Chapter 1

Sole Proprietorship:
 The sole proprietor is not considered an entity separate prom the business
 The sole proprietor is personally liable for all obligations of the business
 A sole proprietorship cannot exist beyond the life of the sole proprietor
 Profits & losses from the business flow through to the sole proprietor
 A sole proprietor is free to transfer his interest at will
 File for bankruptcy personally under the Bankruptcy Code

Joint Venture:
 Is an association of persons or entities with the intent of engaging in a single business venture or
a related series of transactions or projects for profit
 Treated as partnerships in most important legal aspects

General Partnership:
 At least two persons
 Agree to carry on as co-owners
 A business for profit
1. Advantages:
a. Profits & losses of a partnership flow through to the parners
b. Not recognized for federal income tax purposes as separate taxable entities
2. Disadvantages:
a. Partners are personally liable for obligations of the partnership
b. Limited life of entity
c. A partner cannot transfer his interest without the unanimous consent of the other partners
3. Nature of a general partnership
a. All partners are general partners
b. All partners share in management
4. Formation of a general partnership
a. An individual, a corporation or a partnership can be a partner; a minor can be a partner, but
the partnership would be voidable at the option of the minor
b. A general partnership agreement need not be in writing. Exception: if the partners want to
enforce an agreement to remain partners for longer than one year, a writing is required.
5. Operation of a general partnership
a. All partners have equal rights to manage the partnership business regardless of the
contribution differences unless specific agreement made otherwise
b. Examples of areas requiring unanimous consent of all partners include:
i. Admitting new partners
ii. Confessing a judgment (admitting liability in a lawsuit) or submitting a claim to
arbitration
iii. Making a fundamental change in the partnership business (e.g., the sale of a
partnership’s goodwill)
iv. Changing the partnership agreement
v. Assigning partnership property to others
c. Agency law governs: a principal can be bound by the acts of its agent acted with actual or
apparent authority

Becker 2010 – BEC Page 1

 i. Actual authority includes all authority that a principal expressly gives to an agent
plys any authority that can reasonably be implied from the express grant
ii. Apparent authority as a result of being named a partner. It cannot be limited by
resolutions or instructions of which the third party is unaware
d. A partnership may expand or curtail a partner’s authority to enter into transactions on
behalf of the partnership by filing a statement of authority with the secretary of state
*The filing of a limitation does not give third parties constructive knowledge of the limitation
6. Termination
a. Dissociation: does not necessarily cause a dissolution and winding up of the business of the
partnership
i. Wrongful partner is liable for damages cause by the dissociation
ii. Actual authority ends, but apparent authority ends until third parties are given
notice
iii. Dissociated partner’s power to bind partnership continues for 2 year unless notice
has been given
iv. Dissociated partner is liable for debts incurred prior to dissociation unless released
by the creditors; is not liable for debts incurred after dissociation if notice filed with
state. *An incoming partner is not personally liable for debts incurred by the
partnership before he became a partner, but any financial contribution the incoming
partner made to partnership property may be used to satisfy old debts
b. Dissolution: business is wound up and then the entity is terminated
Order of distribution of assets:
1. Liquidated assets
2. Pay creditors/split losses
3. Return of capital/split losses
4. Divide profits
7. All partners have equal rights to share in the profits of the partnership unless an agreement
provides; the partners share losses in the same manner as they share profits
8. Rights of partners:
a. Rights in partnership property: the partner has no right to possess or transfer (through sale,
will, etc.) except for partnership purposes. The property is not subject to personal creditors’
claims or alimony. It is subject to a surviving partner’s survivorship interest
b. Rights in partnership interest: a transfer of partnership interest does not make the assignee
a partner (that can be done only with the consent of all of the partners). The transferee has
no power to manage the partnership, inspect the partnership’s books and records, vote, etc.
the assignee’s only right is to get whatever distribution the assignor would have gotten. *the
same rule applies to a creditor with a charging order and an heir who receives a deceased
partner’s interest
9. Duties and legal obligations of partners:
a. Each partner personally liable for all partnership obligations within the scope of the business
and even if you didn’t personally authorize it.
b. The partners’ liability is joint and several (individual), whether the obligations arise in
contract o tort. Each partner is personally and individually liable for the entire amount of all
partnership obligations.

