Business Associations

(Organizations)
A group of two or more people (or even one
person) can create a new “person” or “entity”
under the law that does business, has rights, has
limits, can create liability etc.
The type of organization greatly determines the
extent of these privileges and duties.

OBE –118, Fall 2004

Professor McKinsey
 The Concept of an “Entity”
• A business organization is often a unique
entity, separate from its owners.
• The entity has a birth place
• The entity has a place(s) of residence
• Concept of agency critical to many forms of
business organization
 Purpose
•What is the purpose of McDonald’s?
•Chevron/ Texaco?
•Hornet Foundation?
•UNICEF?
Why is purpose relevant?
 Constituents
• Owners (Shareholders, members, partners, etc.)
• Managers (Managers, executives, board members, etc.)
• Employees
• Customers
• Partners, contractors, and others
• The Public
• Government
 Business Organizations
Sole Proprietorship
One person
Partnership
Two or more partners
Corporation
Many owners, managers and employees
Hybrids
Best of several forms of business.
Limited Liability Company (LLC)
Best of nearly every form of business.
 Sole Proprietorships
The Original Form of Business
Advantages Disadvantages
Simple Unlimited Liability
Single Taxation Limited Growth
Attracting Capital

• This form of business happens “automatically” when a

person does business of his or her own and does not have
some other type of business org.
 Partnerships
The Other Common Law Form of Business
Advantages Disadvantages
Still Simple Unlimited Liability*
Single Taxation Growth Potential
People Resources Attracting Capital

The Uniform Partnership Act (UPA) – adopted in most states

Default terms if no partnership agreement otherwise
 Partnerships- Basic Concepts
Partners in a business are like spouses, they
depend greatly upon each other, must cooperate,
can create liability for each other, and often end
up with irreconcilable differences
• Forming a partnership- no formality required!!!
• Characteristics of partnership – no limited liability
- but also no double taxation
• Rights and duties of partners – lots of default stuff if not
specified in a partnership agreement
• Managing a partnership
• Ending (Termination) of a partnership
 Corporations
A statutory form of business, heavily regulated and
complex in creation and operation
Advantages Disadvantages
Limited Liability Double Taxation
Growth Complexity
People Resources
Laws Governing Corporations
Securities Laws (Federal and State)
Antitrust Law (Federal and State)
Tax Laws (Federal and State)
Corporate Law (Federal and State)
 Corporations- Basic Concepts
• A statutory immortal being.
• Shareholders/ Directors/ Officers/ Employees
• “Exists” in one particular state
• Shareholders vote and elect Directors
• Directors are called the “Board of Directors” and
must meet regularly, vote to approve or disapprove
actions and must have meeting minutes
• Officers execute the orders of the Board
Limited Liability Company (LLC)
A very new creation that merges the basic sought
after benefits of Limited Liability and Single
Taxation with little administrative complexity

Advantages Disadvantages
Limited Liability Growth (perhaps)
Single Taxation Legal Uncertainty
People Resources
Ease of Creation
Flexibility
 LLC- Basic Concepts
• Owners are called “Members”
• Usually created by filing “Articles of
Organization” with state.
• Many states allow single owner LLC’s
• Often an “operating agreement” is created
between members to govern their
relationship, obligations and rights.
 Sole Partnership Corporation
Proprietorship

LLC
 Corporations

The corporate entity is the most complex,

the most administratively burdensome
type of all business organizations.
It also has the greatest variance, coming in
small, medium, and large, and from one to
one million owners.
 Corporations
• Shareholder/Board Member/ Officer/ Employee

• Corporations must comply with specific laws

(often Corporate Code) of the state incorporated
in.
• Corps must also comply with own Articles of
Incorporation and Bylaws (if any).
• Securities Laws apply to publicly traded
corporations and sometimes other corps and other
business organizations
 Types of Corporations

• Small or “S’ Corporation

Single taxation, but limited to 75 shareholders who are
United States citizens or residents.
• Close Corporation.
“Closely held” – often no Securities laws, other lesser
requirements on a state by state basis.
• Public Corporation
Defined more by securities laws than anything else.
“Publicly traded” More restricted than other
corporations..
 Securities Laws
• If you offer ownership interests to others you
are most likely subject to federal and state
securities laws.
– “Security”: potential for profit or loss dependent
on actions of others, you just provide $
• Must meet strict procedural requirements
when offering investment to others
– Initial public offering (IPO) versus trading
– Prospectus, etc
 Securities Laws (cont)
• Must be very careful when making statements
about status or prospects of company, no
misleading or inaccurate or incomplete
disclosures. (No fraud)
• Cannot allow profit by “insiders” with non-
public information. (No insider trading)
• Must disclose material information including
required quarterly and annual reports. (No
secrets)
 Insider Trading from Investor
Perspective
• Cannot trade on material, non-public
information unless obtained legitimately
with out the violation of laws or obligations.
• Criminal versus civil
• Digging through trash cans?
• Electronically enhanced surveillance in
public settings?
 Incorporation
• Promoters precede the corporation and have
liability that is not erased by incorporating.
• File a charter, forms and fees in a State.
• Charter is a public document that has basic
information about the corporation.
– Initial stock allocation and characteristics
– Agent for service
– Name of entity
 Initial Steps to Get Corporation
Going
• Elect or establish Directors and Officers.
• Hold first meeting.
• Adopt bylaws.
– When where shareholder and director meetings
will be held
– Procedures and requirements for meetings
– Establish more detail on officers and directors
 Going Public
• Don’t confuse “going public” with creating
a corporation.
• When you offer the public investment in the
corporation for the first time you are said to
be “going public”
• This marks a significant change in the way
a company will be operated and the
obligations of the directors and officers.
• Rarely will happen at time of creation but
can and occasionally does.