Chapter 14 business organizations

3 basic forms of business organizations

-sole proprietorship
-partnerships
-corporations
-just because you start off in one type of business structure does not mean
that you can evolve into something else
-closely held-typically a few people or a family owned business
-publicly held- owned my hundreds or thousands of people
-corporate form is used where shareholders can transfer their ownership
without interfering with the organization management.
-you really only get to pick your organization if you are a smaller business or
have a limited number of owners like a closely held corporation. Once you
get too big and have a lot of people involved in the ownership then you are
really pushed in to that corporation format.
If you are considering a business organization format: what factors
should you be looking at to decide which one would best fit your
business model.
-Cost of creation- the legal steps necessary to form a particular business
organization. A business person will be concerned on how much it will cost,
but usually the cost is not the problem. How long will this take and how much
paper work are you going to do? More concerned with all of the headache
that it will caused them.
-Continuity-becomes associated with the stability or durability or the
business organization. So if an owner dies or retires or withdraws, what will
happen to the business organization? Dissolution is not the same in a
business organization as termination. Termination is when it is over
and sell off everything and it is done, dissolution is when there is a change
of ownership in an organization that changes its legal existence.
-managerial control- you must consider potential conflicts and the
mechanisms need to be in place to handle and sort or disputes among
mannerisms. Do you have a strong will individual, an ego maniac, or a few
strong willed people that will be in the management situation with this
business organization? Failure to consider this when forming an organization
can be super detrimental.
-liability-what type of degree will the owner be personally liable or any sort
or debts in the organization or any type of judgments or the organization.
When in the owner going to be liable for harm cause by the business
organization, how does liable pass around the organization to the owner.
Most of the time owners want to limit the individual liability or course but you
must be careful become sometimes you pick a structure to limit your
personal liability then you do something that ties you in personally thus
eliminating that liability shield and creating person liability for you. Just

because you pick a personal liability structure that is suppose to shield you
from personal liability doesnt mean you will be shielded from personal
liability.
-Taxation-businesses are taxed at a high rate depending on the business
format that you pick. Some are single taxed while others are doubled taxed.
People will have a fit about being double taxed but if you are carful and you
are thoughtful about how your business is structured you can avoid some
double taxation. You can have this double taxation but it is not always
detrimental.

Sole proprietorship
-also known as sole trader or proprietorship
- type of business entity that is owned and run by one individual, there is no
legal distinction between the sole proprietorship and the owner. They are one
in the same. (one expectation in the fifth amendment)
-business owner by one person that is entitled to all the profit, or a business
only controlled by one person even though they may have many other
persons working for them.
-more than 75% of the US business are sole proprietorships
EX: writers, consultants, local restaurants and shops, home based businesses
-the usage of this business organization is very limited because multiple
owners cannot create a proprietorship. The owners have full control over the
business, there is no formal documentation needed to create this you just
have to get a business license in most cases.
-if the proprietor obtains the business license that is necessary they can
begin operations.
-east expensive organization to create
-as an organization grows and changes it can shift away from the sole
proprietorship status and into partnership. It can dissolve at anytime; the
ownership CANNOT be transferred. So if the sole proprietor loses interest in
their business they cannot transfer it to a new owner.
-creditors are going to hold sole proprietors personally liable, they are one in
the same legally and they will go after them personally. The sole proprietor
has unlimited personal liability.
-there is no shield with a sole propriety, most of the time owners put their
liabilities in the name of others so that they can protect what they own.
-owners pay the applicable personal tax rate, any income that is owned they
must pay the personal tax rate. They are not taxed as an organization.
-there is not any liability sharing of any of the debt. (this is not an
advantage)

