University of PalestineUniversity of PalestineLegal Environment for BusinessLegal Environment for Business

BMGT 510BMGT 510

Assistant Professor Assistant Professor Muhammad Abu SadahMuhammad Abu Sadah

Unit 4: Corporate Unit 4: Corporate lawlaw

Corporate CharacteristicsCorporate Characteristics

11 . .Separate entitySeparate entity..

22 . .Limited liability of ownersLimited liability of owners..

33 . .Freely transferable ownershipFreely transferable ownership..

44 . .Perpetual life distinct from ownersPerpetual life distinct from owners..

Corporate FormationCorporate Formation

A corporation is formed when the slate of A corporation is formed when the slate of incorporation grants a corporate charter. The incorporation grants a corporate charter. The first decision affecting the formation of a first decision affecting the formation of a corporation is the selection of the state in corporation is the selection of the state in which to incorporate. Although the Model which to incorporate. Although the Model Business Corporation Act provides some Business Corporation Act provides some degree of similarity in the corporation laws of degree of similarity in the corporation laws of the states, there are distinct differences among the states, there are distinct differences among themthem..

Many corporations choose to incorporate in the state Many corporations choose to incorporate in the state where their business originates. However, they where their business originates. However, they may choose to incorporate in a state whose may choose to incorporate in a state whose corporate laws they view more favorably, such as corporate laws they view more favorably, such as Delaware. Delaware's legislative provisions and Delaware. Delaware's legislative provisions and court decisions enable corporations to conduct court decisions enable corporations to conduct their internal affairs with few restrictions. The law their internal affairs with few restrictions. The law of the state of incorporation is usually applied in of the state of incorporation is usually applied in litigation concerning a corporation's activities and litigation concerning a corporation's activities and its relations with its shareholders, SO choosing its relations with its shareholders, SO choosing the state in which to incorporate is an important the state in which to incorporate is an important aspect of forming a corporationaspect of forming a corporation

The persons who apply to the state for incorporation are The persons who apply to the state for incorporation are the in corporators. They are required to pay certain the in corporators. They are required to pay certain filing fees and to file a document, called the articles filing fees and to file a document, called the articles of incorporation, of incorporation, that is reviewed by the secretary of that is reviewed by the secretary of state or the state commerce department. Incorporators state or the state commerce department. Incorporators generally have to comply with several requirements generally have to comply with several requirements before the articles of incorporation are approved. To before the articles of incorporation are approved. To avoid confusing parties that deal with the new avoid confusing parties that deal with the new corporation, its name cannot be too similar to that of corporation, its name cannot be too similar to that of another corporationanother corporation

The corporate name must include a special term The corporate name must include a special term such as such as incorporated, limited, incorporated, limited, or or company, company, or or an abbreviation of one of those terms, to an abbreviation of one of those terms, to indicate that the firm is a corporation. This indicate that the firm is a corporation. This requirement is imposed so that people dealing requirement is imposed so that people dealing with the firm will know that it has limited with the firm will know that it has limited liabilityliability..

Other requirements include the naming of a Other requirements include the naming of a registered agent for the corporation and the registered agent for the corporation and the designation of the corporation's principal place designation of the corporation's principal place of business. These require ments permit all of business. These require ments permit all persons dealing with the corporation to contact persons dealing with the corporation to contact it by mail and to deliver legal papers if it is it by mail and to deliver legal papers if it is sued. Many states require that the officers and sued. Many states require that the officers and directors of the corporation be listed in the directors of the corporation be listed in the

articles of incorporationarticles of incorporation . .

The corporation must begin with a minimum The corporation must begin with a minimum capitalization, typically $1,000. Its capital capitalization, typically $1,000. Its capital structure must indicate the rights of each class structure must indicate the rights of each class of shareholdersof shareholders..

After the articles of incorporation have been After the articles of incorporation have been approved, the shareholders attend an approved, the shareholders attend an organizational meetingorganizational meeting

TYPES OF CORPORATIONSTYPES OF CORPORATIONS

Although this chapter focuses on the business Although this chapter focuses on the business corporation, which is created to make a profit, most corporation, which is created to make a profit, most of the slate corporation laws provide for a number of of the slate corporation laws provide for a number of types of entities that can be organized in the corporate types of entities that can be organized in the corporate form. A corporation may be public or private, form. A corporation may be public or private, organized for profit or nonprofit, publicly or closely organized for profit or nonprofit, publicly or closely held, professional or nonprofes-sional, and foreign or held, professional or nonprofes-sional, and foreign or domestic. Each of these categories focuses on some domestic. Each of these categories focuses on some special characteristic of the corporate form of special characteristic of the corporate form of organizationorganization..

