1 CHAPTERS 32, 33, 34

2 “No one form of organization is right for every business. The proper choice depends upon factors such as sources of financing, tax issues, liability concerns, and the entrepreneur’s goals.”

3 TYPES Sole Proprietorships Partnerships Corporations

4 SOLE PROPRIETORSHIPS An unincorporated business owned by one person. Are easy and inexpensive to create and operate. Earnings are reported on the owner’s personal tax returns.

5 PARTNERSHIP An unincorporated association of two or more co-owners who carry on a business for profit.

6 LEGAL No Federal Law ( Except taxes) Each state regulates Most modeled after the Uniform Partnership Act (UPA) of 1914, which has been revised several times (most recently in 1997).

7 IS IT A PARTNERSHIP? YES IF: Partners share profits Partners share management of business Partners share losses And many more as we shall see

8 HOWEVER Referring to yourselves as partners does not create a partnership, but may be evidence that one was intended. Charitable businesses are not partnerships. Non-profit enterprises are not partnerships

9 TYPES Partnership at will Term partnership

10 But Be Aware!

11 PARTNERSHIP BY ESTOPPEL 1. Participants tell other people that they are partners 2. or they allow other people to say, without contradiction, that they are partners. 3. A third party relies on this assertion; and 4. The third party suffers harm.

12 You Probably Are A partnership

13 PARTNERSHIP PROS Advantages: Easy to form. No double taxation May be easy to manage Easy to terminate

14 AND CONS Disadvantages: Personal liability Funding may be difficult Management may be difficult. Transferability is limited. May terminate when not desired

15 MORE CONS Sometimes unintentional Partners can be held personally liable for the partnership actions and debts.

16 GREAT LEGAL ADVICE ALL PARTNERSHIP AGREEMENTS SHOULD BE IN WRITING! DOT THE Is, X THE TS TEAMWORK

17 AUTHORITY TO BIND PARTNERSHIP Partners with actual or apparent authority may bind the partnership. Actual Express Authority Actual Implied Authority Apparent Authority

18 PARTNER LIABILITY I Ratification: If the partnership accepts the benefit of an unauthorized transaction or fails to repudiate it, it has ratified the transaction.

19 PARTNER LIABILITY II Information Under the Uniform Partnership Act, whatever one partner knows, the partnership is deemed to know.

20 PARTNER LIABILITY III Tort Liability A partnership is liable for intentional and negligent torts of a partner in the ordinary course of business or when the partner is acting with actual authority.

21 PARTNER LIABILITY IV 1. Personal Liability 2. Joint and Several Liability 3. Incoming Partners

22 RELATIONSHIPS AMONG PARTNERS I Financial Rights Profits Losses Pay Property Ownership

23 RELATIONSHIPS AMONG PARTNERS II Management Rights equal rights in management right to bind the partnership to a contract have an equal vote right to inspect and copy the partnership’s books and records. required to share any important information

24 RELATIONSHIPS AMONG PARTNERS III Management Duties Duty of Care Duty of Loyalty Duty of Good Faith Duty of Fair Dealing

25 TERMINATING A PARTNERSHIP Partnership at Will vs. Term Partnership Partnership at Will Term Partnership

26 DISSOCIATION I (TERMINATION IS BETTER TERM) Automatic if a partner quits. Automatic if a partner dies May happen by agreement

27 DISSOCIATION II Must remember, a partner always has the power to leave but may not have the right.

28 DISSOCIATION III When one or more partners dissociate, the partnership can: 1. buy out the departing partner and continue in business or 2. wind up the business and terminate the partnership

29 Dissociation IV Rightful Dissociation Vs. Wrongful Dissociation

30 CHOICE #1. CONTINUATION OF PARTNERSHIP Financial Settlement Liability of the dissociated partner to outsiders for debts incurred before dissociation Liability of Dissociated Partner for Debts Incurred After Dissociation Liability to the Partnership

31 CHOICE #2. TERMINATION Ending a partnership business involves three steps: 1. Dissolution 2. Winding Up 3. Termination

32 OTHER TYPES OF PARTNERSHIPS

33 LIMITED PARTNERSHIPS General (active management) and limited (money-only) partners. Only the general partners are personally liable.

34 JOINT VENTURE A partnership for a limited purpose.

35 LIMITED LIABILITY LIMITED PARTNERSHIP None of the partners are personally liable Formation requires a filed certificate of limited partnership. Very technical

36 CORPORATIONS A legal business entity created under state laws

37 CORPORATIONS Several types : 1. Close 2. Publicly held 3. Non-profit

38 CORPORATIONS Corporations offer limited liability – usually the managers’ and investors’ personal property is not at risk. Corporate stock can be bought and sold, making investments easy to get. Corporations involve a lot of expense and effort to create and operate.

