37-1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Introduction to Forms of Business and Formation of Partnerships Operation of Partnerships and Related Forms Partners’ Dissociation and Partnerships’ Dissolution and Winding Up Limited Liability Companies, Limited Partnerships, and Limited Liability Limited Partnerships Partnerships P A R T

37-3 Introduction to Forms of Business and Formation of Partnerships PA E TR HC 37 I wanted to be an editor or a journalist. I wasn't really interested in being an entrepreneur, but I soon found I had to become an entrepreneur in order to keep my magazine going. Sir Richard Branson, Entrepreneur

37-4 Learning Objectives Choose an appropriate form of business for a particular enterprise and list characteristics of each form Describe creation and risks of being a partner or purported partner Identify partnership capital, property, and interests

37-5 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

37-6 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 Disadvantage: owner bears all risk of loss Sole Proprietorship

37-7 A partnership has two or more owners or partners and takes several forms: –general, limited (LP), limited liability (LLP), limited liability limited (LLLP), or professional A partnership is a legal entity but not a federal tax-paying entity; thus all income or loss must be reported on an individual partner’s federal income tax return whether or not distributed or allocated to the partners Partnership

37-8 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, may be created as a general partnership by default (unintentionally) Partnership

37-9 A corporation is owned by shareholders who elect a board of directors to manage the business, thus ownership & 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 purposes –Exception: Subchapter S corporations Corporation

37-10 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

37-11 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

37-12 Every state has enacted partnership laws The Revised Uniform Partnership Act (RUPA) of 1994, with 1997 amendments, is a model partnership statute 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 The General Partnership

37-13 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 scope of the enterprise Partnership or Joint Venture?

37-14 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, RLLP, Limited Liability Partnership, LLP Partnership Creation – The LLP

37-15 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 However, doctrine of purported partners holds that if third party proves that one apparent partner misled him to believe that the people were partners, the third party may sue partner that caused deception for damages Non-Partners Generally Not Liable to Third Parties

37-16 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 partnership as an entity rather than individual partners Partners and Ownership

37-17 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

37-18 Thought Questions Do you want to start a business? If you wanted to start a business (snowboards, for example), would you choose partnership as the form of business?