Public and Private CorporationsPublic and Private Corporations

This classification refers to the purpose for This classification refers to the purpose for which the corporation has been created. which the corporation has been created. Business corporations such as IBM, Xerox, Business corporations such as IBM, Xerox, and General Motors are private corpora tions and General Motors are private corpora tions that were created by private individuals for that were created by private individuals for private purposes. The Federal Home Loan private purposes. The Federal Home Loan Bank, many of the state universities, and Bank, many of the state universities, and numerous municipal water or school districts numerous municipal water or school districts are public corporations that governments are public corporations that governments created and funded to serve public purposescreated and funded to serve public purposes..

Profit and Nonprofit CorporationsProfit and Nonprofit Corporations

This classification focuses on the operational This classification focuses on the operational objectives of the corporation. A profit-oriented objectives of the corporation. A profit-oriented corporation seeks to make money for its corporation seeks to make money for its shareholders. The corporation distributes shareholders. The corporation distributes profits to the shareholders as dividends or profits to the shareholders as dividends or retains them for its further growth. If the retains them for its further growth. If the corporation's assets are sold, the net assets are corporation's assets are sold, the net assets are divided among the shareholdersdivided among the shareholders..

A nonprofit corporation does not have A nonprofit corporation does not have shareholders and does not seek to pay shareholders and does not seek to pay dividends or operate at a profit. The League of dividends or operate at a profit. The League of Women Voters, the Boy Scouts, and the Women Voters, the Boy Scouts, and the Sisters of Saint Joseph are examples of Sisters of Saint Joseph are examples of nonprofit corporations. Such corpora tions nonprofit corporations. Such corpora tions carry over any surplus of receipts over carry over any surplus of receipts over disbursements to the following yeardisbursements to the following year..

Publicly or Closely Held CorporationsPublicly or Closely Held Corporations

This classification concerns the degree to which This classification concerns the degree to which the stock ownership of a for-profit corporation the stock ownership of a for-profit corporation is spread among owners. A publicly held is spread among owners. A publicly held corporation, such as ATT or IBM, is widely corporation, such as ATT or IBM, is widely owned rather than owned by just a few owned rather than owned by just a few individuals. Publicly owned stock can be individuals. Publicly owned stock can be traded from one owner to another through traded from one owner to another through

stock exchange transac tionsstock exchange transac tions . .

A closely held corporation, such as one formed by the A closely held corporation, such as one formed by the owners of a few people who are generally active in owners of a few people who are generally active in the management or relatives of the founderthe management or relatives of the founder . .

In closely held corporations, unlike publicly held In closely held corporations, unlike publicly held corporations, management and ownership are not corporations, management and ownership are not separated. Most of the state laws affecting private separated. Most of the state laws affecting private corporations apply equally to public and closely corporations apply equally to public and closely held corporationsheld corporations..

Professional and Nonprofessional Professional and Nonprofessional CorporationsCorporations

The professional corporation—the use of the corporate The professional corporation—the use of the corporate form of business organiza tion by people practicing form of business organiza tion by people practicing the same profession—is a rather recent development. the same profession—is a rather recent development. Physicians, attorneys, or accountants may organize Physicians, attorneys, or accountants may organize their business activities as a professional corporation. their business activities as a professional corporation. A law firm known as Smith, James, and Jones, P.C. is A law firm known as Smith, James, and Jones, P.C. is a professional corporation. Usually, people who are a professional corporation. Usually, people who are not licensed to practice the particular profession are not licensed to practice the particular profession are not allowed to be shareholders of such a corporation not allowed to be shareholders of such a corporation and the corporation is permitted to engage only in the and the corporation is permitted to engage only in the activity for which its shareholders are licensed. activity for which its shareholders are licensed. Special state laws usually govern professional Special state laws usually govern professional corporationscorporations..

