Select Page

Business Associations/Corporations
University of Dayton School of Law
Gerla, Harry S.

BUSINESS STRUCTURES AND BACKGROUND
 
·         Introduction
o        There are many different types of business structures available to a young entrepreneur
o        Question is deciding which one is right for you
o        Why go into business
§         Make money
§         Create value (not necessarily just money, but financial and emotional profit)
·         Goal is to earn economic return, profit, or other increase in value
o        Role of the CEO
§         Conduct business in accordance with the desires of the employees
§         CEO is the agent of the individual that owns the corporation
o        What are the deciding factors
§         Taxation of the business
·         What are the effects on the owner(s)
§         Liability of the owners
·         What is the potential liability of the owner(s) for the torts of the business or employees
§         Control of the business
·         How much control of the business does the owner want to retain
§         Profits and return
·         What percentage of the profit earned does the owner want to retain
·         Types of Business Structures
o        Sole Proprietorship
§         Defined
·         Oldest form of business
·         Owner and the business are the same entity
§         Number of owners J
·         One owner
§         Formation J
·         Started without any formalities associated with other forms
§         Profits (how much return is retained by owner) J
·         All profits go to the owner (the sole proprietor)
§         Taxation L
·         Owner and business are same entity for tax purposes
·         Do not pay taxes separately
·         All income of sole proprietorship are reportable as the owner’s personal income tax
·         No double taxation
§         Control (power of owner to make decisions) J
·         All decisions are made by the owner (the sole proprietor)
·         Can give up some control when entering into debt (taking loans, give bank veto power)
§         Liability (risk) L
·         All risks (financial and legal) are undertaken by the owner
·         All of company assets and the owner’s possessions are susceptible to liability
·         Owner must buy insurance to shield from liability
o        Partnership
§         Defined
·         Business entity (usually small) that consists of multiple owners
§         Number of owners
·         Small, but more than one
§         Profits (how much return is retained by owner)
·         Shared among partners
§         Taxation J
·         No double taxation
·         Tax entire profit as if it were the income of the partners
·         Partner pays taxes on a personal level only on the share of the income distributed to that partner
§         Control (power of owner to make decisions) J
·         Control shared by all partners (can make agreements to give up some control)
o        One partner → one vote
·         Any partner can bind all partners in the partnership
·         Control may be managed by an agreement among partners
§         Liability (risk) L
·         All partners are personally and unlimitedly liable for the debts of the partnership
o        Corporation
§         Defined
·         Business entity that is essentially its own person
·         Completely separate and distinguishable from the owners
§         Formation L
·         Must meet more stringent requirements
§         Profits (how much return is retained by owner) L
·         Owner of corporation only gets profit through dividends disbursed (shareholder)
§         Taxation L
·         Corporation gets taxed on profits
·         Then disburses dividends to the owners
·         Owners are taxed on dividends as income
·         Double Taxation
§         Control (power of owners to make decisions) L
·         Owners essentially give up all control to the board of directors
§         Liability (risk) J
·         Owner is not subject to liability
·         Corporation subject to the risk, not the owners
o        S Corporation
§         Defined
·         Tax status of partnership (no double taxation)
·         Legal liability of the corporation
§         Formation
·         Must meet very restrictive IRS requirements
·         Generally for small corporations that couldn’t handle the double taxation of corporations
o        Why choose a corporation
§         1) Limited Liability
·         Owners are not subject to liability for the actions of the corporation
·         Subject to exceptions
o        Piercing the corporate veil
o        Employee/Owner Tort
§         Employee is also owner and is sued for something done as employee
o        Shareholder guarantee
§         Creditor can get to shareholder that personally guarantees debt of corporation
§         Go after them as guarantor of the debt, not as owners of the corporation
§         2) Advantages of Corporation

Delaware kept the Court of Chancery
o        Specialized court only dealing with corporation law
o        Large volume of litigation and much experience
·         3) Delaware rules and courts are very friendly to the management
o        Can be hostile to interests of shareholders
o        General Rules on Starting a Corporation
§         1) Must establish Articles of Incorporation
·         Defined
o        Fundamental Constitution of the Corporation
§         Corporation’s birth certificate
o        Corporation usually formed when the articles are filed
§         Some require the Articles to be approved
o        Also known as the Certificate of Incorporation or the Charter
·         Requirements
o        Depends on the state corporation code
o        MBCA §2.02(a): Articles must set forth
§         Name for corporation
§         Number of shares corporation authorized to issue
§         Address and name of agent at initial registered office
§         Name and address of each incorporator
·         Provisions
o        Mandatory provisions
§         Corporation must have these provisions in their Articles and Bylaws
o        Optional Provisions
§         Generally have some default terms or provisions as well
§         Unless otherwise stated, these provisions apply to the corporation
·         Conflicts
o        Resolved in favor of statute over Articles of Incorporation
·         Amending Articles
o        Requires shareholder approval
o        Shareholders can’t amend directly, must go through the Board of Directors
§         2) Most states require establishing Bylaws
·         Defined
o        Set of rules that govern the internal affairs of the corporation
o        Need not be filed
·         Requirements
o        Not as stringent as the Articles
o        State corporation code less restrictive
o        Created by the Board of Directors
§         Usually at the first meeting
o        MBCA §2.06(b)
§ &