Transcript Introduction  Entrepreneurs wishing to start a new business must be aware of advantages and disadvantages of various business entities for their endeavor.

Introduction
 Entrepreneurs wishing to start a new business must be aware
of advantages and disadvantages of various business entities
for their endeavor. Consider:
 Ease of creation.
 Owners’ liability.
 Tax considerations.
 Need for Capital.
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Sole Proprietorships
The owner is the business; anyone who does business without
creating a separate business organization has a sole
proprietorship.
Advantages
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Disadvantages
Owner is in complete control &
receives all profits
Owner is personally liable for all
torts/contracts
Flexibility
Lacks continuity after death
Ease of creation; maintenance
Difficult to raise financing
Partnerships
A (general) Partnership is an association of two or more persons to
carry on a business as co-owners for profit. (UPA).
Advantages
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Disadvantages
Easy to create and maintain
Partners are personally liable for
all torts/contracts
Flexible, informal
Dissolved upon death
Partners share profits and losses
equally
Difficult to raise financing
Rights Among Partners
 In the absence of a partnership agreement (oral or
written) state statutes govern the rights among partners:
 Management: equal, each one vote, majority wins; need
unanimous consent for some actions.
 Partnership Interest: equal profits, losses shared as profits
shared.
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Duties and Liabilities of Partners
 Fiduciary Duties: Partners are fiduciaries and general
agents of one another and the partnership.
 Authority of Partners: Partners have implied authority
to conduct ordinary partnership business but need
unanimous consent to sell assets or donate to charity.
 Joint Liability for Contracts. If Partner is sued for
Partnership debt, Partner has right to insist that other
partners be sued with her.
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Duties and Liabilities of Partners
 Joint and Several Liability for Torts.
 JSL means 3rd party can sue either one or all partners. 3rd
party may collect against personal assets of all partners.
 Liability of Incoming Partner & Outgoing Partner. New
admitted partner has no personal liability for existing
partnership debts and obligations.
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The Nature of the Corporation
 A corporation is a creature of statute, an artificial “person.”
 Most states follow the Model Business Corporation Act (MBCA)
or the RMBCA, that are model corporation laws.
 The shares (stock) of a corporation are owned by at least one
shareholder (stockholder).
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Limited Liability of Shareholders
 The corporation provides limited liability for
stockholders.
 In certain situations, the corporate “veil” of
limited liability can be pierced, holding the
shareholders personally liable.
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Corporate Taxation
 Corporate profits can either be kept as retained earnings or
passed on to the shareholders as dividends.
 Corporate profits are taxed under federal and state law as a
separate “person” from its shareholders.
 Regular “C” corporations are taxed twice: at the corporate
level and at the shareholder level.
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Classification of Corporations
 Domestic corporation does business in its state of
incorporation.
 Foreign corporation from X state doing business
in Z state.
 Alien Corporation: formed in another country
doing business in United States.
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Classification of Corporations
 Public and Private.
 Nonprofit.
 Close Corporations.
 Shares held by few shareholders.
 More informal management,similar to a partnership.
 Restriction on transfer of shares.
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Classification of Corporations
 “S Corporations”: Avoids the federal “double taxation” of
regular corporations at the corporate level. Only
dividends are taxed to the shareholders as personal
income. IRS requirements:
 Corporation is domestic, fewer than 75 shareholders, only one
class of stock, no shareholder can be a non-resident alien.
 Professional Corporations.
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Corporate Formation
 The process of incorporation generally
involves two steps:
 Preliminary and Promotional Activities; and
 The Legal Process of Incorporation.
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Incorporation Procedures
Promotion
File Articles of
Incorporation
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Name
Search
State
Charter
Subscribers
1st Organizational Meeting
Incorporation Procedures
 State Chartering: Select state (some states such as Delaware
cater to corporations).
 Articles of Incorporation: primary enabling document filed
with the Secretary of State that includes basic information
about the corporation. Person(s) who execute the articles are
the incorporators.
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Incorporation Procedures
 Choose and reserve a Corporate Name.
 Name must have the proper suffix: “corporation,” “corp.,”
“Incorporated.”
 You should also consider registering the corporation as a “dot
com” at networksolutions.com or register.com.
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Incorporation Procedures
 Purpose: trend towards “any legal business.”
 Duration: usually perpetual.
 Capital Structure: Most states requires some minimal
capitalization (Texas used to require $1,000), plus number
and class(es) of shares authorized and “par value” of shares at
incorporation.
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Incorporation Procedures
