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LOGO Click your mouse anywhere on the screen to advance the text in each slide After the starburst appears, click a blue triangle to move to the next slide or previous slide Sole proprietorship Private enterprise Corporation Joint stock company Shareholding company Small corporation Close corporation Professional corporation Partnership Limited partnership General partnership Limited liability partnership Limited liability limited partnership th Legal Environment Ed Legal Environment Forms of business Limited liability company (LLCs) One-member limited liability company Company limited by shares Company limited by guarantee Unlimited company >< limited company No liability company Public company >< private company Public company >< proprietary company Listed company >< non-listed company State-owned enterprises Corporate group Shareholders Members of a company th Partners Legal Environment Ed Legal Environment - Sole traders - Partnerships - Corporation - Limited Liability Companies Business entity run by one person No legal distinction between the owner and the business SOLE PROPRIETOSHIP SOLE TRADER PRIVATE ENTERPRISE Legal Environment 4th Ed Legal Environment Sole Proprietorships Sole traders/ proprietorships • The simplest business form • Finance: the necessary capital to run the biz is provided by the sole owner • Low set up costs • Small enterprises and revenue • Limited financial capacity • Owners may lack some skills or resources • Risk: the proprietor himself bears all the risk No one else has any stake in the biz • Sole proprietorship is not a legal entity A sole proprietorship is an unincorporated business owned by one person Sole proprietorships are easy and inexpensive to create and operate Earnings are reported on the owner’s personal tax returns Legal Environment 4th Ed Legal Environment Management of private enterprises A • The owner of a private enterprise has the full power to manage all business activities of the enterprise; • The owner of a private enterprise may himself or employ other persons to manage and administer the business operations • The owner of a private enterprise shall be the plaintiff, defendant in arbitration or court proceedings in disputes relating to the enterprise • The owner of a private enterprise shall be the legal representative of the enterprise D E 10 Personal Liability for Owners Bob runs a small manufacturing business out of his home, as a small proprietorship operation Bob then orders $30,000 worth of supplies from a packaging company He signs a contract to pay off the supplies over a period of years Then, in the middle of production, there is a drop in demand, and Bob has to cease the business operation Question: Can the packaging company sue Bob for the remaining payments on the supplies? If Bob is unable to fulfill the debt using business assets, whether or not the packaging company can go after his personal property to fulfill the debt? (This may include his personal bank monies, his automobile, or even his home) TAX Schedule C (Form 1040) Example Legal Environment 4th Ed Legal Environment Sole traders Sole trader ADVANTAGES Simple and inexpensive to DISADVANTAGES form Owner is liable for all the debts No separate tax return Uncomplicated management Speedy in making decision Limited options for financing the business One-tiered management Limited managerial skills Long working hours for the manager Lack of continuity 13 Partnerships Legal Environment 4th Ed Legal Environment 16 Characteristics - « M.Smith and sons » - « Peter and friends » - « Brown’s brothers » - « Baker & Mc Kenzie » - « Flécheux, Ngo & associés » - « James and associates » 4th Legal Environment Legal Environment Ed 17 Members/ partners Capital contribution (When to contribute, proof of contribution…) Assignment/ transferability Profit distribution Legal capital Increase or decrease in capital Liability Duties of partners Management 18 Liability Characteristics • A partnership is an unincorporated association of two or more coowners who carry on a business for profit • Partnerships are easy to form (sometimes it happens unintentionally!) • Partnerships have unlimited liability • Each co-owner is a general partner • General partners can be held personally liable for the partnership actions and debts • A joint ownership of the business • Difficult for general partners to transfer their share of capital to an outsider • Unless otherwise agreed, partners share profits, losses and management equally Tort Liability – A partnership is liable for intentional and negligent torts of a partner in the ordinary course of business or when the partner is acting with actual authority Personal Liability – each partner is personally liable for the debts of the partnership Joint and Several Liability – a creditor may sue the partners jointly as a group or separately as individuals Legal Environment 4th Ed Legal Environment Management Rights Liability A B 20 