Simplest form of business entity.
The owner is the business.
The owner owns all the assets of the
business and is personally liable for
Usually uses a fictitious name.
Created with two or more persons.
Partners usually share profits and losses
Each partner has right to manage and is an agent
of the partnership.
Each partner is personally liable for obligations.
Partners own property as tenants in common.
Treated as a “pass through” tax entity.
Joint ventures :
– share a common business interest;
– have the mutual right to direct and govern;
– share the partnership’s profits and losses; and
– combine their property, money, efforts, skill, or knowledge
in the undertaking.
Terminates when venture is completed.
Consists of at least one general partner
and one limited partner.
Limited partner has no right to manage.
Liability is limited to amount of
Attractive to investors.
Created by state statute.
Separate legal entity with constitutional
Owned by shareholders who have
limited liability up to their investment.
Managed by Board of Directors with
day-to-day operations by Officers.
Treated as a “pass through” entity,
where shareholders are treated as
partners for tax partners.
Limited to 35 shareholders, with no
Status is elected with the IRS.
Few shareholders, usually members
of a family.
Flexible, may dispense with
Popular for small businesses.
Owners are called “members.”
Members’ liability limited to amount of
LLC’s are generally “pass through”
entities for tax purposes.
Members can participate in
management without liability.
Statutory entity designed for
Professionals are insulated from a
Comparing Separate Taxable Entities
with Pass-Through Entities.
– Property Transfers—taxable to a corporation.
– Cash Distributions—double taxation to
– Operating Losses—recognized at the corporate
– Capitalization—no restrictions for corporations.
Comparing Separate Taxable Entities
with Pass-Through Entities (Cont’d):
– Allocation of Losses.
– Ability to Raise Venture Capital.
AGENCY AND LIABILITY
Case 22.1 Synopsis. Water, Waste & Land, Inc. v. Lanham.
WWL was a land development and engineering company doing business
under the assumed name of “Westec.” Lanham and Clark were
managers and members of Preferred Income Investors, L.L.C. (PII), an
LLC. Clark contacted Westec about the possibility of hiring Westec to
perform work for PII. Clark gave his business card to representatives of
Westec. The business card listed PII as the business and included
Lanham’s address, which was also the address listed as P.I.I.’s principal
office and place of business in its articles of organization filed with the
secretary of state. There was no indication what P.I.I. meant or that P.I.I.
was a limited liability company. Westec never received a signed contract
from Lanham but received verbal authorization from Clark to begin work.
Westec completed the engineering work and sent a bill for $9,183.40 to
Lanham. No payments were made on the bill. CONTINUED
AGENCY AND LIABILITY
Westec filed a claim in county court against Clark and Lanham individually as
well as against P.I.I. The county court found in favor of Westec. The district court
reversed and held that Lanham was not personally liable. The court reasoned that
Westec was put on notice that it was dealing with an LLC, because the business
card contained the letters “P.I.I.” and Section 7-80-208 of the LLC Act provides
that the filing of the articles of organization serves as constructive notice of a
company’s status as a limited liability company.
ISSUE : May a member of a limited liability company claim protection for amounts
owing for services rendered if the existence of the limited liability company was
not disclosed at the time the services were requested or performed? HELD: For
WESTEC. Clark and Lanham were personally liable for the monies owed by P.I.I.
because under the common law of agency, an agent is liable on a contract
entered on behalf of a principal if the principal is not fully disclosed. In other
words, an agent who negotiates a contract with a third party can be sued for any
breach of the contract unless the agent discloses both the fact that he or she is
acting on behalf of a principal and the identity of the principal.
Formation of General Partnership
– Mutual Agency Relationship.
– Without a Partnership Agreement, state law
– Written Agreements usually include: term, capital
division of profits and losses, name of the
partnership, and consequences of death,
incapacity, or sale of a partnership interest.
Operation of a General
– Each partner is liable for partnership
debts if made with the scope of a
– Each partner has a fiduciary duty to the
Case 22.2 Synopsis. Bohatch v. Butler.
Bohatch questioned the billing practices of another
partner in the law firm. The client had no problem with
the billing. Bohatch was asked to leave by the other
partners. When she filed suit for, inter alia, breach of
fiduciary duty, the partners voted to expel her from the
firm. The trial court found for Bohatch. The appeals
court reversed because the partners only had a duty
not to expel her in bad faith. CONTINUE
Case 22.2 Synopsis. (Cont’d).
