Jody Blanke, Professor Computer Information Systems and Law

Mercer University, Atlanta

Sole Proprietorship

GeneralPartnership

LimitedPartnership

Corporation Limited LiabilityCompany

Limited Liability

No NoNo - gen. part.Yes - lim. part.

Yes Yes

Flow-ThroughTaxation

Yes Yes Yes No (double taxation)

Yes

Management/Control

Yes YesYes - gen. part.No - lim. part.

No Yes

Right to ShareIn Profits

Yes Yes Yes No Yes

Sole Proprietorshipeasy to formno formalitiesunlimited personal liabilityno legal identity apart from owner

e.g., Diversity Heating and Plumbing James Schuster Jerry Schuster

General Partnershipeasy to form

two or more people run a business for profitno formalitiesunlimited personal liabilityjoint liability on contracts and debtsmay continue after death of partnershould have written partnership agreement

Limited Partnershipstatutory creationmust have at least one general partner and

one limited partnerlimited partner has limited liability, but

cannot participate in management

Corporationstatutory creationmust satisfy legal formalities

e.g., articles of incorporation, bylawsperpetual existencelimited liability of shareholdersfree transferability of shares

S Corporationcan avoid double taxation, butcan have no more than 100 shareholders

all of whom must be individuals, estates or trusts cannot be corporations or partnerships

can have only one class of stockcannot own more than 80% of another

corporation

Limited Liability Companyrelatively new statutory creation (1977)“best of all worlds”members have limited liabilitymembers can participate in managementcan choose to be taxed like a corporation or

like a partnership

Limited Liability Partnershipgenerally available only for professionalsno general partnerpartners are not personally liable for the

debts of the LLP or of other partnerspartners are liable for his/her own

negligence, malpractice, etc.

Piercing the Corporate VeilAlter ego theory

commingling of fundsignoring formalities

Undercapitalizatione.g., Walkovsky v. Carlton

Management of CorporationDirectors

overall control of corporation

Officersappointed by board of directors to run day-to-day

operation of corporation

Shareholdersowners of corporationelect the directors

Shareholder VotingStraight voting

one vote for each share for each director nominee

Cumulative votingpermitted and/or required in some statesnumber of voting shares are multiplied by

number of director positions to be filled percentage required to elect one director (x)

1

1

numdir

x

Duty of LoyaltyA director and officers must act in the best

interests of the corporationPersonal interests must be subordinated to

the interests of the corporationA director or officer may not usurp a

corporate opportunity without full disclosure and right of first refusal to corporation

Conflicts of interest must be fully disclosede.g., Globe Woolen v. Utica Gas & Elect.

(1918)

Duty of CareDirectors and officers must be honest and

use prudent business judgmentThey must use the amount of care that an

ordinarily prudent person would use in similar circumstances

e.g., Bates v. Dresser (1920)

Business Judgment RuleDirectors and officers are protected from

honest mistakes of judgment and poor business decisions

They are protected from “Monday morning quarterbacks”

e.g., New Cokee.g., Shlensky v. Wrigley (1968)