A nonprofessional corporation is a corporation A nonprofessional corporation is a corporation whose services do not require licensed whose services do not require licensed professionals. Since dry cleaners are not professionals. Since dry cleaners are not licensed professionals, if the owners of a dry licensed professionals, if the owners of a dry cleaning business form a corporation, it is cleaning business form a corporation, it is considered a nonprofes sional corporationconsidered a nonprofes sional corporation..

Foreign and Domestic CorporationsForeign and Domestic Corporations

Clearly, in the United States a corporation Clearly, in the United States a corporation organized in France would be regarded as a organized in France would be regarded as a foreign corporation, However, in the United foreign corporation, However, in the United States the terms States the terms foreign foreign and domestic refers and domestic refers both to corporations incorporated outside the both to corporations incorporated outside the United States and to corpora tions incorporated United States and to corpora tions incorporated outside a given state. Thus, to a Pennsylvania outside a given state. Thus, to a Pennsylvania court a corporation incorporated in Michigan court a corporation incorporated in Michigan is a foreign corporationis a foreign corporation..

Even if a corporation does business within a state, it Even if a corporation does business within a state, it is generally regarded as a foreign corporation if it is generally regarded as a foreign corporation if it was incorporated in another state. Because was incorporated in another state. Because General Motors was incorporated in Delaware, General Motors was incorporated in Delaware, even Michigan could regard it as a foreign even Michigan could regard it as a foreign corpora tion. However, while the classification of corpora tion. However, while the classification of a corporation as foreign or domestic is generally a corporation as foreign or domestic is generally based on its place of incorporation, the laws of based on its place of incorporation, the laws of some states and of most countries other than the some states and of most countries other than the United States use a different criterion in United States use a different criterion in classifying corpo rations as domestic or foreignclassifying corpo rations as domestic or foreign..

That criterion is the location of the corporation's That criterion is the location of the corporation's center of management. On this basis. General center of management. On this basis. General Motors would probably be regarded as a Motors would probably be regarded as a Michigan corporation, because its center of Michigan corporation, because its center of management is located in Michiganmanagement is located in Michigan..

THE ROLE OF CORPORATE THE ROLE OF CORPORATE PARTICIPANTSPARTICIPANTS

The shareholders of a corporation are its owners. The shareholders of a corporation are its owners. They have the power to sell or dissolve the They have the power to sell or dissolve the corporation and to determine who will be corporation and to determine who will be responsible for managing it, The directors of a responsible for managing it, The directors of a corporation are the managers of its business. corporation are the managers of its business. They determine the corporation's overall They determine the corporation's overall strategy, and they select the officers who are in strategy, and they select the officers who are in charge of conducting the corporations day-to-charge of conducting the corporations day-to-day businessday business..

In large corporations, different people occupy In large corporations, different people occupy the roles of shareholders, directors, and the roles of shareholders, directors, and officers. In smaller businesses, the same officers. In smaller businesses, the same people may perform more than one of these people may perform more than one of these functions. If this occurs, corporate records functions. If this occurs, corporate records should clearly indicate the actions taken by should clearly indicate the actions taken by the shareholders, directors, and officers, as the shareholders, directors, and officers, as they each have separate and distinct legal they each have separate and distinct legal responsibilities in the corporationresponsibilities in the corporation..

Failure to keep accurate corporate records may Failure to keep accurate corporate records may result in the imposition of tax, contract, or tort result in the imposition of tax, contract, or tort liability on those who appear to be responsible liability on those who appear to be responsible for a corporation's business activities, for a corporation's business activities, regardless of their status in the corporationregardless of their status in the corporation..

Shareholder RightsShareholder Rights

Although the Although the shareholders shareholders own the corporation, own the corporation, in most large corporations they do not have an in most large corporations they do not have an active role in corporate management. The active role in corporate management. The shareholders in a large corporation perform shareholders in a large corporation perform several tasks. First, they elect the board of several tasks. First, they elect the board of directors, whose members are entrusted with directors, whose members are entrusted with the management of the corporation. Second, the management of the corporation. Second, they vote to approve or disapprove they vote to approve or disapprove

extraordinary transactions of the corporationextraordinary transactions of the corporation . .

For example, shareholder approval is required if For example, shareholder approval is required if the corporation is to sell most of its assets, the corporation is to sell most of its assets, change its principal place of business, or change its principal place of business, or merge with another corporationmerge with another corporation..

