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JMU COB 218 Chapter 11

Terms in this set (58)

Sole Proprietorship
unincorporated business owned by one person

the simplest form of business, in which the owner is the business

Advantages:
-total control
-retains all profits
-ease of creation (biggest advantage)
-cheapest business to create

Disadvantages:
-unlimited personal liability for all losses/debts/obligations (biggest problem)
-funding limited to personal funds
Franchise
an arrangement in which the franchisor (owner of trademark, trade name, or copyright) licences a franchisee to use the trademark, trade name, or copyright in the sale of goods or services

typically owned by corporations but can be owned by anyone
Chain franchise
a franchise that operates under a franchisor's trade name and is identified as a member of a select group of dealers that engage in the franchisor's business

the franchisee is generally required to follow standardized or prescribed methods of operation

Advantages:
-easy to start since you have a defined set of instructions on how to run the business provided by the franchisor
Disadvantages:
-you can't customize your business since you must abide by the guidelines provided by the franchisor
Distributorship franchise
franchisor licenses franchisee to sell franchisor's product in specific area

Ex. Car dealership
Manufacturing/Processing franchise
franchisor provides franchisee with technical knowledge to manufacture franchisor's product; the franchisee then markets the product either at wholesale or at retail in accordance with the franchisor's standards

these franchises occur since its cheaper to manufacture goods and distribute them locally rather than globally

Ex. Bottling companies
General partnership
arises from agreement, express or implied, between two or more persons to carry on a business together FOR PROFIT

3 Essential Elements:
-sharing of profits and losses
-joint ownership of the business
-equal right in management of the business

Advantages:
-easy to create
-profits are "passed through" to partners and only taxed once
-personal income tax only

Disadvantages:
-unlimited personal liability (you and your partners)
-joint and several liability
Joint and several liability
a third party has the option of suing all the partners in a partnership together or one or more separately

a disadvantage to Partnerships
Fiduciary duties of a partnership
Duty of Loyalty:
-a partner must account to the partnership for any profit or benefit from the firm's business or the use of its property
-a partnership must refrain from competing with the partnership or dealing with the firm as an adverse party

Duty of Care
-refraining from negligent, reckless, or intentional misconduct/violation of law that could be harmful to partnership
Limited partnership (LP)
an agreement by two or more persons to carry on a business for profit with at least one general partner and one limited partner

this type of partnership is a creature of statute, because it does not come into existence until a certificate is filed with the Secretary of State
Limited partner
a partner who contributes capital but has no right to participate in the management or operation of the partnership and is not personally liable for partnership debts beyond the capital contributed

hands off, passive investor
General partner
a partner who assumes responsibility for the management of the partnership and liability for its debts

one who has money and is going to start the business
Limited liability partnership (LLP)
a form of partnership that allows professionals (attorneys and accountants) to enjoy the tax benefits of a partnership while limiting their personal liability for the malpractice of other partners

Advantages:
-it allows the partnership to continue as a "pass through" entity for tax purposes
-no personal liability for partner malpractice

Disadvantages:
-personal liability
Limited liability company (LLC)
a hybrid form of business enterprise that offers the limited liability of the corporation but the tax advantages of a partnership (best of both worlds)

Advantages:
-"pass through" taxation
-no personal liability
Operating agreement
in a limited liability company (LLC), an agreement in which the members set forth the details of how the business will be managed and operated

typically contains provisions relating to management, how profits will be divided, how membership is transferred/sold, and how the LLC is terminated (whether the LCC will be dissolved on the death or departure of a member)
Member-managed
the partners are the ones running the limited liability company (LLC)
Manager-managed
someone else (a third party) is hired to run the limited liability company (LLC)
Corporation
a legal entity formed in compliance with statutory requirements that is distinct from its shareholder-owners

treated like people

Advantages:
-owner's liability limited to amount of investment
-ease of raising capital by issuing/selling stock
-profits taxed as income to shareholders

Disadvantages:
-profits taxed as income, plus income to owners/shareholders (double-taxation)
-formalities required in establishing and maintaining existence
Shareholders
those who have purchased ownership shares in a business (typically a corporation) who technically own a part of that business
Board of directors
people who are elected by the shareholders and are the ones who manage the corporation

they normally employ officers to oversee day-to-day operations
S corporation
a business corporation that qualifies for special income tax treatment

Advantage:
-can avoid double-taxation (not taxed at the corporate level, income is only taxed once when it is distributed to the shareholders who pay personal income taxes on their respective shares of the profits)
Domestic corporation
a corporation that does business in its state of incorporation
Foreign corporation
a corporation that does business in one state but is incorporated in another state
Alien corporation
a corporation that is incorporated in another country but does business in the U.S.
Close corporation
a corporation whose shareholders are limited to a small group of persons, often only family members; the shareholders' rights to transfer shares to others are usually restricted

generally does not offer stock to the public; limit to the number of shareholders you can have

often operated like a partnership (if meets the requirements, can operate as an S corporation)
Articles of incorporation
a document containing the basic information about a corporation (name, location, etc.), the persons who are forming it, its business functions/purpose, and structure, when a business is incorporated

usually filed with the Secretary of State
Corporate express powers
found in its articles of incorporation, in the law of the state of incorporation, and in the state and federal constitutions

corporate bylaws also establish these powers
Corporate implied powers
power to perform all acts reasonably appropriate and necessary to accomplish its corporate purposes

power to do whatever actions are necessary (within the law) to execute express powers
Piercing the corporate veil
the action of a court to disregard the corporate entity and hold the shareholders personally liable for corporate debts and obligations

courts do this when the corporate privilege is abused for personal benefit or when the corporate business is treated so carelessly that it is indistinguishable from the controlling shareholder
Responsibilities of directors
-vote on important corporate decisions
-appoint and supervise officers
-make financial decisions
-manage corporation
Responsibilities of officers
run "day-to-day" business of firm

