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Chapter17-GovernanceandStructureFormsofDoingBusiness..pptxChapter 17 Governance and Structure: Forms of Doing Business
Its Legal, Ethical, and Global Environment
Marianne M. Jennings
Business
11th Ed.
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Comparison of Business Organizations
| Form | Formation | Funding | Management |
| Sole proprietorship Partnership Limited partnership Corporation S corporation or Subchapter S Limited liability company (LLC) Limited liability partnership | No formal requirements Articles of partnership Filing of articles of partnership Formal filing of articles of incorporation Same as above (special IRS filings) Formal filing – articles of organization Filing of articles of limited liability partnership | Individual provides funds Capital contributions of partners Capital contributions of general and limited partners Debt (bonds)/equity (shareholders) Same as above Capital contributions of members Capital contributions of partners | Individual All partners or delegated to one General partner Board of directors, officers and/or executive committee Same as above No centralized management; all members manage or delegate to one member All partners or delegated to one |
Click to edit Master text styles
Second level
Third level
Fourth level
Fifth level
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
| Form | Transfer Control | Taxes |
| Sole proprietorship Partnership Limited partnership Corporation S corporation or Subchapter S Limited liability company (LLC) Limited liability partnership | No transfer Transfer interest but not partner status Same as partnership (except RULPA) Shares (with reasonable restrictions) are easily transferred Restrictions on transfer to comply with S corporation No transfer without consent of the majority No admission without consent of majority | Individual pays on individual return Partner takes profits and losses on individual return (flow-through) Same as partnership Corporation pays taxes; shareholders pay taxes on dividends Shareholders pay taxes on profits; take losses Flow-through treatment Flow-through treatment |
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Comparison of Business Organizations
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
| Form | Termination | Liability |
| Sole proprietorship Partnership Limited partnership Corporation S corporation or Subchapter S Limited liability company (LLC) Limited liability partnership | Death; voluntary Dissolution upon death; withdrawal of partner Same as partnership Dissolved only if limited in duration or shareholders vote to dissolve Same as above Dissolved upon death; bankruptcy Dissolved upon death, bankruptcy | Individual Partners are personally liable General partner is personally liable; limited partners liable to extent of contribution No shareholder personal liability unless Watered or Corporate veil Same as above Limited liability – only liable to extent of capital contribution Varies by state, but liability for acts of partners is limited in some way |
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Comparison of Business Organizations
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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Sole Proprietorships
Formation
Done by an individual
May have a fictitious name
Example: Ralph Jones d/b/a Spuds Brewery
No formal requirements for formation
May have to publish d/b/a name
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Sole Proprietorships
Sources of Funding
Loans
Government help
Liability: Full Personal Liability of Owner
Tax Consequences
Owner claims all income and losses
No separate filing requirement
Management and Control
All assets with one person
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Transferability of Interest
Business can be sold − property, inventory, and goodwill
Owner will usually sign a non-compete agreement
Sole Proprietorships
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Governed by the Uniform Partnership Act (UPA)
Adopted in 49 states
In absence of a partnership agreement, UPA controls
Revised Uniform Partnership Act (1994)
Adopted in nine states
Partnerships
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Partnerships
Definition
An association of two or more persons to carry on as co-owners, a business for profit
Can include corporations and natural persons
Formation
Voluntary formation: By agreement
Draw up articles of partnership
Involuntary formation
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Information in Articles of Partnership
Minimum Requirements
Names of the partners
Name of the partnership
Nature of the partnership’s business
The time frame of operation
Amount of each partner’s capital contribution
Managerial powers of partners
Rights and duties of partners
Accounting procedures for partnership books and records
Methods for sharing profits and losses
Salaries (if any) of the partners
Causes and methods of dissolution
Distribution of property if the partnership is terminated
Suggested Provisions
Disability issues
Insurance coverage
Sale of interest
Divorce of one of the partners
Indemnity agreements
Noncompetition agreements
Leaves of absence
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Partnership Formation
Involuntary Formation: By Implication
Sharing of profits
Constitutes prima facie evidence that a partnership exists
Exceptions − rent, wages, annuity to widow or estate, payment for goodwill
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Partnership Formation
Case 17.1 Blumberg v. Ambrose (2015)
Was there a partnership created?
