Business Organizations

Sole Proprietorship

Partnerships

Corporations

Sole Proprietorship

Owner is the business Generally small Owner gets all the profits Taxes paid on personal income tax form Unlimited liability No continuity upon death Owner personally liable for all debts

Partnership

Partnership agreement taxed at individual level

-- partnership pays no federal taxes

unlimited liability for partnership

One or more general partners

– responsible to manage partnership

– Unlimited liability One or more limited

partners– certificate of partnership– no liability for debts

beyond amount contr.– Cannot manage bus.

General Limited

Corporation

Formal legal structure Shareholders Board of Directors Officers Shareholder liability

limited to amount invested

Can exist in perpetuity double taxation (corp.

tax and dividends)

S Corporations

Corporations can further be divided based on their tax status.

S Corporations C Corporations

S corp

Avoids double taxation Allows Limited Liability Requirements

– domestic– not a member of affiliated group– shareholder criteria– 75 or less shareholders– one class of stock– no nonresident alien shareholders

General Corpis a

“C” Corp

Limited Liability Company

Hybrid of corp and partnership Tax benefits of partnership Limited liability of corp. shareholders Eliminates restrictions on number and type of

shareholders Unlike limited partners, LLC members participate in

management.MN New Name Look UP •Name look up•Organize new companyhttp://www.sos.state.mn.us/home/index.asp

Domain Name Search http://smallbusiness.yahoo.com/domains/

Link to Name Look Up Page

Question

Rick Yurko frequently visited Phylllis’s coffee shop where he purchased lottery tickets. He, Phyllis, another employee and another customer, Francis helped scratch-off the tickets. Yurko said that if they helped him scratch-off the tickets, they would be his partners and share in the winnings.

Judy uncovered a ticket that gave a chance to win $100,000 by appearing on TV. Yuko encouraged Judy to go on TV, but she was not comfortable with that and Yurko said he would go on TV. They signed the ticket on back (required to go on the show) “F.J.P. Rick Yurko” (F.J.P. representing the initials of Frances, Judy and Phyllis)

Yurko won $100,000 and refused to share the money. He paid for all the tickets. Should Judy and Phyllis get a share?

Judy Fitchie v. Rick Yurko, IL Ct of Appeals (1991)

Corporation Formalities

Articles of Incorporation

Bylaws Corporate Veil

(piercing the corp. veil)

Bullington v. Palangio (2001).Bullington v. Palangio (2001).Personal liability because of revoked corporate charterPersonal liability because of revoked corporate charter

Question 18-7, p. 430Blushing Brides publishes a magazine and hired Gray Printing to print it. Zacks, the Blushing Brides member- manger signed the contract. Blushing brides breached the contract and did not pay on time. Gray refused to print more until assurances of payment made. Zacks signed a promissory note payable to Gray. Blushing Bride still did not pay and Gray sued both Blushing Brides and Zacks personally.

Corporate Taxation

Double-taxation – corporations pay income tax on net profits;– shareholders pay income tax on the disbursed

dividends that they receive from the corporation.

Shareholders Own company

– no right to use or take property

– no right to manage– Inspection Rights

Elect Directors (remove for cause)

Approve fundamental corporate changes

– amend bylaws– approve a merger– sale of all assets

Voting– Proxy voting– Quorum– resolutions– majority or super majority

vote– cumulative voting

Other Rights– Stock Certificates

lost certificates– Preemptive Rights– Dividends– Shareholder’s Derivative

Suit– Liability of Shareholders

Shareholders’ Meetings

Meeting– Shareholders’ meetings must occur at least

annually– Notice of the date, time, and place of the meeting

must be sent to the shareholders.

Corporate Management - Directors

First board appointed Election - majority vote of shareholders Generally serve one-year terms Board meetings One vote per director Directors’ Duties (delegated to committees)

– declare dividends– Authorize major change– appoint and remove corporate offices– Key Financial Decisions

Directors’ Qualifications and Compensation

Few qualifications are required; a director can be a shareholder but is not required to be.

Compensation is usually specified in the corporate articles or bylaws.

Officers and Directors

Fiduciaries to company– Loyalty– duty of care

Conflict of Interest Business Judgment Rule

– good faith– best interests– care of a ordinary prudent

person

Officer Duties– Run the company day-to-

day– Hire others

Question 19-2, p. 460 – Conflicts of Interest

Oxy Corp is negotiating with Wick Construction for the building of a new corporate headquarters. Wick, the owner of Wick Construction, is a member of the Board of Oxy Corp. Wick has informed 2 of the 5 directors of his involvement with Wick Construction and assumes the rest know. The Board approves Wick Construction 3-2 with Wick voting in the majority. Problems?

Question

Equal Partners. Brandt and Somerville each owned ½ the stock in PPI. Each did half the work until PPI moved to North Dakota.

One Partner Doing Most of the Work. Somerville started doing more/most of the work. Somerville formed PL MFG, as his own business to make components for the bearing pullers PPI made and sold to PPI. PPI signed loan documents for PL MFG.

Brandt sued for breach of fiduciary duty.

50% Owned by Brandt 50% Owned by Somerville

PL MFGPPI 100% Owned by Somerville

PPI (Sommerville) Signed Loan DocumentsPurchases Products from

Franchises

Franchise Defined. – Any arrangement in which the owner

of a trademark, trade name, or copyright licenses another to use that trademark, trade name, or copyright, under specified conditions or limitations, in the selling of goods and services.

The Franchise Contract– Payment for the Franchise– Location and Business Organization

of the franchise– Price and Quality Controls– Termination

Franchise Culvers

Liquid Capital Required

$300,000 - $500,000

Store Cost $1.5-$3 million

Franchise Fee – Upfront

$5,000 Application Fee - $55,000 Franchise Fee

Royalty Fee 4% of gross sales, 2% national advertising, 1% local

Types of Franchises

Distributorship

(e.g. automobile dealerships)

Chain-style operations

(e.g. fast-food chains)

Manufacturing/processing plant arrangement

(e.g. soft-drink bottling companies, such as

Coca-Cola)

Franchising Contracts

Contract. A franchising relationship is based on a contract.

Special Laws. But the government has enacted laws to protect franchisees from the consequences of contracts into which they have voluntarily entered.

Are lengthy franchise contracts necessarily disadvantageous to franchisees? Explain.