FORMS OF BUSINESS ORGANIZATION IN THE UNITED STATES Unit 33.

FORMS OF BUSINESS FORMS OF BUSINESS ORGANIZATION IN THE ORGANIZATION IN THE

UNITED STATESUNITED STATES

Unit 33Unit 33

PreviewPreview

• Sole proprietorshipSole proprietorship• PartnershipPartnership• CorporationCorporation• Attributes of corporationsAttributes of corporations• Legal termsLegal terms• ExerciseExercise

Forms of Business Forms of Business OrganizationOrganization

• Sole proprietorship (or the Sole proprietorship (or the individual ownership); sole traderindividual ownership); sole trader

• PartnershipPartnership• CorporationCorporation

Factors taken into Factors taken into considerationconsideration

• Financial responsibilityFinancial responsibility• Control of operationControl of operation• Possibilities of growth and expansionPossibilities of growth and expansion• Possibilities of capitalizationPossibilities of capitalization• Financial developmentFinancial development

Sole proprietorshipSole proprietorship

• Business owned by one personBusiness owned by one person• Owner has relatively unlimited Owner has relatively unlimited

control over the business and enjoys control over the business and enjoys all the profitsall the profits

• Unlimited personal responsibility for Unlimited personal responsibility for the losses, debts and other liabilitiesthe losses, debts and other liabilities

• Small retail stores, restaurants, Small retail stores, restaurants, farms etc.farms etc.

PartnershipPartnership

• Association of two or more persons Association of two or more persons as co-owners to carry on a business as co-owners to carry on a business for profitfor profit

• Based upon voluntary agreement of Based upon voluntary agreement of partnerspartners

• Profits and losses shared equally Profits and losses shared equally unless otherwise agreedunless otherwise agreed


• Every partner liable without limit to Every partner liable without limit to creditors for debts of the creditors for debts of the management with equal authoritymanagement with equal authority

• Utilize more capital, labor and skill Utilize more capital, labor and skill than sole proprietorshipsthan sole proprietorships


• Unlike an incorporated Unlike an incorporated company, a partnership does not company, a partnership does not have a legal personality of its have a legal personality of its own; partners are liable for the own; partners are liable for the debts of the firmdebts of the firm


• On leaving the firm they remain On leaving the firm they remain liable for debts already incurred; liable for debts already incurred;

• They cease to be liable for future They cease to be liable for future debts if proper notice of debts if proper notice of retirement has been publishedretirement has been published

CorporationCorporation

• Artificial person created under law Artificial person created under law and empowered to achieve a specific and empowered to achieve a specific purposepurpose

• Formed upon the issuance of a Formed upon the issuance of a certificate of incorporation by the certificate of incorporation by the appropriate government authorityappropriate government authority

Company formationCompany formation

• Certificate of incorporation – issued Certificate of incorporation – issued upon the filing of the constitutional upon the filing of the constitutional documents of the company, together documents of the company, together with statutory forms and the with statutory forms and the payment of a filing feepayment of a filing fee

The ‘constitution’ of a The ‘constitution’ of a companycompany

• Memorandum of associationMemorandum of association• Articles of associationArticles of association• Certificate of incorporationCertificate of incorporation

Memorandum of Association Memorandum of Association (Br.E.) Memorandum of (Br.E.) Memorandum of Incorporation (Am. E.)Incorporation (Am. E.)

Name of the companyName of the company• Objects and powers of the company Objects and powers of the company

(the sphere of activities and nature (the sphere of activities and nature of the company)of the company)

• Share capitalShare capital

Articles of Association Articles of Association (Br. E.)(Br. E.)

Bylaws (Am. E.)Bylaws (Am. E.)• A set of rules governing the conduct A set of rules governing the conduct

of company members and officers of company members and officers (directors, secretary)(directors, secretary)

• Conduct of shareholder and board Conduct of shareholder and board meetings, any restriction on meetings, any restriction on transferability of shares, powers of transferability of shares, powers of directors, etc.directors, etc.

