Business Organizations

Jody Blanke Professor of Computer Information Systems and Law

Limited Liability Flow-Through Taxation Sole Proprietorship General Partnership Limited Partnership

No No No - gen. part.

Yes - lim. part.

Corporation Limited Liability Company

Yes Yes Yes Yes Yes No (double taxation) Yes

Management/ Control

Yes Yes Yes - gen. part.

No - lim. part.

No Yes

Right to Share In Profits

Yes Yes Yes No Yes

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

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

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

Corporation

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

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

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

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.

Piercing the Corporate Veil

  Alter ego theory  commingling of funds  ignoring formalities Undercapitalization 

e.g., Walkovsky v. Carlton

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

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)

x

 1

numdir

 1

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)

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)

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)