Chapter 16
Purchase or lease of substantially all the assets of another corportion or acquisition of another corporations shares
- is not a merger. -The acquiree is legally a separate entity. -These transactions do not require shareholder approval. -But if the corporation is selling or leasing substantially all of its assets and is not doing so in the regular course of the seller (lessor) corporation's business, its shareholders must approve. Also, the shareholders have dissenters' rights.
Prei ncorporation Contracts
-A promoter arranges for the formation of the corporation. (S)he provides for the financing of the corporation and for compliance with any relevant securities law. -Prior to incorporation, the promoter enters into ordinary and necessary contracts required for initial operation. -Promoters generally are personally liable on their contracts. -The corporation is not liable because a promoter cannot be an agent of a nonexistent entity. -A corporation may not ratify a preincorporation contract because no principal existed at the time of contracting. However, adoption of the contract is a legal substitute for ratification. It may be implied from accepting the benefits of the contract. -Adoption is an assignment of rights and delegation of duties from the promoter to the corporation. But it is not retroactive and does not release the promoter from liability. If the promoter, the third party, and the corporation enter into a novation substituting the corporation for the promoter, only the corporation is liable, and the promoter is released. The promoter secures potential investors using preincorporation subscription agreements. Each subscriber agrees to purchase a certain amount of shares at a specified price, payable at an agreed future time. A preincorporation subscription agreement is irrevocable for 6 months, unless otherwise provided in the agreement, or all subscribers consent to revocation. Many state statutes require the agreement be written.
Partnership by estoppel
partnership by estoppel may be recognized when an actual partnership does not exist to prevent injustice. The duties and liabilities of a partner sometimes may be imposed on a nonpartner (a purported partner). -A purported partner has represented that (s)he is a partner or has consented to such a representation. -A third party who has reasonably relied on the representation and suffered harm as a result may assert the existence of a partnership.
Officers and directors
-Officers are elected or appointed by the board. -Generally, officers manage the operations of the corporation. The board may not remove without cause an officer elected or employed by the shareholders. -The usual officers are a president, vice president, secretary, and treasurer. Moreover, an officer may serve as a director. -Unlike directors, officers are agents of the corporation and manage the corporation. 1.Officers have express authority conferred by the bylaws or the board. 2.Officers have implied authority to do things that are reasonably necessary to accomplish their express duties. Officers, like directors, owe fiduciary duties to the corporation. -Officers are subject to the same duties of care and loyalty as directors.
Profits, Losses, and Distributions
-Unless the partnership agreement states otherwise, the RUPA provides that partners share profits and losses equally. -A major disadvantage of a general partnership is that each partner has unlimited personal liability for all losses and debts of the business. -A partner also has the right to distributions. A distribution is a transfer of partnership property from the partnership to a partner for profits, payment for services, or reimbursements. -Unless otherwise agreed, the right to compensation for services is generally a right to receive a share of the profits, not to be paid for services.
Corporate Powers
1-A corporation may do any lawful act to further its business. 2-A corporation may be held liable for the actions of its employees. -Under the law of agency (respondeat superior, or "let the master answer"), a corporate principal may be liable for an agent's torts (civil wrongs not resulting from contracts) committed within the scope of employment. 3-Under the doctrine of ultra vires, a corporation may not act beyond its implied or express powers. -But a corporate action generally may not be challenged on the ground that the corporation lacked power to act. A corporation essentially has the same powers as an individual. -Moreover, the ultra vires doctrine has been eliminated as a defense by either party in a suit involving a corporation. -However, the RMBCA provides a cause of action in three instances in which the power to act may be questioned: --A shareholder can seek an injunction, --Corporations can proceed against directors or officers, and --The state attorney general can proceed against the corporation.
