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BUSINESS OWNERSHIP :
SOLE
PROPRIETOR, PARTNERSHIPS AND
CORPORATIONS
Stephen Ong, BSc(Hons) Econs
(LSE), MBA International ...
• Discussion: Auditor
Independence
1
• Sole
Proprietorship, Partners
hip, & Corporations
2
• Case Discussion :
Premier Oil...
1. Open Discussion
• Rocco R. Vanasco, (1996),"Auditor
independence: an international
perspective", Managerial Auditing
Jo...
Overview
• Introduction to business ownership
• Sole proprietorship
• Partnership
• Corporations
• Corporations and the Sa...
2.
FORMS
OF
BUSINESS
OWNERSHIP
Choosing a Form of Ownership
• There is no one “best” form of
ownership.
• The best form of ownership depends on
an entrep...
Factors Affecting the Choice
• Tax considerations
• Liability exposure
• Start-up and future capital
requirements
• Contro...
Major Forms of Ownership
• Sole Proprietorship
• Partnership
• Corporation
• S Corporation
• Limited Liability Company
• J...
5 - 9
FIGURE 1 (A) Forms of
Business Ownership –
Percentage of Business
5 - 10
FIGURE 1 (B)
Forms of Business
Ownership -
Percentage of Sales
FIGURE1 (C)
Forms of Business
Ownership -
Percentage of Profit
2.1
SOLE
PROPRIETORSHIP
Entrepreneurship
• Entrepreneur: A person who forms and
operates a new business either by himself or
herself or with other...
Creation of a Sole Proprietorship
• No federal or state government approval is
required
• D.b.a. (doing business as): A de...
Advantages of the Sole
Proprietorship
• Simple to create
• Least costly form to begin
• Profit incentive
• Total decision ...
5 - 16
Disadvantages of the
Sole Proprietorship
• Unlimited personal liability
• Limited skills and capabilities
• Feeling...
Liability Features of the
Basic Forms of Ownership
5 - 17
Sole Proprietorship
Claims of Sole Proprietor’s Creditors
Sole P...
Personal Liability of a Sole Proprietor
• Unlimited personal liability: The
personal liability of a sole proprietor for
th...
Exhibit 1 - Sole Proprietorship
2.2
PARTNERSHIP
Partnership
• An association of two or more
people who co-own a business for
the purpose of making a profit.
• Always wise...
Advantages of the Partnership
• Easy to establish
• Complementary skills of partners
• Division of profits
• Larger pool o...
Types of Partners
• General partners
–Take an active role in managing a business.
–Have unlimited liability for the partne...
Advantages of the Partnership
• Easy to establish
• Complementary skills of partners
• Division of profits
• Larger pool o...
Disadvantages of the
Partnership
• Unlimited liability of at least one
partner
Liability Features of the Basic
Forms of Ownership
5 - 26
Partnership
Claims of Partnership’s Creditors
Partnership’s
Asse...
Disadvantages of the
Partnership
• Unlimited liability of at least one partner
• Capital accumulation
• Difficulty in disp...
Limited Partnership
• A partnership composed of at least
one general partner and one or more
limited partners.
• A general...
General Partnership
• An association of two or more persons to
carry on as co-owners of a business for
profit [UPA Section...
Formation of a General
Partnership
• To qualify as a general partnership
under the UPA a business must be
–An association ...
Exhibit 2 - General Partnership
Name of a General Partnership
• A general partnership must file a
fictitious business name statement
with the appropriate ...
Taxation of General Partnerships
• Flow-through taxation
–The income and losses of partnership flow
onto and have to be re...
Right to Share in Profits
 The right to share in the earnings from the
investment of capital
 Unless otherwise agreed
 ...
Tort Liability of General Partners
• Unlimited personal liability of a general
partner
– A general partner’s personal liab...
Contract Liability of General Partners
• General partners have unlimited personal
liability for contracts of the partnersh...
Liability of Incoming General
Partners
• A new partner who is admitted to a
general partnership is
–Liable for the existin...
Dissolution of a General Partnership
• The change in the relationship of
partners in a partnership caused by any
partner c...
Wrongful Dissolution
• A situation in which a partner withdraws
from a partnership without having the right
to do so at th...
Continuation of a General
Partnership After Dissolution
• The surviving, or
remaining, partners have the right
to continue...
Right of Survivorship
• A rule which provides that upon the death of a
general partner:
– The deceased partner’s right in ...
Exhibit 3 - Limited Partnership
Uniform Limited Partnership Act
• Contains a uniform set of provisions
for the formation, operation, and
dissolution of li...
Formation of a Limited Partnership
• Certificate of limited partnership: A document
that two or more persons must execute ...
Defective Formation
• Incorrect creation of a limited
partnership that occurs when:
–A certificate of limited partnership ...
Limited Partnership Agreement
• A document that sets forth:
–The rights and duties of
general and limited partners
–The te...
