BUSINESS ORGANIZATIONS OUTLINE
Fall Semester, 2005
I. BASIC TERMINOLOGY
A. Incorporated v. Unincorporated:
1. Incorporated: the business formed an entity under a corporate statute, filed the appropriate papers
2. Unincorporated: anything that is not a corporation, usually closely held
– Note: This classification views the world of business as polar and ignores the fact that there is a continuum of business size, complexity, and ownership.
– Note: Recent developments have greatly increased the attractiveness of unincorporated forms of business for closely held firms: 1) the creation of new unincorporated business forms that grant the advantage of limited liability and 2) changes in the IRC that give unincorporated firms and their owners considerable freedom in electing how their income is to be taxed
B. Dissolution: entity ceases to be an entity for different reasons and under different circumstances
C. Sole Proprietorship: business owned by a single individual
1. The owner is personally liable on all business obligations.
a. Sole owners may form corporations just to minimize personal exposure (such as for the acts of employees). This would require a state filing.
2. Advantage: There is no written requirement to form a sole proprietorship.
3. Downside: no limit to liability, can’t shelter your assets from risk
D. General Partnership: a contract between two or more businesses 358.150 for LLP
default form of a business that is owned by more than one person
1. AKA general or regular partnership, not some form of limited partnership
2. Advantage: Co-ownership need not be expressly created by any form at the Secretary of State’s office; an oral agreement to share profits might be sufficient to establish a general partnership.
3. Disadvantage: Still unlimited liability. A general partnership is fragile; it may be dissolved by a partner any time by an express statement.
Also they don’t pay a double tax on federal income
E. Limited Liability: the corporation is the only entity that is liable for the business’s obligations, cuts off vicarious liability
1. Exceptions to Limited Liability:
a. You can still be liable for your own personal wrongdoing (ex. as a tortfeasor)
b. You can still be liable under a contract with a personal guarantee
c. Piercing the corporate veil – there is something about the way that you are operating the company that makes the court ignore the black-letter law
d. Federal statutes can pre-empt on certain liability
F. Limited Liability Partnership (LLP) 358.150 : type of general partnership except that partners have no personal liability for firm obligations that exceed the assets of the partnership, unincorporated entity
1. LLPs do not have limited partners; they have general partners that enjoy some type of limited liability.
a. However, partners have full personal liability for claims arising out of their own misconduct.
2. The LLP is
incorporation without the limitations and rules applied to corporations). Still isn’t much case law on LLC’s
1. Owners are called “members”(similar to shareholders)
a. Member managed – management structure is like a limited partnership
b. Manager managed – only the managers have certain kinds of authority
2. Formed with an operating agreement
3. Still are personally liable if you actually commit the tort through management
J. Corporation: incorporation results in the creation of a new legal entity (a fictitious person) with sole responsibility for its obligations
1. Provides limited liability for all investors and participants
a. The assets of the corporation are subject to seizure by corporate creditors.
2. The Players in a Corporation:
a. Shareholders – owners, appoint directors
b. Board of Directors – management authority, oversee the company, hire officers
c. Officers – employees of the company who hire other employees, need at least President and a Secretary (can be same person)
3. Formed by Articles of Incorporation
3. Has By-laws