Shareholders also have the right to inspect the Shareholders also have the right to inspect the books and records of the corporation and the books and records of the corporation and the right to sue the corporation in the event of right to sue the corporation in the event of

improper actionimproper action . .

For example, they may sue the corporation for For example, they may sue the corporation for agreeing to sell part of its assets if that action agreeing to sell part of its assets if that action was not in their best interests. Finally, the was not in their best interests. Finally, the profits of the corporation are distributed to the profits of the corporation are distributed to the shareholders if the corporation is dissolvedshareholders if the corporation is dissolved..

Generally, the shareholders of a corporation must Generally, the shareholders of a corporation must act as a group at a share holders' meeting rather act as a group at a share holders' meeting rather than as individuals. A shareholder who is unable than as individuals. A shareholder who is unable to attend a shareholders' meeting can exercise his to attend a shareholders' meeting can exercise his or her rights by means of a or her rights by means of a proxy proxy which gives which gives someone else the right to vote for the shareholder someone else the right to vote for the shareholder at the meeting. Shareholder proxies are generally at the meeting. Shareholder proxies are generally solicited by the corporate officers, and in solicited by the corporate officers, and in corporations with publicly held shares most of the corporations with publicly held shares most of the shareholders' votes are usually cast by proxies shareholders' votes are usually cast by proxies granted to these officersgranted to these officers..

Proxy fights occur when individuals or groups Proxy fights occur when individuals or groups outside the corporation solicit the proxies of outside the corporation solicit the proxies of shareholders. During such fights, shareholders shareholders. During such fights, shareholders are asked to elect new members to the board of are asked to elect new members to the board of directors or to sell their share to individuals or directors or to sell their share to individuals or groups that are seeking to take over the groups that are seeking to take over the management of the corporationmanagement of the corporation..

Role of the Board of DirectorsRole of the Board of Directors

The board of directors is legally responsible for the The board of directors is legally responsible for the management of corporate activities. If a management of corporate activities. If a corporation acts in an illegal or improper manner, corporation acts in an illegal or improper manner, the members of its board of directors can be held the members of its board of directors can be held liable. The Revised Model Business Corporation liable. The Revised Model Business Corporation Act requires that the business activities of a Act requires that the business activities of a corporation be managed under the direction of its corporation be managed under the direction of its board of directors. The board usually delegates to board of directors. The board usually delegates to corporate officers the responsibility foT managing corporate officers the responsibility foT managing day-to-day corporate activitiesday-to-day corporate activities..

It formulates and super vises management It formulates and super vises management policies and strategies. Frequently, it policies and strategies. Frequently, it authorizes some ot its members to act for the authorizes some ot its members to act for the entire board in certain matters. For example, entire board in certain matters. For example, an executive committee of the board of an executive committee of the board of directors may make critical financial decisions directors may make critical financial decisions and an audit committee may select and review and an audit committee may select and review the activities of auditorsthe activities of auditors..

The board of directors interacts with the The board of directors interacts with the shareholders in several ways. It is responsible shareholders in several ways. It is responsible for calling shareholders' meetings, and it for calling shareholders' meetings, and it determines when dividends should be paid to determines when dividends should be paid to the shareholders and how large the dividends the shareholders and how large the dividends should be. It is elected by the shareholders, should be. It is elected by the shareholders, and it must receive shareholder approval for and it must receive shareholder approval for mergers 01 other extraordinary corporate mergers 01 other extraordinary corporate activitiesactivities..

The board elects corporate officers, and The board elects corporate officers, and thereafter it interacts with them K assure the thereafter it interacts with them K assure the implementation of its policies. Directors acting implementation of its policies. Directors acting as. members of the boari owe the duties of an as. members of the boari owe the duties of an agent to the corporation, including the duty of agent to the corporation, including the duty of loyalty and tb duty of reasonable care. loyalty and tb duty of reasonable care. Corporate officers or directors who neglect Corporate officers or directors who neglect their duties ai be held liable. However, many their duties ai be held liable. However, many of the states shield directors from liability by of the states shield directors from liability by applyin the business applyin the business judgment rulejudgment rule..

Under this rule, directors are not held liable for Under this rule, directors are not held liable for errors i business decisions if they exercise errors i business decisions if they exercise reasonable business judgment. They are liabl reasonable business judgment. They are liabl only for fraud, oppression, or arbitrary actiononly for fraud, oppression, or arbitrary action..