Partnerships
- just because you name something a partnership and star out as a

partnership doesnt mean that it has to stay that way. It can dissolve and
move into a different format
EX: Bill Hewlett and David Packard founded their partnership in 1989.
They were 2 electrical engineers from Stanford university they met on a
camping trip in Colorado. After they graduated they began a part time
business in a garage and had about 538$ in cash and they developed this
product that was the study of negative feedback and there first customer
was Walt Disney. They used this product in the development of the movie
fantasia. In 1961 the company was earning 87.9 million and was listed on the
New York stock exchange.
Ben Cohen and Jerry Greenfield founded their partnership in 1978. A
famous ice cream company Ben and Jerrys. They met in 7th grade gym class
and started this little ice cream business and they took a correspondence
course for 5$ on how to make ice cream. Made ice cream in a renovated gas
station in Vermont. The company was bought by unilever in 2000 for 326
million dollars.
-the key to a partnership is meetings its elements that define a partnership.
Two or more persons, common interest, and agree to share the profits and
loses, or if you dont think you are in a partnership and you have meeting the
elements the law will treat you like a partnership. And if there is a debt or
liability against your partnership even if you didnt call it that they will make
you pay because that what you were even if you didnt call yourself that.
-Each partner is going to contribute to all aspects of the business including
money property labor and skill, in return each person get a share of profits
and loses of the business.
-This person can be another partnership (a person in partnership with
another partnership), person in partnership with another corporation.
PERSON does not have to be a person it can be another business
organization. Partners can be two corporations.
-the cost of forming a partnership is minimal, just like the sole proprietorship.
To form a partnership
-register your partnership to the state
-rules of naming your partnership, you cannot name it using words like
company or corporation that would imply that you are something besides a
partnership. If you are going to name your partnership something other than
the partners names, then you must register that. ASSUME NAME STATUTE:
You cannot trick the public.
-Continuity element: general partnership can be dissolved at any time if
there is a change to the partners, so if someone dies, retires, a partner is
added, or they get out/quit, this leads to dissolution of a partnership and the
resurgence of a new partnership which can be a pain. This is why it is a good
idea to have a partnership agreement. If you have a partnership agreement
that has been drafted up carefully prior to the creation of your partnership,
then you can have in many state continuities without dissolution if you have

a partner who dies or you are adding in partners or your partner leaves.
Otherwise if you dont then some state do not allow it, but most states due if
you have a sturdy partnership agreement that addresses these issues you
dont have a dissolution problem and dont have to go through that process.
-Managerial Control element: good to have these listed in your
partnership agreement. Prove who is going to have a voice in the firm affairs.
Can be a problem when you have an even number of voters because you do
not have a split voter. So if you have 3 partners that always side together
and 3 that always side together that will be a managerial control issue. You
can have more than one person in the decision making process.
-although partnership agreements are not required it is a good idea to have
one
-Liability- all partnerships in a general partnership are going to have
unlimited personal liability they are jointly and severely liable together. EX: if
I am owed 3000 I can go after one of the partners and then that partner can
go after the other partners to get the money. They are ALL personally
responsible. There is no real shield with a general partnership.
-Partnerships are not a taxable organization/ entity. The people are
taxable. The partnership taxes the individual partners. The partners must
report their shares the the partnership profits lose, capital gains, regardless
whether they make the money. If the partners vote to hold the money and
use it in the business you still have to claim that as income because you are
the partnership.
3 general types of partnership arrangements
1. general partnerships
2. limited partnership-partnership with limited liability (use this when you
want investors)
3. joint ventures- limited period of time usually for a single project. Can be
recognized as an ongoing partnership if they continue with the venture but
they have to file.
Advantages-easy and inexpensive to form, shared financial commitment,
complimentary skills-bring in a bunch of partners, partnership incentive for
employees- if you do enough we will make you a partner too,
Disadvantages- joint liability- if you in partnership with a stupid person you
are responsible for their mistakes, disagreements among partners, shared
profits
CASES
-Father and son both owned land and they both raised sweet potatoes- they
each used their own equipment and raised the same amount of potatoes.
They stored them together and the advertised them as Wilber Kim and son. A
lose arose, are the father and son partners such that they must share the
lose. The court said yes they are, they were partners and must share the
lose. If the facts bring the arrangement that they were a partnership even
thought, they did not call themselves that.

