1. Business and Bankruptcy
National American University
LA3100
Instructor S. Johnston

2. LP6: BUSINESS ENTITIES

3. Learning Plan 6 Outline
I.
II.
III.
IV.
V.
VI.
Factors In Business Entity Formation
Noncorporate Entities
Corporate Entities
Limited Liability Entities
Filing Requirements
Comparisons
LP6: BUSINESS ENTITIES

4. I.
Factors in Business Entity Formation
Factors for Comparison:
A. Liability for Owners
B. Structure of Organization
C. Formalities of Formation
[FORMATION FACTORS]
LP6: BUSINESS ENTITIES

5. II. Noncorporate Entities
A. Sole Proprietorship
B. General Partnership
C. Limited Partnership
[NONCORPORATE ENTITIES]
LP6: BUSINESS ENTITIES

6. 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.
[NONCORPORATE ENTITIES]
LP6: BUSINESS ENTITIES

7. 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.
[NONCORPORATE ENTITIES]
LP6: BUSINESS ENTITIES

8. 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.
[NONCORPORATE ENTITIES]
LP6: BUSINESS ENTITIES

9. 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
[CORPORATE ENTITIES]
LP6: BUSINESS ENTITIES

10. III. Corporation Entities
Structure of Corporations
Shareholders
owners of corporation
voting rights
Board of Directors
elected by Shareholders on annual basis
management and control
policy and major decisions
Officers (President, Secretary, Treasurer)
elected by Board of Directors on annual basis
responsible for daily operations
[CORPORATE ENTITIES]
LP6: BUSINESS ENTITIES

11. III. Corporation Entities
Other types of corporations:
[CORPORATE ENTITIES]
LP6: BUSINESS ENTITIES

12. 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
[LIMITED LIABILITY ENTITIES]
LP6: BUSINESS ENTITIES

13. IV. Limited Liability Entities
B. 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)
[LIMITED LIABILITY ENTITIES]
LP6: BUSINESS ENTITIES

14. 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.
[FILING REQUIREMENTS]
LP6: BUSINESS ENTITIES

15. VI. Comparisons
Entity
Sole proprietorship
Advantages
Partnership
Inexpensive to create; simple to form;
and operate and owners/partners report
their share of profit or loss on their
personal tax returns.
Limited partners have limited personal
liability for business debts as long as
they don't participate in management;
General partners can raise cash
without involving outside investors in
management of business.
Limited Partnership
Inexpensive to create; owner authority,
and receipt of profits.
Disadvantages
Owner liability, limited ability to raise
funds, and limited duration of the sole
proprietorship; SOF requirements
Owners (partners) personally liable for
business debts
General partners personally liable for
business debts; More expensive to
create.
Corporation
No personal shareholder liability
Double taxation; expensive to create;
complicated formalities
No 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.
No personal liability; less expensive and
fewer filing requirements than a
corporation. No double taxation.
Lawyers and accountants only
LLC
LLP
[COMPARISONS]
LP6: BUSINESS ENTITIES

16. LP9: CREDIT & BANKRUPTCY

17. 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 debt
Debt secured without collateral.
[CREDIT] LP9: CREDIT & BANKRUPTCY

18. I. Credit
A. 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

19. I. Credit
B. 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

20. 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.
[BANKRUPTCY] LP9: CREDIT & BANKRUPTCY

21. II. Bankruptcy
A. 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
[BANKRUPTCY] LP9: CREDIT & BANKRUPTCY

22. II. Bankruptcy
D. 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
[BANKRUPTCY] LP9: CREDIT & BANKRUPTCY

23. Business and Bankruptcy
National American University
LA3100
Instructor S. Johnston