Essentials of Business Law, 9th edition
INSTRUCTOR’S MANUAL
Chapter 20 Business Organizations
LESSON OVERVIEW
While the previous chapter dealt with agency at large, Chapter 20 deals with business organizations.
The objective of this chapter is to identify the business organizational forms available in the United
States whose purpose is to earn a profit. We understand the concept of sole proprietorship and
partnership along with their advantages and disadvantages. Students will additionally learn the
advantages and disadvantages of being a limited partner. The major characteristics of a corporation,
limited liability companies, and organizational forms that are not business entities are also broadly
discussed in this chapter. Finally, students’ understanding of the topics is evaluated through
objective-type questions, discussion questions, and case scenarios. Students are encouraged to conduct
their own research through the use of the Internet and other sources.
CHAPTER OUTLINE
A. ORGANIZATIONAL FORMS (p. 320)
B. SOLE PROPRIETORSHIP (pp. 320-321)
1. Advantages of a Sole Proprietorship (p. 322)
2. Disadvantages of a Sole Proprietorship (p. 322-323)
C. PARTNERSHIP (pp. 323-325)
1. Advantages of a Partnership (p. 321)
2. Disadvantages of a Partnership (p. 322)
3. Limited Partnership (pp. 322-323)
4. Limited Liability Partnership (p.323)
D. CORPORATION (pp. 323-326)
1. Advantages of a Corporation (pp. 323-324)
2. Disadvantages of a Corporation (p. 324)
3. Subchapter S Corporation (p. 325)
4. Corporate Directors and Officers (p. 325)
5. Fiduciary Responsibility (p. 325)
E. LIMITED LIABILITY COMPANY (pp. 326-327)
1. Advantages of a Limited Liability Company (p. 326)
2. Disadvantages of a Limited Liability Company (p. 327)
F. OTHER ORGANIZATIONAL FORMS (p. 327)
G. CHAPTER SUMMARY (p. 327)
H. CHAPTER ASSESSMENT (pp. 328-3323)
1. Matching Legal Terms (p. 328)
2. True/False Quiz (pp. 328-329)
3. Discussion Questions (pp. 330-331)
4. Thinking Critically About the Law (pp. 332-333)
5. Case Questions (pp. 331-332)
6. Case Analysis (pp. 332-333)
7. Legal Research (p. 333)
KEY TERMS
Key terms are listed at the beginning of the chapter, posted in the student textbook margins, and placed
in bold in the copy. They are listed here for your quick reference.
§ sole proprietorship (p. 320)
§ unlimited liability (p. 320)
§ partnership (p. 321)
§ winding-up period (p. 321)
§ joint venture (p. 321)
§ joint and several liability (p. 322)
§ limited partnership (p. 322)
§ limited liability (p. 322)
§ corporation (p. 323)
§ articles of incorporation (p. 322)
§ bylaws (p. 323)
§ quorum (p. 323)
§ subchapter S corporation (p. 325)
§ proxy (p. 325)
§ fiduciary responsibility (p. 325)
§ duty of loyalty (p. 325)
§ duty of care (p. 325)
§ limited liability company (p. 326)
LEARNING OUTCOMES
The chapter Learning Outcomes will help you and the students discover the concepts and information
that should be understood upon completion of the chapter. You may want to access the PowerPoint
(PPT) slides for Chapter 20 when you begin the study of the chapter and discuss each Learning
Outcome. Each Learning Outcome will be covered separately in the Instructor Notes, but they are
shown here in total as an overview of the sections being presented in Chapter 20. The corresponding
text page numbers and PPT slides are listed next to each outcome. These slides should be used to
reinforce the main points of the lecture.
After completing this chapter, the students will be able to:
1. Identify the business organizational forms available in the United States whose purpose is to earn
a profit. (p. 320, PPT slide 2)
2. Define sole proprietorship and discuss its advantages and disadvantages. (pp. 320-321, PPT slides
3-4)
3. Define partnership and discuss the advantages and disadvantages of organizing as a partnership,
as well as the advantages and disadvantages of being a limited partner. (pp. 321-323, PPT slides 5-12)
4. Explain the major characteristics of a corporation. (pp. 323-326, PPT slides 13-22)
5. Describe limited liability companies. (pp. 326-327, PPT slides 23-26)
6. Identify organizational forms that are not business entities. (p. 327, PPT slide 27)
6.
