Business Associations in a Nutshell
Author:
Shade, Joseph
Edition:
3rd
Copyright Date:
2010
19 chapters
have results for business organizations in a nutshell
Chapter I. Introduction, Concepts and Overview 130 results (showing 5 best matches)
- Different schools use different names for the first course in the law school curriculum that deals with business— . business associations, business organizations, business enterprises, business structures or corporations. In this book, we treat all of these as synonymous terms and sometimes refer to the course as “the basic business course.” Many students have different names—very different names—for the course.
- Accounting is the process of recording, classifying, and communicating financial information. Just as lawyers have cases and statutes (and nutshells) to look to, accountants have GAAP—Generally Accepted Accounting Principles. Financial statements are prepared according to GAAP. Under GAAP, just as under the law of business associations, a business association is treated as an entity.
- The answer to these questions is that since the course is about business, students do have to learn a little about how businesses operate. And they have to become a little familiar some of the terminology and jargon of business and the law related to business. This book seeks to provide the necessary business background in a way that is understandable to students without business backgrounds and relevant to students with business backgrounds.
- The course is mainly about internal relationships within a business association. It covers a wide variety of relationships within several different forms of business associations. The course is also about how the money generated by the business is split up among the owners of the business, how the business is governed and the scope of the duties owed by the managers of business to the owners of and investors in the business association.
- In many large businesses these categories of persons may be clearly identified. Usually in smaller businesses, the functions overlap. The same human being can be both a shareholder, an officer and a director. Even in a larger business the same person may act in more than one capacity.
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Copyright Page 4 results
- Nutshell Series, In a Nutshell
- © West, a Thomson business, 2003, 2006
- Thomson Reuters created this publication to provide you with accurate and authoritative information concerning the subject matter covered. However, this publication was not necessarily prepared by persons licensed to practice law in a particular jurisdiction. Thomson Reuters does not render legal or other professional advice, and this publication is not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney or other professional.
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Chapter V. Who Decides What as to How Businesses Operate (Governance) 255 results (showing 5 best matches)
- Once the LLC is organized the members usually enter into an agreement called an in most states. The operating agreement is a cross between corporate by-laws and a partnership agreement. It provides the members maximum flexibility in creating a business structure tailored to the members’ particular needs and desires. As previously stated the LLC statutes mainly provide only the default rules. The operating agreement, which is a contract, largely governs the organization, structure and management of the LLC. It allows great management flexibility. For example, in most states members are allowed to directly manage the business. This is called a LLC. Or the members can elect one or more managers to manage the business. This is called a
- This is clearly an ordinary course of business transaction for a company with multiple locations like McDonald’s and an officer, probably the vice president in charge of that particular aspect of McDonald’s business, will decide. There may be a provision in the bylaws governing this question.
- The situation is different in a close corporation. In close corporations the shareholders are usually involved in running the business. Often they depend on the business for their livelihood. Shareholders are likely to be linked by family ties or close personal relationships. Obviously, the Wall Street walk is not an option.
- The difference was explained in an irreverent, but understandable way in a book dealing with management entitled
- Many owners of closely held businesses have found that, in addition to limited liability and pass-through taxation, the LLC offers owners of closely held businesses better management options than the management options offered by corporations. LLCs have no statutory requirements for a corporate-like three tiered hierarchy of shareholders, directors and officers, as required in corporations.
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Chapter II. How to Select the Best Business Association for a Particular Business 102 results (showing 5 best matches)
- A business owned by a single owner is called a “sole proprietorship.” Sole proprietorships are not covered in this book (and usually are not covered in the course on business associations) for a very simple reason. A sole proprietorship does not fall within the definition of a “business association.” In the sole proprietorship there is no legal separation between the business and the person who owns and manages the business. There is no association and thus no internal relationships.
- David, who manages a Taco Bell restaurant, and Joe, an accountant, who believes in David’s business abilities and loves tacos, decide to open a taco stand. Joe prepares a business plan in which he estimates it will take a $100,000 investment to get the restaurant started. David will work full-time managing the restaurant, for which he will receive an annual salary of $35,000. He will also invest $10,000 in the business and own receive a 20% ownership in the business. Joe will serve as a part-time bookkeeper and will handle tax, administrative and financial matters. He will receive no salary, but after the first year, he may bill the business as a consultant if he spends more than 10 hours a month on the restaurant’s business. He will invest $10,000 and likewise receive a 20% ownership interest in the business.