Limited Liability Partnership (LLP):

 The partners are not personally liable for acts of fellow partners, employees or agents; not
personally liable for debts and contractual obligations

Becker 2010 – BEC Page 2

  The partners are liable for their negligence and negligence of those under their direct control
 Must file with the state
 No double taxation

Limited Partnership (LP):

 At least one GP who has personal liability for all partnership debts and manages and at least one
LP whose personal liability for partnership debts generally is limited to their capital
contributions and who doesn’t manage
 Limited life
1. General partners:
a. Personally liable for all partnership debts
b. May also be a limited partner at the same time
c. May be a secured or unsecured creditor of the partnership
2. Limited partners:
a. Liability is limited to his investment and unpaid caital contributions
b. Names cannot be identified with the business
c. Must not participate in management, or the lose their limited liability status (in some
instances, such as approving of new general or limited partners, the limited partners may
vote)
d. Is a LP is also a GP, the partner does not have the limited liability of a LP
e. A new partner can be added only upon the consent of all partners
f. Does not owe a fiduciary duty to the limited partnership or to the GPs
3. Formation of a LP
Filing with the state is required
4. Operation of a LP
 GP runs day-to-day affairs and has the same right to manage the partnership as partners in a
GP
 LP does not manage and is not an agent
5. Termination of a LP
a. A LP may be dissolved by:
i. The occurrence of the time or event stated in the partnership agreement
ii. Written consent of all partners
iii. Withdrawal or death of a GP
iv. Judicial decree
b. Death of a LP doesn’t cause dissolution
c. Order of distribution of assets:
i. Creditors (secured and preferred)
ii. Former partners
iii. Partners
d. If there is a loss, GPs are personally liable for all partnership debts
6. Profits and losses are allocated based on GP and LP’s capital contributions unless agreement
provides

Limited Liability Company (LLC):

 Not personally liable for the obligations of the company, like corporations
 Profits and losses from an LLC flow through the company to its members unless the members
choose to have the LLC taxed like a corporation

Becker 2010 – BEC Page 3

  A member or manager is liable for his or her own torts performed in the course of working for
the LLC
 A member of an LLC may not transfer all of his interest in the LLC without the consent of the
other members unless the operating agreement provides
1. Nature of a LLC
a. Owners (members) are not personally liable for obligations of the business entity
b. Taxation as a partnership
2. Formation of a LLC:
Filing articles of organization with the secretary of state:
i. A statement that the entity is an LLC
ii. Name of the LLC, which must include an indication that it is an LLC
iii. Street address of the LLC’s registered office and name of its registered agent
iv. If management is to be vested in managers, a statement to that effect
v. Names of eh persons who will be managing the company
3. Operation of a LLC
a. Generally all members as agents may participate in management
b. Managers selected by the members manage
c. Voting strength is based on capital contributions
4. Termination of a LLC: similar to GP
5. Profits and losses are allocated based on members’ contributions unless an operating agreement
provides

Corporation:
 A legal entity distinct from its owners (shareholders or stockholders) and managers
 Stockholders are generally free to transfer their ownership interests to whomever they want
whenever they want
 C Corp. – double taxation; S Corp. – No double taxation
1. Nature of a corporation
a. Stockholders generally don’t have the power to manage the day-to-day operations of a
corporation
b. Management power is vested in directors, elected by the stockholders
c. Officers, selected by directors, run the day-to-day affairs
d. Stockholders, directors, and officers generally are not personally liable for the obligations of
the corporation. Only the corporation itself can be held liable
e. Perpetual life of entity
2. Formation of a corporation
a. Must file articles of incorporation with the state:
i. Name of the corporation
ii. Names and address of the corporation’s registered agent (on whom process may be
served if the corporation is sued)
iii. Names and addresses of each of the incorporators
iv. Number of shares authorized to be issued
v. One or more classes of shares must have unlimited voting rights
b. Ultra Vires Acts – a number of states require a purpose clause. The clause may be narrow or
very broad. If a corporation has a narrow purpose clause and the corporation undertakes
business outside the clause (or outside the business permitted by statute) it’s said to be
acting “ultra vires”.
*make sure directors don’t allow Ultra Vires Acts

