BLTS 11e-IM-Ch28



Chapter 32Limited Liability Companiesand Special Business FormsIntroductionThe most common forms of business organization when two or more persons are involved are the partnership and the corporation. In this chapter, the basic features of business forms that combine the tax advantages of the partnership and the limited liability of the corporation are explained, and some of their advantages and disadvantages are spelled out. This chapter also briefly reviews less common forms of business organization, including joint ventures, cooperatives, and others.Chapter OutlineI.Limited Liability CompaniesState statutes govern limited liability companies (LLCs). Some of these statutes are based on the Uniform Limited Liability Company Act (ULLCA) or the revised version (Re-ULLCA).A.The Nature of the LLCLLCs are legal entities apart from their owners, who are called members. An LLC can sue or be sued, enter into contracts, and hold title to property [ULLCA 201]. Members have limited liability [ULLCA 303].B.LLC FormationTo form an LLC, the articles of organization must be filed with a central state agency.1.Contents of the ArticlesLike corporate articles of incorporation, LLC articles of organization must include—?The name of he business. This must include an LLC designation?The principal address.*The name and address of a registered agent.?Members’ names. Most states allow one-member LLCs. Some require at least two members.*Information on how the LLC will be managed.2.Preformation ContractsWith respect to the preorganization contracts of LLCs, courts generally apply the well-established principles of corporate law relating to preincorporation contracts.C.Jurisdictional RequirementsFor jurisdictional purposes, an LLC is a citizen of every state of which its members are citizens.D.Advantages of the LLC1.Limited LiabilityAn LLC offers the limited liability of a corporation—the liability of its members is limited to the amount of their investments.Case Synopsis—Case 32.1: Hodge v. Strong Built International, LLCDonald Hodge was hunting in a deer stand when the straps on the stand failed, causing the stand and Hodge to fall to the ground. Hodge was injured in the fall and died as a result. Strong Built International, LLC, was the maker and seller of the deer stand, and Ken Killen was Strong’s sole member and manager. Hodge’s children Donald and Rachael Hodge filed a suit in a Louisiana state court against Strong and Killen, alleging products liability. The court issued a summary judgment in Killen’s favor. The Hodges appealed.A state intermediate appellate court affirmed. Under the state LLC statute, “no member [or] manager, *??*??* of a limited liability company is liable in such capacity for *??*??* [the] liability of the limited liability company.” Killen testified that he did not participate in the design, manufacture, or selection of warnings for the stand in any capacity but that of member and manager of the LLC. “The plaintiffs have submitted nothing to show that Mr. Killen's actions are something more than his duties as a member/manager of the LLC.”..................................................................................................................................................Notes and QuestionsUnder what circumstances might members of LLCs be subject to personal liability for an obligation of th4 firm? Normally, the liability of the members of a limited liability company (LLC) is limited to the amount of their investment in the firm. A court can make an exception to this limited liability and hold a member personally liable if the member undercapitalizes the firm, uses it to commit fraud, commingles personal and LLC funds, fails to observe required formalities, or otherwise treats the LCC as his or her “alter ego.”Thus, if a future member of an LLC wishes to avoid the liability imposed on the member in this case, one option is to carefully observe the formalities for setting up and maintaining the LCC as a business organization apart from its members’ personal interests. The members might limit each other’s access to, or use of, company funds, for example. Also, a member might want assurance that the firm is viable and the other members are trustworthy by, for example, requiring a certain level of financial investment in the business.One of the advantages of the LLC is that its members enjoy limited personal liability for the company’s obligations. In view of this fact, does the possibility that a court may hold an LLC member personally liable for the LLC’s obligations reduce the utility of the LLC form of business organization? One of the main attractions of the LLC is that it offers limited liability to its owners. If the courts routinely disregarded the LLC form and held members personally liable, it certainly would diminish the utility of this organizational form. The courts, though, rarely pierce the veil of an LLC (or a corporation) and only do so when it would be blatantly unfair to a plaintiff, such as a creditor, to do otherwise. Because piercing the veil of an LLC is such an unusual occurrence, it is hard to imagine how this possibility could reduce the overall utility of this business organizational form. Clearly, those who decide to avail themselves of this form of business must realize that certain requirements must be met if they