BUS LAW EXAM 4
Partnership tax status ch 17
-each year partnership files informational return with IRS and each partner receive notice of profit/loss allocation through form K-1 (notifies partner of amount of profit/loss each partner must report on Form 1040 tax return)
franchises ch 16
-not separate entity type, but simply a method of operating a business -may be operated as a sole proprietorship, partnership, limited partnership, LLC, LLP or corp ex. Mcdonalds or Subway -a franchisor is the supplier of goods or services and typically owns trademark, patent, trade secret or product unique to business community -by paying agreed upon fee, franchisee is allowed to operate under franchise name -franchisee pays franchisor percentage of receipts from business. in exchange, franchisor provides a proven business plan, an identity and marketing assistance for franchisee's goods or services -potential buyers of franchises received limited protection through regulations adopted by Federal Trade Commission (FTC); requires franchisors to provide written offering circulars setting forth specified basic information about business being franchised; also requires franchisors supply prospective franchisees with variety of business information including copy of agreement (Uniform Franchise Offering Circular); made available at least 10 days before franchise agreement is signed
assignment of partnership interest ch 17
-share of profits partners will receive -may temporarily or permanently assign interest to third party, often as payment of collateral for debt -creditor may obtain judgment against individual partner for payment of debt, and may satisfy by having court issue a CHARGING ORDER against the partner's partnership interest ( judicial lien); allows creditor to receive payment of debt from profits made by partnership and owed to debtor/partner
directors and employee stock ownership plans ch 18
-shareholders may remove directors at any time without cause -DIVIDENDS paid to shareholders at the board of director's discretion; declaration of dividend cannot render the corporation insolvent - stock dividends (proportion to shareholders existing ownership interests) -for many workers, stock is primary source of retirement income; Employee Stock Ownership Plans (ESOP) regulated by fed law -Employee Retirement Income Security Act (1974 ERISA) is fed law that set minimum standards for pension plans in private industry; protect employees -stock option not taxed until exercised unlike stock
sole proprietorship ch 17
-under name of owner or trade name; dba (doing business as) -no federal/state approval -local gov require purchase city business license allowing entity to do business within city limits (15-25 dollars) -can begin business simply by opening doors -not considered separate entity by IRS so no taxes - must report income or loss and personal income tax return "pass through" -must file Schedule C (profit or loss) along with 1040 tax form; losses are reductible from other taxable income reported on 1040 -personality liability is unlimited
other LP
1) a limited partnership may have a life span part from its owners. for example when a limited partner dies or otherwise leaves, the limited partnership is NOT dissolved 2) a limited partnership id dissolved in much the same way as an ordinary partnership
why do LP?
1) by using a corporate general partner, no individual will have unlimited liability for the debts of the business 2) losses of the business are deductible on the owner's individual federal income tax returns 3) investors may contribute capital to the business yet avoid unlimited liability and the obligation to manage the business. thus, the LP has the ability to attract large amounts of capital.
dissolution of partnerships
1) dissolution -occurs when any partner ceases to be partner (UPA "change in relation caused by cease" -partnership agreement expires or partner quits, declares bankruptcy or dies -only 3 circumstances in which partners have right to continue business are: 1) dissolution caused by wrongful withdrawal 2) expulsion according to provisions 3) agreement provides for continuation -dissolved by action of parties -dissovled by operation of law (declares bankruptcy, death, appropriate judicial decree e.g., insane, ill or disabled, improper conduct) 2) winding-up stages
rights and liabilities of partners in LP
1) each partner is obligated to make capital contributions 2) profits and losses rule: under RULPA, profits and losses are shared on teh basis or % of value of each partner's capital contribution to the LP exception: written agreement to the contrary 3) voting rights -the partnership agreement may provide that certain transactions be approved by GP, LP etc. RULPA states that LP have no inherent right to vote as a class and may receive such right only be agreement of partners 4) admission of new partners: none admitted unless each partner consented 5) partnership interest: each partner in an LP owns a parntership interest, which is his personally property that he may sell or assign to others 6) right to withdraw: partners in LP can withdraw and entitled to receive the fair value of their partnership interest so long as it does not impair the LP's ability to pay creditors
limited liability partnership (LLP)
a reaction to the large personal liability sometimes imposed on professionals (usually attorneys, accountants, architects and engineers) for the professional malpractice of their partners
limited liability company (LLC)
a relatively new business form intended to combine the non-tax advantages of corporations with the favorable tax treatment of partnerships. it is essentially a hybrid between a partnership and a corporation!
