Business Law Chapter 14

Articles of partnership

the formal agreement of a partnership

say-on-oay

a policy of companies that allow the compensation of executives to be reviewed by shareholders

publicly held

- Owned by hundreds if not thousands of people; stock is traded on a public exchange - usually corporation bc shareholders can transfer their ownership without interfering with the organization's management

limited partnerships con't

- a limited partner may assign his or her interest to another without dissolving the limited partnership - general partners are in control - traditionally, the general partners in a limited partnership have unlimited liability. However, these limited partners are not personally liable for the partnership's debts. These limited partners liability typically will not exceed the amount of their investments - under the RULPA a limited partner's surname can't be used in the partnership's name or that partner will become personally liable to unsuspecting creditors - under RUPLA a limited partner who participates in the organization's management becomes liable as a general partner is a third party had knowledge of the limited partner's activities

Limited liability organizations

- a type of business organization that has characteristics of both a partnership and a corporation. The owners of an LLC are called members, and their personal liability is limited to their capital contributions. The LLC, as an organization, is not a taxable entity. - variation of the LLC is a limited liability partnership which is a hybrid business partnership. Often used by doctors, lawyers, and accountants

liability

- always examine how liability passes from the organization to the owner - businesspeople want to limit their personal liability

partnerships - creation

- an agreement between two or more persons to share a common interest in a commercial endeavor and to share profits and losses - easily formed and costs are minimal - doesn't need permission from each sate in which it does business - partnership is dissolved anytime there is a change in the partners. - each partner has an equal voice - all partners have unlimited liability for their organization's debts - jointly and severally liable - partnerships are not a taxable entity - partners are taxed on their share of the partnership's profits, whether the profits are distributed or not. Aka partners often are required to pay income tax on money they do not receive

Corporations

- an artificial, intangible entity created under the authority of a state's law - known as a domestic corporation in the state in which it is incorporated - known as a foreign corporation in all other states - creature of the state legislative bodies, so it's more complex to create and to operate than other forms of business

Corporation: creation

- created by a state issuing a charter upon the application of individuals known as incorporators - more costly to form in comparison to partnerships - costs include filing fees, license fees, franchise taxes, attorneys' fees, and the cost of supplies - also annual costs in continuing a corporation's operation - the corporation must be licensed in foreign states it wishes to do business. - process of qualification requires payment of license fees and franchise taxes

limited partnerships: creation

- created by agreement and the state law requires that the contents of a certificate must be recorded in a public office so that everyone may be fully advised as to the details of the organization - certificate contains: name of partnership, character of business, location, name and place of residence of each member, those who are to be the general and limited partners, length of time the partnership is to exist, amount of cash or the agreed value of property to be contributed by each partner, share of profit or compensation each limited partner shall receive. - limited partnership certificate is required to be recorded in the county where the partnership has its principal place of business

LLC creation

- created through filings - articles of organization are filed with a state official, usually the secretary of state. Instead of incorporators, the term organizers is used - must include LLC, LC, etc. in the name. - like a foreign corporation, the LLC must apply to the state to be authorized to transact business legally - must file annual reports with the states in which it operates

articles of incorporation

- formal application for a corporate charter - must contain the proposed name of the corporation - law requires that the corporate name include one of the following words or end with an abbreviation of them: corporation, company, incorporation, or limited - must not be the same as any domestic corporation or that of a foreign corporation authorization to do business in the state to which the application is made - include the proposed corporation's period of duration, the purpose for which it is formed, the number of authorized shares, and information about initial corporate officials

limited partnerships

- has all the basic attributes of a partnership except that one or more of the partners are designated as limited partners - This type of partner is not personally responsible for the debts of the business organization, but the partners are not permitted to be involved in the control or operations of the limited partnership. - management left in the hands of one or more general partners who remain personally liable for the organization's debts

publicly held corporations

- in large corporations, control by management is maintained with a very small percentage of stock ownership through the use of corporate records and funds to solicit proxies. - proxy: agent appointed by a shareholder for the purpose of voting the shares. - can contribute to public scandals bc the management of a large corporation usually can maintain control with only a small minority of actual stock ownership - limiting the role of corporate governance to only a few people can lead to massive fraud

corporation: managerial control

- issue of control is complicated by three groups: shareholders, directors, officers - shareholders elect the members of the board of directors - directors set the objectives or goals of the corporation, and they appoint the officers - these officers such as the president, VP, secretary, and treasurer are charged with managing the daily operations of the corporation

Trends in managing the organization

- leaders of organizations can create dire consequences by making bad decisions - boards of directors increasing their oversight of management - shareholders becoming increasingly active; shareholders have asked for more say in the level of executive compensation

Creation

- legal steps necessary to form a particular business organization - most signification creation-related issues are how long it will take to create a particular organization and how much paperwork is involved - time and money

limited liability

- limited personal liability: the 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

