chapter 32 formation of a business davidson, knowles & forsythe business law: cases and...

CHAPTER 32CHAPTER 32FORMATION OF A BUSINESSFORMATION OF A BUSINESS

CHAPTER 32CHAPTER 32FORMATION OF A BUSINESSFORMATION OF A BUSINESS

DAVIDSON, KNOWLES & FORSYTHE DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles Business Law: Cases and Principles

in the Legal Environmentin the Legal Environment (8 (8thth Ed.) Ed.)

2© 2004 West Legal Studies in Business© 2004 West Legal Studies in BusinessA Division of Thomson LearningA Division of Thomson Learning

BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.

HISTORICAL OVERVIEW OF HISTORICAL OVERVIEW OF PARTNERSHIPSPARTNERSHIPS


Foundation of business organizations Foundation of business organizations throughout history.throughout history.

U.S. followed English common law for U.S. followed English common law for partnerships.partnerships.

Today, partnerships governed by the Today, partnerships governed by the Unified Partnership Act (UPA).Unified Partnership Act (UPA).

Revised Uniform Partnership Act (RUPA) Revised Uniform Partnership Act (RUPA) for general partnerships.for general partnerships.




RUPA 1997 amendments are:RUPA 1997 amendments are:– Limited liability for partners registered in Limited liability for partners registered in

limited liability partnerships.limited liability partnerships.– Views partnership as separate entity.Views partnership as separate entity.– Dissolution no longer required every time a Dissolution no longer required every time a

partner leaves.partner leaves.– Permits, but not required, filing of statements Permits, but not required, filing of statements

when partnership formed, dissolved, merged, or when partnership formed, dissolved, merged, or limitations on partnership authority.limitations on partnership authority.





Partnerships generally easy to form and Partnerships generally easy to form and have wider potential financial bases than have wider potential financial bases than proprietorships.proprietorships.

Partnerships are not perpetual.Partnerships are not perpetual.Partners face unlimited liability for Partners face unlimited liability for

business-related conduct.business-related conduct.No one formation of business organization No one formation of business organization

is perfect.is perfect.



PARTNERSHIPS DEFINEDPARTNERSHIPS DEFINEDPARTNERSHIPS DEFINEDPARTNERSHIPS DEFINED Uniform Partnership Act defines partnership with Uniform Partnership Act defines partnership with

five characteristics:five characteristics:– An Association: mutual and unanimous assent to be An Association: mutual and unanimous assent to be

partners jointly and severally at time of agreement.partners jointly and severally at time of agreement.– Of Two or More Persons: identifiable entities that elect Of Two or More Persons: identifiable entities that elect

to associate.to associate.– To Carry on a Business: continuity of trade, To Carry on a Business: continuity of trade,

occupation, or profession.occupation, or profession.– As Co-Owners: sharing of ownership of business. As Co-Owners: sharing of ownership of business. – For Profit: operate for profit (money).For Profit: operate for profit (money).



PARTNERSHIPS DEFINEDPARTNERSHIPS DEFINEDPARTNERSHIPS DEFINEDPARTNERSHIPS DEFINEDLimited Partnership.Limited Partnership.

– Must have two or more persons with at least Must have two or more persons with at least one limited partner.one limited partner.

– Limited partners have limited liability.Limited partners have limited liability.– Limited partner is not personally liable for Limited partner is not personally liable for

partnership obligations.partnership obligations.– Limited partner cannot control the business of Limited partner cannot control the business of

the partnership.the partnership.



PARTNERSHIPS DEFINEDPARTNERSHIPS DEFINEDPARTNERSHIPS DEFINEDPARTNERSHIPS DEFINED

Limited Partnership (cont’d).Limited Partnership (cont’d).– Limited partner is precluded from management Limited partner is precluded from management

of the business.of the business.– Revised Uniform Limited Partnership Act Revised Uniform Limited Partnership Act

(RULPA) requires profits and losses to be (RULPA) requires profits and losses to be shared based on:shared based on:

capital contributionscapital contributions unless an agreement specifies otherwiseunless an agreement specifies otherwise



PARTNERSHIPS DEFINEDPARTNERSHIPS DEFINEDPARTNERSHIPS DEFINEDPARTNERSHIPS DEFINED

Limited Partnership.Limited Partnership.– Distribution of assets upon termination of the Distribution of assets upon termination of the

entity and liquidation of its assets is treated entity and liquidation of its assets is treated differently under revised act than under ULPAdifferently under revised act than under ULPA

– Interesting aspect of RULPA is that it specifies Interesting aspect of RULPA is that it specifies if case not provided for under RULPA, are to if case not provided for under RULPA, are to be governed by provisions of ULPA.be governed by provisions of ULPA.



