Chapter 12 - Business Organizations

Sole Proprietorships income is taxed to the individual owner of the business

Acknowledge

Know the two disadvantages of a sole proprietorship

• Limited alternatives exist for raising capital

• Owner is personally liable for all business debts

Know the things typically found in partnership agreements

• Basics: Name of partnership/business, place/date of formation

• Finances: Allocation of shares; accounting rules; distribution of profits; priority of payments

• Management: Voting rights of partners; appointment of managing partners w/ decision-making authority

• Dissolution: Procedures to be followed if partnership is terminated

Know what the court in Norris v. Besel held in regarding the wife’s status as a partner

Background: Leonard Besel did business in his “Leonard’s Home Improvement.” His wife, Shelly, made a Facebook page for his business explaining what work he does. She owns the page and responded to inquiries for him as well as type up invoices and bids. David and Lisa Norris found their business though the page, they signed a contract for him to do work. No work was done. The Norisses sued the Besels saying they are partners so both are liable

Key Takeaway: Shelly was not liable as her limited role in the business did not indicate partnership status

Know what requires partners to act in good faith toward the partnership

The fiduciary duty between partners.

Fiduciary Duty: The duty of loyalty stands for the principle that directors and officers of a corporation in making all decisions in their capacities as corporate fiduciaries, must act without personal economic conflict. The duty of loyalty can be breached either by making a self-interested transaction or taking a corporate opportunity.

Know the disadvantage shared by sole proprietorships and partnerships

• Unlimited liability

• Profits taxed to each owner

Know what the court in Eagles Landing Development, LLC v. Eagles Landing Apartments, LP said about the liability of limited partners for the debts of a limited partnership

Background: Eagles Landing Dev., LLC (Eagles) contracted to build apartments for Eagles Landing Apartments, LP (ELA) for $1.4 million. ELA’s general partner was Bluff City. There were two limited partners, PNC, a limited partnership, and Columbia, a corp. Eagles completed work and was owed $931,000. The agreement stated Bluff’s city contribution wouldn’t exceed net cash flow from the rental apartments. The cash flow wasn’t good, so there was no money there. All cash invested in ELA by partners was gone. Eagles sued for contributions by PNC and Columbia.

Key Takeaway: Limited partners are not liable for the debts of the partnership

Know what you do to create a corporation

File Articles of Incorporation, pay fee to state, then file with state agency (Usually Secretary of State)

Know what constitutional rights a corporation does and does not have

• Does:

  • Access to the courts as an entity that may sue or be sued. Free speech. Equal protection. Protections against unreasonable search and seizures

• Does Not:

  • Give privilege against self-incrimination under 5th Amendment

Know the duty of loyalty owed by a director to the corporation means

Fiduciary Duty of Loyalty

Requires directors place the interests of corporation before their own interests

Know what corporate dissolution means

Process of settling accounts and liquidating assets of corporation

May be voluntary or involuntary, i.e. bankruptcy. Voluntary dissolution involves approval of shareholders and board of directors

Know what a professional corporation is

A category of corporations that may be used by those providing a personal service that requires a license, such as physicians, dentists, architects, and accountants.

Primary reason to adopt this status is for tax benefits

Know the advantages of a Limited Liability Company

Limited Liability Company (LLC) - form of organization authorized by statute at the state level that is characterized by limited liability, management by members/managers, and limitations on ownership transfer

Advantages: Shareholders of LLC are not liable for debts of the corporation beyond the amount of money they have invested in the corporation

*Limited Liability and Pass through taxation

Know what must be in a LLC’s articles of organization

• Company name (must include “LLC”)

• Address of company or its registered agent

• Whether the LLC is to be managed by its members or a manager

• Names and addresses of company members

• Date (or event) upon which the company will be dissolved, if any

• Whether any members are liable for company debts

*Is it going to be member-managed or manager-managed

Know the limitations on transferring ownership of an LLC

Members may not transfer membership interests without consent of other members as provided in the operating agreement

You have to get the other owners’ interests (to agree)

Know what an LLC operating agreement is.

A contract among members of a limited liability company setting forth the parties’ agreements about funding, development, operations, and other key issues of the LLC.

Know what In re 1545 Ocean Avenue, LLC said regarding the requirement for a court dissolve an LLC

Background: 1545 Ocean Avenue LLC was formed fora real estate development. It was owned 50-50 by Ocean Suffolk & Crown Royal. Operating agreement contained no provisions relating to dissolution. Two managers were appointed: King and Houten. They argued over the project and King wanted to pull out and sued for work to stop and LLC to be dissolved. Trial court granted request.

The petitioner must demonstrate that continuing the LLC is “financially unfeasible or effectively impossible”

*LLC can only be dissolved by court when there is a deadlock and nothing is happening

Limited liability is the advantage of Corporations and LLCs

Acknowledge

Members liable to the extent of paid-in capital

Know what the court in State Ex Rel. Yost v. Leonard held regarding piercing the corporate veil when the owner knew of environmental problems the LLC had but did nothing to stop them

Background: Sliman owned & controlled Zerzer, LLC and a warehouse in Ohio. Zerzer leased the property to Leonard, who owned & operated Green Light, LLC, a recycling business. Ohio EPA found violations of hazardous waste laws. Both Sliman and Leonard were charged by the Ohio EPA in for improper handling of hazardous waste. State claimed Zerzer was liable for failure to stop violations. District court held Sliman was not personally responsible. State appealed that Sliman should be responsible

Court held that piercing the corporate veil is warranted when an owner knew of the LLC’s environmental violations and failed to act.