Liability of General and Limited
Partners
• Unlimited liability of general partners
– The unlimited personal liability of ...
Personal Guarantee
• A creditor may require a limited partner to
personally guarantee the repayment of a
loan in order to ...
Management of a Limited
Partnership
• Under the RULPA
– A limited partner is liable as a general partner if his
or her par...
Dissolution of a Limited Partnership
• A certificate of cancellation must be filed by the
limited partnership with the sec...
2.3
CORPORATION
Corporation
• A separate legal entity from its owners.
• Types of corporations:
–Domestic – a corporation doing business i...
Corporation
Types of corporations:
• Publicly held – a corporation that has a
large number of shareholders and
whose stock...
Advantages of the Corporation
• Limited liability of stockholders
Liability Features of the Basic
Forms of Ownership
5 - 55
Corporation
Claims of Corporation’s Creditors
Corporation’s
Asse...
Advantages of the Corporation
• Limited liability of stockholders
• Ability to attract capital
• Ability to continue indef...
Disadvantages of the
Corporation
• Cost and time of incorporation process
• Double taxation
• Potential for diminished man...
S Corporation
• No different from any other corporation
from a legal perspective.
• An S corporation is taxed like a
partn...
Liability Features of the Basic
Forms of Ownership
5 - 59
S-Corporation
Claims of S-Corporation’s Creditors
S-Corporation’...
Limited Liability Company (LLC)
• Resembles an S Corporation but is
not subject to the same
restrictions.
• Two documents ...
Limited Liability Company (LLC)
An LLC cannot have more than two
of these four corporate
characteristics:
1. Limited liab...
Limited Liability Company (LLC)
• An unincorporated business
– Combines the most favorable attributes of
general partnersh...
Uniform Limited Liability Company
Act (ULLCA)
• A model act that provides comprehensive
and uniform laws for the
formation...
Taxation of LLCs
• An LLC’s income or losses flow through to the
members’ individual income tax returns
– This avoids doub...
Articles of Organization
• The formal documents that must be
filed at the secretary of state’s office
of the state of orga...
Operating Agreement
• An agreement entered into among
members that governs the affairs and
business of the LLC and the rel...
Distributional Interest
• A member’s ownership interest in an LLC
– Entitles the member to receive distributions of
money ...
Liability Features of the Basic
Forms of Ownership
5 - 68
Limited Liability Company - LLC
Claims of LLC’s Creditors
LLC’s
...
Exhibit 4 - Limited Liability
Company (LLC)
Liability of Managers
• Managers of LLCs are not personally liable for
the debts, obligations, and liabilities of the LLC
...
Management of An LLC
Type of LLC Description
Member-
managed LLC
The members do not designate
managers to manage the LLC.
...
Agency Authority to Bind an
LLC to Contracts
Type of LLC Agency Authority
Member-
managed LLC
All members have agency
auth...
Duty of Loyalty
• A duty owed by a member of a member-
managed LLC and a manager of a manager-
managed LLC:
– To be honest...
Nature of the Corporation
• A fictitious legal entity that is
created according to statutory
requirements
• Corporation co...
Nature of the Corporation
• Characteristics of a corporation:
– Free transferability of shares
– Perpetual existence
– Cen...
Exhibit 5.1 Corporation
Publicly Held and Closely Held
Corporations
• Publicly held corporation: Has many shareholders -
securities are usually tr...
Incorporation Procedures
• Procedure for incorporating a
corporation varies somewhat from
state to state
• Domestic corpor...
Incorporation Procedures
• Articles of incorporation: The basic governing
documents of a corporation, which must be filed
...
Incorporation Procedures
• Corporate bylaws: A detailed set of
rules adopted by the board of directors
after a corporation...
Incorporation Procedures
• S Corporations: A corporation that has
met certain requirements and has elected
to be taxed as ...
Financing the Corporation
• Equity securities:
Representation of ownership
rights in a corporation
• Equity securities can...
Common Stock
• An equity security that
represents the residual value
of a corporation
• Common stockholder: A
person who o...
Preferred Stock
• Equity security that is given certain
preferences and rights over common stock
• Preferred stock may hav...
Authorized, Issued, and
Outstanding Shares
• Authorized shares: The number of
shares provided for in a
corporation’s artic...
Debt Securities
• Securities that establish a debtor–
creditor relationship in which the
corporation borrows money from th...
Indenture Agreement
• Contract between the corporation
and a holder of a debt security
Shareholders
• Owners of a corporation who elect
the board of directors and vote on
fundamental changes in the
corporation
Exhibit 5.2 Shareholders
Shareholders
• Shareholders meetings: A meeting
of the shareholders of a corporation
that must be held by the
corporation ...
Shareholders
• Quorum: The number of directors
necessary to hold a board meeting
or transact business of the board
• Supra...