COMPARISON OF PROPRIETORSHIP, COMPARISON OF PROPRIETORSHIP, PARTNERSHIP, AND CORPORATIONPARTNERSHIP, AND CORPORATION

Many small and medium-sized businesses face a Many small and medium-sized businesses face a choice between organizing as a sole choice between organizing as a sole proprietorship, partnership, or corporation. proprietorship, partnership, or corporation. This concluding section examines the taxation, This concluding section examines the taxation, liability, control, and continuity treatment that liability, control, and continuity treatment that the law gives each of these forms of business the law gives each of these forms of business organization. Any of these four features may organization. Any of these four features may determine which form is most appropriate in a determine which form is most appropriate in a given situationgiven situation..

TaxationTaxation

Taxation may lead a business to select the Taxation may lead a business to select the proprietorship or partnership form. Neither of these proprietorship or partnership form. Neither of these forms of business organization is taxed as an entity, forms of business organization is taxed as an entity, as is a corporation. The profits of a proprietorship are as is a corporation. The profits of a proprietorship are taxed as ordinary income to the proprietor, and the taxed as ordinary income to the proprietor, and the losses of a proprietorship are deducted from the gains losses of a proprietorship are deducted from the gains that the proprietor derives from other income sources. that the proprietor derives from other income sources. The partnership files a return on Which it reports The partnership files a return on Which it reports income or losses and distributions to the partnersincome or losses and distributions to the partners . .

The partners then report their individual shares of The partners then report their individual shares of the partnership income on their separate returns; the partnership income on their separate returns; any tax liability due from a partner is based on his any tax liability due from a partner is based on his or her overall income. Several tax benefits arise or her overall income. Several tax benefits arise from selecting the sole proprietorship or from selecting the sole proprietorship or partnership form rather than the corporate form. partnership form rather than the corporate form. First, many of the states levy a separate franchise First, many of the states levy a separate franchise tax on the authorized shares of corporations doing tax on the authorized shares of corporations doing business in the state. This tax is not imposed on business in the state. This tax is not imposed on sole proprietorships or partnershipssole proprietorships or partnerships..

Second, because the income derived by a proprietor Second, because the income derived by a proprietor or partner from the operation of a business is or partner from the operation of a business is taxed only when received, it is not subject to taxed only when received, it is not subject to double taxation (taxation of both the organization double taxation (taxation of both the organization and the individual owner), as is corpo rate income and the individual owner), as is corpo rate income distributed to a shareholder. For example, if a distributed to a shareholder. For example, if a corporation earns $100 and distributes $25 of that corporation earns $100 and distributes $25 of that amount to its shateholders as dividends, the amount to its shateholders as dividends, the corporation will be taxed on the $100 it earned corporation will be taxed on the $100 it earned and the shareholders will he taxed on the $25 they and the shareholders will he taxed on the $25 they

receivereceive . .

Thus, a total of $ 125 is taxed. If a proprietorship Thus, a total of $ 125 is taxed. If a proprietorship or a partnership earns $100, that total is taxed or a partnership earns $100, that total is taxed to the proprietor or to all of the partners. In to the proprietor or to all of the partners. In either case, the total amount subject to tax is either case, the total amount subject to tax is only $100. Corporate and individual income only $100. Corporate and individual income tax rates have varied over time. Accordingly, tax rates have varied over time. Accordingly, the prevailing tax rates must be examined to the prevailing tax rates must be examined to determine which form of business organization determine which form of business organization is most desirable from a tax view pointis most desirable from a tax view point..

Finally, because the income from a sole Finally, because the income from a sole proprietorship or a partnership may be only a proprietorship or a partnership may be only a part of the proprietor's or partner's overall part of the proprietor's or partner's overall income, losses from other sources may reduce income, losses from other sources may reduce the business income subject to tax. However, the business income subject to tax. However, because the corporation is a separate entity for because the corporation is a separate entity for tax purposes, the owner of a corporation tax purposes, the owner of a corporation cannot offset corporate profits with individual cannot offset corporate profits with individual losses or use corporate losses to offset losses or use corporate losses to offset individual profitsindividual profits..