Termination
1.A limited partnership is dissolved by an event (time) specified in the partnership agreement, a unanimous decision of the partners, or a court order. -An event of withdrawal of a general partner, e.g., death or retirement, also causes dissolution. But the agreement may provide that the business may be carried on by the remaining general partners (if any). -If no general partner remains, the limited partners may agree to continue the business and appoint a new general partner(s). 2. The limited partnership is not dissolved by the bankruptcy, incapacity, or death of a limited partner or by the transfer of a limited partner's interest. -The personal representative of a decedent's estate has the rights and liabilities of a limited partner solely for the purpose of settling the estate. 3.After dissolution, winding up is done by a general partner who has not caused the dissolution. If no general partner exists, it may be performed by the limited partners or by a court designee. 4. Remaining assets, if any, are distributed as follows: To creditors, including creditors who are partners To present partners and former partners for unpaid distributions To the partners as a return of their contributions To the partners according to the limited partnership agreement in the proportions in which they share distributions
Formation
1.An LLC may be formed for any lawful purpose under a state statute. -An LLC is formed by one or more persons when articles of organization are filed with the appropriate secretary of state (or the equivalent). 2. The articles of organization should state at a minimum (1) the LLC's name; (2) the address of the principal place of business or registered office; (3) the name and street address of the initial agent for service of process; and (4) whether managers, who may not be members, will manage the LLC. 3. The members' contract or operating agreement ordinarily is not legally required. It also may be oral but should be written. -Unless the agreement states otherwise, it may be amended only by a unanimous resolution of the members. -The operating agreement may address such matters as the following: A.Sharing of profits and losses B.Voting rights C.The circumstances causing dissolution D.The LLC must at all times maintain a registered agent for service of process and a registered office in the state.
Piercing the Corporate Veil
1.Courts disregard the corporate form (and thus shareholders are personally liable for corporate acts) when it is used merely to -Commit wrongdoing, -Shield its shareholders from liability for fraud, or -Otherwise circumvent the law. 2.A court might disregard a corporate entity if it finds the shareholders have not conducted the business on a corporate basis, for example, if -Assets of the corporation and the shareholder(s) are commingled, -The corporation was established for a sham purpose, -Corporate formalities are ignored, or -The corporation is inadequately capitalized to carry on its intended business.
Powers of Partners
1.Each partner consents to being both a principal and an agent of the partnership. -Thus, a general partnership and the other general partners are bound by a contract made by a partner acting within the scope of his or her actual or apparent authority. 2.A majority of partners may decide ordinary matters and therefore bind the other partners. But a nonroutine matter requires a unanimous vote. 3.Apparent authority to act as an agent of the partnership results from words or actions of the principal (the partnership) that reasonably induce a third party to rely on the agent's (partner's) authority. -The scope of apparent authority is limited to carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership. -If a partner acts without actual or apparent authority, the partnership and the other partners are not bound unless the other partners ratify. -The RUPA provides for filing a statement of partnership authority that gives notice of any limitations on the authority of a partner
Advantages
1.Limited liability. A shareholder's exposure to corporate liabilities is limited to the investment. 2.Separation of ownership from management. Shareholders have no inherent right to participate in management. 3.Free transferability of interests. Without contractual or legal restriction, shares may be freely transferred, e.g., by sale, gift, pledge, or inheritance. -A shareholder has no interest in specific property. 4.Perpetual life. A corporation has perpetual existence unless the articles provide for a shorter life, or it is dissolved by the state. 5.Ease of raising capital. A corporation raises capital (to start or expand the business) by selling stock or issuing bonds. Constitutional rights. A corporation is considered a person for most purposes under the U.S. 6.Constitution. Thus, it has the right to equal protection, due process, freedom from unreasonable searches and seizures, and freedom of speech. It also has the right to make nearly unlimited contributions of money for political purposes. 7.Transfers of property to a controlled corporation. A transfer of assets for shares of any corporation is tax-free if the transferors gain control immediately after the exchange. Two or more transferors of appreciated property receive the benefit if together they meet the control test. Property includes money.
Liabilities
1.Partners are jointly and severally liable individually and as a partnership for any partnership obligations. These include the torts (e.g., negligence) committed by another partner who acted (1) within the ordinary course and scope of the partnership business or (2) with the authorization of the other partners. -A plaintiff may sue one partner or the partnership. -only a partner who is a judgment debtor is personally liable. 2.A partner may obligate the partnership and partners by contract when acting with actual or apparent authority. 3.Admission into an existing partnership results in liability for partnership obligations incurred prior to admission to the extent of the investment. 4.A withdrawing partner remains liable for partnership debts incurred before withdrawal unless the creditors contractually agree otherwise.