- David’s sister, Lee, has expressed a willingness to invest $80,000 in the business. She hopes for an annual return of 10%–20% on her investment, but she realizes that there are no guarantees. Lee, a highly successful business woman, is president of a large corporation earning an annual salary in excess of $250,000. She has neither the time nor desire to be involved in day-to-day operations of the taco stand but wants a say in fundamental policy decisions of the business and the power to veto such decisions. She wants no exposure to personal liability, over and above her $80,000 investment. In return for her investment she will initially receive a 60% ownership interest in the business. David and Joe will have an option to buy an additional 20% (10% each) of the business from Lee during the first three years of operation for $40,000.
- The above questions translate into the issues that today generally drive the choice of a business association (listed below in business law jargon). Often various tradeoffs are required among the various parties negotiating the proposed new business enterprise. These five factors, in some combination, not only drive the choice of a business association, but also crop up at several other points in the the basic business course. All are concepts you need to focus on and understand in some depth. The sooner you acquire an understanding of these concepts the easier and more enjoyable the basic business course will be for you.
- You should become familiar with the main attributes of each of these business associations, These attributes are discussed below in the context of selecting the most appropriate business association for a particular business. How these attributes play out in other contexts that arise in later stages of the life cycle of a business will be discussed later.
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Chapter III. How Business Associations are Formed 72 results (showing 5 best matches)
- Recall, we said earlier that when the state accepts a corporation’s articles of incorporation for filing, corporate existence begins. The state issues a document called a or a and the corporate entity is born as a legal entity as of the date shown on the charter or certificate of incorporation. This is true, even if the steps necessary to complete the organization— ., adopting bylaws, issuing stock, holding the organization meeting, etc.—are never completed and even if there is some defect in the articles of incorporation. In the jargon of corporate law the resulting business association is a —a legal entity recognized by law for all purposes.
- This brings into play the concepts of “foreign” and “domestic” corporations. A corporation formed in any state in the United States is a domestic corporation in its state of incorporation and nowhere else. Thus, if a corporation is incorporated in Delaware but does all of its business in California, that corporation would be considered a foreign corporation in California. That corporation would have to qualify to do business in California, as well as in every state, other than Delaware, in which it does business.
- Qualifying to do business is a simple statutory procedure, which generally entails: filing certified copies of the articles, filling out a simple form provided by the state, paying a filing fee and appointing a local agent for service of process. Qualifying in multiple states increases the filing fees and franchise taxes that corporations must pay. Thus, the choice of the state of incorporation usually boils down to incorporating locally or in Delaware. A corporation that does the bulk of its business in one or two states will usually incorporate locally—simply because of considerations related to cost and convenience. On the other hand, a corporation which does business in multiple states may choose to incorporate in a particular state and qualify to do business in the other states. In these situations Delaware is by far the most popular choice. A majority of the companies on both the Fortune 500 list and the New York stock exchange are incorporated in Delaware.
- A, B and C own a business that they intend to operate as a corporation. But they commence business and never get around to going to their lawyer or taking the legal steps necessary to form the corporation they desire. A, B and C have become partners in a general partnership and the legal consequences growing out of the partnership relationship follow.
- Despite the simplicity of the modern process of incorporation, people sometimes do not get it right. For example, the party whose job was to file the articles may simply have forgotten to do so. In this situation, the persons who own the corporation, which was never formed, can be held personally liable for debts incurred by the business under agency principles or under specific provisions contained in some corporate statutes. It is likely that such persons may be held liable as partners. If two or more parties are carrying on a business for profit as co-owners and that business is not a corporation, what is it? As we learned in Chapter II, it is a general partnership—the default form of business association. One of the main consequences of partnership status is, of course, joint and several personal liability.
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Chapter VIII. How Businesses Raise Money 176 results (showing 5 best matches)
- . A business association may obtain money from persons who buy interests in the business. In consideration for the money these buyers invest in the business, they acquire interests in ( become the owners of) the business. These interest owners may be persons who will be active in managing the business, passive investors, seeking a return on their investment, or a combination of the two.
- . As stated above, equity means ownership. In a corporation equity is represented by shares. “Shares” are defined in statute talk in the Model Business Corporations Act (“MBCA”) § 1.40(21) as the “units into which the proprietary interests in a corporation are divided.” In plain English this means shares of stock are the units of ownership into which a business formed as a corporation are divided.
