Chapter 1 Introduction to Business Forms

Chapter 1 Introduction to Business Forms

1. The Proprietorship

A business owned by a single individual is called a sole proprietorship. The owner of a proprietorship is personally liable on all business obligations since there is no legal separation between the owner and the business. If such a business becomes successful,the accompanying risks tend to grow as the business grows. The owner will therefore usually wish to minimize his personal exposure by transferring the business to a wholly owned corporation or limited liability company. This may be done very simply by creating the new entity and transferring the business to it. The former owner’s role then changes;He becomes a director,shareholder,and officer of the corporation or the manager of the LLC. In that way,it is unlikely that the proprietor’s per­sonal assets will be available to creditors whose claims arise after the transfer takes place. The former owner, however, remains personally liable on claims arising or liabilities created before the transfer to the new entity took place.

2. The General Partnership

  The AB Software Store demonstrates that the general partnership is the default for busines­ses that are owned by more than one person. In other words, a partnership is formed if two or more persons go into a coowned business without any thought or planning of what the rela­tionship is, Co - ownership, further to establish the existence of a general partnership even though initial financial contributions are unequal. Of course, many general partnerships are carefully - planned, formal affairs with most aspects of the relationship.

III. The Limited Liability Partnership( "LLP")

There is a modem variation of the general partnership, the" limited liability partnership" or"LLP. "An LLP is a general partnership in all respects expect that the statute provides that partners have no personal liability for firm obligations that exceed the assets of the general part­nership. Partners in an LLP,however,have full personal liability for claiming arising from their own misconduct. The LLP has been particularly popular with law and accounting firms, but ap­parently has not been widely used by commercial businesses. See UPA (1997) § § 1001 — 1003,306(c),101(5).

The LLP is a recent innovation and the" shield of limited liability" it provides has not been directly tested as of 2005. However,fallen accounting firm Arthur Anderson operated in the LLP form,and the numerous claims pending against its individual members will likely provide the first test.

4. The Traditional Limited Partnership

The history of limited partnerships may be traced to medieval Europe where a society comandita was developed primarily to permit the nobility and the Church to quietly invest wealth in mercantile enterprises. In England and the United States, limited partnerships were first au­thorized by statute in the late nineteenth and early twentieth centuries. Today, the limited part­nership form of business is exclusively a creature of statute; in the absence of statute (or the failure to comply with the mandatory provisions of the applicable statute) ,all partners are gen­eral partners no matter what their private understanding is or how they are designated in the partnership agreement or held out to the public. Thus,there is no general common law of limited partnerships as there is a common law of general partnerships, and limited partnerships are not a default form of business.

During most of the twentieth Century, the law of limited partnership [ in the United States ] was based on the Uniform Limited Partnership Act of 1916,which,the Uniform Partnership Act of 1914, achieved virtually universal acceptance. There are internal indications that ULPA. (1916) was prepared acceptance. There are internal indications that ULPA( 1916) was prepared on the assumption that the traditional limited partnership was a small local business that desired to raise capital from local risk - adverse investors. What comes to mind is a local hardware store in a small town with two general partners and two or three limited partners, perhaps bankers or other persons substances in the community, who are willing to invest the necessary capital for the hardware store to operate in exchange for a share of its profits but who are unwilling to as­sume the risk of personal liability for the hardware store’s debts. A major emphasis of ULPA (1916) was to ensure that creditors of the hardware store not be misled as to who was responsi­ble for partnership obligations.