This document discusses different forms of business including partnerships, corporations, limited liability companies, limited partnerships, and limited liability limited partnerships. It covers the key aspects of forming, operating, and dissolving each type of business. Specifically, it explains that a partnership is formed by two or more people carrying on a business for profit as co-owners. It also notes that limited partnerships have both general partners who manage the business and have unlimited liability, as well as limited partners who contribute capital but have no management role and limited liability. The document provides an overview of the key characteristics and considerations for each major form of business.
2. INTRODUCTION TO
FORMS OF BUSINESS
AND FORMATION OF
PARTNERSHIPS
P
A E
T R
H
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“It sounds boring, but anything is easy to start –
starting a novel, starting a business…it’s
keeping the thing going that is difficult.”
Prue Leith, author and executive, quoted in The Adventure
Capitalists (Grout and Curry, 1998)
3. Learning Objectives
• Choosing a form of business
• Creation of partnership
• Purported partners
• Partnership capital and property
• Partnership interests
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4. • Choosing a form of business is
important because the business
owner’s liability and control of the
business vary greatly among the
many forms of business
Overview
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What you choose depends on where you
want to go
5. • Sole proprietorship
• Partnership
–General, limited, limited liability, or
limited liability limited partnership
• Corporation
–Regular “C”, Subchapter “S”, nonprofit,
professional
• Limited liability company
–Including professional form
Basic Forms
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6. • A sole proprietorship has only one
owner and is an extension of its
owner
• It is not a legal entity and cannot sue
or be sued, so creditors/claimants
sue the owner
• Advantages: no formalities, taxes
flow to owner, owner takes all profit
and control
Sole Proprietorship
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7. • A partnership has two or more
owners or partners and includes
several forms: general, limited (LP),
limited liability (LLP), limited liability
limited (LLLP), or professional
• Though a legal entity, a partnership is
not a federal tax-paying entity, thus
all income or loss must be reported
on the individual partner’s federal
Partnership
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8. • Advantages: relatively easy to
create, has a legal entity but
individual taxation, partners control
the business, partners take all gain,
flexible structure
• Disadvantages: partners bear all risk
of loss jointly and severally, different
levels of liability to partners
depending on sub-form
Partnership
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9. • A corporation is owned by
shareholders who elect a board of
directors to manage the business,
thus ownership and management of
a corporation may be separate
• Shareholders have limited liability for
the obligations of the corporation
• The corporation is a legal and tax-
paying entity for federal income tax
Corporation
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10. • Advantages: shareholders enjoy
limited liability for corporate
obligations, perpetual existence,
ability to raise large amounts of
capital
• Disadvantages: greater formality
required for formation and operation,
double-taxation, complexity of
structure
Corporation
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11. • A limited liability company (LLC)
combines the nontax advantages of
corporations with favorable tax
treatment of partnerships
• An LLC is owned by members, who
may manage themselves or retain a
manager to run the business
• Members have limited liability for the
obligations of the LLC
Limited Liability Company
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12. • Many nations share
similar forms of
business, including
partnership and
corporation, though
details vary widely
Business Forms Worldwide
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13. • Every state has enacted partnership
laws
• The Revised Uniform Partnership Act
(RUPA) of 1994, with the 1997
amendments, is a model partnership
statute
The General Partnership
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14. • RUPA defines partnership as an
“association of two or more persons
to carry on as co-owners a business
for profit.”
–Partners share profit and loss
• A partnership is a voluntary and
consensual relationship and may
exist by law even if the parties
entered it inadvertently, without
Partnership Creation
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15. • Several musicians
agree to form a band
and share profits
• Two students stand in
line for hours to buy
10 concert tickets.
They sell 8 tickets for
a $5 fee per ticket
and splitting the
Partnership Creation -- Examples
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16. • Unlike an ordinary partnership,
creating a limited liability partnership
(LLP) must comply with a state’s
limited liability partnership statute
• Formation of an LLP requires filing a
form with the secretary of state,
paying an annual fee, and using
proper terminology
– Registered Limited Liability Partnership,
Partnership Creation – The LLP
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17. • If a third person deals with two or
more people who seem to be
partners and is harmed, the third
person may sue to recover damages
from both of the apparent partners
• RUPA Section 308(e): “persons who
are not partners as to each other are
not liable as partners to other
persons.”