What were the signals between the two about their relationship?
What documentation existed?
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Partnership Formation
Involuntary Formation: Partnership by Estoppel (or Ostensible Partner)
Results when someone allows the inference to be made that he/she is a partner
Allowing name to be used to get a loan
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Partnership Funding
Sources of Funding
Capital contributions of partners
Loans by partners
Outside loans
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Partnership Liability
Mutual Principals and Agents
Partnership assets reachable by partnership creditors
Personal assets reachable by partnership creditors when partnership assets are exhausted
Case 17.2 Vrabel v. Acri (1952)
Why wasn’t Mr. Acri a defendant?
Is Ms. Acri liable for the injuries?
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Partnership
Tax Issues
Partnership does not pay taxes
Partnership files informational return
Partners report income and losses on their returns
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Partnership Control
Unless otherwise agreed, each has equal management authority
May delegate day-to-day authority to one partner
Each partner is mutual principal and agent of the others
Partnership Management
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Partnership Management
Borrowing − Done Routinely in Most Partnerships
Unanimous Consent Required for Confession of Judgment, Selling Goodwill, and Admission of Another Partner
No Compensation for Work Unless Agreed
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Fiduciary Duties
Mutual principals and agents
Each is to act in the best interests of the partnership
Partnership Property
Property contributed to the firm or purchased with partnership assets
Own property as tenants in partnership
Partnership Management
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Partnership Management
Transfers of Partners’ Interest
Partner’s interest is personal property
Can be pledged to creditors and transferred
Transferee does not become a partner
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Transfers of Partners’ Interest
Admission of new partner requires unanimous consent
Transferring partner is not relieved of liability
Some partnership agreements require partners to offer it first to remaining partners
Partnership Management
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Partnership Dissolution
One Partner No Longer Associated With the Partnership
Examples: Retirement, death
Can Just Be a Change in Structure or Can Proceed to Termination
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Dissolution Methods
By agreement
By operation of law: death of a partner, bankruptcy of partnership or partner
Court order
Termination
Assets are liquidated
Distribute in this order: outside creditors; partners’ advances (loans); capital contributions; profits
Partnership Dissolution
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Governed by Uniform Limited Partnership Act (ULPA)
Revised Uniform Limited Partnership Act (RULPA)
Recent revision adopted in nearly all states
Use ULPA or RULPA when no agreement
RULPA addresses the needs of the larger limited partnership
Limited Partnerships
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Structure
Must have at least one general partner
Must have at least one limited partner
Liability of limited partner is limited to capital contribution
Liability of general partner is unlimited
Formation
Must meet statutory requirements; if not met a general partnership may be created
L.P.’s: Formation
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Must File Certificate of Limited Partnership
RULPA is Much Briefer and Adopted in Nearly All States
Corrections Can Be Filed By Limited Partners
L.P.’s: Formation
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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L.P.’s: Formation
Formation – the RULPA Requires the Following Information for Formation of a Limited Partnership
Name − must contain the words “Limited Partnership”
Address of principal place of business
Name and address of statutory agent for services process
Business address of general partner
Latest date for dissolution of partnership
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Sources of Funding
Limited partners provide most of the financing
Limited partners can contribute services under RULPA
Loans are used − called advances when made by partners
Under RULPA, limited partners can use services already given as a contribution
L.P.’s: Funding
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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Limited Partners Have Limited Liability, But Cannot Participate in Management
Under RULPA, Can Do the Following and Still Retain Limited Liability Status
Can be an employee
Can consult with and advise the general partner
Can act as a surety guarantor for the limited partnership
Can vote on amendments, dissolution, sale of property, and debt assumptions
L.P.’s: Liability
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Taxed the Same as General Partnerships
Partners Report Profits and Losses on Individual Returns
Limited Partners Get Direct Tax Benefits With Limited Liability
IRS Scrutinizes to be Certain it is a Partnership and Not a Corporation
L.P.’s: Tax Issues
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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Partner Relationships: Management is Responsibility of General Partner
Profits and Distributions
Authority belongs to general partner to make decisions here