Because the corporation is a separate entity and the Because the corporation is a separate entity and the current individual income tax rates increase as the current individual income tax rates increase as the amount of income increases, forming a separate amount of income increases, forming a separate entity to pay a portion of the taxes due on certain entity to pay a portion of the taxes due on certain activities can be beneficial. Splitting income activities can be beneficial. Splitting income between two entities, the corporation and the between two entities, the corporation and the individual, may lower taxes. However, the Tax individual, may lower taxes. However, the Tax Reform of 1986 decreased the tax rate for Reform of 1986 decreased the tax rate for individual income and thus made the formation of individual income and thus made the formation of a separate corporate entity less desirablea separate corporate entity less desirable..

LiabilityLiability

Liability considerations often result in the Liability considerations often result in the selection of the corporate form rather than the selection of the corporate form rather than the proprietorship or partnership form. The sole proprietorship or partnership form. The sole proprietor is liable for all of his or her business proprietor is liable for all of his or her business activities and obligations. All the members of activities and obligations. All the members of a general part nership are liable for the debts, a general part nership are liable for the debts, claims, or judgments of the partnership to the claims, or judgments of the partnership to the

full extent of their total personal assetsfull extent of their total personal assets . .

Thus, the proprietorship or partnership form is Thus, the proprietorship or partnership form is usually not desirable for a business that is usually not desirable for a business that is subject to significant tort liability exposure for subject to significant tort liability exposure for injuries to customers, employees, or other injuries to customers, employees, or other parties. A firm manufactur ing or selling parties. A firm manufactur ing or selling chemicals, pesticides, or dangerous industrial chemicals, pesticides, or dangerous industrial machines would select the corporate form of machines would select the corporate form of organization because of its limited liabilityorganization because of its limited liability..

ControlControl

Control can be easy for the small corporation but Control can be easy for the small corporation but difficult for the large one. This is because the difficult for the large one. This is because the shares of the small corporation are usually not shares of the small corporation are usually not freely traded. The existing shareholders can freely traded. The existing shareholders can restrict the transferability of their shares by restrict the transferability of their shares by requiring thai the corporation or existing requiring thai the corporation or existing shareholders be given the first option to purchase shareholders be given the first option to purchase any shares from a person desiring to sell them. any shares from a person desiring to sell them. The large corporation issues so many shares that it The large corporation issues so many shares that it

usually cannot restrict their transferabilityusually cannot restrict their transferability . .

Thus, although the original owners of a Thus, although the original owners of a corporation can take measures to ensure their corporation can take measures to ensure their ownership of enough shares to counteract any ownership of enough shares to counteract any other shareholders, in recent years many other shareholders, in recent years many corporate take overs have been effected by corporate take overs have been effected by outsiders who bought shares of selected outsiders who bought shares of selected publicly traded corporations. For example, publicly traded corporations. For example, Carl Icaan bought shares of Eastern Airlines Carl Icaan bought shares of Eastern Airlines and I Boone Pickens purchased shares of such and I Boone Pickens purchased shares of such companies as Cities Service and Gulf Oilcompanies as Cities Service and Gulf Oil..

ContinuityContinuity

Continuity is a problem for both the Continuity is a problem for both the proprietorship and the partnership A sole proprietorship and the partnership A sole proprietor's business must be liquidated on the proprietor's business must be liquidated on the owner's death unless it can be quickly sold to a owner's death unless it can be quickly sold to a new owner who continues to operate it. Every new owner who continues to operate it. Every time a partner dies, resigns, or leaves a time a partner dies, resigns, or leaves a partnership, the existing partnership is partnership, the existing partnership is automatically dissolved, though a new one automatically dissolved, though a new one

may be created to continue the businessmay be created to continue the business . .

Dissolution sometimes requires notification of Dissolution sometimes requires notification of all the creditors of the partnership. The all the creditors of the partnership. The withdrawing partner's capital must be paid off withdrawing partner's capital must be paid off by the old partnershipby the old partnership..

The partnership agreement can simplify some of The partnership agreement can simplify some of the problems of partnership continuitythe problems of partnership continuity . .

Transitions can be eased by the partnership's purchase Transitions can be eased by the partnership's purchase of life insurance on the partners, with the partnership of life insurance on the partners, with the partnership as the beneficiary, or by the maintenance ol separate as the beneficiary, or by the maintenance ol separate funds for payment to a withdrawing partnerfunds for payment to a withdrawing partner . .

