Chapter 15-Business Organizations

Basic organizational form in which its owner owns and operates the organization. No formal state filings needed and all profitsare taxed as personal income.

Two or more persons carrying on a business as co-owners. Generally, no legal formation requirements--not even a written partnership agreement. If there isno written agreement in effect, the state’s Uniformed Partnership Act (UPA) will control the partner’s relationship.

Partnership Characteristics

Continuity: Each time a partner leaves (or a new one is admitted), the existing partnership is dissolved and a new one is created. The withdrawing partner is entitled to his/her share of the partnership assets. Termination can occur upon partner’s disability, death, or bankruptcy.

Control: Unless agreed to otherwise, each partner has one vote and actions must be approved by majority vote.

Liability: All partners are fully liable for partnership debts.

Taxation: Partnership itself pays no taxes but individual partners report their income on their own personal tax returns.

An entity separate and distinct from its owners that doesbusiness under a charter provided by the state. It is generally advantageous if a business will have many factors of production and/or require large amounts of capital. Owners usually can transfer their shares freely

CorporationCharacteristics

Cost: Typically greater start up costs then partnerships or proprietorships because of excesses legal formalities of incorporation.

Control: Depends on stock ownership division and voting rights.

Liability: Limited liability and the individual shareholder’s liability is limited to the value of their investments.

Taxation: Unless a Subchapter S, the corporation will pay taxes on any income it earns and shareholders must pay taxes on income distributed to them--- “Double Taxation”

Two classes of partners--limited and general. The limited partner merely contributes capital to the partnership. Thelimited partner has no right to participate in the decisionmaking. The limited partner’s liability is limited to his/herinitial investment. Usually a written agreement specifyingthe relationship between the partners is required as well asa filing with the states division of business entities.

Have the best characteristics of bothpartnerships and corporations. They are not double taxed like regular corporations but are limited in theirownership organization.

Limited Liability Companies have the liability advantages of corporations and tax advantages ofpartnerships, but are generally not subject to the same size restrictions as Subchapter S corporations.

Limited liability partnerships are similarto LLCs but generally address specialcircumstances surrounding business associations among licensed professionals

Operating the OrganizationFiduciary Duty: Applicable to every form of

organization and requires all persons responsible for operating an organization to act in the best interests of the organization and its owners.

Business Judgment Rule: Protects those in control of the day-to-day operations of an organization by providing that those owing a fiduciary duty do not violate this duty by mere errors of judgment.

JUDGE JUDY READY TO RULE----

Case: Shelinsky vs. Wrigley --- Plaintiff stockholder sues board of Directors for deciding NOT to install lights at Wrigley Field as the Directors wanted to keep the Cubs baseball games as “traditional”. Plaintiff sues directors for damages caused by the decision (loss ofNight games and revenues attached thereto)

Dumb Decision but Directors Protected Under Business

Judgment RuleLet’s Play Ball!

Derivative SuitsThe shareholder derivative suit is a device that can protect the minority shareholders in a corporation from abuse by those in control. It allows minority shareholders to sue the board of directors or management “on behalf of the corporation”

Piercing the Veil

Piercing the corporate veil is a devise under which shareholders in a corporation are held personally liable for debts or torts of the corporation. It is used when it appears that a corporation was undercapitalized for sole purpose of shareholders to escape personal liability

JUDGE JUDY READY TO RULE----

Case: Dania Jai-Alai Place Inc. v. Sykes--- Plaintiff is critically injuredwhen valet tender crushes her between 2 cars at event. Plaintiff sues Valetcompany, sister corporation & parent corporation which owns subsidiaries.alleging Defendants are just “one big” operation.Defendant’s claim corporate shield protection and individual companies…...

Park your owncar next time lady...

2 separate companies….can’t pierce corporateveil to get to parent

I’TS THAT TIME--MOVIE TIME--FUN, ACTION, SPECIAL EFFECTS!