Becker 2010 – BEC Page 4

 c. Piercing the Corporate Veil – in some circumstances, the courts will hold the shareholders,
officers, or directors of a de jure corporation liable because the legislative privilege of
conduct business in corporate form is being abused.
i. Reasons corporate veil will be pierced:
1. Commingling personal funds with corporate funds
2. Inadequate capitalization
3. Committing fraud on existing creditors
ii. The court usually will hold liable any officer, director, or shareholder who was active
in the management or operation of the business. This could include a parent
corporation
3. Operation of a corporation
a. Board of Directors
i. Elected by stockholders; removed by a vote of the shareholders with or without
cause
ii. Vested with the duty to manage the corporation to the best of their ability
iii. Only one director under RMBCA, but the articles of incorporation or bylaws may
require as many directors as desired, without limitation
iv. Directors’ meetings
1. Every director must be notified for each meeting
2. Are valid only if a quorum is present; action can be approved by a majority
of the directors present
3. Proxies not allowed
b. Officers
i. Elected by directors
ii. Act as agents and have fiduciary duties
iii. Run the corporation on a day-to-day basis
c. Fundamental changes (DAMS)
i. Dissolution
ii. Amendments to the articles of incorporation
iii. Mergers, consolidations, and compulsory share exchanges
Exception: Merger of subsidiary (Short-form merger) – a parent corporation owning
90%or more of a subsidiary corporation may merge the subsidiary into the parent
without the approval of the shareholders of either corporation or the approval of the
subsidiary’s board. However, the parent must mail a copy of the plan to each
shareholder who has not waived this right.
iv. Sale of substantially all the corporation’s assets outside the regular course of
business
General Procedure:
i. Board resolution (Majority)
ii. Notice
iii. Shareholder approval (Majority)
iv. Filing of articles
4. Termination of a corporation
a. Dissolution requires director and shareholder approval
b. Liquidation, or winding up, involves the process of collecting the corporate assets, paying
the expenses involved, satisfying creditors’ claims, and distributing the net assets of the
corporation

Becker 2010 – BEC Page 5

5. Corporations need not allocate profits and losses among their shareholders; shareholders do not
have a right to a dividend unless and until a dividend is declared by the board of directors. Once the
board declares a dividend, the shareholders are treated as unsecured creditors of the corporation to
the extent of the dividend
6. Rights of shareholders:
a. Voting rights: (regular shareholders’ meetings are held annually)
i. GR: one share, one vote
ii. Exception: Cumulative voting for directors – each share is entitled to one vote for
each director position that is being filled, and the shareholder may cast the votes in
any way, including casting all for a single candidate. This helps minority shareholders
gain representation on the board.
iii. Quorum and approval (majority)
iv. To assure the presence of a quorum, shareholders are allowed to appoint a proxy to
vote for them (proxy form in writing; valid for 11 months; generally revocable)
b. Right to inspect books and records for any proper purpose (e.g., to start a derivative suit, to
solicit shareholders to vote for certain directors, etc.), but not for improper purposes (e.g.,
to get names for a retail mailing list)
*To exercise this right, the shareholder must give 5 days’ written notice of his request,
stating a proper purpose for the inspection. Note that the shareholder need not personally
conduct the inspection; he may send an attorney, accountant, or other agent.
c. Preemptive rights – no preemptive rights unless articles provide for them
d. Shareholders who are dissatisfied with most fundamental corporate changes have an
opportunity to “dissent” and demand that the corporation pay them the fair value of their
shares rather than remain shareholders of a fundamentally changed corporation.
7. Rights of directors:
a. GR: purchasing another company’s assets or stock needs board approval only
b. has sole discretion to declare distributions to shareholders, including dividends, in the form
of cash, property, or the corporation’s own shares
c. Business judgment rule – a director will not be liable to the corporation for acts performed
or decisions made in good faith, in a manner the director believes to be in the best interest
of the corporation, and with the care an ordinarily prudent person in a like position would
exercise.
d. Conflict of interests – should disclose and abstain – liable if unfair
e. Indemnification – corporations are allowed to indemnify directors for expenses for any
lawsuit brought against them in their corporate capacity
8. Rights of officers:
a. Have actual and apparent authority
b. Corporate officers, like corporate directors, are subject to fiduciary duties and must
discharge their duties in good faith and with the same care as an ordinarily prudent person
in a like position
c. May also serve as directors
d. Not required to be shareholders

Becker 2010 – BEC Page 6