Chapter 9: Corporate Governance and Business Organizations

Question 1

Corporate Governance

Answer 1

The structure by which businesses are controlled- the process for running the organization (relationships among officers, Board of Directors, shareholders, and other stakeholders)

Question 2

5 Principles for Good Corporate Governance

Answer 2

1. Ethics
2. Align Business Goals
3. Strategic Management
4. Organization
5. Reporting

Question 3

Entrepreneur

Answer 3

An individual who manages their own business, assuming the risks to make a profit. Advantages: being your own boss, maintaining your own schedule, doing what you love. Disadvantages: requires proper planning, creativity, and hard work.
Qualities: 1. Comfortable with taking risks 2. Independent 3. Persuasive 4. Ability to negotiate 5. Creativity 6. Support by others

Question 4

Most common business organizations

Answer 4

Sole proprietorship, partnership, and corporation

Question 5

Hybrid forms of business organizations

Answer 5

limited partnership, limited liability partnership, a family limited liability partnership, a subchapter S corporation, and a limited liability corporation

Question 6

Sole proprietor

Answer 6

Someone who owns an unincorporated business by himself/herself.

• least expensive
• most simple
• most common business to form

Question 7

Sole proprietor creation

Answer 7

Created once you start doing business. Sole proprietor has no independent identity under law. Usually sign contracts and issue checks in the owner’s name, even if business goes by fictitious name. Does not need governmental permission but may be required to obtain business license or permit in the county of operation. SP can change to a more complex entity.

Question 8

Sole proprietor liability

Answer 8

Liability: Greatest risk of all business forms since the liability for debts of the business is unlimited and the entrepreneur’s assets can be seized to satisfy business obligations. Solution: Hold properly jointly with spouse! And buy the appropriate liability insurance.

Question 9

Sole proprietor taxation

Answer 9

Taxes: keeps all profits from business and pays personal income tax on them within “Schedule C” of personal tax return (1040). But opportunity to raise capital is limited to personal resources or obtaining a loan.

Question 10

Sole proprietor termination

Answer 10

The SP terminates when the owner stops doing business.

Question 11

Partnership

Answer 11

Association of two or more people to carry on a business as co-owners. The partners share the profits and losses of the enterprise on an equal basis unless there is an agreement setting forth some other arrangement.

Question 12

Partnership creation

Answer 12

Do not need written agreement although it is strongly recommended to avoid future conflict. Three essential elements are examined to determine is a partnership has been created: 1. The sharing of profits and losses by two or more people is prima facie evidence- burden then shifts to persons involved 2. A joint ownership of the assets of the business 3. An equal right in the management of the enterprise

Question 13

Hillme v. Chastain and C&H Custom Cabinets

Answer 13

A partnership may be implied from the acts and conduct of the parties. The intent of the parties is the primary factor to determine if relationship exists. Chastain and Hillme decided to go into business with each other and agreed to divide the workload, profits, expenses and losses equally. No written agreement was executed. Chastain bought a cargo trailer and pick up truck in his name, not the business’ account and did not tell Hillme. Chastain claims Hillme is a contractor or employee. Chastain appealed that trial court erred in finding a partnership existing between himself and Hillme. The appeals court disagrees with Chastain and affirms the trial court’s judegment.

Question 14

Fiduciary relationship

Answer 14

One person places complete confidence in another in regard to a particular transaction or one’s general affairs or business. Ex: In a partnership, every partner is bound to act in the highest good faith to his co-partner.

Question 15

Partnership liability

Answer 15

Unlimited liability for the debts of the business- each are liable for the full debts of the business, but a creditor may seek satisfaction of debt out of the partnership assets. If this strategy fails, the creditor may then advance a claim against any single partner or all of the partners for the remaining obligations= JOINT AND SEVERAL LIABILITY

Question 16

Imdemnification

Answer 16

When a partner sues the other partner for reimbursement for the partnership debt he/she paid

Question 17

Agent

Answer 17

One partner can bind the others on business matters with third parties even if those actions exceed the person’s authority.

Question 18

Partnership taxation

Answer 18

Partnership is not a taxable entity. The profits of the business are apportioned to each partner who pays personal income tax on his or her share. The individual partners file a Schedule K-1. Required to file an information return with the IRS to show income, gains, losses, etc.- Form 1065.