders) and their ownership is called an “interest” (not shares).

LLC’s are formed by filing Articles of Organization with the Secretary of State.

Like corporations, LLC’s are creatures of state law. The owners are called “members” (not shareholders) and their ownership is called an “interest” (not shares).

LLC’s are formed by filing Articles of Organization with the Secretary of State.

LLC Advantages & DisadvantagesLLC Advantages & Disadvantages

Advantages DisadvantagesMember liability is limited to amount of investment.

State statutes are not uniform.

Can be treated as a “pass through” entity for tax purposes.

Not all states recognize LLC’s.

Profits can be distributed to members without the double taxation of a corporation. Members pay personal income tax on received dividends.

LLC FormationLLC Formation

Articles of Organization require:Name of Business.Principal Address.Name and Address of Registered Agent.Names of the Owners; andHow the LLC will be managed.

Business name must include LLC or Limited Liability Company.

Articles of Organization require:Name of Business.Principal Address.Name and Address of Registered Agent.Names of the Owners; andHow the LLC will be managed.

Business name must include LLC or Limited Liability Company.

LLC Operating Agreement

LLC Operating Agreement

Operating 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. Case: Hurwitz v. Padden (1996).

Operating 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. Case: Hurwitz v. Padden (1996).

Management of an LLCManagement of an LLCThere are two options for management,

generally set forth in the articles of organization:Member-Managed: all of the members participate in

management, like a partnership.Manager-Managed: members are elected to manage

the LLC. If the articles are silent, statutes provide

either that each member has one vote or votes are made based on percentage of ownership.

There are two options for management, generally set forth in the articles of organization:Member-Managed: all of the members participate in

management, like a partnership.Manager-Managed: members are elected to manage

the LLC. If the articles are silent, statutes provide

either that each member has one vote or votes are made based on percentage of ownership.

Limited Liability Partnerships

Limited Liability Partnerships

Creature of state statute, similar to an LLC, except that an LLP is designed for professionals who normally do business as a partnership (lawyers and accountants).

LLP allows partnership to limit personal liability of the partners but allows “pass through” tax advantages.

Creature of state statute, similar to an LLC, except that an LLP is designed for professionals who normally do business as a partnership (lawyers and accountants).

LLP allows partnership to limit personal liability of the partners but allows “pass through” tax advantages.

Liability in an LLPLiability in an LLP

Recall that partnership law makes all partners jointly and severally for another partner’s tort, including personal assets.

The LLP allows professionals to avoid personal liability for the malpractice of other partners.

Supervising Partner is also liable for acts of subordinate.

Recall that partnership law makes all partners jointly and severally for another partner’s tort, including personal assets.

The LLP allows professionals to avoid personal liability for the malpractice of other partners.

Supervising Partner is also liable for acts of subordinate.

Family Limited Liability Partnerships

Family Limited Liability Partnerships

FLLP is a limited liability partnership in which the majority of the partners are related to each other.

Used frequently for agriculture.

FLLP is a limited liability partnership in which the majority of the partners are related to each other.

Used frequently for agriculture.

LP – Formation LP – Formation







LP ManagementLP Management

Only General Partners can manage but they have a fiduciary obligation to LP’s.

LP’s enjoy limited liability as long as they do not engage in management functions.

An LP will be liable to a 3rd party if the 3rd party believes, based on conduct, that the LP is a general partner.

Only General Partners can manage but they have a fiduciary obligation to LP’s.

LP’s enjoy limited liability as long as they do not engage in management functions.

An LP will be liable to a 3rd party if the 3rd party believes, based on conduct, that the LP is a general partner.

LP – Rights and Liabilities LP – Rights and Liabilities













On dissolution, the limited partner is entitled to return of capital contributions.

LP interests are considered securities and regulated by both federal and state securities laws.

Limited partners’ liability is limited to the capital investment.

On dissolution, the limited partner is entitled to return of capital contributions.

LP interests are considered securities and regulated by both federal and state securities laws.

Limited partners’ liability is limited to the capital investment.

Dissolution of the LPDissolution of the LP

Dissolved in much the same way as a general partnership (Chapter 33).

Retirement, withdrawal, death bankruptcy or mental incompetence of a general partner will trigger dissolution unless the remaining GP’s consent to continue.

Creditors are paid first then partners.

Dissolved in much the same way as a general partnership (Chapter 33).

Retirement, withdrawal, death bankruptcy or mental incompetence of a general partner will trigger dissolution unless the remaining GP’s consent to continue.

Creditors are paid first then partners.

