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o Borrowing money from shareholders and paying interest
o Accumulating income within the corporation by not paying dividends
o Utilization of Subchapter S election
The concept summary on “Advantages and Disadvantages of Corporations.”
Additional Matters for Discussion:
The limitations on the techniques to avoid double taxation.
Review Sidebar 14.8—“Nonprofit Corporations”
D. Limited Partnerships (LO 14-3)
Emphasize:
The distinction between general partners and limited partners.
That the attributes of a general partnership and a corporation that combine to make the
limited partnership an attractive alternative form of business organization.
Creation
Emphasize:
Emphasize:
That the principles guiding partnerships also apply to limited partnerships if there is a
change in the general partners.
Managerial Control
Emphasize:
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who participates in the organization’s management becomes liable as a general
corporations to unanimously elect to have their organization treated like a partnership
for income tax purposes.
That this election is made possible through the language of Subchapter S of the Internal
Revenue Code.
That shareholders in the S corporation can elect to have their business organization
F. Limited Liability Organizations
Emphasize:
The recent growth in LLCs due to the 1988 IRS ruling.
The use of LLPs by professionals.
Creation
Emphasize:
That the owners of LLCs are called members rather than shareholders or partners.
Managerial Control
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Emphasize:
That the managerial control of an LLC is vested in its members, unless the articles of
organization provide for one or more managers.
Taxation
Emphasize:
Sidebar 14.9—“Fiduciary Duties in LLCs”
Additional Matters for Discussion:
Whether the students’ state has adopted legislation authorizing LLCs and LLPs.
Any specific rules related to the students’ state’s statute on LLCs and LLPs.
Some of the operational aspects of LLCs and LLPs.
III. Operating the Organization (LO 14-4)
A. Making the Decision
Emphasize:
That there usually is no absolutely right answer to the question—which organizational
form is best for a particular business’s operation?
That while one of these forms may be best, a careful analysis will consider the various
factors discussed in this chapter.
Additional Matter for Discussion:
That the organizational needs of a business may change during the life of that business.
B. Trends in Managing the Organization
Emphasize:
The distinction between publicly-held and privately-held business organizations.
That three important trends merit consideration here:
o The emergence of the benefit corporation.
o The continued definition of the nature of corporation personhood (see case 14.2).
o Criminal prosecutions for corporate wrongdoing may be declining due to the
increased use of “deferred prosecution agreements” (DPAs) by the federal
government.
Case 14.2: Federal Communications Commission v. AT&T Inc. 131 S.Ct. 1177 (2011)
Answers to Review Questions and Problems
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1. Forms of Business Organizations
a. The three traditional business organizations are the sole proprietorship, the general
partnership, and the corporation. Hybrid forms include the limited partnership, the S
corporation, the limited liability company, and the limited liability partnership.
Factors to Consider When Selecting a Business’s Organizational Form
2. Creation
3. Continuity
All business owners should take into consideration the relationship between the ownership
4. Managerial Control
5. Liability
The factor of liability is used to describe the degree of personal responsibility an owner has
6. Taxation
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Selecting the Best Organizational Form
7. Sole Proprietorships
8. Partnerships
9. Corporations
a. Most likely the shareholders control a closely held corporation since these owners are
10. Limited Partnerships
11. S Corporations
12. Limited Liability Organizations
The primary advantage of an LLC as compared to an S corporation is that there is no limit to
the number of members in an LLC.
Operating the Organization
13. Making the Decision
a. A limited partnership is recommended. Unlimited liability could be restricted to
Chapter 14 – Business Organizations
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Barbara as a general partner. Meanwhile, Albert is protected by the limited liability of
a limited partner.
b. Either a limited partnership or a corporation. In the former, Albert and Barbara could
be the general partners, and the other investors will be limited partners. With a
corporation, the other investors should be sold a nonvoting class of stock.
c. A corporation, S corporation, or limited liability company would allow shareholders or
members to enjoy limited liability.
d. A partnership would not have to qualify to do business in all fifty states.
e. A partnership, S corporation, or limited liability company would allow the losses to be
deducted by Albert and Barbara from their personal incomes.
14. Trends in Managing the Organization
The three important trends that merit consideration here are as follows: (1) the emergence of
the benefit corporation; (2) the continued definition of the nature of corporation personhood;
(3) criminal prosecutions for corporate wrongdoing may be declining due to the increased
use of “deferred prosecution agreements” (DPAs) by the federal government. Students’
answers for the last question may vary. Some students may believe that these trends reflect
an increase in legal risk associated with managing the organization.
Business Discussion #1
1. What type of organization is best suited for this business activity?
2. Who will manage the restaurant during times that you and your co-owners are not present?
3. What liabilities do you and your co-owners face?
Business Discussion #2
1. How would your firm conduct business on such a large scale?
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
independent contractors, will depend on the organization selected.
2. How could you limit potential liability for and by various consultants?
3. Which form of business organization is best suited to meet the needs of your growing firm?