Sole Proprietorship Chapter 12: Sole Prop., Partnerships, Corporations.

Sole Proprietorship Sole Proprietorship Chapter 12: Sole Prop., Partnerships, CorporationsChapter 12: Sole Prop., Partnerships, Corporations

Understanding Business and Personal Law

Sole Proprietorship Sole Proprietorship Section 27.1Section 27.1

Sole Proprietorship and Partnership

Section 27.1Section 27.1Sole ProprietorshipSole Proprietorship

Section 27.2Section 27.2The Partnership The Partnership

2727ChapterChapter Sole Proprietorship and Sole Proprietorship and PartnershipPartnership




What You’ll Learn

How to define sole proprietorship (p. 584)How to define sole proprietorship (p. 584)

How to create a sole proprietorship (p. How to create a sole proprietorship (p. 584)584)




What You’ll Learn

How to identify the advantages of a sole How to identify the advantages of a sole proprietorship (p. 585)proprietorship (p. 585)

How to identify the disadvantages of a How to identify the disadvantages of a sole proprietorship (p. 587)sole proprietorship (p. 587)




Why It’s Important

Understanding the nature of a sole Understanding the nature of a sole proprietorship will help you decide when to proprietorship will help you decide when to form that type of business association rather form that type of business association rather than the other associations that are available than the other associations that are available in the market today.in the market today.




Legal Terms

sole proprietorship (p. 584)sole proprietorship (p. 584)fictitious name (p. 584)fictitious name (p. 584)employer identification number (p. 585)employer identification number (p. 585)unlimited liability (p. 587)unlimited liability (p. 587)




Creation and Operation of a Sole Proprietorship

Advantages of a Sole ProprietorshipDisadvantages of a Sole Proprietorship

Section OutlineSection Outline




Pre-Learning Question Pre-Learning Question

What is a sole proprietorship?




A A sole proprietorship sole proprietorship is a form of is a form of business that is owned and operated business that is owned and operated by one person. However, that owner by one person. However, that owner may have any number of agents or may have any number of agents or employees.employees.

Creation and Operation Creation and Operation of a Sole Proprietorship of a Sole Proprietorship




A sole proprietorship is the most A sole proprietorship is the most common type of business and the common type of business and the easiest to form. Examples include:easiest to form. Examples include:


Repair shopsRepair shopsSmall retail storesSmall retail storesService organizations Service organizations




A person who goes into business as a A person who goes into business as a sole proprietor can choose to operate sole proprietor can choose to operate under his or her own name or can under his or her own name or can make up a name. make up a name.





If a sole proprietor uses anything but If a sole proprietor uses anything but his or her own name, the law calls the his or her own name, the law calls the made-up name a made-up name a fictitious namefictitious name..





In selecting a fictitious name, sole In selecting a fictitious name, sole proprietors must not choose a proprietors must not choose a company name already in use.company name already in use.





There usually are few formal There usually are few formal requirements in establishing a sole requirements in establishing a sole proprietorship. proprietorship.





Some may be required to haveSome may be required to have


Licenses to legally operate as Licenses to legally operate as businessesbusinessesOccupational licensesOccupational licensesCertain types of liability insuranceCertain types of liability insurance




Some states require a formal filing Some states require a formal filing when a sole proprietorship begins or if when a sole proprietorship begins or if the sole proprietorship chooses to use the sole proprietorship chooses to use a fictitious name.a fictitious name.





Ease of creationEase of creationTotal controlTotal controlRetention of profitsRetention of profitsFreedom from excessive Freedom from excessive governmental controlgovernmental controlOne-time taxation of profitsOne-time taxation of profits

Advantages of a Sole Advantages of a Sole Proprietorship Proprietorship




Ease of Creation Ease of Creation

A sole proprietorship is the easiest A sole proprietorship is the easiest form of business association to form. form of business association to form. To create a sole proprietorship, a To create a sole proprietorship, a person needs only to begin the person needs only to begin the operation of the business.operation of the business.




Ease of Creation Ease of Creation

When a sole proprietor decides to hire When a sole proprietor decides to hire workers, he or she will have to contact workers, he or she will have to contact the Internal Revenue Service to obtain the Internal Revenue Service to obtain an an employer identification numberemployer identification number, , which is assigned for income tax which is assigned for income tax purposes.purposes.




