1. Business Organizations Sole Proprietorship Partnerships Corporations

2. Sole Proprietorship Owner is the business Generally small Owner gets all the profits Taxes paid on personal income tax form Unlimited liability No continuity upon death Owner personally liable for all debts

3. Partnership Partnership agreement taxed at individual level -- partnership pays no federal taxes unlimited liability for partnership One or more general partners – responsible to manage partnership – Unlimited liability One or more limited partners – certificate of partnership – no liability for debts beyond amount contr. – Cannot manage bus. General Limited

4. Corporation Formal legal structure Shareholders Board of Directors Officers Shareholder liability limited to amount invested Can exist in perpetuity double taxation (corp. tax and dividends) Start here thursday

5. S Corporations Corporations can further be divided based on their tax status. S Corporations C Corporations

6. S corp Avoids double taxation Allows Limited Liability Requirements – domestic – not a member of affiliated group – shareholder criteria – 75 or less shareholders – one class of stock – no nonresident alien shareholders General Corp is a “C” Corp

7. Limited Liability Company Hybrid of corp and partnership Tax benefits of partnership Limited liability of corp. shareholders Eliminates restrictions on number and type of shareholders Unlike limited partners, LLC members participate in management. MN New Name Look UP Name look up Organize new company http://www.sos.state.mn.us/home/index.asp Domain Name Search http://smallbusiness.yahoo.com/do mains/ http://smallbusiness.yahoo.com/do mains/ Link to Name Look Up Page

8. Question Rick Yurko frequently visited Phylllis’s coffee shop where he purchased lottery tickets. He, Phyllis, another employee and another customer, Francis helped scratch-off the tickets. Yurko said that if they helped him scratch-off the tickets, they would be his partners and share in the winnings. Judy uncovered a ticket that gave a chance to win $100,000 by appearing on TV. Yuko encouraged Judy to go on TV, but she was not comfortable with that and Yurko said he would go on TV. They signed the ticket on back (required to go on the show) “F.J.P. Rick Yurko” (F.J.P. representing the initials of Frances, Judy and Phyllis) Yurko won $100,000 and refused to share the money. He paid for all the tickets. Should Judy and Phyllis get a share? Judy Fitchie v. Rick Yurko, IL Ct of Appeals (1991)

9. Corporation Formalities Articles of Incorporation Bylaws Corporate Veil (piercing the corp. veil) Bullington v. Palangio (2001). Personal liability because of revoked corporate charter Question 18-7, p. 430 Blushing Brides publishes a magazine and hired Gray Printing to print it. Zacks, the Blushing Brides member- manger signed the contract. Blushing brides breached the contract and did not pay on time. Gray refused to print more until assurances of payment made. Zacks signed a promissory note payable to Gray. Blushing Bride still did not pay and Gray sued both Blushing Brides and Zacks personally.

10. Corporate Taxation Double-taxation – corporations pay income tax on net profits; – shareholders pay income tax on the disbursed dividends that they receive from the corporation.

11. Shareholders Own company – no right to use or take property – no right to manage – Inspection Rights Elect Directors (remove for cause) Approve fundamental corporate changes – amend bylaws – approve a merger – sale of all assets Voting – Proxy voting – Quorum – resolutions – majority or super majority vote – cumulative voting Other Rights – Stock Certificates lost certificates – Preemptive Rights – Dividends – Shareholder’s Derivative Suit – Liability of Shareholders

12. Shareholders’ Meetings Meeting – Shareholders’ meetings must occur at least annually – Notice of the date, time, and place of the meeting must be sent to the shareholders.

13. Corporate Management - Directors First board appointed Election - majority vote of shareholders Generally serve one-year terms Board meetings One vote per director Directors’ Duties (delegated to committees) – declare dividends – Authorize major change – appoint and remove corporate offices – Key Financial Decisions

14. Directors’ Qualifications and Compensation Few qualifications are required; a director can be a shareholder but is not required to be. Compensation is usually specified in the corporate articles or bylaws.

15. Officers and Directors Fiduciaries to company – Loyalty – duty of care Conflict of Interest Business Judgment Rule – good faith – best interests – care of a ordinary prudent person Officer Duties – Run the company day-to- day – Hire others Question 19-2, p. 460 – Conflicts of Interest Oxy Corp is negotiating with Wick Construction for the building of a new corporate headquarters. Wick, the owner of Wick Construction, is a member of the Board of Oxy Corp. Wick has informed 2 of the 5 directors of his involvement with Wick Construction and assumes the rest know. The Board approves Wick Construction 3-2 with Wick voting in the majority. Problems?

16. Question Equal Partners. Brandt and Somerville each owned ½ the stock in PPI. Each did half the work until PPI moved to North Dakota. One Partner Doing Most of the Work. Somerville started doing more/most of the work. Somerville formed PL MFG, as his own business to make components for the bearing pullers PPI made and sold to PPI. PPI signed loan documents for PL MFG. Brandt sued for breach of fiduciary duty. 50% Owned by Brandt 50% Owned by Somerville PL MFG PPI 100% Owned by Somerville PPI (Sommerville) Signed Loan Documents Purchases Products from

17. Franchises Franchise Defined. – Any arrangement in which the owner of a trademark, trade name, or copyright licenses another to use that trademark, trade name, or copyright, under specified conditions or limitations, in the selling of goods and services. The Franchise Contract – Payment for the Franchise – Location and Business Organization of the franchise – Price and Quality Controls – Termination FranchiseCulvers Liquid Capital Required $300,000 - $500,000 Store Cost$1.5-$3 million Franchise Fee – Upfront $5,000 Application Fee - $55,000 Franchise Fee Royalty Fee4% of gross sales, 2% national advertising, 1% local

18. Types of Franchises Distributorship (e.g. automobile dealerships) Chain-style operations (e.g. fast-food chains) Manufacturing/processing plant arrangement (e.g. soft-drink bottling companies, such as Coca-Cola)

19. Franchising Contracts Contract. A franchising relationship is based on a contract. Special Laws. But the government has enacted laws to protect franchisees from the consequences of contracts into which they have voluntarily entered. Are lengthy franchise contracts necessarily disadvantageous to franchisees? Explain.