Ch 19 & 18
Factors a court considers
- 3rd party tricked into dealing with a corporation rather than the individual. - Corporation is set up never to make a profit or remain insolvent or is under-capitalized. - Corporation is formed to evade an existing legal obligation. - Statutory formalities are not followed. - Commingling of personal and corporate interests or assets.
Criminal Acts
- A corporation can be liable for criminal acts, but cannot be imprisoned, only fined. - However, under the 'responsible officer' doctrine, corporate officers may go to prison.
First Organizational Meeting
- After the corporation is "chartered" (created) it can do business. - Shareholders should approve the bylaws, elect directors, hire officers and ratify (novation) preincorporation contracts and activities.
Implied Powers
- All acts reasonably necessary to accomplish corporate purposes. - A corporate officer can bind corporation in contract in matters connected with the ordinary business affairs of the enterprise.
"S" Corporations
- Avoids federal "double taxation" of regular corporations at the corporate level. - Only dividends are taxed to the shareholders as personal income. - IRS requirements: Corporation is domestic, fewer than 100 shareholders, only one class of stock, no shareholder can be a non-resident alien or another entity.
Preliminary Activities
- Before corporation is formed, promoters are the persons who take the preliminary steps of organizing the venture and attracting investors via subscription agreements. - Promoter's Liability: Promoter is personally liable for pre-incorporation contracts on behalf of the corporation, unless 3rd party agrees to hold future corporation liable.
Ultra Vires Acts
- Corporate acts beyond the express or implied powers of the corporation - Articles of incorporation now adopt very broad purposes to prevent lawsuits against the corporation.
The Alter-Ego Theory.
- Corporation is "alter ego" of majority shareholder and personal and corporate interests are commingled such that the corporation has no separate identity.
Formation
- Creature of state statute - Separate, artificial, legal entity
Classification of Corporations
- Domestic corporation does business within its state of incorporation. - Foreign corporation from in X state, doing business in Z state. - Alien Corporation: formed in another country. - Public and Private Corporations. - Nonprofit Corporations. - Closely Held Corporations - Shares held by few shareholders. - More informal management, similar to a partnership. - Management of Closely Held Corporations May be Direct by Stockholders. - Transfer of Shares Restricted by Shareholder Agreement.
Express Powers
- Found in the corporation's articles of incorporation, the laws of the state of incorporation, and in the state and federal corporations. - Corporate by-laws may also grant or limit a corporation's express powers.
Liabilities of Partners
- General partner assumes all management and personal liability. - Limited Partner has no management rights, and liability is limited to the amount of investment
Limited Liability of Shareholders
- Generally, shareholders are not personally liable for corporate acts. - But in certain situations, the corporate "veil" of limited liability can be pierced, holding the shareholders personally liable.
Duty of Loyalty
- Loyalty to corporation & shareholders instead of personal interest - Cannot compete with corporation. (buying building company wanted) - Cannot usurp corporate opportunities - No conflicts of interest.
Corporate Earnings and Taxation
- Profits can either be kept as retained earnings or passed on to the shareholders as dividends. - Corporate Tax: can be taxed twice, first to corporation, then to shareholders on dividends.
Corporate Personnel
- Responsibility for management of corp. rests with board of directors (elected by shareholders). - Board of directors makes policy decisions and hires officers to run corporation on a daily basis. - Shareholders can sue corporation and be sued by corporation and bring a derivative suit on behalf of the corporation in some instances. They can't lose more than invested
Incorporation Procedures
- Select State of Incorporation. - Secure the Corporate Name. - Prepare the Articles of Incorporation or Certificate of Formation: which deals with shares, the registered agent and office, incorporators, duration and purpose, and internal organization. - File the Articles/Certificate with State.
A Potential Problem for Closely Held Corporations.
- Separate status not preserved. - Commingling of funds. - No director meetings. - Shareholder use of corporate property.
Corporate Powers
Express Powers, Implied Powers, Ultra Vires Acts
Piercing the Corporate Veil
In certain situations, courts will "pierce the corporate veil" and hold shareholders personally liable in the interests of justice and fairness like not keeping corp separate from private
Corporate Formation
Preliminary Activities, Incorporation Procedures, First Organizational Meeting. Someone gets investors. If papers aren't filed and they get in trouble then they have limited liab.
Torts
Under respondeat superior, liability for torts by agents within course and scope of employment
Nature and Classification of Corporations
• A corporation is a creature of statute, an artificial "person." • Corporations can have one or more shareholders, comprised of natural persons or other entities. • A corporation is a legal "person" and enjoys the same rights and privileges as a natural person: • Access to court systems. • Constitutional guarantees of free speech, due process, and freedom from unreasonable search/seizures
CH 18 Limited Liability Company
• An LLC is a hybrid entity that combines the limited liability of a corporation and the tax advantages of a partnership.** • An LLC is a legal entity separate from its owners.** • LLC's are increasingly the entity of choice for businesses
Dissociation and Dissolution of an LLC
• An LLC member has the power, but not right, to dissociate from the LLC at any time. • Dissociation of an LLC is triggered by events similar to partnership.
LLC Operating or Company Agreement
• Analogous to corporation's bylaws. • Management and how future managers will be chosen. • How profits will be divided. • How membership interests may be transferred. • Dissociation procedures. • Whether formal meetings will be held. • How voting rights will be apportioned. • State Statute Fills in the Gaps: LLC statute governs where operating agreement is silent. • Partnership Law May Apply. If LLC statute is silent, courts may apply partnership principles.
