Basic Business Organizations Class 7

1. Basic Business OrganizationsClass 7

2. Starting a Business • The first question: • What form should the business take? • Sole proprietorship • Partnership • Limited liability company • Corporation

3. Choosing the Form • Consider • Formation issues • Liability protection • Management structure • Taxation considerations • Exit strategies/transferability of interests

4. Sole Proprietorship • The most common form of business organization. • One (sole) owner (or – in WA – a married couple) • Business does not have to be registered with the secretary of state • Profits and losses are the personal profits and losses of the owner and are taxed as such • Personal assets of owner are available to satisfy debts of the business

5. Advantages • Owner is in complete control & receives all profits • Flexibility • Ease of creation; maintenance

6. Disadvantages • Owner is personally liable for all torts and contracts • Lacks continuity after death • Difficult to raise financing

7. An Example • Child care provider • Wants to work out of her house • How does she form this business? • What legal process is required? http://www.access.wa.gov/business/index.aspx http://www.sba.gov/aboutsba/sbaprograms/onlinewbc/index.html

8. Partnership • There are three kinds of partnership • General Partnership • Limited Partnership • Limited Liability Partnership

9. Uniform Act • Washington has adopted the Revised Uniform Partnership Act • The statute governs to • Determine whether a partnership exists • Fill in the missing terms of a partnership agreement http://apps.leg.wa.gov/RCW/default.aspx?cite=25.05

10. Partnership • Association of 2 or more persons to carry on as co-owners of a business for profit. • More than one common owner • Governed by contract • Profits and debts are shared by the partners • Partners share in management of business

11. Advantages • Easy to create and maintain • Flexible, informal • Partners share profits and losses equally

12. Disadvantages • Partners are personally liable for all torts/contracts • Dissolved upon death of any one partner • Difficult to raise financing

13. Partnership Responsibilities • Partners have a fiduciary duty to the partnership and each other. • Liable to the partnership for intentional misconduct or gross negligence • Cannot compete with the partnership • May not take an advantage from the partnership without consent of the partners • In case of conflict of interest, partnership profits must be given to the partnership

14. Joint Liability • Because a general partnership is considered a single business entity, the partners are all liable for the acts of any partner • Personal property of each partner may be used to satisfy the debts of the partnership

15. Termination • Dissolution by Acts of the Partners • Withdrawal of any partner from the partnership • Agreement of the partners • Dissolution by Operation of Law • Death of a partner • Dissolution by Judicial Decree

16. Limited Partnership • In a limited partnership, at least one of the partners does not share in the right to manage the business • The limited partner invests money, but has no decision-making authority • The liability of the limited partner is limited to his or her investment in the business

17. Limited Liability Partnership • An LLP is a kind of general partnership that is governed by statute • The difference between general and limited liability partnerships is that in an LLP the partners are not liable for the debts of the partnership • Clients or customers of the LLP must be informed of the limited liability

18. Limited Liability Co. • A form of business ownership that permits small business owners to limit their liability to the amount of their investments • These are governed by statute • RCW 25.15

19. LLC Agreement • Operating agreement is analogous to corporation’s bylaws. • Agreements may be oral and contain provisions relating to management, dividends, meetings, transfer of membership interests, etc. • Generally, if the operating agreement is silent, courts will apply partnership principles.

20. Advantages • Member liability is limited to amount of investment. • Can be treated as a “pass through” entity for tax purposes (like partnership). • Profits can be distributed to members without the double taxation of a corporation. Members pay personal income tax on received dividends.

21. Corporations • A business entity formed by shareholders • The corporation is an artificial “person” for the purpose of conducting a business and can • Own property • Enter into contracts • Sue and be sued

22. Advantages • The liability of shareholders (the owners) of a corporation is limited to the individual’s investment • The business has a perpetual existence

23. Disadvantages • Takes a lot of attention at the formation stage • Requires ongoing efforts – reporting requirements, annual meetings • Double taxation http://apps.leg.wa.gov/RCW/default.aspx?cite=23B

24. Rights of the Corporation • Because a corporation is a legal “person,” it has constitutional rights. • Equal protection; • Access to the courts, can sue and be sued; • Right to due process; • Freedom from unreasonable search and seizure and double jeopardy. • Freedom of speech. http://www.youtube.com/view_play_list?p=FA50FBC214A6CE87

25. Torts and Criminal Acts • A corporation is liable for the torts committed by its agents or officers within the course and scope of their employment under the doctrine of respondeat superior. • Corporation can be liable for criminal acts, but only fined. Responsible officers may go to prison.

