Business Organizations

1. Business Organizations Jody Blanke, Professor Computer Information Systems and Law Mercer University, Atlanta

3. Sole Proprietorship • easy to form • no formalities • unlimited personal liability • no legal identity apart from owner • e.g., Diversity Heating and Plumbing • James Schuster • Jerry Schuster

4. General Partnership • easy to form • two or more people run a business for profit • no formalities • unlimited personal liability • joint liability on contracts and debts • may continue after death of partner • should have written partnership agreement

5. Limited Partnership • statutory creation • must have at least one general partner and one limited partner • limited partner has limited liability, but cannot participate in management

6. Corporation • statutory creation • must satisfy legal formalities • e.g., articles of incorporation, bylaws • perpetual existence • limited liability of shareholders • free transferability of shares

7. S Corporation • can avoid double taxation, but • can have no more than 100 shareholders • all of whom must be individuals, estates or trusts • cannot be corporations or partnerships • can have only one class of stock • cannot own more than 80% of another corporation

8. Limited Liability Company • relatively new statutory creation (1977) • “best of all worlds” • members have limited liability • members can participate in management • can choose to be taxed like a corporation or like a partnership

9. Limited Liability Partnership • generally available only for professionals • no general partner • partners are not personally liable for the debts of the LLP or of other partners • partners are liable for his/her own negligence, malpractice, etc.

10. Piercing the Corporate Veil • Alter ego theory • commingling of funds • ignoring formalities • Undercapitalization • e.g.,Walkovsky v. Carlton

11. Management of Corporation • Directors • overall control of corporation • Officers • appointed by board of directors to run day-to-day operation of corporation • Shareholders • owners of corporation • elect the directors

12. Shareholder Voting • Straight voting • one vote for each share for each director nominee • Cumulative voting • permitted and/or required in some states • number of voting shares are multiplied by number of director positions to be filled • percentage required to elect one director (x)

13. Duty of Loyalty • A director and officers must act in the best interests of the corporation • Personal interests must be subordinated to the interests of the corporation • A director or officer may not usurp a corporate opportunity without full disclosure and right of first refusal to corporation • Conflicts of interest must be fully disclosed • e.g.,Globe Woolen v. Utica Gas & Elect. (1918)

14. Duty of Care • Directors and officers must be honest and use prudent business judgment • They must use the amount of care that an ordinarily prudent person would use in similar circumstances • e.g., Bates v. Dresser (1920)

15. Business Judgment Rule • Directors and officers are protected from honest mistakes of judgment and poor business decisions • They are protected from “Monday morning quarterbacks” • e.g., New Coke • e.g., Shlensky v. Wrigley (1968)