Chapter 19 Starting a Business LLCs and Other Options Sole Proprietorships an unincorporated business owned by one person Corporations o Corporations in General Limited Liability a corporation protects managers and investors from personal liability for the debts of the corporation and the actions of others but not against liability for their own negligence or other torts and crimes Transferability of Interests Duration perpetual existence Logistics Taxes double taxation o S Corporations Shareholders of S corps have both the limited liability of a corporation and the tax status of a partnership o Close Corporations a company whose stock is not publicly traded Also known as a closely held corporation Limited Liability Companies LLCs offer the limited liability of a corporation and the tax status of a partnership o Limited Liability o Tax Status o Formation a charter an operating agreement o Flexibility can have members that are corporations partnerships nonresident aliens can have different classes of stock no mandatory annual meetings o Transferability of Interests o Duration o Going Public once it goes public it loses its favorable tax status and is taxed as a corporation o Changing Forms changing from corporation to LLC would levy a tax on the assets but changing from a partnership to a LLC or from an LLC to a corporation is not considered a sale o Piercing the LLC Veil if corporate shareholders do not comply with the technicalities of the law they may be held personally liable for the debts of the corporation o Legal Uncertainty this involves managers duties to the members of the organization And derivative lawsuit in the name of the corporation against the managers is not clear if members of an LLC have the same right o Choices LLC v Corporation four reasons for C corporations 1 arcane tax issues 2 C corporations are easier to merge sell or take public 3 corporations can issue stock options and 4 the general legal uncertainty involving LLCs Socially Conscious Organizations Flexible purpose organizations benefit corporations B corporations Low profit limited liability companies L3Cs and Community Interest Companies CICs General Partnerships an unincorporated association of two or more co owners who operate a business for profit o Taxes partnerships are not a taxable entity o Liability personally liable for the debts of the enterprise o Management Management Rights unless the partnership agrees otherwise partners share both profits and losses equally and each partner has an equal right to manage the business Management Duties partners have a fiduciary duty to the partnership 1 partners are liable to the partnership for gross negligence or intentional misconduct 2 partners cannot compete with the partnership 3 a partner may not take an opportunity away from the partnership unless the other partners consent 4 if a partner engages in a conflict of interests he must turn over to the partnership any profits he earned from that activity o Transfer of Ownership the capital needs of the partnership must be provided by contributions from partners or by borrowing Likewise a partner only has the right to transfer the value of her partnership interest not the interest itself o Formation if two or more people do business together sharing management profits and losses they have a partnership whether they know it or not and are subject to all the rules of partnership law Partnership by Estoppel in this non partners are treated as if they were actually partners are forced to share liability It exists if 1 participants tell other people that they are partners or they allow other people to say so 2 a third party relies on this assertion and 3 the third party suffers harm o Termination when a partner quits that event is called dissociation Then the partnership can either buy out the departing partners and continue in business or wind up the buz and terminate the partnership Limited Liability Partnerships LLP the partners are not liable for the debts of the partnership Limited Partnerships and Limited Liability Limited Partnerships o Structure must have at least one limited partner and one general partner o Liability limited partners are not personally liable but general partners are In a limited liability limited partnership the general partner is not personally liable for the debts of the partnership o Taxes once o Formation must file a certificate of limited partnership o Management general partners have it Limited partners are essentially passive investors with few management rights but limited partnership agreements can expand the rights of them o Transfer of Ownership transfer the value but they can sell give away the interest itself if the partnership permits o Duration perpetual existence Professional Corporations PCs provide more liability protection than a general partnership Joint Ventures a partnership for a limited purpose Franchises Chapter 20 Corporations Promoter s Liability o Promoter someone who organizes a corporation A promoter is personally liable on any contract he signs before the corporation is formed o Adopt agree to be bound by the terms of a contract o Novation a new contract with different parties The promoter can get off the hook personally only if the other party agrees to a novation Incorporation Process o Where to Incorporate a company is called a domestic corporation in the state where it incorporates and a foreign corporation everywhere else Delaware is good choice b c 1 laws that favor management 2 an efficient court system 3 an established body of precedent o Charter Name Address and Registered Agent Incorporator Purpose Stock Par Value Number of Shares Classes and Series see below Defining the rights of a class or series of stock is like baking a cake the stock can contain virtually any combination of 1 Dividend rights 2 Voting Rights and 3 Liquidation Rights Owners of preferred stock have preferrence on dividends and also typically in liquidation If holders of cumulative preferred stock miss their dividend one year common shareholders cannot receive a dividend until the cumulative preferred shareholders have been paid all that they are owned no matter how long that takes Alternatively holders of non cumulative preferred stock lose an annual dividend for good if the company cannot afford it in the year it is due Common stock is last in line for any corporate payouts including dividends and liqudation payments Venture captialists often choose a type of stock