Organizational Forms for Small Business Chapter 27

Limited Partnerships - Attributes  At least one general partner with unlimited liability, other partners may be limited  Limited partners are only liable to the extent of their investment  General partners are ultimate decision makers  If the terms of the partnership agreement are not set out by the partners, government imposes its own terms

Limited Partnerships - Formation  Forming: unlike a general partnership, a limited partnership can only be created by proper execution, recording, and publication of certificate.  See page 490  Certificate of Limited Partnership Certificate of Limited Partnership

Limited Partnerships - UPLA  Status of Partners: under ULPA (Uniform Limited Partnership Act) limited partners who participate in managerial decisions lose their status and become liable without limit as general partners.  Varies by state

Subchapter S Corporation - Attributes  Exempt from double taxation (corporation taxed on corporate income and corporate shareholder owners taxed on dividends)  Leaves them with more funds to run their business  Not a corporate form, but a tax status (one must simply be in corporation form the make a qualified filing with IRS)

Formation of S Corporation - Taxing  Simply elect to be taxed as an S corporation  Corporate earnings are treated the same as gain (loss) from a partnership  Business owner treats income or loss as personal income or loss on taxes  Limited liability, perpetual life, free transferability of ownership interests  S Corporation Formation S Corporation Formation

Eligibility of S Corporation  Timely Filing – must file before March 15  Domestic Operation – must be incorporated in U.S.  Identity of Shareholders – natural persons, estates, or trusts (no partnerships, other corporations, and no-qualifying trusts)  Number of Shareholders – 75 or fewer stockholders  Classes of Stock – one class of stock, shareholders do not have to have the same voting rights

Limited Liability Corporation (LLC) - Attributes  Offers limited liability, taxation as a partnership  Must be formed and operated in accordance with state law  Typically formed with “articles of organization” pg. 495 or IRSIRS  Owners liability is limited to the amount that they have invested in business  Earnings taxed as a partnership (but members can declare themselves as fully personally liable at the time of organization)  LLC LLC

LLC Operating Agreement The far reaching bylaws of a corporation Covers: 1. Assignment of % of ownership 2. Assignment of distributive shares (do not have to be equal %) 3. Voting rights (each has vote or proportional) 4. Member rights and duties 5. Prohibitions on sale of interest 6. Termination of ownership interest

Advantages & Disadvantages of LLC  Advantages: 1. No limitations on the number of members 2. No limitations as to whom or what can be a stockholder 3. Members can participate completely in managing business  Disadvantages: 1. Tax problems in transferring assets from a partnership or other type of corporation to a LLC

Limited Liability Partnership (LLP)  Ease of conversion from an existing partnership  Avoidance of double taxation  Partial limited liability protection (only against consequences of conduct involving torts of others in the partnership)  Partners cannot be liable for errors, omissions, negligence, incompetence, or wrongdoings stemming from partnership operations