Shareholders
• Straight voting: A system in which each
shareholder votes the number of shares
he or she owns on candidates...
Shareholders
• Dividend: A distribution of profits of the
corporation to shareholders
• Piercing the corporate veil: A doc...
Board of Directors
• A panel of persons who are elected
by shareholders to make policy
decisions concerning the operation
...
Exhibit 5.3 Board of Directors
Board of Directors
• Regular meetings of a board of
directors are held at the times and
places established in the bylaws
•...
Corporate Officers
• Employees of a corporation who
are appointed by the board of
directors to manage the day-to-
day oper...
Exhibit 5.4 Corporate Officers
Fiduciary Duties of Directors
and Officers
• The duties of care and loyalty owed by
directors and officers to their corpor...
Sarbanes-Oxley Act
• A federal statute enacted by Congress to
improve corporate governance
• The goals of the Sarbanes-Oxl...
Mergers and Acquisitions
• A situation in which one corporation
is absorbed into another corporation
and ceases to exist
•...
Exhibit 5.5 Merger
Dissolution of the Corporation
• Voluntary dissolution
• Administrative dissolution
• Judicial dissolution
• Winding up, l...
Multinational Corporations
• Multinational corporations operate
in more than one country
• Operate in other countries thro...
2.4
OTHER FORMS
Limited Liability Partnership (LLP)
• A special form of partnership in which:
–All partners are limited partners
–There ar...
Limited Liability of Partners
• The liability of LLP partners for
the LLP’s debts, obligations, and
liabilities, is limite...
Exhibit 5 - Limited Liability
Partnership (LLP)
5 - 109
The Professional Corporation
 Designed for professions –
lawyers, doctors, dentists, accountants and
other profes...
The Joint Venture
Much like a partnership, but it:
Is formed for a specific
purpose
Has a beginning and an end
Conclusion
The “right” choice of the form of
ownership is unique to every
entrepreneur and their business.
Each form has...
Exhibit 6 - Franchise
Types of Franchise
Type of Franchise Description
Distributorship
franchise
A franchise in which the franchisor manufacture...
Franchise Agreement
• An agreement that a franchisor and
franchisee enter into that sets forth the
terms and conditions of...
Exhibit 7 - License
CASE DISCUSSION :
PREMIER OIL
Casestudy 3 : Premier Oil
1. Read and prepare the Casestudy on
Premier Oil (Monks & Minow (2011).
Identify the corporate g...
Risk Map Action
High
Medium
Low
Low Medium High
S
I
G
N
I
F
I
C
A
N
C
E
PROBABILITY
Requires
close
monitoring
Manage
and
m...
Stakeholder mapping
Core Readings
• Baron, David P.(2013) Business and its
environment, 7th Edition, Pearson, Ch.14
• Cheeseman, Henry R.(2013...
Next Week’s Ideas for Discussion
• Prem Sikka, (2008),"Enterprise culture
and accountancy firms: new masters of
the univer...
QUESTIONS?
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Transcript of "Mba1034 cg law ethics week 11 business ownership 2013"

  1. 1. BUSINESS OWNERSHIP : SOLE PROPRIETOR, PARTNERSHIPS AND CORPORATIONS Stephen Ong, BSc(Hons) Econs (LSE), MBA International Business(Bradford) Visiting Fellow, Birmingham City University Visiting Professor, Shenzhen University MBA1034 GOVERNANCE, LAW & ETHICS
  2. 2. • Discussion: Auditor Independence 1 • Sole Proprietorship, Partners hip, & Corporations 2 • Case Discussion : Premier Oil3 Today’s Overview
  3. 3. 1. Open Discussion • Rocco R. Vanasco, (1996),"Auditor independence: an international perspective", Managerial Auditing Journal, Vol. 11 No.: 9 pp. 4- 48
  4. 4. Overview • Introduction to business ownership • Sole proprietorship • Partnership • Corporations • Corporations and the Sarbanes- Oxley Act • Other Forms of ownership
  5. 5. 2. FORMS OF BUSINESS OWNERSHIP
  6. 6. Choosing a Form of Ownership • There is no one “best” form of ownership. • The best form of ownership depends on an entrepreneur’s particular situation. • Key: Understanding the characteristics of each form of ownership and how well they match an entrepreneur’s business and personal circumstances.
