Business Law Ch. 14

Forms of Business Organizations

Three basic forms include: * sole proprietorship * partnerships * corporations The hybrid forms include: * limited partnerships * S corporations * limited liability companies * limited liability partnerships.

Partnerships

When two or more people want to own a business together. It is an agreement between two or or persons to share a common interest in a commercial endeavor and to share profits and losses. - the cost of performing a partnership is relatively minimal. Elements of a Partnership: 1.) two or more persons 2.) a common interest in business 3.) sharing profits and losses. DO NOT operate a business with one or more co-workers without a carefully drafted partnership agreement; unresolved issues lead to major legal problems.

Advantages of Partnerships

Advantages: 1.) a partnership is easily formed because it is based on a contract among persons. 2.) costs of formation are not significant. 3.) partnerships are not a tax-paying entity. 4.) each partner has an equal voice in management, unless there is a contrary agreement. 5.) may operate in more than one state without obtaining a license to do business. 6.) they generally are subject to less regulation and less governmental supervision that are corporations.

Factors to Consider when Selecting a Business's Organizational Form

* cost of creating the organization * the continuity or stability of the organization * the control of decisions * the personal liability of the owners * the taxation of the organizations earnings and its distributions of profits to the owner's.

Sidebar 14.2- Formation and Naming of a Partnership

- partners should never rely on implied agreements. - their agreement should be explicitly stated among the parties and drafted into a formal document; this formal agreement is called "ARTICLES OF PARTNERSHIP" - the partners then select the name of the partnership - the right of selection is subject to two limitations in many states: First, a partnership may not use any word in the name, such as "company" that would imply the existence of a corporation. Second, if the name is other than that of the partners, the partners must give notice as to their actual identity under the states "ASSUMED-NAME STATUTE" - failure to comply with this statute may result in the partnership being denied access to courts or may result in criminal actions.

Creation

- the legal steps necessary to form a particular business organization. * the most significant creation issues are how long it will take to create a particular organization and how much paperwork is involved.

Continuity

- the most crucial issue here being the method by which a business organization can be dissolved. - a DISSOLUTION is any change in the ownership of an org that changes the legal existence of the org. ex: the death, retirement, or withdraw of an owner creates issues of whether an organization and its business will continue.

Sidebar 14.4- Steps in Creation of a Corporation

ARTICLES OF INCORPORATION- formal application for a corporate charter. These articles must contain the proposed name of the corp. Must include the following words or end with an abbreviation of them; "corporation", "company", "incorporated", or "limited". *in addition to the name the articles usually will include the proposed corps period of duration, the purpose for which it is formed, the number of authorized shares, and info about the initial corporate officials.

Corporations

An artificial, intangible entity created under the authority of a state's law. DOMESTIC CORPORATION- created by a state charter and operates in the state that charters it. In all other states, this corporation is called FOREIGN CORPORATION. A corp created under the authority of a foreign country may be called an ALIEN CORPORATION.

Publicly Held

An organization owned by hundreds, if not thousands, of owners who can exchange their ownership interests on public exchanges. ex: those whose stock is traded on a public exchange. - usually known as a corporation, because the owners can transfer their ownership without interfering with he organization's management.

Closely Held

An organization that is owned by only a few people. ex: family owned and family operated businesses

Liability

Ask yourself, to what degree are you personally liable in this business? Generally people want to limit their personal liabilities. Partnerships: - the partners personal assets can be claimed by the partnerships creditors. - these partners are JOINTLY and SEVERALLY LIABLE. ex: a partnership has three partners and it owes a creditor $300,000. if it is necessary to collect the debt, this creditor can sue all three jointly for the 300,000. also, the creditor can choose to sue any combination of the three as they choose.

Disadvantages of Partnerships

Disadvantages: 1.) for practical reasons, only a limited number of people can be partners. 2.) a partnership is dissolved anytime a partner ceases to be a partner, regardless of whether the reason is withdraw or death. 3.) each partner's liability is unlimited, contrasted with the limited liability of a corporate shareholder. 4.) partners are taxed on their share of the partnership's profits, whether the profits are distributed or not. in other words, partners often are required to pay income tax on money they do not receive.

Sidebar 14.3- Anticipating a Partnership's Dissolution--Buy and Sell Agreements

In the event that a partner dies or withdraws, the "articles of partnership" should include a BUY and SELL AGREEMENT. This agreement should be entered into when the business entity is created, it provides for the amount and manner of compensation for the interest of the deceased or withdrawing owner. - these frequently use formulas to compute the value of the withdrawing partner's interest and provide for the time and method of payment. - in the event of a death, the liquidity needed is often provided by cash proceeds from life insurance made payable to the business or the surviving partners.

Taxation

Most critical when selecting a business organization. - how is the income earned? - how is the money distributed to the business owners taxed?

Managerial Control

The failure to consider how to overcome disputes involving managerial control can cause business activities to suffer and the organization to fail. Therefore, consideration of potential conflict and mechanisms to resolve disputes are essential when selecting a form for a business venture. Partnerships: - unless an agreement provides to the contrary, each partner has an equal voice in the firms affairs.

Sole Proprietorships

The simplest form of business organization, created and controlled by one owner. - easiest and least expensive - legally no formal documentation is needed. - a business may shift away from a sole proprietorship as it gains more success. - the proprietor may dissolve his or her organization at any time by simple changing the org or terminating the business activity. - is personally obligated for the debt of the proprietorship. - is not taxed as an organization, but must pay applicable personal taxes.