Total Control Total Control

In a sole proprietorship, while the sole In a sole proprietorship, while the sole proprietor is free to seek the advice of proprietor is free to seek the advice of experts, such as accountants, experts, such as accountants, attorneys, and financial planners, all attorneys, and financial planners, all decisions are up to the sole proprietor.decisions are up to the sole proprietor.




Retention of Profits Retention of Profits

Sole proprietors get to keep all of the Sole proprietors get to keep all of the profits that the firm makes. profits that the firm makes.

They must, of course, pay taxes on They must, of course, pay taxes on those profits.those profits.




Freedom from Excessive Freedom from Excessive Governmental Control Governmental Control

The regulations a sole proprietor must The regulations a sole proprietor must follow are much less cumbersome follow are much less cumbersome than the regulations required of other than the regulations required of other types of business ownership, such as types of business ownership, such as limited partners and corporations.limited partners and corporations.




One-Time Taxation of Profits One-Time Taxation of Profits

Sole proprietorships do not pay taxes Sole proprietorships do not pay taxes as a business. Rather, the individual as a business. Rather, the individual sole proprietor who owns the business sole proprietor who owns the business pays taxes based upon his or her pays taxes based upon his or her income, which includes any profits income, which includes any profits made by the business.made by the business.




Disadvantages Disadvantages of a Sole Proprietorship of a Sole Proprietorship

Limited capitalLimited capitalUnlimited liabilityUnlimited liabilityLimited human resourcesLimited human resourcesLimited lifetimeLimited lifetime




Limited Capital Limited Capital

All money used to finance the All money used to finance the business must come from the business must come from the proprietor’s savings or income, or from proprietor’s savings or income, or from loans obtained by the proprietor.loans obtained by the proprietor.




Unlimited Liability Unlimited Liability

Unlimited liabilityUnlimited liability means that the means that the business owner is responsible for all business owner is responsible for all losses experienced by the business.losses experienced by the business.




Limited Human Resources Limited Human Resources

As the only person responsible for the As the only person responsible for the decisions that affect the business, a decisions that affect the business, a sole proprietor is subject to sole proprietor is subject to tremendous stress. Even if he or she tremendous stress. Even if he or she consults experts, the decision-making consults experts, the decision-making responsibility still falls upon the owner. responsibility still falls upon the owner.




Limited Lifetime Limited Lifetime

Unlike a corporation, which has Unlike a corporation, which has perpetual existence, a sole perpetual existence, a sole proprietorship lasts only as long as the proprietorship lasts only as long as the proprietor. When the proprietor dies or proprietor. When the proprietor dies or sells or closes the business, the sells or closes the business, the company no longer exists.company no longer exists.




Amira wants to start her own business. She really doesn’t like the idea of working for someone else—she wants work to suit her own schedule and she has very definite ideas about how a business should be run.




Her idea is to open a slushee and fruit juice stand near the city park. However, she estimates the stand will cost about $7,500 to open and she has only saved $4,000.




Given Amira’s circumstances, name one advantage Amira would find to having a sole proprietorship. Name one disadvantage.




ANSWERANSWER

Advantage—total control; disadvantage—limited capital.




Reviewing What You Learned

1. What is a sole proprietorship?

Section 27.1 Assessment





A form of business that is owned and operated by one person.


Answer





2. How does a sole proprietorship begin?






To create a sole proprietorship, a person needs only to begin the operation of the business.


Answer





3. What are the advantages of a sole proprietorship?






Ease of creation, total control, retention of profits, freedom from excessive governmental control, and one-time taxation of profits.


Answer





4. What are the disadvantages of a sole proprietorship?






Limited capital, unlimited liability, limited human resources, and limited lifetime.


Answer





Critical Thinking ActivityLicensing Requirements Why does the government interfere in the formation and regulation of some sole proprietorships by creating licensing requirements?





Critical Thinking Activity AnswerLicensing Requirements Answers will vary but could recognize that licensing requirements may be necessary for public safety.





Legal Skills in ActionThe Responsibilities of a Sole Proprietor Your Aunt Matilda, a sole proprietor, owns a store called Scrapbook Heaven. She has decided to hire you and your friend Ted to work in the store on the weekends.





Legal Skills in ActionThe Responsibilities of a Sole Proprietor Aunt Matilda is convinced that hiring you and Ted will not involve any new entanglement with the government.





Legal Skills in ActionThe Responsibilities of a Sole Proprietor Send Aunt Matilda an e-mail message that explains the responsibilities of a sole proprietor who hires additional workers.