are to enjoy the advantages, such as limited liability, that this business form offers. When organizational requirements (such as periodic meetings of members), capitalization requirements, and requirements concerning the strict separation of LLC funds from personal funds are not met, it is only fair that the form be disregarded by the courts in the interests of protecting creditors. Indeed, if the members of the company themselves disregard the basic requirements of doing business as an LCC, why shouldn’t the court also be able to disregard the LLC form to hold the members personally liable? If the courts could not do this, it would be unfair to creditors who in good faith dealt with an LLC that, in fact, was merely the “alter ego” of the member-owner of the business.If Strong Built had had more members, how might that have affected the result in this case? The numbers of members would not likely have changed the result in this case, although it certainly would affect the number of parties from which the Hodges could seek to recover. If all of the circumstances in the case had otherwise been the same, there would have been no reason for the outcome to be different.Additional Cases Addressing this Issue —Limited LiabilityCases in which courts were asked to “pierce the veil” of a limited liability company (LLC) and avoid the members’ limited liability include the following.?Hollowell v. Orleans Regional Hospital, 217 F3d 379 (5th Cir. 2000) (under Louisiana law, the LLC veil may be pierced where the LLC is operating as the alter ego of its members or where the members are committing fraud or deceit on third persons through the LLC).?GMAC Commercial Mortgage Corp. v. Gleichman, 84 F. Supp.2d 127 (D.Me. 1999) (in a piercing claim involving a one-member LLC, the court applied corporate concepts without considering whether the LLC entity warranted any different analysis and stated that, where one company pays a major obligation of another and both are owned by the same person, that payment may evidence domination).?Ditty v. CheckRite, Ltd., 973 F.Supp. 1320 (D.Utah 1997) (that a person played an active role in the company’s business “is, at best, only marginally probative of the factors considered when determining whether to pierce the [LLC] veil”).?Hamilton v. AAI Ventures, L.L.C., 768 So.2d 298 (La.App. 1 Cir. 2000) (in a suit involving an LLC, the court invoked the corporate piercing doctrine: “applying the jurisprudence applicable to limited corporate liability, we note there are limited exceptions to the rule of non-liability of shareholders for the debts of a corporation, whereby the court may ignore the corporate fiction and hold the individual members or member liable”).2.TaxationAn LLC offers the tax advantages of a partnership. LLCs with two or more members can elect to be taxed as either a partnership or a corporation. If no choice is made, an LLC is taxed as a partnership. One-member LLCs are taxed as sole proprietorships unless they elect to be taxed as corporations.3.Management and Foreign InvestorsAdvantages of LLCs include its flexible operations and management characteristics.E.Disadvantages of the LLCThese include the lack of uniformity among state LLC statutes and the lack of case law.II.LLC Operation and ManagementA.The LLC Operating AgreementMembers decide how to operate the business. Operating agreements may contain provisions concerning—?Management, including the selection and removal of managers.?The division of profits.?The transfer of membership interests.?Whether the death or departure of a member will trigger dissociation or dissolution (or both).?Formal members meetings.?The apportionment of voting rights.?A buyout on a member’s dissociation.If an agreement does not cover a point in dispute, the governing LLC statute controls.If an issue falls under neither an agreement nor a statute, the principles of partnership law apply.Case Synopsis—Case 32.2: Mekonen v. ZewduGreen Cab Taxi and Disabled Service Association LLC is a taxi service company in King County, Washington. The operating agreement requires the members’ payment of weekly fees. Members who do not pay are in default and must return their taxi licenses to the company. A member in default cannot hold a seat on the board or withdraw from the company without the consent of all of the members. Dissatisfaction with Green Cab’s management resulted in the election to the board of several members who were in default. Other members forced the board to dissolve and hold a new election. Disaffected members, including Shumet Mekonen, withdrew from the company. Both sides continued to drive under the Green Cab name. Mekonen’s group filed a suit in a Washington state court against Dessie Zewdu and other members. The court held that the plaintiffs could not represent themselves as Green Cab and ordered them to return their licenses to the company. The plaintiffs appealed.A state intermediate appellate court affirmed. Under the provisions of the company’s operating agreement, the company held all of the rights to the taxi “licenses and permits necessary to operate its vehicles.” The plaintiffs, as “defaulting members,” had no right to retain and use the licenses...................................................................................................................................................Notes