CORPORATIONS/PARTNERSHIP

S
Elena Cisneros

2.03.01- CONTRACTUAL
RELATIONSHIPS
legal relationship between two or more parties evidenced by a contract

Required Elements
Intention to create legal relations
If you have signed a contract for business-related activities , then you will be able
to sue the other party if they do not fulfil the contractual provisions (which also
means they can sue you if you dont fulfil it)
Subject to contract- means that the document is not a contract and that all of
the contents are bound by a subsequent contract. Also means that the party can
withdraw from the negotiation any time before the contract in concluded
without prejudice- means that anything in the document is not legally binding

STEP 1STEP 2OFFER

Expression of readiness to do something
No contract unless the offer is accepted
ACCEPTANCE
by the offeree
Can lead to a contract
Ex: a company tells you that they will sell
100 boxes of red wine at the price of
$100,000
If no time limit is specified
Offer is valid until the offerer revokes or
cancels it

The one who offered cannot take silence

as a form of acceptance.
Ex: if I dont hear back from you in ten
days, then I assume that you have
accepted and will pay for the product

Invitation to treat
Invited others make offers
Ex: displaying goods on the shelves of a
shop, advertising goods or services in
newspapers or televisions

Made orally or in writing

If method of acceptance is not specified
by the offeror
Postal rule-contacts is formed at the time
of posting the letter of acceptance, even
if the letter gets lost in the mail
Receipt rule- when sent by fax, the
acceptance is valid when the message is
received, regardless if the person reads
the fax
also applies to email

counter-offer
Conditional or partial acceptance
Person only accepts some of the terms
and proposes some new terms
Means that the person is not
accepting the offer, but is making a
new offer to the other party

STEP 3- CONSIDERATION
Detriment to the person who made
the promise or benefit conferred on
the other party
Money, goods, and services are the
most common forms of consideration
Promise of a gift is not forceable in
law

STEP 4- CAPACITY
Minors (people under 18) and
lunatics (mentally disordered
or intoxicated) do not have the
capacity to enter into contracts
Exception- when they enter
into a contract for necessaries
(goods or services that are
suitable to the condition of life
of a minor and to the minors
actual requirements at the
time of the sale and delivery,
such as food and clothes)
If they fail to pay, they can
be sued by the seller

2.03.02-TYPES OF CONTRACTS
Bilateral

Unilateral

Less common
Makes up the majority of
the contracts drafted
Only one of the parties is
obligated to do/refrain from
Consists of two parties who
doing something
are under an obligation to
Ex: reward contract-the person
do something or refrain
who offers promises to pay a
from doing something
sum of money for information,
Ex: contract for the sale of
the person who collects the
goods- the buyer promises
money was never obligated to
to purchase the product,
do something
while seller promises to
supply the product

Void

Not a valid
contract
Ex: a contract
where the
subject of the
contract itself is
illegal

TYPES OF CONTRACTS
Voidable
A valid contract that may
be voided by one of the
parties
Ex: contract made with a
minor since a minor
cannot be obligated to
contract in most
jurisdictions

Executory

Contract that has yet to be

performed or executed

Some jurisdictions
require that only one
party has to have
continuing obligations

Ex: installment contracts

for the purchase of a
home or vehicle

Oral
Valid contracts that are not
in writing
Ex: P1 promises P2 that he
will buy her a fridge is she
gives him her tv instead and
shakes on it
Someone witnesses it
P1 keeps a receipt from the
store he purchased the
fridge from

o Minor

2.03.03- WHO CAN AVOID A

CONTRACT

Minor can only avoid a contract during their minority status and for a reasonable time after
that
Contract becomes ratified and unavoidable when they pass the reasonable time after they
reach majority
Parents arent held liable for contracts made by the minor
Unless they are a co-signer on the contract

o Person who lacks contractual capacity

Mentally incompetent
Can be the result of a mental illness, excessive use of drugs or alcohol, a stroke, etc.
They lack the capacity to understand that a contract is being made or the general nature of the contract
Can avoid the contract in the same manner as a minor
If they later become competent, then they can ratify or avoid the contract at that time

