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

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9• 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

PART

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Introduction to Forms of Business and Formation of

Partnerships

PA ET RHC 37I 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

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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

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• 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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• 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

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• 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

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• 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

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• 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

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• 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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• 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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• 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

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• 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?

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• 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

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• 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

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• 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

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• 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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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?