Learning plans 6 & 9

Business and BankruptcyNational American University

LA3100Instructor S. Johnston

Learning Plans 6 & 9

WEEK 7 l LP6&9

LP6: BUSINESS ENTITIES

WEEK 7 l LP6&9

LP6: BUSINESS ENTITIES

Learning Plan 6 Outline

I. Factors In Business Entity Formation II. Noncorporate EntitiesIII. Corporate EntitiesIV. Limited Liability EntitiesV. Filing RequirementsVI. Comparisons

WEEK 7 l LP6&9

[FORMATION FACTORS] LP6: BUSINESS ENTITIES

I. Factors in Business Entity Formation

Factors for Comparison:

A. Liability for Owners

B. Structure of Organization

C. Formalities of Formation

WEEK 7 l LP6&9

[NONCORPORATE ENTITIES] LP6: BUSINESS ENTITIES

II. Noncorporate Entities

A. Sole Proprietorship

B. General Partnership

C. Limited Partnership

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A. SOLE PROPRIETORSHIP

Consists of one person owning and operating a business.

Liability: Responsible for the payment of all debts incurred by the business.

Structure: Owner may hire and employ several employees to assist in the day-today operation of the business. But Owner is entitled to receive all profits generated by the business.

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B. GENERAL PARTNERSHIPS

An "association of two more persons to carry on a business for profit.“

Liability: Partners equally share responsibility for losses, including the actions of each other.

Structure: General partners contribute their labor and resources to the partnership. Partners equally buy property and incur debts in the partnership name.

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C. LIMITED PARTNERSHIPS

One or one or more general partners and one or more limited partners.

General partners: manage the partnership business and are personally liable for the debts of the business.

Limited partners: invest in the partnership business, but have no management authority. Limited partners are liable only for the amount that they have invested in the partnership, or the amount that they have agreed to invest in the business.

Structure: Although a limited partner may not participate in the management of the partnership business, many states allow the limited partner to engage in certain activities that are not considered management.

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[CORPORATE ENTITIES] LP6: BUSINESS ENTITIES

III. Corporate Entities

Separate and distinct legal entity from owners Continuity of existence despite death (Buy/Sell

Agreement) No personal shareholder liability (only corporation

will be liable for debts) Limitations (cannot appear in pro per in court

except Small Claims actions) Alter Ego/Piercing Corporate Veil Issues

WEEK 7 l LP6&9III. Corporation Entities Structure of Corporations

Shareholders owners of corporation

voting rights

Board of Directorselected by Shareholders on annual basismanagement and controlpolicy and major decisions

Officers (President, Secretary, Treasurer)elected by Board of Directors on annual basisresponsible for daily operations


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III. Corporation Entities Other types of corporations:

IV. Limited Liability Entities

A. Limited Liability Corporation

Hybrid between corporation and partnership.

Combines “pass through” tax treatment of partnership with limited liability of a corporation

Structure: centralized management is optional and may be by managers and/or members

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[LIMITED LIABILITY ENTITIES] LP6: BUSINESS ENTITIES

WEEK 7 l LP6&9

[LIMITED LIABILITY ENTITIES] LP6: BUSINESS ENTITIES

IV. Limited Liability EntitiesB. Limited Liability Partnership

Lawyers and accountants only Pass through tax treatment with corporate liability

shield Registered with Sec. Of State General Partnership with shield from liability No vicarious personal liability for partnership acts Annual franchise tax fee (same as LLC)

V. Filing Requirements Sole Proprietorship: May be required to file a fictitious name statement. General Partnership: Per state law- generally as the Uniform Partnership

Act. Agreement can be written or oral; Statute of Frauds if entity will last more than a year and/or purchase property.

Limited Partnership: Spelled out in each state. If persons attempting to forma limited partnership do not substantially comply with statutes governing the formation of such partnerships, then the limited partners may become personally liable for the debts of the partnership business.

Corporations: Must be formed with Sec. Of State by filing Articles of Incorporation, preparation of Bylaws and Minutes.

LLC/LLP: Must file Articles of Organization with Sec. Of State; parties enter into Operating Agreement; professional associations required.