Each partner has equal rights in management of the partnership unless otherwise agreed Large partnerships are often managed by a few designated managing partners or an executive committee Unless agreed otherwise, partners have an equal vote on matters of partnership business C D E 21 Management Duties 22 Formation Duty of Care – duty owed by partners to manage the partnership affairs without gross negligence, reckless conduct, intentional misconduct, or knowing violation of law Duty of Loyalty – duty of utmost loyalty Duty to not compete with partnership, turn over any profit to partnership, and avoid conflicts of interest Duty of Good Faith & Fair Dealing – duty to deal with each other and the partnership in a fair way Legal Environment 4th Ed Legal Environment Legal Environment 4th Ed Legal Environment 23 Partnership by registration Partnership by estoppel applies if: Participants tell other people that they are partners (even though they are not), or they allow other people to say, without contradiction, that they are partners A third party relies on this assertion; and The third party suffers harm Legal Environment 4th Ed Legal Environment 24 Termination of the Partnership Business Terminating a Partnership Dissociation occurs if a partner quits When one or more partners dissociate, the partnership can either: (i) buy out the departing partner(s) and continue in business or (ii) wind up the business and terminate the partnership A partner always has the power to leave a partnership but may not have the right Legal Environment 4th Ed Legal Environment Ending a partnership business involves three steps: Dissolution decision to end business; can be voluntary or automatic Winding Up During the winding up process, all debts of the partnership are paid, and the remaining proceeds are distributed to the partners Termination the end; happens when winding up is complete 25 Circumstances that Require Dissolution Founders and pre-incorporation contracts Partner is dissociated and half the other partners vote to wind up business All partners agree to dissolve The term expires or partnership achieves its goal – not making contracts until the company has been incorporated; or – making an agreement between the founders on how to share the potential liability – buying an “off-the-shelf” company Partners agree in advance on events that will cause dissociation Partnership business becomes illegal A court determines that the partnership cannot function successfully 27 Terms commonly included in a partnership agreement PARTNERSHIP AGREEMENT ( Articles o f p artnership) - Include almost any terms that the parties wish - U n less the term s are illeg al or trary to public policy or statue 26 • A founder is a person who takes the procedural steps to get a company incorporated • Before incorporating, a founder who makes a contract on the company’s behalf shall be personally liable on it • To avoid potential liability, the founders should: Partner withdraws from a partnership at will Legal Environment 4th Ed Legal Environment Legal Environment 4th Ed Legal Environment + + + + + + + Basic Structure: C apital C on tributions Sharin g of Profits & L osses Man ag ement & C on trol Accoun t ing & Part n ers hip Records Dis s ociation & Dis s ol ut ion Arbitration 2.2 Partnership General partnerships Advantages Advantages: Disadvantages • Do not have • Liability: personal liability to pay taxes • Easy to form • Funding: cannot sell shares; provides by contributing from partners or by borrowing • Management: difficult because, in the Disadvantages: absence of an agreement, all partners have an equal rights in running the business • Transferability: only has the right to transfer the value of his partnership 31 interest, not the interest itself CASE STUDY: Gary Chavers operated Chavers Welding and Construction (“CWC”), Gary's sons Reggie Chavers and Mark Chavers joined their father in the business after graduating Reggie and Mark served only as CWC employees, not as CWC partners In February 1999, CWC entered into an agreement with Epsco, Inc., to provide payroll and employee services for CWC Epsco extended credit to CWC on its belief that CWC was a partnership CWC's account with Epsco became delinquent, and Epsco filed a complaint against Gary, Reggie, and Mark, individually, and doing business as CWC, to recover payment for the past due account Gary discharged a portion of his obligation to Epsco due to his filing for bankruptcy Epsco sought to recover CWC's remaining debt from Reggie and Mark On May 21, 2002, the trial court entered an order stating that Reggie and Mark were partners by estoppel as relates to Epsco The trial court found that Reggie and Mark were jointly and severally liable for the debt of CWC in the amount of $80,360.92 Because the Chaverses represented to Epsco that CWC was a partnership and Epsco relied on this representation when extending credit Limited Partnerships Legal Environment 4th Ed Legal Environment 2.3 