Legal Studies 1101 Lecture Notes Professor Hodge April 8 2014 I Types of Entities a Sole Proprietorship i Creation b Partnership i Creation 1 One owner least expensive easiest to create 2 You do not have to file any forms with the government but you may have to obtain a license of a permit ii Taxes Persona income tax known as a schedule C of business iii tax form If you wish to operate under a fictitious name you must file a fictions name registration iv You can reduce the risk of a sole proprietorship by keeping all of your assets in joint names with a spouse and or by buying liability insurance 1 When two 2 people or more operate a business as co owners 2 Share profits and debts losses equally 3 Can be formed through oral written or implied 4 Cost is minimal 5 Parties responsible for all debts 6 A partnership has been created if If there is sharing of profits a b A joint ownership of business assets c Equal rights to the management of the business ii Liability 1 2 Joint and several liability If a creditor attempts to collect debts but cannot they can file a claim against one or all partners Indemnification The owner who pays a debt unjustly over another partner whereas all debts must be shared equally that partner can sue the other partner s iii Taxation A partnership is not a taxable entity 1 Must show revenue through the individual partners Schedule K 1 iv Termination 1 Termination occurs if there is a change in parties 2 2 step process a Dissolving b Winding up clear up all debts let third party creditors know that the business is shutting down 3 Buy sell agreement What happens in the event of a partner s death a You would decide that the person who died heir s would allows the existing partner to buy the business it would help this situation is the partners had taken out life insurance on each other so that in the event of a death of a partner the other partner would be able to pay the other partner s heirs for the business c Limited Partnership i Creation 1 One of more general partners as well as one or more limited partners 2 Certificate of Limited Partnership Contains the name of the partnership and the names of all partners including the limited partners ii Management iii Liability 1 Must be run by general partners without active involvement from the limited partners 1 Differs for general and limited partners depends on the amount each partner has invested in the company If a limited partner becomes involved in the business the liability can fall on that person if no change to the certificate is made 2 iv Dissolution 1 A general or a limited partner can be dissolved for the reasons listed under Liability above 2 Death bankruptcy of a limited partner does not dissolve d Limited Liability Partnership LLP the business i Creation 1 Hybrid between partnership corporation 2 Not all states recognize this hybrid 3 Business forms must be registered with the state as a limited liability partnership the name must include either limited or limited liability company ii Management All partners manage on routine basis iii Henry Chamberlain v Charles Irving page 376 e Family Limited Liability Partnership FLLP f Corporation i Creation 1 Separate entity from its owners allows the corporation to a Own assets b Borrow c Hire employees d Enter into contracts 2 Articles of Incorporation a Since a corporation is governed through state law you must file an Article of Incorporation with the state office along with a fee b Must include i Corporate name ii Nature and Purpose iii Duration iv Capital Structure v vi Registered Office Internal Organization 3 Certificate of Incorporation a The company s birth certificate ii Continuity 1 Status is not changed when there is a death or sale of stock by a shareholder 2 Looked at as it s own person iii Management 1 Board of Directors a Elected by shareholders b Board of directors select corporate officers ex president secretary etc 2 Business Judgment Rule Guides the conduct of the directors iv Liability 1 Shareholders own the corporation 2 Piercing the corporate veil When a fraudulent business is taken to court you can attack a singular person instead of that person using the corporation as shield to protect their personal assets 3 Shareholders can inspect and copy the corporate books and records but can be limited if suspected of espionage v Taxation Double taxed 1 2 Tax corporate profits and individual profits also vi Gilbert v James Russell Motors Inc page 383 vii g Sub Chapter S Corporation i Name determines the way the corporation is treated ii Profits are passed on to the shareholders then taxed to them as profits would be in a partnership iii Eliminates the problem of double taxation iv Creation 1 Must be a domestic corporation 2 Must be formed in a particular state 3 Must be a state alone company h Limited Liability Company LLC i Allows limited liability to its owners also known as members ii Less formal than a corporation iii An LLC is considered a citizen of every state where its members are citizens iv Advantages and Disadvantages 1 Advantages a Tax advantage of a partnership b Limited liability of a corporation 2 Disadvantages a Members of the company decide how the company is to be operates does not have to be in writing b All owners participate in management i Franchise i An arrangement with the owner of a trademark that allows another to sell the owner s goods for sale and use in a specific area ii Franchisor Owner of the business iii Franchisee Owner of the store who is offering the item iv Distributorship Allows a dealer to sell products such as automobiles at an automobile dealership v Chain style business operation When a franchisee operates a business under the name of the franchisor and must follow standardized ways of running the business ex Bertucci s vi Manufacturing Processing plant franchise Franchisor provides franchisee with an essential ingredient to manufacture a product vii Agreement 1 Franchise agreement is a contract governed by state and federal statues 2 Spells out the terms of the relationship including profits as well as pay and payment for the franchise itself 3 Discusses the business location whether the space is to be leased or bought viii Termination 1 May have a set term and be finished when that term is up 2 Termination Clause Clause that determines when a franchise license can be revoked 3 Franchisor and Franchisee must act in good faith and with fair dealing at all times ix Sherman v Master Protection Corp