General Partnership Ch 16
advantages: easy to form profits/losses taxed to co-owners no 'requirements' to form a partnership most formed through oral or written agreement most states have adopted Uniform Partnership act (UPA) disadvantage: can lose business/personal assets if business falls "unlimited liability" joint venture ex. group of contractors forming joint venture for purpose of completing large construction project partnership formed to complete specific task specific use for partnership form of business
why chose sole proprietorship?
because it's easily formed, inexpensive to form, and as a practical matter, few people consider their business form decision and it may, therefore, occur by default! note that part of starting a sole proprietorship involves filling out and submitting a fictitious business name statement form and posting the relevant notice in your local paper
dissolution of LP
causes of dissolution: 1) expiration of the term specified in the certificate of LP 2) upon the happening of events specified in writing in the partnership agreement 3) by the consent of all partners 4) upon withdrawal of a general partner 5) court order NOT causing dissolution of LP: 1) death, bankruptcy, insanity or withdrawal of a limited partner does not result in dissolution unless certificate of limited partnership compels a dissolution in such circumstances 2) addition of a partner - general or limited
Limited Partnership (LP)
has at least one general partner and at least one limited partner
sole proprietorship
has only one owner and it is merely an extension of that owner. he/she makes all management decisions, all profits are his/hers, he/she assumes greater liability, he/she is personally liable for all obligations of the business
publicity traded corporation
larger owned by hundreds or even thousands of shareholders; make stock and other securities availabile for public purchase on national exchanges, such as new York and American stock Exchanges
Sole Proprietorship Ch 16
needs to purchase a business license not required to notify the International Revenue Service (IRS) "pass through entity" - profits/losses although one person owns, it may have my assets/employees most popular for "going into business for myself" disadvantages: bears entire risk of financial losses - unlimited liability legally responsible for contracts or torts most buy liability insurance to guard against claims and usually involved in relatively low risk ventures
choosing a form of business
one of the most important decisions made by a person beginning a business
close corporation
owned by limited number of shareholders
Corporation (Regular C Corps)
owned by shareholders who elect a Board of Directors to manage the business. the board then often selects officers to run the day-to-day affairs of the business. consequently, ownership and management of the corporation may be completely separate
A Smart Investment
publicly traded companies are looking to directors and officers insurance to protect them from investor lawsuits, which are on the rise -profits below 100 represent profit; above 100 represent loss -Chubb and Executive Risk , American International Group Inc and Reliance
S Corporation
shareholders can elect to have the corporation and its shareholders taxed under subchapter S of the internet revenue code. here, the corporation and its shareholders are taxed nearly entirely like a partnership requirements: a corporation electing S Corporation status can have no more than 100 shareholders
why do LLC?
