Chapter 21 - Forms of Business Organizations

t/f in an LLC, the consent of ALL members is needed to sell, lease, exchange, or disposes of all of the company's property, approve a merger, etc.

true

t/f franchisors must be aware of antitrust laws

true antitrust laws prohibit specific forms of anticompetitive behavior

Advantages of a partnership:

1) Creation is easy (the partners aka the agents of the partnership are generally not required to create an official or even written agreement to create the partnership) 2) Income of business is personal income (the income from the business is TAXED as individual income for each partner) 3) they can deduct business losses woohoo! 4) the ability to choose the people with whom you want to be partners with

franchises fall into three categories:

1) chain-style business operation 2) distributorship 3) manufacturing arrangement

disadvantages of a corporation:

1) corp income taxed TWICE 2) formalities required in establishing and maintaining corporate form

for a termination of partnership to be complete, a partnership must experience:

1) dissolution stage 2) winding-up stage

Duties of partners to one another:

1) duty to be loyal 2) fiduciary duty (MOST IMPORTANT) 3) duty of obedience 4) duty of care

Disadvantages of a partnership:

1) each partner has personal liability for ALL losses, including those of ANOTHER PARTNER (in most cases) (like the other's debt for embezzlement)

types of partnerships:

1) general partnership 2) limited partnership (LP) 3) limited liability partnership (LLP)

termination of a franchise must:

1) give franchisee sufficient notice 2) there must be a cause (ps franchise usually established for a trial period)

advantages of a francise to a franchisee:

1) help from the franchisor in starting the francise 2) instant recognition due to strong trademark 3) benefits from the franchisor's worldwide advertising

two situations in which a partnership by estoppel exists:

1) if a third party is aware of a misrepresentation of partnership and consents to the misrepresenation 2) if a nonpartner has represented himself as a partner, and a third party REASONABLY relies on the information to his detriment, the nonpartner can be held liable

advantages of regular corporation:

1) limited liability for shareholders 2) ease of raising capital by issuing stock 3) profits taxed as income to the shareholders, not the partners

key reasons for the rapid acceptance of LLC's:

1) limited liability like that of a corp to its mems 2) does not require profits and losses to be allocated in proportion to ownership interests 3) not required to hold annual meeting and draft meeting minutes (like a corp would) - record keeping easy and flexible 4) the owner aka member does NOT have to give up his right to participate in management of LLC (like a limited partner would) 5) flexibility it offers members in terms of alt. ways to structure its management ** 6) IRS generaly treats it like a partnership or sole proprietorship, w members reporting their share of the profits and losses of the LLC on their personal tax returns - no double taxation - most importantly you have the right to choose whether to be taxed like a corp or sole **7) members can be from OUT of the country 8) like a corp, ordinary business expenses can be deducted from the profits of an LLC b4 the llc's income is allocated to its owner for tax purposes

advantages / disadvantages to the FRANCHISOR of starting a franchise:

1) low risk in starting a franchise 2) increased income from franchises disadavantages - little control over it and can become liable for the franchise if it exerts too much control

LLC - two options on how a company is to be managed

1) member-managed 2) manager-managed

disadvantages of a franchise to a franchisee:

1) must meet the franchisor's standards or risk losing the fr 2) has little to no creative control over the business

the franchise agreement covers various factors:

1) payment to the franchisor 2) location of the franchise 3) restrictions the franchise must follow 4) method of termination of the franchise

consequences of a corp being a separate identity:

1) shareholders cannot be held personally liable for the debts of the corp (their lia. is limited to what they have invested only) 2) corp is NOT dissolved when a shareholder dies 3) the corp must pay taxes on its profits (in addition, shareholders must pay taxes on dividends they receive from the corp)

special requirements of an LLP:

1) the business name must include the phrase LIMITED LIABILITY PARTNERSHIP or the abbreviation LLP 2) the parties must file a form with the secretary of the state to create the LLP

the limited partnership must meet certain requirements not expected of the general partners:

1) the limited partnership must use the word LIMITED in its title 2) to create a LP, the parties must file a certificate of partnership with a state office (if not filed correctly or at all, courts will rule that only a GENERAL partnership exists) - bad because then ALL parties will be held liable for all the debts

info on the articles of partnership:

1) the partners names as well as the name of the partnership 2) should address the duration of the partnership (date or event when it would expire or indefinite) 3) state the division of profits and losses 4) should establish the division of management duties 5) should state exactly what capital contributions will be made by each partner (creating articles of partnership can prevent legal problems by explicitly establishing the terms of the agreement)

reasons for a rightful DISSOLUTION of a partnership

1) the term established in the partnership agreement expires 2) the p meets its established objective 3) a p withdraws from the partnership at will 4) a partner dies 5) partner declared insane 6) is p becomes illegal 7) a p becomes incapable of performing his duties