EXAMPLE
Helen (17) bought a motorcycle and persuaded the dealer to sell it on credit, the
dealer thought that she was 22 because she showed the dealer an ID card that was
falsely stated her age, she drove the motorcycle and damaged it a few days later,
she returned the motorcycle and said that she would avoid the contract because
she was a minor. In a state that follows the common law rule, the damage and the
fact that she misrepresented her age doesnt prevent her from avoiding the
contract. Some states can hold the misrepresentation and make her pay the
damage, but still avoid the contract. A few states wont let her avoid the contracts
because she lied about her age

2.03.04- INVALIDATED OR
VIOLATED
o How it becomes void
The terms of the agreement are illegal or
against public privacy
A party was not of sound mind while
signing the agreement
A party was under the age of consent
The terms are impossible
The contract restricts the rights of a party

o How it becomes voidable

A party was coerced or threatened into
signing the agreement
A party was under the influence
A party is not of sound of mind or mentally
competent
Terms of the contract were breached
Mutual mistakes on behalf of both parties
The contract is fraudulent (falsifying
facts/information or omitting)

Ex: a minor signs a lease agreement

with a landlord

2.03.04-VOID CONTRACTS
How it becomes void

How it become
voidable

A party was coerced or threatened into signing

The terms of the agreement are
the agreement
illegal or against public privacy
A party was under the influence
A party was not of sound mind
A party is not of sound of mind or mentally
while signing the agreement competent
A party was under the age ofTerms of the contract were breached
Mutual mistakes on behalf of both parties
consent
The terms are impossible The contract is fraudulent (falsifying
facts/information or omitting)
The contract restricts the rights
Ex: a minor signs a lease agreement with a
of a party
landlord

Breach of Contract

A party breaks a promise

and the other party can sue
for breach of contract

Has to be able to prove that

the other party harmed them
in some way (damages)

Covers money lost and can

include time lost as well

Can also be ordered to pay

punitive damages

3.01.01- FORMING A SOLE

PROPRIETORSHIP
o A one-person business that doesnt have to be registered
within the state in order to exist
More than 22.6 million sole proprietorships in the U.S in
2008

o Most common and easiest to set up

Most businesses start this way

o You can always migrate it to an LLC or a corporation

o You do not have to take any legal or formal steps at the
federal, state, or local level
o You may need to register your business or obtain business
and or occupancy licenses
You can contact the nearest SBDC (small business
development center) for step-by-step instructions

 Choose a name
Pick a domain name- for website even if you dont want a website immediately, you can reserve the name
Register your name- required to and it prevents someone else from using the same name in your area
o If you operate the business under your name, you can skip this step
Trademark it- gives you legal protection for a business name
o Not mandatory but important if your name becomes a brand

Financial structure
You must separate your personal finances from the business
Helps if you get a business bank account (used only to deposit business income and pay business expenses), business credit card,
business recordkeeping

Paying taxes
You must file an annual return with the IRS to report your business income and expenses (use Schedule C or C-EZ, which is part of
Form 1040)
If you have no employees, the business can operate under your SS#
Once you hire staff or set up a retirement plan, you must get a federal employer identification number from the IRS

Potential Drawbacks
As a sole proprietor, you are held personally liable for all business-related obligations
o If your business fails to pay suppliers, pay a loan, or loses a suit in court, then creditors can go after your personal possessions
Many businesses incorporate LLC, which offers personal liability protection
If the corporation or LLC fails you, then you can still likely keep our personal property and house
o Obtain insurance
Property and liability coverage
Auto insurance- tell your insurance company if you use your personal car for business to extend protection
Health Coverage
Disability- will pay you if you cant work

PARTNERSHIPS
Very similar to sole proprietorship
Business operated by two or more
partners
No federal regulation that governs
how they are formed
Each state has its own rules
All partners contribute capital and are
fully liable for business debts
Each partner pays taxes separately
Info about income and expenses if
filed for the partnership as a whole