the LLC has limited liability and advantage and the management advantage of the corporation. the LLC and its members receive the same federal tax treatment as S Corporation and its shareholders, yet the LLC has no limit on the number or type of owners, as does an S Corporation
distribution of assets LP
the RULPA rules for distribution of limited partnership assets 1) to firm creditors, including partners who are creditors, except for unpaid distributions to partners 2) to partners for unpaid distributions, including the return of capital to previously withdrawn partners 3) to partners to the extent of their capital contributions 4) to partners in proportion in which they share distributions. hence the partners share the proceeds that remain after all other claimers have ben paid
S Corporations Ch 16
under special federal tax laws, smaller corporations become S Corp advantage: tax as if partnership disadvantage: no more than 100 shareholders advantage owners still have benefit of
use of limited partnerships
used primarily tax shelter ventures (real estate, oil and gas drilling, mining, professional sports)
creating the corporation ch 18
-PROMOTER first conceptualizes entity -INCORPORATORS are initial investors -PROMOTORS CONTRACTS involve any subject necessary in start-up of corporation -right to issue charters is vested in states; few bus activity not regulated by fed is formation of corp -articles of incorporation (certificate of incorporation/corporation charter) are filed within state's Secretary of State -corporation must contain words corporation, incorporated, limited, or company -also adopt SEAL, design that contains name and date (1600 british law) -after charter approved from from state, ORGANIZATIONAL MEETING is held; board of directors must attend where contracts approved, bylaws adopted and corporate officers selected
partnership agreement & property ch 17
-articles of agreement aka partnership agreement; UPA provisions are "gap filler" or "default' provisions -under UPA, each partner has authority to make routine sale of partnership property -UPA "tenants in partnership" (all partners co-owners of partnership property); heirs of deceased have no right to demand posession
LLC and LLP ch 16
-both provide owners with "pass-through" single taxation advantage of sole proprietorship/partnership and limited liability found in corporation -relatively easy to form, making them popular for start-up business difference: LLC be formed by one or more persons who LLP must have two or more owners -no valid reason why business would desire to create general partnership rather than LLP but LLC more complicated -both LLP and LLC are relatively easy to form and "pass through" entities that provide limited liability for owners
limited partnerships ch 17
-cross between limited partnership and corporation (partnership formed by 2+ persons and having 1 or more general partners and limited partners aka passive investors) -first utilized in Italy in 12th century -general partnership face same unlimited personal liability as SP and general partnership but limited partners are investors who contribute cash, property, goods, or services but don't "participate" in business operation -general partner can accumulate capital for entity without admitting other true partners (does not have to share control) -limited partner advantage is limited liability; assets can't be taken to satisfy debt; must carefully guard becoming too involved; if exercises control, protection of limited liability lost -hollywood movies and broadway plays often LLP; also popular for real estate speculation and oil and gas exploration; must be wary of GP's ability to take advantage of weak position of legally passive limited partners -more difficult to establish limited partnerships than general partnerships; certificate of limited partnership must be filed with secretary of state, giving notice to 3rd parties of limited liability -in some states, limited partners remain anonymous, others identity is public information -if partnership fails to file required documents with state, limited partners lose limited liability if 3rd parties don't know they're dealing with LP -LP often public a publicly traded entity for a speculative venture, such as real estate development or mining operations
history of corporation law ch 18
-first appeared in Roman empire as crude attempts to avoid personal liability for investors -English crown first authorized form of corporations by granting CHARTERS to municipalities and religious, charitable and educational bodies; from 1500-1700 great britain chartered trading companies -american law originally based off of british model; after revolutionary war individual states developed own forms of corporate organization, each chartered by state legislatures; functions limited to toll roads, bridges and water systems -in 1811 New York became first state to adopt laws authorizing for-profit corporations without requiring special legislative approval; corporations formed if they complied with general business and corporate laws of state -1950 American Bar Association (ABA) drafted Model Business Corporation Act (MBCA); aba's attempt to standardize various state corporation laws they're uniformly developed, operated and terminated; took on new form of Revised Model Business Corporation Act (RMBCA); basis for American corporate law -Delaware has most sophisticated corporation laws as well as special court (Court of Chancery) -wallstreet investment firms prefer to finance firms incorporated in Delaware; widely known, stable and designed to enhance management's ability to operate firm efficiently; 1/2 of companies traded on New York Stock Exchange formed as delaware corporations
corporations ch 18
-found liable in civil and criminal actions -shareholders can only lose amount their individual capital contributions -share of stock is evidence of shareholder's ownership -corporate shares, called securities, are freely transferable; organized sale of securities takes place on national markets such as New York Stock Exchange and American Stock Exchange and NASDAQ -management teams conduct corporate business, which is governed by state and federal law and corporate articles of incorporation (document used to form business) -boards of directors elected by shareholders and decide questions of corporate policy -directors appoint CORPORATE OFFICERS to manage day-to-day activities -the corporation may terminate by vote of shareholders or bankruptcy but death of owner does not affect status
