bus. law L8

Sole proprietorships -

One person owns all the assets of the business and has an unlimited personal liability for all the activities undertaken by the business.

In the case of a funeral establishment, many states require the sole owner of the establishment –  or a manager employed by  the owner – to be a ______.

licensed funeral director

If a business is going to operate under a name different than that of the sole proprietor, the business name may have to be filed and registered with an appropriate level of government.  In most cases, the name will be filed as an _____

‘Assumed Name’ or ‘Doing Business As’ (DBA)

Sole Proprietor funeral home business with a DBA filing might list the company name on business records, checks, and signage like this:

Jerry J. Jones

Licensed Funeral Director

d/b/a Tripple J Funeral Home

123 main street,

shreveport LA 71108

Management -

A sole owner exercises unilateral control over management and operation of all business activities and operations.

Profits and Losses -

The sole owner is entitled to all the profits generated but also personally liable for all losses suffered by the business.

tax pass-through,

A Partnership is required to file an annual tax return to report the income and expenses of the business.  The partners are required to include this information on their individual tax returns.

The partnership itself does not pay any tax.

the partnership passes their income (or loss) through to the partners.

Taxation -

The company itself is not required to file taxes, as profits or losses are reported by the owner on their personal tax return by including IRS Schedule C, titled Profit or Loss from Business.

Liability Exposure –

The liability exposure for business debts and actions must be considered for a sole proprietorship.  The Owner and Business are treated as one, meaning all assets of the business and all assets of the owner are open to claims for an injury or loss.

If someone is injured when a casket falls off a rack in the    selection room, they could sue the establishment and owner for    damages.  If they win and are awarded damages – and establishment    assets    are not sufficient to pay the award – the court could authorize    taking the personal assets of the sole proprietor to pay the award,    including such assets as a personally owned car or bank savings    account.

ex. Liability Exposure

The owner of a sole proprietorship may sell the operation of the business to another person or entity, and the new owner is ____

free to use any business type they want for the business.

Sole Proprietorship is Terminated when the Owner:

•Ceases or abandons all further business activities

•Files for personal bankruptcy

•Becomes disabled or retires

•Dies

Partnerships -

Voluntary association of 2 or more people who have combined their resources – as co-owners – to carry on a lawful enterprise for their joint profit

Uniform Partnership Act (UPA Act) of 1997 –

This Act is a Model Law intended to achieve uniformity in regulating the creation and operation of business partnerships in the U.S.  This is where we get the Partnership definition.  Roughly 90% of the states and U.S. territories have adopted the UPA Act that is used to regulate Partnerships in the U.S.

if 2 or more people have joint ownership of a business;

share the profits and losses; and have equal rights to the management and operation of the business – they have a partnership business.

In the case of a funeral establishment in a partnership, many states require ___

all partners – or majority of partners – be licensed funeral directors.

General Partner -

Individual partner actively and openly engaged in the business and held to everyone as a partner

There are 2 Primary Types of Partners in a Partnership:

   1. General Partner

   2. Limited Partner

There are 2 Other Possible Types of Partners in a Partnership:

3. Silent Partner

   4. Secret Partner

Limited Partner -

Partner whose liability for the firm’s debts is limited to the amount of his or her investment.  Limited Partner can be known as a Silent Partner.

Silent Partner -

Partner who takes no active part in the management of a partnership but has capital invested.  There are subtle differences among the states between limited and silent partners.

Secret Partner –

Partner whose name is kept secret from the public.  Partnerships can have one or more Secret Partners

 A business partner whose name is recognized by the public and has    a negative connotation associated with it may be a Silent Partner to protect    the integrity and reputation of the company.

ex: secret partner

A Partnership Agreement enumerates the duties, rights, and liabilities of the partners (using provisions in the UPA)

Example:  Section 401(a) of the UPA states, “Each partner has equal rights in the management and conduct of the partnership’s business.” 

Plus, each Partner – Individually – would have ______ for any crimes they commit associated with the Partnership.

The other Partners would not share this same exposure, unless they too were involved in the criminal activity.

Criminal Liability Exposure

There are 3 areas in which a Partner may have Civil Liability Exposure:

1. contracts

2. torts

3. debts

Tort -

Private or civil wrong against a person or his or her property, other than by breach of contract, for which there may be action for damages.

Therefore, a Tort Claim may be filed against:

•A Partnership

•A Partnership and one or more of the Partners

•Only one or more of the partners

Joint and Several Liability -

Joint and several liability makes all parties in a lawsuit responsible for damages up to the entire amount awarded. If one party is unable to pay, then the others named must pay more than their share.

If 2 drivers are both partly responsible for causing an accident that injured a third party, both drivers could potentially be jointly and several liable if their state applies this rule.

Example:  Joint and Several Liability

Agreement -

Acts of the parties may be as simple as the agreement of all the Partners to dissolve the business.  There may be a term of duration in the Partnership Agreement calling for operations to cease and dissolution to take place on a set date. 

