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Business law chapter 12

Terms in this set (76)

What is the most common business form?
Sole proprietorship, 23 million
Sole proprietorship
Oldest and simplest form of business organization. A person may simply begin to do business without formality in enterprises that do not require government license or permit. Legally and practically, the owner is the business; capital comes from the owner's own resources or is borrowed with the owner as debtor.
Two biggest disadvantages of sole proprietorship
1. Limited alternatives for raising capital

2. Owner is personally liable for all business debts.
Partnership
Association of two or more persons to carry on a business as co-owners for a profit. Many forms, joint venture is an example.
General partners
Partners in a partnership. They share control over the business operations and profits.
Who can be a partner in a partnership
Another partnership, a corporation, a person, or some other entity.
Is a partnership treated as an independent legal entity
NO. A case can't be brought against the business. Partners can be sued or sue. Some state law now provides partnerships can be independent.
Forming a partnership
Can begin with an oral agreement between two or more persons to do business as partners or with an implied agreement that may be inferred from the conduct of the partners as they do business together
What should be included in the written agreement for a partnership?
1. Basics (name, place, and date)

2. Finances (contributions of partners, when payments are due, how additional capital contributions will be handled, allocations of ownership shares, accounting rules, distribution of profits, and priority rights)

3. Management (voting rights of partners, appointment of managing partners with decision-making authority, and a compensation committee)

4. Dissolution (procedures to be followed if the partnership is terminated; rights of partners to leave the partnership; procedures to be followed if a partner dies; how partnership shares will be valued; limits on transfers of partnership shares; requirement to go to arbitration in case of disputes among partners
Zhou v. Bickley background
Bickley approached Zhou and Zhang about starting motorcycle shop. The three of them signed a two-year lease on a building for the shop. Zhou and Zhang paid the security deposit and first month's rent. They helped pay for inventory and helped to get shop ready for business. They gave Bickley more money when he asked for it. Zhou and Zhang asked for keys to building, Bickley refused. They asked to see receipts and invoices, and he also refused. They asked to work and he refused too. An attorney sent a demand letter on behalf of Zhou and Zhang. Trail court held that there was no partnership; there was only a "vague agreement to open a motorcycle repair shop". Bickley operated as a sole proprietor who borrowed money that he owed to Zhou and Zhang. Bickley appealed
Zhou v. Bickley verdict
The mere fact that the parties called themselves partners and referred to their business relation as a partnership will not necessarily make them partners, not their business a partnership. The actions were not consistent with the fiduciary duties that partners owe to one another. Bickley's own testimony was inconsistent with a partner shop. Therefore, there was sufficient evidence that could reasonably conclude that the parties did not intend to do things as a partnership...... AFFIRMED
Fiduciary duty
Requires that each partner act in good faith for the benefit of the partnership. Partners must place their personal interest beneath those of the partnership.
Control by partners
Presumption is that each partner has an equal voice in partnership management. Regardless of who runs a partnership, the partners have a duty to one another to disclose all financial aspects of the business and to be completely honest, regardless of personal differences.
Termination of partnerships
By agreement, partners can allow partnership interest to be sold or assigned, usually with approval of existing partners.
Dissolution of partnership
Occurs when an event takes place that precludes the partners from engaging in any new business. Can come about in several ways.
1. Change in the composition of the partners results in a new partnership and dissolution of the old one.
2. One partner is bankrupt
3. Partner dies (one common way to keep business is to purchase life insurance on the partners, with the proceeds to be used to buy back the interests of a deceased partner from the estate)
Limited partnership
A business organization made up of two or more persons (partners) who have entered into an agreement to carry on a business venture for a profit. Unlike in a general partnership, not all partners in a limited partnership have the right to participate in the management of the enterprise and not all are liable for partnership debts.
Winding up of partnership affairs
Involves completing any unfinished business and then collecting and distributing the partnership's assets.
Forming a limited partnersho
Partners must execute a written agreement, called a certificate of limited partnership and filed it with the appropriate state official, usually secretary of state
What is included on a certificate of limited partnership?
Name of the business