Reasons to be a sole propretorship over other business organizations:

1. Creation is easy 2. Propiertor is in TOTAL control of management 3. Proprietor keeps ALL profits

Disadvantages of sole proprietorship:

1. personal liability for ALL losses 2. funding is limited to personal funds and loans (that's why start-ups are so hard)

t/f during wind up stage partners can now engage in business that competes with the partnership business

true

Colette Bohatch v. Butler & Binion case

Supreme Court ruled: even if you whistle-blow in good faith against a partner, they can still fire you as a partner reasoning: basis of partnership law - a belief that partners should be able allowed to choose their partners ***

LLP was first enacted by the state of:

Texas in 1991

T/F Deciding what form of business to create is one of the most important decisions a business makes.

True

T/F The business world is NOT static, and businesses can and do, change over time.

True

Dissolution of LLC:

Under the ULLCA, an LLC dissolves on any event that 1) the OPERATING AGREEMENT specifies will cause dissolution 2) the consent of all the members 3) the passage of 90 consec. days during which the comp has no mems 4) or the issuance of a court order for dissolution

LLC was first recognized in:

Wyoming in 1977

Do sole proprietorships terminate when the sole proprietor dies?

Yes they do

S corportation

a business organization formed under federal law tax that is considered corp YET taxed like a partnership

sole propiertorship

a business organization in which one person (sole proprietor) is in control of the management and profits

franchise (ex. mc'ds)

a business that exists bc of an arrangement bt the franchisor and franchisee

franchise agreement

a contract whereby a company grants permission (a license) to another entity (the franchisee) to use the name or trademark in the operation of a business and associated sale of goods in return for payment

corporation (the most dominant form of business organization and examples are Walmart and McDonalds)

a legal entity formed by issuing stock to investors, who are the owners of the corporation

franchisee

a person who sells goods or services under the trade name or trademark

partnership (according to the Uniform Partnership Act)

a voluntary association between two or more people who co-own a business for profit

limited liability partnership (llp) (fairly new ps)

all the partners assume liability for any partners professional malpractice to the EXTENT of the partnership's assets - llp is diff than other forms of partnerships bc the partner's liability for professional malpractice is limited to the partnership

limited partnership (LP)

an agreement bt at least one general partner and at least one limited partner - the general partners assume unlimited personal liability for debts or management, while the LIMITED partners assume NO liability BEYOND the capital they have invested limited partners DO pay taxes on their share of the business profit

limited liability company (LLC) (one of the newest forms of business organization in the US)

an unincorporated form of business organization that is seen as COMBINING the most advantageous features of partnerships and corps combines the TAX advantages and management flexibility of a partnership with the limited liability of a corporation

In re Leah Woskob v Alex Woskob (hubby wife case):

bankruptcy in and of itself is NOT grounds for automatic dissolution of the partnership Leah won the case - the partnership had NOT dissolved prior to ex's death

if someone who is not a partner but does not CORRECT someone's reliance on this fact, they will:

be ESTOPPED from denying they are partners

general partnership

consists of an agreement that the partners will divide the profits (usually equally) and management responsibilities and share unlimited personal liability for the partnership's debts

Mary Kay inc. V Janet Isbell case:

decision: isbell was not a franchise - ruling reversed and case dismissed (she sold mary kay products from her home and had a shopping cube at mall) significance: raises question on protection of ppl like janet; what is her role if not a franchisee? (where is her legal protection since MK does not require her to have a fixed location)

formation of LLC

formed by filing articles of organization in the state in which members want to establish their LLC (varies by state but) articles include: 1) the name of the business which must include the words or initals LLC 2) its principal business address 3) the name and address of a registered agent for a service 4) the names of the owners 5) info on how the company's management will be structured

one way that a corp can avoid double taxation:

forming an S CORPORATION

operating agreement to form llc:

foundational contract among the entity's owners spells out manners as to how the company is: 1) to be managed 2)how profits & losses will be allocated 3) how interests may be transferred 4) how and when an llc may be dissolved (any matter not on here will be resolved w the state LLC statute)

chain-style business op (like burger king)

franchise operates under the franchisor's business name and is required to follow the franchisor's standards and methods of business op.

distributorship

franchises in which the franchsior manufactures a product and licenses a dealer to sell the product in an exclusive territory (like a car dealership)

one of the key issues to be determined in the operating agreement:

how the company is to be managed

in an LLC, why would one choose to be taxed as a corp?

if most of the profits will be reinvested in the business, this option allows profits to be taxed at the lower corp rate

shareholders

investors in a corp. who own the corp.