Non-Partners Not Liable
to Third Parties
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18. • However, under the doctrine of
purported partners, if the third party
proves that one apparent partner
misled him to believe that the two (or
more) people were partners, the third
party may sue the partner that
caused the deception for damages
suffered when the apparent
partnership failed to perform as
Purported Partners
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19. • When a partnership or limited liability
partnership is formed, partners
contribute cash or other property –
partnership capital – to the
partnership
–Belongs to partnership as an entity
• Tangible and intangible property
acquired by a partnership
presumptively belongs to the
Partners and Ownership
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20. • As owner of a partnership or LLP, a
partner has an ownership interest in
the partnership
• The partnership interest includes
partner’s:
1.Transferable interest
• Partner’s share of profits and losses and
right to receive partnership distributions
2.Management and other rights
A Partner’s Partnership Interest
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21. • Generally, partnership law applies to
joint ventures, but a court may
distinguish the two if the business
purpose is limited to a single project
rather than series of related
transactions
– Reason: joint venturers usually held
to have less implied and apparent
authority than partners due to limited
Partnership or Joint Venture?
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22. Learning Objectives
• Limited Liability Companies
• Limited Partnerships and Limited
Liability Limited Partnerships
• Creation of Limited Partnerships
• Right and liabilities of members
and partners
• Dissociation and dissolution
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23. • The limited liability company (LLC)
combines advantages of the
corporation with regard to protection
from personal liability and favorable
tax status of the partnership
• The Uniform Limited Liability
Company Act of 1996 (ULLCA) offers
default rules similar to RUPA that
govern an LLC in the absence of a
Overview
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24. • An LLC may elect to be taxed like a
partnership or a corporation for
federal income tax purposes
– Election as partnership more common
• Therefore, the LLC pays no federal
income tax and all income and losses
of the LLC are reported by the LLC’s
owner-members on their individual
income tax returns
Taxation of the LLC
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25. • At least one person (organizers) must
file articles of organization with a
secretary of state
– Articles must include LLC name, its
duration, and the name and address of its
registered agent
• Owners of an LLC are members
– An individual, partnership, corporation, or
another LLC may be a member of an LLC
– An LLC is an entity separate from its
Creation of the LLC
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26. • Articles of organization must state
whether the LLC is member-
managed or manager-managed
– If manager-managed, initial managers must
be named
• An LLC probably will have an
operating agreement covering how
members will share profits, manage
the LLC, and withdraw from the LLC
Management of the LLC
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27. • An LLC member has no individual
liability on LLC contracts, unless LLC
contracts signed in a personal
capacity (e.g., as a surety)
• A member’s liability is usually limited
to the member’s capital contributions
• A member is liable for torts s/he
committed while acting for the LLC
Liability of Members
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28. • Under the ULLCA, an LLC must
choose to be member-managed or
manager-managed
• Each member in a member-managed
LLC shares equal rights in the
management of the business and
each member is an agent of the LLC
with implied authority to carry on its
ordinary business
A Member-Managed LLC
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29. • The LLC operating agreement may
modify ULLCA default rules by
granting more power to some
members
–Creating a class of members whose
approval is required for certain
contracts
–Members share power based on capital
contributions
A Member-Managed LLC
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30. • Managers in a
manager-managed
LLC are elected and
removed by a vote of
a majority of LLC
members
• A manager’s powers
to act for the LLC are
similar to a member’s
A Member-Managed LLC
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A team effort.