Certificate of Certificate of incorporationincorporation

• A document certifying that the A document certifying that the company is incorporatedcompany is incorporated

• The validity of the incorporation The validity of the incorporation cannot thereafter be challengedcannot thereafter be challenged

Company managementCompany management

• Director: appointed to carry out Director: appointed to carry out and control the day-to-day and control the day-to-day affairs of the companyaffairs of the company

• Manager: supervisory control of Manager: supervisory control of the affairs of the companythe affairs of the company

Company managementCompany management

• SecretarySecretary• Auditors: do not owe a duty to Auditors: do not owe a duty to

the company as a legal entity, the company as a legal entity, but to the shareholders, to but to the shareholders, to whom the auditor’s report is whom the auditor’s report is addressedaddressed

DirectorDirector

• Duty of care: must exercise the Duty of care: must exercise the care of an ordinarily prudent care of an ordinarily prudent and diligent personand diligent person

• Fiduciary duty: must act in the Fiduciary duty: must act in the best interests of the company best interests of the company and not for any collateral and not for any collateral purposepurpose


• The formation of an association that The formation of an association that has corporate personality, i.e. a legal has corporate personality, i.e. a legal personality distinct from those of its personality distinct from those of its membersmembers

• Such a body can own property and Such a body can own property and incur debtsincur debts


• Company members have no Company members have no liability to company creditorsliability to company creditors

• Incorporated company has its Incorporated company has its own rights and liabilities and own rights and liabilities and legal proceedingslegal proceedings

Attributes of Attributes of corporationscorporations

• Perpetual life (“perpetual Perpetual life (“perpetual succession”)succession”)

• Limited liabilityLimited liability• Transferability of sharesTransferability of shares• Access to capitalAccess to capital• Professional managementProfessional management

Perpetual successionPerpetual succession

• Any corporate body has a legal Any corporate body has a legal existence distinct from the existence distinct from the person or persons of whom it is person or persons of whom it is composedcomposed

Perpetual successionPerpetual succession

• Its lifespan is not limited by that Its lifespan is not limited by that of its members and it is of its members and it is therefore said to have perpetual therefore said to have perpetual successionsuccession

• It continues to exist until wound It continues to exist until wound up in the manner prescribed by up in the manner prescribed by lawlaw

Limited liabilityLimited liability

• Members of companies providing Members of companies providing the share capital cannot be asked to the share capital cannot be asked to contribute more than the nominal contribute more than the nominal value of the shares registered in value of the shares registered in their namestheir names

Limited liabilityLimited liability

• The nominal value of the shares The nominal value of the shares or the amount of the guarantee or the amount of the guarantee will appear in the Memorandum will appear in the Memorandum of Association and in the Annual of Association and in the Annual AccountsAccounts

Transfer of sharesTransfer of shares

• A transaction resulting in a change A transaction resulting in a change of share ownership. It traditionally of share ownership. It traditionally involved:involved:

• 1. a contract to sell the shares1. a contract to sell the shares• 2. their transfer2. their transfer• 3. entry of the transferee’s name on 3. entry of the transferee’s name on

the registrar of members of the the registrar of members of the companycompany

Corporate veilCorporate veil

• In cases when the company is used In cases when the company is used to perpetrate fraud or acts ultra to perpetrate fraud or acts ultra vires, the court may ‘lift’ the vires, the court may ‘lift’ the corporate veil and subject the corporate veil and subject the shareholders to personal liabilityshareholders to personal liability

Legal termsLegal terms

• Sole proprietorshipSole proprietorship• Isključivo vlasništvo; poduzeće s Isključivo vlasništvo; poduzeće s

jednim vlasnikomjednim vlasnikom• PartnershipPartnership• Partnerstvo, ortaštvoPartnerstvo, ortaštvo• CorporationCorporation• Trgovačko društvo, dioničko društvo, Trgovačko društvo, dioničko društvo,

društvo kapitaladruštvo kapitala


• RetailRetail• MaloprodajaMaloprodaja• LiabilityLiability• Obveza (financijska), odgovornostObveza (financijska), odgovornost• CreditorCreditor• Vjerovnik, zajmodavacVjerovnik, zajmodavac• DebtorDebtor• Dužnik, zajmoprimacDužnik, zajmoprimac