Limited Partnership 34 2.3 Limited Partnership Limited partnership is set up by general partners and limited partners a - LP A General Partner a - LP Limited partners France England America General partners 35 36 Characteristics Limited Partnerships Formation of limited partnerships require a filed certificate of limited partnership General partners have management rights; limited partners not Limited partners may transfer the value of their interest, but the interest itself only if the partnership agreement permits Usually, limited partnerships have perpetual existence Membership General partners Limited partners Capital Legal capital Assignment Capital increase 37 Characteristics Legal Environment 4th Ed Legal Environment 38 Limited Liability Partnerships (LLPs) Liability The limited partnership General partners Limited partners Partners in an LLP are not personally liable for debts of the partnership (whether arising from contract or tort) Management: Legal representative Structure 39 Legal Environment 4th Ed Legal Environment 40 Limited Partnerships & Limited Liability Limited Partnerships Have general (active management) and limited (money-only) partners In a limited partnership, only the general partners are personally liable In a limited liability limited partnership, the general partner is not personally liable for the debts of the partnership Limited partnerships are not taxable entities Legal Environment 4th Ed Legal Environment 41 Corporation Legal Environment 4th Ed Legal Environment 42 Some basic concepts Shareholding company/ Corporation Shareholding company or joint-stock company or corporation Since 17th century A shareholding company is established in accordance with the laws, in which its members become shareholders by buying its shares and liable for the debts and the property obligation of the company within the amount of capital contributed to the 43 company Basic concepts Legal capital Charter capital Business capital Capital share 44 Main issues Share Security Bond Share certificate Dividend Shareholder • Characteristics • Management • Classes of shares 45 Characteristics Legal personality Capital contribution (When to contribute, proof of contribution…) Assignment/ transferability Profit distribution Legal capital Increase or decrease in capital Liability Legal status Management • A company is a legal person A legal person is an entity recognized by the law as capable of having rights and duties • A company has a separate legal existence that is distinct from that of its owners, managers, employees and agents Legal Environment 4th Ed Legal Environment 47 Salomon v A Salomon and Co Ltd [1897] AC 22 Facts: Salomon was a boot manufacturer who originally operated the business as a sole trader He converted the business into a company, as several of his sons worked in the business and he wished to give each a share The subscribers to the memorandum were Salomon, his wife and five children They each took one share However, evidence was raised to show that the wife and five children held their shares as nominees for Salomon with the result that Salomon and Co Ltd was in reality a “one man” company He was also appointed the managing director of the company and two of his sons were appointed as directors Salomon sold his business to the company and received more shares and securities in the form of debentures and secured loans from the company in payment The company then experienced the difficulties and eventually went into liquidation The creditors of the company sued Salomon for the company’s debts They argued that Salomon should be liable for as it was just an alias for Salomon himself Salomon, on the other hand, argued that he was not the company and therefore could not be made liable for its debts Decision: The court held that the company was a separate entity from its shareholders It had conducted business in its own right and was not just alias of Salomon Therefore, Salomon was not liable to indemnity the company Lee v Lee's Air Farming Ltd (1961) AC 12 Facts: Catherine Lee’s husband Geoffrey Lee formed the company through Christchurch accountants, which worked in Canterbury, New Zealand It spread fertilisers on farmland from the air, known as top dressing Mr Lee held 2999 of 3000 shares, was the sole director and employed as the chief pilot He was killed in a plane crash Mrs Lee wished to claim damages of 2,430 pounds under the Workers’ Compensation Act 1922 for the death of her husband, and he needed to be a ‘worker’, or ‘any person who has entered into or works under a contract of service… with an employer… whether remunerated by wages, salary or otherwise.’ The company was insured (as required) for worker compensation • The Court of Appeal of New Zealand said Lee could not be a worker when he was in effect also the employer • The Court of Appeal recognised that a director of a company may properly enter into a service agreement with his company, but they considered that, in the present case, in as much as the deceased was the governing director in whom was vested the full government and control of the respondent company he could not also be a servant of the respondent company • Appeal was allowed Decision: • The Privy Council advised that Mrs Lee was entitled to compensation, since it was perfectly possible for Mr Lee to have a contract with the company he owned The company was a separate legal person Consequences of separate legal personality (1) • Entity: Is a legal entity separate to its members • Liability: Members’ liability can be limited • Size: May have any number of members (at least for a public company) • Succession: Perpetual succession – change in ownership does not effect existence • Owners’ interests: Members own transferable shares Lift of corporate veil • • • • Failure to observe formalities Commingling of assets Inadequate capitalization Fraud Consequences of separate legal personality (2) Assets: Company, not members, owns assets Management: Company must have at least one director Company must have a written constitution (charter) Accounts: A company must usually deliver accounts to registrar • Security: A company may offer a floating charge over its assets • Withdrawal of capital: Strict rules concerning repayment of subscribed capital • • • • Characteristics of JSC • The charter capital is divided into equal portions called shares; • Shareholders are liable for the debts of the enterprise within the amount of capital contributed to the enterprise; • Shareholders may freely assign their shares to other persons; • Shareholders may be organizations or individuals; the number is three no restriction on the max number • Joint-stock companies may issue securities to the public • Joint-stock companies have the juristic personality Organizational and management structure Corporations Corporations offer limited liability – usually the managers’ and investors’ personal property is not at risk Corporate stock can be bought and sold, making investments easy to get Corporations have perpetual existence; they can continue without their founders Corporations involve a lot of expense and effort to create and operate Profits are taxable Legal Environment 4th Ed Legal Environment General Meeting of Shareholders Board of Directors Inspection Committee CEO Legal Environment 4th Ed Legal Environment 56 55 General Meetings The Roles in a company • Shareholders: the owners; by buying shares, they provide the money for the company • Directors: elected (and removed) by the shareholders, they set the general policies for the corporation (eg: determining the amount of dividends) • Officers: chosen by the directors, they run the day-to-day operations (eg: chief executive officer) • • • • • • Matters being decided by GM Right to call for a meeting Procedure for calling for a meeting Notice Proceedings at meetings Resolutions at GM 57 Rights and duties of shareholders • • • • • • • • • Adoption of and amendment to the Company Articles Changes of company name and type Certain transactions affecting share capital The issue of new shares Buy-backs of existing shares Appointment and removal of directors Certain parts of the directors’ remuneration and benefits Appointment and removal of the company’s auditors Certain takeovers and reconstructions Rights and duties of directors • Duty of loyalty and good faith • Duty to avoid conflicts of interest • Duty to act in good faith in the interests of the company • Duty to use powers for a proper purpose • Duty of care and diligence • Duty to prevent insolvent trading 10 Rights and duties of officers Question • Duty to avoid conflicts of interest • Duty to act in good faith in the best interests of the company • Duty to use powers for a proper purpose • Duty to act with reasonable care and diligence • Duty not to make improper use of position or information A & B were each directors of a company which imported food products They were the only shareholders of this company, with A holding 5/6 of the shares and B 1/6 B didn’t take any active part in the running of the company, even though he was a director, and did not attend meetings Disputes between A & B led to an agreement that B would sell his shares to A and resign as a director However, what A didn’t tell B was that he had been approached by a 3rd party at a profit Question: Can B make a claim for a part of the profit? Classes of share Corporation • Ordinary • Preference – Redeemable – Dividend preference – Voting preference Advantages Disadvantages 64 Close Corporations “S” Corporations “Close corporation” and “closely held corporation” refer to a corporation whose stock is not publicly traded on a stock exchange Common provisions of close corporations: Protection of Minority Shareholders Transfer Restrictions Flexibility Dispute Resolution Legal Environment 4th Ed Legal Environment 65 Shareholders of S corps have the best of all worlds: the limited liability of a corporation and the tax status of a partnership