continuation contract ch 17
-if desire to continue the partnership, they may enter continuation contract setting forth detail of how organisation will carry on business -well drafted partnership agreement will contain BUY OUT PROVISION specifying amount to be paid to any partner desiring to leave firm (and heirs); most commonly, partners buy life insurance to fund buy-out provision in continuation agreement
protecting minority shareholders and corporate bylaws ch 18
-majority shareholders (sufficient power to exercise control) owe a fidicuary duty to remaining shareholders -corporate bylaws are detailed set of rules, adopted by board of directors after incorporation, govern the entity; much more detailed than articles of incorporation; define QUORUM (number) of voters necessary to hold meeting -articles of incorporation control if articles and bylaw conflict; board may change bylaws but shareholder vote required to amend articles
structure of corporation and roles of participants ch 18
-shareholders right of refusal is requires shareholder to offer shares to other shareholders before outside prospective buyers -preemptive rights give shareholders option of purchasing/subscribing to new issues by corp -in rare instances, article of incorporation may include ANTIDILUTION PROVISION that ensures particular shareholder's % of ownership will remain constant even if shareholder chooses not to purchase further shares -DIRECT LAWSUITS are lawsuits by shareholders to enforce individual shareholder rights -DERIVITAVE lawsuits are brought by shareholder against 3rd parties on behalf of corporation (shareholder make written demand for corp to take legal action, and was expressly refused or 90 days without response) -shareholders are CORPORATE VEIL OF LIMITED LIABILITY -PIERCE THE CORPORATE VEIL when individual shareholders liable for corporate debts; more involved shareholder is in corp, more likely courts will pierce corporate veil and shareholder; key issue of degree is "separateness" -always pierced when subsidiary is liable to federal gov under tax or environmental laws; always liable for environmental clean up costs
winding up ch 17
-when no right to continue business and proper notice of dissolution is made -during the stage, assets of dissolved partners must be sold (liquified) and proceed used to satisfy the outstanding debt of partnership; partner who left involuntarily is not allowed to participate in winding up -after liquidation, debts satisfied in following order 1) outside creditors, excluding partners 2) creditors who are partners 3) capital contributions 4) any balance is distributed to partners in same manner as profit -if creditors claims not satisfied, partners personally liable
notice of dissolution ch 17
-without receiving notice, partner continues to work and legally binds parntership -3rd parties also receive notice, rule applies of partnership is dissolved other than by operation of law (partners presumed to have "notice" when dissolved under operation of law); 3rd parties who had business dealings must have actual notice of dissolution, either written or verbal -3rd parties w/o business dealings but had knowledge, must receive formal notice or CONSTRUCTIVE NOTICE (publication of dissolution or trade journal in circulatoin
LLC attributes
1) LLC is owned by members (they are not called shareholders), who may manage the LLC themselves, or elect the managers who will operate the business a) these members are fiduciaries of the LLC b) these members also have limited liability for the obligations of the LLC (i.e., their liability is limited to their capital contribution; they are not subject to personal liability for the debts/liabilities of the LLC) c) an LLC does not have the S-Corp's limits on the numbers or types of owners/members 2) to create, you must have "LLC in the name" 3) like partnerships, there is no federal income taxation at the firm level. instead, LLC owners pay taxes on their share of the firm's profits (i.e., the IRS recognizes and treats LLCs as partnerships for federal income tax purposes) 4) however, the transfer of membership is prohibited without consent of all the members 5) death, retirement or bankruptcy of any member dissolves and forces the liquidation of the LLC, unless all the remaining members vote to continue the business (note: this factor is one of the major disadvantages of LLC)
Limited Partnerships benefits
1) allows an infusion of capital from investors, yet does not surrender managerial control to such investors; investors relieved of management responsibilities and they can limit their liability to the amount of their investment
why do LLP?
1) allows professionals, such as lawyers and accountants, the flexibility of management, while insulating them in in part from personal liability 2) relatively easy to establish
disadvantages of corporation
1) double taxation for C corp 2) expense of formation 3) complexity of the operation
LP features
1) general partners -contribute capital to the business, manage it, share in its profits, possess unlimited liability for its obligations 2) limited partners -contribute capital and share profits but possess no management powers and have liability limited to capital investment in business
winding up LP basic rules
1) generals who have not wrongfully dissolved an LP may perform the winding up 2) limiteds may wind up if there are no surviving generals 3) any partner may ask a court to perform a winding up 4) beyond the above, winding up principles/rules same as for ordinary partnerships
main advantage of corporation
1) limited liability for investors/owners 2) perpetual life 3) the ability to raise capital by selling stock 4) centralized management enabling investors to be passive owners
attributes of a limited partner
1) limited partners usually have no personal liability once they have paid their capital contribution to the limited partnership (i.e., their liability is normally limited to what capital they paid into/contributed to the LP) 2) limited partners essentially have the same rights as general partners, including the right of access to partnership books and the right to other information regarding partnership business; however, no right to manage the business and if they do, they may lose their personal liability protection 3) tax rules for limited partners: must pay federal income tax on their share of the profits of the business. they may deduct their share of losses only to the extent of their investment in the business
why do C corp?