• Artificial person (Br. E.), legal Artificial person (Br. E.), legal person, legal entityperson, legal entity

• Pravna osoba Pravna osoba • Limited liabilityLimited liability• Ograničena odgovornostOgraničena odgovornost• Transferability of sharesTransferability of shares• Prenosivost dionicaPrenosivost dionica

Introduction to Company Introduction to Company Law: Law:

Exercise Exercise• Complete the text by using the Complete the text by using the

following words: following words: agreements, agreements, borrow, corporations, court, borrow, corporations, court, debts, dividends, employees, debts, dividends, employees, legal, legislation, liability, legal, legislation, liability, limited, objectives, partnership, limited, objectives, partnership, profits, property, registered (x2), profits, property, registered (x2), shareholders, sole trader, sueshareholders, sole trader, sue

agreements, borrow, corporations, court, debts, agreements, borrow, corporations, court, debts, dividends, employees, legal, legislation, liability, dividends, employees, legal, legislation, liability, limited, objectives, partnership, profits, property, limited, objectives, partnership, profits, property,

registered (x2), shareholders, sole trader, sueregistered (x2), shareholders, sole trader, sue

• A company is a ___entity, allowed by A company is a ___entity, allowed by ___, which permits a group of people, ___, which permits a group of people, as___, to create an organization, as___, to create an organization, which can then focus on pursuing which can then focus on pursuing set____. It is empowered with legal set____. It is empowered with legal rights which are usually only rights which are usually only reserved for individuals, such as the reserved for individuals, such as the right to____and be sued, own____, right to____and be sued, own____, hire____ or loan and ____money.hire____ or loan and ____money.



• The primary advantage of a company The primary advantage of a company structure is that it provides the structure is that it provides the shareholders with a right to shareholders with a right to participate in the_____, a participate in the_____, a proportionate distribution of profits proportionate distribution of profits made in the form of a money made in the form of a money payment to shareholders, without payment to shareholders, without any personal____.any personal____.



• There are various forms of legal There are various forms of legal business entities ranging from business entities ranging from the____, who alone bears the risk and the____, who alone bears the risk and responsibility of running a business, responsibility of running a business, taking the profits, but as such not taking the profits, but as such not forming any association in law and forming any association in law and thus not regulated by special rules of thus not regulated by special rules of law, to the____company with law, to the____company with ___liability and to multinational ____.___liability and to multinational ____.



• In a ____, members ‘associate’, In a ____, members ‘associate’, forming collectively an association in forming collectively an association in which they all participate in which they all participate in management and sharing____, management and sharing____, bearing the liability for the firm’s bearing the liability for the firm’s _____and being sued jointly and _____and being sued jointly and severally in relation to the firm’s severally in relation to the firm’s contracts or tortious acts.contracts or tortious acts.



• Limited-liability companies, or Limited-liability companies, or corporations, unlike partnerships, corporations, unlike partnerships, are formed not simply by____entered are formed not simply by____entered into between their first members; into between their first members; they must also be_____at a public they must also be_____at a public office or _____designated by law or office or _____designated by law or otherwise obtain official otherwise obtain official acknowledgement of their existence. acknowledgement of their existence.

KeyKey

• A company is a A company is a legallegal entity, allowed by entity, allowed by legislationlegislation, which permits a group of , which permits a group of people, as people, as shareholdersshareholders, to create an , to create an organization, which can then focus on organization, which can then focus on pursuing set pursuing set objectivesobjectives. It is . It is empowered with legal rights which are empowered with legal rights which are usually only reserved for individuals, usually only reserved for individuals, such as the right to such as the right to suesue and be sued, and be sued, own own propertyproperty, hire , hire emoloyeesemoloyees or loan or loan and and borrow borrow money.money.