 Internal Organization: usually included in the bylaws.
 Registered Office and Agent: specific person that will receive
any legal notice and documents from state and/or 3rd parties.
 Incorporators (usually the promoter): at least one with name
and address.
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First Organizational Meeting
 After the corporation is “chartered” (created) it and can do
business.
 Shareholders should have the first organizational meeting to:
approve the bylaws, elect directors, hire officers and adopt
pre-incorporation contracts and activities.
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Corporate Management-Directors
and Officers
 Every corporation is governed by a board of directors.
 Individual directors are not agents of corporation, only
the board itself can act as a “super-agent” and bind the
corporation.
 A director can also be a shareholder, especially in closelyheld corporations.
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Election of Directors
 Subject to statutory limitations, the number of directors is
set forth in the articles of incorporation:
 Directors appointed at the first organizational meeting.
 In closely held companies, directors are generally the
incorporators and/or the shareholders.
 Term of office is generally for one year.
 Director can be removed for cause (for failing to perform a
required duty).
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Board of Directors Meetings
 Directors hold meetings pursuant to bylaws with recorded
minutes.
 Special meetings may be called with sufficient notice.
 Meetings require QUORUM (minimum number of directors
to conduct official corporate business, usually majority).
 Each director generally has one vote.
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Role of Corporate Officers
and Executives
 Officers serve at the pleasure of the Board of Directors but
have fiduciary duties to company as well.
 Their employment relationships are generally governed by
contract law and employment law.
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Duties and Liabilities
of Directors and Officers
 Directors and officers are fiduciaries of the corporation. They
owe ethical and legal duties to the corporation and
shareholders:
 Duty of Care : Directors/officers are expected to act in good
faith and the best interests of the corporation. Failure to
exercise due care may subject individual directors or officers
personally liable.
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Duties and Liabilities
of Directors and Officers
 Duty of Care (cont’d):
 Make informed and reasonable decisions;
 Rely on competent consultants and
experts; and
 Exercise reasonable supervision
 But…”Business Judgment Rule”
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Duties and Liabilities
of Directors and Officers
 A dissenting director is rarely held liable for mismanagement of
corporation. Dissent must be registered with the corporate
secretary and posted in the minutes of the meetings.
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Duties and Liabilities
of Directors and Officers
 Duty of Loyalty: subordination of personal interests to the
welfare of the corporation.
 No competition with Corporation.
 No “corporate opportunity.”
 No conflict of interests.
 No insider trading.
 No transaction that is detrimental to minority shareholders.
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Conflicts of Interest
 Full disclosure of any potential conflicts of interest and
abstain from voting on any transaction that may benefit the
director/officer personally.
 However, if transaction was fair and reasonable, it will not be
voidable if approved by majority of disinterested directors.
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Corporate Ownership-Shareholders
 Ownership of shares grants a shareholder an equitable ownership
interest in a corporation.
 Shareholders generally have no right to manage the daily affairs of
the corporation, but do so indirectly by electing directors.
 Shareholders are generally protected from personally liability by
the corporate veil of limited liability.
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Shareholder Powers
 Shareholder powers include approving all fundamental changes to the
corporation:
 Amending articles of incorporation or bylaws.
 Approval of mergers or acquisition.
 Sale of all corporate assets or dissolution.
 Shareholders also elect and remove the board of directors.
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Shareholder Meetings
 Shareholders’ meetings must occur at least annually. Voting
requirements and procedures are:
 Quorum of shareholders owning more than 50% of shares must
be present to conduct business;
 Shareholders may appoint a proxy or enter into a voting trust
agreement.
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Shareholder Voting
 Common shareholder entitled to one vote per
share.
 Articles and by-laws can exclude or limit voting
rights of certain classes of stock.
 Quorum must be present -- shareholders
representing more than 50% of outstanding shares
must be present.
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Shareholder Voting
 Shareholders may vote on resolutions.
 Need majority present for most resolutions.
 Need a “super majority” (e.g., 67%) for important
matters: sale of assets, etc..
 Voting lists by corporate secretary contains
record of stock ownership.
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Shareholder Voting
 Methods of Increasing Minority Share-holder Power
Within the Corporation:
 Cumulative Voting allows minority shareholders to get a board
member elected.
 x # to be elected x shareholders # of shares = shareholder can cast them
all for one board nominee.
 Shareholder Voting Agreements.
 Voting Trusts.
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Shareholders’ Rights
 Shareholders have the right:

