Business exam 4

Choosing a business entity

Primarily driven the risk, tax, and operational objectives of the owner(s) and the type of business operations contemplated

In choosing a business entity, principles should also consider the following factors:

Liability

Taxation of income

Formation

Liability

To what extent are the business owners personally liable for debts and other contract or tort liabilities of the business entity itself?

Personal liability

Your personal assets are exposed

Taxation of income

how will tax authorities treat the entity? will the entity itself pay taxes, or are the taxes passed through to the principals?

Formation

How easy is the entity to form and maintain?

sole propreitorship

The easiest single person ownership entity to form and maintain

Top choice for start up business with law annual revenues

Not subject to corporate income taxation, owner reports business income and expenses on their individual tax return

drawback of sole proprietorship

Complete lack of protection of the owner's personal assets for unpaid debts and liabilities of the business. All debts and liabilities of the business are also the personal debts and liabilities of the owner.

Formation of sole proprietorship

Refer to themselves by the owner's name, followed by d/b/a, followed by the name of the business

Termination of sole proprietor

Terminated by an express act of the owner or by operation of law in case of the death or personal bankruptcy of the proprietor.

The proprietor's ownership interest cannot pass to their heirs through a gift or an estate.

Types of partnerships

General

Limited

Limited liability

Partnership

The simplest multiple person business entity is a partnership

General partnership

Not created by filing a form with a government agency. Instead, the law recognizes two or more owners as being a general partnership if they demonstrate an intent to carry as co-owners of a business.

Formation of general partnerships

Typically use the designation "G P" at the end of their business name.

Liability in general partnerships

General partners have no protections of their personal assets for unpaid debts and liabilities of the partnership.

Additionally, all general partners jointly and severally liable for unpaid debts and liabilities of the partnerships

Joint and Several Liability

General partners personal assets are at risk both together and separately for all debts and liabilities of the partnership regardless of the source of the debt and liability

Taxation of General Partnership

Same as sole proprietorship, a general partnership is a pass through entity, meaning they only get taxed once.

Fiduciary Duties

Set of duties general partners have that insured they are acting in the best interest of the partnership.

3 Fiduciary duties

Loyalty

Care

Good faith

Loyalty standard

prohibits a general partner from engaging in competition with the interests of the partnership and prohibits other conflicts of interest with the partnership such as using the partnership property for personal gain at the expense of the interests of the entity

Due care

Partners must exercise thus in handling the affairs of the partnership and treat business affairs with the same diligence as they would apply in treating their own personal business affairs

Good faith standard

requires that partners exercise appropriate discretion in dealing with other partners and third parties concerning the partnerships business enterprise operations

Limited partnership

An entity that exists by virtue of a state statute that recognizes one or more owners as managing the business while other owners participate only in terms of contributing capital or property

A limited partnership has two types of partners

General/Managing Partners

•Limited/Investing Partners

Formation of limited partnership

To form, the general partner files a certificate with the state government authority.

These partnerships typically use the designation "LP" at the end of their business name.

Taxation of Limited Partnership

pass-through; ordinary income tax rates

Limited liability companies

And entity whose primary characteristics are that is offers its owners the same amount of liability protection afforded to owners of a corporate form of entity, and it offers pass through tax treatment for its owners without the restrictions on ownership and scope required for other pass through entities.

Owners are known as members

Limited liability partnership (LLP)

A business entity that limited the personal liability for its partners. Gives limited personal liability to ALL of its partners

Used for professionals, like lawyers, doctors, and accountants

First hybrid business entity

Limited liability company (LLC)

Formation of LLC

Formed by filing articles of organization with the state public filing official in the Secretary of State corporation bureau.

Information required for formation of LLCs

Basic information like name of the entity, location of its principal place of business, and name of members

Important factor that moderates the limited liability of LLC members

A court may discard the protection in a case where the court finds that fairness demands that the LLC members should compensate any damage party when the entity is without resources to cover the full amount owed

Taxation of LLCs

Treated as pass through entities, which means it's only taxed once and avoids double level taxation

Management agreement or operating agreement of LLCs

Statutes typically assume that the members will agree on the species of managing the venture through this

The ways an LLC can be managed is though a:

Member managed LLC

Manager Managed LLC

Member-managed LLC

Like a general partnership, all members have authority to bind the business

Manager-managed LLC

A named manager(s) generally has the day to day operational responsibilities, while the non managing members are typically investors with little input into the course of the business taken.

Non-managing members generally do not have the authority to act on behalf of the business

Dissolution of LLC

A liquidation process triggered by the decision of the majority of membership interests to dissolve the company

Liquidation process

A legal procedure that involves converting a company's assets into cash to pay off its debts and distribute the remaining assets to its members

Dissociation of LLC

Occurs when an Individual member decides to exercise the right to withdraw from the partnership.