  7. 7. Factors Affecting the Choice • Tax considerations • Liability exposure • Start-up and future capital requirements • Control • Managerial ability • Business goals • Management succession plans • Cost of formation
  8. 8. Major Forms of Ownership • Sole Proprietorship • Partnership • Corporation • S Corporation • Limited Liability Company • Joint Venture
  9. 9. 5 - 9 FIGURE 1 (A) Forms of Business Ownership – Percentage of Business
  10. 10. 5 - 10 FIGURE 1 (B) Forms of Business Ownership - Percentage of Sales
  11. 11. FIGURE1 (C) Forms of Business Ownership - Percentage of Profit
  12. 12. 2.1 SOLE PROPRIETORSHIP
  13. 13. Entrepreneurship • Entrepreneur: A person who forms and operates a new business either by himself or herself or with others • Sole proprietorship: A form of business in which the owner is actually the business – The business is not a separate legal entity – Sole proprietor: The owner of a sole proprietorship 14-13
  14. 14. Creation of a Sole Proprietorship • No federal or state government approval is required • D.b.a. (doing business as): A designation for a business that is operating under a trade name • Fictitious business name statement (certificate of trade name) – A document that is filed with the state that designates: • A trade name of a business • The name and address of the applicant • The address of the business
  15. 15. Advantages of the Sole Proprietorship • Simple to create • Least costly form to begin • Profit incentive • Total decision making authority • No special legal restrictions • Easy to discontinue
  16. 16. 5 - 16 Disadvantages of the Sole Proprietorship • Unlimited personal liability • Limited skills and capabilities • Feelings of isolation • Limited access to capital • Lack of continuity of the business
  17. 17. Liability Features of the Basic Forms of Ownership 5 - 17 Sole Proprietorship Claims of Sole Proprietor’s Creditors Sole Proprietor’s Personal Assets
  18. 18. Personal Liability of a Sole Proprietor • Unlimited personal liability: The personal liability of a sole proprietor for the debts and obligations of a sole proprietorship • Taxation of a sole proprietorship –A sole proprietorship does not pay taxes at the business level –A sole proprietor has to file tax returns and pay taxes to state and federal governments
  19. 19. Exhibit 1 - Sole Proprietorship
  20. 20. 2.2 PARTNERSHIP
  21. 21. Partnership • An association of two or more people who co-own a business for the purpose of making a profit. • Always wise to create a partnership agreement. • The best partnerships are built on trust and respect.
  22. 22. Advantages of the Partnership • Easy to establish • Complementary skills of partners • Division of profits • Larger pool of capital • Ability to attract limited partners 5 - 22
  23. 23. Types of Partners • General partners –Take an active role in managing a business. –Have unlimited liability for the partnership’s debts. –Every partnership must have at least one general partner. • Limited partners –Cannot participate in the day-to-day management of a company. –Have limited liability for the partnership’s debts.
  24. 24. Advantages of the Partnership • Easy to establish • Complementary skills of partners • Division of profits • Larger pool of capital • Ability to attract limited partners • Minimal government regulation • Flexibility • Taxation
  25. 25. Disadvantages of the Partnership • Unlimited liability of at least one partner
  26. 26. Liability Features of the Basic Forms of Ownership 5 - 26 Partnership Claims of Partnership’s Creditors Partnership’s Assets General Partner’s Personal Assets General Partner’s Personal Assets
  27. 27. Disadvantages of the Partnership • Unlimited liability of at least one partner • Capital accumulation • Difficulty in disposing of partnership interest without dissolving the partnership • Lack of continuity • Potential for personality and authority conflicts • Partners bound by law of agency
  28. 28. Limited Partnership • A partnership composed of at least one general partner and one or more limited partners. • A general partner in this partnership is treated exactly as in a general partnership. • A limited partner has limited liability and is treated as an investor in the business.
  29. 29. General Partnership • An association of two or more persons to carry on as co-owners of a business for profit [UPA Section 6(1)] –General partners (partners): Persons liable for the debts and obligations of a general partnership • Uniform Partnership Act (UPA): A model act that codifies partnership law –Most states have adopted the UPA in whole or in part
  30. 30. Formation of a General Partnership • To qualify as a general partnership under the UPA a business must be –An association of two or more persons –Carrying on a business –As co-owners –For profit
  31. 31. Exhibit 2 - General Partnership
  32. 32. Name of a General Partnership • A general partnership must file a fictitious business name statement with the appropriate government agency to operate under a trade name • General partnership agreement –A written agreement that partners sign to form a general partnership
  33. 33. Taxation of General Partnerships • Flow-through taxation –The income and losses of partnership flow onto and have to be reported on the individual partners’ personal income tax returns • Right to participate in management –Each partner has a right to participate in the management of a partnership and has an equal vote on partnership matters • Unless otherwise agreed
  34. 34. Right to Share in Profits  The right to share in the earnings from the investment of capital  Unless otherwise agreed  Right to an accounting  Action for an accounting: A formal judicial proceeding in which the court is authorised to  Review the partnership and the partners’ transactions  Award each partner his or her share of the partnership assets
  35. 35. Tort Liability of General Partners • Unlimited personal liability of a general partner – A general partner’s personal liability for the debts and obligations of the general partnership • Joint and several liability: Tort liability of partners together and individually – A plaintiff can sue one or more partners separately – If successful, the plaintiff can recover the entire amount of the judgment from any or all of the defendant-partners who have been found liable