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
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



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To vote.
To have a stock certificate.
To purchase newly issued stock.
To dividends, when declared by board.
To inspect corporate records.
To transfer shares, with some exceptions.
To a proportionate share of corporate assets on dissolution.
To file suit on behalf of corporation.
Preemptive Rights
 Common law concept which is a preference to existing
shareholders to purchase a pro-rated share of newly-issued
stock within a certain period of time.
 Provided for in the articles of incorporation.
 Significant in a close corporation to prevent dilution and loss
of control.
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Dividends
 Distribution of corporate profits or income.
 Only as ordered by the Board.
 Can be stock, cash, property, stock of other corporations.
 State laws control the sources of revenues for dividends, which
may be paid from retained earnings, net profits and surplus.
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Limited Partnerships
Agreement of two or more persons to carry on a business for
profit with at least one general partner and one limited
partner.
 Limits the liability of some of its owners (the limited
partners) to their investment.
 LP is a creature of state statute. Filing a certificate with the
Secretary of State is required.

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LP – Rights and Liabilities
 The General partner assumes all management and personal
liability.
 Limited Partner contributes cash but has no management
rights. Liability is limited to the amount of investment. A
limited partner can forfeit this “veil” of immunity by taking
part in the management of the LP.
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LP -- Rights and Liabilities
 General partners are personally liable to 3rd parties for
breach of contract and tort liability. However, a corporation
(or an LLC) can be a general partner and have limited
liability.
 Limited partners have the right to inspect the LP’s books and
be informed of the LP’s business.
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Limited Liability Companies
Like corporations, LLC’s are creatures of state law. The
owners are called “members” (not shareholders) and their
ownership is called an “interest” (not shares).
 LLC’s are formed by filing Articles of Organization with the
Secretary of State.

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LLC Advantages & Disadvantages
Advantages
Disadvantages
Member liability is limited to
amount of investment.
State statutes are not uniform.
Can be treated as a “pass through” Not all states recognize LLC’s.
entity for tax purposes.
Profits can be distributed to
members without the double
taxation of a corporation. Members
pay personal income tax on
received dividends.
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LLC Formation
 Articles of Organization require:





Name of Business.
Principal Address.
Name and Address of Registered Agent.
Names of the Owners; and
How the LLC will be managed.
 Business name must include LLC or Limited Liability
Company.
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LLC Operating Agreement
 Operating agreement (in Texas a “Company Agreement”) is
analogous to corporation’s bylaws.
 Operating agreements may be oral and contain provisions
relating to management, dividends, meetings, transfer of
membership interests, and other significant issues.
 Generally, if the operating agreement is silent, courts will apply
partnership principles.
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Management of an LLC
 There are two options for management, generally set forth in the
articles of organization:
 Member-Managed: all of the members participate in management, like
a partnership.
 Manager-Managed: members are elected to manage the LLC.
 If the articles are silent, statutes provide either that each member
has one vote or votes are made based on percentage of ownership.
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Limited Liability Partnerships
Creature of state statute, similar to an LLC, except that an LLP
is designed for professionals who normally do business as a
partnership (lawyers and accountants).
 LLP allows partnership to limit personal liability of the
partners but allows “pass through” tax advantages.