1) no human has unlimited liability for the debts of the business. thus, risky business incorporate (e.g., manufacturer) 2) corporations can attract a large amount of capital because investors can avoid unlimited liability, escape the responsibility of managing the business and easily liquidate their investments by selling their shares 3) with respect to S corporations, losses of the business are deductible on individual federal income tax returns. however, because S Corporations are also limited to 100 shareholders, the ability to raise capital is severely limited as it may be difficult to find investors willing to buy their shares, or they may be restricted from selling their shares pursuant to a previous agreement.
attributes of C Corp
1) no shareholder has the right to manage the corporation 2) shareholders have limited liability for the obligations of the corporation (i.e. their liability is normally limited to the amount they pay for their shares/the amount the bought into the corporation) 3) directors and officers have no personal liability for the contract they ore the corporation's employees negotiate in the name of the corporation 4) while managers have personal liability for their own misconduct, they generally have no personal liability for corporate torts committed by other corporate managers or employees 5) taxes: a corporation is usually a tax paying entity for federal income tax purposes; shareholders do not report their share of the corporation's profits on their individual ta returns .they only report when the corporation distributes profits to the shareholders in the form of dividends, or the shareholders sell their stock at a profit. note how this creates a double tax liability as profits are taxed at the corporation level and again at the shareholder level when dividends are paid 6) also, shareholders do not deduct corporate losses on their individual tax returns. they may, however, deduct their investment losses after they have sold their shares of the corporation 7) a corporation has a life separate from its owners and managers. for example, when a shareholder or manager leaves/dies, the corporation is NOT dissolved 8) a shareholder may sell his shares of the corporation to other person without limitation unless there is a contract or agreement to the contrary. the purchaser then becomes a shareholder with all the rights of the selling shareholder
attributes of partnership
1) partners have the equal right to make all management decisions. they also share in all profits of the business 2) personal liability: partners assume personal liability for all the obligations of the business. all debts of the business are debts of the partnership; if assets of the business are insufficient to pay the claims of its creditors, the creditors may require one or more of the partners to pay the claims using their individual/personal assets 3) taxes: is NOT a tax paying entity for federal income tax purposes .instead, all income of the partnership is income to its partners and they must report on their individual tax returns. also, losses are treated the same way 5) has no life apart from its owners. thus when one partner dies or leaves, the partnership is dissolved 6) a partner's interest in a partnership is NOT freely transferable. that means that a purchaser of a partner's interest in the partnership is not a partner of the partnership unless the other partners agree to admit the purchaser as a partner
company officers ch 18
1) president 2) vice president 3) secretary 4) treasurer -appointed by board of directors; often said to have more power than shareholders and board of directors; shareholders have no right to vote on officers -officers have express authority granted them through articles of incorporation or bylaws, and implied authority giving them the ability to take reasonable administrative steps to carry out functions -officers owe fidicuary duty to corporation
classification of corporations
1) private and public 2) for-profit and not-for-profit 3) publicly held and privately held 4) professional -private not created, owned or operated by government entity; most for-profit corp -gov may form public corp to conduct gov activities (school district/park, irrigation, water district) -not-for-profit for charitable or educational purposes (college, university, church, hospital) -for-profit usually divided into PUBLICY HELD/CLOSE or PRIVATELY HELD corp (general motors, disney) -today, every state authorizes formation of professional corporations or PCs; shareholders called MEMBERS
why do partnership?