and QuestionsHow does the financial situation of an LLC influence its operation? The financial situation of an LLC is a ground for the provisions of its operating agreement and the basis for disputes among its members. In the Mekonen case, for example, a significant cause of the conflicts among the members of Green Cab was a series of financial problems that began with a suit filed by competing cab companies before King County issued taxi licenses to Green Cab. Prevented from doing business for almost year after its formation, the company instituted the membership fee requirement to stay afloat. After the company initiated its taxi services, the financial strain continued, and many drivers defaulted on their fee payments. This prompted the prohibition on defaulting members serving on the board. And this ban contributed to the split among the members that led to the litigation featured here.Could the operating agreement of an LLC reduce or eliminate the fiduciary duties that a member-manager might owe to the firm? Although state law differs on which duties apply, and to whom, the answer to this question is generally no. Members of an LLC are free to reach certain agreements as to their rights and responsibilities, but they most likely could not agree to unreasonably restrict a member's right to information, to eliminate a manager's duty of loyalty, or to unreasonably reduce the duty of care.Why wouldn’t a manager always owe a fiduciary duty to the members of an LLC? One would think that the principle of fiduciary duties by a manger to the members of an LLC would go without saying.? But, there is a difference between a fiduciary duty to the entity—here the LLC—and a fiduciary duty to the members of an LLC.? Presumably, a manager of a manager-managed LLC always has a fiduciary duty to the company, just as any manager of any business organization has a fiduciary duty to the company or partnership.? The issue is whether individual members of an LLC can sue a manager for not acting ethically in the best interests of each member.? The members can avoid this issue to some extent by specifying in detail in the management contract what the duties of the manager are.B.Management of an LLCUnless the articles of organization specify otherwise, an LLC is considered to be member-managed. In a member-managed LLC, all members participate in management [ULLCA 404(a)]. In a manager-managed LLC, the members designate a group of persons (member or not) to manage the firm.C.Fiduciary DutiesManagers owe fiduciary duties of loyalty and care to the LLC and its members [ULLCA 409(a), (h)].Enhancing Your Lecture—????How Do You Choose between LLCs and LLPs? ?????One of the most important decisions that an entrepreneur makes is the selection of the form in which to do business. To make the best decision, a businessperson should understand all aspects of the various forms, including legal, tax, licensing, and business considerations. It is also important that all of the participants in the business understand their actual relationship, regardless of the organizational structure.Number of ParticipantsDuring the last decade or so, new forms of business organizations, including limited liability partnerships (LLPs—discussed in Chapter 26) and limited liability companies (LLCs), have been added to the options for business entities. An initial consideration in choosing between these forms is the number of participants. An LLP must have two or more partners, but in many states, an LLC can have a single member (owner).Liability ConsiderationsThe members of an LLC are not liable for the obligations of the organization. The liability of the partners in an LLP varies from state to state. About half of the states exempt the partners from liability for any obligation of the firm. In some states, the partners are individually liable for the contractual obligations of the firm but are not liable for obligations arising from the torts of others. In either situation, each partner may be on his or her own with respect to liability unless the other partners decide to help.Distributions from the FirmMembers and partners are generally paid by allowing them to withdraw funds from the firm against their share of the profits. In many states, a member of an LLC must repay so-called wrongful distributions even if she or he did not know that the distributions were wrongful. Under most LLP statutes, by contrast, the partners must repay only distributions that were fraudulent.Management StructureBoth LLPs and LLCs can set up whatever management structure the participants desire. Also, all unincorporated business organizations, including LLPs and LLCs, are treated as partnerships for federal income tax purposes (unless an LLC elects to be treated as a corporationa). This means that the firms are not taxed at the entity level. Their income is passed through to the partners or members who must report it on their individual income tax returns. Some states impose additional taxes on LLCs.The Nature of the BusinessThe business in which a firm engages is another factor to consider in choosing a business form. For example, with a few exceptions, professionals, such as accountants, attorneys, and physicians, may organize as either an LLP or an LLC in any state. In many states, however, the ownership of an entity that engages in a certain