Type or character of the business

Address of an agent who is designated to receive legal process

Names and addresses of each general and limited partner

Contributions (cash, work, and property) of each partner

Duration of the limited partnership

The rights for personnel changes in the partnership and the continuance of the partnership upon those changes

The proportion of the profits or other compensation that each partner is entitled to receive
Purpose of certificate of limited partnership
Let's third parties know that the limited partners assets are not available to satisfy claims and that the limited partners lack the ability to commit the partnership to obligations.
Limited parters
A limited partnership has at least one general partner and one or more_______. They are investors who may not participate in the managing of the business. They will lose their limited liability and become general partners if they take an active role in managing the business
Eagles Landing vs ELA backgroubnd
Eagles contracted to build apartments to ELA apartments for $1.4 million. ELA's general partner was Bluff City. The two limited partners were PNC and Columbia. Agreement stated that bluff city's contribution would not exceed the net cash flow from the rental of the apartments. All cash invested in ELA by the partners was gone. Eagles sued for contribution by PNC and Columbia. Trial court held that LP owed $931,000. It appealed
Eagles landing vs. ELA verdict
The limited partners argued that even if the full developer's fee is due under the agreement that they did not have to pay since they were only limited partners.
Terminating a limited partnership
Same circumstances that would terminate a general partnership. Bankruptcy of a limited partner doesn't usually dissolve the limited partnership. Limited partners receive their share of the profits and their capital contributions before general partners receive anything.
Corporation
An artificial person, or legal entity, created under state law.
Corporate charters
States issued these charters back in the late 1700s. Because the charter often granted special privilege, there was intense competition to receive charters. A charter might, for example, give a business the privilege of having the only bank in a town.
Articles of incorporation
Must be filed with the appropriate state office to form a corporation.
What do the articles of incorporation provide
1. Name and address of the corporation
2. Name and address of the corporation's registered agent
3. Purpose of the business
4. The classes of stock to be issues and their par value
5. Names and addresses of the incorporators
Certificate of incorporation
After reviewing the corporation's application for completeness, the state issues a certificate of incorporation. Then the incorporators hold their first formal organizational meeting. They elect a board of directors and enact the corporation's bylaws and issue stock.
Bylaws
Rules that regulate and govern the internal operations of the internal operations of the corporation.
Legal entity
A corporation is a legal entity with rights and responsibilities separate from the owners. It is recognized under both federal and state law as a "person." corporations are entitled to many constitutional protections including free speech, equal protection under the law, and protections against unreasonable searches and seizures. Corporation's have the right to sue and be sued.
Three major groups of a corporation
Shareholders, board of directors, and managers. Employees may be referred to as stakeholders
Important features of a corporation
1. Legal separation of ownership (shareholders) and control (management and board of directors). Employees are generally not part of the basic legal structure of the entity
Shareholders
Own the corporation. Evidence of ownership is in the number of shares issued to various parties. Shareholders are not responsible for managing the corporation and are not allowed to exercise day-to-day operations. No legal relationship with creditors of the corporation.
Quorum
More than half of the total shares. Must be represented at the meeting.
Proxy
Written authorization to cast their vote so that they do not have to attend the meeting in person
Board of directors
The governing committee of a corporation, specified in the articles of incorporation or chosen by the incorporators at the first corporate meeting. After the initial selection, board of directors are selected by the shareholders. Directors serve terms for a time specified in the articles although the shareholders can remove a director from office for cause.
Breach of duty
A cause to remove a director from the board of directors
Principal
Board is on behalf of the corporation. It sets corporate policy and decides corporate business, such as the sale of assets, entrance into new product lines, major financing decisions made, and appointment of corporate officers,
Business judgment rule
Makes directors and managers immune from liability when problems result from honest mistakes in judgment, as long as there was reasonable basis for the decisions.
Fiduciary duty of loyalty
Requires that directors place the interests of the corporation before their own interests.
Storetrax.com vs. Gurland backgrounbd
Gurland founded storetrax.com. He then agreed for a group of investors to buy a majority share, and he became president and a member of the board. Two years later, he was removed as president, but stayed on the board for another year. He requested severance pay, but it was denied. He sued. Board said he was not due severance pay because his job duties, titles, and salary changed while he worked at storetrax and it was a breach of fiduciary duty to sue the company. Lower court held for gurland, storetrax appealed.
Storetrax.com vs. Gurland verdict
Directors of a corporation occupy a fiduciary relation to the corporation and its stockholders.

