ACTG 6100ACTG 6100

Legal Issues

Week 4

Business Organizations

Starting a Business

Primary Factors:– Cost and ease of formation– Tax consequences– Liability

Other factors:– Duration– Transferability– Participation in management

How do the factors affect the choice of business organization?

Ease of Formation

Income Tax Consequences

Personal Liability

Sole Proprietorship

Yes Yes No

General Partnership

Yes Yes NO

LLC No Yes Yes

Corporation No No Yes

Consideration of the cost and ease of formation would tend to support the choice of a sole proprietorship or partnership, but consideration of the potential liability weighs in favor of a corporation or an LLC.

Sole Proprietorships

The “default” option for individuals No registration with state No division between the owner and

the business

General Partnerships

The “default” option when 2 or more people do business together.

An association Of 2 or more co-owners To carry on A business for profit

General Partnerships

Not a taxable entity Joint and several liability Each partner has a fiduciary duty Unless there is an agreement to the

contrary:– Equal voice in management– Equal division of profit and loss

Corporations

Shareholders have limited liability Share are freely transferable Perpetual existence Taxable entity Registration with state required

Special Types of Corporations

S – Tax status is like a general

partnership

Close (Closely held) – Restrictions on

the transferability of the stock

Hybrid Forms of Business

The best of a general partnership, and the best of a corporation:LLCLtd. Ptn.Ltd Liability Ltd PtnProf Corp

Corporations

Promoters are personally liable on contracts entered into prior to incorporation

Status as a corporation begins with the filing of a certificate of incorporation.

SH Directors Officers

The Role of Corporate Management

FIDUCIARY DUTY

– Loyalty

– Care

The Business Judgment Rule shelters

directors from personal liability if the

duties have been fulfilled.

The Role of Shareholders

Right to inspect books and records

Right to vote for Directors

Piercing the Corporate Veil

a/k/a Disregarding the corporate entity Reasons

– Failure to observe formalities– Commingling Funds– Inadequate capitalization– Fraud

Shareholders become personally liable.