LGS 200- Abigail Hammond- Exam 3
What do courts look for to determine wether a partnership exists? - ✔️✔️The 3
essential elements
What are the 3 essential elements of a partnership? - ✔️✔️1. A sharing of profits or
losses
2. A joint ownership of the business
3. An equal right to be involved in the management of the business
Tax Treatment of Partnerships - ✔️✔️- Federal (and most state) tax laws treat a
partnership as a "pass through" entity, with profits, losses, and taxes attributed on a pro-
rata basis to the partners.
- The partnership itself pays no taxes and is responsible only for filing an information
return with the IRS.
Pass-through entity - ✔️✔️A business entity that has no tax liability.
- The entity's income is passed through to the owners, and they pay taxes on the
income.
True or False: A partnership itself is responsible only for filing an information return with
the Internal Revenue Service. - ✔️✔️True
Information return - ✔️✔️A tax return submitted by a partnership that reports the
business's income and losses
True or False: Partners cannot deduct a share of the partnership's losses on their
individual tax returns - ✔️✔️False, partners can deduct a share of losses on their
individual tax returns
Articles of a partnership - ✔️✔️A written agreement that sets forth each partner's rights
and obligations with respect to the partnership
Partnership by Estoppel - ✔️✔️A partnership imposed by a court when non-partners
have held themselves put to be partners, or have allowed themselves to be help out as
partners, and outside people have detrimentally relied on their misrepresentations.
Rights of Partners: The relation to different areas - ✔️✔️- Management
- Interest in the partnership
- Compensation
- Inspection of books
,- Accounting
- Property
Rights of Partners: Management/ interest in the partnership - ✔️✔️- All partners have
equal rights in management
- Unless otherwise agreed, each partner has one vote in management matters
- A majority vote controls decisions on ordinary matters
- A unanimous vote is required for decisions with significant change in the nature of the
partnership
True or False: Unanimous consent is likely not required for a partnership to admit new
partners, to amend the partnership agreement, or to enter a new line of business. -
✔️✔️False, Unanimous consent is likely required for a decision like this
Rights of Partners: Compensation - ✔️✔️- Each partner is entitles to the proportion of
the business profits or losses
- A partner's income from the partnership takes the form of a distribution of profits
according to the partners share in the business
Right of Partners: Inspection of Books/ Accounting - ✔️✔️- Each partner has the right
to receive full and complete information about all aspects of the business
- The partnership books must be kept at the firm's principal office
- Every partner is entitles to inspect all books and records on demand and can make
copies
Rights of Partners: Property - ✔️✔️- May uses or possess partnership property only on
behalf of the partnership
- A partner is not a co-owner of partnership property
- A partner has no right to sell, mortgage, or transfer partnership property to another
- A partner cannot use the property to satisfy personal debt
(a partner's creditor can petition a court for a charging order)
Charging Order - ✔️✔️An order granted by a court to a judgement creditor that entitles
the creditor to attach a partner's interest in the partnership
Where are the duties and liabilities of partners derived from? - ✔️✔️Agency law
Fiduciary Duties: Duty of Care - ✔️✔️A partner's duty of care is limited to refraining
from "grossly negligent or reckless conduct, intentional misconduct, or a knowing
violation of the law"
- A partner is not liable to the partnership for: Simple negligence & Honest errors in
judgement in conduction partnership business
Fiduciary Duties: Duty of Loyalty - ✔️✔️The duty of loyalty requires a partner to
account to the partnership for "any property, profit, or benefit."
, - A partner must refrain from competing with the partnership in business or dealing with
the firm as an adverse party
- Duty of loyalty can be breached by: self-dealing, misusing partnership property,
disclosing trade secrets, usurping a partnership business opportunity
Liability of Partners: Disadvantage - ✔️✔️- The partners are personally liable for the
debts of the partnership
- In most states, the liability is essentially unlimited, b/c the acts of one partner subject
the other partners to personal liability
Liability of Partners: Joint liability - ✔️✔️- Each partner in a partnership is jointly liable
for the partnership's obligations
- If a third party sues one partner on a partnership contract, that partner has the right to
demand that the other partners be sued with him/her
Where must the owner of a sole proprietorship report business income? - ✔️✔️On
his/her personal income tax return
Who is legally responsible for all debts and obligations incurred by the business? -
✔️✔️The owner
What kind of account is a sole proprietor allowed to establish that is tax-exempt until the
funds are withdrawn? - ✔️✔️Retirement accounts
The sole proprietor is free to make any decision she or he wishes concerning the
business, including: - ✔️✔️- What kind of business to pursue
- Whom to hire
- When to take a vacation
True or false: The sole proprietor can sell or transfer all or part of the business to
another party at any time without seeking approval from anyone else. - ✔️✔️True
Does a sole proprietorship allow less flexibility than a partnership or corporation? -
✔️✔️No, it allows more flexibility
What is the major disadvantage of a sole proprietorship? - ✔️✔️The proprietor alone
bears the burden of any losses or liabilities incurred by the business
Personal Assets at Risk - ✔️✔️Creditors can pursue the owner's personal assets to
satisfy any business debts.