26. Corporate Express Powers • The express powers of a corporation are found in the corporation’s articles of incorporation, the laws of the state of incorporation, and in the state and federal corporations. • Corporate by-laws may also grant or limit a corporation’s express powers.

27. Corporate Implied Powers • Corporation has implied powers to perform all acts reasonably necessary to accomplish its corporate purposes: • Borrow and lend money. • Extend credit. • Make charitable contributions. • A corporate officer can bind corporation in contract in matters connected with the ordinary business affairs of the corporation.

28. Ultra Vires Doctrine • Corporate acts that are beyond the express or implied powers of the corporation are considered to be “ultra vires” and unlawful.

29. Classification of Corporations • Domestic corporation does business in its state of its incorporation. • Foreign corporation from another state doing business in Washington. • Alien Corporation: formed in another country doing business in United States.

30. Kinds of Corporations • Public and Private. • Nonprofit. • Close Corporations. • Shares held by few shareholders. • More informal management – similar to a partnership. • Restriction on transfer of shares.

31. Kinds of Corporations • “S Corporations” – IRS classification that enables corporation to avoid “double taxation” – only dividends to the shareholders, not corporate profits, are taxed. IRS requirements: • Corporation is domestic, with fewer than 75 shareholders, only one class of stock, no shareholder can be a non-resident alien. • Professional Corporations.

32. Basics of Formation • The corporation is created by Articles of Incorporation • These must include • Name of the corporation • Purpose • List of incorporators and directors • Name and address of registered agent • Share structure • Articles are filed with Secretary of State

33. Corporate Status • De Jure: substantial statutory requirements are met; cannot be attacked by state or 3rd parties. • De Facto: statutory requirements not met, but promoters made good faith effort to comply with corporate law; corporate status can only be attacked by state. • By Estoppel: if it acts like a corporation, it cannot avoid liability by claiming that no corporation exists.

34. Piercing the Corporate Veil • Where the corporate form is used solely to shield individuals from liability • Generally, owner co-mingles personal and corporate assets • Sometimes no stock is issued or • Formation or regulatory rules are ignored

35. Corporate Hierarchy

36. Corporate Structure • The owners of the corporation are the shareholders. • Create the capital of the corporation • Have no management authority • Elect board of directors • Must approve changes in articles of incorporation and other major changes

37. Corporate Structure • The Board of Directors • Elected by the shareholders • Have management responsibility • Appoint, supervise, remove officers of the corporation • The Directors have a fiduciary relationship with shareholders

38. Corporate Structure • Officers and Executives • Elected/appointed by the board of directors • Responsible for carrying out board’s policies and directives • Responsible for management of business • Have a fiduciary duty to act in the best interests of the shareholders and the corporation

39. Requirements • Corporations are required to: • Hold annual meetings of shareholders. • Give reasonable notice of meetings. • Provide reasonable access to books and records to shareholders.

40. Securities Regulation • Two major securities laws • Securities Act of 1933 • Securities Exchange Act of 1934

41. Insider Trading • Occurs when someone with reliable secret information uses that information to benefit from stock trades. • Is a crime, punishable by fine and imprisonment.

42. Sarbanes-Oxley Act • Enacted after the Enron accounting scandal to require additional protections for investors.

43. Additional Regulations • Sherman (Antitrust) Act • Prohibits price fixing and illegal monopolies • Clayton Act • Prohibits anticompetitive mergers • Robinson-Patman Act • Prohibits price discrimination aimed at putting small competitors out of business

44. Merger and Consolidation • Corporations can grow and expand by: • Mergers. • Consolidation. • Purchase of another corporation’s assets. • Purchases of a controlling interest in another corporation.

45. Termination • Termination of a corporation, like a partnership, consists of two phases: • Dissolution (voluntary or involuntary); and • Liquidation.