ch. 16-1 © 2006 prentice hall the legal environment of business a critical thinking approach fourth...

Ch. 16-Ch. 16-11 © 2006 Prentice Hall© 2006 Prentice Hall

THETHE LEGALLEGAL ENVIRONMENTENVIRONMENT OFOF BUSINESSBUSINESS

A Critical Thinking ApproachA Critical Thinking ApproachA Critical Thinking ApproachA Critical Thinking ApproachFourth EditionFourth Edition

Nancy K. KubasekNancy K. Kubasek

Bartley A. BrennanBartley A. Brennan

M. Neil BrowneM. Neil Browne

Nancy K. KubasekNancy K. Kubasek

Bartley A. BrennanBartley A. Brennan

M. Neil BrowneM. Neil Browne

http://vig.prenhall.com/catalog/academic/product/0,1144,0131498568,00.html

CHAPTER 16CHAPTER 16

Law and Business AssociationsLaw and Business Associations

© 2006 Prentice Hall© 2006 Prentice Hall Ch. 16-Ch. 16-22

THE LEGAL ENVIRONMENT OF BUSINESS

Forms of Business OrganizationForms of Business Organization

Sole ProprietorshipSole Proprietorship

PartnershipPartnership

CorporationCorporation



Few legal formalitiesFew legal formalities

Minimal government regulationMinimal government regulation

Owner-proprietor has complete control, Owner-proprietor has complete control, profits, and profits, and

Full liabilityFull liability

Sole ProprietorshipSole Proprietorship



A voluntary association of two or more A voluntary association of two or more persons to carry on business for a profit.persons to carry on business for a profit.

PartnershipPartnership



Limited PartnershipsLimited Partnerships

General PartnershipsGeneral Partnerships

General PartnershipsGeneral Partnerships



Unless otherwise specified in partnership Unless otherwise specified in partnership agreement: agreement:

All partners equally liableAll partners equally liable

Equal management powerEqual management power

Equal division of profits/lossesEqual division of profits/losses

Partnership is not taxed; partners are taxedPartnership is not taxed; partners are taxed

Limited PartnershipsLimited Partnerships



One general partnerOne general partner

One or more limited partnersOne or more limited partners

Limited partners are liable only up to the Limited partners are liable only up to the amount investedamount invested

General partner manages day-to-day businessGeneral partner manages day-to-day business

Governing law: RULPAGoverning law: RULPA

Creating PartnershipsCreating Partnerships

If not written agreement: RULPA If not written agreement: RULPA controlscontrols

In partnership agreements, partners In partnership agreements, partners control:control:

capital contributioncapital contribution

profit distributionprofit distribution

management responsibilitymanagement responsibility © 2006 Prentice Hall© 2006 Prentice Hall Ch. 16-Ch. 16-88


Termination of PartnershipTermination of Partnership

Death of partnerDeath of partner

MergerMerger

BankruptcyBankruptcy

Expiration of partnership agreementExpiration of partnership agreement

Winding-upWinding-up

DissolutionDissolution



CorporationsCorporations

The dominant business formThe dominant business form

Created by Created by statestate statutes statutes

Treated as a legal ‘person’Treated as a legal ‘person’

Raise capital by issuing stockRaise capital by issuing stock

Investors are the ownersInvestors are the owners

Owners enjoy Owners enjoy limited liabilitylimited liability



Types of CorporationsTypes of Corporations

Closely heldClosely held Publicly heldPublicly held MultinationalMultinational S corporationsS corporations Professional corporationsProfessional corporations



Closely Held CorporationsCorporations

Most corporations are closely heldMost corporations are closely held

Stock is not tradedStock is not traded

Stock owned by family and friendsStock owned by family and friends

Stock sales are restrictedStock sales are restricted

Stockholders are frequently also employees, Stockholders are frequently also employees, officers, directors, and registered agentsofficers, directors, and registered agents



Publicly Held CorporationsPublicly Held Corporations

Stock is publicly traded on stock exchangesStock is publicly traded on stock exchanges

Many shareholder-investors, not otherwise Many shareholder-investors, not otherwise engaged in businessengaged in business

Day-to-day control in the hands of managementDay-to-day control in the hands of management

Shareholders elect directorsShareholders elect directors

Directors elect officers, hire managementDirectors elect officers, hire management



Multinational CorporationsMultinational Corporations

Incorporated in more than one jurisdictionIncorporated in more than one jurisdiction

Owns subsidiaries in different countriesOwns subsidiaries in different countries

Shareholders may be from different countriesShareholders may be from different countries

