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MIE 305 Final Exam Questions and Answers
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MIE 305 Final Exam Questions andAnswers
When choosing an organizational form, entrepreneurs should consider: - -
Ease of creation
Owners' liability--maximize gain, limit risk of loss
Tax considerations--pass through or entity tax?
Ability to raise capital--Private funding or shares?
- Basic forms of Business Organization - -Sole proprietorships--> one person
owns it
Partnerships--> Multiple people own it
Corporations--> Ownership to shareholders
Franchises--> operated by any of the above
- Corporate companies - -can create IPOs and can issue shares and
generate lots of capital quickly
- Sole Proprietorships - -The owner IS the business
Taxation: business profits immediately become personal income; reportable
on personal returns
- Advantages to Sole Proprietorships - -Proprietor owns the entire business
and has a right to receive all profits-- Easier and less costly to start; allows
flexibility
- Disadvantages to Sole Proprietorships - -The owner is personally liable for
all losses or liabilities incurred by the business enterprise
Lacks continuity on the death of the proprietor
- General Partnerships - -Arises from partnership agreement between two or
more persons to carry on a business together for profit. Note that writing is
not required; partnerships may be express or implied. Essential elements:
Sharing of profits and losses (must share both!)
Joint ownership
Equal right in management
- General Partnerships cont: - -Disputes? A majority of the partners wins.
What if only 2? General partnership assumes equal shares, so some form of
pre-agreed dispute resolution is usefule. NEW PARTNERS added only by
approval of all existing partners (Shared dilution)
, - General Partnerships Advantages - -Advantages: Firm does not pay federal
taxes: profits are "passed through" to partners
- General Partnerships Disadvantages - -Disadvantages: partners are
subject to personal liability for partnership obligations
Partners share is considered personal property, and may be attached by civil
case not related to the partnership
- joint and several liability - -a doctrine under which a plaintiff can sue &
collect a judgement from, all of the partners together or one of more
partners separately
-if you sue one partner and win, you can only collect from them unless they
dont have enough & then you can sue other partner for difference
-partner who commits torts may be required to reimburse firm
- Fiduciary Duties - -Partnership is a separate entity from personal
interested. Duties of loyalty and care: disclosure of conflicts
- Dissociation - -Occurs when partners ceases to be associated with
partnership: normally entities partner to be bought out (or business operated
w/o them).
- Limited Partnership (L.P.) - -Agreement of two or more persons to carry on
a business for profit w/at least ONE GENERAL PARTNER AND ONE LIMITED
PARTNER
-must file certificate with state office
- general partner - -partner who assumes responsibility for the management
of the partnership & liability for its debts
- limited partner - -a partner who contributes capital but has no right to
participate in management or operation of the partnership & is not
personally liable for partnership debts beyond the capital contributed
- L.P. Facts - -Limits the liability of the limited partners to their investment.
General partner always on the hook for all damages. Profits distributed as
per agreement.
An L.P. is a creation of state statute so filing a certificate w/the secretary of
state is required.
Limited partners CANNOT participate in management.
- Limited Liability Partnership (L.L.P.) - -Hybrid form of business that allows
for "pass through" taxation, but limits personal liability from malpractice of
other partners, no general partner required; all partners can participate in
management of organization. Popular in learned professionals.
, - L.L.P. Formation - -Formed under state law (Uniform Partnership Act/RUPA
of 1997) Easy to convert general or limited partnerships. Reporting
requirement to maintain status
- L.L.P. Liability - -allows professionals to avoid personal liability for
malpractice of partners as in an L.P.
May be a more cumbersome registration process; some states (CA-
accountancy, law, architecture) limit them.
- Limited Liability Companies (L.L.C.) - -hybrid form of business that offers
limited liability of corporation and tax advantages of partnerships
"members"
operating agreement
- L.L.C. Formation - -Must be formed and operated in compliance with state
law by members (may be single-member though)
- L.L.C. Facts - -Profits pass through and taxes are paid individually; may
choose to reinvest and be taxed as a corporation.
Operating agreement (articles of organization - required in some states, NC
is minimalist but also requires):
Managament (member or manager-managed)
How profits will be divided (unequal is ok)
Transfer of membership interests
Whether LLC will be dissolved on death or departure of member; rules on
dissolution/dissociation
Registered Agent
- Corporations - -A legal entity formed in compliance with statutory that is
distinct from its shareholder-owners formed in compliance w/statutory
requirements (articles of incorporations)
Model Business corporations Act (MBCA)
Reused model business corp. Act (RMBCA)
- Corporation Advantages and Disadvantages - -Adv: Limited liability for
losses ("Corporate personhood") and ability to raise mass capital through
issuance of securities. Close (or "closely held") corps; shares are held by
members of a family or by relatively few people e.g. Hobby Lobby, Chik-fil-A
- Domestic Corp - -in a given state, a corp that does business in & is
organized under the law of that state
- Foreign Corp - -from X state doing business in Z state
-in a given state, a corp that does business in the state without being
incorporated therein
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