Business Basics for Lawyers Outline

Business Basics for Lawyers

Ellers

Fall 2015

1. Business Organizations.

Proprietorship: most common way of business operation. Ownership resides in one person, but can consist of more than one person.

Formation: just start operating, but smart to keep separate books for the business;

Duration: as long as owner lives, or decides to retire or decides to step aside;

Efficiency/Management: very efficient, no issues with extra paperwork;

Liability: unlimited, personal;

Transferability of ownership: owner owes the entire interest, can sell if he wishes to;

Relationship between owner and employees: government by principles of agency;

Taxation: pass through, reportable at schedule C of personal tax return.

General Partnership: where two or more people decide to operate business;

Formation: can be created:

ü Orally

ü By written agreement

ü By actions of the parties

Duration: until one party withdraws or dies;

Efficiency/management: coequal; if no written agreement exists; otherwise the profit and loss sharing will be constituted per agreement;

RUPA: if there is no agreement, these are the rules to be followed by the partners by default, but first it has to be adopted by the state where the partnership was created.

Liability: unlimited to all the partners;

Taxation: pass through, reportable on personal tax return; each partner gets K1 form;

Partners are not agents to each other only to a third party on behalf of the partnership; each party has actual and apparent authority.

Limited partnership: is a partnership where partners could be either general or limited but it has to have at least one general partner who has unlimited liability where limited partners are limited only to amount of their investment;

Formation: have to be filed with the state using certificate of limited partnership, which lists who the parties are

Management: Managed by general partners; limited partners could be able to select the general partner; has to be filed with the state; General partner owes fiduciary duty to the partnership;

Liability: general partners- unlimited; limited partners – up to the amount of their investment

Duration: as long as there is at least one general partner or until the agreement between the parties state otherwise or until requested by the state to dissolve;

Taxation: pass through entity.

LLC (limited Liability Company): is the United States-specific form of a private limited company. It is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. An LLC is not a corporation; it is a legal form of a company that provides limited liability to its owners in many jurisdictions. LLCs do not need to be organized for profit. In certain states businesses that provide professional services requiring a state professional license, such as legal or medical services, may not be allowed to form an LLC but may be required to form a very similar entity called a Professional Limited Liability Company (PLLC).

Today mostly limited partnership are replaced by LLCs. Issues with LLCs:

ü More appropriate for small nonpublic businesses

ü Stock exchange won’t accept LLC interest

ü Uncertainty regarding law applicability.

Corporations: is a separate entity with its own rights and independent of its shareholders; could be C or S subchapter;

Formation: articles of incorporation; create bylaws that could be modified later on;

Management: centralized management; managed by BOD: A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. The responsibilities of the board include:

ü governing the organization by establishing broad policies and objectives;

ü selecting, appointing, supporting and reviewing the performance of the chief executive;

ü ensuring the availability of adequate financial resources;

ü approving annual budgets;

ü accounting to the shareholders for the organization’s performance;

ü setting the salaries and compensation of company management;

Lability: limited unless corporate veil is pierced;

Duration: perpetual life, unlimited unless goes bankrupt, is merged with another company or being dissolved, free transferability;

Taxation: double in case of C corp.; treated as partnership in case of S corp.

Corp

Partnership

Centralized Management:

– characterized by separation of ownership & control

– Shareholders = owners

– Board of directors = elected by shareholders and have fiduciary duties to them

– Board hires CEO/Pres

– Employees can also be owners (Stock options)

Owners Manage:

– Equal management amongst the owners (absent a contract changing relationship)

– No board though there can be something centralized

Limited Liability for Owners

– Liability limited to the amount invested in the corporation

– With respect to owners – has nothing to do w/directors who have a whole other set of liabilities coming from breaches of fiduciary duties