Disadvantages
1.Reduced individual control of a business operated by managers, not owners 2.Payment of taxes on corporate income and payment by the shareholders of taxes on distributions received from the corporation . 3.Substantial costs of meeting the requirements of corporate formation and operation 4.State and federal regulation of securities transactions 5.Hostile takeover of a publicly traded corporation Sale or other transfer of unrestricted shares in a close corporation 6.An inability of a minority shareholder in a close corporation to liquidate his or her interest or to influence the conduct of the business
Dissolution
A corporation that has issued stock and commenced business may be voluntarily dissolved by -Unanimous written consent of all shareholders or A majority shareholder vote at a special meeting called for the purpose if the directors have adopted a resolution of dissolution. -A majority of the shares entitled to vote must be represented at the special meeting. Shareholders may seek a judicial dissolution when a deadlock of the board is harmful to the corporation, or the directors' actions are contrary to the best interests of the corporation.
A director's duty of care is tested objectively.
A director must discharge his or her duties -In good faith, -In a manner (s)he reasonably believes to be in the best interests of the corporation, and -With the care that a person in a similar position would reasonably believe appropriate under similar circumstances Reliance on others. In exercising reasonable care, a director may rely on information, reports, opinions, and statements prepared or presented by persons (an appropriate officer, employee, or specialist) whom the director reasonably believes to be competent in the matters presented.
Capitalization
A disadvantage of a sole proprietorship is that it cannot raise equity capital other than the personal resources of the proprietor.
foreign corporation An S corporation Professional corporations
A foreign corporation is one that does business in any state other than the one in which it is incorporated. A certificate of authority is required to do business within the borders of another state. An alien corporation is a corporation organized in another country. It must obtain a certificate to do business from each host state. An S corporation has elected, under federal law, to be taxed similarly to a partnership. Thus, it usually does not pay corporate income tax but, rather, taxes flow through to its shareholders. (A C corporation is taxed at the corporate income tax rate.) Study Unit 13 covers S corporations. Professional corporations (professional service associations) give accountants, lawyers, and other professionals the benefits of incorporation. Statutes typically restrict stock ownership to specific professionals licensed within that state.
Capitalization
A general partnership cannot raise equity by selling shares.
Joint Ventures
A joint venture is an easily formed business structure common in international commerce. It is an association of persons who as co-owners engage in a specific undertaking for profit. A joint venture is treated as a partnership in most cases.
To make a claim against an interest
A judgment creditor of a general or limited partner may attach the partner's transferable interest only by securing a charging order (a lien on the interest) from a court.
A limited partner is liable for
A limited partner is liable for 1. Partnership liabilities only to the extent of his or her capital contribution. (S)he has no right to participate in control of the business. Control is participation in day-to-day management decisions. 2.Knowingly permitting his or her name to be used in the partnership name and held out as a participant in management. But liability is incurred only to persons who reasonably believe the limited partner is a general partner.
LLC Interest
A member may transfer (assign) his or her distributional interest without dissolving the LLC. This interest is personal property.
Merger
A merger combines two or more corporations. One corporation is absorbed by the other and ceases to exist. The surviving corporation succeeds to the legal rights and duties, liabilities to creditors, and assets of the merged corporation. In contrast, a corporation can purchase solely the assets of a corporation and then it does not assume the corporation's liabilities. The shareholders of a merged corporation may receive shares or other securities issued by the surviving corporation. Shares of the merged (acquired) corporation are canceled.
Partnership Interest
A partner's transferable interest consists only of (1) a partner's share of partnership profits and losses and (2) the right to receive distributions as defined in 3.b. above. Transfer (assignment) of a partner's interest does not by itself result in (a) loss of rights (other than to the transferable interest) or (b) excuse the performance of the duties and obligations of a partner. -It also does not result in dissociation or dissolution of the partnership. -The assignee (or the estate of a deceased partner) is entitled only to the profits and distributions the assignor normally would receive. The assignee does not automatically become a partner and cannot act as an agent of the partnership. Partners and their creditors, assignees, and heirs have no interest in any specific partnership property. The creditors proceeds is only against the creditors interest and not a specific property -Property is partnership property when acquired with partnership assets.
Share holders
A shareholder is an owner but has no direct rights, for example, to manage the corporation. -The shareholders' primary participation is by meeting annually and electing directors. Directors are elected by a plurality of the votes (the most votes, not a majority) cast by the shares entitled to vote at a meeting at which a quorum is present. A quorum is the minimum number of shareholders necessary to conduct the meeting.
State Jurisdiction
A state may only exercise personal jurisdiction ("long-arm jurisdiction") over a foreign corporation that has minimum contacts with the state. Minimum contacts consist of activities that are not isolated and that Are purposefully directed toward the state. Place a product in interstate commerce with an expectation or intent that it will ultimately be used in the state. A minimum contacts analysis is based on the expectation of fairness.
