Business Organization PDF

**Chapter 14** **Business Organization** - **Forms of Business Organizations:** - **People conduct business using a number of different organization forms.** - **The law recognizes three basic forms and several hybrif forms that contains attributes of two or more ba...

**Chapter 14** **Business Organization** - **Forms of Business Organizations:** - **People conduct business using a number of different organization forms.** - **The law recognizes three basic forms and several hybrif forms that contains attributes of two or more basic forms.** A green and white screen with text Description automatically generated - **Two terms are important as they relate to rge number of owners of a business oranization.** - **Closely Held: An organization that is owned by only a few people.** - **Publicly Held: A business organization that has hundreds if not thousands, of owners who can exchange their ownership interest on public exchanges.** I. **Factors To consider When Slecting a Business's Organizational Form:** - **Significant factors to consider in selcting the best organizatinal form for a particular business activity include:** - **The cost of creating the organization.\ The continuuity or stability of the organization.** - **The control of decisions.** - **The personal liability of the owners.** - **The taxation of the organization's earning and its distribution of profits to the owners.** - **Creation:** - **The word creation means the legal steps necessary to form a particular business organization.** - **The most significant creation-related issues are how long it will take to create a particular organization and how much papework is involved.** - **Continuity:** - **Another factor to consider when selcting the best organizational form for a business activity is the continuity of the organization.** - **The word continuity becomes associated with the stability or durability of the organization.** - **The crucial issue with this continuity fator is the method by which a business organization can be dissolved.** - **Dissolution: The cancellation of an agreement, thereby rescinding its binding force. A partnership is dissolved anytime there is a change inpartners. A corporations dissolution occurs when that business entity ceases to exist.** - **Mangerial Control:** - **The factor of control concerns who is managing the business organization.** - **This issue is of vital importance to the owners.** - **Liability:** - **When considering liability ask yourself thee questions.** - **To what degree is the owner of a business personally liable for the debts of the business organization?** - **When is the owner liable under the law for harm caused by the business organization?** - **Generally, businesspeople want to limit their personal liability.** - **Although there are organizations that appear to accomploish this goal, you will see that such appearances might be misleading when actually conducting business transactions.** - **Taxation:** - **This factor is often viewed as the most critical selecting the form of business organization.** II. **Selecting the Best Organizational Form:**  A close-up of a document Description automatically generated - **Sole Proprietoships:** - **Sole Propritorship: The simplest form of business orgainzation, created and controlled by one owner.** - **The use of this business organization is very limited because multiple owners cannot create a propietorship.** - **Depending on the factual situtaion presented, greater continuity, less liability, and more flexible tax planning may be required than those afforded by th elaw of the sole proprietoship.** - **Creation:** - **Sole proprietorship is the easiest and least expensive business organization to create.** - **In essence, the proprietor oobtains whatever busines lincense are necessary and begins orperations.** - **Legally, no formal documentation is needed.** - **Continuity:** - **A proprietorhsips continuity is tied directly to the will of the proprietor.** - **In essence, the proprieto may dissolve his or her organizaton at any time by simply changing the organizaton or terminating the business activity.** - **The fact that the proprietorship's business activity may be more stable than the proprietor's willingness to remain involved in the business indicates that the sole proprietorship is less desirable organization form.** - **Ownership of a sole proprietorship cannot be transferred.** - **Managerial Control:** - **The sole proprietor is personally obligated for the debt of the proprietorship.** - **Legaaly speaking, this owner has unlimited liability for the obligation of this type of business orgainzation.** - **The business orgainzation's creditors can seek to hold th eproprietor personally liable for 100 persent of the debt and legal obligations that the proprietorship cannot satisfy.** - **Taxation:** - **The sole proprietorship is not texed as an organization.** - **All the proprietoship's income subject to taxation is attributed to the proprieto.** - **The intial appearance of this tax treatment may appear favorable because the business organization is not taxed.** - **However, the individual propreitor must pay the applicable personal tax rate on the income earned by the proprietoship whether the proprietor actually recieves any of the income from the organization or not.** - **Partnerships:** - **Partnership: A business organizaton involving two ormore persons agreeing to conduct a commercial venture while sharing its profit and losses.** - **Creation:** - **A partnership is easily formed.** - **The cost of forming a partnership is relatively minimal.** - **In addition, the creation of a partnershi is made easier since it does not need to get permission from each state in which it does business.** - **The key to a partnership's existence is satisfying the element of its definition:** - **1. Two or more persons.** - **2. A common interest in business.** - **3. Sharing profits and losses.**  - **Continuity:** - **A general partnership is dissolved any time there is a change in the partners.** - **Therefore, it is generally said that the partnership organization is easily dissolved.** - **Even if the partnership agreement provides that the partnershiop will continue for a stated number of years, any partner still retains the power to dissolve the organization.** - **Although liability may be imposed on the former partner for wrongful dissolution in violation of the agreement, the partnership nevertheless is dissolved.** - **Dissolution is not the same thing as terminating an organization's business actiivtity.** - **Termination involves the winding up or liquidating of a business, dissolution simply means the legal for of orgaanization no longer exists.** A screenshot of a computer screen Description automatically generated - **Managerial Control:** - **In a general partnership, unless the agreement provides to the coontrary, each partner has an equal voice in the firms affairs.** - **Partners may agree to divide control in such a way as to ,ake controlling partners and minority partners.** - **A written partnership agreement should provide specific language governing issues of managerial control.** - **Liability:** - **All persons in a general partnership have unlimited liability for their organizations debts.** - **These partners personal asset, which are not associated with the partnership, may be claimed by the partnership creditors.