Business Law Chapter 36: Small Businesses and Franchises

The business name of an LLC usually must include:

"Limited Liability Corporation" or LLC

Pre incorporation activity

- Speak to potential investors

Persons considered to be limited partners

-General partner in same partnership - corporation - natural person

Tax advantages of sole proprietorship

-Only pay personal income taxes on business profits -Profits are only reported as personal income -Allowed to establish retirement accounts that are tax-exempt until finds are withdrawn - HOWEVER can still be liable for other taxes

The board of directors

1 of 2 types of management - Manage the business and long-term affairs

Requirements of a partnership

1. 2 or more people 2. intend to do business together 3. sharing profits and losses 4. sharing management duties

Requirements for the formation of an LLC

1. Articles of organization 2. Business name must include LLC 3. Number of members 4. Management style 5. Operating agreement

6 requirements for all business forms

1. Business name registration 2. Occupational licensing 3. State tax registration 4. Health and environmental permits 5. Zoning and building codes 6. Import/export regulations

Expressed powers of a corporation arise from

1. Constitution 2. state constitutions 3. state statutes 4. articles of incorporation 5. bylaws 6. resolutions from the board of directors

Incorporation process

1. State of incorporation selected 2. Appropriate business name is secured 3. Articles of incorporation filed w/ state

For-profit corporation

Intend to make a profit

State Regulation of franchises

State disclosures: Many states have laws similar to that of the federal May require good cause to terminate franchise: a state law may prohibit termination without "good cause" or require that certain procedures be followed in terminating a franchise.

Advantages of Sole Proprietorship

Taxes, Flexibility

Sole Proprietorship

a business owned and managed by a single individual

Domestic Corporation

a corporation in the state in which it is incorporated

Alien corporation

formed outside of country

Business judgement rule

rule permits managers to do their job, but also holds them personally responsible (or financially liable) when their business decisions are made without care. Specifically, managers will not be liable for decisions they make: In good faith For a lawful purpose Without a conflict of interest To advance the interests of the corporation With the care that an ordinarily prudent person would take in a similar situation

What does the operating agreement include for an LLC?

sets out the rights and obligations of the members and puts third parties on notice regarding who has authority to make business decisions, how the organization can be dissolved, etc. Without an operating agreement, however, state law will control

Partnership agreement

written agreement outlining the roles of partners, their rights, and duties

chain-style business operation

A type of franchise in which the franchise operates under the franchisor's business name and is required to follow the franchisor's standards and methods of business operation.

Limited Liability

Allows for business owners to not be personally liable for debts made by the business

Franchise

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

C corporation

C corporations pay taxes on profits at the corporate level.

Termination of LLC's:

Can be done through terms of operating agreement, articles of organization, or by an operation of law

Flexibility advantages of sole proprietorship

Can make any decisions without approval from someone else

Foreign Corporation

Corporation that incorporates outside of the state

Trademarks

Designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products

What do most businesses start off as?

Sole proprietorships

De Jure corporation

When a promoter has substantially complied with the requirements for incorporation but has made minor error

A member-managed LLC means:

all members participate, and decisions are made by majority vote.

Which of the following requires a filing with the state in order to be created? (Choose 2 answers.)

an LCC, and a corporation

For tax purposes, sole proprietorships:

are pass-through entities

publicly held corporation

corporation that sells stock on the open market

A shareholder has the right to inspect the corporate books, if done:

in good faith and for a proper purpose.

Owners of the following business associations have limited liability protection (choose 2 answers): sole proprietorships. limited liability companies. general partnerships. limited liability partnerships.

limited liability partnerships. limited liability companies.

Management styles of LLC

Member management and Manager management

Manager-managed organization

Members designate a person or group to make the decisions on behalf of everyone else

Officer

Other form of management -Deal with the day to day things

Limited partnership

Partnership formed by 2 or more parties with at least one being a general partner and at least one being limited

The Board of Directors may conduct business: (Choose 2 answer choices) at regular meetings. privately and outside of meetings called by the corporation. at special meetings. at any time.

at regular meetings. at special meetings.

In a manager-managed LLC, the designated manager may (choose 2 answers): be from outside the members of the company. only be from outside the members of the company. only be from within members of the company. be from within the members of the company.

be from outside the members of the company. be from within the members of the company.