1) requires no formalities: while it is normally formed by agreement it may be formed by default (e.g., under UPA it may be automatically created when two or more persons own a business together without selecting another form) 2) each partner's right to manage the business and the deductibility of the partnership losses on one's individual tax returns are also attractive
attributes of general partner (s)
1) rights and liabilities are similar to partners in a regular ordinary partnership. most importantly, the liability of a general partner is usually unlimited. however, typically, and as a practical matter, the general partner is often a CORPORATION, thereby protecting the human managers that make up the general partner from unlimited personal liability 2) tax rules that apply to general partners are the same as with partners in a regular partnership 3) when a general partner dies or withdraws, the limited partnership is dissolved in the absence of an agreement to the contrary 4) a general partner's rights may not be transferred to another person unless the other partners agree to admit the new person as a partner
other attributes of sole proprietorship
1. not considered to be a legal entity. thus, it cannot sue or be sued (since the owner is the business, creditors must sue the owner and he/she must sue in his/her own name those who harm the business) 2. it automatically terminates on the death of the owner 3. taxes: is not a tax paying entity for federal income tax purposes (i.e., the owner pays all of the taxes himself as an individual; sole proprietorship is not taxed) the same is true with respect to deducting business losses
Arthur Anderson Breaks Off Talks to Settle Criminal Case
Arthur Andersen LLP broke off settlement talks with the justice department aimed at resolving its criminal indictment, a decision that places the firm's future in doubt and complicates the government's broader investigation of Enron Crop since fed prosecutors unsealed the obstruction-of-justice indictment March 14, Andersen has resisted entering a settlement w/ prosecutors unles it could also resolve the class action and a Securities of Exchange Commission civil investigation. reckoned that if couldn't settle all of litigation, there wouldn't be much of a firm worth saving. by breaking off talks, andersen walked away from a federal offer of "deferred prosecution" that would have lifted the felony indictment and in effect put the firm on probation. turning down offer almost act of self-destruction. gov scored major victory by securing a guilty plea on a felony obstruction-of-justice charge from andersen partner david duncan. duncan, andersens lead auditor on enron account, agreed to cooperate with prosecutors. all justice has to do is prove duncan acted within scope of hsi job when he ordered destruction of enron documents. dispute between Lerach, attorney for the lead shareholder in this case, and commercial banks and securities firms that are both creditors of Enron and defendants in the class action. lerach demand banks sign waivers relinquishing their right to have any futre trial judgments reduced to reflect anderson's propriontate liability for Enron's collapse. banks refused. Green was mediator and blasted JP Morgan for criticizing Mr Leach publicly and said comments significantly disrupted settlement talks
other rights/liabilties of GP and LP
GP right: same as in ordinary partnership (agency powers, no compensation beyond share of profit absent agreement to contrary) liability: generals have unlimited liability to the creditors of the LP, also owe certain fiduciar duties to LP and limited partners (not misuse partership property) LP rights: right to be kept informed about partnership affairs by the generals; can sue to enforce an LP right of action against a person who has harmed LP (derivative suit); when LP is sued and generals fail to defend, limiteds can appear on behalf of the LP and assert a defense liability: once LP contributed capital contribution, they normally no longer have any further liability for partnership losses of obligations exception: when limiteds engage in "too much" management activity, they lose limited liability a) under RULPA, limited who participates in control is liable only to those persons who transact business within the limited partnership reasonably believing, based on LP conduct, that LP was general partner.. elements: 1) LP must participate in "control" of limited partnership: day-to-day management decisions 2) participation leads a person to reasonably believe that the limited is a general partner AND 3) person must transact business with the limited partner while holding that belief
attributes of LLP
a) a partner's liability for his partner's professional malpractice (i.e., negligence) is limited to the partnership's assets 2) BUT a partner retains unlimited personal liability for his OWN malpractice (i.e., negligence) and for all NON-professional obligations of the partnership (e.g., rent LLP owes to its landlord for office space, fees owed on a repair bill for the copy machine the LLP uses in course of its business, etc) b) essentially the same as a regular partnership note: to create, there must be an agreement by the owners and they must comply with the limited liability partnership statute (e.g., many states have enacted LLP statues that you have to comply with - you generally need to file the appropriate form with the Secretary of State, pay the annual fee, maintain a certain amount of professional liability insurance, add LLP to name of firm, etc)
important factors that drive business entity/form of business selection:
