Download Chapter 15

Business Law
Chapter 15:
Business Entities
Introduction to Business
Organizations
• The way that a business is set up is
often as important as how it is run and
the choice of business entity often has a
huge influence on the eventual success
or failure of that business.
Sole Proprietorships
• Sole proprietorships are both the oldest,
and simplest, form of business
structure.
• In a sole proprietorship, there is a single
individual who conducts all aspects of
the business.
Legal Liability of Sole
Proprietors
• If a sole proprietor is sued because of
some business disagreement, his
personal assets are in danger.
• This is true because there is no legal
boundary between a sole proprietor’s
business assets and personal assets.
The Advantages of a Sole
Proprietorship
• One of the most obvious advantages to
a sole proprietorship is the freedom
given to the owner to make business
decisions.
Tax Consequences of Sole
Proprietorship
• One of the major advantages of a sole
proprietorship concerns income taxes.
• When a sole proprietor sustains a major
income loss during the year, he can
pass this loss through on his personal
income tax return.
The Disadvantages of a Sole
Proprietorship
• Because the business is so closely
associated with a single person, the
death or incapacity of that person
causes the business to fail. There is
usually no way for the business to
continue without the owner.
• Sole proprietors also frequently suffer
from undercapitalization.
• With only their personal credit and
financial resources to rely on, many sole
proprietors find it difficult to expand their
businesses or to pay unexpected bills.
General Partnerships
• A partnership consists of two or more
people working together in a joint
business venture.
Forming a General
Partnership
• The partners simply agree to be bound
to one another in a business and to
pledge their financial assets for the
business.
• Although many partners write out a
General Partnership Agreement, in most
situations it is not required.
Advantages of General
Partnerships
• The advantages of a partnership are
obvious: with two or more people, the
business can expand and serve more
customers.
• Partners can also contribute more
financial resources than a single
individual.
Disadvantages of General
Partnerships
• A general partner’s personal assets
could be seized to pay a judgment,
sometimes putting the general
partnership in a precarious situation.
Limited Partnerships
• In a limited partnership, there are two
classifications of partners. There are
general partners and limited partners
• General partners are responsible for the
day-to-day management of the business
in the same way that general partners
are in a regular partnership
arrangement.
• Limited partners, on the other hand,
have no right to control day-to-day
operations, but they also enjoy a
protection that the general partners do
not.
Limited Liability
• Limited partners are protected by
limited liability.
• This means that the extent of their
financial loss in the business is limited
to the extent of their financial
contribution.
Limited Liability Companies
• A limited liability company is a cross
between partnership and a corporation
owned by members who may manage
the company directly or delegate to
officers or managers who are similar to
a corporation’s directors.
Forming a Limited Liability
Company
• In order to form a limited liability
company, a company must file several
documents with the state.
• One of the most important is the Articles
of Organization.
Articles of Organization
• This document contains the basic
information about the company,
including the company name, registered
agent and the names of the persons
forming the company.
Naming a Limited Liability
Company
• The name of a limited liability company
must contain the phrase "Limited
Liability Company" or some other easily
recognizable abbreviation, such as
“LLC.”
Advantages of Limited Liability
Companies
• LLCs can take advantage of the
protection of limited liability, as well as
enjoying some of the flexibility of a
partnership and the financial
advantages of spreading investment
over a larger pool of individuals.
• LLCs also allow individual owners to
pass through losses on their personal
income tax returns.
Organization of a Limited
Liability Company
• Individuals who own shares in limited
liability companies are referred to as
“members,” not partners or
shareholders.
• The day-to-day management of a
limited liability company is handled by
"managers.”
Corporations
• An organization that is formed under
state corporate law exists, for legal
purposes, as a separate being or an
"artificial person." The stockholders
have no liability for corporate debts
beyond the value of their stock.
Creating a Corporation
• A corporation is considered be an
artificial person
• Once created, a corporation continues
to exist separate and distinct from the
people that compose it.
Types of Corporations
• There is a wide range of corporation
types, ranging from small, privately held
corporations to huge, multinational
corporations with offices scattered
across the globe.
Corporate Shareholders
• The persons who own the corporation
are called shareholders.
• Shareholders are also entitled to an
annual payment, referred to as a
dividend, based on corporate profits.
Corporate Officers and
Directors
• Corporations have officers who manage
corporate affairs. These officers are
responsible for negotiating with
vendors, hiring and firing employees
and all of the other tasks that we would
associate with any business manager.
Corporate Directors
• Directors decide on long-term goals and
strategies for the corporation which they
then put into effect through the
corporate officers.
Disadvantages of
Corporations
• Shareholders do not enjoy the "pass
through" provisions for income tax
purposes that are seen in sole
proprietorships, general partnerships,
and other business structures that we
discussed in this chapter.
• A corporation pays its own income
taxes.
Advantages of Corporations
• As an artificial person, a corporation
may own property, negotiate contracts,
and, in many ways, enjoy a degree of
flexibility that resembles that seen in
sole proprietorships or partnerships.
Corporate Existence
• Corporations do not die.
• Although a corporation may cease to
exist because of bankruptcy or by
merger with another corporation, it does
not cease to exist when individual
shareholders, directors or officers die.
Transfer of Ownership
• Shares in corporations are bought and
sold by millions every day on the
various stock exchanges around the
world.
• Share ownership, in the form of stock
certificates, is a source of wealth for
millions of people.
Steps in Forming a
Corporation
• All states have rules about how a
corporation is formed.
• In most situations, parties form a
corporation by filing Articles of
Incorporation with the state.
Articles of Incorporation
• The articles of incorporation set out the
basic details of the corporate entity.
Articles of Incorporation
• The name of the corporation
• The number of shares the corporation is
authorized to issue
• The classes of stock issued
• The name and address of the
Registered Agent
• The names and addresses of the
principal incorporators
Corporate Organizational
Meeting
• This meeting, held among the people
who create the corporation, has several
purposes.
• The parties elect officers for the
corporation and then enact by-laws for
the day-to-day management of the
corporation.
Piercing the Corporate Veil
• This doctrine holds that when a person
uses corporate property
interchangeably with his private
property, the court may disregard the
existence of the corporation and seize
the person’s personal assets.
The Role of the Legal Team in
Creating a Business
• Business people often seek out legal
advice in both creating and running their
businesses.
• Legal professionals are often involved in
every step of business activities and
assist with the drafting and filing of
Articles of Incorporation to bankruptcy
actions if the business is not able to
stay afloat.
Licenses and Permits
• Local ordinances may require business
licenses or other permits to run specific
types of businesses.
• If the business will be run out of the
client’s home, there is also the issue of
zoning permits.