Business Organizations (and Corporations)

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Business Entities
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Corporations are recognized as legal “persons” and enjoy virtually same rights and privileges under our Constitution as natural persons.
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Corporate Governance includes
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-Shareholders, Members, Owners -Board of Directors, Managers -Officers, President, Secretary -Employees
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How to choose an entity
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-Type of Business -How many owners and types -Goal for the business –more capital –exit strategy –Owner Buyout -Professionals – accountant, attourney, ect.
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Entrepreneur
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is one who initiate and assumes the financial risk of a new business enterprise and undertakes to provide or control its management.
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Two Major issues
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Taxes and Liability -We know the injured plaintiffs can go after the business, but can they go after the owner personally for all the owner’s personal assets?
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Tax
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How much tax will the business have to pay on their income.
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Liability
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If something happens where the “business” is liable “if one of my fellow partners in the business commits a tort and gets sued, am I liable too? because I’m an owner of the business? We have to consider the personal liability of the business owner.
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Sole Proprietorship
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Is the simplest form of business, in which the owner is the business. One person is the owner of the business. -There is no state Filing requirement, but they should file a d.b.a. -Taxes: this is a good operation for tax purposes. -Any money the “business” makes is not taxed by the Texas Franchise tax or the Federal income tax. -The owner of the business has to pay federal income taxes on the income he personally makes (like every individual does) Liability: Is not a good organization for liability purposes
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Sole Proprietorship and Tort
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If the “business” (meaning the owner or his employees) commits a tort. The business’s assets can be drained AND the injured plaintiff can also go after the owner personally.
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A Partnership
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arises from an agreement, express or implied, between two or more persons to carry on a business for a profit. -There is no state filing requirement, but they should file a d. b. a. and have partnership
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Why do individuals form a partnership?
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1) To get extra “capital” (Money for Business) 2) One partner has an expertise in the field or they compliment each other’s skills
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Partnerships are presumed if:
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Essential elements: 1) Sharing of profits or losses 2) joint ownership of the business 3) Equal rights to be involved in the management of the business.
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Partnerships and Taxes
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– Samge general principles as the Sole Proprietorship. When profit is made by the business, the business is not taxed by the federal income tax or by the Texas Franchise tax. -When the partners receive their cut of the profits, their personal income is federally taxed.
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Partnerships and Liability
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If any of the partners or any employees of the business commit a tort in which the GP becomes vicariously liable, then the plaintiff can drain the GP’s funds and then go after each and every partner “jointly and severally”
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Other Partnerships
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-Limited Partnership -Limited liability partnership
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Limited Partnership (LP)
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-Must file with Secretary of State -Tax – Federal and Texas -Liability- Limited for Limited Partner; full for general partner
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Limited Liability Partnership (LLP)
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-Must file with secretary of state -Tax – Federal and Texas -Liability – Partner not liable personally unless were directly involved in the tort, directive supervision, or had knowledge.
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Agency Concepts and Partnership Law:
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-Partnerships are governed by common law and statutory laws -Partners are agents and fiduciaries of each other. -In the absence of a partnership agreement state statutes govern the partner rights.
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Fiduciary Duties
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-Partners are fiduciaries and general agents of one another and the partnership -Breach and Waiver of Fiduciary Duties -Partner may be able to subject partnership to tort liability -If partner acts within scope of authority, partnership is bound.
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Property rights of partners
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-Property acquired by the partnership remains partnership property. -An individual partner has no right to sell, mortgage, or transfer partnership property. -Use or possess property on behalf of their partnerships -Assign her right to her share of the profits to another to satisfy individual debt.
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Partner Termination
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Can be: -Dissolution -Partnership Buy-Sell Agreements -Winding up and Distribution of Assets
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Dissolusion
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is partner termination by operation of law or judicial decree -Partners can agree to dissolve -By operation of law: death of a partner, bankruptcy of a partner, bankruptcy of partnership, or illegality.
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Partner Buy-Sell Agreements
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Contract that determines in advance of an “event”, how remaining partners will buy-out partners’ interest
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Winding up and Distribution of Assets
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-After dissolution, partnership continues to wind up the partnership affairs. -Partners have no authority except to: –Complete transactions already begun –Contact and preserve partnership assets, discharge liabilities, and provide an accounting.
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An LLC is:
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a hybrid entity that combines the limited liability of a corporation and the tax advantages of partnership. -is a separate legal entity from owners -can hold property separately
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Limited Liability Company (LLC) facts
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-LLC’s are creatures of state law -Owners are called “members” (not shareholders) and their ownership is called an “interest” (not shares) -File a certificate formation with the Secretary of State -Operating Agreement/Company Agreement
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Management of an LLC
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-Either member managed, or manager-managed -In member management, all members participate in management and decisions -Managers ad members owe fiduciary duties to the LLC and to each other.
