Ch 14 - Business Organizations

derivative suit

1.) A lawsuit filed by one or more shareholders of a corporation against that organization's management. This suit is brought to benefit the corporation directly and its shareholders indirectly. 2.) Lawsuit brought on behalf of another through the other's rights; for example, a shareholder suing to enforce a corporation's rights. 3.) A lawsuit a shareholder can bring on behalf of the corporation to correct an injury to the corporation

piercing the corporate veil (alter ego doctrine)

1.) A doctrine that says if a shareholder dominates a corporation and uses it for improper purposes, a court of equity can disregard the corporate entity and hold the shareholder personally liable for the corporation's debts and obligations 2.) If a shareholder dominates a corporation and uses it for improper purposes, a court of equity can disregard the corporate entity and hold the shareholder personally liable for the corporation's debts and obligations. 3.) Grounds - harm caused to third party because SH ignored corporate formalities and injustice resulted: 3a) Owners do not treat corporation as a separate entity 3b) Conmingle personal and corporate funds 3c) Use corporate assets for personal purposes 3d) Owners do not hold meetings Parent/subsidiary corporations or affiliated corporations can be held liable for this

organizational forms

1.) sole proprietorship - see term 2.) partnership - see term 3.) corporation - see term 4.) limited partnership - see term 5.) S corporation - see term 6.) limited liability company & partnership - see term

Corporation

1.) A business owned by stockholders who share in its profits but are not personally responsible for its debts 2.) A business that is owned by many investors. 3.) a company or group of people authorized to act as a single entity (legally a person) and recognized as such in law. 4.) is an artificial, intangible entity created under the authority of a state's law 5.) a corporation is known as a domestic corporation in the state in which it is incorporated 6.) in all other states, this corporation is called a foreign corporation - see foreign corporation term 7.) a corporation created under the authority of a foreign country may be called an alien corporation, though it is generally treated the same as a foreign corporation under the law - see alien corporation term 8.) as a creature of state legislative bodies, the corporation is much more complex to create and to operate than other forms of businesses 1.) CREATION: 1a.) a corporation is created by a state issuing a CHARTER upon the application of individuals known as INCORPORATORS 1b.) in comparison with partnerships, corporations are more costly to form - among the costs of supplies, there also are annual costs in continuing a corporation's operation - these recurring expenses include annual reporting fees and taxes, the cost of annual shareholders' meetings, and ongoing legal-related expenses 1c.) do check the website of your state's authority responsible for issuing corporate charters - in most states, this authority is under the secretary of state 1d.) if a corporation wishes to conduct business in states other than the state of incorporation, that corporation must be licensed in these foreign states 1e.) the process of qualification usually requires payment of license fees and franchise taxes above and beyond those paid during the initial incorporation process 1f.) if a corporation fails to qualify in states where it is conducting business, the corporation may be denied access to the courts as a means of enforcing its contracts 1g.) the separation of the corporate organization's existence from its owners' willingness to remain associated with it is viewed as a major advantage to the corporation's stability 2.) CONTINUITY: 2a.) in contrast to partnership, a corporation usually is formed to have a perpetual existence 2b.) the law treats a corporation's existence as distinct