ACTG 6100 Legal Issues Week 4 Business Organizations

Starting a Business Primary Factors: – –Cost and ease of formation – –Tax consequences – –Liability Other factors: – –Duration – –Transferability – –Participation in management

How do the factors affect the choice of business organization? Ease of Formation Income Tax Consequences Personal Liability Sole Proprietorship Yes No General Partnership Yes NO LLCNoYes CorporationNo Yes Consideration of the cost and ease of formation would tend to support the choice of a sole proprietorship or partnership, but consideration of the potential liability weighs in favor of a corporation or an LLC.

Sole Proprietorships The “default” option for individuals No registration with state No division between the owner and the business

General Partnerships The “default” option when 2 or more people do business together. An association Of 2 or more co-owners To carry on A business for profit

General Partnerships Not a taxable entity Joint and several liability Each partner has a fiduciary duty Unless there is an agreement to the contrary: – –Equal voice in management – –Equal division of profit and loss

Corporations Shareholders have limited liability Share are freely transferable Perpetual existence Taxable entity Registration with state required

Special Types of Corporations S – Tax status is like a general partnership Close (Closely held) – Restrictions on the transferability of the stock

Hybrid Forms of Business The best of a general partnership, and the best of a corporation: LLC Ltd. Ptn. Ltd Liability Ltd Ptn Prof Corp

Corporations Promoters are personally liable on contracts entered into prior to incorporation Status as a corporation begins with the filing of a certificate of incorporation. SHDirectorsOfficers

The Role of Corporate Management FIDUCIARY DUTY – –Loyalty – –Care The Business Judgment Rule shelters directors from personal liability if the duties have been fulfilled.

The Role of Shareholders Right to inspect books and records Right to vote for Directors

Piercing the Corporate Veil a/k/a Disregarding the corporate entity Reasons – –Failure to observe formalities – –Commingling Funds – –Inadequate capitalization – –Fraud Shareholders become personally liable.