KeyKey

• The primary advantage of a company The primary advantage of a company structure is that it provides the structure is that it provides the shareholders with a right to shareholders with a right to participate in the participate in the dividendsdividends, a , a proportionate distribution of profits proportionate distribution of profits made in the form of a money made in the form of a money payment to shareholders, without payment to shareholders, without any personal any personal liabilityliability..

KeyKey

• There are various forms of legal There are various forms of legal business entities ranging from the business entities ranging from the sole sole tradertrader, who alone bears the risk and , who alone bears the risk and responsibility of running a business, responsibility of running a business, taking the profits, but as such not taking the profits, but as such not forming any association in law and thus forming any association in law and thus not regulated by special rules of law, to not regulated by special rules of law, to the the registeredregistered company with company with limitedlimited liability and to multinational liability and to multinational corporations.corporations.

KeyKey

• In a In a partnershippartnership, members , members ‘associate’, forming collectively an ‘associate’, forming collectively an association in which they all association in which they all participate in management and participate in management and sharing sharing profits,profits, bearing the liability bearing the liability for the firm’s for the firm’s debtsdebts and being sued and being sued jointly and severally in relation to jointly and severally in relation to the firm’s contracts or tortious acts.the firm’s contracts or tortious acts.

KeyKey

• Limited-liability companies, or Limited-liability companies, or corporations, unlike partnerships, corporations, unlike partnerships, are formed not simply by are formed not simply by agreementsagreements entered into between entered into between their first members; they must also their first members; they must also be be registeredregistered at a public office or at a public office or courtcourt designated by law or designated by law or otherwise obtain official otherwise obtain official acknowledgement of their existence.acknowledgement of their existence.

Roles in company managementRoles in company managementMatch the roles with definitions: Match the roles with definitions:

auditor, company secretary, director, auditor, company secretary, director, managing director, shareholdermanaging director, shareholder

• Company director responsible for the Company director responsible for the day-to-day operation of the companyday-to-day operation of the company

• Person elected by the shareholders to Person elected by the shareholders to manage the company and decide its manage the company and decide its general policygeneral policy

• Person appointed by the company to Person appointed by the company to examine the company’s accounts and examine the company’s accounts and to report to the shareholders annually to report to the shareholders annually on the accountson the accounts

KeyKey

• Company director responsible for the Company director responsible for the day-to-day operation of the company: day-to-day operation of the company: managing directormanaging director

• Person elected by the shareholders to Person elected by the shareholders to manage the company and decide its manage the company and decide its general policy: general policy: directordirector

• Person appointed by the company to Person appointed by the company to examine the company’s accounts and to examine the company’s accounts and to report to the shareholders annually on report to the shareholders annually on the accounts: the accounts: auditorauditor

Match the roles with definitions: Match the roles with definitions: auditor, company secretary, director, auditor, company secretary, director,

managing director, shareholdermanaging director, shareholder

• Member of the company by virtue of an Member of the company by virtue of an acquisition of shares in a companyacquisition of shares in a company

• Company’s chief administrative officer, Company’s chief administrative officer, whose responsibilities include whose responsibilities include accounting and finance duties, accounting and finance duties, personnel administration and personnel administration and compliance with employment legislation, compliance with employment legislation, security of documentation, insurance security of documentation, insurance and intellectual property rightsand intellectual property rights

KeyKey

• Member of the company by virtue of an Member of the company by virtue of an acquisition of shares in a company: acquisition of shares in a company: shareholdershareholder

• Company’s chief administrative officer, Company’s chief administrative officer, whose responsibilities include accounting whose responsibilities include accounting and finance duties, personnel and finance duties, personnel administration and compliance with administration and compliance with employment legislation, security of employment legislation, security of documentation, insurance and intellectual documentation, insurance and intellectual property rights: property rights: company secretarycompany secretary

Choose the correct word or Choose the correct word or phrase:phrase:

• 1. The constitution of a company 1. The constitution of a company comprises/consists/containscomprises/consists/contains of two of two documents.documents.

