Business Organizations and Real Estate Legal Issues

Business Organizations

• Variety of business organizations with different positive and negative attributes.
• Tax issues are always present, and each type of business organization is treated differently.

1. Sole Proprietorship

• Typically a "mom and pop" or family business.
• Positive Attributes:
  • Easy to form, manage, and relatively inexpensive to begin and maintain.
• Negative Attributes:
  • Personal liability of owners for business obligations.
  • Limited capital raising ability.

2. Partnership

• A contractual relationship for a common business venture that may be verbal or written.
• Partnerships may be formed by natural persons, business entities, or any combination.
• A partnership can be comprised of many parties and can be very large in terms of financial structure and business operations.

i) General Partnership

• Comprised of two (2) or more partners.
  • Positive Attributes:
    • Relatively easy and inexpensive to create.
    • Still somewhat easy to manage.
    • Enhanced ability to raise capital.
    • More diverse skill and knowledge level.
  • Negative Attributes:
    • Joint and several personal liability of all general partners.
    • More potential for disputes.

ii) Limited Partnership

• Comprised of two (2) groups of partners with at least one (1) partner in each group.

  • Pros:
    • Considerable ability to raise capital.
    • Limited liability for “limited partners”.
    • Significant tax benefits.
  • Cons:
    • Can be difficult to manage.
    • More expensive to create.
    • Greater potential for disputes among partners.

• General partners run the business (managers).

  • They have personal liability beyond their investment.

• Limited partners:

  • Only responsible for the amount of money they invested (no personal liability).

• Partnership buys insurance (liability/business insurance).

• Share profits and losses.

• General partners borrow money from bank for their business

3. Corporations ("C" corp.)

• Considered “persons” in legal terms.
• Corporations can enter into contracts, own property, be a party to lawsuits, hire and fire people, etc.
  • Pros:
    • Can raise significant capital – “going public”, etc.
    • Tax can be favorable.
    • No liability for corporate obligations (shareholder, director, officer).
  • Cons:
    • Much more difficult to manage.
    • More expensive to create.
    • More complicated form of business structure.
    • Not necessarily the best form of business for all purposes.

4. Limited Liability Company

*   **Pros:**
    *   More flexible operating rules than corporation.
    *   Tax and liability protection.
    *   Easy to form.
    *   Can raise capital.
*   **Cons:**
    *   Some depending on the state.

5. Miscellaneous

*   Ownership of each type of business organization
*   How to create each business organization
*   How to raise capital – private vs. public and stocks vs. bonds
*   Role of government
*   Ethical issues for business
*   Other legal issues

Real Estate

1. Origin of Real Estate Concepts

• English common law
  • to the “center of the Earth” and “to heaven”.
• Reasonable use – modern law.

2. Types of Property

• Compare and contrast intellectual, real, and personal property.
• All types of property can be bought, sold, and inherited.

3. Difference Between “Ownership” and “Possession”

4. Types of Ownership

• Fee simple: You are the owner and no one has greater entitlement; you own the property.
• Life estate: For the life of #2; as long as you're alive. Does not exist after death.
• Pur Autri Vie: Life of another.

5. Types of Possession

• Leases
  • Tenancy for years: A tendency for fixed period of time - could be 5 months.
  • Periodic.
  • Month to month: Renting an apartment.
• Easement: The right to use another person’s property for a specific purpose.

6. Title “Vesting”

• Grant Deed vs. Bill of Sale
• Sole or multiple owners
  • Tenant in Common: you can sell or will away your property, interest, entitlement.
  • Joint Tenancy: you cannot will away - but can sell during your lifetime
  • Community Property (California)
  • Other States
• Common Law vs. Modern Law Ownership Priority
  • First in Time – First in Right
  • Race Notice
    • Whoever records or files first wins.

7. Legal Aspects of Real Estate Finance

• Mortgage.
• Escrow.
• The “players” – bank, seller, buyer, and broker – contract issues.
• Basic documents.
  • Note: the obligation to pay, the $, and the interest rate & amount of time.
  • (Deed of Trust): secures the loan, the document that authorizes the bank to take your house back from you if you don't pay.
• Foreclosure

Antitrust and Securities Law

Antitrust Issues:

• Public policy is to enhance competition in the marketplace by preventing unreasonable restraints on trade (monopoly conspiracy).
• The federal government agency that enforces antitrust law is the Federal Trade Commission (FTC).
• The “rule of reason” permits antitrust activity if reasonable and there is no practical alternative.

2. Sherman Act

• Federal law passed in 1890 which attempts to prohibit “anti-monopoly” between businesses.

3. Clayton Act

• Prohibits conspiracy.

4. Robinson Pattman Act

• Prohibits price discrimination.

5. Horizontal and Vertical Integration

• May violate antitrust laws.

Sherman Act – Antitrust – the “Per Se Rule”

• An automatic violation – for example “horizontal” and “vertical” price fixing.

Securities Issues:

1. The “33” and “34” Securities Acts

• Federal law regulating initial issuance and resale of securities.
• state security laws
• The term “securities” is not limited to stock.
• are sometimes called “blue sky laws”.

2. Securities Exchange Commission

• Federal regulator.

3. SEC Rules

• 10b5 – prohibits fraud.
• 16b – Short Swing Profits.
• 14a – proxy solicitations.

4. “Insider Trading” and “tippee” liability and ethical issues.

5. Types of stock

• Common, preferred, etc. (debt vs. equity)

• Common stock

  • buy stock, 1 share, 1 vote, it has the most risk but most benefits, not personally liable, paid last.

• preferred stock

  • an alternative, they are paid first, minimal risk
    Order of getting paid

• bondholders

• preferred stock

• common stock