Profits and losses are allocated on the basis of capital contributions
RULPA requires agreement for splitting profits and losses to be in writing
L.P.’s: Profits
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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Partner Authority
General partner has same authority as in general partnership
Can restrict by agreement
Consent of limited partners required for
Admitting a new general partner
Admitting a new limited partner (can give authority in the agreement)
Extraordinary transactions (selling assets)
Limited partners have right to inspect books and records
L.P.’s: Partner Authority
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Transfer of Interests Are Permitted
May have significant restrictions on transfer to prevent liability under federal securities laws
The more easily an interest can be transferred, the more likely the IRS is to label it a corporation
Transfer of a limited partner’s interest does not dissolve the partnership
Under RULPA, Assigning Limited Partner Can Be Given the Authority to Make the Assignee a Limited Partner
L.P.’s: Transferability
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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RULPA Provides for the Following Means
Expiration of time period in agreement or event as provided in agreement
Unanimous written consent of all partners
By court order
Withdrawal of general partner
L.P.’s: Dissolution
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If Termination is Elected, Assets are Distributed as Follows
Outside creditors
Partners’ distributions
Return of capital contributions
Remainder split according to agreement
L.P.’s: Dissolution
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Characteristics of a Corporation
Unlimited duration
Free transferability of interest
Limited liability
Centralized management
Legal existence
Can hold legal title to property
Can sue and be sued
Corporations
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For Profit
Not For Profit
Domestic − in the State of Incorporation
Foreign − Everywhere Else
Government Corporations − Like FNMA
Professional Corporations − Limited Liability on Everything Except Professional Malpractice
Types of Corporations
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Close or Closely Held Corporations: Limited Number of Shareholders, Subject to Less Formality
Subchapter S or S Corporation
IRS election to be treated as partnership for tax purposes
Still have limited liability
Limits on size for this election
Types of Corporations
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Types of Corporations
The Law of Corporations: Model Business Corporation Act (MBCA)
Liberal statute
One-third of the states have adopted
Revised in 1984
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Must Comply With Statutory Requirements
Where to Incorporate
Status of state’s corporation laws
State tax laws
Ability to attract employees
Incentives
Corporate Formation
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File Articles of Incorporation
Name
Names and addresses of all incorporators
Capital structure of the corporation
Types of stock
Corporate Formation
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Corporate Formation
File Articles of Incorporation
Classes of stock
Rights of shareholders
Voting rights
Statutory agent
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Incorporators
Idea people − also called promoters
Will be personally liable for contracts entered into before incorporation
Corporation can ratify contracts − promoter is secondarily liable
Corporation can enter into a novation with the third party − promoter or incorporator is released from liability
Corporate Formation
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Corporate Formation
Must Hold Initial Meeting After Incorporation
Elect new directors
Adopt bylaws (day-to-day procedures)
Issue stock
Ratify pre-incorporation contracts
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Capital and Sources of Corporate Funds
Debt Financing − The Bond Market
Short-term financing − loans from banks
Bond market
Benefits of debt financing
Interest is tax deductible
Debt holders get paid first
Limitation: too much debt renders corporation financially unstable
Corporate Capital
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Corporate Capital
Equity Financing − Shareholder
Common stock: has voting rights, receives dividends when paid
Preferred stock: receiver preference over common stock can be cumulative or noncumulative
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Liability Issues
Must make full payment for shares − if not, there is liability (water stock); not paying par value
Shareholders’ liability generally limited to amount of investment
If corporate veil is pierced, there is shareholder liability; means corporate immunity from liability is set aside
Corporate Liability
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Reason for Piercing the Veil
Inadequate capitalization − must put in enough money to meet the risks of doing business
Alter ego theory − separate nature of corporation is disregarded
No formalities − personal and corporate properties are mixed together
Ignoring corporate formalities − personal elections, meetings
Forming to perpetrate a fraud on creditors
Corporate Liability
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Piercing the Veil
Case 17.3 U.S. v. Bestfoods, Inc. (1998)
Is there a special CERCLA rule for piercing the corporate veil?
What must be shown to hold a parent liable for the action of a subsidiary?
