Chapter 6: Business Organizations Flashcards
sole proprietorship
- the business has a person doing business for himself.
- oldest and simplest form of business
- capital must come from the owner’s own resources or borrowed
- 2 dis: limited alternatives exist for raising capital & owner is liable for all debts
partnership
- an association of 2 or more persons to carry on a business as co-owners for a profit.
- general partners share control over business’s operations and profits
- Common law: Not an independent legal entity -> a case could not be brought against business. The partner had to sue or be sued individually ..
- state law, fed law: partnership may be treated as legal entity.
- Partnership law is codified in the Uniform Partnership Act and Revised Uniform Part. Act.
written agreement of partnership
- basics: names place/date of formation, state law that applies
- finances: contributions of partners, when payments due, how additional capital contributions to be handled, allocation of ownership shares, acctg rules, distribution of profit, priority rights in payments.
- management: voting right of partners, appointment of managing partners, compensation committee.
- dissolution: procedures to followed if partnership is terminates, right to leave partnership, procedure to follow if partners die, how part. shares be valued, limits on transfers of part. shares, requirement to go to arbitration in case of dispute among partners.
No specific agreement of part.
UPA specifies and governs the rlts of parties
- Law does not require part. has a name or be registered -> ousiders might not know of its existence or who’s involved.
Duty of part.
Partners owe a fiduciary duty to one another.
fiduciary duty
ea partner act in good faith for the benefit of the part. The partners must place their personal interests beneath those of part.
Control by Partners
- Each partner has equal voice
- Regardless of who runs a part., the partners have duty to one another to disclose all financial aspects of the business and to be completely honest.
termination of Part.
- unwillingness or an inability to continue with business may bring an end
dissolution (part)
- occurs when an events take place that precludes the partners from engaging in any new business
- change in composition of the partners results in a new partnership and dissolution of the old one.
- withdrawal/death/bankrupt of a partner can cause diss.
- —->expensive so the part. would purchase life insurance on the partners, with the proceeds to be used to buy back the interests of a deceased partner from her estate.
winding up (part)
involves completing any unfinished business and then collecting and distributing the partnership’s assets
limited partnership
is a business organization made up of 2 or more persons who have entered into an agreement to carry on a business venture for a profit.
- not all partners can participate/not all liable for part. debts.
Uniform limited partnership act/ Revised Uniform Limited Partnership act (ULPA)
applied for Ltd Part.
certificate of LP
- Name of business, include L.P. or similar
- Type or character
- Address of an agent who receives legal process
- Names and addresses of ea general and limited partner
- Contributions
- Duration of LP
- The rights for personnel changes in the partnership and the continuance of the partnership upon those changes
- The proportion of the profits or other compensation that ea partner is entitled to receive.
Relationship of parties (LP)
- 1 general partner & 1 or more LIMITED PARTNERS.
- General part: same as partners in general part. (responsibility & liability)
- limited partners: investors. Can see partnership books/participate in dissolution. Not: liable.
Termination of LP
- Bankruptcy does not dissolve LP.
- Winding up: business continues to operate but not enter any new commitments.
- Fnal dispersal: creditors’ rights precede partners’ rights.
Corporation
- artificial person, legal entity.
- incorporation is now available to business regardless of field, size….
corporate charters
- State gov issues this to select business.
- intense competition
- might give business exclusive privilege.
Articles of incorporation
- Name, address
- Name, address of corp’s registered agent
- Purpose of the business
- The class of stock to be issued and their par value
- Names and addresses of incorporators
Certificate of incorporation
- received after sent application.
- incorporators wait until the state has issued the certificate before holding their first formal organizational meeting.
- At the meeting: 1. elect board of directors, enact bylaws, issue stocks.
bylaws
are rules that regulate and govern the internal operations of the corp.
Legal entity
- rights and responsibilities separate from owners.
- recognized as a person under both state and Fed laws.
- may sue or be sued.
- is not protected by 5th amendment against self-incrimination.
close corp.
- closely held
- is one whose shares are held by one shareholder or small group of shareholders.
- no public investor
- no size limit
public corp
- publicly held
- stock traded
- many shareholders-
Shareholders (Corp.)
- own the corporation
- unless stated, shareholders are not restricted from selling or giving the stock to someone else.
- not responsible for managing the corp.