Legal Skills in Action AnswerThe Responsibilities of a Sole Proprietor E-mails will vary, but should include that once Aunt Matilda hires you and Ted, she will have to contact the Internal Revenue Service to obtain employer identification numbers.

Sole Proprietorship Sole Proprietorship End of Section 27.1End of Section 27.1




What You’ll Learn

How to define general partnership (p. 588)How to define general partnership (p. 588)

How to identify the ways that a partnership How to identify the ways that a partnership can be created (p. 588)can be created (p. 588)




What You’ll Learn

How to identify partnership rights in How to identify partnership rights in relation to property (p. 593)relation to property (p. 593)

How to explain the effects of the How to explain the effects of the dissolution of a partnership (p. 597)dissolution of a partnership (p. 597)





Understanding the nature of a partnership Understanding the nature of a partnership will help you decide when to form that type of will help you decide when to form that type of business association.business association.




Legal Terms

general partnership (p. 588)general partnership (p. 588)articles of partnership (p. 588)articles of partnership (p. 588)partnership by proof of existence (p. 590)partnership by proof of existence (p. 590)partnership by estoppel (p. 591)partnership by estoppel (p. 591)tenancy in partnership (p. 593)tenancy in partnership (p. 593)




Legal Terms

joint liability (p. 596)joint liability (p. 596)dissolution (p. 597)dissolution (p. 597)registered limited liability partnership registered limited liability partnership (p. 598)(p. 598)limited partnership (p. 599)limited partnership (p. 599)




The Nature of Partnership Forming a General PartnershipTypes of PartnersPartnership Property Property Rights of PartnersDuties of the PartnersLiability of the Partners





Dissolving a Partnership Effects of DissolutionDistribution of Assets





The Revised Uniform Partnership Act Registered Limited Liability Partnerships Limited Partnerships






What is a partnership?




Partnership law is largely found in the Partnership law is largely found in the Uniform Partnership Act (UPA).Uniform Partnership Act (UPA).

The UPA defines partnership as “an The UPA defines partnership as “an association of two or more persons to association of two or more persons to carry on a business for profit.”carry on a business for profit.”

The Nature of Partnership The Nature of Partnership




More capital and credit available.More capital and credit available.Burden of work is shared.Burden of work is shared.Responsibility for losses shared.Responsibility for losses shared.

Advantages of Partnerships Advantages of Partnerships




Partners share in the liabilities.Partners share in the liabilities.Each partner is responsible for the Each partner is responsible for the others’ actions.others’ actions.Must share profits.Must share profits.Disagreements among partners.Disagreements among partners.Death of a partner dissolves the Death of a partner dissolves the partnership. partnership.

Disadvantages of Partnerships Disadvantages of Partnerships




When two or more competent parties When two or more competent parties combine their money, labor, and skills combine their money, labor, and skills for the purpose of carrying on a lawful for the purpose of carrying on a lawful business, they create a business, they create a general general partnershippartnership. .

Forming a General Partnership Forming a General Partnership




General partnerships can be formed in General partnerships can be formed in one of three ways: one of three ways:

Forming a General Partnership Forming a General Partnership

1.1. By agreementBy agreement2.2. By proof of existenceBy proof of existence3.3. By estoppelBy estoppel




27.227.2

Partnership FormationPartnership Formation

Partnership by

contract

Partnership by

proof of

existence Partnership by

estoppel

Express agreement drawn up by partners

Articles of partnership

Individuals form partnership because of their

method of doing business

Sharing of profits is prima facie evidence

Third party led to believe a partnership exists

No true partnership created




Forming a general partnership by Forming a general partnership by agreement requires the valid assent of agreement requires the valid assent of all parties. Such an agreement is all parties. Such an agreement is usually express and may be written or usually express and may be written or oral.oral.

By Agreement By Agreement




Under the Statue of Frauds, if a Under the Statue of Frauds, if a partnership is to last more than a year partnership is to last more than a year or if the partnership is formed to sell, or if the partnership is formed to sell, buy, or lease real property, it must be buy, or lease real property, it must be evidenced in writing.evidenced in writing.





The partnership agreement is known The partnership agreement is known as the as the articles of partnershiparticles of partnership, or as , or as the articles of copartnership.the articles of copartnership.