Operations in several countriesOperations in several countries



Subchapter S CorporationsSubchapter S Corporations

Closely held (max. 35 shareholders)Closely held (max. 35 shareholders) No nonresident alien shareholdersNo nonresident alien shareholders One class of stockOne class of stock Unanimous consentUnanimous consent May not be member of affiliate groupMay not be member of affiliate group Main featureMain feature: pass-through income tax: pass-through income tax



Creating CorporationsCreating Corporations

A license by the state to do business in A license by the state to do business in corporate formcorporate form

Limited liabilityLimited liability

State law controlsState law controls

Filing Articles of IncorporationFiling Articles of Incorporation

Registered agent for service of processRegistered agent for service of process



Governing LawGoverning Law

Revised Model Business Corporation ActRevised Model Business Corporation Act

Common lawCommon law



Financing the CorporationFinancing the Corporation

Debt FinancingDebt Financing

NotesNotes

BondsBonds

Equity FinancingEquity Financing

Common StockCommon Stock

Preferred StockPreferred Stock

WarrantsWarrants

OptionsOptions



Common StockCommon Stock

AuthorizedAuthorized IssuedIssued

Rights of StockholdersRights of Stockholders

VotingVoting

Participation in profits via Participation in profits via dividendsdividends

Claims to net assets in liquidationClaims to net assets in liquidation © 2006 Prentice Hall© 2006 Prentice Hall Ch. 16-Ch. 16-1919


Preferred Stock Preferred Stock

Generally, preferred stockholders enjoy Generally, preferred stockholders enjoy superior rightssuperior rights

Cumulative preferredCumulative preferred

Participating preferredParticipating preferred

Liquidation preferredLiquidation preferred

ConvertibleConvertible



Consideration for Stock Consideration for Stock

To acquire stock, subscribers contribute To acquire stock, subscribers contribute capitalcapital

Amount contributed equals value of sharesAmount contributed equals value of shares

Failure to adequately contribute exposes Failure to adequately contribute exposes shareholder to liability for the differenceshareholder to liability for the difference

Par value = minimum stated face value per sharePar value = minimum stated face value per shareNo par = a designated valueNo par = a designated value



Secretary of State issues Certificate of Secretary of State issues Certificate of

IncorporationIncorporation First meeting of shareholders: Election of boardFirst meeting of shareholders: Election of board Board elects officersBoard elects officers Board approves by-lawsBoard approves by-laws Board issues stockBoard issues stock

Corporation GovernanceCorporation Governance



Shareholders are owners, but do not controlShareholders are owners, but do not control Shareholders are not agentsShareholders are not agents Participation is limited to electing directorsParticipation is limited to electing directors Annual shareholders’ meetingAnnual shareholders’ meeting

Vote for directors, resolutionsVote for directors, resolutions In person or via proxyIn person or via proxy

Operations-ShareholdersOperations-Shareholders



Management responsibility Management responsibility Set policySet policy Pay dividendsPay dividends Elect officersElect officers Approve executive compensationApprove executive compensation Meet annually or waive by consentMeet annually or waive by consent

Operations-Board of DirectorsOperations-Board of Directors



Usually: President, Vice President, Usually: President, Vice President, Secretary, TreasurerSecretary, Treasurer

Actual management teamActual management team Hire employeesHire employees Execute contractsExecute contracts

Operations-OfficersOperations-Officers



Duties of Corporate ManagementDuties of Corporate Management

Good faithGood faith Prudent person standardPrudent person standard Best interests of corporationBest interests of corporation Corporate opportunity doctrineCorporate opportunity doctrine No conflict of interestNo conflict of interest Business judgment ruleBusiness judgment rule



Limited Liability CompaniesLimited Liability Companies

A hybrid form of business (relatively new)

Limited liability

Pass-through taxation

No restrictions on number or type of members

Variable duration



LLC CharacteristicsLLC Characteristics

Separate entity statusSeparate entity status

Limited liability for membersLimited liability for members

Members (not shareholders)Members (not shareholders)

File Certificate of Organization with stateFile Certificate of Organization with state

LLC agreement among members LLC agreement among members specifies management and control specifies management and control issuesissues



Factors in Choosing Form of BusinessFactors in Choosing Form of Business

TaxationTaxation

ControlControl

LiabilityLiability

ExpenseExpense

TransferabilityTransferability

Duration – exit Duration – exit strategy strategy



Specialized Forms of BusinessSpecialized Forms of Business

CooperativeCooperative

Joint stock companyJoint stock company

SyndicateSyndicate

Joint ventureJoint venture

FranchiseFranchise



High Risk

Low Risk

Global DimensionsGlobal Dimensions

Direct investmentDirect investment

SubsidiarySubsidiary

Joint ventureJoint venture

Agents and Agents and distributorsdistributors

LicensingLicensing

Direct exportDirect export



ch. 16-1 © 2006 prentice hall the legal environment of business a critical thinking approach fourth...

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