LEGL 2700 1nd EditionExam # 3 Study Guide Business Organizations (Lecture 10) What are the 7 business organizations?-Sole ProprietorshipoDoesn’t require any paperwork to be establishedoA single person doing businessoLaw automatically creates this organizationoThat person has total control over the businessoIncome is just subject to personal taxation(your own taxes)oDisadvantages-Cant transfer his or her ownership to other people -Major liability, no separation between owners liability and business liability-PartnershipsoCreation can be automatic based on business conductoCan happen unintentionallyo2 or more people with a common interest in the businessoShare in profits and lossesoNo double taxation, taxed personallyoConsequences:-Both are personally liable, unlimited liability-Joint and several liability for any injuries-Not popular among those that know business -CorporationsoRequire filingoHave a lot of formal requirementsoGovernment, structure requirements etcoMost formal business entityoOne huge advantage-High degree of transferability-Equity interest(easy to buy and sell shares)oLimited liabilityoInvestors/shareholders are liable up to the amount of their investmentoDisadvantage-Double taxation-Corporation is taxed and shareholders are taxed-Limited PartnershipsoRequire filingoSpecial partnership of 2 different classes oTwo types of partnersoGeneral partners- have equity, liability is personal in addition to what they have at stake in the partnership, decision making rightsoLimited partners- only have liability up to the amount they invest, have no decision making -S corporationsoLess formal than corporationsoNot many shareholders, have a cap normally less than 100oResemble partnershipsoNot double taxed -LLC'so"limited liability corporations"oPersonal taxationoLimited liabilityoVery popularoNo personal liabilityoEquity holders are liable up to the amount of their investmentoFormal filing for creationoHighly customizableoMore of a membershipoGeneral commerceoDisadvantage:-Expensive-Less transferability than corporations-LLP'So“Limited liability partnerships”oNo double taxationoPersonal taxationoVery popularoNo personal liabilityoEquity holders are liable up to the amount of their investmentoMore popular for law firms, accounting firms etcoDisadvantage:-Expensive-Less transferability than corporations What do Corporations have Large Amounts of Equity?oGap between ownership and managementoShares are transferable with the rightsoNo negotiationoShares are like cashoMost shares are created equal-Standard share- 1 vote, transferable, not restricted-Restricted Stock- not easily transferred, used for compensating your officers or employeesoShareholders- elect board to oversee management while monitoring and improvingWhat are the 2 Types of Shareholding Suits?1. Shareholder derivative law suitsa. When shareholders are asserting a claim against an officer on behalf of the companyb. Accusing the officer of a wrong to the corporationc. Harmed the company in some wayd. Suing in order to recover for the corporation2. Shareholder direct law suitsa. Has do to with shareholding rights (like voting)b. Deal with the payment of dividendsc. Direct shareholding benefitsd. Company legally has to pay Business Finance (Lecture 11)What are the 4 general stages of business finance?1. Angel Investing Stage:a. talking about early stage business fundingb. call friends and family to ask them for moneyc. more informald. Typical first stage2. Venture Capital Stagea. Next stageb. An investment during the early stages with the goal of seeing that company growc. Usually targets high growth companiesd. Focused on equity investments3. Private Debt and Private Equity Marketsa. Go to small number of investors and say hey do you want to buy an equity position in this company or hey would you extend me some creditb. Normally banks, pension funds, companies, insurance companies, private placementsc. Far fewer requirements4. IPO's and Capital Marketsa. Broadest b. Initial public offerings when you take your equity to a public market, corporations arethe default business organization for doing thatc. Debt can be sold as bonds on the public marketWhat is Debt?-Exchanging money for a promise to pay-Extending credit-Adds interest within a certain amount of time-A contract, contractual rights of payment-Rights to collateral in case person does not pay-The Cons of Debt:oGet squeezed with your cash flowoAssets get less attractive once they have a security interest-The more valuable the loan, the more the loan agreement will say What is Equity stake?Equity:-Selling ownership and money-There Is no promise to pay here-No contract with equity-Comes with Voting rights-Directors and officers owe you duties-No contractual right to payments-Shareholders are the last to get paid in a bankruptcy situation-Normally more expensive-If you grow you can end up paying a whole lot more than a normal loan would-If the company fails you lose investment-When selling:oWe give up voting rightsoWe give up decision making What are Sovereign Governments?- Any country like Russia, France, Cuba etc-Can get loans from banks/other countries, world bank etc-Can get debt-Can issue bonds-Cant issue equity but because you can’t own a sovereign government it doesn’t have shareholdersFor sovereigns there is no such thing as bankruptcyWhen a sovereign restructures:-Negotiates a settlement-Restructures as many bonds as possible-A Hold Out is those bond holders that did not participate and restructure the loans-EX. Those hold outs in Argentina have sued Argentina in New York asking for the full amountCapital Markets and Securities Regulation (Lecture 12)What are Securities?-Not security interests-Include notes, stocks, bonds, treasury bills, etc-Tend to have in common as an instrument that represents something else-Example stock, represents the rightsWhat is the Securities and Exchange Commission?-most important regulatory agency for capital markets-Administers federal securities law-Established in 1934-Broad goals of protecting investors-Facilitating the flow of accurate financial information-Maintaining fair and stable markets/exchanges-Has quasi legislative functionsoCreates rules and regulationsImportant Laws:Securities Act of 1933“Going public”-Disclosures that you have publicize financial information that potential