profession and the liability of the owners are prescribed by state law.Financial and Personal RelationshipsDespite their importance, the legal consequences of choosing a business form are often secondary to the financial and personal relationships among the participants. Work effort, motivation, ability, and other personal attributes can be significant factors, as may fundamental business concerns such as the expenses and debts of the firm. Other practical factors to consider include the willingness of others to do business with an LLP or an LLC. A supplier, for example, may not be willing to extend credit to a firm whose partners or members will not accept personal liability for the debt.Checklist for Choosing a Limited Liability Business Form1.Determine the number of participants, the forms a state allows, and the limits on liability the state provides for the participants.2.Evaluate the tax considerations.3.Consider the business in which the firm engages, or will engage, and any restrictions imposed on that type of business.4.Weigh such practical concerns as the financial and personal relationships among the participants and the willingness of others to do business with a particular organizational form.a. The chief benefits of electing corporate status for tax purposes are that the members generally are not subject to self-employment taxes, and fringe benefits may be provided to employee-members on a tax-reduced basis. The tax laws are complicated, however, and a professional should be consulted about the details.III.Dissociation and Dissolution of an LLCDissociation occurs when a person ceases to be associated with the carrying on of a business. A member of an LLC has the power, but may not have the right, to dissociate from the firm. Events that trigger dissociation under the ULLCA are the same as those under the Uniform Partnership Act.A.The Effect of DissociationOn dissociation, a member’s right to participate in the firm’s business ends. The duty of loyalty also ends, and the duty of care continues only with respect to events that occurred before dissociation. The member’s interest in the firm must be bought out according to the LLC agreement, or for its “fair” value.B.DissolutionA dissociating member does not normally have the right to force the firm to dissolve (although the other members can dissolve the firm if they want and a court might order dissolution).Case Synopsis—Case 32.3: Venture Sales, LLC v. PerkinsWalter Ray Perkins, Gary Fordham, and David Thompson formed Venture Sales, LLC, to develop a subdivision in Petal, Mississippi. Fordham and Thompson were to develop the property, but more than a decade later, the subdivision remained undeveloped. Perkins then sought a judicial dissolution of Venture Sales. The court ordered the LLC dissolved. Fordham, Thompson, and Venture Sales appealed.A Mississippi Supreme Court affirmed. Dissolution is appropriate when an LLC is not meeting its economic purpose. Venture Sales was formed to develop a subdivision. More than a decade later, however, the LLC’s property remained undeveloped. Because the LLC was not meeting its purpose, dissolution was warranted...................................................................................................................................................Notes and QuestionsWhat does the outcome in this case suggest to potential members of LLCs who want to avoid the dispute in which Venture Sales became embroiled? If a future member of an LLC wishes to avoid the dispute that developed among the members of the LLC in this case, one option is to act on a firm’s “economic purpose” within a reasonable time. A member might obtain assurance that a firm is viable and the other members are willing to act to further its purpose by, for example, requiring a level of financial investment in the business greater than the size of the contributions by the parties here.It might be argued that Fordham and Thompson violated their fiduciary duty of care by not acting on the LLC’s economic purpose in a timely manner. Does the manager of an LLC always owe a fiduciary duty to the members? One would think that the principle of fiduciary duties by a manger to the members of an LLC would go without saying.? But, there is a difference between a fiduciary duty to the LLC and a fiduciary duty to the members.? Presumably, a manager of an LLC always has a fiduciary duty to the company, just as any manager of any business organization has a fiduciary duty to the firm.? The issue is whether an individual member of an LLC can sue the manager for not acting ethically in the best interests of each member.? The members can avoid this issue to some extent by specifying their expectations of the manager in the operating agreement or other contract.C.Winding UpOn dissolution, any member who did not wrongfully dissociate can participate in winding up. After liquidation of the assets, the proceeds are distributed in the following order—?Creditors (which may include members).?Capital contributors.?Members according to the operating agreement or in equal shares.IV.Special Business FormsA.Joint VenturesA joint venture is a relationship in which two or more persons combine their efforts or their property for a single transaction or project, or a related series of transactions or projects. Unless otherwise agreed, joint