Why the Form of Business Entity Is Important

The fundamental question that surrounds the creation of any business is what type of corporate form, or legal entity, the business should construct itself as. This is a question with significant consequence: the business form that an organization assumes can dictate not only how much tax the entity will pay, but also what protections the law will provide the leadership of the business organization.

• Litigation and the threat of litigation-often seen by business law observers as one of the most detrimental threats in the commercial world-can be mitigated significantly by the form of business entity an organization assumes.

• No discussion about business entities would be complete-or even informed-without addressing corporate taxation. The choice of business entity form has tremendous implications regarding state and federal taxation upon business earnings, but many types of entities are coupled with onerous tax reporting requirements. There is an ongoing political debate in Washington and in state houses around the country about appropriate corporate taxation levels.

An organization's choice of business entity will have long-term ramifications upon the financial stability of the business, and the ability of those organizations to compete in an ultra-competitive global economy. Consider the competing entities that business might embrace, and the implications and rationale for choosing one over another.

The Notion of Limited Liability

Some small businesses do not incorporate into a formal business entity; for the purposes of taxation, these are considered sole proprietorships. In a sole proprietorship, a business pays taxes as if business income is personal income. Significantly, a sole proprietorship requires no separate tax filing and does not require visiting the Secretary of State's office in any state capital. The entrepreneur or entrepreneurs are relived of the burdensome IRS reporting requirements that those who form partnerships and corporations must adhere to.

On the other hand, those who operate as a sole proprietorship assume significant and serious liability, should the business entity be sued. Damages awarded from just a single lawsuit can cripple a once-thriving business. For that reason, many entrepreneurial organizations have chosen limited liability corporations (LLCs) or limited liability partnerships, which-while imposing greater administrative burdens on management-provide a powerful and durable shield for corporate officers from litigation concerning the acts of the partnership or corporation. There is little question that the major attraction for forming a corporation or partnership is to mitigate personal liability for those who lead the entrepreneurial entity. The surging growth of the LLC, for example, is testament to the belief of many businessperson that success in an ultracompetitive business environment is tied closely to addressing the omnipresent risk of litigation and lawsuits.

Corporations and Piercing the Corporate Veil

Another fundamental issue is how the courts treat decisions made in the corporate boardroom. Unless corporate officers engage in demonstrable malfeasance or gross negligence in the execution of their official duties, state and federal courts have consistently upheld the integrity of the decision-making process among corporate executives. This legal concept, known as the business judgment rule, requires the courts to provide maximum deference to corporate officers in decisions made as part of their official duties, and this deference will not be interfered with unless there is a strong public policy rationale for doing so.

The public policy rationale for protecting corporate decision-making is that if every decision reached by a corporate board or executive officer was open to successful challenge by shareholders or other concerned parties, then no corporation will be able to execute business decisions in a way that could mitigate risk and ensure long-term financial stability and growth. For example, when a company's share price nosedives, shareholders usually challenge the integrity of boardroom decision-making, even bringing litigation against the corporate board. While many of these decisions are settled out of court, it does display some of the serious and chronic litigation minefields that threaten the financial integrity of entrepreneurial interests. It is for this strong public policy reason that the courts will only challenge corporate decision-making-or pierce the corporate veil-in extraordinary circumstances when there is a very strong public policy rationale for penalizing the organization.
Agency - What It Is and What It Is Not

Many businesses rely upon agents who act, operate, and communicate on behalf of the business organization. In a time when independent contractors are relied upon more than ever, and where many businesses have decided to outsource a wide variety of jobs that were once exclusively done in-house, the importance of the agency relationship is perhaps greater today than it has ever been. Given that modern reality, it is important to consider the business context of agency and the risks and challenges involved in that vital and legally significant relationship. Business leaders should know exactly what agents can and cannot do in the context and scope of their relationship with the employer, and what duties and rights agents have towards business organizations.

Assessment

Overview

Write a 2-page analysis of a selected federal or state court case pertaining to the topic of business entities.

Context

Most organizations identify themselves as a specific type of business entity, such as a corporation or a partnership, for legal purposes. The types of legal entities that are available are dictated by public policy.

Read the Assessment 4 Context document for important information related to the following topics:

• Why the Form of Business Entity Is Important.

• The Notion of Limited Liability.

• Corporations and Piercing the Corporate Veil.

• Agency - What It Is and What It Is Not.

Assessment Instructions

Research federal and state court cases pertaining to the topic of business entities. Select one court case and write an analysis that addresses the following:

1. Articulate the importance, context, purpose, and relevance of law in a business environment:

• Identify the parties who are before the court.

• Provide a brief background to problem. Summarize the facts in no more than 2-3 paragraphs.

• Identify the specific disagreement between the parties.

• Explain the ruling of the court in no more than 1-2 paragraphs.

2. Evaluate key judicial concepts that influence the decisions related to business:

• Was there a dissenting opinion? If so, explain why some of the judges or justices disagreed with the majority in the decision.

• Do you agree with the court's decision? Why or why not?

Your analysis should be no more than two double-spaced pages in length. References and citations should adhere to APA formatting and style guidelines.