business entities, securities/antitrust, real estate exam3 mgmt246

3 reasons people form business entities

1. personal liability

2. tax

3. money

Sole Proprietorship

• The simplest form of business – the owner is the business. 

• Typically thought of as a “mom and pop” or family business.

Sole Proprietorship Advantages

• Easy to create, form, manage

• Relatively inexpensive

• Taxes

• Flexibility

Sole Proprietorship Disadvantages

• Unlimited personal liability

• Lack of capital

• lack of continuity (when you die, the business dies too/dissolve)

Partnership

Is an agreement between two or more parties for a common business enterprise or venture; is a contractual relationship that may be verbal or written. 

General Partnership

Comprised of two or more partners – a group of partners. Each person makes a contribution financially and business-wise for the group so they can all be successful 

General Partnership Advantages

• Easy to form and manage

• Inexpensive to create

• More diverse skill and knowledge

General Partnership Disadvantages

• Joint and several liability

• More potential for disputes

Joint Liability

A third party must sue all of the partners as a group, but each partner can be held liable for the full amount

Joint and several liability

Aa third party has the option of suing all of the partners together (jointly) or one or more of the partners separately (severally). Several means to “cut”

Limited partnership

Comprised of a:

• general partner (has unlimited/personal liability) and runs the business on behalf of the investors.

• limited partner: investors or people who invest in the money. they have limited liability. they are silent partners (cannot be part of management)

limited liability

the amount of exposure, risk, money is limited to the amount of their investment. 

Limited partnership advantages

• Considerable ability to raise capital

• Limited liability for “limited partners”

• Can have significant tax benefits

Limited partnership disadvantages

• Difficult to manage

• Expensive to create

• Greater potential for disputes among partners

Sharing of profits and losses

In general and limited partners, the partners can agree how to share profits and expenses amongst themselves.

Dissolution

The partners agree on how long the partnership stays alive or exists. The partnership is dissolved or no longer exists when the building is sold.

Franchise

Contract method of the right to use someone else’s intellectual property (trademark, trade name, copyright) or the right to do business under someone else’s name. 

Franchisor

The parent company that owns the rights (intellectual.)

Franchisee

Has a contract to use the franchisor’s stuff. Individual business owner (independently owned or operated)

McDonald’s Franchise Example.

A woman was scalded by coffee at a McDonald's drive-thru. She sued both McDonald's Inc., (franchisor), and the Yorba Linda McDonalds (franchisee). Franchisor argued they were not directly responsible for the coffee spilling, but Yorba linda McD' responded they were following the franchise agreement, otherwise would be a breach. So franchisee won.

Corporation

• a legal entity created and recognized by state law. 

• Not a contract relationship

• an artifical person in law

• can live forever

Disadvantages of corporations

• More expensive and complicated to create

• Hard to manage

Advantages of corporations

• Provides a shield against personal liability - limited liabilty is provided

• Corporations can file for bankruptcy

• Tax is favorable

• raise capital

Criminal acts

• Corporation cannot commit criminal liabilty in common law

• Corporation CAN commit criminal liability in modern law

Privately held company

Stock is privately held and not sold to the public at large.

Publicly held company

Stock is sold through the stock exchange through brokers to the public at large.

Non-profit

Allows various groups to own property and to form contracts without exposing the individual members to personal liability. (Charities)

S-Corp

A regular corporation that has filed a form with the IRS to avoid double taxation. 

Double taxation

A corporation makes money they have to pay taxes on, and shareholders will again pay taxes on dividends. Corporations with 100 or fewer shareholders can file form with the IRS to pay taxes on behalf of both the corporation and shareholders.

Select state of incorporation

Whatever state a person selects to create the form of incorporation to have the corporation born

Articles of incorporation

A document that The state authorizes the existence of the corporation.

Bylaws

operating rules of a corporation on how the three groups of people interact

corporate financing

get money through both equity and debt financing

stock/shares

When you buy stock/shares in a corporation, you become an owner. 

Equity

You have given money in exchange for an ownership stake/ownership interest 

Common stock

• The most common. Most widely sold on stock markets. Has the most risk. 

Preferred stock

•  In the event of bankruptcy, the preferred shareholders get paid first. 

  • Less risk tolerant

Bond

• A loan to the corporation, people, investors

  • Rather than buying stock, they elect to invest in a corporation by loaning the corporation money. 

Crowdfunding

• Raising small amounts of money from a lot of people 

  • Ex. Instead of borrowing from a bank or investor, you can ask a large number of people to contribute small amounts of money online.

Two exceptions to limited liability/piercing the corporate shield (you are now personally liable)

undercapitalization and alter ego

Undercapitalization

 When a business or organization doesn't have enough financial resources (capital) to meet its ongoing obligations and operate effectively because you didn’t give it enough money.

alter ego

If the corporation is considered merely an extension of yourself, people can come after you personally. You are using your corporate money as your own bank account.

Three groups in corporations

1. shareholders

2. Board of directors

3. officers

shareholders

own the corpration and own equity

elect the second group, which is the BOD

board of directors

• Manage the corporation (on a global basis?)

• Responsible for the overall response of the corporation

• hire the third group, officers

officers

Run the corporation on a day-to-day business

duty to make informed decisions

the directors must make informed and rational decisions

business judgement

As long as you have exercised judgment in reaching an informed decision through rationality and informativeness, you are not liable

shareholder meetings

• Shareholders (owners) are required to have at least one meeting every year to keep the corporate entity proper or otherwise it becomes an alter ego. 

