What is business law?
Business law is comprised of those legal principals derived from statutes, governmental regulations and common law that govern the formation, operation, financing and transactions of businesses of all kinds.
What are the basic forms of business entities?
A sole proprietorship encompasses any business own and operated by an individual. A sole proprietor is personally liable for all debts and liabilities of the business. All income and losses are reported on the sole proprietor’s individual federal and state income tax returns.
A general partnership is “an association of two or more persons to carry on as co-owners a business for profit.” Anytime two or more people operate a business together, the general rule is that they are a partnership whether there is a formal agreement or not. There is a body of statutory and common law that governs the rights and liabilities of partners in a general partnership. Partners are jointly and severally liable for all partnership obligations. This means that a general partner is risking his or her own personal assets to pay claims against the partnership. Individual partners will be taxed on their proportionate share of partnership income.
A corporation is a separate entity created by law. It can be owned by one or more individuals or entities. As an entity separate from its owners, the corporation has the right to acquire, hold, and convey property; to sue or be sued; and generally to act in its own name. A corporation is formed by filing Articles of Incorporation with the Oregon Secretary of State’s office. The Articles of Incorporation along with the corporate Bylaws are the principal governing documents of the corporation. Merely filing Articles and perhaps preparing Bylaws does not necessarily adequately complete the formation process for a formation. A corporation is managed by its Board of Directors who are elected by corporate shareholders. The Board of Directors is generally responsible for appointing corporation officers who assume the actual day-to-day operations of the corporation’s business.
Shareholders, directors and officers generally enjoy limited liability. The shareholder’s liability is limited to the extent of the shareholder’s capital contribution obligation to the corporation. In other words, if the corporation gets sued, the successful creditor will only be able to reach the assets of the corporation and not the personal assets of the shareholders, directors and officers. There are some circumstances in which this shield of limited liability can be lost based on certain kinds of shareholder, officer or director conduct.
There are basically two types of corporation for tax purposes. A C corporation is subject to tax on its taxable income at the entity level. Corporate tax rates differ from personal income tax rates and are generally higher. Any distribution of profits to shareholders will be taxed separately to the shareholder. Thus, the same income can be subject to double taxation (corporate tax and individual tax). S corporations on the other hand, are identical to C corporations except that the shareholders have elected to have the income and deductions pass through to them as individual shareholders proportionate to their ownership interests in the corporation. Items of income, gain, loss, deduction and credit pass through the corporate entity to the shareholders and thus avoid double taxation.
Limited Liability Company
A limited liability company (“LLC”) is very similar to a partnership with the added benefit of protection from potential liability for members. Essentially, a limited liability company is a cross between a corporation and a partnership.
An LLC can be formed by one or more individuals or entities and is organized by filing Articles of Organization with the Oregon Secretary of State’s office. In addition, the LLC should have a written Operating Agreement that governs the activities of the LLC and describes the management, rights and obligations for the members and the company’s operations. The members of an LLC have limited liability similar to that of shareholders of a corporation. The extent of the members’ liability is generally the members’ capital contribution to the LLC.
Generally, limited liability company members will be taxed as a sole proprietor or as a partner. Some limited liabilities elect to be treated as C corporations for tax purposes.
Limited Liability Companies have fewer formalities. Unless required by the Operating Agreement, annual meetings, resolutions, minutes, notice and other ordinary corporate documents are not required. However, it may be prudent to document significant decisions of the members.
Selecting the appropriate business entity involves issues relating to taxation, the liability of the owners, costs of formation, operation, ease of dissolution, transferability of ownership and formalities associated with operations. Proper selection, formation and documentation of a business entity can offer protection to the owners from unnecessary personal liability and provide mechanisms for management, transfer of owners’ interests and, if necessary, dissolution.
What is a copyright?
A copyright is a form of protection provided to the author of original works including literary, dramatic, musical, artistic and certain other intellectual works. Copyright protection subsists from the time the work is created and in fixed form and immediately becomes the property of the author. (Exception, “work made for hire.”)
What is not protected? Titles, names, slogans lettering, coloring, ideas, procedures, methods, systems, processes, concepts, principals, discoveries or devices as distinguished from a description, explanation or illustration.
What is a trademark/service mark?
A trademark is word, phrase, symbol or design or a combination of them that identifies and distinguishes the source of the goods of one party from those of others. “Distinguishes” is the true issue. In order for there to be an infringement, the offending trademark must cause a likelihood of confusion, mistake or deception. Actual confusion is not required.
A service mark is essentially the same thing as a trademark that applies to services as opposed to goods.
What is commercial law?
Although commercial law is a term that can be used very broadly, it is frequently divided into two categories that stem from various chapters of the Uniform Commercial Code. The law of sales and secured transactions.
Sales is the body of statutory law (Uniform Commercial Code adopted in most states) that governs the sale of goods. It includes detailed rules respecting seller’s and buyer’s rights with regard to goods, remedies for breaching agreements respecting goods, resolution of product dissatisfaction claims as well as certain warranties that affect goods.
Secured transaction is the body of law codified in the Uniform Commercial Code which establishes the rules for creating and enforcing security interests. A security interest in personal property is essentially similar to a mortgage in real property. An example of this is when you buy a car and finance it with a bank. The bank takes back a “security interest” which means that until the obligation to the bank is paid off, the bank maintains an interest in the car and has a number of remedies for nonpayment, including repossession of the car. The rules of secured transaction govern many transactions beyond the sale of automobiles and serve as tools for many financing arrangements like the financing of inventory, the financing of the purchase of business assets, securing collateral for loans and providing various remedies when one party breaches a security agreement.
Authored by Carl F. Jepsen, Partner
Warren Allen LLP
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