-Volkmann contacted David about obtaining advise on a residential advising

contract David informed Volkmann that he was going into business with
Philip carol and later was introduce to carol who responded I am happy that
we will be working with you. Volkmann signed a contract with DP associates
assuming that the organizations name was taken from the letters of David
and Philip the 2 guys. So they go and do this business and no actual
agreement was ever made between David and Philip so they were not in an
actual agreement for a partnership. And a dispute arose and Volkmann sued
the two guys and one guy carol said I want out of this I am not in a
partnership with this guy. Should carol be at stop from actually denying the
liability as a partner. The court said yes he cannot deny his liability with the
partner, one who represents that he is a partner when he is not or consents
when he is not by another cannot deny the association.

Corporations
-If a corporation was incorporated in a certain state like GA we call that a
domestic corporation, but if it was incorporated in Alabama we would call
that a foreign corporation. If it was incorporated in Germany we would call
that an alien corporation.
-it costs more to form there is a lot more paper work.
-we call corporations persons but they are this artificial intangible entity
created by the law.
How to start a Corporation
1. Fill out the articles of incorporations
a. Articles of incorporation must list certain things like the period of
deration, purpose of the business, how many shares will be
authorized for distribution, the initial corporate officials.
2. Apply through the state where you want to incorporate for (through the
secretary of states office), when you name your corporation you do not
want to use any misleading terms. Must list you are a corporation/a
company/ limited
a. When you apply for your corporate status you list a registered
agent
i. Registered agent- usually lawyers but they dont have to
be, they are the person that gets served.
3. Secretary of state will approve it
4. Must give notice that you are seeking this corporate status
5. An initial board of directors meets and adopt the corporate bylaws
6. You are now in business
-many corporations are incorporated in Delaware 50% of public corporations
are incorporated there and 64% of the fortune 500 companies are
incorporated in Delaware. They have a Delaware court of chancery which is a
very prestigious court. Consists of one chancellor and 4 Vice chancellors and
these chancellors are nominated by the governor of Delaware and confirmed
by the Delaware senate they serve 12 year terms. It is a non jury court that

serves as a Delaware court that has an original and exclusive equity

jurisdiction.
- In the fall the Delaware governor announced that Tamika Montgomery
reeves 2006 cumulate grad from UGA Law was unanimously voted by the
court. The first Africa American to serve on the court and the second female.
-legislature in Delaware is very supportive of business interest, the
incorporation in Delaware is extreme line.
-continuity- when people die or want to retire or quit or switch owners it
does not really effect the corporation. It can impact the corporation but not
the legal existence
-managerial control- make business more complex because you have
shareholders, board of directors, and officers (shareholders select the board
of directors/ select the goals and objectives and the directs select the officers
and the officers are given the charge of forming the daily operations) One
will argue who is really in control of the corporation?
-Proxy-you appoint someone else to vote for shares.
-If you are inside the corporations you get to use corporate assets to
gain proxy votes which helps you, but if you are outside the corporation and
you are a shareholder you have to use your own money to get people to
proxy for you.
-derivative suit- if you can show that the majority shareholders or officers
are doing something illegal or fraudulent or against the corporations
interests, ex: the corporation is giving one of the board of directs some huge
loan interest free. This is against the entity itself.
-Liability-limited personal liability, whatever you have invested in the shares
is how much you are out when things go badly. You are not always shielded
from this liability though.
-piercing the corporate vail- proving they are under the alter ego
theory and then you lose your limited liability and you become personally
responsible for the debts of the corporate organization.
-alter ego theory- doctrine used by the courts to ignore the corporate
status of the group of shareholders, stockholders, officers, board of directors
and that they are held personally liable for their actions when they have
acted fraudulently or unjustly or refusing to pierce the vail.
-just because you are a sole owner doesnt mean you can prove alter
ego,