LECTURE OUTLINE
A. ORGANIZATIONAL FORMS
Numerous responsibilities and decisions come with accomplishing the objective to own and operate
one’s own business. There are several different types of organizational forms that may be selected for a
business structure. Businesses are generally structured as one of the following:
B. SOLE PROPRIETORSHIP
A sole proprietorship is a business owned and operated by one person.
1. Advantages of a Sole Proprietorship
A person wishing to open a business may elect to organize as a sole proprietorship
because these are extremely easy to form. Another advantage to a sole proprietorship is
that the owner has complete authority, within the boundaries of the law, for the running
of the business, and does not need to report to any other person.
2. Disadvantages of a Sole Proprietorship
The major disadvantage of a sole proprietorship is the fact that the owner of the
establishment has unlimited liability, which means that the owner is personally liable
for all of the legal debts and obligations of the business. A second disadvantage of a sole
proprietorship is the difficulty the owner faces in raising money to finance the
operations of the business.
C. PARTNERSHIP
A partnership is a business owned and operated by two or more persons. Partners, by agreement with
one another, share responsibility for managing the affairs of the business.
Dissolution of a partnership is governed by the partnership contract and usually occurs due to (1) the
death or disability of one of the partners, (2) the expulsion of one of the partners, (3) illegality of the
partnership’s business, (4) the retirement of one of the partners, or (5) the bankruptcy of the business.
Dissolution is followed by a winding-up period, during which there is an orderly liquidation of the
partnership assets. At times, individuals become partners for only a short period of time, or for only a
single project. This activity is defined as a joint venture.
1. Advantages of a Partnership
Each partner has the right to share in the profits of the business. Just as each partner has
a right to share in the profits of the company, each partner also has a right to share in the
value of the firm’s assets. A partnership is fairly easy to form, and the owners have
complete authority for the running of the business.
2. Disadvantages of a Partnership
The major disadvantage of a partnership is the fact that each partner has unlimited
liability for all legal obligations and debts of the business. In addition, partners have
joint and several liability, which means that a person with a claim against the
partnership can elect to sue either all of the partners together or any individual partner
whom he or she chooses.
3. Limited Partnership
A limited partnership is a business in which there are one or more general partners and
one or more limited partners.
Advantage of Being a Limited Partner. The limited partner is attracted to the limited
partnership because it provides him or her with limited liability; that is, his or her
personal liability for all of the legal debts and obligations of the business is limited to his
or her investment in the business.
Disadvantage of Being a Limited Partner. While the limited partner does not have the
disadvantage of unlimited liability, he or she is not able to participate in the overall
management of the business, lest he or she be deemed by the courts to be a general
partner, and lose his or her limited liability.
4. Limited Liability Partnership
A limited liability partnership has one or more general partners and one or more
limited partners. Limited partnerships receive the same tax treatment as all partnerships.
Also, as with all partnerships ,authority, dissolution, and so forth are governed by the
partnership contract.
D. CORPORATION
A corporation is a business formed as a separate legal entity. Corporations are owned by shareholders,
who purchase shares of stock in the corporation. The corporation drafts articles of incorporation that
list the general powers of the company. The company usually has bylaws, which provide rules for the
meetings of the corporation. A quorum, the minimum number of shares necessary to be present at a
meeting, is required for action to be taken.
1. Advantages of a Corporation
The major advantage of a corporation is the fact of limited liability to shareholders.
Courts are extremely hesitant to pierce the corporate veil; that is, the law assigns
responsibility for corporate obligations to shareholders only under very unusual
circumstances. Another advantage to a corporation is the ease with which the company
can raise capital.
2. Disadvantages of a Corporation
The major disadvantage of a corporation is the fact that the corporation is required to
pay separate income taxes at a special corporate rate for any year during which a profit
is earned. A second disadvantage to a corporation is the expense associated with forming
and maintaining the company.
3. Subchapter S Corporation
A subchapter S corporation is a corporation for all purposes as explained above but
with the advantage of being taxed as a partnership. In order to qualify as a subchapter S
corporation, the company must comply with tax regulations.
4. Corporate Directors and Officers
Shareholders, who own the corporation, do not directly manage the activities of the firm.
Shareholders vote for directors, members of a board who are responsible for managing
the overall strategy and operations of the firm over the long term. Frequently,
shareholders who cannot attend meetings of the corporation nonetheless vote for
directors by signing a proxy, a legal document that transfers the right to vote in a
corporate election to another person.