LLC managerial control, liability, taxation

- managerial control vested in its members, unless the articles of organization provide for one or more managers - similar to partners in a partnership, members of LLCs make contributions of capital. They have equal rights to share in the LLC's profits and losses - a majority of these decision makers decide the direction of the organization - a dissenting member has the right to sell the membership interest to the other members of the LLC - members act as agents of their LLC, but they're not personally liable to third parties - LLCs are nontaxable entities

managerial control

- managing the business organization - vital importance to the owners - don't assume you and your co-owners have to be equal in all aspects; voice in management can be decided among you

taxation

- most critical when selecting the form of business organization - people have stated that the double taxation of corporate income should be avoided by selecting a different form of organization - advantages to both "single taxed" and "double tax"

corporation: taxation

- must pay income taxes on their earnings - advantage: if the corporation makes a profit that is to be retained by the corporation to support growth, no income is allocated to the shareholders - disadvantage: corporation suffers a loss during a given tax year, the existence of the corporate tax is a disadvantage because the loss can't be distributed to the shareholders in order to reduce their personal tax liability - disadvantage: double tax

alter-ego theory

- one method used by courts to pierce the corporate veil when a shareholder fails to treat the corporate organization as a separate legal entity - used if the corporate entity is disregarded by these officials themselves, so that there is such a unity of ownership and interest that separateness of the corporation has ceased to exist

closely held corporations

- one shareholder may be able to control a closely held corporation - the individual, or the group, can own an actual majority of the issued shares and this majority can control the election of a board of directors - minority ownership interest in a corporation provides you with very little influence - 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. Such suits may seek to enjoin the unlawful activity or to collect damages for the corporation - buy and sell agreements are essential in closely held corporations

LLC continuity

- owners of LLCs are called members - not limited to individuals - unlike in the S Corporation, a business organization can be an owner in any LLC - transferability of a member's interest is restricted in the fashion of a partner as apposed to the free transferability of a corporate shareholder: anytime a member dies or withdraws there is a dissolution of the business organization - within 90 days of withdrawing member's disassociation, the business of the LLC may be continued rather than wound up.

When do shareholders have limited liability in closely held corporations?

- shareholders have limited liability for contract-like obligations that are imposed as a matter of law (such as taxes) - liability is also limited when the corporate obligation results from torts committed by company employees while doing company business.

continutiy

- stability or durability of the organization - crucial issue is dissolution: change in the ownership of an organization that changes the legal existence of the organization

Termination v. dissolution

- termination involves the winding up or liquidating of a business - dissolution means the legal form of organization no longer exists

double tax

- the corporation must pay a tax on the money earned and the shareholder pays a second tax on the dividends distributed - similar situation: when a corporation is dissolved and its assets are distributed to shareholders as capital gains

S Corporations

- the federal gov't permitted shareholders of certain corporations to unanimously elect to have their organization treated like a partnership for income tax purposes - has all legal characteristics of corporations, except shareholders in the S Corporation are responsible for accounting on their individual income tax returns for their respective shares of their organization's profits or losses - through the election, shareholders avoid having a tax assessed on the corporate income itself - they can't have more than 75 shareholders, each of whom must elect to have the corporate income allocated to the shareholders annually in computing their income for tax purposes, whether actually paid out or not

sole proprietorships

- the simplest form of business organization, created and controlled by one owner - no formal documentation is needed - proprietorship's continuity is tied directly to the will of the proprietor - ownership cannot be transferred - sole proprietor is in total control of his or his business's goals and operations - personally obligated for the debt of the proprietorship; unlimited liability - not taxed as an organization. All the proprietorship's income subject to taxation is attributed to the proprietor

corporation: continutiy

- usually is formed to have perpetual existence - law treats a corporation's existence as distinct from its owners' status as shareholders - shareholder's death does not affect the organizational structure of a corporation: major advantage to corporation's stability

corporations: liability

- 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 corporations contracts - 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. - shareholders will usually be required to add their own individual liability as security for borrowing

Four hybrid forms of business organizations

1. limited partnerships 2. S corporations 3. limited liability companies 4. limited liability partnerships

Avoiding double taxation

1. reasonable salaries paid to corporate officials may be deducted in computing the taxable income of the business - in a closely held corporation in which all or most shareholders are officers or employees, this technique may avoid double taxation of substantial portions of income - internal revenue code disallows a deduction for excessive or unreasonable compensation and treats such payments as dividends 2. corporations provide expense accounts for many employees, including shareholder employees - law limits deductions for business meals and entertainment to 50 percent of the cost 3. the capital structure of the corporation may include both common stock and interest-bearing loans from shareholders - internal revenue code has a counteracting rule relating to corporations that are undercapitalized - if the corporation is undercapitalized, interest payments will be treated as dividends and disallowed as deductible expenses 4. Not to pay dividends and to accumulate the earnings - internal revenue service seeks to compel corporations to distribute those profits not needed for a business purpose, such as growth 5. A corporation may elect to file under Subchapter S of the Internal Revenue Code - election eliminates the corporate tax

Three basic forms of business organizations

1. sole proprietorships 2. partnerships 3. corporations

Closely held

Owned by only a few persons; family-owned

5 factors to consider in selecting the best organizational form for a business activity

creation, continuity, managerial control, liability, taxation

piercing the corporate veil

the legal doctrine used by courts to disregard the existence of a corporation, therefore holding the shareholders personally liable for the organization's debts

charter

the legal document issued by a state when creating a new corporation

jointly and severally liable

the legal principle that makes two or more people, usually partners, liable for an entire debt as individuals or in any proportional combination

incorporators

those individuals who are responsible for bringing a corporation into being