Parties to the agreementParties to the agreementSpecific nature, scope, and limits of Specific nature, scope, and limits of the businessthe businessPlanned duration of the businessPlanned duration of the business

Important Points Covered Important Points Covered in an Agreement in an Agreement




Amount of each partner’s original Amount of each partner’s original investment and procedure for future investment and procedure for future investmentsinvestmentsProvisions regarding salaries, Provisions regarding salaries, withdrawal of funds, and the division withdrawal of funds, and the division of profitsof profits





Terms under which a partner may Terms under which a partner may withdraw from the partnershipwithdraw from the partnership





Sometimes a partnership can be Sometimes a partnership can be formed because of the way that two or formed because of the way that two or more people conduct their business more people conduct their business together.together.

By Proof of Existence By Proof of Existence




Such a partnership, which forms Such a partnership, which forms regardless of the label given to the regardless of the label given to the enterprise or the intent of the parties enterprise or the intent of the parties involved, is termed a involved, is termed a partnership by partnership by proof of existence.proof of existence.

By Proof of Existence By Proof of Existence




If someone does or says something If someone does or says something that leads a third party to believe that that leads a third party to believe that a partnership exists, then a court may a partnership exists, then a court may treat the arrangement as a treat the arrangement as a partnership by estoppelpartnership by estoppel..

By Estoppel By Estoppel




This type of partnership is not a real This type of partnership is not a real partnership. It is a way for the court to partnership. It is a way for the court to prevent injustice because someone prevent injustice because someone has relied on the words or actions of has relied on the words or actions of another party and has acted another party and has acted accordingly.accordingly.

By Estoppel By Estoppel




There are five types of partners: There are five types of partners:

Types of Partners Types of Partners

1.1. GeneralGeneral2.2. SecretSecret3.3. SilentSilent4.4. DormantDormant5.5. LimitedLimited




Each of these partners is a co-owner Each of these partners is a co-owner of the business and has some liability of the business and has some liability for the debts of the firm.for the debts of the firm.





27.227.2


Type of Partner Participation in the Business

Relationship to the Public

Degree of Liability

General Active Known Unlimited

Secret Active Unknown Unlimited

Silent Not active Known Unlimited

Dormant Not active Unknown Unlimited

Limited Not active Known Limited




It is important to distinguish between It is important to distinguish between property that belongs to the property that belongs to the partnership and property that belongs partnership and property that belongs to individual partners.to individual partners.

Partnership PropertyPartnership Property




Is property contributed directly to Is property contributed directly to the partnership when the the partnership when the partnership is created.partnership is created.Is property that is bought with Is property that is bought with partnership funds.partnership funds.





In addition, the court may ask certain In addition, the court may ask certain questions to determine whether or not questions to determine whether or not certain property belongs to the certain property belongs to the partnership.partnership.





Certain rights arise regarding property Certain rights arise regarding property that belongs to the partnership. These that belongs to the partnership. These include: include:

Property Rights of the Partners Property Rights of the Partners

The right to use the propertyThe right to use the propertyThe right to manage the firmThe right to manage the firmThe right to share in the profits The right to share in the profits




Partners are co-owners of all the real Partners are co-owners of all the real and personal property included in the and personal property included in the partnership. partnership.

This co-ownership is called This co-ownership is called tenancy tenancy in partnershipin partnership by the UPA. by the UPA.

Right to Use Property Right to Use Property




As a result, the partners can use the As a result, the partners can use the property for partnership business; property for partnership business; however, there are limitations. however, there are limitations.

For example, a partner cannot, on his For example, a partner cannot, on his or her own, transfer ownership of the or her own, transfer ownership of the property.property.

Right to Use Property Right to Use Property




Unless a partner’s rights are limited in Unless a partner’s rights are limited in the partnership agreement, each the partnership agreement, each partner has an equal voice in partner has an equal voice in managing the partnership’s business.managing the partnership’s business.

Right to Manage the Firm Right to Manage the Firm




Unless there is an agreement to the Unless there is an agreement to the contrary, partners share equally in the contrary, partners share equally in the profits, regardless of their initial capital profits, regardless of their initial capital contribution or the time devoted by contribution or the time devoted by each partner to the business.each partner to the business.

Right to Share in the Profits Right to Share in the Profits




Partners must trust one another. Partners must trust one another.

Each partner is an agent of the other Each partner is an agent of the other partner and has duties comparable to partner and has duties comparable to those of an agent.those of an agent.

Duties to the Partners Duties to the Partners




1.1. To always act in good faith and in To always act in good faith and in the best interests of the firm.the best interests of the firm.





