1. Basic Business Organizations Class 7

2. Starting a Business The first question:
What form should the business take?
Sole proprietorship
Partnership
Limited liability company
Corporation

3. Choosing the Form Consider Formation issues Liability protection
Management structure
Taxation considerations
Exit strategies/transferability of interests

4. Sole Proprietorship The most common form of business organization.
One (sole) owner (or – in WA – a married couple)
Business does not have to be registered with the secretary of state
Profits and losses are the personal profits and losses of the owner and are taxed as such
Personal assets of owner are available to satisfy debts of the business

5. Advantages Owner is in complete control & receives all profits
Flexibility
Ease of creation; maintenance

6. Disadvantages Owner is personally liable for all torts and contracts
Lacks continuity after death
Difficult to raise financing

7. An Example Child care provider Wants to work out of her house
How does she form this business?
What legal process is required?

8. Partnership There are three kinds of partnership General Partnership
Limited Partnership
Limited Liability Partnership

9. Uniform Act Washington has adopted the Revised Uniform Partnership Act
The statute governs to
Determine whether a partnership exists
Fill in the missing terms of a partnership agreement

10. Partnership
Association of 2 or more persons to carry on as co-owners of a business for profit.
More than one common owner
Governed by contract
Profits and debts are shared by the partners
Partners share in management of business

11. Advantages Easy to create and maintain Flexible, informal
Partners share profits and losses equally

12. Disadvantages Partners are personally liable for all torts/contracts
Dissolved upon death of any one partner
Difficult to raise financing

13. Partnership Responsibilities
Partners have a fiduciary duty to the partnership and each other.
Liable to the partnership for intentional misconduct or gross negligence
Cannot compete with the partnership
May not take an advantage from the partnership without consent of the partners
In case of conflict of interest, partnership profits must be given to the partnership

14. Joint Liability
Because a general partnership is considered a single business entity, the partners are all liable for the acts of any partner
Personal property of each partner may be used to satisfy the debts of the partnership

15. Termination Dissolution by Acts of the Partners
Withdrawal of any partner from the partnership
Agreement of the partners
Dissolution by Operation of Law
Death of a partner
Dissolution by Judicial Decree

16. Limited Partnership
In a limited partnership, at least one of the partners does not share in the right to manage the business
The limited partner invests money, but has no decision-making authority
The liability of the limited partner is limited to his or her investment in the business

17. Limited Liability Partnership
An LLP is a kind of general partnership that is governed by statute
The difference between general and limited liability partnerships is that in an LLP the partners are not liable for the debts of the partnership
Clients or customers of the LLP must be informed of the limited liability

18. Limited Liability Co.
A form of business ownership that permits small business owners to limit their liability to the amount of their investments
These are governed by statute
RCW 25.15

19. LLC Agreement
Operating agreement is analogous to corporation’s bylaws.
Agreements may be oral and contain provisions relating to management, dividends, meetings, transfer of membership interests, etc.
Generally, if the operating agreement is silent, courts will apply partnership principles.

20. Advantages Member liability is limited to amount of investment.
Can be treated as a “pass through” entity for tax purposes (like partnership).
Profits can be distributed to members without the double taxation of a corporation. Members pay personal income tax on received dividends.

21. Corporations A business entity formed by shareholders
The corporation is an artificial “person” for the purpose of conducting a business and can
Own property
Enter into contracts
Sue and be sued

22. Advantages
The liability of shareholders (the owners) of a corporation is limited to the individual’s investment
The business has a perpetual existence

23. Disadvantages Takes a lot of attention at the formation stage
Requires ongoing efforts – reporting requirements, annual meetings
Double taxation

24. Rights of the Corporation
Because a corporation is a legal “person,” it has constitutional rights.
Equal protection;
Access to the courts, can sue and be sued;
Right to due process;
Freedom from unreasonable search and seizure and double jeopardy.
Freedom of speech.