ISSUE: Can a partnership expel a whistle-blowing
partner merely for reporting in good faith the alleged
misconduct of another partner? HELD: AFFIRMED.
The Texas Supreme Court stated there was no whistle-
blowing exception to the at-will nature of partnerships;
therefore, the partners were free to expel Bohatch and
were not to liable for damages for doing so.
Decision Making in a General Partnership—
unless stated otherwise, decisions must be
unanimous on all non-routine matters.
Dissolution and Winding Up of the General
Partnership—settling and liquidating to
terminate the partnership.
Termination of the General Partnership—all
partnership business is complete and no
partner has authority to act.
Formal Requirements: Certificate filed with
state with designation of limited partners.
LP interests are securities and regulated by
Limited Participation—no management
Not recognized until certificate of Limited
Partnership is filed.
Where to Incorporate—any state.
Costs and state laws must be factored.
Some states are favorable to corporations
Delaware permits broader limitations on
directors’ personal liability.
Almost 60% of Fortune 500 corporations are
incorporated in Delaware.
How to Incorporate:
– One or more incorporators file certificates or
articles of incorporation with the state.
– Bylaws voted on at the organizational meeting.
– De Jure Corporation—substantial compliance with
statutes; corporation by right; cannot be challenged.
– De Facto Corporation—corporation in fact as long as
incorporators were unaware of defect and made a good
faith effort to comply with statutes.
– Corporation by Estoppel—if a third party treats a
business as a corporation, the third party cannot deny it
is a corporation and try to reach shareholders personal
“Alter Ego” Theory—business not a
distinct entity from the owners.
1. Domination by Controlling Shareholder.
2. Commingling of Assets
3. Bypassing Formalities—in a close
corporation shareholders must agree to
– Insufficient amount placed at risk in corporation
– That will anticipate reasonable corporate
Case 22.3 Synopsis. Walkovszky v. Carlton.
Plaintiff was injured when he was run down by a taxi owned
by Seon Cab Corp. Carlton was a shareholder of ten
corporations, of which Seon was one. Each corporation
owned two taxis, and each had the minimum required
liability coverage. Walkovszky sought to pierce the
corporate veil to reach Carlton personally for his injuries.
ISSUE: May the corporate veil be pierced solely because
the corporation is undercapitalized? HELD: No. In New
York, the veil will not be pierced solely for
MANAGEMENT OF THE
Directors—members of the Board of
Directors; if also an officer, she is an
inside director; if she is not an officer,
then she is an outside director.
Officers—agents hired, fired, and
compensated by the Board.
Shareholders—owners of the company
who elect the directors to the Board.
Shareholders of record can vote for
themselves or have another vote for
them as a proxy.
Cumulative Voting—number of
votes is equal to the number of
shares owned times the number of
directors to be elected to the board.
Shareholders have a common law
right to inspect the books and
This right can be lost if not used in
Case 22.4 Synopsis. State Ex Rel. Pillsbury v.
Honeywell, Inc. (1971).
Pillsbury sought to stop Honeywell’s production of
fragmentation bombs because he did not like them
produced in his own community. Pillsbury sought
shareholder lists and other records from Honeywell
after purchasing 100 shares of Honeywell. Honeywell
refused. Pillsbury sued.
Case 22.4 Synopsis.
ISSUE: Does a shareholder who desires to change a
corporate policy, even if motivated by
social/political concerns, have the proper purpose
required to gain access to a shareholder list?
HELD: NO. All courts found Honeywell within its
rights to refuse Pillsbury’s requests because it was
not a properly motivated interest of a shareholder.
1. Human Rights.
2. Environmental Conditions.
3. Corporate Governance.
Merger—combination of two or more corporations
into one; the disappearing corporation(s) is (are)
part of the survivor.
Sale of Assets—if all or substantially all of the
corporation’s assets are being sold, then the sale
must be approved by both the shareholders and the
Appraisal Rights—right to receive fair cash value of
their shares when voted against a transaction.
Tender Offers—public offers to all
shareholders of the “target” to buy
shares at a stated price.
purchase financed by debt.