Allie vs. US case 14.1

-In Mitigation and owners of some propertys, The Allies created this
corporation called BSA corporation and BSA owned these housing units. So
the Allies had a contract with HUD that they would house people and the
government pays the BSA rent for these people to live in these housing units.
So HUD puts people in these housing units and pays people to live there.
HUD wasnt paying the rent for these residents to live in these units so the
Allies are mad because BSA was not getting their payments from HUD. So
they sue the federal government saying that we have a contract and you

didnt pay us. This was in the federal claims courts because they sued the US
government. The government sues back saying that we dont owe you
money, you guys have breached the contract. The places that you had our
people in were horrible/ disgusting. The court found that BSA did breach the
contract by not maintaining the property in a safe and sanitary state. So
where is the money going to come from? now they look at BSA and they
dont have the assets. They dont even have a fraction of the money to cover
the damages. In order to hold the BSA liable the government has to prove to
the court that the corporate vail must be pierced because the allies were
operating with the BSA as an alter ego. 1. The corporate entity must be a
mirror instrumentality of another entity or individual 2. The corporate entity
must be used to commit a fraud or wrong 3. They must be an unjust lose or
injury to the party seeking to pierce the vail. The allies had to pay over a
million dollars in damages
-Taxation- seen as a negative. Double taxation-corporations get taxed on
the income they make, then when they distribute the shares to the
shareholders the individuals also get taxed off the income from the shares.
-there are ways that you can avoid double taxation, but you have to be
careful

non profit corporations

501C3 entities- able to give you a tax receipt

Limited partnerships- the investors have a shield up as long as they stay
were they belong
-with continuity aspect can switch off without destroying the partnership
aspect but general partners cannot
General partnerships- have more of a person responsibility, when your
limited partners dont stay quiet they lose their shield.
ROPA- when a third party become knowledgeable of the limited partners
activity in the general partnership management.

S-corporations
-we call them s-corps because the entity status from subchapter S in the IRS
code.
-the federal government created the s-corporations, permits shareholders,
very specific types of corporations to unanimously elect that they are
actually going to have their corporation treated like a partnership for income
tax purposes, so if you can qualify for this subchapter s election, then you
can get the best of both worlds. You are a corporation but you can elect for
tax purposes to be treated like a partnership avoiding double taxation.
-treating the corporation like a partnership
-if your s-corporations makes big money that you are holding onto and you
are not getting the pass through income then maybe s-corps are not the best
option for you.

-you must meet certain requirements in order to make this election. Not all
corporations will qualify.
Requirements:
1. must be domestic
2. cannot be other partnerships, corporations, non resident alien
shareholders
3.must be individuals with some very select exceptions like
SunTrusts and estates
4.cannot have more than 100 shareholders
5.can only have one class of stock
6. cannot be an ineligible corporation (certain financial institutions,
insurance companies, domestic international sales corporations)
-the s-corps is still a corporation that has its own independent existence, for
tax purposes its a good idea but it also still runs as it own entity operation
-shareholders must file certain information with the internal revenue service
every year and each shareholder must elect for the corporate income to be
allocated to shareholders annually when commuting their taxes.

Limited Liability Organizations

-Limited liability company(LLC)-business structure that combines the
pass through taxation of a partnership or sole proprietorship with the limited
liability of a corporation. An LLC you must be care on how you name them;
they are not a corporation they are a company that provides limited liability
to its owners. You must have in your name certain verbiage, they wanted to
see that you are calling it a Limited liability company or limited company or
LLC or LCC has to be in the name.
Characteristics:
1. Limited liability of a corporation but it has a pass through availability
as far as taxation
2. Often well suited for companies who have a single owner
3. Avoids the complexities of the limited partnership
Created by:
1.LLC file articles of organization file it with the secretary of state
2.Have organizers (instead of incorporators for a corporation)
3. file annual reports with the state in which you operate
4. owners are called members (corporation they are called shareholders)
-membership in an LLC is not limited like the s-corps, you can have
business organizations as members
-transferability of the members interest is restricted similar to a
partnership. So if a member dies or withdraws then the LLC dissolved and
resurges, although in some states if you have it in your partnership
agreement in your articles of organization you CAN have in there that if all
the members agree within 90 days then you do not have to dissolve but you