What is critical to the growth of most small businesses? - ✔️✔️Raising capital
What allows the owner to retain full ownership and control of his/her business? -
✔️✔️Obtaining a bank loan
What do courts look for to determine wether a partnership exists? - ✔️✔️The 3
essential elements
What are the 3 essential elements of a partnership? - ✔️✔️1. A sharing of profits or
losses
2. A joint ownership of the business
3. An equal right to be involved in the management of the business
Tax Treatment of Partnerships - ✔️✔️- Federal (and most state) tax laws treat a
partnership as a "pass through" entity, with profits, losses, and taxes attributed on a pro-
rata basis to the partners.
- The partnership itself pays no taxes and is responsible only for filing an information
return with the IRS.
Pass-through entity - ✔️✔️A business entity that has no tax liability.
- The entity's income is passed through to the owners, and they pay taxes on the
income.
True or False: A partnership itself is responsible only for filing an information return with
the Internal Revenue Service. - ✔️✔️True
Information return - ✔️✔️A tax return submitted by a partnership that reports the
business's income and losses
True or False: Partners cannot deduct a share of the partnership's losses on their
individual tax returns - ✔️✔️False, partners can deduct a share of losses on their
individual tax returns
Articles of a partnership - ✔️✔️A written agreement that sets forth each partner's rights
and obligations with respect to the partnership
Partnership by Estoppel - ✔️✔️A partnership imposed by a court when non-partners
have held themselves put to be partners, or have allowed themselves to be help out as
partners, and outside people have detrimentally relied on their misrepresentations.
Rights of Partners: The relation to different areas - ✔️✔️- Management
- Interest in the partnership
- Compensation
- Inspection of books
,- Accounting
- Property
Rights of Partners: Management/ interest in the partnership - ✔️✔️- All partners have
equal rights in management
- Unless otherwise agreed, each partner has one vote in management matters
- A majority vote controls decisions on ordinary matters
- A unanimous vote is required for decisions with significant change in the nature of the
partnership
True or False: Unanimous consent is likely not required for a partnership to admit new
partners, to amend the partnership agreement, or to enter a new line of business. -
✔️✔️False, Unanimous consent is likely required for a decision like this
Rights of Partners: Compensation - ✔️✔️- Each partner is entitles to the proportion of
the business profits or losses
- A partner's income from the partnership takes the form of a distribution of profits
according to the partners share in the business
Right of Partners: Inspection of Books/ Accounting - ✔️✔️- Each partner has the right
to receive full and complete information about all aspects of the business
- The partnership books must be kept at the firm's principal office
- Every partner is entitles to inspect all books and records on demand and can make
copies
Rights of Partners: Property - ✔️✔️- May uses or possess partnership property only on
behalf of the partnership
- A partner is not a co-owner of partnership property
- A partner has no right to sell, mortgage, or transfer partnership property to another
- A partner cannot use the property to satisfy personal debt
(a partner's creditor can petition a court for a charging order)
Charging Order - ✔️✔️An order granted by a court to a judgement creditor that entitles
the creditor to attach a partner's interest in the partnership
Where are the duties and liabilities of partners derived from? - ✔️✔️Agency law
Fiduciary Duties: Duty of Care - ✔️✔️A partner's duty of care is limited to refraining
from "grossly negligent or reckless conduct, intentional misconduct, or a knowing
violation of the law"
- A partner is not liable to the partnership for: Simple negligence & Honest errors in
judgement in conduction partnership business
Fiduciary Duties: Duty of Loyalty - ✔️✔️The duty of loyalty requires a partner to
account to the partnership for "any property, profit, or benefit."
, - A partner must refrain from competing with the partnership in business or dealing with
the firm as an adverse party
- Duty of loyalty can be breached by: self-dealing, misusing partnership property,
disclosing trade secrets, usurping a partnership business opportunity
Liability of Partners: Disadvantage - ✔️✔️- The partners are personally liable for the
debts of the partnership
- In most states, the liability is essentially unlimited, b/c the acts of one partner subject
the other partners to personal liability
Liability of Partners: Joint liability - ✔️✔️- Each partner in a partnership is jointly liable
for the partnership's obligations
- If a third party sues one partner on a partnership contract, that partner has the right to
demand that the other partners be sued with him/her
Where must the owner of a sole proprietorship report business income? - ✔️✔️On
his/her personal income tax return
Who is legally responsible for all debts and obligations incurred by the business? -
✔️✔️The owner
What kind of account is a sole proprietor allowed to establish that is tax-exempt until the
funds are withdrawn? - ✔️✔️Retirement accounts
The sole proprietor is free to make any decision she or he wishes concerning the
business, including: - ✔️✔️- What kind of business to pursue
- Whom to hire
- When to take a vacation
True or false: The sole proprietor can sell or transfer all or part of the business to
another party at any time without seeking approval from anyone else. - ✔️✔️True
Does a sole proprietorship allow less flexibility than a partnership or corporation? -
✔️✔️No, it allows more flexibility
What is the major disadvantage of a sole proprietorship? - ✔️✔️The proprietor alone
bears the burden of any losses or liabilities incurred by the business
Personal Assets at Risk - ✔️✔️Creditors can pursue the owner's personal assets to
satisfy any business debts.
What is critical to the growth of most small businesses? - ✔️✔️Raising capital
What allows the owner to retain full ownership and control of his/her business? -
✔️✔️Obtaining a bank loan