Fiduciary relationship requires that a director perform his duties....
1. In good faith
2. In a manner he reasonably believes to be in the best interests of the corporation
3. With the care that an ordinarily prudent person in a like position would use under similar circumstances.

There existed a conflict between respondent's interests as an aggrieved former employee and his duty as a director of the corporation.

AFFIRMED
Managers
Hired by the corporation board of directors to run the business. Managers have the same broad duties of care and loyalty as the directors. Managers prefer to be paid more and receive more benefits
Terminating a corporation
Conducted in two parts: dissolution and winding up phase. Dissolution may be voluntary or involuntary (bankruptcy), and marks the end of the corporation. Upon dissolution, the corporation may not take on any new business. A voluntary dissolution involves the approval of the shareholders and board of directors.

If dissolution is voluntary, board of directors is responsible for winding up the affairs of the corporation. The proceeds of liquidation are first used to satisfy creditors and any remainder goes to the shareholders
Close corporation
Statutory close corporation to distinguish it from a closely held corporation. Limited number of shareholders, usually 30 to 50. Shares may not be sold openly so there is very limited market for shares. Shareholders must have an agreement that governs the affairs of the corporation, but these entities are not subject to formal rules regarding shareholder and director meetings as are required with regular corporation's.
S corporation
Regular corporation's are c corporation's. S corporation's are a classification by the IRS. They only have one class of stock and may not have more than 100 shareholders. S corporation's held for tax considerations because they do not pay taxes, so it is like a partnership for tax purposes.
Professional corporation's (PC's)
Benefit is the liability of the members of the group can be limited to what is invested in the PC. Owners of the PC can comprise only the professionals involved in the firm itself, that is, the doctors whose practices are tied together to some extent.
Benefit corporation
A new class of corporation that voluntarily meets high standards of purpose, accountability, and transparency. These corporation's
1. Have corporate purpose to create a material positive impact on society and the environment;
2. Are required to consider the impact of their decisions not only on shareholders but also on workers, community, and the environment;
3. Are required to make available to the public an annual benefit report that assesses their overall social and environmental performance against a third-party standard.
Double taxation
Corporations profits are taxed at the corporation level and then they must pay federal taxes and state taxes. Then, if remaining profits are paid to the shareholders, the shareholders must pay income taxes on what they received.
Limited liability company
A business operation that is treated like a corporation for liability purposes but like a partnership for federal tax purposes. No member is personally liable for debts.

Usually formed by two or more members.
Articles of organization
What you file for an LLC
Includes:
Company name

Address

Whether the LLC is to be managed by members or by a
manager

Name and addresses of company members
Date upon which company will be dissolved
Whether any members are to be liable for company debts.
Membership interest
Members of an LLC have an interest in the company, like owning stock in a corporation or being a limited partner in a limited partnership. No restrictions on the number of members, but usually under 30. Individuals, partnerships, and other LLCs may be members.
Operating agreement
Members of a LLC sign this agreement. It establishes the company's method of management, allocation of profits and losses among members, restriction on the transfer of membership interests, and the process to be followed in dissolving the company.
Termination of an LLC
LLC is technically not allowed "perpetual" life. An LLC is dissolved and its affairs are wound up usually because of the occurrence of an event specified in the articles of the organization to bring about the dissolution of the company or by the consent of all members
In RE 1545 vs. Ocean Avenue LLC Background
1545 Ocean Avenue LLC was formed for real estate development. It was owned 50-50 by Ocean Sufflok and Crown Royal. Two managers were appointed. Crow Royal wanted to pull out and sued for work to stop and the LLC had to be dissolved. Trial court granted those requests. Ocean Suffolk appealed.
In RE 1545 vs. Ocean Avenue LLC verdict
A dissolution is allowed when it is not reasonably practicable to carry on the business. At any time when there is more than one manager, any one manager may take any action permitted under the agreement, unless tha pro all is expressed in the articles.