venturers share profits and losses equally. Large organizations often investigate new markets or new ideas by forming joint ventures with other enterprises.1.Similarities to PartnershipsGenerally, partnership principles apply to joint ventures. Joint venturers owe each other the fiduciary duties of partners.a.Liability and Management RightsMembers have equal rights to manage their project, unless specified otherwise, and are equally personally responsible for its liabilities.b.Authority to Enter ContractsMembers have authority as agents to enter into contracts for the business that will bind the joint venture.2.Differences from PartnershipsJoint venturers have less implied and apparent authority than partners. Unless specified otherwise, a joint venture terminates when the project for which it was formed is done.Additional Background—Joint Ventures and Federal Tax LawsFor tax purposes, the Internal Revenue Service (IRS) treats joint ventures the same as partnerships, with a few exceptions. Generally, the income of a joint venture (and a partnership) is not taxed to the firm, but taxed to the members. There are certain reporting requirements that a joint venture must meet, however.?Except for certain real estate ventures, a joint venture must file an informational tax return.?A joint venture can choose its own taxable year, but without the consent of the IRS, that year cannot be different from the taxable year of a principal partner (a partner with more than a 5 percent interest in the capital or the profits).?Transactions between the joint venture and one of the joint venturers is treated as if it occurred between the venture and a party outside the firm.?If a joint venture is a passive investment, the venture can be excluded from the partnership taxation provisions of the Internal Revenue Code, on the agreement of all of the joint venturers.?Joint venturers can change the allocation of their profits and losses any time before the deadline for filing the informational tax return with the IRS.B.SyndicatesA group of individuals getting together to finance a particular project, such as the building of a shopping center or the purchase of a professional basketball franchise, is a syndicate. It may exist as a corporation or a partnership. In some cases, the members merely own property jointly and have no legally recognized business arrangement.C.Joint Stock CompaniesA joint stock company is a hybrid of a partnership and a corporation—?Ownership is in shares of stock.?Management is by directors and officers.?Property is usually held in the names of the members.?Shareholders have personal liability (but are not considered to be agents of one another).?It is not usually treated as a legal entity for purposes of a suit.D.Business TrustsA business trust is created by a written trust agreement. Legal ownership and management of the property of the business are in one or more trustees, and profits are distributed to beneficiaries.E.CooperativesA cooperative is an association organized to provide an economic service without profit to its members. An incorporated cooperative is subject to state laws governing nonprofit corporations. Unincorporated cooperatives are often treated like partnerships.Teaching Suggestions1.Ask students what sort of business organization they would use if they went into business for themselves and the reasons for their particular selections. Does any single form of business organization appear to be superior? What sorts of questions would one want to ask before selecting a business organization?2.In the absence of a written operating agreement, ask students what factors they would look for in determining the interests in a dispute among the members of an LLC. Of course, the state LLC statute will most likely determine the outcome. Have students find and read their state’s LLC statute.3.Inadequate financing can be the cause of the failure of any business. Have students determine for themselves how much capital might actually be needed to start a small business by asking them to project a budget covering the expenses. Initial expenses may include down payments for the purchase or lease of property; amounts to buy or lease furniture, fixtures, machinery, equipment, and inventory; amounts to pay for the installation of telephones, utilities, and electronic equipment; amounts to pay for office and sales supplies, taxes and licenses, professional fees, advertising and promotion, and living expenses for the partners for at least the first three months. What are the rights and liabilities of the parties who provide these funds, whether their source is a bank, a partner, or some other party? This and the next topic might also be discussed after covering the materials on corporations.4.After students have begun to realize what it can cost to start a business and what the rights and liabilities are of the people who start it, ask them under what circumstances a lack of capital might be desirable (or at least not a major obstacle) in beginning a business. A better mousetrap, more efficiency, creative marketing, and hard work have served as a springboard for many successful enterprises.Cyberlaw LinkShould online businesses adopt a limited liability form of business organization? Why or why not? Which form of business organization would be best for a business that