PARTNERSHIP PROPERTYPARTNERSHIP PROPERTYPARTNERSHIP PROPERTYPARTNERSHIP PROPERTY

The UPA defines partnership property as:The UPA defines partnership property as:– Property contributed as capital contributions.Property contributed as capital contributions.– Property acquired on account of partnership.Property acquired on account of partnership.– Property acquired with partnership funds.Property acquired with partnership funds.– Any interest in real property acquired in the Any interest in real property acquired in the

partnership’s name.partnership’s name.– Any conveyance to the partnership in its name.Any conveyance to the partnership in its name.



THE PARTNERSHIP AGREEMENTTHE PARTNERSHIP AGREEMENTTHE PARTNERSHIP AGREEMENTTHE PARTNERSHIP AGREEMENTPartnership created by agreement, either Partnership created by agreement, either

expressed (oral or written) or implied.expressed (oral or written) or implied.Imposed Rules.Imposed Rules.

– Partners each entitled to an equal voice.Partners each entitled to an equal voice.– Partners entitled to equal share of profits.Partners entitled to equal share of profits.– Partners share losses in same proportion as they Partners share losses in same proportion as they

share profits.share profits.– Books must be kept at central office of Books must be kept at central office of

business.business.



THE PARTNERSHIP THE PARTNERSHIP AGREEMENTAGREEMENT

THE PARTNERSHIP THE PARTNERSHIP AGREEMENTAGREEMENT

Regardless of what partnership agreement says, Regardless of what partnership agreement says, any attempt to modify rules will be deemed any attempt to modify rules will be deemed void.void.

Imposed Rules:Imposed Rules:– Partners are agents of partnership.Partners are agents of partnership.– Partners have unlimited personal liability for Partners have unlimited personal liability for

torts/contracts which partnership has insufficient torts/contracts which partnership has insufficient assets to cover debt.assets to cover debt.

– Partner is expected to devote service only to the Partner is expected to devote service only to the partnership.partnership.



THE PARTNERSHIP AGREEMENTTHE PARTNERSHIP AGREEMENTTHE PARTNERSHIP AGREEMENTTHE PARTNERSHIP AGREEMENT

Express Terms.Express Terms.– Agreement should designate the name of the Agreement should designate the name of the

business.business.– Partnership agreement should cover purpose Partnership agreement should cover purpose

and duration of partnership.and duration of partnership.– How profits and losses are shared.How profits and losses are shared.– Withdrawal procedures.Withdrawal procedures.



LIMITED LIABILITY LIMITED LIABILITY PARTNERSHIPSPARTNERSHIPS


A growing number of states recognize the A growing number of states recognize the limited liability partnership (LLP).limited liability partnership (LLP).

Partner’s personal assets are protected from Partner’s personal assets are protected from liability claims against partnership.liability claims against partnership.

Partner in an LLP is not personally liable Partner in an LLP is not personally liable for malpractice, negligence, or other tort for malpractice, negligence, or other tort committed by a co-partner or agent.committed by a co-partner or agent.




Partners remain personally liable for their Partners remain personally liable for their own negligence and for contractual own negligence and for contractual obligations of partnership.obligations of partnership.

RUPA amendments require election to RUPA amendments require election to become a LLP.become a LLP.

1997 RUPA amendments, treats LLP’s as 1997 RUPA amendments, treats LLP’s as partnerships in all respects. partnerships in all respects.



TAXATION OF PARTNERSHIPSTAXATION OF PARTNERSHIPSTAXATION OF PARTNERSHIPSTAXATION OF PARTNERSHIPS

For taxation purposes, partnership form of For taxation purposes, partnership form of business neither an advantage or business neither an advantage or disadvantage.disadvantage.

Partnership is not taxed on its profits and Partnership is not taxed on its profits and losses.losses.

Partners are personally taxed on their share Partners are personally taxed on their share of the partnership’s profits and losses.of the partnership’s profits and losses.



HISTORICAL OVERVIEW OF HISTORICAL OVERVIEW OF CORPORATIONSCORPORATIONS


Concept of corporate personality may have Concept of corporate personality may have been recognized as early as the time of been recognized as early as the time of Hammurabi.Hammurabi.

Canon law distinguished between Canon law distinguished between corporation sole and aggregate.corporation sole and aggregate.

The fiction theory probably developed by The fiction theory probably developed by the papacy.the papacy.




English monarchs tightened control over English monarchs tightened control over corporations, deemed to exist by virtue of corporations, deemed to exist by virtue of concessionary grants of power from state.concessionary grants of power from state.

Careful regulation of corporations remains Careful regulation of corporations remains an essential characteristic of law of an essential characteristic of law of corporations.corporations.



