Business Organizations

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Business Organizations

• Jody Blanke
• Professor of Computer Information Systems and Law

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(No Transcript)
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Sole Proprietorship

• easy to form
• no formalities
• unlimited personal liability
• no legal identity apart from owner
• e.g., Diversity Heating and Plumbing
• James Schuster
• Jerry Schuster

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General Partnership

• easy to form
• two or more people run a business for profit
• no formalities
• unlimited personal liability
• joint liability on contracts and debts
• may continue after death of partner
• should have written partnership agreement

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Limited Partnership

• statutory creation
• must have at least one general partner and one
  limited partner
• limited partner has limited liability, but cannot
  participate in management

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Corporation

• statutory creation
• must satisfy legal formalities
• e.g., articles of incorporation, bylaws
• perpetual existence
• limited liability of shareholders
• free transferability of shares

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S Corporation

• can avoid double taxation, but
• can have no more than 100 shareholders
• all of whom must be individuals, estates or
  trusts
• cannot be corporations or partnerships
• can have only one class of stock
• cannot own more than 80 of another corporation

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Limited Liability Company

• relatively new statutory creation (1977)
• best of all worlds
• members have limited liability
• members can participate in management
• can choose to be taxed like a corporation or like
  a partnership

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Limited Liability Partnership

• generally available only for professionals
• no general partner
• partners are not personally liable for the debts
  of the LLP or of other partners
• partners are liable for his/her own negligence,
  malpractice, etc.

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Piercing the Corporate Veil

• Alter ego theory
• commingling of funds
• ignoring formalities
• Undercapitalization
• e.g., Walkovsky v. Carlton

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Management of Corporation

• Directors
• overall control of corporation
• Officers
• appointed by board of directors to run day-to-day
  operation of corporation
• Shareholders
• owners of corporation
• elect the directors

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Shareholder Voting

• Straight voting
• one vote for each share for each director nominee
• Cumulative voting
• permitted and/or required in some states
• number of voting shares are multiplied by number
  of director positions to be filled
• percentage required to elect one director (x)

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Duty of Loyalty

• A director and officers must act in the best
  interests of the corporation
• Personal interests must be subordinated to the
  interests of the corporation
• A director or officer may not usurp a corporate
  opportunity without full disclosure and right of
  first refusal to corporation
• Conflicts of interest must be fully disclosed
• e.g., Globe Woolen v. Utica Gas Elect. (1918)

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Duty of Care

• Directors and officers must be honest and use
  prudent business judgment
• They must use the amount of care that an
  ordinarily prudent person would use in similar
  circumstances
• e.g., Bates v. Dresser (1920)

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Business Judgment Rule

• Directors and officers are protected from honest
  mistakes of judgment and poor business decisions
• They are protected from Monday morning
  quarterbacks
• e.g., New Coke
• e.g., Shlensky v. Wrigley (1968)