have to have it in your articles of organization when you filed in with the
secretary of state, otherwise it is like a partnership.
-managerial control invested in its members but you can in your articles or
organization put that control in the managers but that is up to the members.
-Members act as agents of the LLC, they make contribution of capital, they
have equal rights to share in the LLCs profits and loses,
-dissenting members of the LLC have some rights very similar to the minority
shareholders, they can bring derivative law suits against the control
members of the LLC.
-It is a lot harder to pierce the corporate vail- members must really show that
if you are a dissenting member and they are bringing these derivative suits
they must show that the members have co-mingled their funds with those of
the LLC.
-LLC are not their own taxable entities
-Limited liability partnership(LLP)- has no general partners all of the
owners of the LLP have limited personal liability, often used by
professionals like doctors, lawyers, CPAs, accountants. They are
similar to LLC in that they have characteristics of a partnership and a
corporation. Most of the time people prefer the LLP structure because then
they are not responsible for their partners mistakes. Protects against certain
debts that arise by different partners acting individually. A lot of the time
these entities do not want to establish a corporation because it is too much
trouble and money so an LLP is a very attractive option.
-some states wont let doctors and lawyers form an LLC so their only
option is an LLP
3 trends in managing corporations
1. Benefit corporations- part of our goal is to benefit certain organization
in the community so the shareholders understand that when they get
involved.
2. Nature of corporate person- the courts treats businesses like a person
under many areas of the law. Corporations have rights. Corporations
and individuals have equal claims under the law
Hobby lobby case
-closely held corporations have a right to free exercise of religion. Were they
mandated by the government to over certain birth control to their female
employees/ spouses? Can this corporation do this? Yes, they can they are a
person that are subject to the free exercise clause in the constitution in the
bill of rights and so they are a non publicly traded company and a closely
held corporation. They can in fact because they have a person under the law
assert this right. But it is not always obvious when a corporation is going to
be considered an individual given those identical rights by the court.
Sometimes people try to assert hat and it fails.

AT&T case
- They over charged the government and they told the government that
they over charged them. So the FCC did an investigation and AT&T had
to prove some documentation which they did and it showed that AT&T
owed the federal government 500 thousand dollars that they had
overcharged the government. Then the trade association wanted to
see the documents by the law called FOIA (freedom of information Act)
so if the government is in possession on certain documents and there
is not an exception keeping the government from turning them over
and if they are requested under FOIA the government must turn them
over. AT&T was not fine and said that it invaded their personal
property. The trade association said no and the government got
involved and said that personal is not the same al persons in the
corporation. The question was whether a corporation have personal
property for the purposes of this exception under FOIA. AT&T said that
it is clear and basic. The court said that just because you have the
same root doesnt mean you have the same name. the natural
meaning of personal cover only on individuals and that ATTs reasoning
would let foreign state and local governments off the hook in this
exception. Why have this rule and then an exception that basically
exempts everyone from the rule? At the end of the day even though a
corporation is treated as an individual under most aspects of the law
there are some rights that only individuals can possess. Corporations
do not have personal privacy rights under FOIA exemption 7C.
Criminal prosecutions for corporate wrong doing- the government is
using deferred prosecution agreements abundantly and a lot of people do not
agree with that. On the one side is does encourage self reporting.
Corporations are more likely to admit they have a problem, the government
can say thank you for telling us and here is your trade off. But some people
say why should they be getting out of being punished that is not fair,
individuals dont get out of it.