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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Corporation Pays Tax
Shareholders pay tax on dividend income
Subchapter S or S Corporation
Corporate liability protection with partnership tax status
Corporate Tax Issues
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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Corporate Directors
Election of Directors
Elected by shareholders to make corporate policy
May operate by committee
Hire officers of corporation and set officers’ salaries
Director Liability
Protected by the Business Judgment Rule
Directors and Officers must act in good faith and with prudence to avoid personal liability
Can consult experts, but must study issues
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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Control By Board of Officer Pay
Dodd-Frank Requirements on Independence of Compensation Committee and Pay Votes
Shareholder “say on pay” vote every three years
Independent compensation committee
Claw-back provisions in compensation for executives if there is fraud or other illegality
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Case 17.4 Brehm v. Eisner (2000)
Who made the decision to terminate Ovitz?
Was hiring Ovitz just a HUGE mistake?
Why is there no liability on the part of the directors?
Director Liability
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Corporate Liability
Officer Liability
Increasing personal liability
Increasing prosecutions
Particularly when environmental laws are violated
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Sarbanes-Oxley Act
Liability for Officers and Directors
Prohibitions on loans to officers
Code of ethics for financing reporting
Lawyer’s new duties to company and officers
Board Membership – majority must be independent
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Sarbanes-Oxley, Dodd-Frank, and Boards
Majority of Independent Directors
Only Independent Directors on Audit and Compensation Committees
No Loans to Officers
Codes of Ethics for Financial Reporting
Legal Counsel’s Role
Must investigate issues raised
Must notify CEO of investigation
Must report material violations to CEO
Must go to independent directors if problem is not resolved
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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Voting Shareholders
Elect the board
The Proxy
Vote on critical corporate issues
Pooling agreement
Voting trust
Shareholder Rights
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Shareholder Rights
Shareholders Have Right to Vote on Mergers, Consolidations, and Sale of All Assets, Not on Acquisition
Procedure
Board of Directors adopts resolution in favor of combination or sale
Resolution with notice of meeting sent to all shareholders
Shareholders vote on resolution at meeting
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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Shareholder Rights
Dissenting Shareholders
Shareholders not voting in favor of the combination can force corporation to purchase their shares for cash – called appraisal rights
Corporation May Use Freeze-Out to Defeat Dissenters’ Rights
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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Shareholders Have Access to Books and Records
Under revised MBCA, no ownership requirements
Must have proper purpose
Generally Shares in a Corporation are Freely Transferable; However Sometimes Transfers are Restricted
Shareholder Rights
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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Shareholder Rights
Transfer Restrictions
Must be noted or referenced on stock certificates
Must serve a necessary purpose
Must be reasonable
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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Voluntary
Board resolution
Shareholder approval
Involuntary
Forced by court or state agency
Example: Fraud
Corporate Dissolution
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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Limited Liability Companies
History: In Existence Internationally for Some Time
GMBH − Europe
Limitada − South America
LLC − U.S.
Nature
Aggregate organization
Liability shield
Income flows through
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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Articles of Organization
Filed Centrally
Name Must Disclose Status – L.L.C. or LLC
LLC: Formation
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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Funding: Members Contribute Capital
Liability
Members stand to lose capital contributions, but their personal assets are not subject to attachment
Case 17.5 Martin v. Freeman (2012)
What were the assets?
Is there personal liability?
Limited Liability Companies
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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Limited Liability Companies
Tax Consequence
Income passes through to members
LLC does not pay taxes
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©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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Management and Control
Operating Agreement − specifies voting rights
One member or an outside consultant can have operating authority delegated to him or her
Transferability of Interest
Interest can be transferred
Transferee does not become a member unless majority of remaining members approve
Limited Liability Companies
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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Dissolution and Termination
Generally withdrawal, death or expulsion of members will dissolve company
Some states permit judicial dissolution
All states permit voluntary dissolution
Limited Liability Companies
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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Formation: Must File To Create
Funding: Capital Contribution From Partners
Liability: Limited Liability For All
Tax Consequences: Tax Reporting Entity Not Tax Paying
Limited Liability Partnership
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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Limited Liability Partnership
Management and Control
Partners can participate in management without personal liability for partnership debts
Transferability
Transfer must be restricted
Dissolution and Termination
Similar to Limited Partnership
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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Joint Ventures Increasing
Joint ventures with countries themselves
Business structure varies
Example: Germany and differing board structures
International Issues
©2017 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, 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 or school-approved learning management system for classroom use.
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