CHAPTERS 32, 33, 34
Business Law and the Legal Environment
1
“No one form of
organization is right
for every business.
The proper choice
depends upon factors
such as sources of
financing, tax issues,
liability concerns, and
the entrepreneur’s
goals.”
Business
Law and the Legal Environment
2
TYPES
 Sole
Proprietorships
 Partnerships
 Corporations
Business Law and the Legal Environment
3
SOLE PROPRIETORSHIPS



An unincorporated business owned by one
person.
Are easy and inexpensive to create and
operate.
Earnings are reported on the owner’s
personal tax returns.
Business Law and the Legal Environment
4
PARTNERSHIP
An unincorporated
association of two or more
co-owners who carry on a
business for profit.
Business Law and the Legal Environment
5
LEGAL
Federal Law (Except taxes)
 Each state regulates
 Most modeled after the Uniform
Partnership Act (UPA) of 1914, which
has been revised several times (most
recently in 1997).
 No
Business Law and the Legal Environment
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IS IT A PARTNERSHIP?
YES IF:
Partners share profits
 Partners share management
of business
 Partners share losses
 And many more as we
shall see

Business Law and the Legal Environment
7
HOWEVER

Referring to yourselves as partners does
not create a partnership, but may be
evidence that one was intended.
 Charitable businesses are not
partnerships.
 Non-profit
enterprises are not
partnerships
Business Law and the Legal Environment
8
TYPES
Partnership at will
Term partnership
Business Law and the Legal Environment
9
But
Be
Aware!
Business Law and the Legal Environment
10
PARTNERSHIP BY
ESTOPPEL
1.
2.
3.
4.
Participants tell other people that they
are partners
or they allow other people to say,
without contradiction, that they are
partners.
A third party relies on this assertion;
and
The third party suffers harm.
Business Law and the Legal Environment
11
You
Probably
Are
A
partnership
Business Law and the Legal Environment
12
PARTNERSHIP PROS
Advantages:
 Easy
to form.
 No double taxation
 May be easy to manage
 Easy to terminate
Business Law and the Legal Environment
13
AND CONS
 Disadvantages:
 Personal
liability
 Funding may be difficult
 Management may be difficult.
 Transferability is limited.
 May terminate when not desired
Business Law and the Legal Environment
14
MORE CONS
 Sometimes
unintentional
 Partners can be held personally liable
for the partnership actions and debts.
Business Law and the Legal Environment
15
GREAT LEGAL ADVICE
ALL PARTNERSHIP
AGREEMENTS SHOULD BE
IN WRITING!
DOT THE Is, X THE TS
TEAMWORK
Business Law and the Legal Environment
16
AUTHORITY TO BIND
PARTNERSHIP
Partners with actual or apparent
authority may bind the partnership.
Actual Express Authority
 Actual Implied Authority
 Apparent Authority

Business Law and the Legal Environment
17
PARTNER LIABILITY I
Ratification:
If the partnership accepts the
benefit of an unauthorized
transaction or fails to repudiate it,
it has ratified the transaction.
Business Law and the Legal Environment
18
PARTNER LIABILITY II
Information
Under the Uniform Partnership
Act, whatever one partner
knows, the partnership is
deemed to know.
Business Law and the Legal Environment
19
PARTNER LIABILITY III
Tort Liability
A partnership is liable for
intentional and negligent torts of a
partner in the ordinary course of
business or when the partner is
acting with actual authority.
Business Law and the Legal Environment
20
PARTNER LIABILITY IV
Personal Liability
2. Joint and Several
Liability
3. Incoming Partners
1.
Business Law and the Legal Environment
21
RELATIONSHIPS AMONG
PARTNERS I
 Financial
Rights
Profits
 Losses
 Pay

 Property
 Ownership
Business Law and the Legal Environment
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RELATIONSHIPS AMONG
PARTNERS II
Management Rights





equal rights in management
right to bind the partnership to a contract
have an equal vote
right to inspect and copy the partnership’s
books and records.
required to share any important information
Business Law and the Legal Environment
23
RELATIONSHIPS AMONG
PARTNERS III
Management Duties




