1. Business Organizations
Chapter 18
Business Organizations

2. Sole Proprietorships Own the business but may have employees
May operate under an assumed or fictitious name
Reasons for forming sole proprietorship
Simplicity, control, convenience, privacy

3. Partnerships Advantages Disadvantages Easy to form
State approval not required
Income is divided among partners and taxed as part of personal incomes of partners
Disadvantages
Liability exposure
Partners must keep minutes of meetings and business records

4. Partnerships Definition Existence
“Association of two or more persons carrying on, as co-owners, a business for profit.”
Existence
Objective test
Proof of a partnership’s existence
Profit sharing
Right to manage
Partnership as an entity

5. Forming Partnerships
Need to have partnership contract, but not essential for legality
If a partnership agreement cannot by its terms be completed within one year, statutes of frauds require that partnership agreement be written to be enforceable

6. Rights of Partners
Contribution to be repaid and to share equally in profits after debts are paid
To be indemnified for personal liabilities incurred by a partner in ordinary partnership business

7. Rights of Partners
To be repaid with interest payments or advances beyond the amount of capital contribution
To manage the partnership along with the other partners
Have formal accounting as to partnership affairs

8. Duties of Partners
To contribute toward partnership losses according to partner’s share in the profits
To keep partnership books
To have the right to inspect and copy books
To render information to copartners regarding things affecting the partnership
To have fiduciary duty to copartners similar to that owed by an agent to a principal

9. More Aspects of Partnerships
Agreements
Salaries
Suits against one another
Liability for copartners’ contracts and torts
Authority
Express
Implied
Apparent

10. Partnership Property Partners may own property in partnership name
Realty and automobiles have titles or deeds, but smaller items don’t
Partnership property is that which was brought into partnership on partnership’s account

11. Individual Partner’s Property Rights
Tenant in partnership
Interest in the partnership
Homestead exemptions
Dower
Curtesy
Partnership by estoppel

12. Limited Partnerships
When a partner does not want to take active role in management, limited partnership occurs
Features
One general partner and limited partners
Limited partnerships must have one limited partner

13. Business Trusts Settlor Res Beneficiaries Trustee Equitable title
Massachusetts trust
Real estate investment trust (REIT)

14. Limited Liability Companies (LLCs)
Hybrid form of organization, taking best of partnerships and corporations
Federal income tax treatment is flexible
Disadvantage is that LLC memberships are not freely transferable

15. Corporations
Corporation is an intangible legal person, body, or entity
Made up legal fiction to satisfy social and economic needs
Shareholders (stockholders) have ownership in corporations
Key advantage is limited liability and transferable shares

16. Professional Corporations
Organized by attorneys, physicians, architects, and engineers
Objective is to provide firm with limited liability
Exceptions
State laws differ regarding tort liability
Vicarious liability depends on tort

17. More About Corporations
Subchapter S corporations
Constitutional rights of corporations
Laws governing corporations
Mostly state, not federal, laws

18. Terms to Know Regarding Corporations
Domestic corporation
Foreign corporation
Governmental corporation
Municipal corporation
Corporations for profit
Corporations not-for-profit
Professional corporations

19. Corporations
Domestic corporation: organized under state law of state in which it is located
Foreign corporation: organized under laws of a state other than the one in which it is located

20. Model Business Corporation Act (MBCA)
Gives management considerable power
Registered agent

21. How Corporations are Formed
Corporate promoter sells share subscriptions
Promoter’s preincorporation legal duties
Novation
Continuing offer
Adoption
Ratification

22. Disregard of Corporations
Alter ego, piercing the corporate veil, disregarding corporateness
Court says no corporation exists because corporation
May be used to commit fraud
May be used contrary to public policy
People running it may be mingling their business with the corporation, so the corporation is not a separate entity

23. Aspects of Corporate Directors
Number
First board
Term
Vacancies
Quorum
Bylaws
Meetings
Dividends
Conflicts of interest
Duty of care
Loans
Illegal acts

24. Corporate Stockholders
Person who owns shares in a corporation
One vote in stockholders’ meeting for one share of stock
Proxy is authorization given to someone else to vote for absent shareholder

25. Corporate Officers
President, vice president(s), secretary, and treasurer
Elected by board of directors
Bylaws prescribe elections and duties of officers
Agency law determines relationship between corporation and its officers

26. Recap – Comparison of Forms of Business
For a good comparison of the legal forms of business, study Figure 18.3 in the textbook.