a) ownership and control (there are positives and negatives ins haring ownership and control with others vs. being your own boss) b) continuity of life (what happens when one of the owners dies, leaves the business, retires, etc?) c) transferability of interest (e.g., can one of the owners transfer his/her ownership interest in the entity to a creditor?) d) tax implications (which entity minimizes the amount of tax owed to the government?) e) liability (who is responsible for the legal liabilities of the business?) f) cost g) ability to attract funding/financing from investors (e.g., venture capitalists)
Andersen ex-Party Pleads Guilty, In a Significant Blow to the Firm
agency law. under certain circumstances, a company/principal is liable (civially) for certain torts committed by its agent/employee. but here, we have a different situation. the company is being charged with a crime (criminal law - not civil law) for an act of one of its agents/employees. this article points out the rules of the game are a little different - it is in many ways easier for a company to be held criminally liable for a crime committed by one of its employees. arthur andersen LLP partner in charge of Enron Corp account, david duncan, pleaded guilty in federal court in Houston to obstruction of justice. raises chances that anderson will have to accept gov's terms if it wants to settle pending obstruction indictment against the firm. testimony also prove valuable in the broader investigation of Enron and exec who presided over its efforts to inflate profit and hide debt before its bankruptcy filing late last year. guilty plea is sufficient to bind the company. "a grand slam hit" for the Justice Deparment. anderson lawyers argue Duncan agreeing to plea only to avoid prison and that he never really intended to commit a crime. Mr Duncan's cooperation made it cler that the defendant's substantial assistance to prosecutors would ease his scheduled for Aug 27
Enron Board's Actions Raise Liability Questions
another application and example of Business Judgment Rule. Enron BOD blew it "big time" and if sued by their shareholders, they will be able to argue that their decisions/activities are protected by Business judgment rule and therefore not have personal liability to the shareholder. -board twice waved corporate ethics code to allow creation of controversial partnerships raises red flags about directors' potential liability. full boar twice suspended this code to allow partnerships to be headed by Enron executive who stood to financially benefit from them. -new york based international group dropped liability insurance for sunbeam directors and officers shortly after Boca Raton, Fla consumer-products concern restated financial results for 6 quarters ended. sunbeam sued AIG unit and AIG agreed to pay sunbream million but refused to reinstate the canceled policy. -first waiver occured in 1999 when Fastow run private partnership with LJM Cayman LP. boards "waiver of Enron's code of ethics to permit Mr. Fastow to act as the general partner". later, Fastow looking to set up LJM2 Co-Investment LP.board approaved waiver for Fastow on LJM2.
TRW Rebuffs Northrop, Offer Owns Plan
application of business Judgment Rule TRW inc rejected Northrop Grumman Corp's hostile takeover bid of $5.9 million and urged shareholders to support an ambitious restructuring plan that says it would unlock greater shareholder value. TRW argues plan better for shareholders than bid by northrop. if you were TRW's board of directors you might have an incentive to reject northrop's bid as you would likely find yourself out of a board of director's job -most likely bidders are United Technologies Corp, Honeywell International INc or possibly European company -TRW reject Grumman's $47 pershare offer calling it an "opportunistic attempt to acquire TRW's preire franchise". company's objections to the offer include - growwly undervalues TRW's business and opportunitites opinion or TRW's independent financial advisors that the offer is inadequate from a financial point of view -offer remains below current market price -proposal highly conditional resulting in significant uncertainy that deal will be consummate d-offer is subject to a collar which could result in press less than 47 per share
Lender liable for 6.6 Million
article relating to the uniform partnership act test for determining the existence of a partnership -6.6 punitive damages against Bank of America for heavy-handed supervision
Limited Partnership ch 16
has both general and limited partners only general partners have unlimited liability limited partners lose only their investment limited partnerships are "pass through" entities and any business income/loss is reported on personal tax returns of the partners Uniform Limited Partnnership Act (ULPA) is law that governs these organizations; adopted by all states more difficult to form than general partnerships
partnership (ordinary partnership)
has two or more owners, called partners
Corporation aren't criminals
if the government/our society were to adopt the position taken by the author of htis wall street journal op-ed piece, coudl/how would we effectively be able to deter/discourage such behavior and thereby be able to prevent another enron type situation/meltdown? usually under auspices of 1970 Racketeer Influenced and Corrupt Organizations Act. 2 justifications carted out. first, the complexity of modern corporations is said to justify criminal liability due to the difficulty of proving the responsibility of a particular individual. second, corporations ought not benefit from the criminal acts of their agents under common law, corporation not guilty of a crime bc it could not possess mens rea, a guilty mind. due to fact that most crimes are matters of state law, which has adhered relatively closely to common law. Hughes Aircraft, conspiring to defraud and make false statements to fed gov and Bank of New England for violations of the Currecy Transaction Reporting Act Justice Department indicated E.F. Hutton on mail and wire fraud charges without indicting a single individual. could not prove guilt of any individuals. Hutton pleaded guilty.