 How to form a partnership in Kansas

o Choose a partnership name
A partnership ma use the surnames of the individual partners or use a fictitious business name
Check government databases to make sure that you dont run into federal trademark law protections or common
law

o File a trade name as a trademark

If the business name is different from the surnames of the partners, then you are not required to register a trade
name
You may use a trade name as long as it does not violate the trademark rights of another business
Consider registering your business name as a trademark to protect your name

o Draft/Sign a partnership agreement

Not a mandatory legal requirement for establishing a partnership, but very important
Helps insure that there will be no misunderstandings between partners
Things that should be covered in an agreement: how to resolve disputes, how to admit new partners, partners
authority and management duties, allocation of profits, losses, and draws.

o Obtain licenses, permits, and zoning clearance

May need to obtain business or professional licenses depending on the type of business activity you are engaged in

o Obtain a EIN
Employer identification number
Required by the IRS for tax reporting purposes

3.01.02- DISSOLVING
PARTNERSHIP

Process of alerting everyone who does business with you and your partners that the partnership is
ending and that each partner will no longer be responsible for the debts/liabilities of the others
Can be dissolved at any time by any of the partners and does not require that all partners agree about
it
Usually, the one who wants to dissolve it is responsible for telling the customers and clients
Events that might trigger it (automatically happens)
o
o
o
o
o

One of the partner dies

When one of the partners files for bankruptcy
Something happens that makes the partnership illegal
Retirement of a partner or a dispute between partners
If a business has enough growth, they will dissolve the partnership and become a corporation

Steps to take
o
o
o
o

Notify state and federal tax authorities

Turn in a dissolution and liquidation form to the state in which you do business
Notify all creditors that the partners are no longer responsible for the debts of the others
Notify all suppliers, customers, and clients

3.01.03- LIMITED VS. GENERAL

PARTNERSHIP
Limited
requires a partnership agreement
has both limited and general partners
limited partner (does not have total
responsibility for the debts of the
partnership)
the most they can lose is their own
investment
they have a lack of management
control
they do not have the authority to run
the business
more or less, they are an investor

Authority to run the business

Control over day-to-day management
Can make legally binding business decisions
Subject to unlimited personal liability for the debts of the
business
Doesnt have a limit on their personal responsibility of the
debts of the business (the person could lose their
investment in the business and personal assets)
Each partner is jointly and separately liable
If a creditor cant get what is owed by one of the partners,
then one of the other partners has to pay his share even if
they already paid their own
If sued and one partner doesnt have the money, then the
other partners have to pay

1. Choose a Corporate Name

3.02.01- FORMING A
CORPORATION

a. Must contain the word association, company, foundation, institute, society, Corp., union, etc. something that lets people
know that you are a corporation
b. Must be recognizably different from other business entities names
c. You can reserve a name for 120 for $30-35

2. Prepare and file articles of incorporation

a. Must file an Article of Incorporations
i. name and address of corporate and agent for service of process, the tax closing month, the nature of the business, number of shares
the corporation is authorized to issue, name and address of each incorporator and board of directors, duration of the corporate, and
effective date of the articles
1. fee is $90

3. appoint a registered agent

a. must have an agent for service of process
i. individual/corporation that agrees to accept legal papers on behalf of the corporation if it is sued
ii. must have a physical street address in Kansas

4. Set up a corporate records book

a. Corporations important papers, minutes of director and shareholder meeting, stock, certificates, and stock certificate stubs
b. Keep at the principal office of your corporation

1. Corporate Bylaws
a. Internal corporate document that sets out basic ground rules for operating a corporation
b. Not filed with the state

2. Initial Corporate Directors

a. Person who signed the articles ( incorporator) appoints someone who will serve on the board until the
first meeting of shareholders

3. Issue stock
a. Not required, by small corporations usually issue paper stock certificates
b. Share of stock is classified as a security under state and federal securities laws that regulate the offer and
sale of corporate stock

4. Kansas annual report requirements

a. Must file and annual report with the Secretary of State every year
b. Must be filed by the 15th day of the fourth month following the end of the corporations tax year