2.2. To always use their best skill and To always use their best skill and judgment in looking after the firm’s judgment in looking after the firm’s affairs.affairs.





3.3. To be loyal to the firm and put the To be loyal to the firm and put the firm’s interests first.firm’s interests first.





Partners have unlimited liability for all Partners have unlimited liability for all of the debts of the partnership of the debts of the partnership incurred while they are partners, even incurred while they are partners, even to the extent of their personal assets.to the extent of their personal assets.

Liability of the Partners Liability of the Partners




Partners are liable to other Partners are liable to other members of the firm for their share members of the firm for their share of the firm’s debts.of the firm’s debts.Partners share losses in the same Partners share losses in the same proportion that they share profits.proportion that they share profits.





Partners are jointly liable with their Partners are jointly liable with their partners on contracts entered into by partners on contracts entered into by any member of the firm acting within any member of the firm acting within the actual or apparent scope of the the actual or apparent scope of the firm’s business.firm’s business.





Joint liabilityJoint liability means that in the event means that in the event of a lawsuit, all the partners must be of a lawsuit, all the partners must be sued together. Partners are jointly and sued together. Partners are jointly and severally (separately) liable for torts severally (separately) liable for torts committed within the scope of the committed within the scope of the firm’s business.firm’s business.






How do partnerships come to an end?




A A dissolutiondissolution is a legal detachment. is a legal detachment. The dissolution of a partnership is a The dissolution of a partnership is a change in the relationship of the change in the relationship of the partners that occurs when any partner partners that occurs when any partner stops being associated with the stops being associated with the business.business.

Dissolving a Partnership Dissolving a Partnership




Dissolution does not necessarily bring Dissolution does not necessarily bring the business to an end. the business to an end.

Other partners may want to continue Other partners may want to continue in business together.in business together.

Effects of Dissolution Effects of Dissolution




If so, If so,


New financial arrangements need to New financial arrangements need to be made.be made.A new agreement must be drawn A new agreement must be drawn up.up.




Public notice is usually given to Public notice is usually given to relieve retiring partners from liability relieve retiring partners from liability for any new debts.for any new debts.





Upon dissolution, an accounting of the Upon dissolution, an accounting of the firm’s financial affairs is necessary to firm’s financial affairs is necessary to determine how the firm’s assets will determine how the firm’s assets will be distributed or divided. be distributed or divided.

Distribution of Assets Distribution of Assets




Liabilities are paid in this order:Liabilities are paid in this order:


1.1. Money owed to creditors other than Money owed to creditors other than partners.partners.

2.2. Money lent by partners to the firm.Money lent by partners to the firm.




3.3. The original money paid into the The original money paid into the partnership by each partner.partnership by each partner.

4.4. The surplus, if any, owed to the The surplus, if any, owed to the partners.partners.





If the business is insolvent:If the business is insolvent:


Assets are sold to pay the creditors.Assets are sold to pay the creditors.Partners are individually liable for Partners are individually liable for any unpaid balance that the sale of any unpaid balance that the sale of the assets will not cover.the assets will not cover.




When Jess and Joe’s Café closed, they had $38,000 and owed $25,000 to creditors. Neither Jess nor Joe had any outstanding loans to the business, but each had paid $5,000 into the business to start it.




Will Jess and Joe get their money back? Will there be any additional money left over?




ANSWERANSWER

Yes, Jess and Joe will get their money back. There will $3,000 left over. $38,000 – 25,000 = 13,000 –10,000 = $3,000.





What is the Revised Uniform Partnership Act?




Since the UPA was written in 1914, it Since the UPA was written in 1914, it has undergone extensive revision. has undergone extensive revision. This new variation of the act is This new variation of the act is referred to as the Revised Uniform referred to as the Revised Uniform Partnership Act (RUPA).Partnership Act (RUPA).

The Revised The Revised Uniform Partnership Act Uniform Partnership Act





What is a registered limited liability partnership?




A A registered limited liability registered limited liability partnership (RLLP) partnership (RLLP) is a new type of is a new type of partnership designed to eliminate a partnership designed to eliminate a major disadvantage of the general major disadvantage of the general partnership—joint and several liability.partnership—joint and several liability.

Registered Limited Registered Limited Liability Partnerships Liability Partnerships




Partners of an RLLP can escape joint Partners of an RLLP can escape joint and several liability for the torts, and several liability for the torts, wrongful acts, negligence, or wrongful acts, negligence, or misconduct of other partners by misconduct of other partners by registering with the appropriate state registering with the appropriate state office.office.