The remaining members may either continue the LLC or decide to trigger dissolution

Expulsion of LLC

Members may agree to standards and procedures for expulsion of a member by a majority vote of other members

Statement of qualification

Document filed to form a limited liability partnership.

Includes name and street address, a statement electing to become an LLP, an effective date, and signatures of at least 2 partners

Liability of LLP

All partners have liability protection for the debts and liabilities of the partnership.

The LLP acts to shield only the personal of assets of the partners that did not commit the tortious conduct or misconduct.

Malpractice

Negligence misconduct, lack of ordinary skill, or a breach of duty in the performance of a professional service resulting in injury or loss.

Taxation of LLP

Treated as Pass through entities. All incomes and losses are reported on the partners' individual tax returns

3 categories of allocation in corporations

1. Shareholders

2. Board of Directors

3. Officers

Shareholders

The owners of a corporation; act principally through electing and removing directors and approving or withholding approval of major corporate decisions.

Board of directors

Responsible for oversight and management of the corporation's course of direction.

Acts of the directors take place only at official meetings that occur at regular annual or semiannual times

Officers

carry out the directors' set course of direction through management of the day-to-day operations of the business.

Appointed by, and may be removed by, the board of directors

Liability of the three allocations of corporations

Generally, shareholders, directors, and officers have limited personal liability in case the corporation runs up large debts or suffers some liability.

Corporate veil

a personal liability shield for corporate owners

Veil

Material that protects or overs the face

Piercing the corporate veil

Courts will discard the corporate veil and allow parties to reach through the corporation to access the personal assets of one or more shareholders.

The court will discard the corporate veil when it believes that fairness demands doing so

2 ways the corporate veil can be pierced

1. Inadequate capitalization

2. Fraud

Inadequate capitalization

One important factor courts examine in deciding whether to price the veil is whether or not a corporation has been adequate capitalized

Fraud

If the shareholders, officers, or directors have committed fraud or have engaged in some type of serious or willful wrongdoing, this is an important factor in a courts decision to pierce the corporate veil.

2 types of corporate transactions

1. Mergers

2. Acquisitions/ takeovers

Merger

Occurs when two or more companies combine to form a new entity altogether, and neither of the previous companies remains in existence.

Acquisitions/Takeovers

is the purchase of one company by another company, the aquiring corporation takes over the target corporation by stepping into the shoes of the target, while the target company disappears by operation of law.

Such purchases may be of the stock or assets of the acquired entity

Acquiring corporation

the company trying to take over another company

Target corporation

the company that the Acquiring Corporation is trying to take over

Security

Any investment that involves a person giving something with an exception of profit through the efforts of a third party

Initial Public Offering (IPO)

Issuing securities to the public markets for the first time

Fundamentals of the Securities Market

The sale is made through a mandatory registration statement that disclosed important facts about the offerings to potential investors

Once a company has sold shares to the public, it becomes subject to extensive reporting requirements to federal regulators

The securities market functions through the interaction of two parties:

1. Investors

2. Issuers

Investors

Seeking a return from their investment based on the value of the security

Issuers

Those institutions and entities that sell securities to investors

They include business corporations that are seeking to raise capital through investors

Securities fall into one of two general categories:

equity or debt

Equity instruments

represent an investor's ownership interests in a venture, in which the financial return on the investment is based primarily on the performance of the venture that issued the securities

Equity instruments for investors

Investors with equity interest may profit considerably from a company that is consistently profitable—However, if the company fails, the equity interest becomes worthless, and the investor is without any legal recourse (if no fraud or malfeasance occurred) to recover their original investment

Securities regulation

Fundamentally, they all have the same rationale: to protect investors and ensure public confidence in the integrity of the securities market

Disclosure

The underlying premise of all securities regulation

Securities and Exchange Commission (SEC)

The federal administrative agency charged with rulemaking, enforcement, and adjudication of federal securities laws.

Electronic Data Gathering, Analysis, and Retrieval (EDGAR)

The online database made available to the public through the SEC's computer database of public corporation disclosures and filings required by federal securities laws

Registration statement

If a corporation is going to sell stock to the public, they have to file a registration statement with the SEC

Steps for registration statement

The registration statement is submitted and the SEC has 10 days to review it for incomplete or misleading disclosures

During the SEC review phase, the security may not be sold

Once the registration statement has become effective, the securities are permitted to be sold to the public

Exemptions from Registration

From a federal standpoint, the most common exception is one for NONPUBLIC OFFERINGS to a limited number of sophisticated investors who have prior business relationships with the issuer or who privately negotiate their securities purchases.