CORPORATE NATURECORPORATE NATURECORPORATE NATURECORPORATE NATURECorporations are artificial persons created Corporations are artificial persons created

under statute of state or nation.under statute of state or nation.Organized for the purpose set out in Organized for the purpose set out in

application for corporate existence.application for corporate existence.Corporation is an invisible, intangible, Corporation is an invisible, intangible,

artificial person.artificial person.Corporations enjoy most rights natural Corporations enjoy most rights natural

persons possess.persons possess.



CORPORATE NATURECORPORATE NATURE

Advantages of Corporate Form:Advantages of Corporate Form:– Insulation from liability.Insulation from liability.– Centralization of management functions.Centralization of management functions.– Continuity of existence.Continuity of existence.– Free transferability of shares.Free transferability of shares.



FORMATION OF A FORMATION OF A CORPORATIONCORPORATION


Process of forming corporation involves Process of forming corporation involves complex issues that demand the attention of complex issues that demand the attention of well-versed professionals. well-versed professionals.

Types of Corporations:Types of Corporations:– Public-issue private corporation.Public-issue private corporation.– Close corporation.Close corporation.– Professional corporation.Professional corporation.– Municipal (also called public or quasi-public) Municipal (also called public or quasi-public)

corporation.corporation.





Promoters.Promoters.– Help form the corporation by procuring Help form the corporation by procuring

subscribers for stock.subscribers for stock.– Take other affirmative steps toward Take other affirmative steps toward

incorporating.incorporating.




Articles of Incorporation is a document that Articles of Incorporation is a document that signals official existence of corporation and signals official existence of corporation and contains:contains:– Name of corporation;Name of corporation;– Its purpose;Its purpose;– Its duration;Its duration;– Location of its principal office or registered agent;Location of its principal office or registered agent;– Its powers, its capital structure;Its powers, its capital structure;– Its directors and names; andIts directors and names; and– Signatures of the incorporators.Signatures of the incorporators.





Corporate Charter/Certificate of Corporate Charter/Certificate of Incorporation officially begins a Incorporation officially begins a corporation’s existence.corporation’s existence.

Organizational Meeting where the bylaws Organizational Meeting where the bylaws are adopted, pre-incorporation agreements are adopted, pre-incorporation agreements approved, and officers elected.approved, and officers elected.

Bylaws regulate the internal affairs of a Bylaws regulate the internal affairs of a corporation.corporation.



DE JUREDE JURE vs. vs. DE FACTODE FACTO CORPORATIONSCORPORATIONS

DE JUREDE JURE vs. vs. DE FACTODE FACTO CORPORATIONSCORPORATIONS

A A de jurede jure corporation is valid by law if slight corporation is valid by law if slight defect in formation.defect in formation.

Corporation has serious defect may be considered Corporation has serious defect may be considered de factode facto corporation unless: corporation unless:– Law under which the corporation could have been Law under which the corporation could have been

incorporated exists.incorporated exists.– There was a good faith effort to comply with statute.There was a good faith effort to comply with statute.– There was some use or exercise of corporate powers.There was some use or exercise of corporate powers.



CORPORATE POWERSCORPORATE POWERSCORPORATE POWERSCORPORATE POWERS Articles of Incorporation set forth powers of the Articles of Incorporation set forth powers of the

corporation.corporation. Provisions redundant as states express what entity Provisions redundant as states express what entity

can do:can do:– Ability to conduct business.Ability to conduct business.– To exist perpetually.To exist perpetually.– To sue and be sued.To sue and be sued.– To use corporate name and seal.To use corporate name and seal.– To make bylaws.To make bylaws.



CORPORATE POWERSCORPORATE POWERSCORPORATE POWERSCORPORATE POWERSCorporations have implied power to do Corporations have implied power to do

anything reasonably necessary to conduct anything reasonably necessary to conduct business.business.

Typically implied powers consists of:Typically implied powers consists of:– Holding or transferring property.Holding or transferring property.– Acquiring stock from other corporations.Acquiring stock from other corporations.– Borrowing money or effecting loans.Borrowing money or effecting loans.

Statutes may enumerate these and other Statutes may enumerate these and other implied powers.implied powers.



ULTRA VIRESULTRA VIRES ACTS ACTSULTRA VIRESULTRA VIRES ACTS ACTSUltra viresUltra vires is beyond the scope or legal is beyond the scope or legal

power of a corporation.power of a corporation.When sued corporations could use When sued corporations could use ultra ultra

viresvires as defense to enforce contract. as defense to enforce contract. State statutes abolished State statutes abolished ultra viresultra vires defense defense

allowing suits in three situations:allowing suits in three situations:– Shareholder injunctive action. Shareholder injunctive action. – Shareholder suit to recover damages .Shareholder suit to recover damages .– State proceedings to dissolve corporation .State proceedings to dissolve corporation .



