Legal 2 Test 2 Studyguide
Sole Proprietorships the simplest form of business organization. Sole proprietorships are the most common form of business organization in the US.
* Forming a sole proprietorship is easy and does not cost a lot. * The owner has the right to make all management decisions concerning the business, including those involving hiring and firing employees. * The sole proprietor owns all of the business and has the right to receive all of the business’s profits. * A sole proprietorship can be easily transferred or sold if and when the owner desires to do so; no other approval (such as from partners or shareholders) is necessary. Disadvantages:
* The sole proprietor’s access to the capital is limited to personal funds plus any loans he or she can obtain * The sole proprietor is legally responsible for the business’s contracts and the torts he or she or any of his or her employees commit in the course of employment. Creating a sole proprietorship is easy. There are no formalities, and no federal or state government approval is required. A sole proprietor bears the risk of loss of the business. In addition, the sole proprietor has unlimited personal liability. Therefore, creditors may recover claims against the business from the sole proprietor’s personal assets (e.g., home, automobile, bank accounts). A sole proprietorship is not a separate legal entity, so it does not pay taxes at the business level. Instead, the earnings and losses from a sole proprietorship are reported on the sole proprietor’s personal income tax filing. A sole proprietorship business earns income and pays expenses during the course of operating the business. A sole proprietor has to file tax returns and pay taxes to state and federal governments. For federal income tax purposes, a sole proprietor must prepare a personal income tax Form 1040 U.S. Individual Income Tax Return and report the income or loss from the sole proprietorship on his or her personal income tax form. The income or loss from the sole proprietorship is reported on Schedule C (Profit or Loss from Business), which must be attached to the taxpayer’s Form 1040. Vernon v. Schuster The father dies and the son takes over the sole proprietorship. Vernon had a warranty while the father was alive, and the warranty was broken because the product had failed so he wanted money from the son who took over the job. The court ruled that the son had formed a new sole proprietorship and was not liable for his father’s warranty. Partnerships a voluntary association of two or more persons for carrying on a business as co-owners for profit. Partners are personally liable for the debts and obligations of the partnership.
Formation four criteria to qualify as a general partnership: * As association of two or more persons
* Carrying on a business
* As co-owners
* For profit
An agreement to share losses of a business is strong evidence of a general partnership. It is compelling evidence of the existence of a general partnership if a person is given the right to share in profits, losses, and management of a business. A limited partnership agreement may specify how profits and losses from the limited partnership are to be allocated among the general and limited partners. General partnerships do not pay deferral income taxes. Instead, the income and losses of partnership flow onto and have to be reported on the individual partners’ personal income tax returns. This is called “flow-through” taxation. A new partner in a general partnership takes on all of the liabilities and responsibilities that the original partners have. Zuckerman v. Antenucci A woman’s child was born with severe physical problems. During her pregnancy, she was treated by Dr. Pena and Dr. Antenucci. She brought a medical malpractice suit against both doctors. The jury (trial court) found that Pena was guilty of medical malpractice but Antenucci was...
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