• 2. The memorandum of association 2. The memorandum of association states states //provides for / sets upprovides for / sets up the objects of the the objects of the company and details its authorised company and details its authorised capital.capital.

• 3. The articles of association contain 3. The articles of association contain arguments / provisions / directivesarguments / provisions / directives for the for the internal management of a companyinternal management of a company

KeyKey

• 1. The constitution of a company 1. The constitution of a company comprises/comprises/consistsconsists/contains/contains of two of two documents.documents.

• 2. The memorandum of association 2. The memorandum of association states states //provides for / sets upprovides for / sets up the objects the objects of the company and details its authorised of the company and details its authorised capital.capital.

• 3. The articles of association contain 3. The articles of association contain arguments / arguments / provisionsprovisions / directives / directives for for the internal management of a companythe internal management of a company

Choose the correct word or Choose the correct word or phrasephrase

• 4. The company is governed by the 4. The company is governed by the board of directors, whilst the day-to-day board of directors, whilst the day-to-day management is delegated management is delegated upon / to / forupon / to / for the managing director.the managing director.

• 5. In some companies, the articles of 5. In some companies, the articles of association association make /give / allowmake /give / allow provision provision for rotation of directors, whereby only a for rotation of directors, whereby only a certain portion of the board must retire certain portion of the board must retire and present itself for re-election before and present itself for re-election before the AGM.the AGM.

KeyKey

• 4. The company is governed by the 4. The company is governed by the board of directors, whilst the day-to-day board of directors, whilst the day-to-day management is delegated management is delegated upon / upon / toto / for / for the managing director.the managing director.

• 5. In some companies, the articles of 5. In some companies, the articles of association association makemake /give / allow /give / allow provision provision for rotation of directors, whereby only a for rotation of directors, whereby only a certain portion of the board must retire certain portion of the board must retire and present itself for re-election before and present itself for re-election before the AGM.the AGM.

Choose the correct word or Choose the correct word or phrasephrase

• 6. Many small shareholders do not 6. Many small shareholders do not bother to attend shareholders’ bother to attend shareholders’ meetings and will often receive meetings and will often receive proxy circulars from the board, proxy circulars from the board, seeking authorisation to vote seeking authorisation to vote on the on the basis of / in respect of / on behalf ofbasis of / in respect of / on behalf of the shareholder.the shareholder.

KeyKey

• 6. Many small shareholders do not 6. Many small shareholders do not bother to attend shareholders’ bother to attend shareholders’ meetings and will often receive meetings and will often receive proxy circulars from the board, proxy circulars from the board, seeking authorisation to vote seeking authorisation to vote on the on the basis of / in respect of / basis of / in respect of / on behalf ofon behalf of the shareholder.the shareholder.

Complete the following using: Complete the following using: in in terms of, in the course of, by way terms of, in the course of, by way

of, in response toof, in response to• 1. _____choosing the name of the 1. _____choosing the name of the

company, a number of matters must be company, a number of matters must be considered.considered.

• 2. Confidential information 2. Confidential information acquired_____one’s directorship shall not acquired_____one’s directorship shall not be used for personal advantage.be used for personal advantage.

• 3. I would advise that members of your 3. I would advise that members of your project group formalise your relationship project group formalise your relationship ____a partnership agreement, ____a partnership agreement, incorporation or limited liability incorporation or limited liability company.company.

KeyKey

• 1. 1. In the course of choosing In the course of choosing the name of the name of the company, a number of matters must be the company, a number of matters must be considered.considered.

• 2. Confidential information acquired 2. Confidential information acquired by by way of/in the course of way of/in the course of one’s directorship one’s directorship shall not be used for personal advantage.shall not be used for personal advantage.

• 3. I would advise that members of your 3. I would advise that members of your project group formalise your relationship project group formalise your relationship by way of by way of a partnership agreement, a partnership agreement, incorporation or limited liability company.incorporation or limited liability company.