- Assume the capital structure of a business is $100,000, all equity, and that business earns $20,000 before interest and taxes in a given year of operation. That business has earned a return on equity of 20% ( $20,000/$100,000). Now assume the capital structure of the business consists of $50,000 equity and $50,000 debt, bearing interest at 10% per year. The business earns $20,000, before interest and taxes during the year. Earnings must be reduced by the $5,000 in interest expense, however the $15,000 earned after payment of interest constitutes a return on equity of 30% (
- This chapter provides a basic overview of a subject generally referred to as “
- Sometimes a business needs more money to operate and grow than the business can generate from retained earnings and ordinary bank borrowing. Often the businesses needing money are highly successful companies which need funds to finance additional growth and expansion. Examples include: Microsoft, McDonalds, Wal Mart and Google in their early stages of development. When this situation arises the company may seek “equity financing.” In other words, the business may raise money by selling additional equity securities. This raises a host of business and legal issues which must be considered.
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Preface 7 results (showing 5 best matches)
- Different law schools have different names for the course—“business associations,” “business enterprises,” “business organizations,” “corporations,” etc. This book uses these terms synonymously and sometimes refers to the course as the “basic business course.”
- The book is organized along the lines of the life cycle of a business— . selecting the best form of business association for the particular business, forming the business entity, governing, operating and financing the business, getting money out of the business into the hands of the owners of the business, and ending the business association. Many legal issues arise along the way. This book covers a wide variety of issues that arise in each of the business associations covered by the book, both closely held and publicly held businesses.
- This book seeks to give students taking the basic business course a reliable overview of the major issues that arise in a business relationship. More specifically, we have tried to (1) arrange the material in a way that fosters understanding of how issues arise and are handled in each of the business associations covered in this book, (2) explain the basic concepts likely to be covered in class and (3) provide business and practice examples in which the basic concepts have been applied.
- Beginning in the 1990s two new business associations, LLCs and LLPs, came on the scene. These unincorporated business associations possess limited liability similar to corporations, while offering tax and governance options superior to corporations. This made the newer forms of business associations more attractive to many closely-held businesses than corporations. Almost all publicly held businesses are organized as corporations. Accordingly, students in the basic business course, who intend to practice law in the 21st century need to develop a high level of understanding of the law of partnerships and LLCs, as well as the law of corporations.
- For the first nine decades of the 20th Century the Corporation was the dominant form of business association and the entry-level basic business law course in almost all law schools was Corporations. 30 or 40 years ago most law schools also offered a course in Agency and Partnership, usually as part of the first year curriculum, but those courses have now largely disappeared. Thus many students are first exposed to the law of agency in business associations.
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Chapter IX. How The Owners of a Business Make Money 100 results (showing 5 best matches)
- Generally, the owners of a business, regardless of the form of business association, can make money in three ways: (1) by being paid a salary by the business, (2) by receiving distributions of all or part of the profits from the business or (3) by selling all or part of their interest in the business at a profit.
- Reliable tax rules which assured that the LLC will be taxed as a partnerships was the most critical hurdle that had to be cleared in order to facilitate the development of the LLC as a form of business entity acceptable to owners of closely held businesses. A short history of how this hurdle was cleared will likely help you to understand current LLC law a little better.
- Many of the answers to the issues discussed in this chapter are governed by areas of the law other than the law of business associations— ., contract law, tax law, etc. However, the type of business association and the governing statutes have a significant impact on how the owners of the business make money.
- First, look at the probable expectations of the parties to the deal. Continued employment by, and salary from, the business were probably a big part of ’s reason for investing in the business. While ’s shares in the corporation are, in theory freely transferable, seldom does anyone want to buy a minority interest in a close corporation. Further, a minority shareholder in a corporation, unlike a partner in a partnership, can not easily compel a dissolution in which his interest is bought out. Controlling shareholders may have some incentive to buy out minority shareholders because disgruntled minority shareholders can be a nuisance. But the price the controlling shareholders are willing to pay the minority shareholders for their interests is often inadequate.
- The IRS routinely reviews the reasonableness of salaries and often disallows the deduction for part of the salary, which they view as (and tax as) a dividend. A number of cases have litigated this issue and portions of the salaries have been taxed as dividends. In a few cases owners of successful closely held businesses who took business deductions for personal expenses or extraordinarily high salaries ( who did no work for the business) have been criminally charged with tax evasion.