Ex. CEO, CFO, COO
Responsibilities of shareholders
-elect board of directors
-approve major corporate decisions
Rights of directors
-Right to compensation
-Right to participation
-Right to inspection
-Right to indemnification
Rights of officers
Rights are determined in the employment contract
Rights of shareholders
-stock certificates
-preemptive rights
-Right to dividends
-Right to transfer shares
-Right to inspection
-Right to corporate dissolution
-Right to file derivative suit
-Right to file direct suit
Duties/Liabilities of directors and officers
-Duty of Care
-Duty of Loyalty
-Disclose and avoid conflicts of interest
-Business Judgement Rule
Powers of shareholders
-Vote to approve major corporate decisions (mergers, acquisitions, dissolution of corporation, etc.)
-Receive dividends for the distribution of profit
-Inspection (Ex. Of corporate records)
-Transfer shares (selling ownership interest)
-Derivative Suit (file this on behalf of corporation if directors and officers caused harm or are failing to act)
Entrepreneur
one who initiates and assumes the financial risk of a new business enterprise and undertakes to provide or control its management

primary motive is to make profits
Franchisee
one receiving a license to use another's trademark, trade name, or copyright in the sale of goods and services

the purchaser of a franchise
Franchisor
one licensing another to use the owner's trademark, trade name, or copyright in the selling of goods or services
Articles of partnership
a written agreement that sets forth each partner's rights and obligations with respect to the partnership

usually specifies the name/location of the business, the duration of the partnership, the purpose of the business, each partner's share of the profits, how the partnership will be managed, and how assets will be distributed upon dissolution

not required to create a partnership
Fiduciary relationship
a relationship founded on trust and confidence

partnerships are built around this type of relationship
Dissociation
the severance of the relationship between a partner and a partnership
Member
a person who has an ownership interest in a limited liability company (LLC)
Articles of organization
the document filed with the Secretary of State's office by which a limited liability company (LLC) is formed

contains information such as the name of the business (must include the words "Limited Liability Company" or "LLC"), its principal address, the name and address of a registered agent, the names of the owners, and information on how the LLC will be managed
Bylaws
the internal rules of management adopted by a corporation or other association
Securities
generally, stocks, bonds, and other items that represent an ownership interest in a corporation or a promise of repayment of debt by a corporation
Stocks (equity securities)
an ownership (equity) interest in a corporation, measured in units of shares
Bonds (debt securities)
a security that evidences a corporate (or government) debt

represents borrowing of funds by firms and governments
Venture capital
financing provided by professional, outside investors (usually a group of wealthy investors and securities firms) to new business ventures

usually obtained by start-up businesses and high-risk enterprises
Commingle
to put funds or goods together into one mass so that they are mixed to such a degree that they no longer have separate identities
Quorum
the number of members of a decision-making body that must be present before business may be transacted
Business judgement rule
a rule that immunizes corporate management from liability for decisions that result in corporate losses or damages if the decision-makers took reasonable steps to become informed, had a rational basis for their decisions, and did not have a conflict of interest with the corporation

incentivizes risk taking
Proxy
in corporate law, a written or electronically transmitted form in which a stockholder authorizes another party to vote the stockholder's shares in a certain manner
Shareholder proposal
when a shareholder wants to change a company policy, they can put their idea up for a shareholder vote by submitting a ________________ to the board of directors asking the board to include the proposal in the proxy materials that are sent to all shareholders before meetings
Cumulative voting
a voting method designed to allow minority shareholders to be represented on the board of directors

each shareholder is entitled to a total number of votes equal to the number of board members to be elected multiplied by the number of voting shares a shareholder owns
Preemptive rights
rights that entitle shareholders to purchase newly issued shares of a corporation's stock, equal in percentage to shares already held, before the stock is offered to outside buyers

apply only to additional, newly issued stock sold for cash; rights must be exercised within a specified time period (usually 30 days)

most important in close corporations
Dividends
a distribution of corporate profits or income ordered by the directors and paid to the shareholders in proportion to their respective shares in the corporation

can be paid from the following sources:
-Retained earnings
-Net profits
-Surplus
Derivative suit
a suit brought by a shareholder to enforce a corporate cause of action against a third party

before shareholders can bring this suit, they must submit a written demand to the corporation asking the board of directors to take action (directors then have 90 days to act)

purpose:
-to act as "guardians" of the corporate entity
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