The disadvantages of an S corp are: There can only be one class of stocks There can be no more than 75 shareholders Shareholders cannot be partnerships or other corporations Shareholders must be U.S citizens or residents th Legal Environment Ed Legal Environment 66 11 Professional Corporations Most states let professionals incorporate In many states, PCs provide more liability protection than a partnership The corporation may be liable for an individual member’s mistakes, but the innocent professionals are not at risk Doctors …… Architects Professional Services Accountants Consultants Lawyers Legal Environment 4th Ed Legal Environment 67 Limited Liability Company LLCs Legal Environment 4th Ed Legal Environment 69 Limited liability companies with two or more members • Characteristics of LLC with two or more members • Capital contribution Legal Environment 4th Ed Legal Environment 70 Characteristics Capital contribution (When to contribute, proof of contribution…) Assignment/ transferability Profit distribution Legal capital Increase or decrease in capital Liability Legal status Management Legal Environment 4th Ed Legal Environment 72 12 Characteristics of LLC with two or more members • • • • Members of the company may be individuals or legal persons The minimum number of members is two and maximum is 50 The company is not allowed to issue shares to the public The company has juristic personality and the members are liable for the debts of the company within the amount committed to contribute to the company Limited Liability Companies An LLC offers the limited liability of a corporation and the tax status of a partnership, without the disadvantages of an S corporation The LLC offers: Limited liability, Favorable tax status, Flexibility in management and membership, Duration even after a member withdraws The biggest disadvantage with LLC is the legal uncertainty involved since state laws vary and organization forms are not standardized Legal Environment 4th Ed Legal Environment Capital contribution • Members shall have to contribute capital fully and on time as committed • The amount of capital not yet contributed on time shall be considered a debt that member owes the company • Member shall have to compensate for any damage arising from such failure to contribute capital fully and on time as committed 74 Organizational and management structure Members’ Council Director/ General Director Inspection Committee 76 Members’ Council of LLC • comprises all members • is the highest decision-making body of the company • The frequency of meetings of the Board of members shall be specified by the company’s charter but meet at least once a year Voting rights of a member of the Council • The company’s development orientation; • Amendments to the company’s charter; • Decide the annual business plan and development strategy of the company; • Decide development investment projects of the company • Election, dismissal of the Chairperson of the Members’ Council; designation, dismissal of Director/General Director; • Approval for the annual financial statement; • Restructuring or dissolution of the company • Decide the increase or decrease of charter capital; decide the time method for raising additional capital; 13 Director/ General Director Rights of Director/ General Director • The Director or General Director of a company is the person who administer the everyday business operation of the compay; • responsible to the Members’ Council for the performance of his/her rights and obligations • the legal representative of the company if provided so by the company charter • Organize the implementation of Resolutions of Members’ Council; • Decide the issues related to the company’s everyday business operation; • Organize the implementation of the company’s business plans and investment plans; • Promulgate the company’s rules and regulations, unless otherwise prescribed by the company’s charter; • Designate, dismiss the company’s managerial positions, except for those within the competence of the Members’ Council; One member Limited liability companies • A one-member limited liability company is a company which is owned by one organization or individual • can’t issue shares Joint Venture A joint venture is a partnership for a limited purpose Non-profit enterprises not qualify as a joint venture Legal Environment 4th Ed Legal Environment 82 Other Forms of Organization Business Trusts – an unincorporated association run by trustees for the benefit of investors Cooperatives – groups of individuals or businesses that join together to gain the advantage of volume purchases or sales Franchises are not actually a separate form of business – they can take almost any one of the ones discussed already Franchising is a popular method of starting a business that is a compromise between employment and starting your own business Franchisees have freedom to make many choices, but are limited in other ways Legal Environment 4th Ed Legal Environment 83 14