Registered Limited Registered Limited Liability Partnerships Liability Partnerships





What is a limited partnership?




According to RUPA, a According to RUPA, a limited limited partnershippartnership is “a partnership formed is “a partnership formed by two or more persons. . . having one by two or more persons. . . having one or more general partners and one or or more general partners and one or more limited partners.”more limited partners.”

Limited Partnership Limited Partnership




Limited partnerships are often used in Limited partnerships are often used in real estate ventures and tax shelter real estate ventures and tax shelter investments.investments.

Limited Partnership Limited Partnership





1. What is a general partnership?






An association of two or more persons to carry on a business for profit.


Answer





2. How can a partnership be created?






By agreement, by proof of existence, and by estoppel.


Answer





3. What are the partner’s rights in relation to property?






The right to use partnership property, the right to manage the firm, and the right to share profits.


Answer





4. What are the effects of the dissolution of a partnership?






Dissolution need not end a partnership. Other partners may wish to continue the business.


Answer





New financial arrangements must be made in regard to the new firm. A new agreement must be drawn up regarding the conduct of the new firm.


Answer





Public notice must usually be given in order to relieve the retiring partners from liability for any new debts created by the new firm.


Answer




What You’ll Learn

How to define corporation (p. 606)How to define corporation (p. 606)

How to distinguish among various types of How to distinguish among various types of corporations (p. 607)corporations (p. 607)

How to create a corporation (p. 608)How to create a corporation (p. 608)




What You’ll Learn

How to finance a corporation (p. 614)How to finance a corporation (p. 614)

How to distinguish between a corporation How to distinguish between a corporation and a limited liability company (p. 616)and a limited liability company (p. 616)





Understanding the nature of a corporation Understanding the nature of a corporation will help you decide when to form one rather will help you decide when to form one rather than the other associations that are than the other associations that are available.available.




Legal Terms

corporation (p. 606)corporation (p. 606)shareholder (p. 606)shareholder (p. 606)share (p. 606)share (p. 606)promoter (p. 608)promoter (p. 608)articles of incorporation (p. 610) articles of incorporation (p. 610)




Legal Terms

certificate of incorporation (p. 612)certificate of incorporation (p. 612)common stock (p. 614)common stock (p. 614)dividends (p. 614)dividends (p. 614)preferred stock (p. 614)preferred stock (p. 614)limited liability company (p. 616)limited liability company (p. 616)




The Nature of a Corporation Advantages of a CorporationDisadvantages of a CorporationTypes of Corporations





Forming a CorporationThe Incorporation ProcessCorporate Financing


Forming a Limited Liability Company




Incorporation Problems De Facto CorporationCorporation by EstoppelPiercing the Corporate Veil






What is a corporation?




A A corporationcorporation is a body formed and is a body formed and authorized by law to act as a single authorized by law to act as a single person, distinct from its members or person, distinct from its members or owners. owners.

The Nature of a Corporation The Nature of a Corporation




About 90 percent of all business in About 90 percent of all business in the United States is done by the United States is done by corporations.corporations.Not all corporations are large Not all corporations are large businesses. Approximately 40 businesses. Approximately 40 percent of all corporations employ percent of all corporations employ fewer than five employees.fewer than five employees.





An individual who owns shares of a An individual who owns shares of a corporation is called a corporation is called a shareholdershareholder or a stockholder. or a stockholder. A A shareshare is a single unit of is a single unit of ownership of a corporation.ownership of a corporation.





Each shareholder has one vote for Each shareholder has one vote for each share of stock that he or she each share of stock that he or she owns.owns.Shareholders cast their votes to Shareholders cast their votes to elect a board of directors whose elect a board of directors whose duty is to direct the corporation’s duty is to direct the corporation’s business.business.





Selling shares enables a Selling shares enables a corporation to tap into a large corporation to tap into a large source of capital.source of capital.Shareholder’s liability is limited to Shareholder’s liability is limited to the amount of money he or she paid the amount of money he or she paid for shares in the corporation.for shares in the corporation.

Advantages of a Corporation Advantages of a Corporation




It is a legal entity and has the power It is a legal entity and has the power to make contracts, buy and sell to make contracts, buy and sell goods, and sue and be sued.goods, and sue and be sued.It has continuity of existence, It has continuity of existence, regardless of the lifespans of regardless of the lifespans of founders, shareholders, and founders, shareholders, and directors.directors.

