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Doing Business and Dispute Resolution
Introduction
This week we look first at the different legal forms of business, including “doing business as” (sole proprietorship), operating a corporation, and a number of possibilities in between. We look at the various ways of funding these different types of businesses, including publicly trading stock. We close our study of business law with a look at various means of dispute resolution.
Common Forms of Business Organizations in the United States
There are a number of forms of doing business in our country, and each has advantages and disadvantages that must be considered when selecting the structure for one’s commercial enterprise. Several questions should be considered carefully before selecting a structure for moving forward into the business world.- What is the ease and cost of forming the business?
- How much money is required for the start-up, and how will it be funded?
- Who will be the founder of the organization, and who will control ownership interest?
- Who will manage the ongoing operations?
- How will ownership and control be transferred?
- How will the business entity be taxed?
- What is the life expectancy of the organization, and how can it be dissolved?
- What is the potential liability of management? Of owners?
It is necessary to understand and consider all of these aspects of the various forms of business in order to make a proper decision that will best serve the needs and goals of the owners. This is true both in the start-up phase of the business and also in the long-term, successful development of the enterprise.
There are roughly eight or nine forms of business, but four are dominant in today’s world.
| Common Forms of Doing Business | Description |
|---|---|
| Sole proprietorship (may be referred to as a DBA [doing business as]) | An individual owns and operates the business and is personally liable for all of the debts. This type of business entity cannot be transferred to another owner. |
| Partnership | This is when two or more individuals work together (two or more persons co-own a business for profit); defined as partners, they are “joint and severally liable” for the debts of the organization. |
| Corporation (Inc.) | This is a legal artificial entity created by statutes in the various states that provides limited liability for the owners. This type of business is the most successful at raising large amounts of money through the sale of stocks and bonds. |
Limited liability company (LLC) (two or more members) |
This is an entity that combines the best elements of a partnership and a corporation. This organization is taxed much like a partnership but with liability limited to the ownership. |
Classification, Funding, and Management of Various Types of Business Organizations
In considering the details of the various forms of business, our initial focus will be on corporations. How are corporations formed and governed? How do corporations raise money in capital markets? What competitive concerns arise out of mergers or combinations of companies?
Corporations are formed by state statutes with Delaware being the most popular base for incorporation. Corporations offer important advantages for larger firms doing business, such as limitation of liability, the ability to raise capital through securities markets, and perpetual existence. But don’t be lulled into a false sense of security; there are instances in which corporate owners can be held liable. The doctrine of “piercing the corporate veil” provides an exception to the claim of unlimited protection. Piercing the corporate veil has the effect of holding corporate shareholders responsible for the debts of the entire corporation.
In comparison to corporations, the other currently popular forms of business—sole proprietorship, partnership, and the limited liability company—rely almost entirely on the owners for business funding, specifically start-up funds. As these business organizations build ownership of valuable assets, they may gain access to bank loans and the ability to acquire financed acquisition of land, buildings, and equipment.
Sole proprietorships rely totally on the management of the owner, and to a major degree, partnerships, and limited liability companies are also dependent on ownership for both strategic direction and day-to-day operation.
Federal Laws Governing the Registration, Issuance, and Trading of Securities
The big advantage of corporations is their need and ability to raise money and a lot of it. To meet their major demands for funds, they market instruments called securities, which include stocks, bonds, debentures, convertibles, notes, and other creative tools of corporate financing.
Since the stock market crash of 1929, which was followed by the Great Depression of the 1930s, the issuance and selling of securities has been tightly controlled. The Securities Act of 1933 controlled the initial registration and sale of securities, and then the Securities Exchange Act of 1934 quickly followed to put restrictions on the resale and trading of such securities. A federal statute of 1934 also established the Securities and Exchange Commission (SEC), which was charged with regulating both the original registration and resale of such securities. Together, this legislation has formed the basis for the regulation and control of all corporate financing activity in the United States. Despite these federal regulations, the potential remains for fraud and resulting liability to be ever present. Corporate officials, their lawyers and accountants, and big-dollar investors frequently find themselves with financial responsibilities growing out of security registrations that contain a “material and possibly intentional misrepresentation or omission.” A flurry of additional security legislation in the 1990s amended the 1933 and 1934 acts and served to stabilize security transactions in the age of the Internet.
Global Dimensions of Rules Governing the Issuance and Trading of Securities
Moving forward in our discussion of security law, we cover the movement of companies overseas. There have been some major and incredible changes in the makeup of our large companies, especially in the growth of multinational corporations.
So the questions becomes: How do we deal with our businesses’ legal requirements in the global environment? Does international law govern those companies that operate in multiple countries? What legal protections are available for international competition? Are multinational companies finding ways to avoid any local laws? Are international companies putting themselves under the governance of too many laws?
Specifically from the standpoint of the United States, what factors affect our domestic companies’ ability to function in the international business environment? Two items stand out in today’s international business environment that affect our domestic companies: U.S. legislation of the mid-1980s that imposed very specific requirements on the offering and sale of stock in foreign countries and the 1977 Foreign Corrupt Practice Act, which imposed legal restrictions on U.S. businesspeople operating abroad.
Outlining the Various Types of Alternative Dispute Resolution
The cost and time required to proceed through the U.S. court system to resolve any type of dispute, as outlined below, has led to the rapid growth in the development of alternative dispute resolution (ADR). The average time to proceed through the typical state court system to resolve a civil business dispute is about 3 years. In comparison, the average time to resolve such a dispute through arbitration is about 2 months. Obviously, the cost associated with arbitration reflects the much shorter timeline versus the court process. The most common means of alternative dispute resolution include the following (though this list is still developing).
- Negotiation and settlement: The parties in dispute simply work together to resolve their dispute.
- Mediation: A third party is involved to facilitate negotiation and settlement by meeting with the parties separately and trying to outline a middle-of-the-road solution that is acceptable to all parties.
- Arbitration: An expert in the field of contention and dispute is appointed and given the authority to render a decision to resolve the conflict that is supported by the federal or state court system. Arbitration is frequently listed in business contracts for resolving disputes, including employment contracts.
- Minitrial: This is not really a trial, but a voluntary, nonbinding settlement technique where the parties present their evidence and a panel of officials decides the outcome.
- Private trial: Attorneys for each side present their arguments to a decision maker, frequently a retired judge, who makes a ruling. The trial is held in private and may be confidential.
- Commercial trial: Parties agree to be on television before a judge and to accept the ruling. The parties must abide by the ruling but are also compensated for appearing on television.
Alternative dispute resolution is growing rapidly, and many court systems, particularly federal courts, require the parties to submit to mediation or a minitrial before actually beginning the trial process in court.