Limited Liability Limited Partnerships

Limited Liability Limited Partnerships

Limited Liability Limited Partnership is a type of limited partnership.

Difference between LP and LLLP is that the general partner has limited liability, like a limited partner, up to the amount of investment.

Most states do not allow for LLLP’s.

Limited Liability Limited Partnership is a type of limited partnership.

Difference between LP and LLLP is that the general partner has limited liability, like a limited partner, up to the amount of investment.

Most states do not allow for LLLP’s.

Special Business FormsSpecial Business Forms

Joint Venture: two or more entities combine efforts or property for a single transaction or project.

Unless agreed otherwise, JV’s share profits and losses equally.

Common in international transactions when U.S. companies wish to expand overseas.

Joint Venture: two or more entities combine efforts or property for a single transaction or project.

Unless agreed otherwise, JV’s share profits and losses equally.

Common in international transactions when U.S. companies wish to expand overseas.

JV CharacteristicsJV CharacteristicsResembles a partnership and is taxed like a

partnership. However, a JV is limited in time and scope, whereas a partnership is an ongoing business. Other differences:JV members has less implied and apparent

authority than partners.Death of JV member does not terminate JV.

JV members can specify duration. If not, then JV terminates when purpose is accomplished.

Resembles a partnership and is taxed like a partnership. However, a JV is limited in time and scope, whereas a partnership is an ongoing business. Other differences:JV members has less implied and apparent

authority than partners.Death of JV member does not terminate JV.

JV members can specify duration. If not, then JV terminates when purpose is accomplished.

Other EntitiesOther Entities

Syndicate (Investment Group): group of individuals getting together to finance a particular project.

Joint Stock Company is a hybrid of partnership and corporation: (1) ownership represented by shares of stock; (2)managed by directors and officers of the company; and (3) can have a perpetual existence.

Syndicate (Investment Group): group of individuals getting together to finance a particular project.

Joint Stock Company is a hybrid of partnership and corporation: (1) ownership represented by shares of stock; (2)managed by directors and officers of the company; and (3) can have a perpetual existence.

Other EntitiesOther Entities

Business Trust is created by a written agreement setting forth the interests of the beneficiaries and obligations and powers of trustees. Legal ownership and management of property remains with trustees and profits distributed to the beneficiaries.

Cooperative is an association organized to provide a not-for-profit service to members.

Business Trust is created by a written agreement setting forth the interests of the beneficiaries and obligations and powers of trustees. Legal ownership and management of property remains with trustees and profits distributed to the beneficiaries.

Cooperative is an association organized to provide a not-for-profit service to members.

Private FranchisesPrivate Franchises

Franchisor (Owner of trademark, trade name or copyright) licenses Franchisee to use the trade mark, trade name or copyright in the sale of goods or services.

Types:Distributorship.Chain Style Business Operation.Manufacturing or Processing Arrangement.

Franchisor (Owner of trademark, trade name or copyright) licenses Franchisee to use the trade mark, trade name or copyright in the sale of goods or services.

Types:Distributorship.Chain Style Business Operation.Manufacturing or Processing Arrangement.

Private FranchisesPrivate FranchisesLaws Governing Franchising

Governed by commercial sales and contract law. If franchise is primarily for the sale of goods, UCC Article 2 governs.

State and federal laws regulate franchising to protect franchisee.

The Franchise ContractThe contract states parties’ rights and duties and

can include an exclusive “territory” to market goods/services.

Laws Governing FranchisingGoverned by commercial sales and contract law.

If franchise is primarily for the sale of goods, UCC Article 2 governs.

State and federal laws regulate franchising to protect franchisee.

The Franchise ContractThe contract states parties’ rights and duties and

can include an exclusive “territory” to market goods/services.

Private FranchisesPrivate Franchises

Franchise ContractFranchise contract can specify Franchisee’s

type of business entity including capital structure, sales quotas and record keeping.

Quality Control is a legitimate issue for Franchisor because of good will, reputation and trademark value.

Courts will not question Franchisor’s strict supervision but Franchisor may be liable for torts of agents.

Franchise ContractFranchise contract can specify Franchisee’s

type of business entity including capital structure, sales quotas and record keeping.

Quality Control is a legitimate issue for Franchisor because of good will, reputation and trademark value.

Courts will not question Franchisor’s strict supervision but Franchisor may be liable for torts of agents.

Documents

Chapter 15 The Entrepreneur’s Options. What are the major forms of business organizations used by entrepreneurs in the U.S.? What are the advantages