The legal form of a business can have great bearing on the successful operation and resulting profitability of the business venture. Accordingly, it is important to have a general understanding of the fundamental features of each of the basic types of business organization.

STEP ONE:

ASSIGNED READING: Read Chapters 26, 28 and 29 of Law for Business (Barnes, 2012).

STEP TWO:

BACKGROUND:

Each type of business structure possesses certain advantages and disadvantages that must be considered in deciding which form of business organization to select. Some of these important attributes are 1. Limited liability 2. Taxation 3. Formalities 4. Financing 5. Management 6. Life of the business 7. Liquidity of investment.

HYPOTHETICAL:

Dave and Donna, a newly married couple, plan to quit their jobs, move to Wyoming, and open a software development business. They want the business to have few investors. They have lined up potential clients who will finance their initial efforts in return for software customization.

QUESTION:

Which type of business organization would you advise that Dave and Donna use for their new business venture? Explain the basis for your advice.

STEP THREE:

BACKGROUND:

Normally, shareholders in corporations are not personally liable for the debts of the corporation. This limited liability probably is the principal reason that people incorporate a business today. Through incorporation, the owners' loss is limited to the extent of their investment in the corporation. However, in some instances, a creditor may be able to persuade a court to disregard this separateness between shareholder and corporation. If so, it is said that the court has pierced the corporate veil. This is done by the court in order to give the creditor a judgment against one or more of the shareholders. The shareholders held personally liable on the debt usually are only those who are active in the management of the business.

HYPOTHETICAL:

Monogram, Inc., wished to buy a company that produced and sold smoke detectors. Accordingly, Monogram formed Monotronics, Inc., for the sole purpose of buying and operating the business. Monogram contributed $1.8 million cash to Monotronics and held 100 percent of its stock. After several profitable months, Monotronics's sales began to fall until its total assets dwindled to $10,000. Monotronics finally ceased doing business altogether, although it owed its largest creditor, Edwards Company, $352,000. Edwards Company attempted to hold Monogram liable for Monotronic's debts.

QUESTION:

Should the court pierce the corporate veil and hold Monogram liable on the Monotronics contractual obligations?