Withdrawal or Alienation -

Forced dissolution by an act of the parties might include the decision of a Partner to voluntarily withdraw from the company; however, the withdrawal of a Partner does not usually end the Partnership.

Expulsion -

Partnership may be dissolved when a Partner is expelled from the company but departing Partners are still liable for all existing Partnership obligations prior to their leaving.

Common grounds for Dissolution by Court Order may center around any of these 4 core issues:

1. insanity

2. incapacity

3. misconduct

4. futility

Insanity

(mental illness, psychosis, unsound mind) - Condition of such intensity that a person cannot conduct their own affairs because they do not have the capacity to communicate rationally and sensibly with others

Incapacity

Physical condition and inability of a person to perform tasks and duties, often focused on employment obligations and responsibilities

• may be the result of an injury or illness that can be temporary or permanent and may be severe enough to justify the legal dissolution of a partnership by court order

Misconduct

may take different forms, including such activities as:

•The continuing and intentional breach of the Partnership Agreement, especially as related to managing the affairs of the company

•Engaging in conduct outside the Partnership that negatively impacts or exposes the Partnership to undue scrutiny or ridicule

•Engaging in criminal conduct that may call into question the reputation, standing, and integrity of the Partnership and thereby potential to hinder and prejudice the continuing and future endeavors of the company

•Conduct that makes it impossible for the Partnership to continue if the Partner remains a member of the company

Futility

It may be determined the continuation of a Partnership is simply pointless and beyond reach

•Could occur when it becomes clear the only way for a company to remain in business would be to continue operating at a loss

•Irreconcilable differences between partners

Operation of Law -

The way an individual acquires certain rights or liabilities through no act or cooperation of his or her own, but merely by the application of the established legal rules to the particular transaction

When an individual dies Intestate (without a will), the    laws of descent and distribution provide for the inheritance of    the estate by the heir.  The property of the deceased is said to be    transferred by ___.  

Example:  operation of law

Illegality -

Continuing the business would be illegal

Death –

A Partner dies, but the Partnership obligations of a dead Partner pass to his estate. This rule follows the general requirement that dissolution not eliminate a Partner’s Partnership Liabilities.

Bankruptcy –

Partnership or the Partner files bankruptcy  

Limited Liability Company (LLC) –

A hybrid form of business that combines features of both the Corporation and Partnership types

is more closely aligned with the dynamics of a partnership but provides some of the personal liability protections previously only available to corporate structured businesses.

Articles of Organization –

Identify basic information, such as the name the business will be conducted in and the names of the owners

members

The owners of an LLC - usually only 1 person is needed to create an LLC

Operating Agreement

Serves as the by-laws or rules and regulations that provide for the more detailed operation of the company, such as enumerating the powers and duties of a manager or the procedure a member may follow to call a membership meeting

In most states, an LLC must include ‘limited liability company’ or ‘LLC’ in the business name, and states will not allow 2 companies in the same state to have or use the same name

Brown Funeral Home, LLC

Michael Baker

Licensed Funeral Director

123 main street….

LLC management

LLC Members may manage the company themselves or hire a manager as an employee to run the company

Profits and Losses

Shared with Members based on terms in the Operating Agreement, and distributions are reported on the LLC annual tax return.

Liability is _____ for the Members of an LLC

limited

Limited Liability Protection to Owners:

•Personal assets are shielded from liability claims made against the LLC

•Liability is limited based on the investments they made in the LLC

Pass through Taxation

•LLC must file an annual business tax return that includes details on the distribution of profits and losses to the members, but DOES NOT PAY taxes directly to the IRS

•Profits and losses are passed through to the Members who are responsible for reporting income and loss on their Individual Tax Returns

Corporation -

Business entity created by statutory law and owned by individuals known as shareholders (or stockholders)

It is a legal entity separate from its owners and can be described as an artificial being created by operation of law.

Shareholders or stockholders

Corporate owners that are generally not liable for the actions of the corporation if the corporation is operated pursuant to its charter and the shareholders do not commit any illegal or wrongful acts on behalf of the corporation.

double taxation

Unlike a Partnership or LLC where profits and losses are passed directly through to the owners, BOTH the Corporation and the Stockholders (owners) pay income taxes

Incorporation

the act of creating a corporation.

There is _____ or advantage to using either of these names or abbreviations (inc. or corp.) The meaning is the same

NO legal distinction

Promoter -

Organizes the formation of a corporation and may seek to find interested parties to raise capital funds and secure investments to formally create the corporation.

Fiduciary –

A person in relationship of trust and confidence.  A fiduciary acts on behalf of another, putting their clients’ interest ahead of their own, with a duty to preserve trust.  Being a fiduciary requires being bound legally and ethically to act in the other’s best interests.  