Cousins Subs v McKinney case:

issue: did cousins subs make misleading statements of material facts? decision: there is more weight in a written contract than verbal anything; cousins did NOT make any misleading statements of material facts (counterclaim dismissed) significance: unclear whether Cousins Subs made verbal promises; REGARDLESS, McKinney did SIGN contracts that contradicted said promises. ** It is IMPORTANT for businesspeople to read contracts THOROUGHLY and to make sure all promises are there. **

example of sole propiertsorhip

lawn-mowing business or a sewing shop

qualification (LLC)

llc needs to register in states in which they want to do business in - just file a certificate of authority and a business license in each add. state -

foreign company (llc)

llc will be known as this in each additional state in the US (but will be governed under the rules of the state where it was created)

In a manager-managed LLC:

members select a group of managers to manage the affairs of the company - these managers have authority to enter into contracts on behalf of llc (but non managers cant)

dissociation (in LLC)

mems voluntary withdrawal from the LLC

duty of care to the other partners

must perform her management functions to the best of her abilities (honest mistakes have pass on being held liable)

winding up

once the partnership is LIQUIDATED, the partners begin the process of winding up ; the activity of 1) completing unfinished partnership 2) collecting and paying debts 3) collecting partnership assets 4) taking inventory

franchisor

owner of a trade name or trademark

Federal Trade Commission has a franchise rule:

requires franchisors to present prospective franchisees w material facts necessary for an informed decision about entering into a relationship

which law is a corp under?

state law

manufacturing arrangement

the franchisor provides the franchisee w a formula or necessary ingredient to manufacture a product

fiduciary duty

the partner must work in good faith for the benefit of the partnership and REFRAIN from taking any kind of action that will UNDERMINE the partnership (partners must DISCLOSE any material facts affecting the business)

The National Conference of Commissioners on Uniform State Laws recognized that llc needed to have some rule so:

they drafted the Uniform Limited Liability Company Act (ULLCA) in 1995 but has not been uniformly adopted so check w ur state lol

what happens if someone who is not a partner is estopped? do they have rights to the partnership?

they will NOT be able to claim the rights associated being a partner, they could STILL be held liable for the costs of damages to the customer

duty of obedience in a partnership

to obey the partnership agreement; if they don't they can be held liable for any losses that the partnership incurs

*(in a corp) shareholders elect a board of directors which is responsible for managing the business

true

*(in a corp) the board of directors hires officers to the run the day to day business

true

A CORPORATION is considered a resident of the state where it is incorporated and also where it was created

true

LLC is under state law

true

T/F A partnership is not considered a separate legal entity and is DISSOLVED when a partner dies

true

T/F during the wind up stage the partners must STILL fulfill their fudiciary duties - disclose all info about the assets

true

T/F if a limited partner dies, the limited partner is usually unaffected (in an lp)

true

T/F in a limited partnership, if a GENERAL partner dies, the limited partnership is usually dissolved

true

T/F in llp, if one partner is guilty of malpractice, the other partners' personal assets cannot be taken

true

T/F parties who are not named in a partnership agreement can be considered partners

true

T/F sole pro is by far the most popular form of business organization in the US

true

T/F the sole proprietorship is not considered a separate legal entity

true

The UPA governs PARTNERSHIPS in most states in the absence of an express agreement

true

t/f S corporation CANNOT have more than 100 shareholders

true

t/f a corporation separates business ownership from business control

true

t/f an LLC is considered a citizen of every state in which its members reside

true

t/f any income of the s corp TAXED when it is distributed to the shareholders, who must report the income on their personal income tax forms

true

t/f contract law and UCC in particular applies to the franchise relationship

true

t/f federal and state laws have been established to protect the franchisee in the franchise relationship

true

t/f managers in an LLC owe the LLC and its members the same fiduciary duties as the officers and directors of a corp oww to the corp and its shareholders

true

t/f members of an LLC all have the apparent and actual authority to enter into contracts on behalf of the LLC

true

t/f under the ULLCA, LLC's are member-managed

true

t/f under the ucclla and most llc statutes: a members voluntary withdrawal from the LLC does NOT terminate the LLC

true

t/f an LLC is not required to have a detailed written operating agreement

true

T/F LLP is EXTRA protection awarded partners in an LLP that makes the LLP a SEPARATE form of partnership

true limited partnerships are not the same as limited liability partnerships bc of it!

a corporation is a separate legal identity

true this means the CORP Can be sued

S corporations are ALWAYS formed under federal law

true ; federal law (NOT state law)

T/F if a franchisor exercises too much authority in day to day affairs of the business, the franchisor could be held liable for the torts of the franchisee's employees

true!

t/f the LLP is not considered a separate legal entity

true; each partner PAYS TAXES on his or her share of the income of the business ** in llp

dissolution stage

when a partner stops fulfilling the role of a partner to the business (by choice or default) (can be rightful or wrongful)

articles of partnership

written agreement that creates the partnership

LLC's citizenship is determined where the members reside

yeah

remember: a party can be sued in federal court over a matter involving more than 75,000 when diversity of citizenship exists

yeah