5. Fiduciary Responsibility
Directors and officers have a fiduciary responsibility to the company in which they
hold their positions. Fiduciary responsibility means that directors and officers will
exercise their authority while working under a duty of loyalty and a duty of care.
a) Duty of Loyalty
The duty of loyalty means that a director has a legal and ethical obligation to
administer to the affairs of the corporation with personal integrity, honesty, and
candor.
b) Duty of Care
The duty of care means that a director has a legal and ethical obligation to act
diligently and prudently in conducting the affairs of the corporation.
E. LIMITED LIABILITY COMPANY
A limited liability company (LLC) is a relatively new organizational form available in most states. An
LLC is taxed as a partnership for federal tax purposes. The owners of the LLC act as a management
team, that is, they share in the overall control of the business.
1. Advantages of a Limited Liability Company
The LLC provides all of the owners with limited liability, while allowing them to
participate in the management of the business. Since it is generally a small company, in
most states it is quite easy to form.
2. Disadvantages of a Limited Liability Company
As is true for all small firms, the owners of an LLC frequently have difficulty in raising
additional funds to expand or maintain the business.
F. OTHER ORGANIZATIONAL FORMS
The organizational forms discussed in this chapter are those whose purpose is to earn profits. It must be
noted that there are several other organizational forms that exist in the United States whose purpose is
to aid society. These organizations are referred to as not-for-profits and can include charitable
organizations as well as others, such as universities, political parties, labor unions, social clubs, and
others.
INSTRUCTOR NOTES
A resulting answer or explanation is provided below for each Learning Outcome in Chapter 20. Every
outcome is also mapped to corresponding text page numbers, PPT slides, and relevant chapter
assessment exercises and activities for ease of reference and use.
LO1. Identify the business organizational forms available in the United States whose purpose is to
earn a profit.
For-profit businesses are generally organized as one of the following forms: (1) sole proprietorship, (2)
partnership, (3) corporation, or (4) limited liability company.
Text Pages: 320
PowerPoint: Slide 2
Discussion Questions: 26
Case Analysis: 41
LO2. Define sole proprietorship and discuss its advantages and disadvantages.
A sole proprietorship is a business owned and operated by one person. Advantages to organizing
as a sole proprietorship include: (a) the business is easy to form, (b) the owner has complete authority
for the running of the business, (c) all profits generated flow directly to the owner, and (d) the business
is easy to dissolve. Disadvantages of organizing as a sole proprietorship include: (a) the owner has
unlimited liability, and (b) the owner faces difficulty in raising money to finance the operations of the
business.
Text Pages: 320-321
PowerPoint: Slides 3-4
Discussion Questions: 27
Thinking Critically About the Law: 34
Case Questions: 37
LO3. Define partnership and discuss the advantages and disadvantages of organizing as a
partnership, as well as the advantages and disadvantages of being a limited partner.
A partnership is a business owned and operated by two or more persons. Advantages to organizing as a
partnership include: (a) each partner has the right to share in the profits of the business, and (b) each
partner has a right to share in the value of the firm’s assets. Disadvantages of organizing as a
partnership include: (a) each partner has unlimited liability for all legal obligations and debts of the
business, and (b) partners have joint and several liability. The advantage of being a limited partner is
that he or she is provided with limited liability. The disadvantage of being a limited partner is that he or
she is not able to participate in the overall management of the business, lest he or she be deemed by the
courts to be a general partner.
Text Pages: 321-323
PowerPoint: Slides 4-12
Discussion Questions: 28-29
Thinking Critically About the Law: 32-33
Case Questions: 38
Case Analysis: 42
LO4. Explain the major characteristics of a corporation.
A corporation is a business formed as a separate legal entity, a kind of legal person. Corporations are
owned by shareholders, who purchase shares of stock in the corporation. A corporation drafts articles of
incorporation, which list the general powers of the company, and bylaws, which provide rules for the
meetings of the corporation. Generally, corporations exist in perpetuity.
Text Pages: 323-326
PowerPoint: Slides 13-22
Discussion Questions: 30-31
Thinking Critically About the Law: 35-36
Case Questions: 39
Case Analysis: 40
LO5. Describe limited liability companies.
A limited liability company, which provides all of the owners with limited liability, is taxed as a
partnership for federal tax purposes. The owners of the limited liability company act as a management
team; that is, they share in the overall control of the business.
Text Pages: 326-327
PowerPoint: Slides 23-26
LO6. Identify organizational forms that are not business entities.
Organizational forms that are not business entities are not-for-profits that include universities, political
parties, labor unions, social clubs, and others.
Text Pages: 327
PowerPoint: Slide 27