BLAW 101-110 Lecture Notes - Business Organizations I - 6.8.22 PDF

Legal Environment of Business BLAW110 Lecture 21 Business Organizations I: SP’s, Partnerships and LLC’s  Corporate Law Intro Definition: Legislation that regulates commercial organizations with limited liability and investments represented by shares Creation o...

Legal Environment of Business BLAW110 Lecture 21 Business Organizations I: SP’s, Partnerships and LLC’s  Corporate Law Intro Definition: Legislation that regulates commercial organizations with limited liability and investments represented by shares Creation of entities is important to society as it builds jobs and wealth Corporate law includes many different areas of law, including secured transactions, tax, contracts and antitrust  How to form an entity Step 1: Decide on a name for the entity Must be available in that specific State Step 2: Decide on the entity’s “home” Every entity must be a resident of the State in which it is formed Step 3: Decide on the entity type Sole proprietorships (SP), partnerships (GP/LP), limited liability company (LLC), corporation (C or S-Corp), non-profit Step 4: File formation documents/articles with the Secretary of State (SOS)  Sole Proprietorships Definition: A business that has no separate legal existence from its owner 100% of the risk, 100% of the reward No formation required with the SOS (operate under your own name) Income and Taxation: All income is taxed at personal/individual rates, and not at the entity level (known as “flow-through” or “pass- through” taxation) Reported on Schedule C (Profit and Loss from Business) Individuals pay income tax and self-employment tax (Social Sec. and Medicare) Pros: Most flexibility and control over business Cons: Unlimited personal liability, tough to raise capital to build  Partnerships Definition: An arrangement by two (or more) parties to manage and operate a business and share its profits Formation: Not required with SOS, but file Fictitious Name Permit with County Profits and Taxation: Pass-through entity, default rule for profits to be split 50-50 unless partners agree to a different split (each partner receives Schedule K-1) General Partnerships (GP) have all partners operating the business, limited partnerships (LP) have at least one general partner Limited partners’ liability is limited to the amount of their investment, GP’s are unlimited  Partnership Agreements Contract between partners which establishes rules for voting and profit control, adding a new member, additional capital calls, membership interest transfers, “bad boy” provisions/involuntary forfeiture of membership interests Establishes a duty of care and duty of loyalty to the partnership Either partner can bind the partnership in a contract  Partnership Voting/Profits Example Hypo: Adam and Bryan start up a general partnership. Adam contributes $60,000 and Bryan contributes $40,000. What % of profits does each member receive if the partnership agreement says nothing? What about if the agreement says that each member receives profits in accordance with capital contributions? What % of management control/voting does each member receive? Key Features of Partnership: (1) Shared profits/losses; (2) Shared ownership/liability; and  Franchises Definition: An arrangement in which the owner of some form of intellectual property (logo, slogan) is used Franchisee receives the benefits of an established brand, but must conform to all franchisor (company) requirements Franchisee must also pay royalty fee to franchisor  Limited Liability Companies LLC’s involve elements of sole proprietorships, partnerships and corporations Formation: File articles of incorporation with SOS Income and Taxation: LLC does not have its own tax structure, and is either taxed as a SP (single-member); partnership (default), or corporation (by election) Pros: Simpler day-to-day management relative to a corporation, limited liability for its members, can be owned by other LLC’s/corps/Trusts  Operating Agreements LLC’s are governed internally by an Operating Agreement, which details: How managers/members are approved, division of profits, management by members or managers, voting rights, dissociation of a member (by death, disability or departure), dissolution/winding up Cons: Transferability of membership interests still requires consent of other members/majority vote; members owe fiduciary duties of care and loyalty to the LLC; professionals ineligible to form LLC’s; laws can differ state-to-state  Transfer of Obligations Hypo: You run a shoe business out of your home and are signing contracts in your name without forming an entity. Later, you form an LLC and transfer the rights and obligations under the contract to the newly created entity. Are you allowed to do so?  Secondary Issues - Valuation Hypo: Actor Kevin Costner was a 92.5% limited partner in a casino, bar and restaurant. Two limited partners who owned the other 7.5% in the LP sued Costner to dissolve the partnership so they could be bought out of their interest. Can they do so? Holding: A partner who seeks to be bought out cannot force the judicial sale of a property or dissolve the partnership when the other partners wish to continue operating the business With real property, the partnership owns the property, not the individuals who bought it  In-Class Exercise: LLC Search Look up an LLC using: https://bizfileonline.sos.ca.gov/search/business Find out the following four pieces of information: 1. The name of the entity 2. When the entity was formed 3. Whether the entity is listed as active/FTB suspended/terminated 4. The agent for service of process Agent is the individual or third-party company that accepts service of process when a party receives notice it has been sued