Public corporation

made by government for governmental purpose

Rights of shareholders

right to information, right to approve corporate changes, right to vote

The Franchise Contract

the legal agreement between franchisor and franchisee

First corporate meeting

1. election of board directors 2. adoption of by laws 3. adoption and ratification of any pre-incorporation contracts by promoters

Implied powers of corporations

Corporation has the power to perform necessary actions for the corporation to work Ex: Hire and fire employees

Partner's liability

Each partner is personally responsible for debts

Which of the following are qualities of a non-profit corporation? (Choose 2 answers.) It provides minimal dividends to company shareholders. Its goal is to not earn a profit. Its goal is to earn a profit. It does not provide dividends to shareholders.

Its goal is to earn a profit. It does not provide dividends to shareholders.

Warnings

Shareholders may still find themselves personally liable if courts decide to pierce the corporate veil

At the first meeting of corporate shareholders, what business is normally conducted? (Choose 2 answers.) The election of the board of directors The adoption of corporate bylaws The filing of the articles of incorporation Voting on the business name

The election of the board of directors The adoption of corporate bylaws

The formation of LLC's are governed by:

The laws of the state in which it is created

In which of the following would the business judgment rule not help a manager escape liability? Choose 2 answer choices. If they conducted a reasonable inquiry, but the activity still resulted in a poor outcome When they acted as an ordinarily prudent person in good faith would act When they did not act in the best interests of the corporation When they committed an illegal act

When they did not act in the best interests of the corporation When they committed an illegal act

Benefit corporations

a for-profit corporation that seeks to have a material positive impact on society and the environment

In order to capitalize a sole proprietorship, an owner is likely to:

pay out of their own pocket or undertake personal debt.

Small Business Association (SBA)

A U.S. government agency that advises and assists small businesses by providing management training and financial advice and loans.

Close corporation

A corporation whose shareholders are limited to a small group of persons, often family members.

Member-managed organization

All members of LLC participate and vote to make decisions about the corporation

Private corporation

All other corporations that are not public or publicly held

Partner's rights

All partners have equal rights to management, profits and losses, to inspect business, but NOT to compensation for skills energy, time, etc. Property owned by partnership not individually Partner may act as agent on behalf of partnership

Which of the following should be approved by shareholders? Choose 2 answers. A change in employee compensation An acquisition of the company by another company A sale of old computers that the company no longer uses A dissolution of the corporation

An acquisition of the company by another company

Manufacturing Arrangement

Franchisor provides franchisee with technical knowledge to manufacture franchisor's product

s-corporation

Has special tax status granted to corporations that meet certain requirements

Federal regulation of franchises

Industry-specific standards: protect franchisee from unreasonable demands and bad faith termination The franchise rule: requires franchisors to disclose certain material facts that a prospective franchisee needs in order to make an informed decision concerning the purchase of a franchise.

What are the 3 types of more formal organizations that come from sole proprietorship?

Limited Partnership (LP), Limited Liability Partnership (LLP), and Limited Liability Company (LLC)

Partner's duties

Must contribute all of the capital needs, provide information to business for record keeping, fiduciary duties (partners owe each other duty of care and loyalty)

The articles of agreement for an LLC must include:

Name of business, principal address, name and address of registered agent

Parts of a franchise contract

Payment for franchise, business premises, location, business organization, quality control, pricing arrangements

Limited partners

Person whose financial obligations are limited to the amount of capital that they put in -Often require registry - Any new partners requires amendment to filing

Uniform Limited Liability Company Act (ULLCA)

Provides model rules and procedures for the development and governance of limited liability companies -very few states adopt these provisions

Pierce the corporate veil

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

Which of the following is a necessary element of the business judgment rule? Choose 2 answer choices. The person acted with the care of an ordinarily prudent person. The person acted in good faith. The person acted with extraordinary skill and care. The outcome of the action did not cause financial harm to the corporation.

The person acted with the care of an ordinarily prudent person. The person acted in good faith.

De Facto corporation

The promoter has made a good faith effort to incorporate and has actually used the corporation to conduct business

Disadvantages of sole Proprietorship

Unlimited liability, personal assets at risk, lack of community, and limited funds available

Number of members requirement for LLC:

Usually one member, some states may require at least 2

Termination of franchise

Usually stated in contract

Where should Articles of Incorporation be filed?

With the state

Distributorship

a type of franchising arrangement in which the franchisor makes a product and licenses the franchisee to sell it

Non-profit corporation

make profit but reinvest into the business -Doesn't distribute to shareholders

Trade Secrets

methods of production kept secret by the producing firm

A foreign corporation is: one that was incorporated in two or more different states. one that was incorporated outside of the United States. one that it privately held. one that was incorporated in a different state.

one that was incorporated in a different state.

Which of the following are TWO disadvantages of a sole proprietorship? (Choose 2 answers.)

personal liability for debts limited capital

The board of directors manages:

the business and affairs of the corporation.