Unit 3
Chapter 13
Sole Proprietorship
Not a separate “legal” entity
No difference between business and entrepreneur But it is a separate “accounting” entity.
For tax purposes
Total Liability for unpaid debts or torts
Unlimited liability does not need writing
The franchise
Organization selling to franchisee the right to use name for business
Can only sell products that are authorized by franchisor
Protections for franchisees (state and federal law)
Common Contract terms
Territorial rights
Quality control
Pricing arrangements

Industry specific protections
Disclosure rules
Wrongful termination
Is franchisor liable for acts of the franchisee??
Yes, since they dictate how they’re supposed to act.
Partnership
Applicable law
Uniform Partnership act
Law that will control settlement if no partnership agreement is made
Absent a partnership agreement, profits/losses will be allocated EQUALLY
Creditor can go after any general partner for full amount owed.
Contracts
If you are a general partner, you have the ability to bind all other partners in a contract
You cannot inherit the status of a partner
Agency
Characteristics: Easy in, easy out and little government interference
You do not have to declare you’re a partner because there’s no limited liability.
Limited Partnership
One or more partners
Limited Partner
Only responsible for money invested
****In return, does not participate in management
Filing is required
Must put something on record that partner is limited
LLP
Organization of people who bind together to get limited liability
Think of the P for professionals
Usually professionals like doctors, architects, etc.
They do not get limited liability from malpractice.
They do get limited liability from their partners
Filing is REQUIRED.
LLLP
Not really going to be on exam
Combination of Limited Partnership and LLP
Corporations
Shareholders
Elect board of directors
Can amend the articles of incorporation
Direct hires offier.
Dividends
Do not have to be paid out
Are taxable
Basics of Corporate Law
State law
Uniform Business Corporation Code
Must have stock
Must have board of directors
Must meet once a year
Must keep assets of the business separate from money of owners
If you do, you will lose limited liability status
If you do not do any of these things, you will lose LL status
Three tiers- know all three and what their actions are
Shareholders – the owners of the corporation
Own it, but don’t run it.
Directors – Responsible for calling the shots
Create bylaws
Have the authority to hire officers
Officers – The workers, or employees.
Works for shareholders
Creation of a Corporation
Filing the Articles of Incorporation( Know those 4)
Identifies name of corporation
Name of incorporators
Authorized of stock
Duration of existence

Does NOT list directors or officers hired after corp is formed
Financial Structure
Debt v. Equity instrument
Debt: Bond
Pays back principle + interest
Equity: Common Stock
Preferred Stock
If dividends are paid, preferred stock gets them first
Stock dividends and stock splits
Does not increase net worth
Number of shares you own go up
Does not increase your percentage of ownership
Duties of directors and officers
Fiduciary duty: Exercise reasonable care
Business Judgement rule: liability for failure to act in a “reasonable” fashion. No liability for simple errors in “business judgement.”
Must use gound, sound, business judgement
Derivative action suit: If directors do not use “good sound business judgement” shareholders can sue directors for mismanagement
Loss of limited liability
Failure to disclose
You have an obligation to disclose that you have limited liability
Piercing the corporate veil
Comingling of funds
S
Special forms of corporations
Subchapter S corporation
Small company
Doing business in one state only
Has limited liability
Do NOT have to pay corporate income tax
LLC
Limited Liability