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[FILING REQUIREMENTS] LP6: BUSINESS ENTITIES

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[COMPARISONS] LP6: BUSINESS ENTITIES

VI. ComparisonsEntity Advantages DisadvantagesSole proprietorship

Inexpensive to create; owner authority, and receipt of profits.

Owner liability, limited ability to raise funds, and limited duration of the sole proprietorship; SOF requirements

Partnership Inexpensive to create; simple to form; and operate and owners/partners report their share of profit or loss on their personal tax returns.

Owners (partners) personally liable for business debts

Limited Partnership Limited partners have limited personal liability for business debts as long as they don't participate in management; General partners can raise cashwithout involving outside investors in management of business.

General partners personally liable for business debts; More expensive to create.

Corporation

No personal shareholder liability Double taxation; expensive to create; complicated formalities

LLCNo personal liability; less expensive and fewer filing requirements than a corporation. No double taxation.

Must file Articles of Organization with Sec. Of State; parties enter into Operating Agreement.; Annual franchise fee.

LLP No personal liability; less expensive and fewer filing requirements than a corporation. No double taxation.

Lawyers and accountants only

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LP9: CREDIT & BANKRUPTCY

WEEK 7 l LP6&9

[CREDIT] LP9: CREDIT & BANKRUPTCY

I. Credit

A debt is an obligation for money owed to a creditor.

Generally, debt can be divided into two categories:

Secured debt Any debt in which the creditor possesses a lien or security interest in specific property of the debtor.

Unsecured debtDebt secured without collateral.

WEEK 7 l LP6&9I. CreditA. Secured Debt

Secures liens to warranty against loan default. Collateral may be either real property (land and fixtures) or personal property.

a. Mortgage lien: Lien using real property as collateral. b. Mechanic's lien: Filed against the property by a contractor who

has not been paid for materials or services furnished to the property.

c. Judgment lien: Filed entered against a person for an obligation unrelated to real property (for example failure to pay a credit card balance).

d. Personal Property: Cars, boats, jewelry, etc. used as collateral via security agreement and a "financing statement" in accordance with Article 9 of the UCC.

[SECURED CREDIT] LP9: CREDIT & BANKRUPTCY

WEEK 7 l LP6&9I. CreditB. Unsecured Debt

Unsecured debt refers to debt that is not secured by collateral.

Examples of unsecured debt include credit cards, and medical bills.

Debtor is motivated to comply with loan repayment terms by consequence of credit reporting and lawsuit.

In bankruptcy, secured debt is returned to creditor. Unsecured debt is discharged. (with the exception of student loans and child support).

[UNSECURED CREDIT] LP9: CREDIT & BANKRUPTCY

WEEK 7 l LP6&9

[BANKRUPTCY] LP9: CREDIT & BANKRUPTCY

II. Bankruptcy

Bankruptcy laws derive from the Constitution (Article 1, Section 8, Clause 4).

Designed to motivate debt repayment and productive wage earning.

Prior responses were debtor’s prisons, "sins of the father" and indentured servitude.

Federal law abolished debtor’s prisons in 1833; By 1850 most states had diminished penalties.

Imprisonment for debt usually limited now to failure to pay criminal fines or child support.

WEEK 7 l LP6&9


II. BankruptcyA. Chap. 7: Fresh Start

Automatic Stay Trustee Secures Property You Want to Keep (Car) Exception: Student Loans

B. Chap 9: Reorganization of municipalities

C. Chap. 11: Large Business Consolidation Consolidate debt Terminate contracts and leases Recover assets Reorganize operations

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II. BankruptcyD. Chap. 12: Regular Joe and Farmer Consolidation

Consolidate debt Regular income Family farmer or family fisherman with seasonal income

E. Chap. 13: Prevent Foreclosure Reorganize mortgage Regular income Income less than certain standard (means test)

F. Chap. 15: Foreign Bankruptcy Filing and Protection Prevents discrimination against foreign debtors Allows foreign creditors to secure repayment

Business and BankruptcyNational American University

LA3100Instructor S. Johnston

Learning Plans 6 & 9