Chapter 16
Business Organizations
Advantages: Sole Proprietorship
• Can be started with very few legal formalities (very simple). • Proprietor has 100% control over the business. • Receive all profits. • Less costly. • More flexibility. • Allows Keogh retirement plan.
Disadvantages: Sole Proprietorship
• Proprietor has unlimited personal liability for any debts or liabilities incurred by the business. • Business as well as personal assets can be used to pay debts of business. • The ability to raise financial capital for the business may be more limited in a sole proprietorship. • Sole proprietor has to be “Jack of all trades.” • Sole proprietorship “dies with the owner.”
Advantages: General Partnership
• Addition of one or more persons as coowners may alleviate the difficulty of raising capital found in the sole proprietorship. • General partnerships allow for the specialization of labor. • Partners can share in the profits as well as the losses of the business.
Disadvantages: General Partnership
• Liability for the acts of other partners. • Unlimited personal liability for the partners. • Partners are jointly and severally liable for the partnership obligations. • Difficulty in selecting partners. • Necessity and cost of a detailed, written partnership agreement. • Unanimous agreement required for important partnership matters. • Partnership considered an entity by law.
Section 3: Limited Partnership
• Unincorporated association, or firm, in which the limited partners are relieved from liability beyond the amount of their capital contribution. • Composed of at least one general partner. • Limited partners do not participate in the dayto-day operations of the business. • Transferability of interest in limited partnerships is restricted by state laws or limited partnership agreement.
Section 4: Corporations
• A legal entity which can be created under state law, owned by shareholders and managed by a board of directors.
Nature of the Corporation
• One or more natural persons identified under a common name. • The corporation substitutes itself for the natural persons in conducting corporate business and incurring liability, but its authority and liability are separate and apart from these natural persons.
Advantages: Corporations
• Corporate debts are the obligation of the corporation, but not the shareholders personally, unless the shareholders have signed in an individual capacity and agreed to be liable for corporate debts. • Even though they own the corporation, shareholders normally do not participate in the governance of the corporation. • Shareholders protected by corporate veil. • Corporation has an unlimited duration. • Identity Protection.
Disadvantages: Corporations
• Start-up formalities. • Limited management control by shareholders. • Cost associated with incorporation. • Double taxation.
Corporate Terminology
• Public corporation - One set up by a government. • Private corporation - Set up by individuals. • Close or closed corporation - Corporation with total ownership in a few hand. • Domestic - Corporation is considered domestic in the state in which it was incorporated. • Foreign - Corporation is considered foreign in all other states than the one where incorporated.
Corporate Terminology
• Eleemosynary corporation - Charitable corporation. • Closely held - Corporation not traded on any recognized exchanges. • Publicly traded - Traded on one of the national exchanges.
“S” Election Requirements and Restrictions
• No more than 75 shareholders. • Shareholders must be natural persons or limited trusts/estates. • Only one class of stock allowed. • S corporations cannot specially allocate the component profits and losses of the business.
Limited Liability Companies
• The limited liability company (LLC) is a hybrid form of business organization that offers the limited liability feature of corporations but the tax benefits of partnerships. • Unlike limited partners, LLC members participate in management. • Unlike shareholders in S corporations, members of LLCs may be corporations or partnerships, are not restricted in number, and may be residents of other countries.
Corporate Formation
• Promotional Activities (start-up period).
– Promoter’s liability – Subscribers and Subscriptions
• Incorporation Procedures.
– State chartering
• Articles of incorporation
– – – – – – – Corporate name Nature and purpose Duration Capital Structure Internal Organization Registered Office and agent Incorporates
• Certificate of Incorporation:
– Corporate Charter
• First Organizational Meeting
Improper Incorporation
• De Jure Corporations: important statutory requirements are met - corporate status cannot be attacked by state or third parties. • De Facto Corporations: statutory requirements not met - but a good faith effort was made to comply by the corporation & it is acting like a corporation - corporate status can only be attacked by state.
Election of Directors
• The number of directors is set out in articles of incorporation or by laws of state.
– RMBCA permits no board for corporation w/ fewer than 50 shareholders.
• First board appointed by incorporators.
– serve until first annual shareholders’ meeting. – usually appointed for staggered terms.
• Directors can be removed for cause as specified in articles or bylaws.
Board of Directors’ Meetings
• Formal meetings with recorded minutes. • Set at a particular date and time in articles or bylaws.
– Notice of special meetings must be sent as directed in articles or by-laws.
• Quorum requirements differ state to state or can be set in articles or by-laws, usually a majority. • Voting must be in person, not proxy, usually a majority necessary for ordinary matters and > than a majority for extraordinary matters.
Directors’ Management Responsibilities
• Authorization for major corporate policy: new product lines, labor relations, sale or lease of corporate assets. • Appointment, supervision, and removal of officers and determination of their compensation. • Financial decision: declaration of dividends, issuance of authorized shares of stocks or bonds. • Delegate some power to executive committee.
Shareholder Voting
• Common shareholder entitled to one vote per share. • Articles and by-laws can exclude or limit voting rights of certain classes of stock. • Quorum must be present > 50%. • Vote on resolutions
– need majority of present for most resolutions – need > than majority for important matters: sale of assets, etc..
• Voting lists
– cut off date 70 days ahead of action (notice, dividends, etc..)
Shareholding Voting
Shareholder voting requirements and procedures are as follows:
– A minimum number of shareholders must be present at a meeting for business to be conducted; resolutions are passed by simple majority vote. – Cumulative voting may or may not be required or permitted. Cumulative voting gives minority shareholders a better chance to be represented on the board of directors. – A shareholder may appoint a proxy to vote his or her shares.
Section 5: Limited Liability Companies
• New form of business that offers limited liability to its members and taxation as a partnership if certain conditions are met. • As of 1994, 40 states allow such forms of business. • Members are co-proprietors who are not personally liable merely due to membership. • Essentially an S corporation without most of restrictions placed on S corporations.
Section 6: Limited Liability Partnerships
• New form of business that allows the partners to escape joint and several liability in tort. • Before it is possible, the state in which the partnership is to be formed must have passed legislation providing for this form of partnership. • Designed for professionals who normally do business as partners.
Section 8: Other Organizational Forms
• Joint Venture: A relationship within which two or more persons or business entities combine their efforts or their property for a single transaction or project or a related series of transactions or projects.
• Resembles a partnership but unlike a partnership, a joint venture is usually a combination of businesses that join together temporarily for a special project. • Although the businesses are not considered partners in any other respect, partnership law is generally applied to such relationships.
Other Organizational Forms
• Syndicate: An investment group or a group of individuals getting together to finance a particular project. • Joint Stock Company: a true hybrid of the partnership and a corporation • Business Trust: created by a written trust agreement and sets forth the interests of the beneficiaries and the obligations and powers of the trustee • Cooperative: An association, either incorporated or not, that is organized to provide an economic service, without profit, to its members.
Section 9: Private Franchises
• A franchise is any arrangement in which the owner of a trademark, a tradename, or a copyright licenses others to use the trademark, tradename, or copyright in the selling of goods or services.
• Requires start-up fees and royalty payments on the part of the franchisee.
• Types of Franchises.
– Distributorship – Chain-Style Business Operation – Manufacturing or Processing-Plant Arrangement
The Franchise Contract
• Payment for the Franchise (Fee). • Location and Business Organization of the Franchise. • Price and Quality Controls of the Franchise. • Termination of the Franchise.