Chapter 26 'The legal form of a business can have great bearing on the successful operation and result-ing profitability of the business venture....
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Chapter 26

"The legal form of a business can have great bearing on the successful operation and result-ing profitability of the business venture. Accordingly, it is important to have a general understanding of the fundamental features of each of the basic types of business organization. This chapter offers a general examination of1. Sole proprietorships2. Partnerships (both general and limited)3. Corporations (publicly held and close)4. Limited liability companies5. Limited liability partnerships6. FranchisingSole ProprietorshipA sole proprietorship is a business operated by a person as his or her own personal property. The enterprise is merely an extension of the individual owner. Agents and employees may be hired, but the owner has all the responsibility; all the profits and losses are the owner's. For example, one might conduct a computer service business as an individual proprietorship. It would be very much like buying a house as an investment and renting it out. The person operating the business need not use his or her own name as the name of the business; it may be operated under an assumed or trade name, such as the Data Experts Company. Such a trade name would have to be registered with the proper state or local official, however. Employees of the business are the personal employees of the owner. The salaries and wages paid to employees of the business and other business expenses are deductible in determining taxable income.PartnershipsGeneral PartnershipA partnership is a voluntary association designed to carry on a business for profit. How-ever, no express agreement to create a general partnership is necessary. All that is required is that the parties intend to have the relationship the law defines as a partnership. In a general partnership, each partner is an owner and has a right to share in the profits of "


"A corporation is treated as an entity separate and distinct from its owners. Incorporating makes it is easier to hold property over long periods of time because corporate existence is not generally threatened by the death, bankruptcy, or retirement of an individual owner. A corporation can acquire, hold, and convey property in its own name. It can also sue and be sued in its own name. The principal reason to incorporate a business today, however, is the limited liability of its shareholders. Ordinarily, the owners (shareholders) of a corporation are not personally liable for its debts; their loss is limited to their investment.Corporations often are divided into publicly held and close corporations. The stock of the close corporation is held by a family or small group of people who know one another.A publicly held corporation sells shares to people who may have little interest in it except as investors.One's status as a shareholder gives one certain ownership rights in the corporate busi-ness, although this does not include an automatic right to be an employee. However, in numerous instances, the employees of a publicly held corporation will become shareholders, and the shareholders in a close corporation will serve as employees."

Chapter 28

"Corporations are extremely important in today's society. The growth of the modern corporation has been largely responsible for the dynamic economic development attained by this country over the past century. Through corporations, people are able to invest money in a business enterprise without worrying about unlimited liability or management responsibilities. Thus, corporation law gives business the capability to raise the capital necessary to achieve the economies of scale vital to economic efficiency.If you plan to form a new business, you may very well decide that it should be a corporation. After all, not all corporations are huge economic entities; most of them are small businesses. Further, today it is very easy to form a corporation.This chapter will look at the basic issues that arise in the incorporation process. Specifically, it will examine1. The nature of a corporation.2. The pre incorporation process.3. The actual incorporation.4. Liability for defective incorporation.5. When courts will pierce the corporate veil.6. Close corporations.7. The termination process.Nature of a CorporationThe Principal Characteristics of the CorporationThe concept of a corporation developed in early law. One advantage of the corporate form of business is that it makes it easier to hold property for long periods of time. This is because the corporation is treated as an intangible being with a life separate from the lives of its owners"

Chapter 29

"The shareholders are the owners of the corporation. Through their power to elect directors and to amend the articles of incorporation, they can affect the way the business is run. They do not, however, have the power to make management decisions. All statutes of incorporation give that power to the directors. The directors, in turn, usually delegate the making of at least the day-to-day operating decisions to the officers.If the shareholders are dissatisfied with those decisions, they can replace the directors, who in turn will probably replace the officers. The shareholders generally have no right to instruct the directors or the officers on the operating decisions they should make. Share-holders must approve certain extraordinary corporate transactions such as a merger, a sale or lease of substantially all the assets of the corporation, or the dissolution of the corporation. However, the Model Business Corporation Act (MBCA) requires the proposal for these actions to come from the board of directors.As this discussion should make clear, the board of directors and officers of a publicly held corporation have broad management authority. However, their managerial discretion is not unlimited. There are limits placed on this power beyond the voting rights of the shareholders. Basically, the directors and officers must act in a manner consistent with the powers and objectives of the corporation and with the state and federal laws that govern corporate activities.The Board of DirectorsPowers and DutiesMost state incorporation statutes declare that "the business of the corporation shall be managed by a board of directors." Of course, in a large corporation, especially where a number of the directors have full-time jobs elsewhere, this is impossible. The directors tend to ratify management decisions made by the top executives rather than to take the initiative in making the decisions. Recognizing this, the MBCA now says: "All corporate powers shall be exercised by or under the authority of, and the business and affairs of a corporation shall be managed under the direction of, a board of directors."



The legal form of a business can have great bearing on the successful operation and resulting profitability of the business venture. Accordingly, it is important to have a general understanding of the fundamental features of each of the basic types of business organization.

STEP ONE: 

ASSIGNED READING: Read Chapters 26, 28 and 29 of Law for Business (Barnes, 2012).

STEP TWO: 

CHAPTER 26: 

1) Describe the pros and cons of the following business organizations: sole proprietorship; partnership; corporation and limited liability company.

2) What is the most important advantage that a corporation provides a shareholder? Explain. 

3) Explain the advantages and disadvantages of doing business as a franchisee.

CHAPTER 28:

4) Identify the basic steps in the incorporation process and explain legal rules when there has been a defective incorporation. 

5) Explain when a court will pierce the corporate veil and hold shareholders personally liable for corporate obligations. 

6) Describe the various ways in which a corporation may be terminated.

CHAPTER 29:

7) Explain the duty of due care and diligence imposed on directors and officers. 

8) Describe the business judgment rule. 

9) Explain the test for determining when a corporation is liable for the torts or crimes of its employees. 

10) Explain the test for determining when officers or directors are liable for tortious or criminal behavior.

Answered by Expert Tutors

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