Chapter 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
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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
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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
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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 partnerships business
The time frame of operation
Amount of each partners 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 wasnt 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
Partners 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
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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
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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
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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
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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 partners 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
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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 states 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
©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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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
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