The Legal Environment of Business A Critical Thinking Approach 5th Edition Nancy K. Kubasek Bartley A. Brennan M. Neil Browne

Law and Business Associations CHAPTER 16 Law and Business Associations

Forms of Business Organization THE LEGAL ENVIRONMENT OF BUSINESS Forms of Business Organization Sole Proprietorship Partnership Corporation

Sole Proprietorship Few legal formalities THE LEGAL ENVIRONMENT OF BUSINESS Sole Proprietorship Few legal formalities Minimal government regulation Owner-proprietor has complete control, profits, and Full liability

THE LEGAL ENVIRONMENT OF BUSINESS Partnership A voluntary association of two or more persons to carry on business for a profit. Limited Partnerships General Partnerships

THE LEGAL ENVIRONMENT OF BUSINESS General Partnerships Unless otherwise specified in partnership agreement: All partners equally liable Equal management power Equal division of profits/losses Partnership is not taxed; partners are taxed

Limited Partnerships Must say the word “Limited” One general partner THE LEGAL ENVIRONMENT OF BUSINESS Limited Partnerships Must say the word “Limited” One general partner One or more limited partners Limited partners are liable only up to the amount invested General partner manages day-to-day business Governing law: RULPA

Creating Partnerships THE LEGAL ENVIRONMENT OF BUSINESS Creating Partnerships If not written agreement: RULPA controls In partnership agreements, partners control: capital contribution profit distribution management responsibility duty of loyalty, good faith, and fair dealings

Termination of Partnership THE LEGAL ENVIRONMENT OF BUSINESS Termination of Partnership Death of partner Merger Bankruptcy Expiration of partnership agreement Winding-up Dissolution

Corporations The dominant business form Created by state statutes THE LEGAL ENVIRONMENT OF BUSINESS Corporations The dominant business form Created by state statutes Treated as a legal ‘person’ Raise capital by issuing stock Investors are the owners Owners enjoy limited liability

Types of Corporations Closely held Publicly held Multinational THE LEGAL ENVIRONMENT OF BUSINESS Types of Corporations Closely held Publicly held Multinational S corporations Professional corporations Nonprofit Corporation

Closely Held Corporations THE LEGAL ENVIRONMENT OF BUSINESS Closely Held Corporations Most corporations are closely held Stock is not traded Stock owned by family and friends Stock sales are restricted Stockholders are frequently also employees, officers, directors, and registered agents

Publicly Held Corporations THE LEGAL ENVIRONMENT OF BUSINESS Publicly Held Corporations Stock is publicly traded on stock exchanges Many shareholder-investors, not otherwise engaged in business Day-to-day control in the hands of management Shareholders elect directors Directors elect officers, hire management

Multinational Corporations THE LEGAL ENVIRONMENT OF BUSINESS Multinational Corporations Incorporated in more than one jurisdiction Owns subsidiaries in different countries Shareholders may be from different countries Operations in several countries

Subchapter S Corporations THE LEGAL ENVIRONMENT OF BUSINESS Subchapter S Corporations Closely held (max. 35 shareholders) No non-resident alien shareholders One class of stock Unanimous consent May not be member of affiliate group Main feature: pass-through income tax

Professional corporation Definition: a corporation organized by doctors and lawyers, dentists and accountants or other professionals. Non Profit Corporation Definition: formed for purposes other than making a profit, such as hospitals, educational institutions, charities

Creating Corporations THE LEGAL ENVIRONMENT OF BUSINESS Creating Corporations Governed by Revised Model Business Corporation Act A license by the state to do business in corporate form Limited liability State law controls Filing Articles of Incorporation Registered agent for service of process

Financing the Corporation THE LEGAL ENVIRONMENT OF BUSINESS Financing the Corporation Debt Financing Notes Bonds Debentures Equity Financing Common Stock Preferred Stock Warrants Options

Common Stock Authorized Issued Rights of Stockholders Voting THE LEGAL ENVIRONMENT OF BUSINESS Common Stock Authorized Issued Rights of Stockholders Voting Participation in profits via dividends Claims to net assets in liquidation Since NO preferential rights, they bear the greatest risk of loss

THE LEGAL ENVIRONMENT OF BUSINESS Preferred Stock Generally, preferred stockholders enjoy superior rights Cumulative preferred Participating preferred Liquidation preferred Convertible

Consideration for Stock THE LEGAL ENVIRONMENT OF BUSINESS Consideration for Stock To acquire stock, subscribers contribute capital Amount contributed equals value of shares Failure to adequately contribute exposes shareholder to liability for the difference Par value = minimum stated face value per share No par = a designated value

Corporation Governance THE LEGAL ENVIRONMENT OF BUSINESS Corporation Governance Secretary of State issues Certificate of Incorporation First meeting of shareholders: Election of board Board elects officers Board approves by-laws Board issues stock

Operations-Shareholders THE LEGAL ENVIRONMENT OF BUSINESS Operations-Shareholders Shareholders are owners, but do not control Shareholders are not agents Participation is limited to electing directors Annual shareholders’ meeting Vote for directors, resolutions In person or via proxy

Operations-Board of Directors THE LEGAL ENVIRONMENT OF BUSINESS Operations-Board of Directors Management responsibility Set policy Pay dividends Elect officers Approve executive compensation Meet annually or waive by consent

THE LEGAL ENVIRONMENT OF BUSINESS Operations-Officers Usually: President, Vice President, Secretary, Treasurer Actual management team Hire employees Execute contracts

Duties of Corporate Management THE LEGAL ENVIRONMENT OF BUSINESS Duties of Corporate Management Good faith Prudent person standard Best interests of corporation Corporate opportunity doctrine No conflict of interest Business judgment rule

Limited Liability Companies THE LEGAL ENVIRONMENT OF BUSINESS Limited Liability Companies A hybrid form of business (relatively new) Limited liability Pass-through taxation No restrictions on number or type of members Variable duration

LLC Characteristics Separate entity status THE LEGAL ENVIRONMENT OF BUSINESS LLC Characteristics Separate entity status Limited liability for members Members (not shareholders) File Certificate of Organization with state LLC agreement among members specifies management and control issues

Creating a Limited Liability Company Choose state Select a name File articles of incorporation Duration is unlimited unless specified Financing- forms of contributions vary Operating agreement defining control Tax – flow through entity

Factors in Choosing Form of Business THE LEGAL ENVIRONMENT OF BUSINESS Factors in Choosing Form of Business Taxation Control Liability Expense Transferability Duration – exit strategy

Specialized Forms of Business THE LEGAL ENVIRONMENT OF BUSINESS Cooperative Joint stock company Syndicate Joint venture Franchise

Global Dimensions High Risk Low Risk Direct investment Subsidiary THE LEGAL ENVIRONMENT OF BUSINESS Global Dimensions Direct investment Subsidiary Joint venture Agents and distributors Licensing Direct export High Risk Low Risk

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