5. Other tax and regulatory requirements

a. EIN- employer identification number
b. Business licenses may need to obtain other local and state business licenses based on type of business
and location

3.02.02- RIGHTS AND RESPONSIBILITIES

Board of Directors
A group of individuals who are in charge of running the corporation
Also called a board of trustees (for a non-profit), board of governors, or executive
board
President/CEO selects the board of directors
Should be selected for their ability to help move the corporation forward and provide
oversight and guidance
Duties
Set by the corporate bylaws and state laws
Primary duty is to care for the finances and legal requirements
Set the mission and vision of the corporation
Set policy for corporate officers and employees to follow
The do not participate in day-to-day operations of the company

 Liability and corporate board members

They have several types of liability
Must act on behalf of the shareholders and they cannot co-mingle corporate and personal funds
A lot of board agree on a conflict of interest policy
States that board members cannot let personal interests influence their decisions on behalf of the
corporation/shareholders

Can buy officer and board member liability insurance

Protects the corporation against lawsuits against board members and to prevent board members from being
sued personally

Compensation
Some corporations compensate their board members
Based on type and size of corporation

Many corps. Dont compensate but they provide reimbursement for travel expenses to board
meetings and other corp. locations
Can be compensated with stock options

Annual meeting
One of the most important legal requirements
Includes annual report of the state of the corporation

Removing a member
Have term limits
Personal intervention and dismissal

CORPORATION OFFICERS
o President/Chairman of the Board
Responsible for the overall functioning of the board of directors

Makes sure that there is an agenda planned for every board meeting
Presides over meetings
Serves as supervisor/liaison with corporate executives reporting to the board
Primary spokesperson for the organization
Signs specific documents on behalf of the BOD and corp

o Vice President
No specific duties but can fill in for the president if required

o Treasurer
Primary responsibility for the financial well-being of the corporation but does not take day-to-day responsibility
Creates and maintains corporations annual budget for each financial year
o Includes presenting the budget to the board for approval
Creating, implementing, and reviewing financial policies
Reviewing investment activities
Overseeing the annual financial audit of the corporation ( if public)

CORPORATION OFFICER
Secretary
Overall responsibility to create and maintain corporate records and other important documents
Record minutes of all board meetings and committees
Keeps record of all policies approved by the board
Maintain a calendar of corporate events (including date of annual meeting and budget approval dates)
Maintain personnel and payroll records for executive employees reporting directly to the board of
directors
Keeping all records in a safe place and make sure all documents are in good order in case of audits

Shareholders
Owners of a company
Not responsible for the day-to-day management of a companys business or its affairs
Right to vote at meetings of shareholders on certain decisions about running the
corporation
Changes to a companys constitution, approval of major transactions, authorizing dividends

3.02.03- CORPORATION PROS AND

CONS
Advantages
Additional capital can be raised
easily through stock markets
Transfer of ownership is easy
Only the owners contribution is at
stake during liquidation, instead of
their personal assets
Business doesnt die when its
owners die (shareholders)

Disadvantages
Complex process
Double taxation ( they get a flat
rate tax and then the dividends
paid to the shareholders is taxed)
Cost of running a corporation

3.02.04- DIFFERENT TYPES OF

CORPORATIONS
C- Corporation
Standard corporation
A separate legal entity
owned by shareholders
Good for someone who
wants:
Venture financing for financing
Flexible profit-sharing among
owners
To own real estate
Easily sell your business
Offer stock options to
employees
Your earning to stay in the
business so that it can grow

S- Corporation
Standard corporation
that has a special tax
status with the IRS
No tax is paid at the
corporate level
Advantage of benefits
that the corporate
business types holds,
but has an advantage
of pass-through
taxation
Low risk of IRS audit
Flexibility to set
salaries for
employee/owners to
minimize Social

Limited Liability
Corp.

Alternative to corporations
and partnerships b
combining the corporate
advantage of limited liability
protection with the
partnership advantage of
pass-through taxation
If your company anticipates
losses for at least two years
Want to own real estate
Minimize ongoing
formalities (annual
meetings of shareholders
and directors)