AGEC 3503 Exam 3 Study Review 2025

Business entities that provide NO protection: - -Sole Proprietorship and General Partnership Business entities that provide some protection: - -Limited partnership Business entities that provide full protection: - -Limited Liability Companies and Corporations Why are there differences in protection depending on business entities? - -Some business entities function as a separate legal entity (like another person) and others do not. Sole Proprietorship: liability of owners - --100% personal liability for the business debt -Creditors will be able to reach your personal assets as well as what you invested into the business (This means that property such as your land, your home, your personal bank accounts are at risk!) Sole Proprietorship: legal status - --Not a separate legal entity. This means business owner is sued directly. Sole Proprietorship: formation and management - -- ONLY 1 person involved -Formed or dissolved at the discretion of the individual who owns it -Only 1 person to consult for decision making -The addition of any person becomes a partnership; thus, the business entity changes Sole Proprietorship: Taxation - -Income is taxed on the individual's tax return (1040) Schedule C General Partnership - --An association of two or more "persons" who agree to carry on as co-owners of a business for profit. -No intent is necessary to create partnership General Partnership: Liability - -- Each partner is jointly and severally liable for the debts of the business. (unlimited liability) - Not only are you personally liable for the debts and actions of the business (just like the sole proprietorship), but you are also responsible for all of the other partners actions - Creditors can reach your personal assets, in addition to what you have invested into the business General Partnership: Legal Status and Formation - --Separate legal entity - No formalities are required - Can be formed unintentionally (only intent required is to run business for profit) AGEC 3503 AGEC 3503 - There can be a formal partnership agreement that details management responsibilities and how profits/losses will be split General Partnership: Management - --Each member of the partnership is called a "general partner" - The decisions are made by all partners and all partners actively participate...any partner can bind the rest of the partners to a contract - Profits and losses are split evenly unless the partnership agreement states otherwise General Partnership: Taxation - -- The general partnership has the advantage of being a "passthrough entity" - This means the partnership itself pays no income taxes - Instead, income is taxed only after it is distributed to the partners. (This is different than the "double tax" where income is taxed when the business earns it and when it is paid out to the individual partners.) Limited Partnership - --A more formal business organization that limits some liability; only required to have one general partner Limited Partnership: Liability - -General Partner- is fully liable for the financial and legal obligations of the business Limited Partner- Only at risk of losing the capital invested or pledged to the business; personal assets are not at risk Limited Partnership: Legal Status and Formation - --separate legal entity - Requires at least 1 General partner and 1 Limited partner - Requires a partnership agreement that lays out how the business will be run, including how profits/losses will be divided - Certificate must be filed with Secretary of State - Name of business must have "limited" or "LLP" Limited Partnership: Management - -The General partner manages the business - Policy reasons: General partner has the most at stake. Incentive to make sound business decisions - The limited partner CANNOT manage the business or they may be deemed to be a general partner. Limited Partnership: Taxation - -Limited Partnership is also a "pass-through entity" - Income is only taxed after it is passed on to the general or limited partners. Limited Liability Company (LLC) - -- Similar to Limited Partnerships except everybody can be protected. - Provides protection to personal assets - Made up of "members" rather than "partners" - Established 1970's AGEC 3503 AGEC 3503 Limited Liability Company (LLC): Liability - -- Members' personal assets are protected from creditors of the business. - Creditors can only reach that which has been invested or pledged to the business Limited Liability Company: Legal Status and Formation - -- separate legal entity Formation: - Can be formed with 1 or more members - Created by delivering Articles of Organization to the Secretary of State's office - Must include Name of LLC , Address of LLC, and agent for service of process, -Certain reports must be filed each year to maintain LLC status Limited Liability Company: Management - -2 options: - Member Management (small businesses): - All members have the right to participate in management - This is the more common option Manager Management (large businesses): - Only designated members have management authority as provided in articles of organization - Profits and losses are shared equally among members unless otherwise agreed Limited Liability Company: Taxation - --can elect to be taxed as a "pass through entity" or as a corporation LLC: taxed as "pass through entity" - --income is taxed only when it is distributed to the members LLC: taxed as corporation - --income would be taxed when the LLC earns it and again when it is distributed to the members Corporation - -Offer liability protection for shareholders - Similar to that of LLC - Oldest and most complex business organization with centuries of case law Corporation: Liability - --Shareholders are protected from creditors of the corporation in most cases -Corporations (and LLCs) provide the most liability protection for owners Corporation: Legal status - --Corporation is a separate legal entity Corporation: Formation - -Articles of incorporation must be filed with Secretary of State - Must include name of corporation, purpose of corporation, stock structure -Fictitious name statement AGEC 3503 AGEC 3503 By Laws - Include details of how the corporation will be run officers, shareholder meetings, number and terms of Directors on Board Corporations: Formalities - -Record keeping requirements -Regular board meetings -Annual shareholder meetings (remember the trip to Hawaii)- Annual filing requirements for the state Corporations: Management - -Shareholders elect a Board of Directors -Board of Directors appoint Officers -Officers are responsible for day-to-day management decisions -Board of Directors is responsible for long term planning and management -Shareholders have limited management authority and vote only on extraordinary measures -Like selling more than 1/2 of the assets or dissolving S Corporation - -Limited number of shareholders (100 or less) -"Legal persons" that are allowed to be shareholders is limited to citizens, resident aliens, estates and certain trustsNo corporations, non-resident aliens -Only one class of voting stock -Distribution rights to shareholders must be equal -No tax at the corporate level..."pass through" -Similar to taxation of LLC Business Orgs and Estate Planning - -Other advantages besides avoiding probate: -You can "gift" shares of a business much easier than physically dividing up assets -By splitting up ownership of a business between different people you can lower the taxable value of an estate. Federal Income Tax - --Tax that you pay on income you earn each calendar year -Important to agriculture because it has a lot of expenses Taxable incomes: - -- Gross Income - Personal Deductions - Business Deductions - Standardized Deduction/Personalized Deductions - Personal Exemption Business deductions - --ordinary and necessary expenses paid during the year for running the business Estate tax - --tax imposed on the transfer of the "taxable estate" from a deceased individual AGEC 3503 AGEC 3503 Gift tax - --tax imposed on the transfer of property (including money) during a person's life Tax Cuts and Jobs Act of 2017 (passed 12/2017) - --Lowered Corporate Income Rates substantially -Several major changes (unified credit) with the estate tax State Estate/Inheritance Taxes - --A tax that some states impose on the decedent's estate. (in addition to any federal estate taxes) How many states have an inheritance tax? - -20 + DC Estate planning - --determines how they are going to distribute the assets to the next generation Succession planning - --brings in the nex