  36. 36. Contract Liability of General Partners • General partners have unlimited personal liability for contracts of the partnership • Under the UPA –General partners have joint liability for the contracts and debts of the partnership –Joint liability: Liability of partners for contracts and debts of the partnership • A plaintiff must name the partnership and all of the partners as defendants in a lawsuit
  37. 37. Liability of Incoming General Partners • A new partner who is admitted to a general partnership is –Liable for the existing debts and obligations of the partnership only to the extent of his or her capital contribution –Personally liable for debts and obligations incurred by the general partnership after becoming a partner
  38. 38. Dissolution of a General Partnership • The change in the relationship of partners in a partnership caused by any partner ceasing to be associated in the carrying on of the business [UPA Section 29] • Winding up: Liquidating a partnership’s assets and distributing the proceeds to satisfy claims against the partnership
  39. 39. Wrongful Dissolution • A situation in which a partner withdraws from a partnership without having the right to do so at that time – The partner is liable for damages caused by the wrongful dissolution of the partnership • Upon dissolution the debts are satisfied in the following order [UPA Section 40(b)] • Creditors (except partners who are creditors) • Creditor-partners • Capital contributions • Profits
  40. 40. Continuation of a General Partnership After Dissolution • The surviving, or remaining, partners have the right to continue a partnership after its dissolution –Continuation agreement – Expressly sets forth: • The events that allow for continuation of the partnership • The amount to be paid outgoing
  41. 41. Right of Survivorship • A rule which provides that upon the death of a general partner: – The deceased partner’s right in specific partnership property vests in the remaining partner or partners • The value of the deceased general partner’s interest in the partnership passes to his or her beneficiaries or heirs • Liability of outgoing partners – Personally liable for debts and obligations that exist at the time of dissolution – Not liable for any new debts and obligations incurred after the dissolution
  42. 42. Exhibit 3 - Limited Partnership
  43. 43. Uniform Limited Partnership Act • Contains a uniform set of provisions for the formation, operation, and dissolution of limited partnerships • Revised Uniform Limited Partnership Act (RULPA) –Provides a more modern, comprehensive law for the formation, operation, and dissolution of limited partnerships
  44. 44. Formation of a Limited Partnership • Certificate of limited partnership: A document that two or more persons must execute and sign that makes a limited partnership legal and binding – Under RULPA, two or more persons must execute and sign the certificate – The certificate of limited partnership must be filed with • The secretary of state of the appropriate state • The county recorder in the county or counties in which the limited partnership carries on business, if required by state law
  45. 45. Defective Formation • Incorrect creation of a limited partnership that occurs when: –A certificate of limited partnership is not properly filed –There are defects in a certificate that is filed –Some other statutory requirement for the creation of a limited partnership is not met
  46. 46. Limited Partnership Agreement • A document that sets forth: –The rights and duties of general and limited partners –The terms and conditions regarding the operation, termination, and dissolution of a
  47. 47. Liability of General and Limited Partners • Unlimited liability of general partners – The unlimited personal liability of general partners of a limited partnership for the debts and obligations of the general partnership • Limited liability of limited partners – The limited liability of limited partners of a limited partnership only up to their capital contributions to the limited partnership – Limited partners are not personally liable for the debts and obligations of the limited partnership
  48. 48. Personal Guarantee • A creditor may require a limited partner to personally guarantee the repayment of a loan in order to extend credit to the limited partnership –If the limited partnership defaults on the loan: • The creditor may enforce the personal guarantee and recover payment from the limited partner who personally guaranteed the repayment of the loan
  49. 49. Management of a Limited Partnership • Under the RULPA – A limited partner is liable as a general partner if his or her participation in the control of the business is substantially the same as that of a general partner – The limited partner is liable only to persons who reasonably believed him or her to be a general partner – New Section 303 of the RULPA permits limited partners to participate in the management of a limited partnership without losing their limited liability shield
  50. 50. Dissolution of a Limited Partnership • A certificate of cancellation must be filed by the limited partnership with the secretary of state of the state in which the limited partnership is organized • Distribution of assets of a limited partnership – Creditors of the limited partnership, including partners who are creditors (except for liabilities for distributions) – Partners with respect to: • Unpaid distributions • Capital contributions • The remainder of the proceeds
  51. 51. 2.3 CORPORATION
  52. 52. Corporation • A separate legal entity from its owners. • Types of corporations: –Domestic – a corporation doing business in the state in which it is incorporated. –Foreign – a corporation doing business in a state other than the state in which it is incorporated. –Alien – a corporation formed in another country but doing business in the United States.
  53. 53. Corporation Types of corporations: • Publicly held – a corporation that has a large number of shareholders and whose stock usually is traded on one of the large stock exchanges. • Closely held – a corporation in which shares are controlled by a relatively small number of people, often family members, relatives, or friends.