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Chapter VI. The Legal Duties of the Decision Makers and how those Duties are Enforced (herein Fiduciary Duties) 269 results (showing 5 best matches)
- business lawyers
- The line of business test
- decision on grounds that the case vitiates the business judgment rule with respect to decisions involving litigation. While true, this is a more limited intrusion on the business judgment rule than a decision as to how the business should be ., day and night baseball) and it is an intrusion in an area in which the court has more expertise.
- In the last chapter we identified the real people who make decisions for business associations. With legal power goes legal responsibility. The decision makers for a business association, whether the business is structured as a corporation, a partnership or an LLC are said to have “
- The approach in the case reflects the approach of almost all courts prior to the 1980s. Many courts still adhere to this approach, which is based on a policy of leaving business decisions to business people. As the opinion said, courts do not have the training or expertise to second-guess business decisions made by disinterested business people who are acting without fraud or other taint.
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Chapter X. How Business Associations End (herein End Games) 109 results (showing 5 best matches)
- Another possible end game for a corporation is some type of business combination. Business combinations impact various groups that have interests in or relationships with the corporations involved in the business combination. Business combinations can take a variety of forms. In fact, few legal transactions provide the participants with so many different options for achieving the same basic economic end result as business combinations (also known as “mergers and acquisition”). Most of the details regarding the various types of mergers and acquisitions are beyond the scope of the basic business course (and this book). However, you should be aware of certain basics which are often covered in the basic course in business associations. Almost all law schools offer an advanced course in Mergers and Acquisitions, which students having an interest in practicing business law should consider taking.
- Business associations have a life cycle. As is the case with most relationships, at some point in time most business associations end. Some business associations end quickly; others last a very long time. The end games vary, as do the legal issues raised in connection with the end games. Most professors in the basic business course, at a minimum, touch on the fundamentals concepts of , the primary types of end games herein discussed. Your professor will likely expect you to understand the procedures employed in ending a business association. Often different options are available for accomplishing the desired result of ending a particular business association.
- Our primary focus in this chapter is on end games for the entity, as opposed to changes in ownership of the entity. However, some transaction, such as business combinations, through stock or asset purchases, which have a fundamental impact on business relationships, while not technically entity end games, also warrant discussion. Time and space only allow a basic overview of the matters considered in this chapter. Details can be learned in the advanced business courses offered by all law schools.
- In a merger, two or more business entities combine into one business entity. For example, assume Bubba’s Burritos, Inc., a privately held chain of Mexican restaurants, merges into McDonald’s Corporation, a large publicly held company.
- If a partner leaves a partnership before the end of the term specified in the partnership agreement, then the business of the partnership can be continued if all of the partners other than the one who wrongfully dissolved the partnership so agree. If they decide to continue the business, the departing partner is again paid for the
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Chapter IV. The Limits of Limited Liability 80 results (showing 5 best matches)
- Limited liability, one of the main factors considered in selecting a business association, also plays a key role in operating, financing and managing the business. Historically, until the 1990s limited liability was only available to owners of corporations and limited partners of limited partnerships. Today, however limited liability is also readily available to the owners of unincorporated business associations such as LLCs and LLPs. While the shield of limited liability, is broad, it is not absolute. This chapter focuses on two questions:
- Either an individual or a corporation may own controlling interests in a number of corporations which are engaged in related activities. These are called sister corporations. Many large corporations own subsidiaries, and usually there is a legitimate business purpose for conducting operations through subsidiary corporations. However, sometimes multiple corporations are used to artificially divide what is essentially one business enterprise into segments in order to unreasonably limit liability or to mislead creditors or customers.
- From the early 1900s, when the first limited partnership statutes were passed until the 1990s, when LLCs and LLPs came on the scene the LP was the only business association that allowed investors to acquire equity positions in business enterprises without risking unlimited personal liability. But the conceptual foundation was a trade-off—in return for limited personal liability the limited partners had to be passive investors with no power to manage or control the business.
