Business Associations (Organizations) OBE –118, Fall 2004 Professor McKinsey 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.

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

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

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

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

Sole Proprietorships The Original Form of Business Advantages Simple Single Taxation Disadvantages Unlimited Liability 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.

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

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 Rights and duties of partners – lots of default stuff if not specified in a partnership agreement Ending (Termination) of a partnership Managing a partnership - but also no double taxation

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

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

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

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.

Sole Proprietorship Partnership LLC Corporation