Formation
A written certificate of limited partnership must be filed with the state in which it is organized. The certificate gives potential creditors notice of the limited liability of the limited partners. If a certificate is not filed, the organization is treated as a general partnership. The certificate contains the following: -Name of the limited partnership -Name and street address of its agent for service of process -Name and business address of each general partner -Latest date upon which the limited partnership is to dissolve To do business in any other state, registration as a foreign limited partnership is required.
Liability of Members and Managers
Member-managers have limited liability.
Limited partner has the rights to
Among other things, a limited partner has the right to 1.Propose and vote on partnership affairs that do not directly control partnership operations, e.g., admission or removal of a general partner. 2.Withdraw upon 6 months' notice or according to the partnership agreement. -A limited partner may not withdraw the capital contribution if the effect is to impair creditors' rights. 3.Do business with the partnership, e.g., become a creditor (secured or unsecured) by lending it money. 4.Have reasonable access to partnership records, including tax returns, and to inspect and copy partnership records. 5.Assign the limited partnership interest. But the assignee does not become a substituted limited partner. If the limited partner is insolvent, a creditor may obtain a charging order from a court that acts as an involuntary assignment. 6.Apply for dissolution of the partnership. 7.Obtain an accounting of partnership affairs.
Over View
An LLC is a noncorporate hybrid business structure that combines the limited liability of the corporation and the limited partnership with the tax advantages of the general partnership and the limited partnership. An LLC is a legal entity separate from its owner-investors (called members). Individuals and any corporate and noncorporate business entities may be members.
Management
An LLC is deemed to be member-managed unless the articles provide otherwise. In a member-managed LLC, all members have a right to participate, and most business matters are decided by the majority. In a manager-managed LLC, each manager, who need not be a member, has equal rights, and most business matters are decided by the manager or by a majority of the managers
Termination
An LLC is dissolved upon 1.Expiration of a specified time period or occurrence of a specified event. 2.Consent of a number or percentage of members provided in their agreement. 3.Death of a member if noted in the articles. 4.Judicial determination of the following: -Frustration of purpose -Impracticability of continuing (e.g., because of a member's conduct) -Inappropriate behavior -The equitability of liquidation
Limited Liability partnership
An LLP is a general partnership with limited liability. -It is a favorable form of organization for professionals who have not incorporated. In many states, this form is restricted to use by professionals. -An LLP must file a statement of qualification with the secretary of state and maintain professional liability insurance. -All partners are general partners who have limited liability for the acts of other parties. In most states, liability is limited for all partnership obligations, including those resulting from contracts. Thus, a full shield statute imposes liability only to the extent of the LLP's assets, with certain exceptions. For example, a partner remains liable for obligations s(he) personally guaranteed or incurred and for wrongful acts. A partner who is an immediate supervisor also is liable for the wrongs committed within the scope of employment by an employee.
Tender offer
An acquirer may bypass board approval of a business combination by extending a tender offer of cash or shares, usually at a higher-than-market price, directly to shareholders to purchase a certain number of the outstanding shares. -Managements of target corporations have implemented diverse strategies to counter hostile tender offers. The following are examples of antitakeover strategies: -Issuing stock. The target significantly increases its outstanding stock. -Self-tender. The target borrows to tender an offer to repurchase its shares. -Legal action. A target may challenge one or more aspects of a tender offer. A resulting delay increases costs for the raider and enables further defensive action.
Taxation
An advantage of a partnership (general or limited) is that it is a tax reporting, not a tax paying, entity. Profit or loss is passed through to the partners.
Advantages
An advantage of the general partnership is that it can exist without any formalities. No filings are required, and a partnership may be created without an explicit agreement (oral or written) or even an intent to form a partnership.
Taxation
Members may elect to be taxed as partners in a partnership (a pass-through entity). But single-member LLCs (called "disregarded entities" for tax purposes) are taxed as sole proprietorships. Taxation as a corporation (a taxable entity) may be advantageous if reinvestment in the LLC is desired, and corporate rates are lower than personal rates.