39 FORMING A CORPORATION Where State laws By whom How Registration Ownership

40 WHERE TO INCORPORATE State law – not Federal Either the home state of the business or a state which has favorable laws for corporations (often Delaware)

41 ARTICLES OF INCORPORATION (CHARTER) Required Provisions Name of corporation Address and Registered Agent Incorporator Purpose Stock

42 OPTIONAL PROVISIONS Indemnification of Directors Cumulative Voting

43 DEFINITIONS Promoters Shareholders Officers Stock De Facto Corporation De Jure Corporation Corporation by Estoppel

44 PROMOTER The person who normally is hired to set up the corporation. Also called the “incorporator”

45 PROMOTER’S LIABILITY The promoter is personally liable on any contract signed before formation. The corporation is not liable unless it adopts the contract after incorporation.

46 NOVATION Even if the corporation adopts the contract, the promoter is still liable until the third party agrees to a novation (new contract), unless the contract clearly indicates that the other party is relying only on the corporation, which he knows does not yet exist.

47 SHAREHOLDERS The owners of a corporation who pay value for the stock in the corporation. Stock represents their ownership. Take over from the promoter

48 BOARD OF DIRECTORS Elected by the shareholders to oversee the corporation. Normally draw up by-laws. DIRECTORS BEWARE!!!!!

49 OFFICERS Elected by the directors to run the corporation on a day-to-day basis. officers BEWARE!!!!!

50 STOCK I Stock can be: Authorized and unissued Authorized and issued or outstanding Treasury stock (been issued, then bought back by company)

51 STOCK II STOCK MUST BE REGISTERED WITH THE PROPER AUTHORITIES OR YOU GET FREE ROOM AND BOARD

52 STOCK III Number of shares Par value

53 STOCK IV Classes and series: Common or Preferred

54 DE FACTO CORPORATION The promoter has made a good faith effort to incorporate and has actually used the corporation to conduct business but has failed to comply with all the laws.

55 DE JURE CORPORATION The promoter has substantially complied with the requirements for incorporation, but has made some minor error.

56 CORPORATION BY ESTOPPEL If a party enters a contract believing in good faith the corporation exists, he cannot later take advantage of the fact that it does not.

57 CLOSE CORPORATIONS Few shareholders Stock is not publicly traded on a stock exchange. Normally limited purpose

58 “PUBLIC CORPORATIONS” Larger, with many shareholders. Very strict laws govern. (make lawyers lots of money)

59 NON-PROFIT CORPORATIONS Very strict laws Normally serve “public purpose” No shareholders Board of trustees

60 Numerous specialty corporations

61 “S” CORPORATIONS Limited liability of a corporation and the tax status of a partnership. Very technical Used quite often by professionals

62 “S” CORPORATIONS - DISADVANTAGES There can only be one class of stocks. There can be no more than 75 shareholders. Shareholders cannot be partnerships or other corporations. Shareholders must be U.S. citizens or residents.

63 PROFESSIONAL CORPORATIONS Lawyers, accountants, doctors, engineers, etc. – must have professional license Normally PCs provide more liability protection than a partnership. Tax advantages May limit professional liability Easy to add new members

64 LIMITED LIABILITY COMPANIES An LLC offers the limited liability of a corporation and the tax status of a partnership, without the disadvantages of an S corporation.

65 OTHER FORMS OF ORGANIZATION A business trust is an unincorporated association run by trustees for the benefit of investors (who are called “beneficiaries”). Cooperatives are groups of individuals or businesses that join together to gain the advantages of volume purchases or sales.

66 FRANCHISES Franchising is a popular method of starting a business that is a compromise between employment and starting your own business. Franchisees have freedom to make many choices, but are limited in other ways.

67 FOREIGN CORPORATIONS I Does business in any another state besides the state of incorporation. Must “register” in foreign state.

68 FOREIGN CORPORATIONS II An unqualified company that is doing business cannot file a lawsuit until it has registered. It can, however, defend itself against a suit and it can file a lawsuit if it is NOT doing business in that state.

69 PIERCING THE CORPORATE VEIL A court may hold shareholders and officers, personally liable for debt in four circumstances: 1. Failure to observe formalities 2. Commingling of assets 3. Inadequate capitalization 4. Fraud

70 DEATH OF A CORPORATION May be voluntary By court order By shareholder vote By original articles of incorporation terms

71 TERMINATION Terminating a corporation is a three- step process: 1. Vote by a majority of the shareholders. 2. Filing Articles of Dissolution with the Secretary of State. 3. Winding up – paying debts and distributing assets.

72 FINAL ADVICE PUT TOGETHER A TEAM: Lawyer, accountant, banker, financial advisor, cfp, clu, and specialist in the business you are starting!

73 And take Their Advice!