1. 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.

2. 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

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

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

5. Business Organizations Sole Proprietorship Partnership Corporation Hybrids One person Two or more partners Many owners, managers and employees Best of several forms of business. Limited Liability Company (LLC) Best of nearly every form of business.

6. 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.

7. 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 Default terms if no partnership agreement otherwise

8. 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

9. 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)

10. 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

11. 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

12. 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.

13. Sole Proprietorship Partnership LLC Corporation

14. Corporations The corporate entity is the most complex, the most administratively burdensome type of all business organizations. It also has the greatest variance, coming in small, medium, and large, and from one to one million owners.

15. Corporations Shareholder/Board Member/ Officer/ Employee Corporations must comply with specific laws (often Corporate Code) of the state incorporated in. Securities Laws apply to publicly traded corporations and sometimes other corps and other business organizations Corps must also comply with own Articles of Incorporation and Bylaws (if any).

16. Types of Corporations Small or “S’ Corporation Close Corporation. Public Corporation Single taxation, but limited to 75 shareholders who are United States citizens or residents. “Closely held” – often no Securities laws, other lesser requirements on a state by state basis. Defined more by securities laws than anything else. “Publicly traded” More restricted than other corporations..

17. Securities Laws If you offer ownership interests to others you are most likely subject to federal and state securities laws. –“Security”: potential for profit or loss dependent on actions of others, you just provide $ Must meet strict procedural requirements when offering investment to others –Initial public offering (IPO) versus trading –Prospectus, etc

18. Securities Laws (cont) Must be very careful when making statements about status or prospects of company, no misleading or inaccurate or incomplete disclosures. (No fraud) Cannot allow profit by “insiders” with non- public information. (No insider trading) Must disclose material information including required quarterly and annual reports. (No secrets)

19. Insider Trading from Investor Perspective Cannot trade on material, non-public information unless obtained legitimately with out the violation of laws or obligations. Criminal versus civil Digging through trash cans? Electronically enhanced surveillance in public settings?

20. Incorporation Promoters precede the corporation and have liability that is not erased by incorporating. File a charter, forms and fees in a State. Charter is a public document that has basic information about the corporation. –Initial stock allocation and characteristics –Agent for service –Name of entity

21. Initial Steps to Get Corporation Going Elect or establish Directors and Officers. Hold first meeting. Adopt bylaws. –When where shareholder and director meetings will be held –Procedures and requirements for meetings –Establish more detail on officers and directors

22. Going Public Don’t confuse “going public” with creating a corporation. When you offer the public investment in the corporation for the first time you are said to be “going public” This marks a significant change in the way a company will be operated and the obligations of the directors and officers. Rarely will happen at time of creation but can and occasionally does.