Case analysis 2

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Chapter Five
Organizing Business to Limit Liability

Chapter Five
Organizing Business to Limit Liability

  • Risk management skills

  • Protecting the business

Competition

Employees, vicarious liability

Partners

  • Attitude, professionalism-avoid hobby business

Organizing Business to Limit Liability
Forms of Business

  • Sole Proprietorship

  • General/limited Partnership

  • Limited Liability Partnership (LLP)

  • Limited Liability Company (LLC)

  • Corporation

SOLE PROPRIETORSHIP

  • Single Owner

  • Full control of business

  • Owner and business are one

  • Total profit and total liability

SOLE PROPRIETORSHIP

  • Owner liable for lawsuits, debts, and other obligations from business operations

  • Capital formation can be a problem

  • All of the owner’s assets are on the line

  • Game-over if owner dies, retires, or sells out

GENERAL PARTNESHIP

  • Association of two or more partners

  • Carry on as business co-owners

  • Partnership is a separate legal entity

  • Can operate after death of a partner

  • Most basic type of partnership

GENERAL PARTNESHIP

  • Formed by partnership agreement

  • Must have one General partner

Assets are at risk

Burden of unlimited partnership liability

  • Partners have limited liability for obligations of partnership

LIMITED LIABILITY PARTNERSHIP

  • General partner and limited partners

  • Joint and several liability rules are different

  • General partner

Management, with

Limited personal liability

LIMITED LIABILITY PARTNERSHIP

  • Limited partners

Investors, with

Limited liability beyond investment

  • Federal and State registration requirements vary

  • Protect from vicarious liability/business debts

LIMITED LIABILITY COMPANY

  • Another form of starting a business

  • Less formal than corporation

  • File with a state Secretary of State

  • Owners avoid personal liability

  • Capitalization and tax advantages

  • Protect from vicarious liability/business debt

CORPORATION

  • Legal entity created by articles of incorporation

  • Operated with no individual liability

  • A “legal person”

  • Securing funds or going international

  • High maintenance

  • Protect from vicarious liability/business debts

CORPORATION
Formation

  • Owners initiate incorporation process

  • Articles filed with Secretary of State

  • Certificate of Incorporation Issued by Secretary of State

  • Statutory Agent appointed

  • Shareholders elect directors and adopt by-laws

LIMITING LIABILITY

  • Regardless of which organization is used

  • None offers protection against negligence

Duty to be reasonably careful,

Failure to be reasonably careful,

Proximate cause of

Injury

LIMITING LIABILITY

  • Type of organization is determined by:

Type of business/liability needs

Cost of formation

Capitalization requirements and sources

Transfer of ownership

Planned duration

Taxes

LIMITING LIABILITY

  • Very important decision early in the life of the business

  • Accountants

  • Lawyers

  • Federal, State, and Local considerations

  • Risk management-first step

OPERATING THE CORPORATION

  • Look like a corporation

Display the corporate name…Inc.

Establish and maintain operating capital

Multiple owners/shareholders

OPERATING THE CORPORATION

  • Sound like a corporation

External communications

Internal communications

FAA, NTSB

With employees

OPERATING THE CORPORATION

  • Act like a corporation

Professional demeanor

Project your company image

Only one Jeff Bezos, Elon Musk, Richard Branson

OPERATING THE CORPORATION

  • Documentation

Establish, and

Maintain

A paper trail

OPERATING THE CORPORATION

  • Documentation

Authorized signatories

Separate personal assets from corporate assets

Corporate decisions

Leases, rental agreements, employee records, etc.

Minutes of corporate meetings

OPERATING THE CORPORATION

  • Duties to employees

Worker’s Compensation

Withholding taxes

Independent Contractors-qualification can be misinterpreted

“Piercing the Corporate Veil”

  • Getting around corporation status to hold individuals liable

  • Corporation commits fraud or harms public

  • Corporation is a fraud, shell company

  • Corporate formalities not followed

“Piercing the Corporate Veil”

  • Corporate and individual assets not separated

  • “Alter ego” finding by court

Operating like a partnership/sole proprietorship

After incorporation