25. Torts and Criminal Acts
A corporation is liable for the torts committed by its agents or officers within the course and scope of their employment under the doctrine of respondeat superior.
Corporation can be liable for criminal acts, but only fined. Responsible officers may go to prison.

26. Corporate Express Powers
The express powers of a corporation are found in the corporation’s articles of incorporation, the laws of the state of incorporation, and in the state and federal corporations.
Corporate by-laws may also grant or limit a corporation’s express powers.

27. Corporate Implied Powers
Corporation has implied powers to perform all acts reasonably necessary to accomplish its corporate purposes:
Borrow and lend money.
Extend credit.
Make charitable contributions.
A corporate officer can bind corporation in contract in matters connected with the ordinary business affairs of the corporation.

28. Ultra Vires Doctrine
Corporate acts that are beyond the express or implied powers of the corporation are considered to be “ultra vires” and unlawful.

29. Classification of Corporations
Domestic corporation does business in its state of its incorporation.
Foreign corporation from another state doing business in Washington.
Alien Corporation: formed in another country doing business in United States.

30. Kinds of Corporations Public and Private. Nonprofit.
Close Corporations.
Shares held by few shareholders.
More informal management – similar to a partnership.
Restriction on transfer of shares.

31. Kinds of Corporations
“S Corporations” – IRS classification that enables corporation to avoid “double taxation” – only dividends to the shareholders, not corporate profits, are taxed. IRS requirements:
Corporation is domestic, with fewer than 75 shareholders, only one class of stock, no shareholder can be a non-resident alien.
Professional Corporations.

32. Basics of Formation
The corporation is created by Articles of Incorporation
These must include
Name of the corporation
Purpose
List of incorporators and directors
Name and address of registered agent
Share structure
Articles are filed with Secretary of State

33. Corporate Status
De Jure: substantial statutory requirements are met; cannot be attacked by state or 3rd parties.
De Facto: statutory requirements not met, but promoters made good faith effort to comply with corporate law; corporate status can only be attacked by state.
By Estoppel: if it acts like a corporation, it cannot avoid liability by claiming that no corporation exists.

34. Piercing the Corporate Veil
Where the corporate form is used solely to shield individuals from liability
Generally, owner co-mingles personal and corporate assets
Sometimes no stock is issued or
Formation or regulatory rules are ignored

35. Corporate Hierarchy Shareholders Board of Directors Officers Employees
Clients/Customers

36. Corporate Structure
The owners of the corporation are the shareholders.
Create the capital of the corporation
Have no management authority
Elect board of directors
Must approve changes in articles of incorporation and other major changes

37. Corporate Structure The Board of Directors
Elected by the shareholders
Have management responsibility
Appoint, supervise, remove officers of the corporation
The Directors have a fiduciary relationship with shareholders

38. Corporate Structure Officers and Executives
Elected/appointed by the board of directors
Responsible for carrying out board’s policies and directives
Responsible for management of business
Have a fiduciary duty to act in the best interests of the shareholders and the corporation

39. Requirements Corporations are required to:
Hold annual meetings of shareholders.
Give reasonable notice of meetings.
Provide reasonable access to books and records to shareholders.

40. Securities Regulation
Two major securities laws
Securities Act of 1933
Securities Exchange Act of 1934

41. Insider Trading
Occurs when someone with reliable secret information uses that information to benefit from stock trades.
Is a crime, punishable by fine and imprisonment.

42. Sarbanes-Oxley Act
Enacted after the Enron accounting scandal to require additional protections for investors.

43. Additional Regulations
Sherman (Antitrust) Act
Prohibits price fixing and illegal monopolies
Clayton Act
Prohibits anticompetitive mergers
Robinson-Patman Act
Prohibits price discrimination aimed at putting small competitors out of business

44. Merger and Consolidation
Corporations can grow and expand by:
Mergers.
Consolidation.
Purchase of another corporation’s assets.
Purchases of a controlling interest in another corporation.

45. Termination
Termination of a corporation, like a partnership, consists of two phases:
Dissolution (voluntary or involuntary); and
Liquidation.