** - **Jointly and severally liable: The egal principle that makes two or more people, usually partners, liable for an entire debt as individual or in any proprtional combination.** - **Taxation:** - **Partnership are not a taxable entity.** - **The fact that this type of organization pays no income tax does not mean that the profits of the partnership arefree from income tax.** - **A partnership files an information return that return that allocates to each partner his or her proportionate share of profits or losses from operation, dividend income, capital gains or losses, and other items that would affect the income tax owed by a partner.** - **Partners then report their share of such items on their individual income tax returns, irrespective of whether they have actually received the items.** - **This aspect of a partnership is an advantage to the partners if the organization suffers a net loss.** - **The pro rata share of this loss is allocated to each partner, and it can be used t reduce these partners personal taxable income.**  - **Corporations:** - **Corporation: An artificial , but legal, person created by the state law. As a business organization, the corporations resperation of owners and managers gives it a high level of flexibility.** - **Domestic corporation: A business organization organization created by the issuance of the state charter that operates in the state that issued the center.** - **Foreign corporation: A business organization, created vy the issuance of state charter, that operates in states other than the on issuing the charter.** - **Alien corporation: A corporation created under the authority a foreign country.** - **Creation:** - **Charter: The legal document issued by a state when creating a new corporation.** - **Incorporators: Those individual who are responsible for bringing a corporation into being.** - **Articles of incorporation: The legal document that forms the application for a state charter of incorporation.** - **Continuity:** - **Managerial control:** - **Shareholders: The owners of corporation. Typically, these owners vote on majjor decisions affecting their corporations, most commonly the electiopn of a board of directors.** - **Directors: Those individuals who are elected by the shareholders to decide the goals and objectives for the corporate organization.** - **Officers: Thses \\e individuals appointed by directors of a corporation to conduct the daily operations of the corporate organization.** - **Derivative suit: A lawsuit filed by one or more shareholders of a corporation against the at organizations management. This suit is brought to benefit the corporation and its shareholders indirectly.** - **Liability:** - **Piercing the corporate veil: The legal doctrine used by courts to disregard the existence of a corporation, thereby holding the shareholders personally liable for the organizations debts.** - **Alter-ego theory: One method by courts to pierce the corporate veil when a shareholder fails to treat the corporate organization as a separate legal entity.** - **Taxation:** - **Double tax: A disadvantage of a corporate form of organization in that the corporation must pay a tax on the money earned and the shareholder pays a second taxs on the dividends distributed.** A white background with black text Description automatically generated - **Limited Partnerships:** - **Limited partners: Those owners of a limited partnership who forgo control of the organizations operation return fo rtheir liability being limited to the amount of their investment.** - **General partner: The owner of a limited partnership that enjoys the control of the partnerships operation. This type of partner is personally liable for the debts of the limited partnership.** - **Creation:** - **Continuity:** - **Managerial control:** - **Liability:** - **S corporations:** - **S corporations: A business organization that is formed as a corporation but, by a shareholders election, is treated as a partnership for taxtion purposes.** - **Limited liability organizations:** - **Limited liabiloty company: A type of business organization that has characteristics of both a partnership and a corporation. The owners of an LLC are called members, and their personal liability is limited to their capital contributions. The LLC, as an organizayion, is not taxable entity.** - **Creation:** - **Articles or organization: The document used to create a limited liability company. Its purpose corrsponds to the purpose of the articles or partnership and the articles of incorporation.** - **Organizers: The parties responsible for bringing a limited liability company into existence. These parties correspond to the functions of incorporators with respect to corporations.** - **Continuity:** - **Members: The individuals or business entities that belong to a limited liability company.** - **Managerial control:** - **Managers: A person designated and charged with day-to-day operations of limited liability company.** III. **Operating the organization Through Agents:** - **Terminology:**  - **Principal: The person who gives an agent authority.** - **Agent: The person who on behalf of a principal deals with a third party.** - **Independent contractor: A person who contracts to do work for another person or entity, who is not considered to be an employee.** - **Third party: One who enters into a relatinship with a principal by way of interacting with the principals agents.** - **Contractual Liability From an Agents Acts:** - **Contractual authority can take the following forms:** - **Actual authority** - **Implied Authority** - **Apaarent Authority** - **Actual authority: The authority a principal expressly or implicityly gives to an agent in an agency relationship. This authority may be written, spoken, or derived from the circumstances of the relationship.** - **Implied Authority: Actual authority that Is incidental to express authority.** - **Apparent authority: The authority that a third party in an agency relationship percieves to exist between the principal and the agent. In fact, no actual authority does exist. Sometimes also called ostensible authority.** - **Trading partnership: A business organization made up of two or more partners engaged inproviding services.** - **Nontrading partnership: A business organization made up of two or more engaged inbuying and selling goods.** - **Ratification: What occurs when a prinicipal voluntarily decides to honor an agreement.** - **Tort Liability From an Agents Acts:** - **Respondeat superior: The doctrine imposing liability on one for torts committed by another person who is in his or her imploy and subject to his or her control.** - **Frolic and detour: The activity of an agent or an employee who has departed from the scope of the agency and is not, therefore, a representative of his or her employer.** IV. **Trends in Managing the Organization:** - **Business judgement rule: A presumption that a corporate director is acting in good faith and with due care in the best interest of firm. The presumption is commonly applied in shareholder derivative suits. It can be overcome with a showing that a director has breached a fiduciary duty to the firm.** - **Benefit Corporation: A corporate form that requires to ensure that the corporation meets explicit social goals (i.e, confers a public benefit) in addition to producing shareholder profits.**