Promoters may offer enticements to potential investors – such as stocks, bonds, limited partnerships, and independent investments.

•A promoter has a _____ duty and obligation to act for the benefit and in the best interests of the new corporation

fiduciary

Articles of Incorporation –

These are like primary laws that are used to establish the general organization and governing that will achieve corporate existence. They are sent to the state government in which the corporate headquarters is to be located. This brings the organization into existence as a legal entity. The Articles of Incorporation formally create a corporation and are submitted by the Incorporators (these are the founders.)

Charter By-Laws –

These are like secondary laws best used to detail how the corporation is formed and run. They are legal documents that set up the internal structure and rules of the organization. They provide the framework for internal governance and day-to-day operations.  They must provide a detailed description of the major elements of a corporation as they relate to the company:

Public Corporation -

When the corporation serves a government function.

Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the U.S. Congress to maintain stability and public confidence in the nation’s financial system.  Serving a government function, it’s classified as a public corporation.

Example: Public Corporation

Private Corporation -

When the corporation does not serve a government function.

McDonalds, Amazon – They serve the public and do not serve a government function

Example: Private Corporations

Private Corporations have 2 categories:

1. For Profit

2. Non- Profit

Subchapter S Corporation -

A corporation in which shareholders are taxed as a partnership (no double taxation) without losing corporation status.

Closely Held Corporation – or Close Corporations –

Corporation where the outstanding shares of stock and managerial control are held by a limited number of people (often members of the same family)

Great Lake Cheese Company, Inc. was founded in    1958 and today remains privately owned – closely held – by the    Epprecht Family.  The business operates 8 plants across 5 states    and provides cheese products all over the United States.

Example: Closely Held Corporation – or Close Corporations

Domestic Corporation -

A corporation that operates in the same state where the corporation was initially formed.  

Lewis Brothers Animal Hospital was founded in    Houston, Texas and operates in Houston and Austin, Texas.  They    do not operate outside of the state of Texas.  

Example: Domestic Corporation

Foreign Corporation

A corporation that is operating in any other state than where it was initially formed.

The Coca-Cola Company was founded in Georgia but    operates in all 50 States, so it is a Foreign Corporation.  This has a    bearing on establishing which state and municipal government    authorities have jurisdiction over the corporation for such    matters as taxes and regulatory control.  

example: Foreign Corporation

There are 3 Primary Structures associated with a Corporation:

1. stockholders

2. board of directors

3. officers

Stockholders (Shareholders) have certain rights when it comes to affairs of the corporation, and many are mandated by state laws, including the right to:

•Receive properly executed stock certificates as evidence of ownership

•Attend corporate meetings and vote, unless denied by express agreement

•Receive proportionate shares of profits when distributed as dividends

Annual General Meetings.

State laws usually require shareholders to meet at least 1 time a year to conduct the affairs of the corporation.

ExtraordinaryGeneral Meetings.

if shareholders need to meet at other times,

Quorum -

Percentage of the entire membership as defined in the corporate charter

If the charter specifies the required quorum for an annual meeting is 60% of the stockholders and the company has 100 stockholders – 60 of them would need to be present for the meeting to conduct any formal business

example: Quorum

Proxy -

Authority granted by a stockholder for another person to act on their behalf at a corporate meeting. Shareholders unable to attend meetings designate another stockholder that is going to attend to be their proxy

By proxy, the other person is permitted to attend the meeting to represent the stockholder and cast votes on motions before the membership.  The proxy _____

casts 2 ballots when voting

Board of Directors (Board) of a corporation -

The body elected by the stockholders to define and establish corporate policy

Officers of a corporation –

People selected and hired to serve at the discretion of the Board of Directors

President - A president serves as the Chief Executive Officer (CEO)

•This position works very closely with the corporate Board of Directors and often serves as the public face and spokesperson for the company.

Vice President -

Serves as 2nd in command of the day-to-day operations and represents the President when needed

Treasurer

Responsible for management of the corporate funds and often supervises an accounting office that handles corporate-wide financial matters, such:

•Accounts Receivable (Money owed to the company/incoming $)

•Accounts Payable (Money the company owes/outgoing $)

•Tax compliance

Secretary

Corporate Officer that works very closely with the Board.

•Handles such duties as:

•Maintaining the books, records, and files of the corporation

•Organizing and managing shareholder, board, and senior management meetings

•Ensuring compliance with state corporate laws

•Serving as the primary contact for shareholder inquiries and assistance

In smaller corporations with no in-house legal counsel, it is not unusual for a corporate secretary to be a business law attorney.

Capital Stock

Represents the total number of stock shares a company is authorized by the corporate charter to issue

There are typically 2 Classes of Capital Stock:

• common stock

• preferred stock

Common Stock -

No preference over other classes, but those who own this stock have ownership in the corporation and share in the profits of the business

Preferred Stock  -

Affords the shareholder additional rights and options that may not always be available to Common Stock Shareholders