Elet5e ch11

ESSENTIALS OF THE LEGAL ENVIRONMENT TODAY, 5E

ROGER LEROY MILLER

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

CHAPTER 11

BUSINESS ORGANIZATIONS

LEARNING OBJECTIVES

1. What advantages and disadvantages are associated with the sole proprietorship?

2. What is meant by joint and several liability? Why is this often considered to be a disadvantage of doing business as a general partnership?

3. What are the two options for managing a limited liability company?

LEARNING OBJECTIVES (CONT’D)

4. In what circumstances might a court disregard the corporate entity (pierce the corporate veil) and hold the shareholders personally liable?

5. What are the duties of corporate directors and officers?

INTRODUCTION

•When choosing an organizational form, entrepreneurs should consider:• Ease of creation• Owners’ liability• Tax considerations• Ability to raise capital

SOLE PROPRIETORSHIPSAND FRANCHISES

• Sole Proprietorships• The owner is the business• Advantages • Proprietor owns the entire business and has a right to

receive all profits• Easier and less costly to start; allows flexibility

• Disadvantages• The owner is personally liable for all losses or liabilities

incurred by the business enterprise.• Lacks continuity on the death of proprietor

• Franchises• An arrangement in which the franchisor

(owner of trademark, trade name or copyright) licenses franchisee to use the trademark, trade name, or copyright in the sale of goods or services. • Types of franchises• Distributorship• Chain-style business operation• Manufacturing or processing-plant arrangement

• Laws governing franchises• Governed by contract law• Federal regulation of franchising• State regulation of franchising

• The franchise contract• Payment for the franchise – initial fee or lump-sum price

for the license• Business premises – lease or purchase • Location of the franchise – franchisor typically

determines territory to be served• Quality control by the franchisor

• Termination of the franchise• The Franchise Agreement may grant franchisee the

opportunity to “cure” an ordinary breach within a period of time to prevent termination.

• Wrongful termination• Generally the terms of a franchise contract favor the franchisor.

• Importance of good faith and fair dealing• Courts usually try to balance the rights of both parties. If franchisor

arbitrarily or unfairly terminates a franchise, the franchisee will be provided with a remedy for wrongful termination.

• If franchisor’s decision to terminate was made in the normal course of the franchisor’s business operations, and reasonable notice of termination was given to the franchisee, most courts will not consider the termination wrongful.

PARTNERSHIPS

•General Partnerships• Arises from agreement, express or

implied, between two or more persons to carry on a business together for profit

1.Sharing of profits and losses2.Joint ownership3.Equal right in management

PARTNERSHIPS• Advantages and disadvantages• Firm does not pay federal taxes• Profits are “passed through” to partners• Joint and several liability – a third party has the

option of suing all of the partners together or one or more separately

• Fiduciary duties• Dissociation of a partnership – occurs when

partner ceases to be associated with partnership; normally entitles partner to be bought out

PARTNERSHIPS • Limited Partnerships• Agreement of two or more persons to carry

on a business for profit with at least one general partner and one limited partner.

• Limits the liability of the limited partners to their investment.

• Limited partners cannot participate in management.

• An LP is a creature of state statute so filing a certificate with the Secretary of State is required.

PARTNERSHIPS

• Limited Liability Partnerships• Hybrid form of business that allows for

‘pass-through’ for tax purposes, but limits personal liability from malpractice of other partners.• LLP formation – formed under state law• Liability – allows professionals to avoid

personal liability for the malpractice of partners

LIMITED LIABILITY COMPANIES

• LLC Formation – must be formed and operated in compliance with state law• Advantages of the LLC – profits pass through and taxes are paid individually. • The LLC Operating Agreement• Management• How profits will be divided• Transfer of membership interests• Whether LLC will be dissolved on death or

departure of member

LIMITED LIABILITY COMPANIES

•Management of an LLC• Either member-managed, or manager-

managed.• Managers and members owe fiduciary

duties to the LLC and each other.•Dissociation and Dissolution of an LLC• Member has the power, but not the right,

to dissociate from the LLC at any time.• Trigger Events: voluntary withdrawal,

expulsion by other members or court order, bankruptcy, incompetence, or death.

CORPORATIONS

• A legal entity formed in compliance with statutory requirements that is distinct from its shareholder-owners.•Model Business Corporation Act (MBCA)• Revised Model Business Corporation Act (RMBCA)

CORPORATIONS

•Nature and Classification• The limited liability of shareholders• Key advantage

• Corporate earnings and taxation• Dividends and profits• Corporate profits can be subject to double taxation• S corporation

• Criminal acts and tort liability• A corporation is liable for the torts committed by its

agents or officers within the course and scope of their employment.

CORPORATIONS

• Domestic, foreign, and alien corporations• Domestic corporation does business in its state of

incorporation.• Foreign corporation from X state doing business in Z

state. • Alien corporation: formed in another country doing

business in United States.• Close corporations• One whose shares are held by members of a family or

by relatively few people

CORPORATIONS• Formation and Financing• Articles of incorporation• Corporate Powers• Express and implied powers• Piercing the Corporate Veil• Courts pierce the veil when the corporate

privilege is abused for personal benefit or the business is treated carelessly that it is indistinguishable from the controlling shareholder.

DIRECTORS, OFFICERS, AND SHAREHOLDERS

•Directors• Election of directors• Compensation of directors• Board of directors’ meetings• Rights of directors• Corporate Officers and Executives• Hired by the board of directors

•Duties and Liabilities of Directors and Officers• Duty of care• The business judgment rule• Duty of loyalty• Conflicts of interest

• Shareholders• Shareholders’ powers• Shareholders’ meetings• Proxies• Shareholder proposals

• Shareholder voting• Cumulative voting• Other voting techniques

EXHIBIT 11.1

• Rights of shareholders• Preemptive rights• Dividends

• Retained earnings• Net profits• Surplus

• Inspection rights• Transfer of shares• The shareholder’s derivative suit

MAJOR BUSINESS FORMS COMPARED

• Businesspersons consider several factors when deciding which form of business organization to choose:• Ease of creation• Liability of the owners• Tax considersation• Ability to raise capital

EXHIBIT 11.2

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