Liability and the Business Judgment Rule
Courts avoid substituting their business judgment for that of officers or directors. The rule protects an officer or a director from personal liability for honest errors of judgment if (s)he -Acted in good faith; -Was not motivated by fraud, conflict of interest, or illegality; and -Was not grossly negligent. To avoid personal liability, directors and officers must -Make informed decisions (educate themselves about the issues), -Be free from conflicts of interest, and -Have a rational basis to support their position
Types of Corporations De jure corporation De Facto Corporation Corporation by Estoppel
De jure corporation. A corporation formed correctly in full compliance with all mandatory provisions of the incorporation statute. De facto corporation. A corporation formed not in full compliance with all mandatory provisions of the incorporation statute. To be recognized as a de facto corporation, the organization must show a good faith attempt to substantially comply with the incorporation statute and that it has been exercising corporate powers (e.g., holding meetings or transacting business in the corporate name). Corporation by estoppel. When a corporation is neither a de jure nor a de facto corporation, the law recognizes a corporation by estoppel to prevent (1) third parties from denying the existence of a corporation after having dealt with the organization as a corporation or (2) the organization from denying it is a corporation when it held itself out as a corporation and third parties reasonably relied on that representation to their detriment.
Financing
Debt financing increases the corporation's risk because it must be repaid at fixed times even if the corporation is not profitable (versus dividends on equity securities, which are discretionary). Equity financing in the form of voting shares (common shares) transfers ownership interests. Thus, shareholders are not creditors. In bankruptcy, creditors have priority in remaining assets.
Share holder suits Direct Derivative
Direct suits by shareholders are lawsuits filed on their own behalf, either individually or as members of a class. A shareholder derivative suit is to recover for wrongs done to the corporation. The action is for the benefit of the corporation, and any recovery belongs to it, not to the shareholder. The corporation is the true plaintiff. An example is a suit to recover damages from management for an ultra vires act (actions outside the corporation's authority).
Authority of the Board
Directors formulate overall policy for the corporation -but they are neither trustees nor agents of the corporation -A director cannot act individually to bind the corporation.
Directors' Fiduciary Duty
Directors owe a fiduciary duty to the corporation to (1) act in its best interests, (2) be loyal, (3) use due diligence in discharging responsibilities, (4) be informed about information relevant to the corporation (5) disclose conflicts of interest. Controlling or majority shareholders owe similar duties.
Dissolution
Dissolution and winding up occur only after certain events. But dissolution may occur without winding up. -Dissolution may be by operation of law, for example, because of an event that makes the partnership's business illegal. -Moreover, a court may order dissolution, for example, because the economic purpose of the partnership cannot be achieved. -Actual authority of a partner to act on behalf of the partnership terminates upon dissolution except as necessary to wind up partnership affairs. -Apparent authority of a partner may continue to exist throughout the winding up process unless notice of the dissolution has been communicated to the other party to the transaction. -A partner's liability for the partnership's obligations continues after dissolution. -Most fiduciary duties of the partners also remain in effect. -A statement of dissolution may be filed by any partner who has not wrongfully dissociated to give nonpartners 90 days' notice after filing. A partnership may continue after dissolution if all parties (including any dissociating partner who has not wrongfully dissociated) waive the right to winding up and termination.
Preferred Luiqidating Stock (Share dividends) Stock (share) Split
Dividends are returns on capital paid in cash, shares, or other property. Preferred shareholders are entitled to a fixed amount that must be paid before common shareholders are paid. If the preferred shares are cumulative, any dividends not paid in preceding years (dividends in arrears) are carried forward and must be paid before the common shareholders receive anything. Liquidating dividends are a return of, not a return on, a shareholder's capital. Stock (share) dividends are payable in the shares of the corporation as a percentage of the shares outstanding. When a stock dividend is declared, the corporation transfers the legally required amount from earned surplus (retained earnings) to stated capital (common stock). Total equity is not changed. Stock (share) split is an issuance of shares to reduce the unit value of each share. A stock split does not increase a shareholder's proportionate ownership. It merely increases the number of shares outstanding.
Duties of Partners
Duties imposed upon partners include the fiduciary duties of loyalty and care. The duty of loyalty is limited to -Not competing with the partnership, -Not acting as a party with an adverse interest, and -Not exploiting a partnership opportunity or secretly using partnership assets. The duty of care is not to engage in -Knowing violations of the law, -Intentional wrongdoing, or -Gross negligence. A partner also has an obligation of good faith and fair dealing. However, no duty is violated solely because a partner acts in his or her own interest, e.g., doing business with the partnership.