Complete the following using: in Complete the following using: in terms of, in the course of, by way terms of, in the course of, by way

of, in response toof, in response to• 4. This form of corporation is often 4. This form of corporation is often

considered to be the most flexible considered to be the most flexible body ____corporate structure.body ____corporate structure.

• 5. Our company formations expert is 5. Our company formations expert is unable to provide advice____your unable to provide advice____your query, as there are a number of query, as there are a number of factors which need to be taken into factors which need to be taken into account which do not relate directly account which do not relate directly to his area of expertise.to his area of expertise.

KeyKey

• 4. This form of corporation is often 4. This form of corporation is often considered to be the most flexible considered to be the most flexible body body in terms of in terms of corporate structure.corporate structure.

• 5. Our company formations expert is 5. Our company formations expert is unable to provide advice unable to provide advice in response in response to to your query, as there are a number your query, as there are a number of factors which need to be taken into of factors which need to be taken into account which do not relate directly account which do not relate directly to his area of expertiseto his area of expertise


of, in response toof, in response to• 6. The relationship between 6. The relationship between

management and boards of directors management and boards of directors at US multinational companies has at US multinational companies has been changed dramatically through been changed dramatically through a series of corporate governance a series of corporate governance initiatives begun_____corporate initiatives begun_____corporate scandals, the Sarbanes-Oxley Act scandals, the Sarbanes-Oxley Act and other requirements.and other requirements.

KeyKey

• The relationship between The relationship between management and boards of directors management and boards of directors at US multinational companies has at US multinational companies has been changed dramatically through been changed dramatically through a series of corporate governance a series of corporate governance initiatives begun initiatives begun in response to in response to corporate scandals, the Sarbanes-corporate scandals, the Sarbanes-Oxley Act and other requirements.Oxley Act and other requirements.


of, in response toof, in response to• 7. Shareholders and other investors 7. Shareholders and other investors

in corporations tend to view in corporations tend to view corporate governance_____the corporate governance_____the corporation’s increasing value over corporation’s increasing value over time.time.

• 8. Regular and extraordinary board 8. Regular and extraordinary board meetings may be held by telephone, meetings may be held by telephone, video-telephone and_____written video-telephone and_____written resolutions.resolutions.

KeyKey

• 7. Shareholders and other investors 7. Shareholders and other investors in corporations tend to view in corporations tend to view corporate governance corporate governance in terms of in terms of the corporation’s increasing value the corporation’s increasing value over time.over time.

• 8. Regular and extraordinary board 8. Regular and extraordinary board meetings may be held by telephone, meetings may be held by telephone, video-telephone and video-telephone and by way of by way of written resolutions.written resolutions.

Which of the following can Which of the following can go the verb go the verb to fileto file??

• An action, an appeal, an amendment, An action, an appeal, an amendment, a breach, a brief, charges, a claim, a a breach, a brief, charges, a claim, a complaint, a debt, a defence, a complaint, a debt, a defence, a dispute, a document, a fee, an dispute, a document, a fee, an injunction, a motion, provisions, a injunction, a motion, provisions, a suitsuit

To fileTo file

• To send a document to courtTo send a document to court• To register something officiallyTo register something officially• Podnijeti (prijavu, tužbu, zahtjev), Podnijeti (prijavu, tužbu, zahtjev),

podići (optužnicu), dostaviti, podići (optužnicu), dostaviti, evidentirati, pokrenuti postupak, evidentirati, pokrenuti postupak, urudžbirati, arhiviratiurudžbirati, arhivirati

KeyKey

• An action, an appeal, an amendment, An action, an appeal, an amendment, a brief, charges, an injunction, a a brief, charges, an injunction, a motion, a suitmotion, a suit

FORMS OF BUSINESS ORGANIZATION IN THE UNITED STATES Unit 33.

Documents

sole proprietorship

future debts

sole proprietorshipsutilize

partnership association

unlimited control

incorporated company

legal personality

proper notice of retirement