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Liability in an LLP
 Recall that partnership law makes all partners jointly and
severally for another partner’s tort, including personal assets.
 The LLP allows professionals to avoid personal liability for
the malpractice of other partners.
 Supervising Partner is also liable for acts of subordinate.
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Merger and Consolidation
 Business Entities can grow and expand by:
 Mergers.
 Consolidation.
 Purchase of another entity’s assets.
 Purchases of a controlling ownership interest in another entity.
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Merger
 Legal combination of two or
more entities (A & B) after
which only A entity remains.
A’s organizational docs are
amended to include a
certificate of merger.
 After merger, A continues as
the surviving entity with all of
B’s rights and obligations.
A
B
A
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Consolidation
 Occurs when two or more
corporations (A & B) combine
such that both cease to exist and a
new corporation emerges which
has all the rights and obligations
previously held by A and B.
 C’s articles of consolidation take
the place of the original articles of
A and B.
A
B
C
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Conversion
 Occurs when entities of one type
become a different type of entity.
 C’s articles of consolidation take
the place of the original articles of
A and B.
A
B
C
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Purchase of Assets
 The acquiring corporation extends its ownership and
control over the physical assets of another company.
 Acquiring corporation shareholders do not need to
approve unless:
 Acquiring corporation is paying for assets with its own stock and
there is not enough stock authorized or
 Acquiring corporation sells on a national exchange, is paying with
its own stock, and newly issued stock = 20% or more than the
outstanding shares.
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Purchase of Assets: Liabilities
 Generally, an acquiring corporation is not liable for
liabilities of selling corporation unless:
 The acquiring corporation impliedly or expressly assumes the
liabilities.
 Sale amounts to what is really a merger or consolidation.
 Purchaser continues the seller’s business and retains the same
personnel.
 Sale is fraudulently executed to escape liability.
 The selling corporation needs both board and
shareholder approval.
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Purchase of Stock
 Alternative to merger or consolidation is the purchase of a
controlling interest (e.g., 51%) of a “target” corporation’s
stock (called a “takeover”) giving the purchaser corporation
controlling interest in the target.
 The aggressor deals entirely with the target’s shareholders.
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Purchase of Stock: Tender
 Tender Offers.
 A publicly advertised offer addressed to all shareholders of the
target is called a tender offer.
 Tender offer is usually higher than market value per share but
conditioned on the acquisition of a certain % of shares
 Can be in exchange for aggressor's stock.
 Sec strictly regulates tender offers.
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Termination
 Termination of a corporation, like a partnership, consists
of two phases:
 Dissolution (voluntary or involuntary); and
 Liquidation.
 Dissolution can brought about by:
 Act of legislature.
 Certificate expiration.
 Voluntary approval by shareholders and board.
 Unanimous action by all shareholders.
 Court order.
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Dissolution
 Shareholders can initiate dissolution by a unanimous vote to
dissolve.
 Or, the Board can initiate by submitting a proposal to the
shareholders for a vote at the annual shareholder meeting or
specially-called meeting.
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Liquidation
 Voluntary Dissolution.
 Board liquidates and acts as trustees of assets.
 Court will appoint a receiver if:
 Board refuses; or
 Creditors want a receiver.
 Involuntary Dissolution.
 Court appoints receiver.
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Other Forms/Entities
 Joint Venture
 Syndicate
 Joint Stock Company
 Business Trust
 Cooperative Association
 Unincorporated Association
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Joint Ventures
Joint Venture: two or more entities combine efforts or
property for a single transaction or project.
 Unless agreed otherwise, JV’s share profits and losses
equally.
 Common in international transactions when U.S.
companies wish to expand overseas.

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JV Characteristics
 Resembles a partnership and is taxed like a partnership. However,
a JV is limited in time and scope, whereas a partnership is an
ongoing business. Other differences:
 JV members has less implied and apparent authority than partners.
 Death of JV member does not terminate JV.
 JV members can specify duration. If not, then JV terminates
when purpose is accomplished.
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Other Entities
Syndicate (Investment Group): group of individuals getting
together to finance a particular project.
 Joint Stock Company is a hybrid of partnership and
corporation: (1) ownership represented by shares of stock;
(2)managed by directors and officers of the company; and
(3) can have a perpetual existence.

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Other Entities
Business Trust is created by a written agreement setting
forth the interests of the beneficiaries and obligations and
powers of trustees. Legal ownership and management of
property remains with trustees and profits distributed to
the beneficiaries.
 Cooperative is an association organized to provide a notfor-profit service to members.

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