Chapter 12 Notes: Business Organizations

Vocabulary flashcards covering the major business organization types, governance structures, liability concepts, taxation, and related doctrines from Chapter 12 notes.

Sole Proprietorship

Default, simplest business entity owned by one person; total control by the owner; unlimited personal liability; pass-through taxation; minimal formalities (license may be required); not a separate legal entity.

d/b/a (doing business as)

A trade name used by a sole proprietor; does not create a new entity; SP remains; may require registration or licensing depending on location.

Franchise

Not a separate entity; a different way of structuring the relationship between two entities where one uses another's brand/model under a franchise agreement.

Partnership

An association of two or more persons to carry on a business as co-owners for shared profits; intent to partner not strictly required; can be General or Limited.

General Partnership (GP)

A partnership where all partners typically share profits and management; unlimited personal liability; joint and several liability; default equal voice absent an agreement.

Limited Partnership (LP)

Partnership with general partner(s) managing and liable; limited partners are silent investors with liability limited to their investment; LP status can be lost if limited partners participate in management.

General Partner

A partner who manages the GP and bears personal liability for partnership debts and obligations.

Limited Partner

A partner who contributes capital but does not participate in management; liability limited to the amount invested.

Joint and Several Liability

In a GP, each partner is responsible for the entire amount of partnership debts; any one partner can be sued for the full amount; if one pays, they can seek contribution from the other.

Scope of Partnership Liability

Liability generally extends to actions within the partnership’s business; activities outside the scope may not bind the partnership.

Fiduciary Duty

Duty to act in the best interests of the partnership/corporation; includes loyalty, care, information, and candor.

Duty of Loyalty

Place the partnership’s or company’s interests above personal interests; disclose conflicts; avoid competing ventures.

Duty of Reasonable Care

Act with the care a reasonably prudent partner would in similar circumstances.

Duty of Information

Keep partners informed; disclose material information to the partnership.

Duty of Candor

Be truthful and transparent with other partners about relevant facts.

Business Judgment Rule (BJR)

Protects directors/officers from personal liability for business decisions if there was a reasonable basis for the decision; encourages prudent risk-taking.

Corporate Opportunity Doctrine

Directors/officers cannot personally exploit business opportunities related to the corporation’s present or prospective business if the company has capacity; must disclose and seek permission.

Piercing the Corporate Veil

Disregarding the separate legal status of a corporation to hold owners personally liable in certain circumstances (e.g., undercapitalization, commingling funds, failure to follow formalities).

Articles of Incorporation

Documents filed with the state to form a corporation, specifying basics like authorized shares and purpose.

Board of Directors

Governing body elected by shareholders; sets policy, hires executives, and oversees management; fiduciaries to the corporation.

Shareholder (SH)

Owner of a corporation who holds shares; has limited liability and typically does not manage day-to-day operations.

Officers/Executives

Individuals (e.g., CEO, CFO) appointed by the board to manage daily operations; execute board directives.

Double Taxation

C corporations pay taxes at the corporate level and shareholders pay taxes again on dividends; income taxed twice.

Pass-Through Taxation

Tax treatment where profits/losses flow to owners' personal tax returns, avoiding entity-level tax (typical for sole proprietorships, partnerships, LLCs).

Non-Profit Corporation

Corporation organized for public/charitable purposes; no shareholders; profits must be reinvested back into the mission; can pay employees.

Limited Liability Company (LLC)

Hybrid entity with limited liability for all members and pass-through taxation; organized via articles of organization and governed by an operating agreement.

Articles of Organization

Document filed with the state to form an LLC.

Operating Agreement

Internal contract among LLC members outlining governance, profits, and dissolution; recommended for all LLCs.

Member-Managed LLC

An LLC where all members participate in day-to-day management; suitable for small, active ownership; may deter passive investors.

Manager-Managed LLC

An LLC where managers (members or outsiders) run daily operations; attracts passive investors and can streamline decisions.

Single-Member LLC

An LLC with one member; taxed like a disregarded entity for federal taxes but with limited liability protection.

Multi-Member LLC

An LLC with multiple members; profits/losses pass through; flexible management structure.

Limited Liability (LLC) Protects Personal Assets

Members’ personal assets are generally protected from business debts and claims.

Franchise Agreement

Contract between franchisor and franchisee detailing rights, obligations, quality control, and conduct; central to franchise disputes.

Franchise vs Company Store

Franchise expands through external owners; company stores are owned/operated by the franchisor; control dynamics differ.

Stare Decisis

Latin for 'let the decision stand'; legal principle of following precedent.

Judicial Immunity

Immunity protecting judges and certain court-appointed officials from personal lawsuits for official acts.

Missouri Plan

A method for selecting appellate judges involving merit-based commissions and gubernatorial appointment, aiming to reduce bias.

Secretary of State Filings

State official responsible for business entity filings (formation, amendments, annual reports).

Federal Judges

Nominated by the President, confirmed by the Senate, lifetime appointment during good behavior; removal requires impeachment by the House and conviction by the Senate.

State Judges

Judges chosen by various methods (elections, appointments, merit plans) depending on the state; SC uses legislative elections and merit-based processes.

Judicial Immunity Case Concept

Public official acting within a court-appointed role is immune from private lawsuits for official acts.