1. Choice of Organizational Form Amma

2. Facts Brigg has operated a landscaping business, Good Earth Landscaping, as a sole proprietorship. He has done most of the work himself and financed the business out of his pocket. Brigg wants to expand by taking on regular employees and purchasing new equipment. His sister, Pearl, is willing to put up some money, but she wants to be sure she won’t have to pay any more than what she invests.

3. Q 1 Pearl invests on the understanding that she will share in the profits, will help Brigg run the business, and will not be liable beyond her investment. Are her understandings valid?

4. A 1 No. When Brigg and Pearl agreed to “carry on as co-owners a business for profit” they formed a general partnership—whether they intended to or not. As a partner, Pearl is liable for the business’ contractual debts, even if they exceed the amount of her investment.

5. Q 2 What forms of business organization might accommodate Pearl’s multiple wishes?

6. A 2 Pearl wants limited liability. She can be—  A limited partner in an LP  A shareholder in a corporation

7. Q 3 Is Pearl assure of limited liability if she is a limited partner? A corporate shareholder?

8. A 3 No. These organizational forms provide some, but not complete, assurance that participants can limit their losses to the amount they invested.

9. A 3 As a limited partner in an LP, Pearl would not be liable for business debts and obligations beyond her investment unless she “participates” in the management of the business. Pearl would risk becoming personally liable if she helps Brigg run the business.

10. A 3 When and whether courts disregard corporate limited liability is an important question of corporate law. Normally by being active in the management of the business. Piecing typically happens only when a corporate participant defrauds or confuses creditors about limited liability or engages in activities that frustrate creditors’ expectations to be paid ahead fo shareholders.

11. Q 4 For Pearl, what is the difference between being a limited partner in an LP, or a shareholder in a corporation?

12. A 4 As the previous answer illustrates, a limited liability is somewhat similar in an LP, and corporation. But the tax implications can be markedly different.

13. A 4 Under a corporate structure, there may be double taxation that will reduce the amount of profits available to distribute to Pearl— the return on her investment. Unless the corporate earnings are taxed first at the corporate level and then a second time at the shareholder level when distributed as dividends.

14. A 4 Unless the parties have chosen to be taxed as a corporation, business earnings in a partnership are taxed only once at the partner or member level, whether or not the earnings are distributed. This flow through tax treatment leaves available more earnings to distribute to Pearl—a better return on her investment.

15. THANK YOU