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Organizational Forms for Small Business Chapter 27
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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
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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
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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
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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)
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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
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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
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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
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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
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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
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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
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