Legal Environment Chapter 11.

S Corporation

A business corporation that qualifies for special income tax treatment.

Close Corporation

A corporation whose shareholders are limited to a small group of persons, often only family members. In a close corporation, the shareholders' rights to transfer shares to others are usually restricted.

Alien Corporation

A designation in the United States for a corporation formed in another country but doing business in the United States.

Dividend

A distribution to corporate shareholders of corporate profits or income, disbursed in proportion to the number of shares held.

Joint and Several Liability

A doctrine under which a plaintiff can sue, and collect a judgment from, all of the partners together (jointly) or one or more partners separately (severally).

Limited Liability Partnership (LLP)

A form of partnership that allows professionals to enjoy tax benefits of a partnership while limiting their personal liability for the malpractice of other partners

Limited Liability Company (LLC)

A hybrid form of business enterprise that offers the limited liability of the corporation but the tax advantages of a partnership.

Corporation

A legal entity formed in compliance with statutory requirements that is distinct from its shareholder-owners.

Learning Objective 1 What advantages and disadvantages are associated with the sole proprietorship?

A major advantage of the sole proprietorship is that the proprietor owns the entire business and has a right to receive all of the profits (because he or she assumes all of the risk). Disadvantages of the Sole Proprietorship The major disadvantage of the sole proprietorship is that the proprietor alone bears the burden of any losses or liabilities incurred by the business enterprise.

General Partner

A partner who assumes responsibility for the management of the partnership and liability for its debt

Limited Partner

A partner who contributes capital but has no right to participate in the management or operation of the partnership and is not personally liable for partnership debts beyond the capital contributed

Limited Partnership (LP)

A partnership consisting of one or more general partners and one or more limited partners.

Member

A person who has an ownership interest in a limited liability company

Fiduciary Relationship

A relationship founded on trust and confidence.

Business Judgment Rule

A rule that immunizes corporate management from liability for decisions that result in corporate losses or damages if the decision-makers took reasonable steps to become informed, had a rational basis for their decisions, and did not have a contract of interest with the corporation.

Bond

A security that evidences a corporate (or government) debt.

Shareholder's Derivative Suit

A suit brought by a shareholder to enforce a corporate cause of action against a third party

Articles of Partnership

A written agreement that sets forth each partner's rights and obligations with respect to the partnership.

Partnership

An agreement by two or more persons to carry on, as co-owners, a business for profit.

Stock

An ownership (equity) interest in a corporation, measured in units of share

Franchise

Any arrangement in which the owner of a trademark, trade name, or copyright licenses another to use that trademark, trade name, or copyright in the selling of goods or service

Learning Objective 5 What are the duties of corporate directors and officers?

Directors and officers are deemed fiduciaries of the corporation because their relationship with the corporation and its shareholders is one of trust and confidence. As fiduciaries, directors and officers owe ethical—and legal—duties to the corporation and to the share- holders as a whole. These fiduciary duties include the duty of care and the duty of loyalty.

Venture Capital

Financing provided by professional, outside investors (venture capitalists) to new business venture

Learning Objective 4 In what circumstances might a court disregard the corporate entity (pierce the corporate veil) and hold the shareholders personally liable?

Generally, courts pierce the veil when the corporate privilege is abused for personal ben- efit or when the corporate business is treated so carelessly that it is indistinguishable from the controlling shareholder. In short, when the facts show that great injustice would result from the use of a corporation to avoid individual responsibility, a court will look behind the corporate structure to the individual shareholder

Securities

Generally, stocks, bonds, and other items that represent an ownership interest in a corporation or a promise of repayment of debt by a corporation.

Foreign Corporation

In a given state, a corporation that does business in the state without being incorporated there

Domestic Corporation

In a given state, a corporation that does business in, and is organized under the law of, that state.

Operating Agreement

In a limited liability company, an agreement in which the members set forth the details of how the business will be managed and operated.

Proxy

In corporate law, a written or electronically transmitted form in which a stockholder authorizes another party to vote the stockholder's shares in a certain manner

Franchisor

One licensing another (the franchisee) to use the owner's trademark, trade name, or copyright in the selling of goods or services.

Franchisee

One receiving a license to use another's (the franchisor's) trademark, trade name, or copyright in the sale of goods and service

Entrepreneur

One who initiates and assumes the financial risk of a new business enterprise and undertakes to provide or control its management.

Preemptive Rights

Rights that entitle shareholders to purchase newly issued shares of a corporation's stock, equal in percentage to shares already held, before the stock is offered to outside buyer

Piercing the Corporate Veil

The action of a court to disregard the corporate entity and hold the shareholders personally liable for corporate debts and obligations.

Articles of Incorporation

The document containing basic information about the corporation that is filed with the appropriate governmental agency, usually the secretary of state, when a business is incorporated.

Articles of Organization

The document filed with a designated state official by which a limited liability company is formed

Bylaws

The internal rules of management adopted by a corporation or other association.

Learning Objective 2 What is meant by joint and several liability? Why is this often considered to be a disadvantage of doing business as a general partnership

The main disadvantage of the partnership is that the partners are subject to personal liability for partnership obligations. Partners are jointly and severally (separately) liable for partnership obligations, including contracts, torts, and breaches of trust. Joint and several liability means that a third party has the option of suing all of the partners together (jointly) or one or more of the partners separately (severally).

Learning Objective 3 What are the two options for managing a limited liability company?

The members may decide in their operating agreement to be either a "member-managed" LLC or a "manager-managed" LLC. Managers in a manager-managed LLC owe fiduciary duties to the LLC and its members, including the duty of loyalty and the duty of care.

Quorum

The number of members of a decision-making body that must be present before business may be transacted

Retained Earnings

The portion of a corporation's profits that has not been paid out as dividends to shareholders.

Dissociation

The severance of the relationship between a partner and a partnership.

Sole Proprietorship

The simplest form of business, in which the owner is the business. The owner reports business income on his or her personal income tax return and is legally responsible for all debts and obligations incurred by the business.

Commingle

To put funds or goods together into one mass so that they are mixed to such a degree that they no longer have separate identities