from its owners' status as shareholders 2c.) a shareholder's death or sale of her or his stock does not affect the organizational structure of a corporation 2d.) this ability to separate management from ownership is often cited advantage of the corporation 2e.) although the sale of stock by a major shareholder or the shareholder's death has no legal impact on that corporation's ability to do business - the shareholder may have been the driving force behind the corporation's success - without this shareholder, the corporation's business may fail 3.) MANAGERIAL CONTROL 3a.) the issue of control is complicated by three groups in the corporate form of organization 3b.) 1st, the shareholders elect the members of the board of directors - these directors set the objectives or goals of the corporation, and they appoint the officers - these officers, such as the president, vice president, secretary, and treasurer, are charged with managing the daily operations of the corporation in an attempt to achieve the stated organizational objectives or goals 3c.) PUBLICLY HELD Corporations - control by management (a combination of directors and officers) is maintained with a very small percentage of stock ownership through the use of corporate records and funds to solicit proxies - a PROXY is an agent appointed by a shareholder for the purpose of voting the shares - management can, at corporate expense, solicit the right to vote the stock of shareholders unable to attend the meetings at which the directors of the company are elected - an outsider MUST either own sufficient stock to elect the directors or MUST solicit proxies at his or her own expense - the management of a large corporation usually can maintain control with only a small minority of actual stock ownership 3d.) CLOSELY HELD CORPORATIONS: - unlike the situation with a large, publicly held corporation, one shareholder (or at least a small group of shareholders) may be able to control a closely held corporation - this can result because this individual (or the group) can own an actual majority of the issued shares - this majority can control the election of a board of directors - the directors, in turn, elect officers, who again may be the shareholders with the largest interests - those who own a majority of a closely held corporation can rule with near-absolute authority - the majority may pay themselves salaries that use up profits and may never declare a dividend - However, the minority interest is not without some rights because the directors and officers stand in a trust relation to the corporation and to the minority shareholders if the corporation is closely held - this relation imposes a duty on directors to act for the best interests of the corporation rather than themselves individually - if the majority is acting illegally or oppresses the rights of the minority shareholders, a lawsuit known as a DERIVATIVE SUIT may be brought by a minority shareholder on behalf of the corporation - see DERIVATIVE SUIT term 3d.) do realize that any minority ownership interest in a corporation provides you with very little influence - the basic difficulty of owning a minority interest in a closely held corporation arises from the fact that there is no ready market for the stock should the shareholder desire to dispose of it 4.) LIABILITY: 4a.) the legal ability to separate a corporation's shareholders from its managers means that the owners are liable for the debts of the corporation only to the extent of those shareholders' investment in the cost of the stock - see limited personal liability term - your status as a shareholder in a CLOSELY HELD CORPORATION probably limits your liability for torts; you likely forgo your limited liability for contracts by cosigning your corporation's contracts - the generalization that the investors in a corporation have limited liability but those in a partnership have unlimited liability is too broad and needs qualification *** stopped pg 420

