Business Organizations Jody Blanke Professor of Computer Information Systems and Law

Sole Proprietorship General Partnership Limited Partnership CorporationLimited Liability Company Limited Liability No No - gen. part. Yes - lim. part. Yes Flow-Through Taxation Yes No (double taxation) Yes Management/ Control Yes Yes - gen. part. No - lim. part. NoYes Right to Share In Profits Yes NoYes

Sole Proprietorship  easy to form  no formalities  unlimited personal liability  no legal identity apart from owner e.g., Diversity Heating and Plumbing  James Schuster  Jerry Schuster

General Partnership  easy to form two or more people run a business for profit  no formalities  unlimited personal liability  joint liability on contracts and debts  may continue after death of partner  should have written partnership agreement

Limited Partnership  statutory creation  must have at least one general partner and one limited partner  limited partner has limited liability, but cannot participate in management

Corporation  statutory creation  must satisfy legal formalities e.g., articles of incorporation, bylaws  perpetual existence  limited liability of shareholders  free transferability of shares

S Corporation  can avoid double taxation, but  can have no more than 100 shareholders all of whom must be individuals, estates or trusts  cannot be corporations or partnerships  can have only one class of stock  cannot own more than 80% of another corporation

Limited Liability Company  relatively new statutory creation (1977)  “best of all worlds”  members have limited liability  members can participate in management  can choose to be taxed like a corporation or like a partnership

Limited Liability Partnership  generally available only for professionals  no general partner  partners are not personally liable for the debts of the LLP or of other partners  partners are liable for his/her own negligence, malpractice, etc.

Piercing the Corporate Veil  Alter ego theory commingling of funds ignoring formalities  Undercapitalization e.g., Walkovsky v. CarltonWalkovsky v. Carlton

Management of Corporation  Directors overall control of corporation  Officers appointed by board of directors to run day-to- day operation of corporation  Shareholders owners of corporation elect the directors

Shareholder Voting  Straight voting one vote for each share for each director nominee  Cumulative voting permitted and/or required in some states number of voting shares are multiplied by number of director positions to be filled  percentage required to elect one director (x)

Duty of Loyalty  A director and officers must act in the best interests of the corporation  Personal interests must be subordinated to the interests of the corporation  A director or officer may not usurp a corporate opportunity without full disclosure and right of first refusal to corporation  Conflicts of interest must be fully disclosed  e.g., Globe Woolen v. Utica Gas & Elect. (1918)

Duty of Care  Directors and officers must be honest and use prudent business judgment  They must use the amount of care that an ordinarily prudent person would use in similar circumstances  e.g., Bates v. Dresser (1920)

Business Judgment Rule  Directors and officers are protected from honest mistakes of judgment and poor business decisions  They are protected from “Monday morning quarterbacks”  e.g., New CokeNew Coke  e.g., Shlensky v. Wrigley (1968)Shlensky v. Wrigley (1968)