BUSINESS ORGANIZATIONS
LARSON
SPRING 2012
I. Introduction
A. Types of organizations
1. Sole proprietorship:
§ a single owner who has decided to run a business, without incorporating it or forming it as an LLC
§ no distinction between the business and the owner
§ business is not taxed; Owner is
ú if business generates taxable income, the owner must report this income on his/her personal income tax return (as opposed to taxing it as a business)
§ owner personally liable for all business’ debts and liabilitiesà can aid this problem with insurance
2. Partnership
· General:
o Two or more owners
o Separate business entity from its owners
§ Ex: A and B for “AB”= three legal entitiesà A, B, and AB
· Partnerships are taxed by “flow-through” taxesà where the business as an entity dos not pay taxes, but the income (or loss) flows through to the partners and is reported on their personal income taxes.
o Any profits are shared equally by the partners; and each partner reports that income on their personal income taxes
o Partners are jointly and severally liable for all debts and obligations of the businessà the creditor can recover the full amount from EITHER owner
§ Limited Partnerships:
ú Flow-through tax treatment
generalà has full decision making authority; but is personally liable for liabilities
§ Limited Liability Partnership:
ú Same as partnership but no joint and several liability
ú Any obligation arising is the responsibility of the partnershipà unless a “partial shield” LLP where the partners are not personally liable for wrongful acts of other partners or employees but are personally liable for liabilities of the partnership
3. Corporations:
o Shareholders (stockholder) are the ownersà they own stock (equity interest in the corporation)
o They annually elect directors who run the business; and some of the decision-making authority is delegated to the officers
o Shareholders are not personally liable
§ “C” corporations:
§ taxed doublyà taxed as a corporation, and its shareholders are taxed on their dividends received from the corp.
§ “S” corporation:
§ taxes pass to shareholders, and they report them on their personal income taxes
ú no more than 100 shareholders
ú can only have individuals, estates, certain trusts, and nonprofits
ú only US citizens
ú no more than 1 class of stock
ú must be incorporated in US
4. Limited Liability Companies
§ Limited liability on owners
§ Flow-through tax treatment
§ Can be member-managed (all members make decisions) or manger-managed (one or a few have authority to make decisions)
B. Financial Statements
1. Balance sheet
§ Assetsà things business owns
ú Currentà assets that will be converted into cash or consumed in near future
ú Property, equipment, etcà tangible assets
ú other
§ Liabilitiesà amounts owed to 3rd parties such as banks or creditors
§ Equityà difference between the two
Liabilities + Owners equity= Assets
2. Income statement
3. Cash flow statement
Agency
· The fiduciary relationship arising when one person (principal) manifests assent to another person (agent) that the agent shall act on the principals behalf and subject to the principal’s control; AND agent and principal must agree
o Agreement between Principal and Agent
o P agrees A will act for P
o A agrees to accept the undertaking
o P is in control of the relationship
§ Assent is manifested through written or oral words or other conduct
· “Agent” à person who by mutual assent, works on behalf of principal and is subject to the principals control
· “Principal”à person on whose be
n be terminated by:
ú Agents death
ú Principals death
ú Principals loss of capacity
ú Agreement between agent and principal of when termination occurs; or an occurrence of event upon which the agent should reasonably determine that principal no longer assent to agent acting on their behalf
ú Manifestation of revocation by principal to agent; or renunciation by agent to principal revoking his position ; or
ú The occurrence of an event specified in statute that terminates authority
ii. Apparent Authority
§ No actual authority
§ 3rd party reasonably believes the Agent has authority to act on behalf of the Principal
1. 3rd party must have acted in good faith belief the transaction was within the actual authority of apparent agent (actions of “agent” must have induced 3rd party to believe that he has authority)
2. belief must be based upon the acts, omissions, or statements of the Principal; and
3. 3rd party belief must be objectively reasonable
**if someone is purporting to be agent, then principal is not liable**
iii. 3rd parties:
A person lacking the authority, attempts to make a contract with a 3rd party, on behalf of another person, give an implied warranty of authority to 3rd party and is subject to liability to 3rd party for damages caused by breach of warranty, UNLESS:
§ principal ratifies act;
§ person who made contract gave notice to 3rd party that they were not authorized by principal to make contract; or
§ 3rd party knows that person who made contract did so without authority