Composition of the Board
Each state has a specific requirement with respect to the number of directors elected to sit on the board. Many states require a minimum of three. Under the RMBCA, a minimum of one director is required. However, the RMBCA also permits a corporation to dispense with a board by unanimous shareholder agreement. The initial board is usually appointed by the incorporators or named in the articles, and this board serves until the first meeting of the shareholders. In most states, shareholders have a right to remove, with or without cause, any director or the entire board by a majority vote.
Capitalization
Funding of an LLC is from members' contributions. Without an agreement to the contrary, it may consist of tangible and intangible property and services, including obligations to contribute cash or property or to perform services. A disadvantage is that LLC interests may be considered securities subject to federal and state regulation.
If there is a negative balance
If a partner's account has a negative (debit) balance, the partner is liable to contribute the amount of the balance. If a partner does not make a required contribution, the other partners must pay the difference in the same proportion in which they share losses. A partner making an excess contribution may recover the excess from the other partners. Creditors may enforce the obligation of partners to contribute to the partnership if a partner does not pay his or her share of the losses.
Consolidated
In a consolidation, a new corporation is formed, and the two or more consolidating corporations cease operating as separate entities. Otherwise, the requirements and effects of the combination are similar to those for a merger.
Incorporation
Incorporation may be in any state. Articles of incorporation (the corporate charter) must be filed with the secretary of state or another designated official. -Incorporators sign the articles. Only one incorporator is required. Articles of incorporation must include the following: -Corporation's name -Number of authorized shares -Name and street address of the corporation's registered agent -Name and street address of each incorporator The articles also may contain optional provisions. After filing, the incorporators elect the members of the initial board of directors if they have not been named in the articles. The incorporators then resign.
Formation
Of all business structures, the sole proprietorship is the easiest to create. -It is formed at the will of the proprietor. - A disadvantage is that it is not a separate legal entity because it is not distinct from its owners. -Most filing, registration, and attorneys' fees are avoided. -An advantage is that a sole proprietorship ordinarily can do business in any state without having to file, register, or otherwise qualify to do business in that state. Formation is subject to few legal requirements. However, a proprietor doing business under a fictitious name is usually required to make a d/b/a or "doing business as" filing under state law. This kind of statute also applies to partnerships.
Inspection Rights
Shareholders and their agents have a fundamental right to a reasonable inspection of books and records of the corporation, including the articles, bylaws, minutes of shareholder meetings, and the annual report. Inspection must be in good faith and for a proper purpose that relates to the shareholders' interest in the corporation. An improper purpose is one that does not relate to the shareholders' interest in the corporation, e.g., to benefit a personal business. Improper purposes include -Harassment of management, -Discovery of trade secrets, -Gaining a competitive advantage for another company, and -Development of a mailing list for sale or similar use.
Share holder obligations
Shareholders must approve fundamental corporate changes including -Mergers and share exchanges other than short-form mergers. -A sale of or a disposition of substantially all assets that leave the corporation with no significant continuing business activity. -Dissolutions. -Amendments to the articles that materially and adversely affect shareholders' rights. Shareholders may amend or repeal the articles of incorporation and the bylaws. A shareholder has no right to receive dividends unless they have been declared.
Disaster apprasial rights
Shareholders who disagree with fundamental corporate changes may be paid the fair value of their shares in cash. For example, dissenters' rights might arise from A disposition of assets that leaves the corporation without a significant continuing business activity. Certain mergers and share exchanges. Shareholder awareness of dissenters' rights is especially important in a short-form merger because notice of the merger is not required to be given to shareholders of the parent. Under federal securities law, a dissident shareholder may require the corporation to provide a list of shareholders. The dissident may then mail proxy materials to those shareholders if (s)he pays the cost of the mailing.
Most states permit corporations to indemnify directors and officers for expenses of litigation involving business judgments, subject to some exceptions.
The RMBCA permits the articles to limit the liability of directors to the corporation or shareholders. However, the limitation applies only to money damages. The articles may not limit liability for the wrongful acts of a director. Usually, an officer or director who is liable to the corporation for negligent performance is not entitled to indemnification as a matter of public policy. However, a court may order indemnification of an officer or director (even though found negligent) if the court determines (s)he is fairly and reasonably entitled to it in view of all the relevant circumstances.
Rupa
The RUPA provides for dissociation, dissolution, winding up, and termination.
Formation
The Revised Uniform Partnership Act (RUPA) defines a partnership as "an association of two or more persons to carry on as co-owners a business for profit." A business is any trade, occupation, or profession.