  54. 54. Advantages of the Corporation • Limited liability of stockholders
  55. 55. Liability Features of the Basic Forms of Ownership 5 - 55 Corporation Claims of Corporation’s Creditors Corporation’s Assets Shareholder’s Personal Assets Shareholder’s Personal Assets
  56. 56. Advantages of the Corporation • Limited liability of stockholders • Ability to attract capital • Ability to continue indefinitely • Transferable ownership
  57. 57. Disadvantages of the Corporation • Cost and time of incorporation process • Double taxation • Potential for diminished managerial incentives • Legal requirements and regulatory “red tape” • Potential loss of control by founder(s)
  58. 58. S Corporation • No different from any other corporation from a legal perspective. • An S corporation is taxed like a partnership, passing all of its profits (or losses) through to individual shareholders. • To elect “S” status, all shareholders must consent, and the corporation must file with the IRS within the first 75 days of its tax year.
  59. 59. Liability Features of the Basic Forms of Ownership 5 - 59 S-Corporation Claims of S-Corporation’s Creditors S-Corporation’s Assets Shareholder’s Personal Assets Shareholder’s Personal Assets
  60. 60. Limited Liability Company (LLC) • Resembles an S Corporation but is not subject to the same restrictions. • Two documents required: –Articles of organization –Operating agreement
  61. 61. Limited Liability Company (LLC) An LLC cannot have more than two of these four corporate characteristics: 1. Limited liability 2. Continuity of life 3. Free transferability of interest 4. Centralized management
  62. 62. Limited Liability Company (LLC) • An unincorporated business – Combines the most favorable attributes of general partnerships, limited partnerships, and corporations • An LLC is a separate legal entity (or legal person) distinct from its members • Member: An owner of an LLC – Some states refer to members as shareholders
  63. 63. Uniform Limited Liability Company Act (ULLCA) • A model act that provides comprehensive and uniform laws for the formation, operation, and dissolution of LLCs • Revised Uniform Limited Liability Company Act (RULLCA): A revision of the ULLCA – Provides comprehensive and uniform laws for the formation, operation, and dissolution of LLCs
  64. 64. Taxation of LLCs • An LLC’s income or losses flow through to the members’ individual income tax returns – This avoids double taxation • Formation of an LLC – An LLC may be organized by one or more persons – It can be organized in only one state – The name of the LLC must contain the words limited liability company or limited company or the abbreviation L.L.C., LLC, L.C., or LC.
  65. 65. Articles of Organization • The formal documents that must be filed at the secretary of state’s office of the state of organization of an LLC in order to form the LLC –The LLC is a domestic LLC in the state in which it is organized –The LLC foreign LLC in any state in which it wants to conduct business
  66. 66. Operating Agreement • An agreement entered into among members that governs the affairs and business of the LLC and the relationships among members, managers, and the LLC –Certificate of interest: A document that evidences a member’s ownership interest in an LLC –The ULLCA mandates that a member has the right to an equal share in the LLC’s profits • Unless otherwise agreed
  67. 67. Distributional Interest • A member’s ownership interest in an LLC – Entitles the member to receive distributions of money and property from the LLC • Liability LLC members – The liability of LLC members for the LLC’s debts, obligations, and liabilities, which is limited to the extent of their capital contributions – Members of LLCs are not personally liable for the LLC’s debts, obligations, and liabilities
  68. 68. Liability Features of the Basic Forms of Ownership 5 - 68 Limited Liability Company - LLC Claims of LLC’s Creditors LLC’s Assets Member’s Personal Assets Member’s Personal Assets
  69. 69. Exhibit 4 - Limited Liability Company (LLC)
  70. 70. Liability of Managers • Managers of LLCs are not personally liable for the debts, obligations, and liabilities of the LLC they manage [ULLCA Section 303(a)] • Liability of a member tortfeasor – Tortfeasor: A person who intentionally or unintentionally (negligently) causes injury or death to another person –A tortfeasor is liable to persons he or she injures and to the heirs of persons who die because of his or her conduct
  71. 71. Management of An LLC Type of LLC Description Member- managed LLC The members do not designate managers to manage the LLC. The LLC is managed by its members. Manager- managed LLC The members designate certain members or nonmembers to manage the LLC. The LLC is managed by the designated managers; nonmanager members have no right to manage the LLC.
  72. 72. Agency Authority to Bind an LLC to Contracts Type of LLC Agency Authority Member- managed LLC All members have agency authority to bind the LLC to contracts. Manager- managed LLC The managers have authority to bind the LLC to contracts; the nonmanager members cannot bind the LLC to contracts.