- As previously discussed, in the 1990s the state legislatures in all states passed enabling statutes which authorized the creation of two types of unincorporated business associations (the LLC and LLP). LLCs and LLPs both provide limited liability for the owners, allow pass through taxation for the business association and allow the owners to freely participate in the management of the business. Among the many major questions raised by the creation of these relatively new types of business
- That problem was addressed in § 303(b) of the Revised Uniform Limited Partnership Act (“RULPA”), which creates a number of statutory “safe harbors.” The governing statute now defines a number of actions limited partners can take without being deemed to be “participating in the management or control” of the business. The list includes:
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Chapter VII. Protection the Law Gives to Persons who Buy or Sell Securities (herein Rule 10b–5) 202 results (showing 5 best matches)
- For purposes of organization and analysis, it is helpful to break the Rule 10b–5 cause of action down into its elements. Different writers classify the elements of a 10b–5 cause of action in slightly different ways or use slightly different labels for the elements. Any classification is nothing more than an analytical tool. The classification most commonly used to explain the rule’s application consists of the following eight (8) elements:
- While Rule 10b–5 has been applied in a vast variety of factual contexts, the two most common applications of Rule 10b–5 (the only applications covered in this book or likely to be covered in the basic business course) are so called (1) securities fraud cases and (2) insider trading cases.
- The fraud on the market theory is based on the hypothesis that, in an open and developed securities market, the price of a company’s stock is determined by the available information regarding the company and its business…. Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements…. The causal connection between the defendants’ fraud and the plaintiffs’ purchase of stock in such a case is no less significant than in a case of direct reliance….”
- The telephone call or letter does not have to cross state lines; nor does the actual offer to buy or sell securities have to be by mail or telephone. For example, the buyer and seller can work in the same building and the offer and sale can be in a face to face conversation in that building. But if one party calls the other to arrange the meeting or to clarify some detail or if a check or stock certificate is transmitted by mail, the requirement has been satisfied. See, 511 F.2d 641 (5th Cir. 1975), a case in which phone calls between two brothers in the same apartment complex in New Orleans, negotiating the sale of an interest in a closely held family business, were enough to satisfy the jurisdictional means.
- In those cases there are problems determining what constitutes a fiduciary relationship of confidentiality. Two criminal prosecutions, both within the area of the 2nd Circuit, which recognized the misappropriation theory before it was recognized by the U.S. Supreme court, are good examples. In , 778 F.Supp. 205 (S.D.N.Y. 1991) a psychiatrist who traded on inside information furnished him by a patient during a counseling session was convicted. But in , 947 F.2d 551 (2nd Cir. 1991) the court held that inside information given by a wife to her husband about the proposed sale of a family business to a large publicly held company did not did not violate Rule 10b–5. In its opinion the Chestman court said that it would not presume that a duty of confidentiality existed between a husband and wife.
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Outline 82 results (showing 5 best matches)
- A. WHAT THE COURSE IN BUSINESS ASSOCIATIONS IS ABOUT
- CHAPTER II. HOW TO SELECT THE BEST BUSINESS ASSOCIATION FOR A PARTICULAR BUSINESS
- F. THE EVOLUTION OF BUSINESS ASSOCIATIONS (A LITTLE HISTORY AND A SHORT LOOK AT THE FUTURE)
- f. Examples of Who Decides How a Large Public Corporation Like McDonald’s Runs Its Business
- CHAPTER IX. HOW THE OWNERS OF A BUSINESS MAKE MONEY
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Note Regarding Statutory Citations 2 results
- The law of business associations is primarily statutory nonuniform state law supplemented by an increasing amount of Federal law. The governing state statutes are not identical but are similar. Most state partnership state partnership statutes are modeled on either the Uniform Partnership Act or the Revised Uniform Partnership Act. Most state corporation statutes are modeled on the Model Business Corporation Act or the Delaware General Corporation Law. This book contains numerous references to those statutes as well as the other statutes listed below. To save space we have included the statutory references by referring to the abbreviations to the statutes set forth below followed by section number (
- MCBA—Model Business Corporation Act
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Index 18 results (showing 5 best matches)
- Publication Date: December 3rd, 2009
- ISBN: 9780314208514
- Subject: Business Organizations
- Series: Nutshells
- Type: Overviews
- Description: This book gives students in an introductory course in business associations a succinct but reliable overview of the principle legal issues that arise in business relationships over the life cycle of the business. It explains the basic concepts that govern these relationships and provides specific examples of how they apply. It also explains similarities and dissimilarities in the business associations covered. The book is intended to help students understand the course whether their background is in accounting or music.