Taxation (the taxation of the organization's earnings and its distribution of profits to the owners)

1.) this factor often is viewed as the MOST CRITICAL when selecting the form of business organization 2.) at issue is: - how is the income earned by the business taxed? - how is the money distributed to the business owners taxed? - is it possible that owners may have to pay taxes on the money that is attributed to them as income but which they have not actually received? 3.) the answers to these questions provide much needed guidance when deciding which form of organization is best suited for a business operation ** remember a single tax is NOT ALWAYS better than a double tax ** 4.) people have stated that the double taxation of corporation income should be avoided by selecting a different for m of organization - there are specific advantages to creating the organizational forms that are "single taxed" - however, advantages also exist when an organization is subject to the supposed "double tax"

liability (the personal liability of the owners)

1.) when considering the liability factor, you should ask yourself: - to what degree is the owner of a business personally liable for the debts of the business organization? - when is the owner liable under the law for harm caused by the business organization? 2.) generally, businesspeople want to limit their personal liablity 3.) there are organizations that appear to accomplish this goal, you will see that such appearances might be misleading when actually conducting business transactions - for this reason, this liability factor is very IMPORTANT and deserves significant consideration as it relates to each of the organizational forms presented ** DO always examine how liability passes from the organization to the owner **

partnerships

1.) whenever TWO or MORE people wish to own a business together, a partnership is a possible organizational form - a partnership is an agreement between two or more persons to share a common interest in a commercial endeavor and to share profits and losses - the PERSONS should be interpreted broadly enough to allow business organizations, as well as individual, to form a partnership - EX. 2 or more individuals, an individual and a corporation, a partnership and a corporation, or any combination of these entities may agree to create a business organization called a partnership 1.) CREATION: 1a.) when compared to other forms of business organizations (other than the sole proprietorship), a partnership is EASLIY formed 1b.) the cost pf forming a partnership is relatively minimal 1c.) the creation of a partnership is made easier since it DOE NOT NEED to get permission from each state in which it does business 1d.) the key o a partnership's existence is satisfying the elements of its definition: - two or more persons - a common interest in business - sharing the profits and losses ** Don't operate a business with one or more co-owners without a carefully drafted partnership agreement; unresolved issues lead to major legal problems ** 1e.) if the parties CONDUCT their affairs in such a way as to meet these definitional elements, a partnership EXISTS REGARDLESS of whether the persons involved call themselves partners or not 1f.) articles of partnership - see term 1g.) assumed-name statue - see term 2.) CONTINUITY: 2a.) a general partnership is DISOLVED any time there is a change in the partners 2b.) Ex. if a partner dies, retires, or otherwise withdraws from the organization, the partnership is dissolved 2c.) Ex. if a person is ADDED as a NEW partner, there is a technical dissolution of the organization 2d.) it generally is said that the partnership organization is easily dissolved 2e.) even if the partnership agreement provides that the partnership will continue for a stated number of years, any partner still retains the POWER to dissolve the organization 2f.) although liability may be imposed on the former partner for wrongful dissolution in violation of the agreement the partnership nevertheless is dissolved 2g.) a dissolution DOES NOT necessarily destroy the business of the partnership 2h.) dissolution is not the same thing as terminating an organization's business activity 2i.) termination involves the winding up or liquidating of a business simply means the legal form of organization no longer exists 2j.) buy and sell agreement - see term 2k.) DON'T rely on partners having an equal voice in managing the organization; negotiate how to share this managerial responsibility 3.) MANAGERIAL CONTROL: 3a.) in general partnership, unless the agreement provides to the contrary, EACH partner has an equal voice in the firm's affairs 3b.) partners may agree to divide control in such a way as to make controlling partners and minority partners 3c.) the decision of who has what voice in management is of crucial importance to the chances of the business's success and to the welfare of the partners' relationship with each other 3d.) the possibility of a deadlock among partners is very real, especially when there are only a few partners and there are an even number of them 3e.) care should be taken to design mechanisms to avoid or at least handle the disputes that will arise when partners share managerial control 3f.) a written partnership agreement should provide specific language governing issues of managerial control 4.) LIABILITY: 4a.) all partners in a general partnership have UNLIMITED liability for their organization's debts 4b.) these partners' personal assets, which are not associated with the partnership, may be claimed by the partnership's creditors 4c.) from a creditor's perspective, this personal liability of each partner EXTENDS to the organization's entire debt, not just to a pro rata share 4d.) these partners are JOINTLY and SEVERALLY LIABLE for the partnership's obligations 4e.) Ex. assume that a general partnership has three partners and that it owes a creditor $300,000 - if it is necessary to collect the debt, this creditor can sue all THREE partners JOINTLY for the $300,000 - as an alternative, the creditor can sue any one partner or any combination of the two for the entire $300,000 - among the partner's, anyone who has to pay the creditor more than her or his pro rata share of the liability usually can seek contribution from the remaining partners 5.) TAXATION: 5a.) like proprietorships, partnerships are NOT a TAXABLE entity 5b.) the fact that this type of organization pays NO INCOME TAX does NOT mean that the profits of the partnership are free from income tax 5c.) a partnership files an information return that allocates to each partner his or her proportionate share of profits or losses from operations, dividend income, capital gains or losses, and other items that would affect the income tax owed by a partner 5d.)partners then report their share of such items on their INDIVIDUAL income tax returns, irrespective of whether they have actually received the items 5e.) a partnership DOES NOT PAY TAXES; this may be a benefit or detriment to the partners depending on whether the organization makes or loses money and whether it distributes or retains any profits made 5f.) this aspect of a partnership is an advantage to the partners if the organization suffers a net loss 5g.) the pro rata share of this loss is allocated to each partner, and it can be used to reduce these partners' personal taxable income - however, by this same reasoning, a partnership is a disadvantage if the organization retains any profits made by the organization for the purpose of expansion