Duties of Directors
• Attend Board Meetings • Adopt Policies • Authorize Major Actions • Supervise Officers & Management • Approve Dividends
Preemptive Rights
• Common law concept which is a preference to existing shareholders to purchase a pro-rated share of newly-issued stock within a certain period of time. • Provided for in the articles of incorporation. • Significant in a close corporation to prevent dilution and loss of control.
Limited Liability Partnership
• Designed for professional service firms, it allows limits on personal liability of the partners but allows "pass through" tax advantages. • Liability in an LLP. • LLP allows professionals to avoid personal liability for the malpractice of other partners.** (Same principals apply in professional corporations and associations.)
Duties and Liabilities of Directors and Officers
• Directors and officers are fiduciaries of the corporation. They owe ethical and legal duties to the corporation and shareholders: -Duty of Care, and -Duty of Loyalty • Failure to follow these duties may subject the officers and directors to personal liability
Duty of Care
• Directors/officers are expected to act in good faith and the best interests of the corporation. • Make informed and reasonable decisions • Rely on competent consultants and experts and • Exercise reasonable supervision. • Directors and officers may be liable for negligent acts that breach the standard of due care: • Crimes and torts committed by them individually and/or those committed by employees under their supervision. • Shareholder derivative suits where shareholder(s) sue directors on behalf of corporation.
Dissolution.
• Dissociated member has no right to force the LLC to dissolve. • Remaining members can choose to continue or dissolve. • Operating agreement 'trigger' events will cause dissolution.
• Effect of Dissociation.
• Dissociating member loses the right to participate in management and right to act as an agent. • Member also has the right to have her interest bought out by other members. • If the dissociation violates the operating agreement, it is wrongful and the member can be held liable for damages.
Management of an LLC
• Either member-managed, or manager-managed. • In member management, all members participate in management and decisions. • Managers and members owe fiduciary duties to the LLC and to each other.
Limited Partnership
• Entity that limits the liability of some of its owners (the limited partners). - Consists of at least one general partner and one limited partner to carry on a business for profit.
Board of Directors
• Every corporation is governed by a board of directors who has ultimate authority over the corporation. Hired by shareholders • Individual directors are not agents of corporation, only the board itself can bind the corporation. • A director can also be a shareholder, especially in closely-held corporations.
Conflicts of Interest
• Full disclosure of any potential conflicts of interest and abstain from voting on any transaction that may benefit the director/officer personally.*** Work for best interest of comp • However, if transaction was fair and reasonable, it will not be voidable if approved by majority of disinterested directors.
Shareholder Liability
• If the corporation fails, shareholders generally cannot lose more than their investment. • Shareholders are generally not liable for the contracts or torts of the corporation. However, in certain situations the corporate veil may be pierced: Mainly undercapitalization theory or alter-ego theory
Business Judgment Rule (BJR)
• Immunizes a director or officer from liability from consequences of a business decision that turned sour. (freeway building) • Court will not require directors or officers to manage "in hindsight." • As long as decision was reasonable, informed, made in good faith and in the best interests of the corporation, BJR will apply.
Nature of the LLC
• LLC's are creatures of state law. • Owners are called "members" (not shareholders) and their ownership is called "interests" (not shares • Limited Liability of Members. • Even when sued by employees of the firm. • Liability under the Alter-Ego Theory. • As with corporations, courts may 'pierce the veil' of the LLC and hold members personally liable. • Other Similarities to Corporations. • Separate legal entity from owners. • Can hold property separately. • 'Foreign' designation, doing business in another state
Advantages of the LLC
• Limited Liability: to amount of investment. • Flexibility in Taxation. • Members can choose to be taxed as partnership (pass through) or corporation (double-tax) • Management and Foreign Investors.** • LLC's allow foreign investors to own LLC interests and flexible management.**
Winding Up.
• Members must collect and liquidate the assets. • After all assets are sold, proceeds distributed to pay creditors, then capital contributions, then remaining $ distributed pro-rata.
Roles of Corporate Officers
• Officers serve at the pleasure of the /hired by Board of Directors (and are elected by them) but have fiduciary duties to company as well. • Run day-to-day operations of the corp. • Their employment relationships are generally governed by contract law and employment law. • Officers may be terminated for cause even if they have a contract
Shareholders
• Ownership of shares grants a shareholder an equitable ownership interest in a corporation. • Shareholders generally have no right to manage the daily affairs of the corporation, but do so indirectly by electing directors.** • Shareholders are generally protected from personally liability by the corporate veil of limited liability.**
Formation of the LLC
• Requires filing articles of organization or certificate of formation with state. • Contents of the Articles/Certificate: • Name of Business. • Principal Address. • Name and Address of Registered Agent. • Names of the Initial Members/Managers. • Preformation Contracts. • Prior to charter, owners of the firm are called promotors or organizers. • If promoter forms a "preformation contract" prior to formation, they may be personally liable.
Shareholder Powers
• Shareholder powers include approving all fundamental changes to the corporation: - Amending articles of incorporation or bylaws. - Approval of mergers or acquisition. - Sale of all corporate assets or dissolution. • Shareholders also elect and remove the board of directors.
Termination
• Termination of a corporation consists of two phases: - Dissolution (voluntary or involuntary legal "death" of the corporation) and - Liquidation (assets converted to cash and distributed to creditors and shareholders).***
Disadvantages of the LLC
• The main disadvantage is the lack of uniformity with state laws.* • Therefore businesses that operate in multiple states may not receive consistent treatment, and may make it harder to attract investors.**
Shareholder Rights
• Vote in Person or by Proxy • Vote by Number of Shares Owned*** • Inspection of Books & Records • Right to Transfer Shares (unless restricted by agreement) • Right to buy newly issued stock (Preemptive Rights) • Dividends and Rights on Dissolution
