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Business Organizations
UMKC School of Law
Luppino, Anthony (Tony) J.

Business Organization
Fall 2011

I.           Categories of business organizations
A.        Incorporated
1.        Liabilities
a)        Shareholders are not personally liable for the debts of the company
2.        Tax implications
a)        “C” corporation
(1)      Tax label (not state statutorily created entity)
(2)      Two levels of taxation
(a)      Corporate tax on income
(i)        Paid by corporation
(b)     Tax on dividends paid to shareholders
(i)        Paid by shareholders
b)        “S” corporation
(1)      Tax label
(2)      Flow through status
(a)      Taxed at shareholder level, not corporate level
(b)     Tax on earnings paid to shareholders
3.        Ownership
a)        Closely-held
(1)      No active market for ownership
(2)      Can refer to actual number of owners (closely v. widely held)
(3)      Relatively easy for owners to incur personal liability
(a)      Personal guarantees demanded by vendors
b)        Publicly held
(1)      Market exists for ownership
4.        Creation
a)        By statutes
b)        Filing articles of incorporation
5.        Structure
a)        Shareholders – ultimate owners of the enterprise
b)        Directors – managers of corporate affairs
c)         Officers – act for corporation and implement decisions of directors
6.        Advantage/disadvantages
a)        Disadvantages
(1)      Tax structure
(2)      Procedural requirements – can increase cost of operation
b)        Advantages
(1)      Corporate personhood – enjoys some of the guarantees and protections of natural persons
(a)      1st amendment – freedom of speech (watch out for commercial speech)
(b)     5th amendment – protection of takings clause
(c)      No unreasonable search and seizure
(d)     Plead former jeopardy as bar to prosecution
(e)      Due process and equal protection
B.        Unincorporated
1.        Sole proprietorship
a)        Liability
(1)      Owner is liable for debts of the company
(2)      No legal separation of business and owner
b)        Tax implications
(1)      Disregarded entity
c)         Ownership
(1)      One owner
d)        Advantages/Disadvantages
(1)      Risk grows as business grows
2.        General Partnership
a)        Liability
(1)      All general partners are jointly and severally liable for debts of and claims against partnership
(a)      Even if
(b)     Not involved in the actions that gave rise to liability
(c)      Received little or no direct personal benefit from actions that gave rise to liability
(2)      Exception
(a)      Limited liability partnership (LLP)
(i)        Limited partner liability does not exceed partnership assets
(ii)                 Requires special filing
(iii)    Must have full personal liability for claims arising from partner’s own misconduct
b)        Tax implications
(1)      Flow through status
(2)      No entity level tax
(3)      One level of taxation (partners)
(4)      In theory, an unincorporated entity can be classified as a partnership, C corporation or S corporation for federal tax purpose
c)         Ownership
(1)      Two or more owners
d)        Creation
(1)      Can be inadvertent
(a)      Default form or ownership for two or more people
(2)      Co-ownership need not be express
(a)      Oral agreement to share profits enough to establish partnership even if initial contributions are unequal
e)        Advantages/disadvantages
(1)      Disadvantages
(a)      Fragile
(i)        May be dissolved at any time by partner’s statement of express will
(a)     § 358.310(1)(b)
(b)     If fail to comply with statute, all partners are GP no matter what they thought they were, how they were held out to public or how designated in partnership agreement
(c)      No common law of limited liability partnership
3.        Limited Partnership (and LLLP variation)
a)        Liability
(1)      General partnership has same liability as in a  general partnership
b)        Exception
(1)      Limited liability limited partnership         
(a)      General partner has protection of LLP election
(b)     Requires special filing
(2)      Limited partners are not personally liable for claims or debts of partnership
c)         Tax impli

  Sources of agency law
1.        Case law
2.        Restatements
3.        Statutory provisions with express or implied adoption of agency law principles
F.         Terminology
1.        Agency
a)        Fiduciary relationship
(1)      Agent act on principal’s behalf
(a)      Subject to principal’s control
(2)      Duties
(a)      Duty of care
(b)     Duty of loyalty – agent should not act in his own interest to the detriment of the principal or against the principal’s interest
b)        Principal (P) à agent (A)
2.        Agent
a)        Co-agent – agency relationship with same principal
b)        Dual agent – agency relationship with more than one principal (joint principals)
3.        Principals
a)        Disclosed
(1)      3p knows A is working for P
(2)      3p knows identity of P
(3)      Liability
(a)      Agent is not liable for a contractual obligation – unless agrees to be
b)        Undisclosed
(1)      3p has no notice that A is working for P
(2)      Liability
(a)      Agent is liable
(b)     Principal is liable if the agent acted w/in the scope of the actual authority
c)         Unidentified
(1)      3p has no notice that A is working for P
(2)      3p has no notice of P’s identity
(3)      Liability
(a)      Agent is typically liable unless agent gets the 3p to agree that he won’t be.
4.        Notice
a)        A person has notice if a person
(1)      Knows a fact
(2)      Received effective notification
(3)      Should know the fact to fulfill a duty owed to another person
b)        Notice given to an agent is effective as to its principal
5.        Manifestation
a)        Written word
b)        Spoken word
c)         conduct