LEGL: Forms of Business Organizations Flashcards
Sole Proprietorship
The simplest form of business organization, created and controlled by 1 owner
Sole Proprietorship Pro
i. Creation: Least expensive business organization to create
ii. Taxation: Not taxed as an organization
iii. Managerial Control: Sole proprietor is in total control of the business’s goals and operations
Sole Proprietorship Con
i. Continuity: Proprietorship’s continuity is tied directly to the will of the owner
ii. Liability: Owner has unlimited liability for the obligations of the business organization
Partnership
Agreement between two or more persons to share a common interest in a commercial endeavour and share in profits and losses
i. Persons: can be an indivual or organization ; not only talking about indivuals
General Partnership Pro
- Creation can be automatic but may be modified by agreement
- Cost of formation is not significant
- Taxed at the partner level only (entry isn’t taxed)
- Equal voice in management unless there is a contrary agreement
- Partnerships may operate in more than 1 state without obtaining a license
- Partnerships are generally subject to less regulation and less government supervision than corporations.
General Partnership Cons
- Only a limited number of people can be partners.
- Dissolved whenever a partner ceases to be a partner (withdrawal, death)
a. Deal/buy out their interest then can continue - Each partner has an equal voice, which can lead to deadlocks
- Personal liability and joint and several liability for all debts and liabilities.
- Partners taxed on their share of partnership profits, whether those profits are distributed or not (could pay taxes on income you don’t see)
Differences between General Partnerships and Limited Partnerships:
- Limited partners are not personally responsible for the debts/liabilities of the organization.
- Limited partners are not involved in the operations of the partnership.
- Limited partnership certificate must be filed in the county of its principal POB and additional copies in other counties/states where LPship conduct business
a. What happen if this is not done/kept updated?
i. Those limited partners are treated as general partners and liable
Limited Liability Patnership
- Not responsible for the debts of the business organization Unless they participate in the management or control of the organization
- Can assign interest without dissolving the partnership.
-i. All partners have some liability protection
ii. All partners are considered general partners
iii. All partners can participate in the operations of the business
iv. LLP partners are still liable for their individual negligence
v. Taxed at the partner level
vi. Commonly used by professionals (attorneys, accountants, doctors)
Corporations
Artificial and intangible entity created under the authority of a state’s law
Types of Corporations
Domestic: Corporation that’s in the state which is incorporated in
ex: Corporation in ga would domestic in ga
Foreign: corporation in states in other than it was incorporated in
ex: Corporation incorporated in ga and goes to Florida; in Florida it would be a foreign corporation
Alien: form corporation in a different country
ex: Creating a corp in Mexico
Articles of Incorporation
use this to create the corporation
1. Listing name, how long doing business, purpose, officers, proposed number of shares want to issue
2. Sending to sectary of state’s office
Corporations Pros
i. Corporation has perpetual existence
ii. Shareholder’s death or sale of stock does not affect the organizational structure.
iii. Limited personal liability of owners (limited to their investment).
iv. Allows for a large number of owners.
v. Shareholders can be both owners and emplyees which makes them entitled to benefits such as worker compensation
vi. Ownership can be divided into many unequal shares.
Corporations Cons
i. Created by a state issuing a charter upon the application of incorporators
ii. More costly to form
iii. Corporation must be licensed/qualified to be able to conduct business in foreign states.
iv. Double Taxation: Taxes at the corporate and at the individual level.
v. Lack of direct control by the owners.
vi. Subject to more government regulation
Publicly Held Office
i. When analyzing matters of managerial control, we need to look at publicly held corporations vs. closely held corporations.
ii. Publicly held corporations: In very large corporations, control by management is maintained with a small percentage of stock ownership and funds to request proxies
iii. -Proxy: Agent appointed by a shareholder for the purpose of voting the shares.
1. In publicly held corporations, management can solicit the right to vote the stock of shareholders unable to attend the meetings at which the directors of the company are elected
iv. When can issues arise?
1. Different people in each position to avoid shady business and so there’s a check and balance system
Closely Held Corporations
i. One shareholder or small group of shareholders may be able to control a closely held corporation by owning the ¬¬¬¬¬¬¬¬¬¬¬¬¬¬¬majority of shares
1. Note: The directors & officers stand in a fiduciary relationship to the corporation and to minority shareholders in a closely held corporation.
ii. No ready market for minority stock should shareholder desire to sell it. (Should use a buy & sell agreement to protect against this)
iii. Minority shareholders are subjected to the decisions of the majority.
iv. What tool does a minority shareholder possess when the majority shareholder(s) is acting illegally or oppressing the minority by acting in his/her personal interest?
1. Bring a derivative lawsuit against the majority shareholder(s) on behalf of the corporation