Duty of Care
Duty of Loyalty
Duty of Good Faith
Duty of Fair Dealing
Business Law and the Legal Environment
24
TERMINATING A
PARTNERSHIP
Partnership at Will vs. Term
Partnership
 Partnership
at Will
 Term Partnership
Business Law and the Legal Environment
25
DISSOCIATION I
(TERMINATION IS BETTER TERM)
 Automatic
if a partner quits.
 Automatic if a partner dies
 May happen by agreement
Business Law and the Legal Environment
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DISSOCIATION II
Must remember, a partner
always has the power to
leave but may not have the
right.
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DISSOCIATION III
When one or more partners
dissociate, the partnership can:
1. buy out the departing partner
and continue in business or
2. wind up the business and
terminate the partnership
Business Law and the Legal Environment
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Dissociation IV
Rightful Dissociation
Vs.
Wrongful Dissociation
Business Law and the Legal Environment
29
CHOICE #1. CONTINUATION OF
PARTNERSHIP




Financial Settlement
Liability of the dissociated partner to
outsiders for debts incurred before
dissociation
Liability of Dissociated Partner for Debts
Incurred After Dissociation
Liability to the Partnership
Business Law and the Legal Environment
30
CHOICE #2. TERMINATION
Ending a partnership business
involves three steps:
1.
2.
3.
Dissolution
Winding Up
Termination
Business Law and the Legal Environment
31
OTHER TYPES OF
PARTNERSHIPS
Business Law and the Legal Environment
32
LIMITED PARTNERSHIPS
 General
(active management)
and limited (money-only)
partners.
 Only the general partners are
personally liable.
Business Law and the Legal Environment
33
JOINT VENTURE
A partnership for
a limited purpose.
Business Law and the Legal Environment
34
LIMITED LIABILITY
LIMITED PARTNERSHIP
 None
of the partners are personally
liable
 Formation requires a filed certificate
of limited partnership.
 Very technical
Business Law and the Legal Environment
35
CORPORATIONS
A legal business entity
created under state laws
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36
CORPORATIONS
Several types:
Close
2. Publicly held
3. Non-profit
1.
Business Law and the Legal Environment
37
CORPORATIONS



Corporations offer limited liability – usually
the managers’ and investors’ personal
property is not at risk.
Corporate stock can be bought and sold,
making investments easy to get.
Corporations involve a lot of expense and
effort to create and operate.
Business Law and the Legal Environment
38
FORMING A
CORPORATION
Where
 State laws
 By whom
 How
 Registration
 Ownership

Business Law and the Legal Environment
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WHERE TO
INCORPORATE
law – not Federal
 Either the home state of the
business or a state which has
favorable laws for corporations
(often Delaware)
 State
Business Law and the Legal Environment
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ARTICLES OF INCORPORATION
(CHARTER)
Required Provisions


Name of corporation
Address and Registered Agent

Incorporator

Purpose

Stock
Business Law and the Legal Environment
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OPTIONAL PROVISIONS
 Indemnification
of Directors
 Cumulative Voting
Business Law and the Legal Environment
42
DEFINITIONS







Promoters
Shareholders
Officers
Stock
De Facto Corporation
De Jure Corporation
Corporation by Estoppel
Business Law and the Legal Environment
43
PROMOTER
The person who normally is hired
to set up the corporation.
Also called the “incorporator”
Business Law and the Legal Environment
44
PROMOTER’S
LIABILITY
 The
promoter is personally liable on
any contract signed before formation.
 The corporation is not liable unless it
adopts the contract after
incorporation.
Business Law and the Legal Environment
45
NOVATION
Even if the corporation adopts the
contract, the promoter is still liable
until the third party agrees to a
novation (new contract), unless the
contract clearly indicates that the
other party is relying only on the
corporation, which he knows does
not yet exist.
Business Law and the Legal Environment
46
SHAREHOLDERS
The owners of a corporation who pay
value for the stock in the corporation.
Stock represents their ownership.
Take over from the promoter
Business Law and the Legal Environment
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BOARD OF DIRECTORS
Elected by the shareholders to oversee
the corporation.
Normally draw up by-laws.
DIRECTORS BEWARE!!!!!
Business Law and the Legal Environment
48
OFFICERS
Elected by the directors to run the
corporation on a day-to-day basis.
officers BEWARE!!!!!
Business Law and the Legal Environment
49
STOCK I
Stock can be:
 Authorized
and unissued
 Authorized and issued or
outstanding
 Treasury stock (been issued, then
bought back by company)
Business Law and the Legal Environment
50
STOCK II
STOCK MUST BE
REGISTERED WITH THE
PROPER AUTHORITIES OR
YOU GET FREE ROOM AND
BOARD
Business Law and the Legal Environment
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STOCK III
Number of shares
Par value
Business Law and the Legal Environment
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STOCK IV
Classes and series:
Common
or
Preferred
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DE FACTO CORPORATION
The promoter has made a good
faith effort to incorporate and has
actually used the corporation to
conduct business but has failed
to comply with all the laws.
Business Law and the Legal Environment
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DE JURE CORPORATION
The promoter has substantially
complied with the requirements
for incorporation, but has made
some minor error.
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CORPORATION BY
ESTOPPEL
If a party enters a contract
believing in good faith the
corporation exists, he cannot
later take advantage of the
fact that it does not.
Business Law and the Legal Environment
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CLOSE CORPORATIONS