Advantages of a Corporation Advantages of a Corporation




A corporation’s income may be A corporation’s income may be taxed more than once. First as the taxed more than once. First as the company profits; then shareholders’ company profits; then shareholders’ dividends become part of their dividends become part of their taxable income.taxable income.Large corporations face extensive Large corporations face extensive government regulation.government regulation.

Disadvantages of a Corporation Disadvantages of a Corporation




Original founders can lose not only Original founders can lose not only control but also actual ownership.control but also actual ownership.Because of the prominence of some Because of the prominence of some corporations, business decisions corporations, business decisions may be subject to close scrutiny.may be subject to close scrutiny.

Disadvantages of a Corporation Disadvantages of a Corporation




28.128.1

Types of CorporationsTypes of Corporations





How is a corporation formed?




Each state has its own version of Each state has its own version of corporate law. States may use:corporate law. States may use:

Forming a Corporation Forming a Corporation

The Model Business Corporation The Model Business Corporation Act (MBCA) Act (MBCA) The Revised Model Business The Revised Model Business Corporation Act (RMBCA) Corporation Act (RMBCA) Their own statutes Their own statutes




1.1. A A promoterpromoter carries out the carries out the incorporation process by taking the incorporation process by taking the initial steps to organize and finance initial steps to organize and finance a business.a business.

2.2. Promoters choose a corporate Promoters choose a corporate name.name.

The Incorporation Process The Incorporation Process




3.3. Promoters are responsible for Promoters are responsible for drawing up and filing the drawing up and filing the articles of articles of incorporationincorporation, an application for , an application for incorporation of a business that incorporation of a business that describes a corporation’s describes a corporation’s organization, powers, and authority. organization, powers, and authority.





4.4. A filing fee completes the A filing fee completes the application.application.





5.5. After the application is approved by After the application is approved by the secretary of state, the the secretary of state, the corporation receives a corporation receives a certificate of certificate of incorporationincorporation, its official , its official authorization to do business in the authorization to do business in the state (also called a charter).state (also called a charter).





6.6. Initial shareholders elect a board of Initial shareholders elect a board of directors who replace the original directors who replace the original incorporators.incorporators.

7.7. Directors elect a chairman and top Directors elect a chairman and top corporate officers to manage the corporate officers to manage the company.company.





The articles of incorporation usually The articles of incorporation usually include the following information:include the following information:

Articles of Incorporation Articles of Incorporation

Name of the corporation, including Name of the corporation, including the words the words company, incorporatedcompany, incorporated, , or or corporationcorporation or appropriate or appropriate abbreviations.abbreviations.




Proposed duration of the Proposed duration of the corporation.corporation.Purpose(s) of the corporation.Purpose(s) of the corporation.Number, classes, and value of Number, classes, and value of corporate shares.corporate shares.





Shareholders’ rights in relation to Shareholders’ rights in relation to shares, classes of shares, and shares, classes of shares, and special shares.special shares.Address of the original registered or Address of the original registered or statutory agent.statutory agent.





Names and signature of the initial Names and signature of the initial directors.directors.Names and signatures of the Names and signatures of the incorporators.incorporators.





A corporation may choose to issue A corporation may choose to issue several different kinds of stock. Along several different kinds of stock. Along with each share of stock come certain with each share of stock come certain rights. rights.

Corporate Financing Corporate Financing




Common stockCommon stock is the basic form of is the basic form of corporation ownership. corporation ownership.

Types of Stock Types of Stock

Owners have voting rights. Owners have voting rights. It pays It pays dividendsdividends, or profits, to the , or profits, to the shareholders based on the shareholders based on the corporation’s performance.corporation’s performance.




Preferred stockPreferred stock is the second type of is the second type of stock issued by a corporation. stock issued by a corporation.

Types of Stock Types of Stock

Owners have no voting rights.Owners have no voting rights.But do receive a fixed dividend.But do receive a fixed dividend.Preferred stock dividends are paid Preferred stock dividends are paid before common stock dividends.before common stock dividends.




Draw a flow chart that describes the relationship between the following people.

Board of directorsBoard of directorsInitial shareholdersInitial shareholdersChairpersonChairpersonTop corporate officers Top corporate officers




ANSWERANSWER

Initial shareholders hire board of directors who elect the chairperson and top corporate officers.





What is a limited liability company?




