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A sole proprietorship is an unincorporated business owned by one person.
Sole proprietorships are easy and inexpensive to create and operate.
Earnings are reported to the owner's personal tax returns.
-Usually the managers and investors personal property is not at risk.
-Managers, employees, and even stockholders are still personally liable for their own negligence and crimes.
-Corporate stock can be bought and sold, making investments easy to get.
-Corporations have perpetual existence
-Corporations involve a lot of expense
-Corporations are taxable entities.
Suppose that Loretta opens a candy shop on Main Street. Wary about her liability serving food to the public, she incorporates her business. However, she fails to follow the manufacturer’s suggestions and refrigerate her fudge. As a result, every mother in town falls ill after eating gifts of fudge on Mother’s Day. The business has a bank account with a few thousand dollars. Loretta has $100,000 in savings in a mutual fund account. Will the injured mothers have a right to the mutual funds, or only the bank account?
-refer to a corporation whose stock is not publicly traded on a stock exchange.
-Common provisions of close corporations: Protection of minority shareholders, transfer restrictions, flexibility, dispute resolution.
Shareholders of S corps have the best of all worlds: the limited liability of a corporation and the tax status of a partnership.
The disadvantages of an S corp:
-there can only be one class of stocks.
-there can be no more than 100 shareholders.
-Shareholders cannot be partnerships or other corps
-shareholders must be US citizens or residents
-all shareholders must agree that the company should be an S corporation.
Offers the limited liability of a corporation and the tax status of a partnership, without the cumbersome requirements of an S corporation (such as annual filing, rules about classes of stock, and numbers of stockholders, etc.)
-The disadvantages with LLCs include extensive set-up and more difficulty in obtaining capital financing.
-favorable tax status
-flexibility in classes of membership
-easy transferability of interest
-duration (does not dissolve upon withdrawal of a member)
-two or more co-owners who carry on a business for profit
-each co-owner is a general partner
-easy to form
-do not pay taxes
can be held personally liable for the partnership actions or debts; financing may be difficult because they cannot sell shares.
-Each partner has equal rights in management of the partnership unless otherwise agreed.
-Large partnerships are often managed by a few designated managing partners or an executive committee.
-Unless agreed otherwise, partners have an equal vote on matters of partnership business.
Duty of Care
Duty of Loyalty
Duty of Good Faith & Fair Dealing
-occurs if a partner quits
-A partner always has the power to leave a partnership, but may not have the right.
-When one or more partners dissociate, the partnership can either buy out the departing partner(s) and continue in business or wind up the business and terminate the partnership.
Dissolution - decision to end (voluntary or automatic)
Winding Up - all debts of the partnerships are paid, and the remaining proceeds are distributed to the partners.
Termination - the end; happens when winding up is complete.
-Partner withdraws from partnership at will
-Partner is dissociated and half the other partners vote to wind up business
-All partners agree to dissolve
-The term expires or partnership achieves its goal.
-Partnership business becomes illegal.
-A court determines that the partnership cannot function successfully.
a. A sole proprietor.
b. A partner in a general partnership.
c. A general partner in a limited liability limited partnership.
d. A general partner in a limited partnership.
(LLP - partners in a LLP are not personally liable for debts of the partnership.)
(Limited Partnerships & Limited Liability Limited Partnerships)
-Have general and limited partners
-In a LP, only the general partners are personally liable
-Formation of limited partnerships require a filed certificate of limited partnership.
-Usually, Limited partnerships continue even if partners leave the partnership.
a. has no potential liability to the customer.
b. can be held personally liable to the customer since she is a partner.
c. can only be held liable to the amount of her investment.d. is personally liable, but the customer must first collect from the general partners before collecting from Miranda.
Organization of professionals (such as doctors, lawyers, accountants, etc.); all members must be of the same profession.
-professional corporations provide more liability coverage than a general partnership
-When one member commits malpractice, the corporation’s assets are at risk and the personal assets of that member, but not the personal assets of the other members.
Not, strictly speaking, a separate form of entity, but rather an important option for entrepreneurs
FTC regulates franchising, which has been subject to abuses by some franchisors
Agreements are often one-sided
The person who organizes a corporation is called a PROMOTER. The promoter is personally liable on any contract signed before formation.
The corporation is not liable unless it ADOPTS the contract after incorporation. The promoter is no longer liable if the other party agrees to a NOVATION – a new contract.
(Charter's Required Provisions)
Name of corporation
Address and Registered Agent
Incorporator –person who signs the charter and delivers it to the Secretary of State for filing (perhaps the lawyer or the promoter)
Purpose –can be a broad statement, such as “to conduct lawful business”
a. yStar is liable on the contract because the contract was signed in its name.
b. yStar becomes liable on the contract as soon as it is incorporated.
c. yStar is liable on the contract if the contractor knows that the corporation does not yet exist.d. yStar will be liable on the contract only if the corporation adopts the contract.
-authorized and unissued
-authorized and issued or outstanding
-treasury stock (been issued, then bought back by company)
-classes and series
-owners of preferred stock have preference on dividends and liquidation.
-common stock is last in line for any corporate payouts, including dividends and liquidation.
Directors and officers are elected, unless all shareholders agree to not have a board of directors.
Small corporations may elect directors by written consent.
Minute book holds records of all meetings.
may be voluntary (shareholders vote) or forced (by court order).
court may hold shareholders liable for debt in the case of:
Failure to observe formalities (such as holding meetings, keeping records)
Commingling of assets (using corporate funds to pay personal debts, etc.)
Inadequate capitalization (the corporation should obtain insurance against liability for torts)
(of a corporation is a 3 step process) :
Vote by a majority of the shareholders.
Filing Articles of Dissolution with the Secretary of State.
Managers vs. Shareholders:
(the inherent conflict)
Managers – want, first to keep their jobs and second, to build a strong company.
Managers have a fiduciary duty to act in the best interests of the shareholders.
Shareholders – want the price of stock to increase.
The business judgment rule does not apply if
(1) the directors were self-dealing and
A manager makes decisions that benefit himself or another company associated with the manager.
Self-dealing transactions may be acceptable if:
The disinterested members of the board of directors approve the transaction.
The disinterested shareholders approve it.
The duty of care requires officers and directors to act in the best interests of the corporation and to use the same care that an ordinarily prudent person would in the management of her own needs.
Decisions must have a rational business purpose.
Decisions and actions are legal.
Directors, not shareholders, have the right to manage the corporate business.
Inside directors -- officers in the corporation, typically control their company’s board.
Shareholders have neither the right nor the obligation to manage the day-to-day business of the enterprise.
Right to Information
Under the Model Act, shareholders with a proper purpose have the right to inspect and copy the corporation’s minute book, accounting records, and shareholder lists.
Right to Vote
Annual meeting of shareholders are the norm for publicly traded companies.Companies whose stock is not publicly traded may either hold an annual meeting or use written consent from their shareholders.
Election and Removal of Directors
Shareholders have the right to elect directors and also to remove them from office, though this is a complex and expensive process and is rarely done.
Compensation for Officers and Directors
A corporation must seek shareholder approval before undergoing any of the following fundamental changes:
Sales of Assets
Amendments to the Charter
in response to corporate scandals
-companies must adopt effective financial controls
-ceo's and cfo's must personally certify financial statements
-a boards audit committee must be independent
-no personal loans to directors or officers
-if a company has to restate its earnings, its ceo and cfo must reimburse the company for any bonus
-must disclose an ethics code
-whistleblowing employees are protected
Enacted by Congress in the wake of the Great Recession of 2008-10
Includes requirement that at least every three years, shareholders get a non-binding vote on executive compensation
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