Small Businesses, LLs, and Corps (Chapters 13-15)

Question 1

What are factors considered in deciding what form of business one will open?

Answer 1

Ease of creation, owners’ liability, tax considerations, ability to raise capital.

Question 2

What are advantages and disadvantages of a sole proprietorship?

Answer 2

Advantages: Owner is in complete control and receives all profits, flexible, easy to create and maintain/make decisions, pay only personal taxes on profits.
Disadvantages: Personally liable for all torts/contracts & business liabilities, lacks continuity after death, difficult to raise financing.

Question 3

How is a partnership created? How are they governed? What are the agency concepts and partnership law involved?

Answer 3

Two or more people agree to carry on business for profit, are joint owners with = rights to manage and share profits and losses. Common and statutory law. Each partner is an agent and fiduciary of other, might be imputation of liability between partners. Different from agents; co-owners.

Question 4

When does UPA apply and what are essential elements to see if a partnership was formed?

Answer 4

Apply in the absence of agreement of partners (articles of partnership) and look for: sharing of profits/losses, joint ownership, = right to participate in management.

Question 5

How have partnerships begun to be viewed?

Answer 5

Separate legal entities, can own property, convey it, sue/be sued. (Used to have to sue each partner). Not separate entity for tax purposes, “pass through.”

Question 6

What are state statutes that govern partner rights in the absence of an oral/written agreement?

Answer 6

Mgmt: =, each one vote, majority wins, some things need unanimous vote. Profits/losses shared equally. (Interest in property too).

Question 7

What are duties and liabilities of partners?

Answer 7

Personally liable for debts of partnership, each acts as principal and agent of other. Duty of loyalty (partner has to account to partnership for any property, profit or benefit) and duty of care to refrain from grossly negligent or reckless conduct or knowing violation of law. Joint and Several Liability for Torts - 3rd party can sue all or one partner, can collect against personal assets of all partners, acts of one partner subject others to liability.

Question 8

Pros and cons of partnership?

Answer 8

Advantages: Easy to maintain, flexible and informal, partners share profits/losses equally, tax pass through entity (personal income tax).
Disadvantages: Partners liable for all torts/contracts, dissolves on death, difficult to raise financing.

Question 9

What is a franchise and what different kinds are there?

Answer 9

Franchisor licenses franchisee to use trademark, trade name or copyright in sale of goods or services. Distributorship (Car dealerships), Chain Style Business Operation (McDonald’s), Manufacturing or Processing Arrangement (Coke).

Question 10

What is in a franchise contract?

Answer 10

UCC Article 2 applies. Franchisee type of business entity, including capital structure, sales quota and records keeping. Location, lease or purchased premises, rights to an “exclusive” territory to market goods/services.

Question 11

What do franchisors have a right to?

Answer 11

Termination for good cause, has a legitimate interest in quality control to protect its reputation and trademark value. Might be liable for torts of agents if it controls too much.

Question 12

What are LLCs?

Answer 12

A hybrid entity that combines limited liability of a corporation with tax advantages of a partnership. Will be automatically taxed as a partnership unless otherwise stated on tax return (1997 IRS Rule).

Question 13

What are LLCs as “entities?” What can people do to them and how do they exist?

Answer 13

Owners are called “members” and LLCs are legal entities separate from owners, can sue/be sued. “Limited liability,” shielded from personal liability; risk of loss limited to investments. Can own property and enter into contracts. A 3rd party can “pierce the corporate veil” and hold a managing member liable (alter ego). Exists beyond illness of death of members.

Question 14

How must LLCs be formed and what are their jurisdictional requirements?

Answer 14

An article of organization has to be filed and must include: name of business, principal address, name and address of registered agent, names of owners and how LLC will be managed. Name must include LLC or “Limited Liability Company.” Legal entity separate from its owners, may be treated differently than a corporation for federal jurisdiction based on diversity, citizenship is citizenship of members, which may live in different jurisdictions.

Question 15

What are the advantages and disadvantages of a LLC?

Answer 15

Advantages: Member liability is limited to amount of investment, can be treated as “tax through” for tax purposes, profits can be distributed to members without double taxation of a corp, members pay personal income tax on dividends, easy to form.
Disadvantages: State statutes not uniform, not all states recognize LLCs, must maintain with state entity (not difficult).