Partnership advantages and disadvantages

Advantages 1. Easy to start up 2. lower tax burden 3. limited government regulation 4. not as difficult to raise funds - additional borrowers 5. combination of skills - improved efficiency 6. costs of formation are not significant Disadvantages 1. Unlimited liability 2. profits are shared 3. limited life of business - assets are distributed if a partner dies 4. disagreements 5. laws of agency

Buy-Sell Agreement

1.) A legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled. 2.) In the context of partnerships, an express agreement made at the time of partnership formation for one or more of the partners to buy out the other or others should the situation warrant—and thus provide for the smooth dissolution of the partnership. .) Business use of Life Insurance where partners in a business buy life insurance on each other. They agree that when one of them dies the survivors have the right to purchase the deceased partner's share of the business. The death benefit from the insurance is used to finance the purchase. 4.) to prevent problems that may arise when a partner dies or withdraws from a partnership, the articles of partnership should include a BUY AND SELL AGREEMENT 5.) this agreement, which should be entered into when the business entity is created, provides for the amount and manner of compensation for the interest of the deceased or withdrawing partner 6.) buy and sell agreements frequently use formulas to compute the value of the withdrawing partner's interest and provide for the time and method of payment 7.) in the case of death, the liquidity needed is often provided by the cash proceeds from life insurance taken out on the life of the deceased and made payable to the business or to the surviving partners 8.) upon payment of the amount required by the buy and sell agreement to the estate of the deceased, the interest of the deceased ends, and all the surviving partners can continue the business, as members of a new partnership

Corporation Advantages and Disadvantages

1.) Advantage: limited liability, ease of transferring ownership, profession management, unlimited life 2.) Disadvantage: government regulations, double taxation

forms of business organizations

1.) Basic 3 forms include: 1a.) Sole Proprietorship 1b.) Partnership 1c.) Corporation 2.) hybrid 4 forms that contain 2 or more basic forms include: 2a.) limited partnerships 2b.) S corporations 2c.) limited liability companies 2d.) limited liability partnerships

Sole Proprietorship Advantages

1.) Easiest to start 2.) Least regulated 3.) Single owner keeps all the profits 4.) Taxed once as personal income

Piercing the Corporate Veil

1.) The action of a court to disregard the corporate entity and hold the shareholders personally liable for corporate debts and obligations. 2.) An action in which a court disregards the corporate entity and holds the shareholders personally liable for corporate debts and obligations. 3.) A doctrine that says if a shareholder dominates a corporation and uses it for improper purposes, a court of equity can disregard the corporate entity and hold the shareholder personally liable for the corporation's debts and obligations

limited personal liability

1.) The concept that the owners of a corporation are not personally liable for the debts of the business. Thus stockholders' potential financial losses are limited to the amount of their equity investment. 2.) this term is used to describe the exposure of business owners to pay the debts of their businesses when such exposure does not exceed the owner's investment in the business 3.) owners are liable for the debts of the corporation only to the extent of those shareholders' investment in the cost of the stock 4.) corporate shareholders are said to have limited personal liability

article of partnership

1.) The written agreement establishing a partnership 2.) a partnership agreement 3.) A written agreement that sets forth each partner's rights and obligations with respect to the partnership.

publicly held

1.) a business organization that has hundreds, if not thousands, of owners who can exchange their ownership interests on public exchanges 2.) corporation whose shares are owned by a large number of people and are widely traded 3.) shares can be easily purchased or sold by investors 4.) other businesses may be owned by hundreds, if not thousands, of persons 5.) these organizations are PUBLICLY HELD ones 6.) Ex. of publicly held businesses include those whose stock is traded on a public exchange 7.) the reason for this corporate form being used is that shareholders can transfer their ownership without interfering with the organization's management ** the issue of which organizational form is best usually involves closely held businesses; publicly held businesses typically are corporations **

