CHAPTERS 32, 33, 34

1. CHAPTERS 32, 33, 34 Business In A Nutshell

2. “No one form of organization is right for every business. The proper choice depends upon factors such as sources of financing, tax issues, liability concerns, and the entrepreneur’s goals.”

3. TYPES • Sole Proprietorships • Partnerships • Corporations

4. SOLE PROPRIETORSHIPS • An unincorporated business owned by one person. • Are easy and inexpensive to create and operate. • Earnings are reported on the owner’s personal tax returns.

5. PARTNERSHIP An unincorporated association of two or more co-owners who carry on a business for profit.

6. LEGAL • No Federal Law (Except taxes) • Each state regulates • Most modeled after the Uniform Partnership Act (UPA) of 1914, which has been revised several times (most recently in 1997).

7. IS IT A PARTNERSHIP? YES IF: • Partners share profits • Partners share management of business • Partners share losses • And many more as we shall see

8. HOWEVER • Referring to yourselves as partners does not create a partnership, but may be evidence that one was intended. • Charitable businesses are not partnerships. • Non-profit enterprises are not partnerships

9. TYPES Partnership at will Term partnership

10. But Be Aware!

11. PARTNERSHIP BY ESTOPPEL • Participants tell other people that they are partners • or they allow other people to say, without contradiction, that they are partners. • A third party relies on this assertion; and • The third party suffers harm.

12. You Probably Are A partnership

13. PARTNERSHIP PROS Advantages: • Easy to form. • No double taxation • May be easy to manage • Easy to terminate

14. AND CONS • Disadvantages: • Personal liability • Funding may be difficult • Management may be difficult. • Transferability is limited. • May terminate when not desired

15. MORE CONS • Sometimes unintentional • Partners can be held personally liable for the partnership actions and debts.

16. GREAT LEGAL ADVICE ALL PARTNERSHIP AGREEMENTS SHOULD BE IN WRITING! DOT THE Is, X THE TS TEAMWORK

17. AUTHORITY TO BIND PARTNERSHIP Partners with actual or apparent authority may bind the partnership. • Actual Express Authority • Actual Implied Authority • Apparent Authority

18. PARTNERLIABILITY I Ratification: If the partnership accepts the benefit of an unauthorized transaction or fails to repudiate it, it has ratified the transaction.

19. PARTNER LIABILITY II Information Under the Uniform Partnership Act, whatever one partner knows, the partnership is deemed to know.

20. PARTNER LIABILITY III Tort Liability A partnership is liable for intentional and negligent torts of a partner in the ordinary course of business or when the partner is acting with actual authority.

21. PARTNER LIABILITY IV • Personal Liability • Joint and Several Liability • Incoming Partners

22. RELATIONSHIPS AMONG PARTNERS I • Financial Rights • Profits • Losses • Pay • Property • Ownership

23. RELATIONSHIPS AMONG PARTNERS II Management Rights • equal rights in management • right to bind the partnership to a contract • have an equal vote • right to inspect and copy the partnership’s books and records. • required to share any important information

24. RELATIONSHIPS AMONG PARTNERS III Management Duties • Duty of Care • Duty of Loyalty • Duty of Good Faith • Duty of Fair Dealing

25. TERMINATING A PARTNERSHIP Partnership at Will vs. Term Partnership • Partnership at Will • Term Partnership

26. DISSOCIATION I(TERMINATION IS BETTER TERM) • Automatic if a partner quits. • Automatic if a partner dies • May happen by agreement

27. DISSOCIATION II Must remember, a partner always has the power to leave but may not have the right.

28. DISSOCIATION III When one or more partners dissociate, the partnership can: 1. buy out the departing partner and continue in business or 2. wind up the business and terminate the partnership

29. Dissociation IV Rightful Dissociation Vs. Wrongful Dissociation

30. CHOICE #1. CONTINUATION OF PARTNERSHIP • Financial Settlement • Liability of the dissociated partner to outsiders for debts incurred before dissociation • Liability of Dissociated Partner for Debts Incurred After Dissociation • Liability to the Partnership

31. CHOICE #2. TERMINATION Ending a partnership business involves three steps: • Dissolution • Winding Up • Termination

32. OTHER TYPES OF PARTNERSHIPS

33. LIMITED PARTNERSHIPS • General (active management) and limited (money-only) partners. • Only the general partners are personally liable.

34. JOINT VENTURE A partnership for a limited purpose.

35. LIMITED LIABILITY LIMITED PARTNERSHIP • None of the partners are personally liable • Formation requires a filed certificate of limited partnership. • Very technical

36. CORPORATIONS A legal business entity created under state laws

37. CORPORATIONS Several types: • Close • Publicly held • Non-profit

38. CORPORATIONS • Corporations offer limited liability – usually the managers’ and investors’ personal property is not at risk. • Corporate stock can be bought and sold, making investments easy to get. • Corporations involve a lot of expense and effort to create and operate.

39. FORMING A CORPORATION • Where • State laws • By whom • How • Registration • Ownership

40. WHERE TO INCORPORATE • State law – not Federal • Either the home state of the business or a state which has favorable laws for corporations (often Delaware)

41. ARTICLES OF INCORPORATION(CHARTER) Required Provisions • Name of corporation • Address and Registered Agent • Incorporator • Purpose • Stock

42. OPTIONAL PROVISIONS • Indemnification of Directors • Cumulative Voting

43. DEFINITIONS • Promoters • Shareholders • Officers • Stock • De Facto Corporation • De Jure Corporation • Corporation by Estoppel

44. PROMOTER The person who normally is hired to set up the corporation. Also called the “incorporator”

45. PROMOTER’S LIABILITY • The promoter is personally liable on any contract signed before formation. • The corporation is not liable unless it adopts the contract after incorporation.

46. NOVATION Even if the corporation adopts the contract, the promoter is still liable until the third party agrees to a novation (new contract), unlessthe contract clearly indicates that the other party is relying only on the corporation, which he knows does not yet exist.

47. SHAREHOLDERS The owners of a corporation who pay value for the stock in the corporation. Stock represents their ownership. Take over from the promoter

48. BOARD OF DIRECTORS Elected by the shareholders to oversee the corporation. Normally draw up by-laws. DIRECTORS BEWARE!!!!!

49. OFFICERS Elected by the directors to run the corporation on a day-to-day basis. officers BEWARE!!!!!

50. STOCK I Stock can be: • Authorized and unissued • Authorized and issued or outstanding • Treasury stock (been issued, then bought back by company)