1. Ch. 16-1 © 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS A Critical Thinking Approach Fourth Edition Nancy K. Kubasek Bartley A. Brennan M. Neil Browne Nancy K. Kubasek Bartley A. Brennan M. Neil Browne

2. CHAPTER 16 Law and Business Associations © 2006 Prentice Hall Ch. 16-2 THE LEGAL ENVIRONMENT OF BUSINESS

3. Forms of Business Organization Sole Proprietorship Partnership Corporation © 2006 Prentice Hall Ch. 16-3 THE LEGAL ENVIRONMENT OF BUSINESS

4. Few legal formalities Minimal government regulation Owner-proprietor has complete control, profits, and Full liability Sole Proprietorship © 2006 Prentice Hall Ch. 16-4 THE LEGAL ENVIRONMENT OF BUSINESS

5. A voluntary association of two or more persons to carry on business for a profit. Partnership © 2006 Prentice Hall Ch. 16-5 THE LEGAL ENVIRONMENT OF BUSINESS Limited Partnerships Limited Partnerships General Partnerships General Partnerships

6. General Partnerships © 2006 Prentice Hall Ch. 16-6 THE LEGAL ENVIRONMENT OF BUSINESS Unless otherwise specified in partnership agreement: Unless otherwise specified in partnership agreement: All partners equally liable All partners equally liable Equal management power Equal management power Equal division of profits/losses Equal division of profits/losses Partnership is not taxed; partners are taxed Partnership is not taxed; partners are taxed

7. Limited Partnerships © 2006 Prentice Hall Ch. 16-7 THE LEGAL ENVIRONMENT OF BUSINESS One general partner One general partner One or more limited partners One or more limited partners Limited partners are liable only up to the amount invested Limited partners are liable only up to the amount invested General partner manages day-to-day business General partner manages day-to-day business Governing law: RULPA Governing law: RULPA

8. Creating Partnerships If not written agreement: RULPA controls In partnership agreements, partners control: capital contribution profit distribution management responsibility © 2006 Prentice Hall Ch. 16-8 THE LEGAL ENVIRONMENT OF BUSINESS

9. Termination of Partnership Death of partner Death of partner Merger Merger Bankruptcy Bankruptcy Expiration of partnership agreement Expiration of partnership agreement Winding-up Winding-up Dissolution Dissolution © 2006 Prentice Hall Ch. 16-9 THE LEGAL ENVIRONMENT OF BUSINESS

10. Corporations The dominant business form Created by state statutes Treated as a legal ‘person’ Raise capital by issuing stock Investors are the owners Owners enjoy limited liability © 2006 Prentice Hall Ch. 16-10 THE LEGAL ENVIRONMENT OF BUSINESS

11. Types of Corporations Closely held Closely held Publicly held Publicly held Multinational Multinational S corporations S corporations Professional corporations Professional corporations © 2006 Prentice Hall Ch. 16-11 THE LEGAL ENVIRONMENT OF BUSINESS

12. Corporations Closely Held Corporations Most corporations are closely held Most corporations are closely held Stock is not traded Stock is not traded Stock owned by family and friends Stock owned by family and friends Stock sales are restricted Stock sales are restricted Stockholders are frequently also employees, officers, directors, and registered agents Stockholders are frequently also employees, officers, directors, and registered agents © 2006 Prentice Hall Ch. 16-12 THE LEGAL ENVIRONMENT OF BUSINESS

13. Publicly Held Corporations Stock is publicly traded on stock exchanges Stock is publicly traded on stock exchanges Many shareholder-investors, not otherwise engaged in business Many shareholder-investors, not otherwise engaged in business Day-to-day control in the hands of management Day-to-day control in the hands of management Shareholders elect directors Shareholders elect directors Directors elect officers, hire management Directors elect officers, hire management © 2006 Prentice Hall Ch. 16-13 THE LEGAL ENVIRONMENT OF BUSINESS

14. Multinational Corporations Incorporated in more than one jurisdiction Incorporated in more than one jurisdiction Owns subsidiaries in different countries Owns subsidiaries in different countries Shareholders may be from different countries Shareholders may be from different countries Operations in several countries Operations in several countries © 2006 Prentice Hall Ch. 16-14 THE LEGAL ENVIRONMENT OF BUSINESS

15. Subchapter S Corporations Closely held (max. 35 shareholders) Closely held (max. 35 shareholders) No nonresident alien shareholders No nonresident alien shareholders One class of stock One class of stock Unanimous consent Unanimous consent May not be member of affiliate group May not be member of affiliate group Main feature: pass-through income tax Main feature: pass-through income tax © 2006 Prentice Hall Ch. 16-15 THE LEGAL ENVIRONMENT OF BUSINESS

16. Creating Corporations A license by the state to do business in corporate form A license by the state to do business in corporate form Limited liability Limited liability State law controls State law controls Filing Articles of Incorporation Filing Articles of Incorporation Registered agent for service of process Registered agent for service of process © 2006 Prentice Hall Ch. 16-16 THE LEGAL ENVIRONMENT OF BUSINESS