31. • An LLC is liable for the contractual
obligations incurred by its members
or managers acting within their
express, implied, or apparent
authority
• An LLC is also liable for the torts and
other wrongful acts of managing
members and other managers acting
within their authority
Tort and Contract Liability
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32. • Each member in a member-managed
LLC and each manager in a
manager-managed LLC is a fiduciary
of the LLC and its members with
duties similar to the duties of
partners, including the duty of care
• Nonmanaging members of a
manager-managed LLC owe no
fiduciary duties
Duties of Members
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33. • A member’s ownership interest in an
LLC is the member’s personal
property
– Limited ability to sell or transfer LLC rights
• A member may transfer the
distributional interest in the LLC to
another person
– Transferee not a member, but receives right
to partnership distributions
Ownership Interest of Members
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34. • A member in an LLC has the right is
to receive distributions (usually
profits)
• ULLCA states that members share
profits and other distributions equally,
regardless of differences in their
capital contributions
–This may be altered by the operating
agreement
Distributions to Members
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35. • Under the ULLCA, members
dissociate from an LLC in ways
similar to those by which a partner
dissociates from a partnership or LLP
under RUPA
–Under the ULLCA, a partner has the
power to dissociate by withdrawing
from the LLC at any time
Dissociation
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36. • As in partnership, a member’s
dissociation may be wrongful or
nonwrongful
• Dissociation terminates a member’s
status as a member, and a
dissociated member is treated as a
transferee of a member’s
distributional interest
• In Re Garrison-Ashburn, LC concerns
Dissociation
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37. • Dissolution of an LLC is similar to
that of an LLP or partnership
• When an LLC dissolves, any member
who has not wrongly dissociated may
wind up the business
– LLC bound by reasonable acts of members
during winding up
Dissolution
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38. • After all the LLC assets
sold, proceeds
distributed first to LLC
creditors, then members’
contributions are
returned
• Any remaining proceeds
are distributed in equal
shares to the members
Dissolution
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39. • Substantially similar to RUPA, the
ULPA of 2001 is the first
comprehensive statement of
American limited partnership law
– Only ULPA applies to limited partnerships
• The limited partnership (or LLLP)
form is perpetual and used primarily
in tax shelter ventures, real estate
ventures, oil and gas drilling, and
Uniform Limited Partnership Act
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40. • Limited partnerships has two owner
classes:
–General partners contribute capital,
manage the business, share in profits,
and possess unlimited liability for its
obligations
–Limited partners contribute capital and
share profits, but possess no
management powers
• Liability limited up to the amount of their
The Limited Partnership
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41. • A variant of a limited partnership is
the limited liability limited partnership
(LLLP) which offers limited liability
status for all its partners, including
general partners
• Except for liability of general
partners, limited partnerships and
LLLPs are identical
Limited Liability Limited
Partnership
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42. • A limited partnership (or LLLP) may
be created only by complying with the
applicable state statute, but
requirements are minimal
• A certificate of limited partnership
must be executed (signed by all
general partners) and submitted to
the secretary of state
Creating the LP or LLLP
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43. • A partner may contribute any
property or other benefit to the limited
partnership
• Under ULPA, profits and losses are
shared on the basis of the value of
each partner’s capital contribution
unless there is a written agreement to
the contrary
• ULPA of 2001 requires few actions to
Rights of LP and LLLP Partners
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44. • ULPA is clear that limited partners
have no inherent right to vote on any
matter
• Default rule is that no new partner
may be admitted unless each partner
has consented to the admission
– Limited partnership agreement may provide
for other admission procedures
Rights of LP and LLLP Partners
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45. • Each partner in a limited partnership
owns a transferable interest in the
limited partnership as personal
property
• A partner’s transfer of his
transferable interest has no effect on
his status as a partner, absent a
contrary agreement
Transferable Interest
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46. • A general partner of a limited
partnership or LLLP has same right
to manage and same agency powers
as a partner in an ordinary
partnership, including the duty of care
• A general partner of a limited
partnership or LLLP is in a position of
trust and therefore owes fiduciary
duties to the limited partnership and
Management & Duties
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47. • Through a
derivative action or
derivative suit, a
partner may sue to
enforce a limited
partnership right of
action against a
person who has
harmed the limited
Derivative Actions
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48. • Partners have the power to withdraw
from the limited partnership at any
time, but ULPA gives the partners no
right to withdraw, absent a contrary
provision in the limited partnership
agreement
• Under ULPA, a withdrawing partner
has no right to receive the value of
the partnership interest
Withdrawing
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49. • ULPA of 2001 adopts terminology
and the framework of partnership law,
thus ULPA establishes dissociation
and dissolution rules
• A limited partner dissociates upon
limited partner’s death, withdrawal, or
expulsion from the partnership
Dissociation of the LP and LLLP
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50. • A dissociated limited partner is not a
limited partner, has no rights as a
limited partner, and is treated as a
mere transferee of the dissociated
limited partner’s transferable interest
• ULPA treats dissociation of general
partners as RUPA treats partner
dissociations in a partnership
Dissociation of the LP and LLLP
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51. • A general partner’s express and
implied authority to act for the limited
partnership terminates upon
dissociation, the partner may retain
apparent authority
• A dissociated general partner will
remain liable on a limited partnership
obligation incurred while a partner
unless creditor agrees to a release of
liability
Dissociation of the LP and LLLP
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52. • ULPA provides that a limited
partnership (or LLLP) is not
dissolved, wound up, or terminated
merely because a partner dissociated
from the limited partnership
• When a limited partnership dissolves,
winding up follows automatically by
the general partners
Dissolution of the LP and LLLP
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53. • After general partners
have liquidated the
assets, proceeds are
distributed first to
creditors and if
proceeds exceed
creditors’ claims, the
remainder is paid to
the partners in the
same proportions that
Dissolution of the LP and LLLP
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