Chapter 15—Business Organizations
A.Chapter Introduction
This chapter introduces the student to the law relating to business organizations. Anyone who wishes to start a business must decide under what organizational form the business should operate. The major forms of business organization are sole proprietorships, general partnerships, limited partnerships, limited liability partnerships, limited liability companies, and corporations. These are called business organizations. This chapter covers the non-corporate forms of business, including sole proprietorships, general partnerships, limited partnerships, limited liability partnerships, and limited liability companies. The chapter also includes corporations. Many lawyers’ practices involve counseling entrepreneurs who want to start new businesses, preparing the legal documents to start a new business, and advising existing businesses on a variety of legal matters. Paralegals must have knowledge of this field of the law to prepare necessary documents, conduct research, and work with the lawyer in providing legal services to entrepreneurs and business organizations. After studying this chapter, the student will be able to:
- Define a sole proprietorship and the liability of a sole proprietor.
- Define general partnership and describe how general partnerships are formed.
- Define limited partnership and distinguish limited and general partners.
- Define LLP and describe the limited liability of partners of an LLP.
- Define LLC and describe the process of organizing an LLC.
- Define corporation and list the major characteristics of a corporation.
B.Instructional Ideas
- Have students explore the website of the appropriate state government office that regulates business organizations in your state.
C.Lecture and Class Discussion Outline
Sole Proprietorship—A form of business in which the owner and the business are one; the business is not a separate legal entity. A sole proprietorship can operate under the name of the sole proprietor or a trade name. Operating under a trade name is commonly designated as a d.b.a. meaning doing business as. If a trade name is used, a fictitious business name statement must be filed with the appropriate state government office.
Liability of a Sole Proprietor—The sole proprietor is personally liable for the debts and the obligations of the sole proprietorship.
General Partnership—An association of two or more persons to carry on as co-workers of a business for profit.
Uniform Partnership Act (UPA) —A model act that codifies partnership law.
Most states have adopted all or part of the UPA.
Entity Theory of Partnerships—A theory that holds that partnerships are separate legal entities that can hold title to personal and real property and transact business in the partnership name.
Taxation of Partnerships—Partnerships do not pay federal income taxes. The income and losses of partnerships flow onto individual partners’ federal income tax returns.
Partnership Agreement—An agreement establishing a general partnership. It sets forth terms of the partnership. It is good practice to have a written partnership agreement that the partners sign.
Partners’ Contract Authority—A contract entered into by a partner with a third party on behalf of a partnership is binding on the partnership.
Tort Liability
Partnership liability—The partnership is liable to third persons who are injured by torts committed by a partner while he or she is acting within the ordinary course of partnership business.
Joint and several liability of partners—The partners are personally liable for torts committed by partners acting on partnership business. This liability is joint and several, which means that the plaintiff can sue one or more of the partners separately. If successful, the plaintiff can recover the entire amount of the judgment from any or all of the partners.
Limited Partnership
Revised Uniform Limited Partnership Act (RULPA)—A model act containing a uniform set of provisions for the formation, operation, and dissolution of limited partnerships.
Limited Partnership—A special form of partnership that has both limited and general partners.
General partners—Partners in a limited partnership who invest capital, manage the business, and are personally liable for partnership debts.
Limited partners—Partners in a limited partnership who invest capital but do not participate in management and are not personally liable for partnership debts beyond their capital contributions.
Limited Liability Partnership (LLP)—A form of business in which there does not have to be a general partner who is personally liable for debts and obligations of the partnership. All partners are limited partners and stand to lose only their capital contribution should the partnership fail.
Limited Liability Company (LLC)—A special form of unincorporated business entity that combines the tax benefits of a partnership with the limited personal liability attribute of a corporation.
Corporations
Nature of the Corporation—A legal entity created pursuant to the law of the state of incorporation. A corporation is a separate legal entity—an artificial person—that can own property, sue and be sued, and enter into contracts.
Characteristics of Corporations
Limited liability of shareholders—Shareholders are liable for the debts and obligations of the corporation only to the extent of their capital contributions.
Free transferability of shares—Shares of a corporation are freely transferable by the shareholders unless they are expressly restricted.
Perpetual existence—Corporations exist in perpetuity unless a specific duration is stated in the corporation’s articles of incorporation.
Centralized management—Board of directors of the corporation makes policy decisions of the corporation. Corporate officers appointed by the board of directors run the corporation’s day-to-day operations. Together, the directors and officers form the corporation’s management.
Classifications of Corporations
Domestic corporation—A corporation in the state that it is incorporated.
Foreign corporation—A corporation operating in any state other than the one in which it is incorporated. A foreign corporation must obtain a certificate of authority from these other states in order to transact intrastate business in such states.
Alien corporation—A corporation that is incorporated in another country. Alien corporations are treated as foreign corporations for most purposes.
Franchise—Established when one party licenses another party to use the franchisor’s trade name, trademarks, commercial symbols, patents, copyrights, and other property in the distribution and selling of goods and services.
Franchisor—The party who does the licensing in a franchise arrangement.
Franchisee—The party who is licensed by the franchisor in a franchise arrangement.
D.Internet Resources
E.Suggested Answers – Ethics Questions for Analysis and Discussion
1.No, this is an ethically prohibited relationship.
2.No, only attorneys may derive profits from a law practice.
3.No, this is an ethically (and criminally) prohibited practice.
Cases for Discussion
1.Suppliers and mortgagees brought action against partners, limited partnership, and one partner’s company in charge of a land development project. The trial court held that the two partners were not jointly and individually liable to a third partner. On appeal the Arkansas Supreme Court held that partners were jointly and individually liable.
2.Appeal was taken from a judgment of the trial court finding that employees were liable in damages to the employer for setting up a competing business in violation of the fiduciary duty owed to the employer. The appellate court held that the employees breached their fiduciary duties by competing with the employer while employed by the employer.
Case for Briefing
1.The plaintiff was the government of the United States and it was suing to recover civil penalties previously imposed on defendants.
2.WRW Corporation and the three sole individual shareholders, officers, and directors of the corporation.
3.Attaching the liabilities of a corporation to its officers and directors.
4.Yes.