Business Associations (Organizations)

1. Business Associations(Organizations) A group of two or more people (or even one person) can create a new “person” or “entity” under the law that does business, has rights, has limits, can create liability etc. The type of organization greatly determines the extent of these privileges and duties. OBE –118, Fall 2004 Professor McKinsey

2. The Concept of an “Entity” • A business organization is often a unique entity, separate from its owners. • The entity has a birth place • The entity has a place(s) of residence • Concept of agency critical to many forms of business organization

3. Purpose • What is the purpose of McDonald’s? • Chevron/ Texaco? • Hornet Foundation? • UNICEF? Why is purpose relevant?

4. Constituents (Shareholders, members, partners, etc.) • Owners • Managers • Employees • Customers • Partners, contractors, and others • The Public • Government (Managers, executives, board members, etc.)

5. Business Organizations Sole Proprietorship Partnership Corporation Hybrids Limited Liability Company (LLC)

6. Sole Proprietorships The Original Form of Business Advantages Disadvantages Simple Unlimited Liability Single Taxation Limited Growth Attracting Capital • This form of business happens “automatically” when a person does business of his or her own and does not have some other type of business org.

7. Partnerships The Other Common Law Form of Business Advantages Disadvantages Still Simple Unlimited Liability* Single Taxation Growth Potential People Resources Attracting Capital The Uniform Partnership Act (UPA) – adopted in most states

8. Partnerships- Basic Concepts Partners in a business are like spouses, they depend greatly upon each other, must cooperate, can create liability for each other, and often end up with irreconcilable differences • Forming a partnership- no formality required!!! • Characteristics of partnership – no limited liability - but also no double taxation • Rights and duties of partners – lots of default stuff if not specified in a partnership agreement • Managing a partnership • Ending (Termination) of a partnership

9. Corporations A statutory form of business, heavily regulated and complex in creation and operation Advantages Disadvantages Limited Liability Double Taxation Growth Complexity People Resources Laws Governing Corporations Securities Laws (Federal and State) Antitrust Law (Federal and State) Tax Laws (Federal and State) Corporate Law (Federal and State)

10. Corporations- Basic Concepts • A statutory immortal being. • Shareholders/ Directors/ Officers/ Employees • “Exists” in one particular state • Shareholders vote and elect Directors • Directors are called the “Board of Directors” and must meet regularly, vote to approve or disapprove actions and must have meeting minutes • Officers execute the orders of the Board

11. Limited Liability Company (LLC) A very new creation that merges the basic sought after benefits of Limited Liability and Single Taxation with little administrative complexity Advantages Disadvantages Limited Liability Growth (perhaps) Single Taxation Legal Uncertainty People Resources Ease of Creation Flexibility

12. LLC- Basic Concepts • Owners are called “Members” • Usually created by filing “Articles of Organization” with state. • Many states allow single owner LLC’s • Often an “operating agreement” is created between members to govern their relationship, obligations and rights.

13. Corporation Sole Proprietorship Partnership LLC