transacts deals only online?Discussion Questions1.Why are LLCs and partnerships attractive to businesspersons? For many businesspersons, these business forms combine the tax advantages of partnerships with the limited liability of corporations. The income of the firm is passed through to the members or the partners, rather than being taxed at the organization’s level. Even one-member LLCs may realize the tax advantage that accrues from not being taxed as a corporation (unless the LLC elects otherwise). Also, the members or the partners of the firm are not usually liable beyond the extent of their investment in the firm for the debts and other obligations of the firm.2.Why might the members of an LLC prefer to put the terms of their operating agreement in writing? Generally, LLC members should protect their interests by forming a written operating agreement. If there is no written agreement covering an issue in dispute among the members, the state LLC statute will govern the outcome. Typically, the principles of partnership law apply. These statutes and principles may not be to the liking of all, or any, of the members.3.What is the difference between an LLC and a limited liability partnership (LLP)? An LLP is similar to an LLC. The difference between them is that an LLP is designed more for professionals who normally do business as partners in a partnership. The major advantage of the LLP is that it allows a partnership to continue as a pass-through entity for tax purposes but limits the personal liability of the partners.4.Should fraud be required to pierce the veil of an LLC? Probably not. A showing of fraud or an intent to defraud is not necessary to pierce a corporate veil. Fraud may initiate a suit to disregard a corporate fiction, but it is not a prerequisite. If an LLC has caused damage and has inadequate capitalization, co-mingled funds, diverted assets, or been used as a shell, individual members should not be immune from liability simply because they did not commit acts that included all of the elements of fraud.5.In some circumstances, the principles of partnership law may be applied to a limited liability company. Should the principles of partnership law apply to other forms of business entities? Reasons to apply these principles to other entities include that the principles are established and tested, and therefore known. Reasons not to apply these principles include that other entities have unique characteristics that these principles might not address and may overlook.6.What is a joint venture? A joint venture is created when two or more persons or entities combine their interests in a particular business enterprise and agree to share in losses or profits jointly or in proportion to their contributions. A joint venture is treated much like a partnership and is taxed like a partnership but it differs in that its creation is in contemplation of a limited activity or single transaction.7.What is a syndicate? A syndicate is created when a group of individuals get together to finance a particular project such as the building of a shopping center or the purchase of a franchise. Syndicates are also called investment groups. A syndicate may be structured as a corporation or partnership or any of a number of other types of enterprises. In some cases, the structure of the syndicate may be very informal with the members merely owning property jointly and having no legally recognized business arrangement.8.Discuss the principal characteristics of a joint stock company and a business trust. A joint stock company has many of the characteristics of a corporation in that (1) its ownership is represented by transferable shares of stock, (2) it is usually managed by directors or officers of the company or association, and (3) it can have perpetual existence. Yet a joint stock company is usually treated like a partnership because it is formed by agreement (not statute). Moreover, the company’s property is usually held in the names of its members and the shareholders have personal liability. The members of a joint stock company—unlike a partnership—are not considered to be agents of one another. A business trust more closely resembles a corporation in that it is created by a written trust agreement that sets forth the interests of the beneficiaries and the obligations and powers of the trustees. The trustees hold legal title to the property and manage it for the benefit of the beneficiaries, who in turn are entitled to share in any profits distributed by the corporation. Death or bankruptcy will not terminate a business trust. Moreover, the beneficiaries are not personally liable for the debts or obligations of the business trust.9.When might individuals choose to do business as a cooperative? Because a cooperative is organized to provide an economic service without profit to its members, it is generally used by groups of individuals who wish to pool their resources to gain some advantage in the marketplace. Consumer purchasing cooperatives are formed to obtain lower prices through quantity discounts while seller marketing cooperatives are formed to control specific markets and thus obtain higher sales prices from consumers. Cooperatives are often exempt from certain federal antitrust laws because of their special status.10.Why would a limited liability company (LLC) choose to be