TAXATION OF CORPORATIONSTAXATION OF CORPORATIONSTAXATION OF CORPORATIONSTAXATION OF CORPORATIONS

Tax treatment of corporation stems from Tax treatment of corporation stems from law’s recognition of corporation as separate law’s recognition of corporation as separate entity for federal income tax purposes.entity for federal income tax purposes.

Profits and losses of a C corporation are Profits and losses of a C corporation are taxed to the corporation.taxed to the corporation.

Profits and losses of an S corporation Profits and losses of an S corporation (Subchapter S corporation) are taxed to the (Subchapter S corporation) are taxed to the shareholders.shareholders.



DISREGARDING THE DISREGARDING THE CORPORATE ENTITYCORPORATE ENTITYDISREGARDING THE DISREGARDING THE CORPORATE ENTITYCORPORATE ENTITY

In order to serve justice it will be necessary In order to serve justice it will be necessary to “pierce the corporate veil.”to “pierce the corporate veil.”

Law may impose personal liability on Law may impose personal liability on shareholders if:shareholders if:– The shareholder is sole shareholder in an The shareholder is sole shareholder in an

association so thinly capitalized that it cannot association so thinly capitalized that it cannot meet its obligations.meet its obligations.

– If shareholder is draining off corporate assets.If shareholder is draining off corporate assets.



LIMITED LIABILITY COMPANIESLIMITED LIABILITY COMPANIESLIMITED LIABILITY COMPANIESLIMITED LIABILITY COMPANIES

State statute that allows LLPs is often the State statute that allows LLPs is often the same that authorizes LLCs.same that authorizes LLCs.

Concerns about federal and state tax Concerns about federal and state tax structures.structures.

State statutes vary.State statutes vary.



LIMITED LIABILITY COMPANIESLIMITED LIABILITY COMPANIESHistory of Limited Liability Companies.History of Limited Liability Companies.

– Purpose to provide limited liability to investors.Purpose to provide limited liability to investors.– Member’s liability limited to capital investment.Member’s liability limited to capital investment.– State statutes generally dictate: State statutes generally dictate:

Two or more members.Two or more members. Stated term of duration less than 30 years.Stated term of duration less than 30 years. All members must have limited liability.All members must have limited liability. Shares not freely transferable.Shares not freely transferable. Central management elected by members.Central management elected by members. Indication in its name that it is an LLC.Indication in its name that it is an LLC.



LIMITED LIABILITY COMPANIESLIMITED LIABILITY COMPANIESTaxation of Limited Liability Companies:Taxation of Limited Liability Companies:

– IRS examines whether enterprise has IRS examines whether enterprise has characteristics of a corporation or not.characteristics of a corporation or not.

– LLC is an association.LLC is an association.– LLCs article of organization and state statutes LLCs article of organization and state statutes

determine characteristic of an LLC.determine characteristic of an LLC.– IRS and courts decide if partnership taxation is IRS and courts decide if partnership taxation is

appropriate if LLC lacks: continuity of life, appropriate if LLC lacks: continuity of life, centralized management and transferability of centralized management and transferability of shares.shares.



LIMITED LIABILITY COMPANIESLIMITED LIABILITY COMPANIES

Flexibility and Variance.Flexibility and Variance.– LLC statutes vary from state to state.LLC statutes vary from state to state.– LLC statutes vary is whether professional LLC statutes vary is whether professional

service associations can form LLC.service associations can form LLC.– Many states will not permit an LLC to continue Many states will not permit an LLC to continue

perpetuity as a corporation can.perpetuity as a corporation can.– Most LLC statutes greatly restrict Most LLC statutes greatly restrict

transferability of shares. transferability of shares.



OTHER TYPES OF BUSINESS OTHER TYPES OF BUSINESS ORGANIZATIONSORGANIZATIONS


Partnership by Estoppel. To use estoppel, Partnership by Estoppel. To use estoppel, three facts must be shown:three facts must be shown:

Someone who is not a partner was held out to be a Someone who is not a partner was held out to be a partner by the firm.partner by the firm.

Third person justifiably relied on the holding out.Third person justifiably relied on the holding out. Person will be harmed if no liability is imposed.Person will be harmed if no liability is imposed.

Joint Ventures: set up to carry out a limited Joint Ventures: set up to carry out a limited number of transactions, or a single deal.number of transactions, or a single deal.





Mining Partnerships.Mining Partnerships.– Selling of an interest or bequeathing of an Selling of an interest or bequeathing of an

interest by will is permitted.interest by will is permitted.

chapter 32 formation of a business davidson, knowles & forsythe business law: cases and...

Documents

knowles forsythe business

business organizations

ownership of business

limited liability partnerships

west legal studies

views partnership

partnership authority

partnership obligations