chapter 12 Legal Environment of Business

General Partner

a partner who assumes responsibility for the management of the partnership and liability for all partnership debts

Limited Partner

a partner who contributes capital to the partnership but has no right to participate in the management and operation of the business

Dissociation

a partner withdraws from a partnership

S corporation

- can elect through the IRS - only one class of stock - no more than 100 shareholders - only natural citizens shareholders -not other corporations or partnerships -avoid double-taxation - can revert back to C corporation

Franchise

-The owner of a trademark, trade name, or copyright licenses the franchisee to use it in the selling of goods or services -The franchisee is an independent business owner but receives the benefit of being associated with a well-known name

Limited Partnership

-business organization made up of two or more persons who agreed to carry on business for profit -not all partners have right to participate in management of enterprise/ liable for partnership debts -bankruptcy does not not dissolve it

sole-proprietorship

-business owned by a sole owner. The business generally is not formed as an entity -entity does not need to be registered with the secretary of state -The owner reports business income on his personal income tax return and is legally responsible for all debts and obligations incurred by the business -Disadvantages of Sole Proprietorships The sole proprietor has unlimited liability for all obligations incurred in doing business

Partnership

-co-owners of it and have joint control over its operation and the right to share in its profits - 2 or more persons carry on a business for profit. - presumption that partners have equal voice -no income tax on its income. Pay tax on their share of partnership income -*oral, written, or implied by conduct*

How to create a corporation

-create and file *articles of incorporation* with the proper state official -elect a board of directors. -enact bylaws. - issue stock.

Limited Liability Companies (LLC)

-encourage small business development -profits are taxed once as owner's income - form document of *articles of organization* - operating agreement - agreement provides members equal voice in management regardless of ownership percentage -can continue if all members give their consent -Formation of LLC Articles of organization must be filed with a central state agency -LLC can be taxed either as a partnership or as a corporation Unless indicated, IRS automatically taxes like a partnership

Professional Corporations

-group of professionals that are licensed -liability limited to what they put into the entity -stocks can not be sold to outside investors

Limited Liability

-invest in business without placing all personal wealth at risk -management can be passive about internal management of business -

Close corporation

-limited number or stakeholders - shares not sold openly -shareholders have agreement the governs that affairs of the corporation - not formal rules regarding shareholder and director meetings (required of regular corporations)

Benefit Corporation

-only in 30 states -corporate purpose to create a material positive impact on society/ environment -consider impact on stakeholders/workers/community/ environment - make available report to public against 3rd party standards -greater leeway in making decisions that are not traditional standard of maximizing the financial interests of the firm.

How to form partnership

-oral agreement -implied agreement -Written agreement 1. Basics 2. Finances 3. Management 4.Dissolution (procedures to be followed if partnership is terminated)

Uniform Limited Partnership Act

-partners must file *certificate of limited partnership* with appropriate state official (usually Secretary of State). -certificate contain: 1. name of business 2. type or character of business 3. address of an agent who is designated to receive legal process 4. name and addresses of each general and limited partner 5. contributions of each partner 6. duration of limited partnership 7. the rights of personnel changed in partnership 8. proportion of the profits or compensation each partner receives.

Law of Partnership

-partnership not treated as in independent legal entity. -partners had to sue or be sued individually

Corporations continued

-recognized as legal "persons" -can have one or more shareholders -Owners can be natural persons or other businesses -substitutes itself for shareholders

corporation

-sole managerial control over business but does not have enough money to set the business up so she is seeking investors. - double taxation (federal taxes and shareholders pay income tax)

Domestic Corporation

-the corporation does business in and is organized under the law of that state

Foreign Corporation

-the corporation does business in the state without being incorporated therein

Alien Corporation

-the corporation was formed in another country but doing business in the United States

5 Factors the lead courts to pierce the corporate veil

1) A party is tricked or misled into dealing with the corporation rather than the individual (2) The corporation is set up never to make a profit or always be insolvent, or it is too "thinly" capitalized—that is, it has insufficient capital at the time of formation to meet its prospective debts or other potential liabilities (3) The corporation is formed to evade an existing legal obligation (4) Statutory corporate formalities, such as holding required corporation meetings, are not followed (5) Personal and corporate interests are commingled (mixed together) to such an extent that the corporation has no separate identity

Dissociation of Limited Partnerships

1. A general partner has the power to voluntarily withdraw from a LP unless the partnership agreement specifies otherwise 2. A limited partner theoretically can withdraw from the partnership by giving *6 months'* notice unless the partnership agreement specifies a term—most do 3. On dissolution, the limited partner is entitled to return of capital contributions after debts are paid

Franchise Rule

1. Franchisors are required to disclose certain material facts that a prospective franchisee needs to make an informed decision concerning the purchase of a franchise 2. Required to explain termination, cancellation, and renewal provisions of the franchise contract

Liabilities of Partners in a LP

1. General partners are personally liable to the partnership's creditors 2. Limited partners enjoy limited liability so long as they do not participate in management

Rights of partnership

1. Management- have equal rights in the managing the partnership 2. Interest in partnership- profits are shared equally unless contracted differently 3. Compensation- usually none 4. Inspection books- accessible to all 5. Accounting of Partnership Assets- required 6. Property Rights- property acquired by a partnership is the property of the partnership

Basis for piercing the corporate veil

Hold owners personally responsible in limited liability organizations 1. Corporate formalities are not observed. 2. The officers pay corporate debts and bills with personal checks when the corporation is running low on cash. (fraud) 3. The corporation is undercapitalized at its start up.

General Partnerships

Share control over business's operations and profits.

General partnership

Three Elements for a Partnerships 1. A sharing of profits and losses 2. A joint ownership of the business 3. An equal right to be involved in the management of the business

Perpetual Existence

corporation has right to exist even though death or retirement of stakeholder

Legal Entity

corporation rights and responsibilities separate from the owners. Recognized under federal and state law as a "person"

Tort liability for a partnership

extends to the partnership itself and to the individual partners. The liability of the individual partners is *joint and several and unlimited*.

Uniform Partnership Act

it provided default rules that determine the operation of partnership when a partnership is silent or no other formal agreements.

business judgment rule

makes directors immune from liability if there is a reasonable basis for their decisions.

Fiduciary duty

requires that each partner act in good faith for the benefit of the partnership. Interests behind others in partnership.

right to indemnification

the director would be reimbursed for legal costs and fees incurred as a result of being sued for his or her actions as a director of the corporation.

A voluntary termination of a corporation's existence

vote of the shareholders and directors