Voting Rights Preemptive Rights
The articles may establish the voting rights per share. These are important to owners of a closely held corporation. They give a shareholder an option to subscribe to a new issuance of shares in proportion to their current interest in the corporation. Thus, they limit dilution of equity.
Dividends and Other Distributions
The board has discretion to determine the time and amount of distributions. A distribution ordinarily is a transfer of money or other property. Generally, two prerequisites are used to determine whether the board is likely to distribute dividends. First, the corporation should not be insolvent after the distribution. Profitability is not a legal condition of a distribution. However, a distribution is illegal if the corporation is insolvent or payment would cause insolvency. A dividend also is illegal if not paid from the funds statutorily designated to be available for payment. Second, the board must authorize the distribution. Directors must declare a distribution by resolution. Shareholders have the status of unsecured creditors once a dividend is declared.
Board of Directors
The board of directors holds an organizational meeting to take all steps needed to complete the organizational structure. The new board Adopts bylaws if they were not adopted by the incorporators. Bylaws govern the internal structure and operation of the corporation. They may contain any provision for managing the business as long as it does not conflict with the law or the articles. Elects officers.
Termination
The duration of the sole proprietorship is at the proprietor's discretion. Lack of continuity of existence is a disadvantage of a sole proprietorship because it automatically terminates upon the proprietor's death.
Operation
The operation of a limited partnership is similar to that of a general partnership. One exception is that, without a contrary agreement, profits and losses are shared on the basis of the value of contributions actually made by each partner.
Termination
The partners may choose to limit the duration of the partnership to a definite term or the completion of a specific undertaking. The partnership also may be at will. A partnership at will is not limited to "a definite term or the completion of a specific undertaking."
Taxation
The proprietor and the proprietorship are not distinct entities, so the income or loss of the business passes through to, and is reported by, the proprietor.
Profits and Losses
The proprietor has the advantage of receiving all profits. The proprietor has the disadvantage of unlimited personal liability for all losses and debts and his or her personal assets are at risk.
Powers of the Proprietor
The proprietor makes all management decisions without answering to other executives, directors, or owners. Thus, control and accountability are completely centralized.
Partner Rights and Liabilities
Unless the partnership agreement states otherwise, a general partner in a limited partnership has the same rights and powers and the same duties as a partner in a general partnership. A general partner has no authority to admit additional general or limited partners without the unanimous written consent of all partners. But a general or limited partner may assign the interest to creditors or others without dissolving the partnership.
Unsecured partnership creditors
Unsecured partnership creditors have priority in partnership assets. But they have the same priority in the partners' assets as the partners' creditors.
When a partner dies
When a partner dies, his or her partnership interest is personal property that may be inherited according to a valid will. -The heirs are assignees, not partners. -The estate does not become a partner. -The death of a partner causes dissociation, not dissolution. -The remaining partners may choose to continue the partnership. -The estate is responsible for the partner's allocated share of any partnership liabilities.
Winding up
Winding up is the administrative process of settling partnership affairs, including the use of partnership assets and any required contributions by partners to pay creditors. 1.Creditors are paid in full before any distributions are made to partners. -However, partners who are creditors share equally with nonpartner creditors under the RUPA. 2.After payment of creditors, any surplus is paid in cash to the partners. -A partner has no right to a distribution in kind (of noncash assets) and need not accept a distribution in kind. 3.To settle partnership accounts with positive (credit) balances, each partner receives a distribution. -Profits and losses from liquidation of assets are increases (credits) and decreases (debits), respectively. -Prior credits to an account include contributions made and the partner's share of profits. Credits include the money and the value of other property (net of liabilities) contributed. -Prior debits include distributions received and the share of losses.
Profits, Losses, and Distributions
Without a contrary agreement, statutes most often provide for profits, losses, and distributions to be shared based on the values of members' contributions.
Closely held corporation Publicly held corporation A public corporation
close (closely held) corporation -Is owned by relatively few shareholders, -Does not sell its stock to the public, -Is commonly owned by its officers and directors, and -Has shareholder-managers. A publicly held corporation sells its shares to the public, generally on a national stock exchange. Its share prices are regularly published. Shares in the corporation are units of property interests in the net assets of the entity (including an interest in its profits). A public corporation is organized for public purposes related to the administration of government, e.g., an incorporated municipality, and it may be funded by local taxes. It is formed by specific legislation that defines its purpose and powers.
