1. Essentials of the legal environment today, 5e
ROGER LEROY MILLER
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2. BUSINESS ORGANIZATIONS
CHAPTER 11
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3. Learning Objectives
What advantages and disadvantages are associated with the sole proprietorship?
What is meant by joint and several liability? Why is this often considered to be a disadvantage of doing business as a general partnership?
What are the two options for managing a limited liability company?
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4. LEARNING OBJECTIVES (CONT’D)
In what circumstances might a court disregard the corporate entity (pierce the corporate veil) and hold the shareholders personally liable?
What are the duties of corporate directors and officers?
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5. Introduction
When choosing an organizational form, entrepreneurs should consider:
Ease of creation
Owners’ liability
Tax considerations
Ability to raise capital
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6. Sole Proprietorships and Franchises
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
LO-1
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7. Sole Proprietorships and 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
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8. Sole Proprietorships and Franchises
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
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9. Sole Proprietorships and Franchises
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.
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10. Partnerships General Partnerships
Arises from agreement, express or implied, between two or more persons to carry on a business together for profit
Sharing of profits and losses
Joint ownership
Equal right in management
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11. 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
LO-2
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12. 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.
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13. 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
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14. 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
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15. 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.
LO-3
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16. 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)
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17. 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.
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18. 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
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19. corporations Formation and Financing Corporate Powers
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.
LO-4
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20. DIRECTORS, OFFICERS, AND SHAREHOLDERS
Election of directors
Compensation of directors
Board of directors’ meetings
Rights of directors
Corporate Officers and Executives
Hired by the board of directors
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21. Directors, officers, and shareholders
Duties and Liabilities of Directors and Officers
Duty of care
The business judgment rule
Duty of loyalty
Conflicts of interest
LO-5
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22. Directors, officers, and shareholders
Shareholders’ powers
Shareholders’ meetings
Proxies
Shareholder proposals
Shareholder voting
Cumulative voting
Other voting techniques
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23. Exhibit 11.1
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24. Directors, officers, and shareholders
Rights of shareholders
Preemptive rights
Dividends
Retained earnings
Net profits
Surplus
Inspection rights
Transfer of shares
The shareholder’s derivative suit
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25. 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
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26. Exhibit 11.2
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27. Exhibit 11.2
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28. Exhibit 11.2
© 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.