A A limited liability company (LLC)limited liability company (LLC) is is a new type of business enterprise that a new type of business enterprise that has been adopted by all states. It is a has been adopted by all states. It is a combination of a partnership and a combination of a partnership and a corporation.corporation.

Forming a Limited Forming a Limited Liability Company Liability Company




LLCs offer limited liability to its LLCs offer limited liability to its owners.owners.Like the partners in a partnership, Like the partners in a partnership, the owners of an LLC escape the owners of an LLC escape double taxation.double taxation.





LLCs are statutory entities—they can LLCs are statutory entities—they can be formed only if owners follow the be formed only if owners follow the legal steps required—and must also legal steps required—and must also have a statutory agent for service of have a statutory agent for service of process.process.






How does the law deal with incorporation problems?




The courts have developed two The courts have developed two doctrinesdoctrines——de factode facto corporations and corporations and corporation by estoppelcorporation by estoppel——to deal with to deal with incorporation problems.incorporation problems.

Incorporation ProblemsIncorporation Problems




Even when making a good faith Even when making a good faith attempt to incorporate, promoters attempt to incorporate, promoters sometimes inadvertently make an sometimes inadvertently make an error in filing, or fail to complete the error in filing, or fail to complete the incorporation. incorporation.

De FactoDe Facto Corporation Corporation




The laws says that, although the The laws says that, although the corporation does not exist in law (corporation does not exist in law (de de jurejure), it does exist in fact (), it does exist in fact (de factode facto). ). This type of corporation is called a This type of corporation is called a de de factofacto corporation. corporation.

De FactoDe Facto Corporation Corporation




Like other estoppel doctrines, Like other estoppel doctrines, corporation by estoppel stops people corporation by estoppel stops people from denying the consequences of from denying the consequences of their own actions.their own actions.

Corporation by Estoppel Corporation by Estoppel




Corporation by estoppel usually Corporation by estoppel usually occurs when some party has been occurs when some party has been willing to treat a person or a group of willing to treat a person or a group of people as a corporation, generally people as a corporation, generally reaping some benefit from the reaping some benefit from the relationship.relationship.





When this happens, the court will not When this happens, the court will not allow that party to then deny the allow that party to then deny the existence of the corporation because existence of the corporation because doing so would be unfair.doing so would be unfair.





Sometimes there are extreme Sometimes there are extreme circumstances in which the courts will circumstances in which the courts will deny shareholders the benefits of deny shareholders the benefits of limited liability and hold them limited liability and hold them personally liable. This is known as personally liable. This is known as piercing the corporate veilpiercing the corporate veil..

Piercing the Corporate Veil Piercing the Corporate Veil





1. What is a corporation? Who are its owners?






An artificial person created by law owned by shareholders or stockholders.


Answer





2. What are the two main types of corporations?






Public and private.


Answer





3. What are the steps necessary to form a corporation?






Promoters choose a corporate name, draw up and file articles of incorporation with the office of the secretary of state, pay the filing fee, and receive the certificate of incorporation;


Answer





initial shareholders elect a board of directors; and directors elect a chairman and top officers to manage the corporation.


Answer





4. How are corporations financed?






By selling shares of stock in the corporation.


Answer





5. What is the difference between a corporation and a limited liability company?






A limited liability company is a combination of a partnership and a corporation. Like a corporation, it offers limited liability to its owners. Like a partnership, the owners escape double taxation.


Answer





Critical Thinking ActivityAdvantages and Disadvantages of a Corporation If you had a chain of very successful restaurants in a large city, why might you decide to incorporate the business? Why might you decide not to incorporate?





Critical Thinking Activity AnswerAdvantages and Disadvantages of a Corporation Answers will vary, but could include raising capital for further expansion as an advantage and additional government regulation as a disadvantage.





Legal Skills in ActionForming a Corporation Your brother, Dirk, wants to start a business manufacturing playground equipment using recyclable materials, such as plastics and old tires.





Legal Skills in ActionForming a Corporation He wants to organize his company as a corporation in order to raise capital to build his manufacturing plant, but he isn’t sure how to go about it.





Legal Skills in ActionForming a Corporation Write a letter to Dirk outlining the steps he should take to incorporate his business.





Legal Skills in Action AnswerForming a Corporation Letters will vary, but should include contacting the secretary of state’s office in Dirk’s state.

Sole Proprietorship Chapter 12: Sole Prop., Partnerships, Corporations.

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Transcript of Sole Proprietorship Chapter 12: Sole Prop., Partnerships, Corporations.