creation of limited partnerships
in order to form a limited partnership you must comply with the applicable state statute called the Revised Unifrom Limited Partnership act (RULPA). under the RULP requirements are farily minimal: 1) certificate of limited partnership a) must be signed and filed with secretaty of state and signed by all GP.. must contain: -name of LP, which contain words "LP" -name and address of each GP -latest date LP will dissolve -name and address of an agent for service of legal process on behalf of LP any "person" may be a general or limited partner, including natural person, partnership, limited partnership, trust, estate, association or corporation note: corporation normally sole GP of LP so no natural person has unlimited liability RULPA permits partners to make capital contributions of cash, property, services rendered, promissory note, or a binding promise to contribute cash, property or services
Corporations Ch 16
legal entities separate from owners sometimes called "artificial person" chartered/approved by state laws corporate charters date back to common law days when corporations could only be formed by charters issued by King of England advantages: owners (shareholders), except to extent of their investment, are shielded from liability of coporate debts limited liability for shareholders makes corporation ideal choice for starting a speculative business, or when owner wants to protect assets if fails disadvantages: corporation is taxed not "pass through" taxed at corporate level and any dividends paid to shareholders are taxed second time "double taxation" bc same dollar or profit taxed twice, paid for limited liability status process of forming is "incorporation" applicant files Certificate of Incorporation with the state's Secretary of State - includes # of shares of stock corp is authorized to and and name of designated agent who may be served with legal papers in event of litigation - once corporation is CHARTERED, becomes entity separate from owners owned by shareholders (stockholders). in exchange for monetary investment, issued stock certificates to evidence their ownership. freely bought and sold.
corporate personnel
the shareholders own the corporation. they elect a board of directors to govern the corporation. the board of directors hires corporate officers and other employees to run the daily business of the corporation
After Enron, Companies Confront Dearth of Willing Board Members
this article highlights how even WITH the traditional protection that the Business Judgment Rule has and it supposed to offer the BOD, they still can and often do face the risk of liability and litigation. some folks are no longer willing or are hesitant to accept that risk and are opting out of serving on such boards. the way to minimize liability risk for board members to purchase what is called "directors and officers" insurance. but it becomes more difficult to get and/or may be becoming prohibitively expensive -interVentures Inc had board bigger than some state legislatures
partnership creation
under Unified Partnership Act (UPA): 1) voluntarily association of 2 or more persons 2) idea must be to operate a business for profit; purpose 3) -key concept is that most of statutory provisions are default provisions; only apply if partnership fails to specify otherwise -have fiduciary duty to enterprise and each other; faithful and representative -creation vary from formal written agreement to unspoken understanding; express (words/writing) vs implied (sharing profit) vs ostensible partner/apparent partner (if 3rd party relies) - if 1+ partner represents ostensible partner as true partner, parties estopped (forbidden) from claiming otherwise -partnership capital (capital in form of money or investment, cannot be withdrawn without consent from all partners) -if partners make loans, they become creditors -fictious business names (not name of partners) must file certificate of fact (assumed name certificate) at the county courthouse or secretary of state's office -partnerships at will have no fixed duration (UPA says partner can dissolve at any time and entitled to return of contribution) vs. partnership at term
creation of an LP
unlike a sole proprietorship or partnership, a limited partnership may only be created by complying with a state statute permitting limited partnerships (e.g., the parties must sign a certificate of limited partnership and file it with the secretary of state and this certificate is usually open to public inspection) thus, it cannot be created by default