  73. 73. Duty of Loyalty • A duty owed by a member of a member- managed LLC and a manager of a manager- managed LLC: – To be honest in his or her dealings with the LLC – To not act adversely to the interests of the LLC • No fiduciary duty – A member of a manager-managed LLC who is not a manager: • Owes no fiduciary duty of loyalty or care to the LLC or its other members
  74. 74. Nature of the Corporation • A fictitious legal entity that is created according to statutory requirements • Corporation codes: State statutes that regulate the formation, operation, and dissolution of corporations
  75. 75. Nature of the Corporation • Characteristics of a corporation: – Free transferability of shares – Perpetual existence – Centralized management – Limited liability of shareholders: A general rule of corporate law which provides that generally shareholders are liable only to the extent of their capital contributions for the debts and obligations of the corporation and are not personally liable for the debts and obligations of the corporation
  76. 76. Exhibit 5.1 Corporation
  77. 77. Publicly Held and Closely Held Corporations • Publicly held corporation: Has many shareholders - securities are usually traded on national stock exchanges • Closely held corporation: A corporation owned by one or a few shareholders • Revised Model Business Corporation Act: A 1984 revision of the MBCA – Arranges the provisions of the act more logically – Revises the language to be more consistent – Makes substantial changes in the provisions
  78. 78. Incorporation Procedures • Procedure for incorporating a corporation varies somewhat from state to state • Domestic corporation: A corporation doing business in the state in which it was formed 16-78
  79. 79. Incorporation Procedures • Articles of incorporation: The basic governing documents of a corporation, which must be filed with the secretary of state of the state of incorporation – Name of corporation – Number of shares authorized – Address of registered office and agent – Name and address of each incorporator • Registered agent: A person or corporation that is empowered to accept service of process on behalf of a corporation
  80. 80. Incorporation Procedures • Corporate bylaws: A detailed set of rules adopted by the board of directors after a corporation is incorporated that contains provisions for managing the business and the affairs of the corporation • Organizational meeting: A meeting that must be held by the initial directors of a corporation after the articles of incorporation are filed
  81. 81. Incorporation Procedures • S Corporations: A corporation that has met certain requirements and has elected to be taxed as an S corporation for federal income tax purposes –Pays no federal income tax at the corporate level –Income or loss flows to the shareholders and must be reported on the shareholders’ individual income tax returns
  82. 82. Financing the Corporation • Equity securities: Representation of ownership rights in a corporation • Equity securities can be: –Common stock –Preferred stock
  83. 83. Common Stock • An equity security that represents the residual value of a corporation • Common stockholder: A person who owns common stock
  84. 84. Preferred Stock • Equity security that is given certain preferences and rights over common stock • Preferred stock may have any or all of the following preferences, rights, or attributes: – Dividend preference – Liquidation preference – Cumulative dividend right – Right to participate in profits – Conversion right – Redeemable preferred stock
  85. 85. Authorized, Issued, and Outstanding Shares • Authorized shares: The number of shares provided for in a corporation’s articles of incorporation • Issued shares: Authorized shares that have been sold by a corporation
  86. 86. Debt Securities • Securities that establish a debtor– creditor relationship in which the corporation borrows money from the investor to whom a debt security is issued • Classifications: –Debenture –Bond –Note
  87. 87. Indenture Agreement • Contract between the corporation and a holder of a debt security
  88. 88. Shareholders • Owners of a corporation who elect the board of directors and vote on fundamental changes in the corporation
  89. 89. Exhibit 5.2 Shareholders
  90. 90. Shareholders • Shareholders meetings: A meeting of the shareholders of a corporation that must be held by the corporation to elect directors and to vote on other matters –Annual –Special –Proxy
  91. 91. Shareholders • Quorum: The number of directors necessary to hold a board meeting or transact business of the board • Supramajority voting requirement: A requirement that a greater than majority of shares constitutes a quorum of the vote of the shareholders
  92. 92. Shareholders • Straight voting: A system in which each shareholder votes the number of shares he or she owns on candidates for each of the positions open • Cumulative voting: A system in which a shareholder can accumulate all of his or her votes and vote them all for one candidate or split them among several candidates
  93. 93. Shareholders • Dividend: A distribution of profits of the corporation to shareholders • Piercing the corporate veil: A doctrine that says if a shareholder dominates a corporation and uses it for improper purposes, a court of equity can disregard the corporate entity and hold the shareholder personally liable for the corporation’s debts and obligations
  94. 94. Board of Directors • A panel of persons who are elected by shareholders to make policy decisions concerning the operation of a corporation –Inside director (executive) –Outside director (non- executive, independent) 16-94
  95. 95. Exhibit 5.3 Board of Directors
  96. 96. Board of Directors • Regular meetings of a board of directors are held at the times and places established in the bylaws • A board can call special meetings of the board of directors as provided in the bylaws
