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Business Associations/Corporations
SUNY Buffalo Law School
Mutua, Athena D.

Spring 2007 Corporations Outline

I. Introduction

The 5 Questions One Must Be Able to Answer:

1. What is the business structure?
2. How does one form the business structure?
3. Who owns the business?
4. How does the business make money?
5. How does one get out of a business?

What is the purpose of a business?

To make a profit ($$$)
To create value for the business’s owners
Note: Businesses also serve hidden public functions by facilitating certain human needs.

What is Milton Friedman’s View?

He describes businesses as “special purpose entities” whose sole purpose is to make $ on behalf of the owners.
Managers are agents of the owners of the business, and as agents their primary responsibility is to the owners of the business.

What is the structure of Not-For-Profits?

They are associations, not businesses

Entity Theory of the Firm: A corporation is a separate legal person with individual rights.

How does a Lawyer determine what form a business should take (what are the considerations)?

Ease of Forming: How easy/difficult is it to get started as this type of entity?
Liability: Lawyers seek to reduce the risk of an owner’s liability when one is going to invest in a business.

Personal Liability: If you can be held personally liable, then your personal assets can be reached and not just your business’s assets.
Limited Liability: As investor, you will only be liable for your investment in the business, and not your personal assets.
2 Types of Liability can occur in Business Law?

Tort: injury to person/property
Contract: damages that occurred from the breach of an agreement, economic liability.

Taxes: when forming a business structure, one wants to make tax liability for the owner as little as possible.

Pass Through Taxation: The owners of the business will pay tax on the profits/losses of the business on their personal income tax returns.
Double Taxation: The business entity, itself, pays taxes and then the owners must also pay taxes on distributions of earnings (dividends) that the business issues to its owners.

Management/Control: What type of power does the owner want in the business or who do they want to delegate that power to?

Centralized Management or Triangular Model: The owners delegate power to the managers who then run the entity. The managers make day-to-day decisions and are agents of the entity.
Decentralized Management: All of the business owners are the actual managers of the entity.

Transferability/Exit: How easy/difficult is it for me to sell or exit from this form of business?

AP Smith Mf

nterests even if some shareholders disagree with the action. So as long as a donation has some business purpose and is not given to a pet charity, a donation will be allowed.

II. The Sole Proprietorship & its Funding; Agency; & Franchise Law

Note on Managers as Agents to the Corporation: Managers are agents of the corporation, which is a separate legal entity; they are not agents of the owners, in the eyes of the law.

The Sole Proprietorship:

Defined: Default business structure for business with one owner
State: One has to file nothing with the state to form this type of business.
Owner: The owner is the sole proprietor
Profits/Losses & Taxes: The owner bears the profits/losses of the business and pays the taxes on the profits (if any) on his/her personal income tax return.
Creditors: They sue the sole proprietor (not the business)
Liability: There is personal liability; no limited liability. The owner is responsible for the torts and contracts of her employees. This poses a big risk to someone who operates a business this way because all of their personal assets are exposed.