During the meeting, they are electing the board of directors.

Proxy

• In a contentious situation, people or shareholders can allow other people to vote their shares FOR them. You authorize someone to vote for your stock. 

Stock certificate

• Evidence of ownership or a document of title 

LLC

• Shares features of both a corporation and a limited liability partnership (A hybrid) 

  • Operations of a LLC is the same as partnership (limited liability) and does not have many of the formalities of a corporation

Articles of organization

When you file the article of organization, you select the name and have the LLC formed.

Management of an LLC

Member-managed (managed by a member that other members elect to run it)

Operating agreement

• Act as the bylaws (not exactly called bylaws)

  • Only one group of people.

• Are the rules on how the LLC runs

LLC advantages

• No personal liability

• raising capital

• less formal legal rules than a corp

• good tax flexibility

Dissasociation

• The LLC can be terminated, dissolved, or canceled at some point of time 

• Members/Investors can sell the building and dissolve the LLC (like in a corporation)

Sherman Act

Congress passed the law called a Sherman Act of 1890 → Anti-Monopoly

Monopoly

•  The extent a company becomes so large of an economic power that it constitutes unreasonable restrained trade and commerce 

FTC Federal Trade Comission

 Federal government agency enforcing antitrust law

Baseball

Only industry exempt from antitrust law

Rule of reason

Permits antitrust activity if reasonable and has no practical alternative.

Clayton Act

Prevent companies from conspiring with one another to limit competition. When you have one company getting so large – it could cause abuse in raising prices. 

Robinson Pattman act

•  Prohibits price discrimination in the marketplace

• An amendment to the Clayton Act. 

• Everything must be equal and cannot discriminate on price.

Vertical Integration

A business strategy where a company acquires another company that operates at different stages in its supply or distribution chain.

Horizontal Integration

• A business strategy where a company acquires another company that operates at the same level in an industry (e.g., competitors).

  • A merger between firms that compete in the same market. 

  • The same level for all competitors.

Vertical integration example

• A shoe manufacturer buying a leather tannery or a clothing retailer opening its own manufacturing facilities. 

• Subway buying a supplier of ingredients like bread or meat. 

• disney buying all other movie theaters

Horizontal Integration example

• A large grocery chain buying out a smaller grocery chain in the same region.

• FTC doesn't want Subway’s largest competitor to buy Subway and restrain trade/fix prices from controlling the sandwich business.

• Disney buying Paramount and warner bros

mergers

• Friendly transaction, merging of two companies

  • Two companies become one

acquisition

Not usually friendly affairs and purchases another company.

white knight

• A defense mechanism a target company utilizes to fend off potential acquirement 

• Asking another company to rescue you from a hostile business that wants to acquire you (can be forceful by buying all the stock)

family jewel mechanisms

Selling your most valuable assets so that the hostile company loses interest

enforcement

• The federal agencies that enforce the federal antitrust laws:

  • US Department of Justice (DOJ) 

  • Federal Trade Commission (FTC)

    • Established by the Federal Trade Commission Act

International Law

International companies have to deal with anti-trust issues, there are similar laws in Europe, Asia, and Latin America

Securities

“Stock”. If you make an investment with the expectation of making a profit

SEC

• to protect the invested public and drive credibility to the markets

The 33 Securities Act

• Registration

• Requires people companies who wish to sell their stock to the public at large must first seek approval/permission from the SEC to go public by application and registration

Howey test

Howey tried to sell real estate for a project, but was considered sale of securities by the SEC

1. Did you invest money?

2. Did you expect profits from the efforts of others? 

• If yes to both, then it's likely an investment contract, meaning security laws apply.

• Securities is much broader than stock

The 34 securities act

• 1934 – Disclosure

• Requires that before you sell stock to the public, the company has to give them a disclosure statement

10b5 SEC rule

• Prohibits insider trading. 

  • Provide integrity to the market

16B Short swing profits

• large shareholders are required to buy and hold for 6 months 

14A proxy

Truth in what is intended with a proxy, If you are a shareholder or group of shareholders that believe the company is not being operated properly, you can bundle your stock votes together

Blue Sky laws

• Blue Sky laws are state securities laws 

Real property

• Is the ground and everything attached permanently to the ground. 

personal property

 Everything that is not real property, everything movable

intellectual property

• Creature of the mind – doesn’t exist. 

• The creation process is intellectual property and very valuable in the technological realm. 

fee simple

• You own or will it forever. 

• Significance of owning → you can give it away to your hier. 

life estate

• Own it for your lifetime only. cannot will away

pur autri vie

• Means life of another

  • Ownership includes possession and use

title vesting

how your name is described in the title

tenant in common

• Each tenant in common can sell their interest in their lifetime to someone else. You can also sell interest upon their death. works like a partnership

joint tenancy

• As joint tenants, 1-4 can sell their interest in their lifetime.

• They cannot will it away. 

Community property

• Is All property acquired after marriage. 

• The collateral rule is all property acquired before marriage is separate by definition

Ownership

• Title, the right to possess and use because you own it. 

Possession

•  The right to possess/use. The apartment, airspace, paint on walls, etc. 

  • A lease 

Easement

• Simply to use someone else’s property for their own specific purpose.

tenancy for years

• A tenancy possession for a fixed period of time or certain term

tenancy of sufferance

Lease is expired and you are in wrongful possession.

month to month

apartment leases

Escrow

Third party facilitator to close the contract on behalf of all the three parties of the buyer, seller, and banker in the process of selling a house because none of them trust each other