1. Its Legal, Ethical & Global Environment 6 th Ed. Its Legal, Ethical & Global Environment 6 th Ed. B U S I N E S S MARIANNE M. JENNINGS Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. Chapter 21 Forms of Doing Business

2. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 2 Sole Proprietorship  Formation Done by an individual May have a fictitious name Example: Ralph Jones d/b/a Spuds Brewery No formal requirements for formation May have to publish d/b/a name  Formation Done by an individual May have a fictitious name Example: Ralph Jones d/b/a Spuds Brewery No formal requirements for formation May have to publish d/b/a name

3. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 3 Sole Proprietorship  Sources of Funding Loans Government help  Liability Full personal liability of owner  Tax Consequences Owner claims all income and losses No separate filing requirement  Management and Control All assets with one person  Sources of Funding Loans Government help  Liability Full personal liability of owner  Tax Consequences Owner claims all income and losses No separate filing requirement  Management and Control All assets with one person

4. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 4 Sole Proprietorship  Transferability of Interest Business can be sold—property, inventory, and goodwill Owner will usually sign a non-compete agreement  Transferability of Interest Business can be sold—property, inventory, and goodwill Owner will usually sign a non-compete agreement

5. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 5 Partnership  Governed by the Uniform Partnership Act (UPA) Adopted in 49 of 50 states In absence of agreement UPA controls Revised Uniform Partnership Act (1994)—adopted in nine states  Governed by the Uniform Partnership Act (UPA) Adopted in 49 of 50 states In absence of agreement UPA controls Revised Uniform Partnership Act (1994)—adopted in nine states

6. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 6 Partnership  Definition An association of two or more persons to carry on as co-owners, a business for profit Can include corporations and natural persons.  Formation Voluntary formation: By agreement Draw up articles of partnership  Definition An association of two or more persons to carry on as co-owners, a business for profit Can include corporations and natural persons.  Formation Voluntary formation: By agreement Draw up articles of partnership

7. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 7 Partnership  Formation Involuntary formation: By implication Sharing of profits Constitutes prima facie evidence that a partnership exists Exceptions—rent, wages, annuity to widow or estate, payment for goodwill Involuntary formation: Partnership by estoppel (or ostensible partner) Results when someone allows the inference to be made that he/she is a partner Allowing name to be used to get a loan  Formation Involuntary formation: By implication Sharing of profits Constitutes prima facie evidence that a partnership exists Exceptions—rent, wages, annuity to widow or estate, payment for goodwill Involuntary formation: Partnership by estoppel (or ostensible partner) Results when someone allows the inference to be made that he/she is a partner Allowing name to be used to get a loan

8. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 8 Partnership  Case 21.1 Shaw v. Delta Airlines, Inc. (1992) What two questions must be decided by the jury? Do you believe Delta created the impression that SkyWest and Delta were one and the same?  Case 21.1 Shaw v. Delta Airlines, Inc. (1992) What two questions must be decided by the jury? Do you believe Delta created the impression that SkyWest and Delta were one and the same?

9. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 9 Partnership  Sources of Funding Capital contributions of partners Loans by partners Outside loans  Partner Liability Mutual principals and agents Partnership assets reachable by partnership creditors Personal assets reachable by partnership creditors when partnership assets are exhausted  Sources of Funding Capital contributions of partners Loans by partners Outside loans  Partner Liability Mutual principals and agents Partnership assets reachable by partnership creditors Personal assets reachable by partnership creditors when partnership assets are exhausted

10. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 10 Partnership  Case 21.2Vrabel v. Acri (1952) Why wasn’t Mr. Acri a defendant? Is Ms. Acri liable for the injuries?  Case 21.3 Beane v. Paulsen (1993) What happens when a partner leaves the firm? What is the liability of partners in a professional corporation?  Case 21.2Vrabel v. Acri (1952) Why wasn’t Mr. Acri a defendant? Is Ms. Acri liable for the injuries?  Case 21.3 Beane v. Paulsen (1993) What happens when a partner leaves the firm? What is the liability of partners in a professional corporation?

11. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 11 Partnership  Management and Control Partnership control Unless otherwise agreed, each has equal management authority May delegate day-to-day authority to one partner Each partner is mutual principal and agent of the others Borrowing—done routinely in most partnerships Unanimous consent required for confession of judgment, selling goodwill, and admission of another partner No compensation for work unless agreed  Management and Control Partnership control Unless otherwise agreed, each has equal management authority May delegate day-to-day authority to one partner Each partner is mutual principal and agent of the others Borrowing—done routinely in most partnerships Unanimous consent required for confession of judgment, selling goodwill, and admission of another partner No compensation for work unless agreed

12. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 12 Partnership  Management and Control Fiduciary duties Mutual principals and agents Each is to act in the best interests of the partnership Partnership property Property contributed to the firm or purchased with partnership assets Own property as tenants in partnership  Management and Control Fiduciary duties Mutual principals and agents Each is to act in the best interests of the partnership Partnership property Property contributed to the firm or purchased with partnership assets Own property as tenants in partnership

13. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 13 Partnership  Transfers of partners’ interest Partner’s interest is personal property Can be pledged to creditors and transferred Transferee does not become a partner  Transfers of partners’ interest Partner’s interest is personal property Can be pledged to creditors and transferred Transferee does not become a partner

14. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 14 Partnership  Management and Control Transfers of partners’ interest Admission of new partner requires unanimous consent Transferring partner is not relieved of liability Some partnership agreements require partners to offer it first to remaining partners  Management and Control Transfers of partners’ interest Admission of new partner requires unanimous consent Transferring partner is not relieved of liability Some partnership agreements require partners to offer it first to remaining partners

15. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 15 Partnership  Tax Issues Partnership does not pay taxes Partnership files informational return Partners report income and losses on their returns  Tax Issues Partnership does not pay taxes Partnership files informational return Partners report income and losses on their returns

16. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 16 Partnership  Dissolution One partner no longer associated with the partnership Examples: Retirement, death Can just be a change in structure or can proceed to termination  Dissolution One partner no longer associated with the partnership Examples: Retirement, death Can just be a change in structure or can proceed to termination

17. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 17 Partnership  Dissolution Methods By agreement By operation of law: Death of a partner, bankruptcy of partnership or partner Court order  Termination Assets are liquidated Distribute in this order: outside creditors; partners’ advances (loans); capital contributions; profits  Dissolution Methods By agreement By operation of law: Death of a partner, bankruptcy of partnership or partner Court order  Termination Assets are liquidated Distribute in this order: outside creditors; partners’ advances (loans); capital contributions; profits

18. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 18 Limited Partnerships  Governed by Uniform Limited Partnership Act (ULPA)  Revised Uniform Limited Partnership Act (RULPA) Recent revision adopted in nearly all states Use ULPA or RULPA when no agreement RULPA addresses the needs of the larger limited partnership  Governed by Uniform Limited Partnership Act (ULPA)  Revised Uniform Limited Partnership Act (RULPA) Recent revision adopted in nearly all states Use ULPA or RULPA when no agreement RULPA addresses the needs of the larger limited partnership

19. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 19 Limited Partnerships  Structure Must have at least one general partner Must have at least one limited partner Liability of limited partner is limited to capital contribution Liability of general partner is unlimited  Formation Must meet statutory requirements; if not met a general partnership may be created  Structure Must have at least one general partner Must have at least one limited partner Liability of limited partner is limited to capital contribution Liability of general partner is unlimited  Formation Must meet statutory requirements; if not met a general partnership may be created

20. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 20 Limited Partnerships  Formation Must file certificate of limited partnership; see text for list of requirements and note differences between ULPA and RULPA RULPA is much briefer Corrections can be filed by limited partners  Formation Must file certificate of limited partnership; see text for list of requirements and note differences between ULPA and RULPA RULPA is much briefer Corrections can be filed by limited partners

21. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 21 Limited Partnerships  Formation. The RULPA requires the following information for formation of a Limited Partnership: Name - must contain the words “Limited Partnership” Address of principal place of business Name and address of statutory agent for services process Business address of general partner Latest date for dissolution of partnership  Formation. The RULPA requires the following information for formation of a Limited Partnership: Name - must contain the words “Limited Partnership” Address of principal place of business Name and address of statutory agent for services process Business address of general partner Latest date for dissolution of partnership

22. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 22 Limited Partnerships  Sources of Funding Limited partners provide most of the financing Limited partners can contribute services under RULPA Loans are used—called advances when made by partners Under RULPA, limited partners can use services already given as a contribution  Sources of Funding Limited partners provide most of the financing Limited partners can contribute services under RULPA Loans are used—called advances when made by partners Under RULPA, limited partners can use services already given as a contribution

23. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 23 Limited Partnerships  Liability Limited partners have limited liability but cannot participate in management Cannot use their names in partnership name Under RULPA, can do the following and still retain limited liability status: Can be an employee Can consult with and advise the general partner Can act as a surety guarantor for the limited partnership Can vote on amendments, dissolution, sale of property, and debt assumptions  Liability Limited partners have limited liability but cannot participate in management Cannot use their names in partnership name Under RULPA, can do the following and still retain limited liability status: Can be an employee Can consult with and advise the general partner Can act as a surety guarantor for the limited partnership Can vote on amendments, dissolution, sale of property, and debt assumptions

24. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 24 Limited Partnerships  Partner Relationships Management is responsibility of general partner  Profits and Distributions Authority belongs to general partner to make decisions here Profits and losses are allocated on the basis of capital contributions RULPA requires agreement for splitting profits and losses to be in writing  Partner Relationships Management is responsibility of general partner  Profits and Distributions Authority belongs to general partner to make decisions here Profits and losses are allocated on the basis of capital contributions RULPA requires agreement for splitting profits and losses to be in writing

25. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 25 Limited Partnerships  Partner Authority General partner has same authority as in general partnership Can restrict by agreement Consent of limited partners required for: Admitting a new general partner Admitting a new limited partner (can give authority in the agreement) Extraordinary transactions (selling assets) Limited partners have right to inspect books and records  Partner Authority General partner has same authority as in general partnership Can restrict by agreement Consent of limited partners required for: Admitting a new general partner Admitting a new limited partner (can give authority in the agreement) Extraordinary transactions (selling assets) Limited partners have right to inspect books and records

26. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 26 Limited Partnerships  Transferability ULPA allows transfer of interests May have significant restrictions on transfer to prevent liability under federal securities laws The more easily an interest can be transferred, the more likely the IRS is to label it a corporation Transfer of a limited partner’s interest does not dissolve the partnership Under RULPA, assigning limited partner can be given the authority to make the assignee a limited partner  Transferability ULPA allows transfer of interests May have significant restrictions on transfer to prevent liability under federal securities laws The more easily an interest can be transferred, the more likely the IRS is to label it a corporation Transfer of a limited partner’s interest does not dissolve the partnership Under RULPA, assigning limited partner can be given the authority to make the assignee a limited partner

27. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 27 Limited Partnerships  Tax Consequences Taxed the same as general partnerships Partners report profits and losses on individual returns Limited partners get direct tax benefits with limited liability IRS scrutinizes to be certain it is a partnership and not a corporation  Tax Consequences Taxed the same as general partnerships Partners report profits and losses on individual returns Limited partners get direct tax benefits with limited liability IRS scrutinizes to be certain it is a partnership and not a corporation

28. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 28 Limited Partnerships  Dissolution RULPA provides for the following means: Expiration of time period in agreement or event as provided in agreement Unanimous written consent of all partners By court order Withdrawal of general partner  Dissolution RULPA provides for the following means: Expiration of time period in agreement or event as provided in agreement Unanimous written consent of all partners By court order Withdrawal of general partner

29. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 29 Limited Partnerships  Dissolution If termination is elected, assets are distributed as follows: Outside creditors Partners’ distributions Return of capital contributions Remainder split according to agreement  Dissolution If termination is elected, assets are distributed as follows: Outside creditors Partners’ distributions Return of capital contributions Remainder split according to agreement

30. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 30 Corporations  Characteristics of a Corporation Legal existence Unlimited duration Free transferability of interest Limited liability Centralized management Can hold legal title to property Can sue and be sued  Characteristics of a Corporation Legal existence Unlimited duration Free transferability of interest Limited liability Centralized management Can hold legal title to property Can sue and be sued

31. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 31 Corporations  Types of Corporations Profit Not for profit Domestic—in the state of incorporation Foreign–everywhere else Government corporations—like FNMA Professional corporations—limited liability on everything except professional malpractice Close or closely held corporations: Limited number of shareholders, Subject to less formality  Types of Corporations Profit Not for profit Domestic—in the state of incorporation Foreign–everywhere else Government corporations—like FNMA Professional corporations—limited liability on everything except professional malpractice Close or closely held corporations: Limited number of shareholders, Subject to less formality

32. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 32 Corporations  Types of Corporations Subchapter S or S corporation IRS election to be treated as partnership for tax purposes Still have limited liability Limits on size for this election  The Law of Corporations Model Business Corporation Act (MBCA) Liberal statute One-third of the states have adopted Revised in 1984  Types of Corporations Subchapter S or S corporation IRS election to be treated as partnership for tax purposes Still have limited liability Limits on size for this election  The Law of Corporations Model Business Corporation Act (MBCA) Liberal statute One-third of the states have adopted Revised in 1984

33. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 33 Corporations  Formation Must comply with statutory requirements File articles of incorporation Name Names and addresses of all incorporators Capital structure of the corporation Types of stock  Formation Must comply with statutory requirements File articles of incorporation Name Names and addresses of all incorporators Capital structure of the corporation Types of stock

34. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 34 Corporations  Types of Corporations File articles of incorporation Classes of stock Rights of shareholders Voting rights Statutory agent  Types of Corporations File articles of incorporation Classes of stock Rights of shareholders Voting rights Statutory agent

35. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 35 Corporations  Types of Corporations Where to incorporate Status of state’s corporation laws State tax laws Ability to attract employees Incentives  Types of Corporations Where to incorporate Status of state’s corporation laws State tax laws Ability to attract employees Incentives

36. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 36 Corporations  Types of Corporations Incorporators Idea people—also called promoters Will be personally liable for contracts entered into before incorporation Corporation can ratify contracts—promoter is secondarily liable Corporation can enter into a novation with the third party—promoter or incorporator is released from liability  Types of Corporations Incorporators Idea people—also called promoters Will be personally liable for contracts entered into before incorporation Corporation can ratify contracts—promoter is secondarily liable Corporation can enter into a novation with the third party—promoter or incorporator is released from liability

37. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 37 Corporations  Types of Corporations Must hold initial meeting after incorporation Elect new directors Adopt bylaws (day-to-day procedures) Issue Stock Ratify Pre incorporation contracts  Types of Corporations Must hold initial meeting after incorporation Elect new directors Adopt bylaws (day-to-day procedures) Issue Stock Ratify Pre incorporation contracts

38. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 38 Corporations  Capital and Sources of Corporate Funds Debt Financing—The Bond Market Short-term financing—loans from banks Bond market Benefits of debt financing Interest is tax deductible Debt holders get paid first Limitation Too much debt renders corporation financially unstable  Capital and Sources of Corporate Funds Debt Financing—The Bond Market Short-term financing—loans from banks Bond market Benefits of debt financing Interest is tax deductible Debt holders get paid first Limitation Too much debt renders corporation financially unstable

39. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 39 Corporations  Capital and Sources of Corporate Funds Equity financing—shareholder Common stock: Has voting rights, receives dividends when paid Preferred stock: Receiver preference over common stock can be cumulative or noncumulative  Liability Issues Must make full payment for shares—if not, there is liability (water stock) Not paying par value  Capital and Sources of Corporate Funds Equity financing—shareholder Common stock: Has voting rights, receives dividends when paid Preferred stock: Receiver preference over common stock can be cumulative or noncumulative  Liability Issues Must make full payment for shares—if not, there is liability (water stock) Not paying par value

40. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 40 Corporations  Liability Issues Shareholders’ liability generally limited to amount of investment If corporate veil is pierced, there is shareholder liability Means corporate immunity from liability is set aside Reasons for piercing Inadequate capitalization—must put in enough money to meet the risks of doing business Alter ego theory—separate nature of corporation is disregarded  Liability Issues Shareholders’ liability generally limited to amount of investment If corporate veil is pierced, there is shareholder liability Means corporate immunity from liability is set aside Reasons for piercing Inadequate capitalization—must put in enough money to meet the risks of doing business Alter ego theory—separate nature of corporation is disregarded

41. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 41 Corporations  Liability Issues Reason for Piercing No formalities—personal and corporate properties are mixed together Ignoring corporate formalities - elections, meetings Forming to perpetrate a fraud on creditors  Liability Issues Reason for Piercing No formalities—personal and corporate properties are mixed together Ignoring corporate formalities - elections, meetings Forming to perpetrate a fraud on creditors

42. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 42 Corporations  Case 21.4U.S. v. Best Foods, Inc. (1998) Is there a special CERCLA rule for piercing the corporate veil? What must be shown to hold a parent liable for the action of a subsidiary?  Case 21.4U.S. v. Best Foods, Inc. (1998) Is there a special CERCLA rule for piercing the corporate veil? What must be shown to hold a parent liable for the action of a subsidiary?

43. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 43 Corporations  Corporate Management and Control Election of Directors Elected by shareholders to make corporate policy May operate by committee Hire officers of corporation and set officers’ salaries Director liability Protected by the Business Judgment Rule. Directors and Officers must act in good forth and with prudence to avoid personal liability Can consult experts but must study issues  Corporate Management and Control Election of Directors Elected by shareholders to make corporate policy May operate by committee Hire officers of corporation and set officers’ salaries Director liability Protected by the Business Judgment Rule. Directors and Officers must act in good forth and with prudence to avoid personal liability Can consult experts but must study issues

44. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 44 Corporations  Case 21.5Grobow v. H. Ross Perot (1988) Why is director independence important? How does the business judgement rule apply in the repurchase?  Case 21.5Grobow v. H. Ross Perot (1988) Why is director independence important? How does the business judgement rule apply in the repurchase?

45. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 45 Corporations  Liability Issues Officer liability Increasing personal liability Increasing prosecutions Particularly when environmental laws are violated  Liability Issues Officer liability Increasing personal liability Increasing prosecutions Particularly when environmental laws are violated

46. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 46 Corporations  Corporate Management and Control- Shareholders Voting shareholders Elect the board The Proxy Vote on critical corporate issues Pooling agreement Voting trust  Corporate Management and Control- Shareholders Voting shareholders Elect the board The Proxy Vote on critical corporate issues Pooling agreement Voting trust

47. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 47 Corporations  Shareholder Rights in Combinations Shareholders have right to vote on mergers, consolidations, and sale of all assets, not on acquisition  Shareholder Rights in Combinations Shareholders have right to vote on mergers, consolidations, and sale of all assets, not on acquisition

48. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 48 Corporations  Shareholders Rights in Combinations Procedure Board of Directors adopts resolution in favor of combination or sale Resolution with notice of meeting sent to all shareholders Shareholders vote on resolution at meeting  Shareholders Rights in Combinations Procedure Board of Directors adopts resolution in favor of combination or sale Resolution with notice of meeting sent to all shareholders Shareholders vote on resolution at meeting

49. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 49 Corporations  Shareholder Rights in Combinations Dissenting Shareholders Shareholders not voting in favor of the combination can force corporation to purchase their shares for cash-- called appraisal rights Corporation may use freeze-out to defeat dissenters’ rights  Shareholder Rights in Combinations Dissenting Shareholders Shareholders not voting in favor of the combination can force corporation to purchase their shares for cash-- called appraisal rights Corporation may use freeze-out to defeat dissenters’ rights

50. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 50 Corporations  Corporate Management and Control Shareholders have access to books and records Under revised MBCA, no ownership requirements Must have proper purpose Generally share in a corporation are freely transferable; however sometimes transfers are restricted Transfer restrictions Must be noted or referenced on stock certificates Must serve a necessary purpose Must be reasonable  Corporate Management and Control Shareholders have access to books and records Under revised MBCA, no ownership requirements Must have proper purpose Generally share in a corporation are freely transferable; however sometimes transfers are restricted Transfer restrictions Must be noted or referenced on stock certificates Must serve a necessary purpose Must be reasonable

51. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 51 Corporations  Dissolution of a Corporation Voluntary Board resolution Shareholder approval Involuntary Forced by court or state agency Example: Fraud  Dissolution of a Corporation Voluntary Board resolution Shareholder approval Involuntary Forced by court or state agency Example: Fraud

52. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 52 Corporations  Corporate Tax Issues Corporation pays tax Shareholders pay tax on dividend income Subchapter S or S corporation Corporate liability protection with partnership tax status  Corporate Tax Issues Corporation pays tax Shareholders pay tax on dividend income Subchapter S or S corporation Corporate liability protection with partnership tax status

53. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 53 The Limited Liability Company  History Been in existence internationally for some time GMBH—Europe Limitada—South America LLC—U.S. Nature Aggregate organization Liability shield Income flows through  History Been in existence internationally for some time GMBH—Europe Limitada—South America LLC—U.S. Nature Aggregate organization Liability shield Income flows through

54. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 54  Formation Articles of organization Filed centrally Name must disclose status - L.L.C. or LLC  Formation Articles of organization Filed centrally Name must disclose status - L.L.C. or LLC The Limited Liability Company

55. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 55  Funding Members contribute capital  Liability Members stand to lose capital contributions, but their personal assets are not subject to attachment  Tax Consequence Income passes through to members LLC does not pay taxes  Funding Members contribute capital  Liability Members stand to lose capital contributions, but their personal assets are not subject to attachment  Tax Consequence Income passes through to members LLC does not pay taxes The Limited Liability Company

56. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 56  Management and Control Operating Agreement—specifies voting rights One member or an outside consultant can have operating authority delegated to him or her  Transferability of Interest Interest can be transferred Transferee does not become a member unless majority of remaining members approve  Management and Control Operating Agreement—specifies voting rights One member or an outside consultant can have operating authority delegated to him or her  Transferability of Interest Interest can be transferred Transferee does not become a member unless majority of remaining members approve The Limited Liability Company

57. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 57  Dissolution and Termination Generally withdrawal, death or expulsion of members will dissolve company Some state permit judicial dissolution All state permit voluntary dissolution  Dissolution and Termination Generally withdrawal, death or expulsion of members will dissolve company Some state permit judicial dissolution All state permit voluntary dissolution The Limited Liability Company

58. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 58  Formation Must file to create  Funding Capital contribution from partners  Tax Consequences Tax reporting entity not tax paying  Formation Must file to create  Funding Capital contribution from partners  Tax Consequences Tax reporting entity not tax paying Limited Liability Partnership

59. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 59 Limited Liability Partnership  Management & Control Partners can participate in management without personal liability for partnership debts  Transferability Transfer must be restricted  Dissolution & Termination Similar to limited partnership  Management & Control Partners can participate in management without personal liability for partnership debts  Transferability Transfer must be restricted  Dissolution & Termination Similar to limited partnership

60. Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 60 International Issues in Business Structure  Joint Ventures Increasing Joint ventures with countries themselves Business structure varies Example: Germany and differing board structures  Joint Ventures Increasing Joint ventures with countries themselves Business structure varies Example: Germany and differing board structures