Chapter 15 The Regulatory Process

-Administrative Agencies- boards, bureaus, commissions, and
organizations that make up the governmental bureaucracy.
-when you make a law you have to have a agency to control it.
Types of regulatory authority:
-Quasi-legislative-make rules that impact the law.
-Quasi- judicial- they can act like a court. Make decisions that can be
binding and hard and difficult for courts to actually review.

Station night club fire was caused my pyrotechnics that was set off by the
tour manager. Within 5 and a half minutes the whole club was in flames. 4th
deadly night club fire in US history and one of the deadly disasters in New
England.
-Any type of fireworks is controlled by the ATF. The limited the AFT permit
-the higher the fireworks go up the bigger the fall out zone that has to be
cleared.
-must go to the state law to get permission
-judges have to review and permit fireworks
-fire marshals must also be there

Reasons for agencies

-provide specificity- the legislative branch cannot legislate insufficient
detail to cover all aspects of a problem. So they give this broad law and pass
it on to an agency and the agency gets down into the nitty-gritty to actually
make rules and regulations that are very specific for each different type of
business situation that would possibly arise covering the law made to
congress
-expertise- the EPA or NRC these people can hone in on one narrow type of
topic and they provide that expertise so congress will ask NRC about that
topic and NRC will provide that information.
-protection- business community is seen as bad and they think they are out
to get people. They are suppose to protect the public from the bad business
people EX:SEC(help consumer) consumer product safety commissions
-regulations- when you have a company that is given a monopoly, then the
administrative agency steps in to provide the contract terms for that
particular company because they lose their contract rights once they are
given their monopoly status and set all the contract for that particular
business.
-services- the US mail, and social security
Functions of agencies
-rule making- quasi legislative power, they can make rules that have the
force and effect of law, they can apply to business practices generally, they
can go straight to the heart of a particular industry, OSHA applies to some
industries that dont apply to others.
-little mini governments
-adjudicating- quasi judicial function, they can be fact finding and apply law
to the facts issuing an order if you will that has to be followed, usually have
to be sanctions fines they can provide other penalties, they can issue sees
and dissees orders which is common for a particular order. Many disputes are
going to be settled by a consent order.
-advising- they report back to the president and congress they can propose
new legislation to congress or they inform the attorney general if there is a

need for judicial action due to the violations of the law. They report to the
general public. They publish advisory opinions to aid businesses regarding
compliance issues the advisory opinions are not binding, but they can be
helpful to businesses in viewing how this agency will apply this rule.
-investigating- Investigate illegal actions, they have subpoena powers they
can require reports, they can examine witnesses under oath, they can obtain
info from other agencies
-if you dont comply all those rules apply to administrative agencies
Organizations of Administrative agencies
usually have 5 to 7 members on the board so they have these
commissioners and board members. No more than a simple majority can
belong to the same political party. Federal appointment requires senate
approval. Must work exclusively for that agency/ board. Removal is by the
president only and the grounds for removal is very narrow. You can be
removed from inefficiency for neglect of duty or mal feeses in office.

Free enterprise fund case

Sarbaines Oxly Act, when they create the Sarbaines oxely act they created
this board.PCAOB was under SEC Which is the Public company accounting
board(they are suppose to be watching big accounting companies, when you
were appointed to this board you have tenyer), president--> SEC (can only
be removed by the president by good cause) -->PCAOB (not government
officers or employers)
The PCAOB started doing their jobs, so this accounting firm pairs up with a
free enterprise fund and sued the PCAOB. They started to cry out that it
doesnt have constitutionality. The district court and the court of applied said
that it did not violate the constitution. The court of appellees said the that
the board members where inferior of the SEC. the question was does the act
violate separation of powers because it prevented the president to remove
board members? Yes, the board can continue but the board members must
be able to be removed by the commission at will.
chair person appointed by the presidentsecretary keeps records and signs
all orders and keeps all the rule and they all must be put in the
federal register do not confuse with IPgeneral counsel approved by
senate vote director of operations administrative law judges (ALj)