Slide 1Quote of the Day:Slide 3Starting a BusinessBasic Business FormsChoice Depends on…Sole proprietorshipSole proprietorshipGeneral PartnershipGeneral PartnershipGeneral Partnership - LiabilityPartnership - ExampleGeneral PartnershipLimited PartnershipCorporation – “C-Corp.”CorporationExamplesS - CorporationLimited Liability Company (LLC)Limited Liability CompanyProfessional Corporation (“PC”)Limited Liability PartnershipFranchiseBUSINESS ORGANIZATIONSChapter 21, 221/14/19 Dr. Gerlinde Berger-Walliser1Quote of the Day:Control everything, own nothing.” - John D. RockefellerCORPORATION, n. An ingenious device for obtaining individual profit without individual responsibility. - Ambrose Bierce in The Devil’s DictionaryStarting a Business•Limited number of legal business forms available•Trade-off between:•Owner’s interests•Creditors’, investors’ interests•Customers’ and suppliers’ interests•The public’s (government’s) interests •Choice depends on management objectives, legal limitations and taxationBasic Business FormsChoice Depends on… •Ease of formation•Financial resources available and •Financial resources needed•Level of risk and risk tolerance (liability)•Availability of business partners•Control•Transferability•TaxationSole proprietorship•A sole proprietorship is an unincorporated business owned and operated by one natural person.•May hire employees, but may not be owned by multiple people•No legal entity•If sole proprietorship is sued, the owner is sued•Single taxationSole proprietorshipAdvantages•Easy to form (“hang out a shingle”)•No capital needed•Owner has full and complete right to manage, full and solitary control of the business•Single taxationDisadvantages•Difficult to raise money (no business partners, shareholders, investors, only bank loans)•Owner personal liable for all business debts and for torts of employees •Lasts the lifetime of the owner/not transferableGeneral Partnership•An association of 2 or more (natural or legal) persons to carry on, as co-owners, a business for profit.•Easy to form (no formalities, no capital needed)•May be formed, by circumstancesGeneral Partnership•Raises money through debt or new partners•Shared management•Shared profits•Shares need not to be equal, see •Partnership agreement•Taxation: Partners are individually taxed on their incomeGeneral Partnership - Liability•All partners jointly liable•to third parties•for contracts (entered into with authority – express, implied or apparent) •for torts - including professional negligence (malpractice).•to each other (loyalty, non-competition, disclosure, protection of confidential info, no conflict of interest, etc. – fiduciary relationshipPartnership - Example•Members of the Daniels family formed a partnership for the purpose of ownership of and renting of space in an office building. William Daniels rented part of the building for his law office, paying substantially below market rent. Partners had no contract among them to maximize rental income.•Later Enea acquired a 1/3 interest in the PS. Upon discovering William’s low rent he sued for breach of fiduciary obligations.General Partnership•Not transferable, unless all partners agree•Difficult to “get rid” of an unwanted partner•Ends upon withdrawal (or death) of any partner – although the business may continue, the PS is dissolved (ended) and there must be accounting – the new PS continues the business.Limited Partnership•Not limited liability partnership•Like GPS, but•Limited partners do not participate in the management and have limited liability (= no personal liability, risk limited to capital contribution)•General partners must file a certificate of limited partnership with the Secretary of State and•Name must include LPCorporation – “C-Corp.”•Dominant form of business organization •Unique name must include corporate designation ("corp.", "inc.", "co.", "S.p.A." or "ltd.”) •Owned by shareholders•Closely held corporation,•Publicly traded•Separate legal entity•“Shields” the owner from personal liability: •Owners liability limited to their investment into the corporation, not liable with personal assets•Note: shareholders and managers are always liable for their own actshttp://steve-lovelace.com/corporate-feudalism-the-end-of-nation-states/Corporation•Managed by board of directors•Directors manage (make policy) for Officers to carry out (day to day operation)•Shareholders have no control, all they can do is vote on directors or sue in case directors breaches fiduciary duties•Legal formalities and fees for creation and continuation (annual meetings for shareholders and directors, company minute book), •Investors can buy shares, easily transferable•Perpetual existence•Double taxationExamplesHarold Lang Jeweler’s, Inc. v. Johnson Lang, Inc., A Fla. Corp., did business in NC for many years, but when it sued in NC court to collect a large debt, the case was dismissed. Lang never filed the proper paperwork to do business as a corporation in NC.Coopers and Lybrand v. Fox Fox met with C&L to provide him accounting services representing that he was an agent of a soon to be formed corporation. C&L did the work , billed $10,000, but didn’t get paid. C&L sued Fox individually.S - Corporation•Limited liability of the corporation•Taxed like a partnership•If corporation looses money, investors can deduct these losses against their other income•Can issue only one class of stocks•Maximum of 100 shareholders•Partnerships or corporations cannot be shareholders•Shareholders must be U.S. citizensLimited Liability Company (LLC)•Newest of business organizations•Law might be different from state to state, not mature•Provides the Limited Liability of a corporation with the taxation structure of a PS, without the limitations of an “S” corp.•LLC members may choose to be taxed as a PS or as a corporation.Limited Liability Company•Legal formalities for creation and continuation•Unique name must include LLC designation•Generally limited to debt and new membership shares•Members (owners) have right to manage (like a PS) •Usually a managing member or committee is designated in operating agreement, may be rotated•Members (owners) have NO personal liability for contracts - this is why LLC’s exist•Tort Liability?Professional