The Portable MBA in Finance and Accounting, 3rd Edition

(Greg DeLong) #1
Choosing a Business Form 227

Many of the rules applicable to the operation of partnerships are set forth
in the Uniform Partnership Act, which has been adopted in one form or another
by 49 states. That Act defines a partnership as “an association of two or more
persons to carry on as co-owners a business for profit.” Notice that the defini-
tion does not require that the individuals agree to be partners. Although most
partnerships can point to an agreement between the partners (whether written
or oral), the Act applies the rules of partnership to any group of two or more
persons whose actions fulfill the definition. Thus, the U.S. Circuit Court of Ap-
peals for the District of Columbia, in a rather extreme case, held, over the de-
fendant’s strenuous objections, that she was a partner in her husband’s burglary
“business” (for which she kept the books and upon whose proceeds she lived),
even though she denied knowing what her husband was doing at nights. As a re-
sult of this status, she was held personally liable for damages to the wife of a
burglary victim her husband had murdered during a botched theft.
In contrast, a corporation is a legal entity separate from the legal identities
of its owners, the shareholders. In the words James Thurber used to describe a
unicorn, the corporation “is a mythical beast,” created by the state at the request
of one or more business promoters upon the filing of a form and the payment
of the requisite, modest fee. Thereupon, in the eyes of the law, the corpora-
tion becomes for most purposes a “person” with its own federal identification
number! Of course, one cannot see, hear, or touch a corporation, so it must in-
teract with the rest of the world through its agents, the corporation’s officers
and employees.
Corporations come in different varieties. The so-called professional cor-
poration is available in most states for persons conducting professional prac-
tices, such as doctors, lawyers, architects, psychiatric social workers, and the
like. A subchapter S corporation is a corporation that is the same as a regular
business corporation in all respects other than taxation. These variations are
discussed later.
A fourth common form of business organization is the limited partner-
ship, which may best be described as a hybrid of the corporation and the gen-
eral partnership. The limited partnership consists of one or more general
partners—who manage the business much in the same way as do the partners
in a general partnership—and one or more limited partners, who are essen-
tially silent investors with no control over business operations. Like the general
partnership, limited partnerships are governed in part by a statute, the Uni-
form Limited Partnership Act (or its successor, the Revised Uniform Limited
Partnership Act), which has also been adopted in one form or another by
49 states.
The limited liability company (LLC), is now available to entrepreneurs in
all 50 states. The LLC is a separate legal entity owned by “members” who may,
but need not, appoint one or more “managers” (who may but need not be mem-
bers) to operate the business. A few states require that there be more than
one member, but the trend is toward allowing single-member LLCs. An LLC
is formed by filing an application with the state government and paying the

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