taxed as a corporation, rather than as a partnership? After the Internal Revenue Service (IRS) ruled that LLCs could be taxed as partnerships, all of the states issued statutes authorizing the form. LLCs are taxed as partnerships or, electively, as corporations. The ability to avoid double taxation is only one of the advantages of the LLC form of business organization. Members of an LLC might choose to be taxed at the corporate rate if their individual tax brackets are higher than the corporate tax rate and they would prefer to reinvest their earnings in the business.Activity and Research Assignments1.Experts predict that limited liability companies (LLCs) will replace both corporations and partnerships for most small businesses as a result of Internal Revenue Service (IRS) regulations. The regulations allow a small business that is not incorporated to choose whether to be taxed as a corporation or a partnership by checking a box on an IRS form. Ask students to find and take a look at these regulations. Are there any restrictions? Why will these regulations effect such a change?2.After having discussed the structure of various forms of business organization, ask each student to draft a brief agreement to establish one of the forms.3.Ask students to research their state’s statutes and case law on any of the forms of business organization discussed in this chapter.4.Ask students about running businesses on the Internet. Is it easier to start a business in “virtual” space than in “real” space? Is it less (or more) expensive? What are the applicable laws? Perhaps most important from a business person’s perspective, is it possible to turn a profit? How? Are there different considerations for choosing an organizational form for doing business on the Net than there are for doing business elsewhere? If so, what are they?5.Ask students to find out what is required to pay taxes as different forms of business organizations. The Internal Revenue Service publishes a pamphlet on business taxes that students might find useful. Ask students to research further what is required if the enterprise has employees. What about state and local taxes?Explanation of a Selected Footnote in the TextFootnote 9: Murdo Cameron developed components to make replicas of the P-51 aircraft. Douglas Anderson agreed to collaborate on the manufacture of one P-51 for each of them and to make additional P-51s to sell. For the first plane, which Anderson would build, Cameron would provide an engine, which Anderson would pay for after the plane’s first flight. Anderson borrowed funds from SPW Associates, LLP, to finance the making of the P-51s, using the first plane as the security. Anderson built one plane before defaulting on the loan. SPW filed a suit in a North Dakota state court against Anderson, Cameron, and others. The court ruled that Anderson and Cameron had entered into a joint venture, the plane was the venture’s property, Anderson was authorized to grant SPW a security interest in it, and SPW was entitled to its possession. Cameron appealed. In SPW Associates, LLP v. Anderson, the North Dakota Supreme Court affirmed. There are four elements to a joint venture: (1) a contract to engage in a common undertaking; (2) a contribution of money, property, time, or skill; (3) an interest in, and mutual right to control, venture property; and (4) an agreement to share profits. Anderson and Cameron had contracted to build two P-51s, they had contributed money, property, time, and skill, and they each had exerted control over the planes’ components. As for an agreement to share profits, their contract referred to “future aircraft purchases” and “multiple year production runs,” and they admitted they intended to build planes to sell. Anderson, as a joint venturer, had authority to grant a security interest in the venture’s property (the P-51) for the loan from SPW, which was thus entitled to keep the plane on his default.If the court had ruled that there was no joint venture in this case, how would that have affected the result? Under that ruling, Cameron would likely have been entitled to the possession of the plane or at least to the possession of some of its components, including the engine. Why? Because if Anderson and Cameron had not been involved in a joint venture, Cameron would have had a lien on the engine, assuming it was not paid for, and this lien would have been superior to SPW’s interest.How might the outcome of this case have been different if Cameron had been merely an aircraft parts supplier, with his only profit to be from the sale of components to Anderson? Under that circumstance, one of the elements of a joint venture would have been lacking, and the court might have ruled in Cameron’s favor with respect to the possession of the plane, or at least with respect to the components that could be traced to him. Under the facts as they were, however, the parties’ written agreement “expressly recognizes a much broader, on-going role by Cameron in the construction of the airplanes. The agreement does not merely envision that Cameron will sell parts to Anderson, but creates reciprocal duties and obligations between Cameron and Anderson in the design and manufacture of component parts and completed airplanes,” which supports the court’s ruling. ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download