Page 476 - Encyclopedia of Business and Finance

eobf_L 7/5/06 3:14 PM Page 453

Law in Business

To qualify as a lawyer, a person must usually earn pose is to encourage recycling or advocate a political cause
both a college degree and a three-year law degree and then is not a partnership.
pass a rigorous examination (the bar exam). Lawyers are A partnership can be created very easily. If Sam and
normally certified in one or possibly two states. Thus Mike are mechanics and put on a sign “Sam and Mike’s
lawyers certified in Massachusetts would not be qualified Garage—Open for Business,” they have formed a partner-
to answer a question about law in Texas or even a question ship under the law. Any income or losses are split half and
about local law in a distant city within their own state. half in the absence of an agreement that says otherwise.
The rules and ethics of law practice are governed by the Normally a partnership is created by written document
supreme court of each state. with the help of a lawyer. Suppose Jill and Joan wanted to
Most lawyers do not have degrees in business. Their start a sporting-goods store. Suppose Jill could work only
half time but could contribute $50,000 to start the busi-
expertise is law, not business. All businesses need lawyers
ness, while Joan had no money but knew the business and
from time to time, but it is important for the businessper-
could work full time. With the help of a lawyer, they
son to know as much as possible about the law to better
might agree as follows: The business would operate month
weigh the legal advice and the needs of business.
to month. If there was income, Joan would draw the first
$1,500 as salary. Then Jill would draw $750 as salary.
FORMS OF BUSINESS Additional income would pay Jill 6 percent per year on
There are three basic legal forms of business: proprietor- the $50,000 she contributed. Finally, any additional
ship, partnership, and corporation. income, if available, would be split evenly between the
partners.
Proprietorship. Many businesses begin with an idea If Sam and Mike call their business “Quality
worked out at the kitchen table, in a garage workshop, or Mechanics” or Jill and Joan call their business “Sports
today, on the computer. There are no legal impediments Unlimited,” the names must be registered with the state
to or requirements for starting most businesses. One and may not be the same as a name previously registered.
needs only an idea, perhaps inventory, and customers. The purpose of registration is to let the public know
When one simply starts a business with nothing more, it Quality Mechanics really means Sam and Mike.
is called a sole proprietorship. For some business, licenses A partnership is easy to create, but its drawback is lia-
are necessary. Plumbers, beauticians, and, of course, bility. Suppose Joan buys a large inventory that will not
lawyers and physicians must be licensed by the state. Car- sell. Each partner is fully responsible for company debts.
penters, psychologists, tax advisers, and bookkeepers, It may cost them their life savings. Accounting or law
while they often have professional qualifications, do not partnerships may have hundreds of partners. The limited
need to be legally certified or licensed. liability partnership and the limited liability company,
now recognized in all states, provides the simplicity of
The sole proprietor is responsible for all the debts of
the business and in turn receives, after taxes, all of the partnership and protection from wrongful or negligent
acts of other partners. Any business may be called a com-
profits. The sole proprietor may hire employees. A sole
pany. A corporation, which also provides protection from
proprietorship tends to have no more than up to twelve to
personal liability, is different.
fifteen employees. If the number of employees increases
beyond this, the business normally evolves into another
Corporations. A corporation is the form of most large
form.
businesses and increasingly small ones. The corporate
name is registered with the state and must include the
Partnership. The Uniform Partnership Act, recognized by
words corporation, incorporated, limited, or professional cor-
more than forty states, states that “a partnership is an asso- poration. The latter is most commonly used for corpora-
ciation of two or more persons to carry on as coowners a tions rendering legal, medical, or other services. The
business for profit” (UPA 6[11]). A number of factors dif- owners or shareholders contribute money, property, or
ferentiate this form of business from a sole proprietorship. services for shares. If the shares are traded on an exchange
More than one person is involved, and they are co-owners the corporation is public. Shares in private—usually
of the business. A partnership, like a sole proprietorship, smaller—corporations are often held by a few individuals
may employ workers who are not owners. or a single person.
Business may be defined as “every trade, occupation, Shareholders elect a board of directors, which in turn
or profession.” A partnership may be made up of mem- appoints corporate officers who hire employees. After
bers of any occupation. The goal of the partnership is salaries and other expenses are paid, the profits may be
profit; therefore, an organization of persons whose pur- distributed to the shareholders in the form of dividends or

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 453