Alien Corporation

1.) a corporation chartered by a foreign government and conducting business in the United States 2.) one that is incorporated in a foreign country 3.) A designation in the United States for a corporation formed in another country but doing business in the United States.

assumed-name statue

1.) a state law that requires partners to make a public filing of their identities if their partnership operates under a name that does not reveal the partners' identities 2.) subject to 2 limitations: - may not use any word such as "company" that would imply the existence of a corporation - if the name is other than that of the partners, the partners MUST give notice as to their actual identity under the stare

closely held

1.) an organization that is owned by only a few people 2.) shares owned by few shareholders (family) and not traded on exchanges 3.) organizations owned by only a few persons 4.) some organizations are owned by only a few persons 5.) such organizations are said to be CLOSELY HELD 6.) Family-owned and family-operated businesses are common examples of CLOSELY HELD organizations 7.) the decision of selecting an appropriate organizational form usually is limited to those situations involving the few owners of a closely held business ** the issue of which organizational form is best usually involves closely held businesses; publicly held businesses typically are corporations **

continuity (the continuity or stability of the organization)

1.) another factor to consider when selecting the best organizational form for a business activity is the CONTINUITY of the organization 2.) How does an organization's existence relate to its owner? - the meaning if the word CONTINUITY becomes associated with the stability or durability of the organization ** the death, retirement, or withdrawal of an owner creates issues of whether an organization and its business will continue ** 3.) crucial issue with this continuity factor is the method by which a business organization can be dissolved 4.) dissolution - see term 5.) a dissolution is any change in the ownership of an organization that changes the legal existence of the organization 6.) in essence, the questions become: - is the organization easily dissolved? - what impact does a dissolution of the organizational form have on the business activity of that organization?

Foreign Corporations

1.) operate in states other than their state of incorporation 2.) A corporation in any state except the state in which it is incorporated. 3.) do business in one state but are chartered in another

Sole Proprietorship

1.) sole proprietorship has many relevant factors - the use of this business organization is VERY LIMITED because multiple owners CANNOT create a proprietorship - depending on the factual situation presented, greater continuity, less liability, and more flexible tax planning may be required than those afforded by the law of the sole proprietorship 2.) CREATION: 2a.) a sole proprietorship is the EASIEST and LEAST EXPENSIVE business organization to create 2b.) in essence, the proprietor obtains whatever business licenses are necessary and begins operations 2c.) the EASE of the steps necessary to CREATE a proprietorship makes it an ATTRACTIVE alternative when beginning a new business venture 2d.) HOWEVER, as the other factors might dictate, a business may shift away from the proprietorship form as it becomes more successful 3.) CONTINUITY: 3a.) a proprietorship's continuity is tied DIRECTLY to the will of the proprietor 3b.) the proprietor may dissolve his or her organization at any time by simply changing the organization or terminating the business activity 3c.) the fact that the proprietorship's business activity may be more stable than the proprietor's willingness to remain actively involved in the business indicates that the sole proprietorship is LESS DESIRABLE organizational form 3d.) ownership of a sole proprietorship CANNOT be TRANSFERRED 4.) MANAGERIAL CONTROL: 4a.) the sole proprietor is in TOTAL CONTROL of his or her business's goals and operations 4b.) while the proprietor has complete responsibility for the business's success or failure, the owners of all the other organizational forms usually share control to some degree 4c.) as long as this control issue is CAREFULLY thought out, there can be real value in having more than one voice in control of managing a business enterprise 5.) LIABILITY: 5a.) a sole proprietor is personally obligated for the debt of the proprietorship 5b.) legally speaking, this owner has unlimited liability for the obligations of this type of business organization 5c.) the business organization's creditors can seek to hold the proprietor personally liable for 100% of the debts and legal obligations that the proprietorship cannot satisfy 5d.) the desire to AVOID the potentially HIGH RISK of personal liability is an IMPORTANT reason other organizational forms might be viewed as preferable to the proprietorship ** a sole proprietorship may appear to have many advantages; sharing responsibility and liability with others are NOT among them 6.) TAXATION: 6a.) a sole proprietorship is NOT TAXED as an organization 6b.) all the proprietorship's income subject to TAXATION is attributed to the proprietor 6c.) the initial appearance of this tax treatment may appear favorable because the business organization is NOT TAXED 6d.) HOWEVER, the individual proprietor MUST PAY the applicable personal tax rate on the income earned by the proprietorship whether the proprietor actually receives any income from the organization or not 6e.) if the organization retains its profits for business expansion purposes instead of distributing this money to the proprietor, that owner still MUST PAY TAXES on the income made by the proprietorship

