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Legal Studies 1101 Lecture Notes, Professor Hodge – April 8, 2014I. Types of Entities:a. Sole Proprietorshipi. Creation:1. One owner, least expensive, easiest to create2. You do not have to file any forms with the government, but you may have to obtain a license of a permitii. Taxes: Persona income tax known as a “schedule C” of businesstax formiii. If you wish to operate under a fictitious name, you must file a fictions name registrationiv. 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 b. Partnershipi. Creation:1. When two (2) people or more operate a business as co-owners2. Share profits and debts/losses equally3. Can be formed through oral, written or implied 4. Cost is minimal5. Parties responsible for all debts6. A partnership has been created if:a. If there is sharing of profitsb. A joint ownership of business assetsc. Equal rights to the management of the businessii. Liability:1. Joint and several liability: If a creditor attempts to collect debts but cannot, they can file a claim against one or all partners2. 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 parties2. 2 step process:a. Dissolvingb. Winding up: clear up all debts, let third party creditors know that the business is shutting down3. 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 businessc. Limited Partnershipi. Creation:1. One of more general partners as well as one or more limited partners2. Certificate of Limited Partnership: Contains the name of the partnership and the names of all partners including the limited partnersii. Management:1. Must be run by general partners without active involvement from the limited partnersiii. Liability1. Differs for general and limited partners – depends on the amount each partner has invested in the company2. If a limited partner becomes involved in the business, the liability can fall on that person if no change to the certificate is madeiv. Dissolution1. 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 dissolvethe businessd. Limited Liability Partnership (LLP)i. Creation:1. Hybrid between partnership & corporation2. Not all states recognize this hybrid3. 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 basisiii. Henry Chamberlain v. Charles Irving (page 376)e. Family Limited Liability Partnership (FLLP)f. Corporationi. Creation:1. Separate entity from its owners – allows the corporation to:a. Own assetsb. Borrow $$c. Hire employeesd. Enter into contracts2. Articles of Incorporationa. Since a corporation is governed through state law, you must file an Article of Incorporation with the state office along with a feeb. Must include:i. Corporate nameii. Nature and Purposeiii. Durationiv. Capital Structurev. Internal Organizationvi. Registered Office3. Certificate of Incorporationa. The company’s “birth certificate” ii. Continuity1. Status is not changed when there is a death or sale of stock by a shareholder2. Looked at as it’s own “person”iii. Management1. Board of Directorsa. Elected by shareholdersb. Board of directors select corporate officers (ex: president, secretary, etc.)2. Business Judgment Rule: Guides the conduct of the directorsiv. Liability1. Shareholders own the corporation2. 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 assets3. Shareholders can inspect and copy the corporate books and records but can be limited if suspected of espionagev. Taxation1. Double taxed2. 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 treatedii. Profits are passed on to the shareholders then taxed to them asprofits would be in a partnershipiii. Eliminates the problem of double taxationiv. Creation1. Must be a domestic corporation 2. Must be formed in a particular state3. Must be a state-alone companyh. Limited Liability Company (LLC)i. Allows limited liability to its owners (also known as members)ii. Less formal than a corporationiii. An LLC is considered a citizen of every state where its members are citizensiv. Advantages and Disadvantages1. Advantages:a. Tax advantage of a partnershipb. Limited liability of a corporation2. Disadvantages:a. Members of the company decide how the company is to be operates – does not have to be in writingb. All owners participate in managementi. Franchisei. An arrangement with the owner of a trademark that allows another to sell the owner’s goods for sale and use in a specific areaii. Franchisor: Owner of the businessiii. Franchisee: Owner of the store who is offering the item iv. Distributorship: Allows a dealer to sell products such as automobiles at an automobile dealershipv. 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 productvii. Agreement:1. Franchise agreement is a contract governed by state and federal statues2. Spells out the terms of the relationship including profitsas well as pay and payment for the franchise itself3. Discusses the business location, whether the space is to be leased or boughtviii. Termination:1. May have a set term and be finished when that term is up2. “Termination Clause”: Clause


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TEMPLE LGLS 1101 - Lecture Notes

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