Question 16

What are options for management in a LLC? What happens if the articles of organization are silent on this? Where do fiduciary duties apply?

Answer 16

Member-managed: All of members participate in management, like a partnership.
Manager-managed: Members elected to manage LLC.
Statues provide that either each member has one vote or votes are made based on percentage of ownership.
Apply only in manager-managed LLCs: Duty of loyalty and care.

Question 17

What might LLC operating agreements containt?

Answer 17

Can be oral, management, dividends, meetings, transfers of membership interests, other sig issues. If operating agreement is silent, courts apply partnership principles.

Question 18

How is a LLP similar to a LLC?

Answer 18

Designed for professionals who do business as a partnership (lawyers and accountants). Limit personal liability, allow “pass through” tax advantages.

Question 19

What is liability like in a LLP?

Answer 19

Allows professionals to avoid personal liability for the malpractice of other partners. Supervising partner also liable for acts of subordinate.

Question 20

How is a Limited Partnership (LP) conducted?

Answer 20

Limits liability of some of its owners (limited partners). Needs to file certificate of limited partnership with Secretary of State. Agreement between one general and one limited partner to carry on a business for a profit. (Allow one’s name to be used in ads).

Question 21

What is the difference between a General and a Limited partner?

Answer 21

General Partner - Can manage but have fiduciary obligation to LPs (act primarily for another’s benefit). Liable to creditors.
Limited Partner - Enjoy limited liability as long as they do not engage in management functions. Liable to a 3rd party if 3rd party believes, based on conduct, that Limited Partner is a General Partner.

Question 22

What is a corporation considered? What can it do?

Answer 22

It is considered an “artificial person” and legal entity. Can engage in any act and enter in any contract available to a “natural person;” same access to courts, sue/be sued, free speech, due process, unreasonable search, etc. Stocks owned by one “natural” person or shareholder. Substitutes itself for persons/shareholders in conducting corporate business/incurring liability. (Study Slide 28).

Question 23

What liability do shareholders have?

Answer 23

Limited liability; owners or shareholders are usually not liable beyond investments unless they assume credit liability as guarantor. In limited situations, 3rd party can pierce “corporate veil” of limited liability to sue shareholders personally.

Question 24

When can the “corporate veil” be pierced? How does a court conclude it has happened and what are factors it considers to evaluate if it is permissible?

Answer 24

Court in the interest of fairness or justice holds shareholders personally liable for corporate acts. Shareholders used corporation as a shield from illegal activity or illegitimate objectives. (More likely in small families, corp. and shareholder no longer separate entities, exposed to personal liability). Factors: 3rd party tricked into dealing with corp. rather than individual, corp. set up to never make a profit, statutory formalities not allowed, corp. formed to evade an existing legal obligation, personal and corporate interests are mixed/commingled. (Little more on 31).

Question 25

How are corporations taxed?

Answer 25

Twice; at corporate and shareholder level.

Question 26

What liability do corporations have in respect to torts and criminal acts?

Answer 26

Liable for torts (negligence) by agents/officers within scope of employment. Can be liable for criminal acts but only fined, responsible officers may go to prison. Employer not liable if not committed within scope of employment.

Question 27

What are the pros and cons of corporations?

Not here but know domestic, foreign, alien as well

Answer 27

Advantages: Shareholders not personally liable for torts/contracts, doesn’t dissolve upon death, not hard to raise financing.
Disadvantages: Difficult to create and maintain, not as flexible to maintain, double taxation.

Question 28

What powers does a corporation have?

Answer 28

Express Powers: Found in articles of incorporation, state laws of incorporation and state and federal corps.
Implied Powers: Has power to perform all acts reasonably necessary to accomplish its purposes (borrow/lend money, extend credit, charitable contributions). Corp officer can bind corporation in contract matters connected with ordinary business affairs of enterprise.

Question 29

What is ultra vires and what remedies are available for it?

Answer 29

Corporation’s acts go beyond its express/implied powers in state statutes or own articles. Corporate articles now adopt very broad purposes to prevent these lawsuits.
Remedies: Shareholders can bring actions for corporation to prevent them from engaging in ultra vires acts, corporation can recover damages from officers and directors that engage in UV acts, attorney general may bring action to dissolve corporation for UV act.