dissolution

1.) the breaking up into parts; termination of a legal bond or contract 2.) is any change in the ownership of an organization that changes the legal existence of the organization 3.) in essence, the questions become: - is the organization easily dissolved? - what impact does a dissolution of the organizational form have on the business activity of that organization?

factors in selecting the best organizational form for a business activity

1.) the cost of creating the organization 2.) the continuity or stability of the organization 3.) the control of decisions 4.) the personal liability of the owners 5.) the taxation of the organization's earnings and its distribution of profits to the owners

Managerial Control (the control of decisions)

1.) the factor of control concerns WHO is managing the business organization 2.) this issue is of vital IMPORTANCE to the OWNERS 3.) the egos of the businesspeople can cause them to insist on equal voices in management 4.) this factor under each organizational form, KEEP in MIND the difficulties that can arise when a few strong-willed business owners disagree with one another 5.) usually when people are excited about getting started in a business opportunity, no one takes time to discuss methods of resolving potential deadlocks 6.) the failure to consider how to overcome disputes involving managerial control can cause business activities to suffer and organizations to fail 7.) consideration of potential conflict and mechanisms to resolve disputes are essential to consider when selecting a form for a business venture ** don't assume you and your co-owners have to be equal in ALL aspects; voice in management can be decided among you **

steps in creation of a corporation

1.) the formal application for a cooperate charter is called the ARTICLES of INCORPORATION 2.) these articles must contain the proposed name of the corporation 3.) so that persons dealing with a business will know that it is a corporation, the law requires that the corporate name include one of the following words or end with an abbreviation of them: "corporation," "company," "incorporated," or "limited" 4.) in addition, a corporate name must not be the same as, or deceptively similar to, the name of any domestic corporation or that of a foreign corporation authorized to do business in the state to which the application is made 5.) the corporate name is an asset and an aspect of goodwill - as such, it is legally protected 6.) in addition to the proposed corporate name, the articles of incorporation usually will include the proposed corporation's period of duration, the purpose for which it is formed, the number of authorized shares, and information about the initial corporate officials 7.) once drafted, these papers are sent to the appropriate state official (usually the secretary of state), who approves them and issues a corporate charter 8.) notice of this incorporation usually has to be advertised in the local newspaper in order to inform the public that a new corporation has been created 9.) the initial board of directors then meets, adopts the corporate bylaws, and approves the sale of stock 10.) at this point, the corporation becomes operational

creation (the cost of creating the organization)

1.) the word CREATION means the legal steps necessary to form a particular business organization 2.) at times,, a businessperson may be concerned with how much it will cost to have each form established 3.) Usually, the cost of creation is NOT a MAJOR factor in considering which form of business organization a person will choose to operate a business 4.) the most significant creation-related issues are HOW LONG it will take to create a particular organization and how much paperwork is involved 5.) the issues when considering methods of creating business organizations usually are TIME and MONEY

Corporations

1.) third basic organizational form to operate a business 2.) is an artificial, intangible entity created under the authority of a state's law 3.) a corporation is known as a domestic corporation in the state in which it is incorporated 4.) in all other states, this corporation is called a foreign corporation 5.) a corporation created under the authority of a foreign country may be called an alien corporation, though it is generally treated the same as a foreign corporation under the law