  97. 97. Corporate Officers • Employees of a corporation who are appointed by the board of directors to manage the day-to- day operations of the corporation
  98. 98. Exhibit 5.4 Corporate Officers
  99. 99. Fiduciary Duties of Directors and Officers • The duties of care and loyalty owed by directors and officers to their corporation and its shareholders – Duty of loyalty: A duty that directors and officers have not to act adversely to the interests of the corporation and to subordinate their personal interests to those of the corporation and its shareholders – Duty of care: A duty of corporate directors and officers to use care and diligence when acting on behalf of the corporation
  100. 100. Sarbanes-Oxley Act • A federal statute enacted by Congress to improve corporate governance • The goals of the Sarbanes-Oxley Act are to improve corporate governance rules, eliminate conflicts of interest, and instill confidence in investors and the public that management will run public companies in the best interests of all constituents
  101. 101. Mergers and Acquisitions • A situation in which one corporation is absorbed into another corporation and ceases to exist • A merger occurs when one corporation is absorbed into another corporation –Surviving corporation –Merged corporation
  102. 102. Exhibit 5.5 Merger
  103. 103. Dissolution of the Corporation • Voluntary dissolution • Administrative dissolution • Judicial dissolution • Winding up, liquidation, and termination
  104. 104. Multinational Corporations • Multinational corporations operate in more than one country • Operate in other countries through a variety of means, including the use of agents, branch offices, subsidiary corporations, business alliances, strategic partnerships, franchising, and other arrangements
  105. 105. 2.4 OTHER FORMS
  106. 106. Limited Liability Partnership (LLP) • A special form of partnership in which: –All partners are limited partners –There are no general partners • LLPs enjoy the flow-through tax benefit of other types of partnerships • Articles of limited liability partnership –The formal documents that must be filed at the secretary of state’s office of the state of organization of an LLP in order to form the LLP
  107. 107. Limited Liability of Partners • The liability of LLP partners for the LLP’s debts, obligations, and liabilities, is limited to the extent of their capital contributions –Partners of LLPs are not personally liable for the LLP’s debts, obligations, and liabilities
  108. 108. Exhibit 5 - Limited Liability Partnership (LLP)
  109. 109. 5 - 109 The Professional Corporation  Designed for professions – lawyers, doctors, dentists, accountants and other professionals  Created in the same manner as a corporation  Identified by the abbreviations:  P.C. – Professional Corporation  P.A. – Professional Association  S.C. – Service Corporation
  110. 110. The Joint Venture Much like a partnership, but it: Is formed for a specific purpose Has a beginning and an end
  111. 111. Conclusion The “right” choice of the form of ownership is unique to every entrepreneur and their business. Each form has advantages and disadvantages. The entrepreneur must be thoughtful and strategic about this important decision.
  112. 112. Exhibit 6 - Franchise
  113. 113. Types of Franchise Type of Franchise Description Distributorship franchise A franchise in which the franchisor manufactures a product and licenses a franchisee to distribute the product to the public. Processing plant franchise A franchise in which the franchisor provides a secret formula or process to the franchisee, and the franchisee manufactures the product and distributes it to retail dealers. Chain-style franchise A franchise in which the franchisor licenses a franchisee to make and sell its products or distribute its services to the public from a retail outlet serving an exclusive territory. Area franchise A franchise in which the franchisor authorizes a franchisee to negotiate and sell franchises on its behalf in designated areas. The area franchisee is
  114. 114. Franchise Agreement • An agreement that a franchisor and franchisee enter into that sets forth the terms and conditions of a franchise • Liability of franchisors and franchisees –The franchisor deals with the franchisee as an independent contractor • Franchisees are liable on their own contracts and are liable for their own torts • Franchisors are liable for their own contracts and torts
  115. 115. Exhibit 7 - License
  116. 116. CASE DISCUSSION : PREMIER OIL
  117. 117. Casestudy 3 : Premier Oil 1. Read and prepare the Casestudy on Premier Oil (Monks & Minow (2011). Identify the corporate governance issues faced. 2. You are required to: – Analyse the scenario’s in the case study and plot the resulting risk analysis on an appropriate risk map. – Map out the stakeholder power/interest issues, and propose the appropriate corporate actions.
  118. 118. Risk Map Action High Medium Low Low Medium High S I G N I F I C A N C E PROBABILITY Requires close monitoring Manage and monitor Significant focus and action Accept but monitor Management effort worthwhile Manage and monitor Accept risks Accept but periodically review Accept but monitor
  119. 119. Stakeholder mapping
  120. 120. Core Readings • Baron, David P.(2013) Business and its environment, 7th Edition, Pearson, Ch.14 • Cheeseman, Henry R.(2013) Business law, 8th Edition, Prentice Hall. Ch.14-16 • Barringer, Bruce R. & Ireland, R. Duane, 2011 Entrepreneurship – Successfully launching new ventures 4th edition, Pearson.
  121. 121. Next Week’s Ideas for Discussion • Prem Sikka, (2008),"Enterprise culture and accountancy firms: new masters of the universe", Accounting, Auditing & Accountability Journal, Vol. 21 Iss: 2 pp. 268 - 295
  122. 122. QUESTIONS?
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