Few shareholders
Stock is not publicly traded on a stock
exchange.
Normally limited purpose
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“PUBLIC
CORPORATIONS”
Larger, with many shareholders.
Very strict laws govern.
(make lawyers lots of money)
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58
NON-PROFIT
CORPORATIONS
Very strict laws
Normally serve “public purpose”
• No shareholders
• Board of trustees
•
•
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Numerous specialty
corporations
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60
“S” CORPORATIONS
 Limited
liability of a corporation
and the tax status of a
partnership.
 Very technical
 Used quite often by
professionals
Business Law and the Legal Environment
61
“S” CORPORATIONS DISADVANTAGES
 There
can only be one class of
stocks.
 There can be no more than 75
shareholders.
 Shareholders cannot be
partnerships or other corporations.
 Shareholders must be U.S. citizens
or residents.
Business Law and the Legal Environment
62
PROFESSIONAL
CORPORATIONS





Lawyers, accountants, doctors, engineers,
etc. – must have professional license
Normally PCs provide more liability
protection than a partnership.
Tax advantages
May limit professional liability
Easy to add new members
Business Law and the Legal Environment
63
LIMITED LIABILITY
COMPANIES
An LLC offers the limited liability of
a corporation and the tax status of a
partnership, without the
disadvantages of an S corporation.
Business Law and the Legal Environment
64
OTHER FORMS OF
ORGANIZATION
A business trust is an unincorporated
association run by trustees for the benefit
of investors (who are called
“beneficiaries”).
 Cooperatives are groups of individuals or
businesses that join together to gain the
advantages of volume purchases or sales.

Business Law and the Legal Environment
65
FRANCHISES
Franchising is a popular method of starting a
business that is a compromise between
employment and starting your own
business.
Franchisees have freedom to make many
choices, but are limited in other ways.
Business Law and the Legal Environment
66
FOREIGN
CORPORATIONS I
 Does
business in any another
state besides the state of
incorporation.
 Must
“register” in foreign state.
Business Law and the Legal Environment
67
FOREIGN
CORPORATIONS II
An unqualified company that is doing
business cannot file a lawsuit until it
has registered. It can, however,
defend itself against a suit and it can
file a lawsuit if it is NOT doing
business in that state.
Business Law and the Legal Environment
68
PIERCING THE CORPORATE
VEIL
A court may hold shareholders and
officers, personally liable for
debt in four circumstances:
1.
Failure to observe formalities
2. Commingling of assets
3. Inadequate capitalization
4. Fraud
Business Law and the Legal Environment
69
DEATH OF A CORPORATION
 May
be voluntary
 By court order
 By shareholder vote
 By original articles of
incorporation terms
Business Law and the Legal Environment
70
TERMINATION
Terminating a corporation is a threestep process:
1.
2.
3.
Vote by a majority of the shareholders.
Filing Articles of Dissolution with the
Secretary of State.
Winding up – paying debts and
distributing assets.
Business Law and the Legal Environment
71
FINAL ADVICE
PUT TOGETHER A
TEAM:
Lawyer, accountant,
banker, financial
advisor, cfp, clu, and
specialist in the
business you are
starting!
Business Law and the Legal Environment
72
And take
Their
Advice!
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73