The only basis for dissolution can be if 1545 LLC cannot effectively operate under the operating agreement to meet and achieve the purpose for which it was created.

REVERSED
Factors that influence the choice of business organizations
Potential liabilities imposed on the owners
Transferability of ownership interests
Ability of the business organization to continue in the event of the death or withdrawal of an owner
Capital requirements of the business
Tax rate applicable to business organization selected
limited liability
Allows a person to invest in a business without placing their personal wealth at risk

Means that if the sums owed are so large that the organization goes into bankruptcy, the owners could lose investment but won't be personally liable.

Courts can pierce the corporate veil and hold the owners personally liable under some circumstances.
Transferability of ownership
Ability of an owner in a business to sell or pass that interest to others
K.C. Roofing vs. On Top Roofing Background
Nugent kept changing businesses, while working continuously. K.C. Roofing was owed $45,000 for roofing supplies sold to On Top Roofing. K.C. Asked court to pierce the corporate veil and hold the Nugents personally liable. District court held for K.C. Nugents appealed
When will courts pierce corporate veil?
When a plaintiff shows:

1. Control. Complete domination, not only in finances, but of policy and business practice in respect to the translation attacked.
2. Such control must have been used by defendant to commit fraud or wrong
3. The aforesaid control and breach of duty must proximate lay cause the injury or unjust loss complained of.
K.C. Roofing vs. On Top Roofing verdict
Conducted the three prong test for piercing the corporate veil.

There was substantial evidence to support the trial court's findings.

Through his domination and control over On Top, Nugent was using it for the unfair or inequitable purpose of avoiding their debts to the plaintiff.

AFFIRMED
Nontraded entities
Proprietor of a sole proprietorship is the business.

Because partners have such broad powers with respect to the operation of the business, the law does not want to make someone a partner with someone else unless there is a mutual agreement.
Duration
Refers to its ability to continue to operate in the event of the death, retirement, or incapacity of an owner of the business.

Sole proprietorship terminates with death or incapacity of proprietor

Partnership is dissolved by death, retirement, or incapacity of partner.

Corporation has the potential for perpetual existence
How many sales take place at franchises?
1/3
Franchise
Exists whenever a franchisee, in return for payment of a franchise fee, is granted the right to sell goods or services by a franchiser according to a marketing plan.

A franchisee operates as an independent business, usually as a corporation or LLC, subject to standards specified by the franchises.
What do successful franchises have in common
A trademark that conveys authenticity and exclusivity

Uniform product or service
Types of franchises
Product distributorships (car dealerships)

Trademark or trade-name licensing, in which franchisee has license to market the company's brands (Coke)

Business format franchising, in which the franchisee follows the business model set out by the parent company (McDonalds)
FTC Franchise Rule
Requires franchisor to give prospective franchisees an offering circular- a detailed disclosure document- at least ten days before any money changes hands, or before a franchisee commits to a purchase.
Franchise agreemnt
Sets forth the rights and obligations of the franchisor and franchisee.
Trade name and procedure
Agreement grants the franchisee the right to use the franchisor' snake and identifying trademarks or trade dress
Territorial rights
The franchisor may not be allowed to operation additional outlets in the territory.
Dunkin Donuts vs. Sandip Background
Defendants breached their franchise agreement by failing to remodel their shops, participate in mandatory system-wide programs, attend required training, and prepare immigration forms.

They also transferred a significant amount of the franchise without dunkin knowing.

Dunkin entered into a settlement to allow Sandip to try to find buyers for their shops. Sandip submitted a proposal sale agreement but Dunkin refused to accept the proposed buyer.

Dunkin moved to a court order to turn over the physical possession of the shops. Sandip counter claimed that Dunkin rejected a reasonable proposal for buyer
Dunkin Donuts vs. Sandip Verdict
Sandip said that Dunkin didn't consider the buyers financial condition before rejecting the proposed sale.

Dunkin utilizes a two-step analysis.
1. Evaluate whether the store is likely to "break even" the following year
2. Consider the financial condition of buyer

Here store wouldn't break even. Therefore they did not act unreasonably by failing to investigate the buyers financial condition.

Dunkin wins
Termination of franchises
Franchise agreements are usually explicit about events that bring about the termination.
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