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LLC Taxes and Liability
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-Taxes: No federal Income Tax for Business but you do have Texas Franchise Tax and the members get hit with the federal income tax -Liability: the LLC is liable for the torts of it’s members/employees but members aren’t liable for torts of the LLC or other members. All the “innocent” member would lose is his prior monetary investment in the LLC
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Dissolution of an LLC
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Winding up: -Controlled by Operating Agreement -After all assets are sold, proceeds distributed to pay creditors, then capital contributors, then remaining money distributed pro-rata.
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Corporations
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-A corporation is a creature of statute, an artificial “person” -Corporations can have one or more shareholders, comprised of natural persons or other businesses -A corporation is a legal “person”, has similar rights and privileges as a natural person
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Corporate Personnel
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-Responsibility for management of company rests with board of directors (elected by shareholders) -Board of directors makes policy decisions and hires officers to run corporation on a daily basis.
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Corporate Earnings and taxation
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-Profits can either be kept as retained earnings or passed on to the shareholders as dividends. -Corporate Taxation: can be taxed twice, first to corporation, then to shareholders via dividends. -Taxes (double taxation) -Business federal Income Tax and then individuals are taxed on dividends -Texas Franchise tax -Liability – shareholders are well protected (must pierce the corporate veil)
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Classification of Corporations
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-Public and Private Corporations -Nonprofit Corporations -Close Corporations –Shares held by few shareholders –More informal management, similar to a partnership –Shareholder Agreement to Restrict Stock Transfers.
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The process of incorporation
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-File a Certificate of formation with the secretary of state (Articles of Incorporation) -By-Laws -Organizational Meeting -Corporate Minutes
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Directors and Officers
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-A corporation is governed by a board of directors elected by shareholders. -Individual directors are not corporate agents, only the board can act as an agent and bind the corporation. -A director can also be a shareholder, especially in closely-held corporations -Few qualifications are required for directors -Directors appointed at the first organizational meeting -Term is usually one year -Quorum to make decisions
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Shareholders
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-Acquisition of shares grants an equitable ownership interest in a corporation -Shareholders generally have no right to manage the daily affairs of the corporation, but do so indirectly of the corporation, but do so indirectly by electing directors.
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Shareholders’ Powers:
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-Approving all fundamental changes to the corporation -Amending articles of incorporation or bylaws. -Approval of mergers or acquisition -Sale of all corporate assets or dissolution -Shareholders also elect and remove the board of directors.
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S-Corp
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-Pass through tax treatment (no corporate tax) -You must meet the criteria to be an S-corp -File to create a “corporation” with the texas Secretary of State -The difference occurs with the IRS file a form to elect Subchapter status. This will relieve the S-Corp from having to pay federal income taxes on their income.
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Anna and Jennifer start a new business as a partnership, and agree from the beginning that if one of the partners wants to leave the partnership at a later date, that the other partner will purchase the leaving partner’s ownership interest at book and amortized over a five-year term. This type of agreement is referred to as a
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buy-sell agreement
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Tara signs a written agreement with Harry, giving Harry the right to cast Tara’s votes for a certain group of people nominated for the Syllibar Corporation board of directors. This agreement between Tara and Harry is known as a
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Proxy
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Marsha is a sole proprietor of a small quilting shop. She has considered changing her business structure, but she cannot find an alternative structure that would give her the main advantage she enjoys as a sole owner. The major advantage is that she
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receives all the profits
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Acme Co. has just completed the incorporation process and received its articles of incorporation from the state. At the first organizational meeting of the new company, the officers’ most important task is to
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adopt bylaws
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Elliot is suing Acme, Inc. for a breach of contract, but because it has very little in assets, he asking the court to pierce the corporate veil and hold the officers personally liable. In which of the following situations would the court likely approve Elliot’s request?
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The corporation was under-capitalized from the beginning, and never had sufficient assets to operate as a viable business.
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Eddie and Eric enter into a partnership agreement to sell gourmet dog biscuits. If they do not specify how long the general partnership will last, the partnership will end
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whenever either partner wants to end it
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As a director and officer of Harold Transport, Inc., Harold would most likely be considered to have breached his duty of loyalty if he
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buys stock in Arnold’s Transpport, Inc., a competing trucking firm
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Xavier consults with an attorney and some business acquaintances from the Chamber of Commerce about the management of his LLC. He is told that management may take one of two forms, a member-managed LLC or a manager-managed LLC. In the second form
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the managers may be members, nonmembers, or a combination of both
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Wendy is a member of the board of directors and the chief financial officer of The Shoe Fits, Inc. Under the duty of due care that she owes the corporation, Wendy does NOT need to
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oversee every aspect of the business, including such things as ordering merchandise and arranging for janitorial services.

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