- not allowed to exercise day-to-day control
- elect board of directors
- vote only on matters that change the corp’s structure or existence.
- no legal relationship w creditors.
quorum
more than half of the total shares must be presented at the meeting
proxy
a written authorization to cast their vote.
- is often solicited by the corp’s management
Board of directors (Corp.)
- the governing of a corp.
- is specified in the articles of incorporation or chosen by the incorporators at the first corporate meeting.
- shareholders can remove for a breach of duty or misconduct
- director act to exert managerial authority
- honest mistake not resulting from neglience or disagreements about the appropriate strategy do not result in personal liability.
limited liability company (LLC)
- treated like a corp for liability purposes
- treated like a part. for fed tax purposes. Profit taxed only once., as earnings of owners or shareholders.
Creation of LLC
- Company name
- address
- whether LLC is managed by members or manager
- Name, add of com members
- Date upon which the co will be dissolved
- whether any members are to be liable for com debts.
personal liability (LLC)
- members/manager will not be held liable for debts
- members may agree by contract to be held liable
relationship of parties (LLC)
- formed by 2 or ore MEMBERS having equal status.
- members have membership interest (like owning stock in a corp or as limited partner in LP)
- in practice:under 30 mems.
- ind’l, corp, partn., LLC may be members.
- cannot transfer membership interests w/o consent
- member sign operating agreement-provides rules and rlts of members, establish com’s method of management, allocation of profit, losses.
- member may hire manager
- manager cant be member
the continuity-of-life factor
- LLC not allow “perpetual” life
- death/bankruptcy/retire/resign of member terminates the membership of the member but LLC can still continue if others give consent
termination
bc of an event specified in article of org bringing about the dissolution or by the consent of all members.
limited liability
- allows to invest without being held liable.
- owner do not have to personally pay org’s debt.
unlimited liability
- sole proprietors and general partners have unlimited personal liability for the debts, torts.
- some states: creditors exhaust business partnership property before moving against personal property of partner or require any partner to pay entire remain debt
pierce the corporate veil
court hold shareholders personally liable in limited liability entities because
- corp is a sham
- owners intend to operate business as proprietorship or partnership
- shareholders are held liable in instances of fraud, under-capitalization, failure to follow corp formalities.
non-traded entities
If a partner sells his interest in a partnership:
- partnership continues
- new person does not automatically become a partner.
- new person is entitled to receive the share of profit but NO right to participate in management or access part.’s information
- –> protect existing partners
publicly traded corp
- stock of public corp. maybe traded on a stock exchange
- transfer of ownership of share is simple and done at low cost.
limited life
To avoid liquidation partners usually agree in advance to a continuation agreement. (same as LLCs)
perpetual existence
- corporation
- death/retire of a shareholder does not bring about the termination of corp or has no impacts.
Franchises
- a franchisee is granted the right to sell goods or services by an franchisor according to a marketing plan.
2 characteristic of franchise
- Trademark : convey authenticity and exclusivity
2. Uniform service/product
types of franchise
- product distributorship: franchise has right to sell product of parent com (car dealership)
- trademark or trade-name licensing: franchisee has license to marker comp’s brands (Coca cola)
- business format franchising: franchisee follows business model set out by parent company (McDonald). Franchisor provides franchisee everything needed.
FTC Franchise rule
Franchisor give franchisee offering circular:
- Name, add, # of other franchisees
- an audited financial statement of franchisor and financial history
- the background and experience of business’s key executives
- responsibilities that franchisor and franchisee have to ea other
- # of franchisees and how many have gone out of business
State regulation (franchise)
- require franchisor to register with state and provide prospective franchisees with prospectus disclosure doc.
principle of corp (BOD)
- sets policy and decides corporate business
business judgment rule
makes directors and managers immune from liability when problems result from honest mistake as long as they have reasonable basis for their decision.
fiduciary duty
Directors are subject to fiduciary duty of loyalty -> place interest of corp before their own interest.
managers
- run the business
- managers want to be paid more. Owners want them to be frugal
Terminating corp.
DISSOLUTION
Upon diss, the corp might not take any new business.
- voluntary: involves approval of the shareholders and BoD.
- involuntary: occurs b/c of bankruptcy or fraud in the establishment.
WINDING UP
-assets are liquidated, satisfies creditors then shareholders.