17. Governing Law Revised Model Business Corporation Act Revised Model Business Corporation Act Common law Common law © 2006 Prentice Hall Ch. 16-17 THE LEGAL ENVIRONMENT OF BUSINESS

18. Financing the Corporation Debt Financing Notes Notes Bonds Bonds Equity Financing Common Stock Common Stock Preferred Stock Preferred Stock Warrants Warrants Options Options © 2006 Prentice Hall Ch. 16-18 THE LEGAL ENVIRONMENT OF BUSINESS

19. Common Stock AuthorizedIssued Rights of Stockholders Voting Participation in profits via dividends Claims to net assets in liquidation © 2006 Prentice Hall Ch. 16-19 THE LEGAL ENVIRONMENT OF BUSINESS

20. Preferred Stock Generally, preferred stockholders enjoy superior rights Cumulative preferred Cumulative preferred Participating preferred Participating preferred Liquidation preferred Liquidation preferred Convertible Convertible © 2006 Prentice Hall Ch. 16-20 THE LEGAL ENVIRONMENT OF BUSINESS

21. Consideration for Stock To acquire stock, subscribers contribute capital To acquire stock, subscribers contribute capital Amount contributed equals value of shares Amount contributed equals value of shares Failure to adequately contribute exposes shareholder to liability for the difference Failure to adequately contribute exposes shareholder to liability for the difference Par value = minimum stated face value per share No par = a designated value © 2006 Prentice Hall Ch. 16-21 THE LEGAL ENVIRONMENT OF BUSINESS

22. Secretary of State issues Certificate of Incorporation Secretary of State issues Certificate of Incorporation First meeting of shareholders: Election of board First meeting of shareholders: Election of board Board elects officers Board elects officers Board approves by-laws Board approves by-laws Board issues stock Board issues stock Corporation Governance © 2006 Prentice Hall Ch. 16-22 THE LEGAL ENVIRONMENT OF BUSINESS

23. Shareholders are owners, but do not control Shareholders are owners, but do not control Shareholders are not agents Shareholders are not agents Participation is limited to electing directors Participation is limited to electing directors Annual shareholders’ meeting Annual shareholders’ meeting Vote for directors, resolutions Vote for directors, resolutions In person or via proxy In person or via proxy Operations-Shareholders © 2006 Prentice Hall Ch. 16-23 THE LEGAL ENVIRONMENT OF BUSINESS

24. Management responsibility Management responsibility Set policy Set policy Pay dividends Pay dividends Elect officers Elect officers Approve executive compensation Approve executive compensation Meet annually or waive by consent Meet annually or waive by consent Operations-Board of Directors © 2006 Prentice Hall Ch. 16-24 THE LEGAL ENVIRONMENT OF BUSINESS

25. Usually: President, Vice President, Secretary, Treasurer Usually: President, Vice President, Secretary, Treasurer Actual management team Actual management team Hire employees Hire employees Execute contracts Execute contracts Operations-Officers © 2006 Prentice Hall Ch. 16-25 THE LEGAL ENVIRONMENT OF BUSINESS

26. Duties of Corporate Management Good faith Good faith Prudent person standard Prudent person standard Best interests of corporation Best interests of corporation Corporate opportunity doctrine Corporate opportunity doctrine No conflict of interest No conflict of interest Business judgment rule Business judgment rule © 2006 Prentice Hall Ch. 16-26 THE LEGAL ENVIRONMENT OF BUSINESS

27. Limited Liability Companies A hybrid form of business (relatively new) Limited liability Pass-through taxation No restrictions on number or type of members Variable duration © 2006 Prentice Hall Ch. 16-27 THE LEGAL ENVIRONMENT OF BUSINESS

28. LLC Characteristics Separate entity status Separate entity status Limited liability for members Limited liability for members Members (not shareholders) Members (not shareholders) File Certificate of Organization with state File Certificate of Organization with state LLC agreement among members specifies management and control issues LLC agreement among members specifies management and control issues © 2006 Prentice Hall Ch. 16-28 THE LEGAL ENVIRONMENT OF BUSINESS

29. Factors in Choosing Form of Business TaxationControlLiabilityExpenseTransferability Duration – exit strategy © 2006 Prentice Hall Ch. 16-29 THE LEGAL ENVIRONMENT OF BUSINESS

30. Specialized Forms of Business Cooperative Joint stock company Syndicate Joint venture Franchise © 2006 Prentice Hall Ch. 16-30 THE LEGAL ENVIRONMENT OF BUSINESS

31. High Risk Low Risk Global Dimensions Direct investment Subsidiary Joint venture Agents and distributors Licensing Direct export © 2006 Prentice Hall Ch. 16-31 THE LEGAL ENVIRONMENT OF BUSINESS