Unlike dissolution of the proprietorship, dissolution of Unlike dissolution of the proprietorship, dissolution of the partnership generally does not require it I the partnership generally does not require it I liquidate or to cease doing business. However, the liquidate or to cease doing business. However, the partnership must be able to pay off the withdrawing partnership must be able to pay off the withdrawing partner and prepare a new partnership agreement partner and prepare a new partnership agreement among the remaining partnersamong the remaining partners..

Dissolution of the partnership can sometimes be Dissolution of the partnership can sometimes be handled internally by adjustments in its financial handled internally by adjustments in its financial and accounting records that do not adversely and accounting records that do not adversely

affect its business operationsaffect its business operations . .Nevertheless, both the proprietorship and the Nevertheless, both the proprietorship and the partnership face continuity problems that must be partnership face continuity problems that must be dealt with. On the other hand, the corporatior dealt with. On the other hand, the corporatior existence is generally perpetual and its continuity existence is generally perpetual and its continuity is unaffected by the withdrawal any one is unaffected by the withdrawal any one shareholder, key officer, or employeeshareholder, key officer, or employee..

SUMMARYSUMMARY

Three types of business organization are reviewed in Three types of business organization are reviewed in this chapter: the proprietorship, the partnership, and this chapter: the proprietorship, the partnership, and the corporation. The proprietorship, which is the the corporation. The proprietorship, which is the easiest to form, has no special legal status distinct easiest to form, has no special legal status distinct from that of its owner. The partnership involves two from that of its owner. The partnership involves two or more persons who jointly carry a business for or more persons who jointly carry a business for profit. It is generally formed b; partnership agreement profit. It is generally formed b; partnership agreement specifying the duties of partners toward other partners specifying the duties of partners toward other partners and third partis Several other business types are and third partis Several other business types are similar to partnershipsimilar to partnership . .

The joint venture and the limited part nership are used in The joint venture and the limited part nership are used in a variety of situations by per sons who desire only a variety of situations by per sons who desire only some characteristics of the partnership. Because a some characteristics of the partnership. Because a partner in a partnership may act as both its principal partner in a partnership may act as both its principal and its agent, he or she has duties and rights that and its agent, he or she has duties and rights that define the relationships among the partners. The define the relationships among the partners. The partners generally have authority to bind the partners generally have authority to bind the partnership in normal busi ness activities, and the partnership in normal busi ness activities, and the partnership is liable for contracts made or torts partnership is liable for contracts made or torts committed by the partnerscommitted by the partners..

The corporation is a desirable form of organization The corporation is a desirable form of organization for many business activities. Essential char for many business activities. Essential char acteristics of the corporation are its separate entity acteristics of the corporation are its separate entity status, its limited liability, its ease of ownership status, its limited liability, its ease of ownership

transfer, and its perpetual lifetransfer, and its perpetual life . .A corporation is formed by filing articles of A corporation is formed by filing articles of incorporation in a state office. Large forprofit incorporation in a state office. Large forprofit private firms are the most noticeable corporations, private firms are the most noticeable corporations, but nonprofit corporations, professional but nonprofit corporations, professional corporations, public corporations, and closely corporations, public corporations, and closely

held corporationsheld corporations . .

The bylaws of a corporation determine how it is The bylaws of a corporation determine how it is organized. Shareholders, directors, and officers organized. Shareholders, directors, and officers each perform distinct roles in the activities of the each perform distinct roles in the activities of the corporation. The shareholder-owners select the corporation. The shareholder-owners select the board of directors and vote to ratify or reject ex board of directors and vote to ratify or reject ex traordinary corporate decisions. The directors are traordinary corporate decisions. The directors are responsible for formulating and overseeing the cor responsible for formulating and overseeing the cor poration's management policies. The officers are poration's management policies. The officers are responsible for the corporation's day-to-day responsible for the corporation's day-to-day operationsoperations..

In determining whether a proprietorship, a In determining whether a proprietorship, a partnership, or a corporation is most suitable in partnership, or a corporation is most suitable in a given situation, four factors are often a given situation, four factors are often examined. The taxation, liability, continuity, examined. The taxation, liability, continuity, and control as pects of these forms of business and control as pects of these forms of business organization are generally critical to a organization are generally critical to a determination of the form that best fits die determination of the form that best fits die needs of a particular businessneeds of a particular business..