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Business Law Exam 3
business organization comparisons
24
Business
Undergraduate 2
11/06/2012

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Term
Sole Proprietorship characteristics
Definition
individual acting as a business
Term
Sole P advantages
Definition
easiest and least costly
subject to least gov regulation
individual gets all proftis
complete control
flexibility
Term
Sole P disadvantages
Definition
individual gets all of profits and losses of business
total liability
limited to one owner
no continuity (when indiv. dies so does business)
limited ability to raise fund
Term
Franchises characteristics
Definition
arrangement by which the owner of a trademark, tradename or copyright licenses it to others to use
Term
Types of Franchises
Definition
Manufacturing- franchisor discloses trade secrets to franchisee so they can manufacture francisor's procuct

Distruibutorship- franchisor grants franchisee license to sell their products

Chain style business- franchisee operates a business under franchisor's name
Term
Advantages of Franchise
Definition
Easy to form
franchise fees and royalty payments
marketing support
need fewer employees
franchisees have vested interest in success of business
uniformity of procedures & QC
Term
Disadvantages of franchise
Definition
cost of complying with fran. laws
limits on the ability of a franchisor:
1.terminate a franchise
2. withhold consent to a transfer of a franchise
3. change the competitive circumstances of franchise
inventory repurchase obligations (if franchise terminated)
liability risks
Term
Partnerships (Characteristics)
Definition
*(seperate legal entity-not seperate taxable entity)

an association of 2 or more persons (individ. or another bus. entity) carrying on business as co-owners for PROFIT
Term
Types of Partnerships
Definition
General- has ONLY general partners

Limited- has both general and limited partners(at least 1 of each)
Term
Advantages of partnerships
Definition
easily formed
minimal costs of formation
not a taxable entity (taxed at indiv. level instead)
owners may have an equal voice in management
Term
Disadvantages of partnerships
Definition
Limited # of owners
Dissolved everytime:
1. Existing general partner leaves
2. NEW general partner joins
Unlimited liability of general partners
partners are taxed on their share of income whether they recieve it or not (some choose to allocate it to busines instead of themselves)
Term
Joint Ventures
Definition
Two or more persons combine their efforts in particular business enterprise and agree to share profits AND losses jointly or in a proportion to their contribution
Term
Joint venture vs. partnership
Definition
JV is less formal associatioin & contemplates a single transaction or LIMITED activity, vs. PNSP contemplates the operation of an ongoing business

a partership is a legal entity in most states, JV is not

JV CANNOT sue OR be sued
Term
Corporations( seperate legal entity)
Definition
can have continuous existants

employees= agents

*owners can come and go
Term
Types of corporations
Definition
Public- government (ex. utlities)
Private-
Profit- purpose to gain $
Non-profit-
Domestic- if formed in a state & still in that state
Foreign- if formed in another state (needs to register in every state does business in

Alien- from another country

Professional- formed by docs, lawyers, engineers etc.
Term
Advantages of corportations
Definition
easiest way to raise substantial capital from a large # of investors

ownership may be divided into many seperate & unequal shares which are easily transferable (change of shareholders does not affect continuity of a corporation

limited liability of owners for debts (unless court pierces the corporate veil which it will do under some circumstances)

control can be vested in a minority of the shareholder by using techniques such as non voting or preferred stock.

can have perpetual existance (unless otherwise stated in articles of incorp)

certain laws do not apply (ex. usery laws)
owners may also be employees (entitled to benefits such as worker's comp, unemployment, etc.
Term
Circumstances where court would pierce the corporate veil
Definition
1. Prevent fraud
2. Inadequate capitalization
3. Failure to recognize corporate formalities
* NO LIMIT for: criminal acts, malpractice, torts, etc.
Term
Disadvantages of corporations
Definition
cost of formation & maintenance
double taxation of corporate income
1. at corporate level
2. by shareholders when they recieve dividends
must qualify to do business in all states where it intends to conduct intrastate business
vicarious liability
for federal jurisdictional purposes corportions are considered residents of
1. state of incorporation
2. state of principal place of business
3. state where it conducts intrastate business
Term
Limited Liability Companies (seperate legal entity)
Definition
Combine
a. the corporate characteristics of limited liability for all ownes with
b. the tax benefits of a partnership (no tax liability for the entity- all profits and losses are passed through to owners)
Term
Advantages LLC
Definition
Limited liability of owners (liability for corporate debts is limited to the amount of capital contribution)
can have perpetual existance
can elect to be taxed as a
1. unless LLC indicates that it wants to be taxed as a corp., IRS will tax it as a partnership

2. single member LLC's cannot be taxed as partnership automatically taxed as sole propietorship unless they indicate that they want to be taxed as a corporation
Term
Disadvantages LLC
Definition
No uniform governing law- thus LLCs operating in more than one state not recieve consistant treatment

must register with Secretary of State

for jurisdictional purposes, may be residents of multiple states (residents of every state in which a member resides)
Term
LLP (seperate legal entity)
Definition
Combine the corporate characteristic of limited liability for all owners with the tax benefits of a partnership
Term
LLP Advantages
Definition
LLP is NOT taxable entity
Limited liability for ALL partners
Term
LLP disadvantages
Definition
no uniform law

must register with secretary of state
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