BUSA 2106 Unit 4

stock certificates

a certificate issued by a corporation evidencing the ownership of a specified number of shares in the corporation; only a few jurisdictions still require physical __, and shareholders there have the right to demand that the corporation issue these or replace those that were lost or destroyed; stock is intangible personal property, however, and the ownership right exists independently of this; in most states and under RMBCA 6.26, a board of directors may provide that shares of stock will be uncertificated (paperless); notice of shareholders' meetings, dividends, and operational and financial reports are distributed according to the ownership lists recorded in the corporation's books

stock warrants

a certificate that grants the owner the option to buy a given number of shares of stock, usually within a set time period; usually, when preemptive rights exist and a corporation is issuing additional shares, it gives its shareholders these; these are often publicly traded on securities exchanges

close corporation

a corporation whose shareholders are limited to a small group of persons, often family members; are also referred to as closely held, family, or privately held corporations; usually, the members of the small group constituting the shareholders of this are personally known to each other; because the number of shareholders is so small, there is no trading market for the shares; in practice, a this is often operated like a partnership; the statutes in many states allow close corporations to depart significantly from certain formalities required by traditional corporation law; under the RMBCA, close corporations have considerable flexibility in determining their operating rules; if all of a corporation's shareholders agree in writing, the corporation can operate without director, bylaws, annual or special shareholders' or directors' meetings, stock certificates, or formal records of shareholders' or directors' decisions

publicly held corporation (public company)

a corporation whose shares are publicly traded in securities markets, such as the New York Stock Exchange or the NASDAQ

outside director

a person on a corporation's board of directors who does not hold a management position at the corporation

inside director

a person on a corporation's board of directors who is also an officer of the corporation

members

a person who has an ownership interest in a limited liability company; are shielded from personal liability in most situations, their liability is normally limited to the amount of their investments; an exception arises when a member has significantly contributed to tortious conduct

business judgement rule

a rule under which courts will not hold corporate officers and directors liable for honest mistakes of judgment and bad business decisions that were made in good faith; courts give significant deference to the decisions of corporate directors and officers, and consider the reasonableness of a decision at the time it was made, without the benefit of hindsight, so corporate decision makers are not subjected to second-guessing by shareholders or others in the corporation; will apply as long as the director or officer took reasonable steps to become informed about the matter, had a rational basis for her or his decision, and did not have a conflict between her or his personal interest and the interest of the corporation; provides broad protections to corporate decision makers; most courts will apply the rule unless there is evidence of bad faith, fraud, or a clear breach of fiduciary duties

shareholder's derivative suit

a suit brought by a shareholder to enforce a corporate cause of action against a third person; if shareholders perceive that the corporate directors are not acting in the best interests of the corporation, they may sue the directors on behalf of the corporation; when the corporation is harmed by the actions of a third party, the directors can bring a lawsuit in the name of the corporation against that party; if the corporate directors fail to bring a lawsuit, shareholders can do so derivative; the right of shareholders to bring a derivative action is especially important when the wrong suffered by the corporation results from the actions of the corporate directors and officers; for obvious reasons, the directors and officers would probably be unwilling to take any action against themselves; before shareholders can bring ___, they must submit a written demand to the corporation, asking the board of directors to take appropriate action; the directors then have ninety days in which to act; only if they refuse to do so can the ___ go forward; in addition, a court will dismiss a ___ if a majority of the directors or an independent panel determines in good faith that the lawsuit is not in the best interests of the corporation; when shareholders bring a ___, they are not pursuing rights or benefits for themselves personally but are acting as guardians of the corporate entity, so if the suit is successful, any damages recovered normally go into the corporation's treasury, not to the shareholders personally

voting trust

an agreement (trust contract) under which legal title to shares of corporate stock is transferred to a trustee who is authorized by the shareholders to vote the shares on their behalf for a specified period of time; the trustee is then responsible for voting the shares on behalf of all the shareholders in the trust; the shareholder retains all rights of ownership (eg, the right to receive dividend payments) except the power to vote the shares

shareholder agreement

an agreement between shareholders that restricts the transferability of shares, often entered into for the purpose of maintaining proportionate control of a close corporation; can also provide for proportional control when one of the original shareholders dies; the decedent's shares of stock in the corporation can be divided in such a way that the proportionate holdings of the survivors, and thus their proportionate control, will be maintained

corporate officers and executives

are hired by the board of directors; at a minimum, most corporations have a president, one or more vice presidents, a secretary, and a treasurer; in most states, an individual can hold more than one office, such as president and secretary, and can be both an officer and a director of the corporation; in addition to carrying out the duties articulated in the bylaws, corporate and managerial officers act as agents of the corporation, so the ordinary rules of agency normally apply to their employment; corporate officers and other high-level managers are employees of the company, so their rights are defined by employment contracts, but the board of directors normally can remove a corporate officer at any time with or without cause; if the directors remove an officer in violation of the terms of an employment contract, however, the corporation may be liable for breach of contract

shareholder voting agreements

before a shareholders' meeting, a group of shareholders can agree in writing to vote their shares together in a specified manner; such agreements usually are held to be valid and enforceable

sometimes, actions that may benefit the corporation as a whole do not

coincide with the separate interests of the individuals making up the corporation; in such situations, it is important to know the rights and duties of all participants in the corporate enterprise

Co.

company

conflicts of interest

corporate directors often have many business affiliations, and a director may sit on the board of more than one corporation; directors are precluded from entering into or supporting businesses that operate in direct competition with corporations on whose boards they serve; their fiduciary duty requires them to make a full disclosure of any potential conflicts of interest that might arise in any corporate transaction; sometimes, a corporation enters into a contract or engages in a transaction in which an officer or director has a personal interest; the director or officer must make a full disclosure of the nature of the conflicting interest and all facts pertinent to the transaction; he/she must also abstain from voting on the proposed transaction; when these rules are followed, the transaction can proceed; otherwise, directors would be prevented from ever having financial dealings with the corporations they serve

transfer of shares

corporate stock represents an ownership right in intangible personal property; the law generally recognizes the owner's right to transfer stock to another person unless there are valid restrictions on its transferability, such as frequently occur with close corporation stock; when shares are transferred, a new entry is made in the corporate stock book to indicate the new owner; until the corporation is notified and the entry is complete, all rights—including voting rights, a notice of shareholders' meetings, and the right to dividend distributions—remain with the current record owner

Corp.

corporation

nonprofit corporations (not-for-profit corporations)

corporations formed for purposes other than making a profit (eg, private hospitals, educational institutions, charities, religious organizations); this is a convenient form of organization that allows various groups to own property and to form contracts without exposing the individual members to personal liability; in some circumstances, this and its members may also be immune from liability for a personal injury caused by its negligence

duty to make informed decisions

directors and officers are expected to be informed on corporate matters and to conduct a reasonable investigation of the situation before making a decision; they must, for instance, attend meetings and presentations, ask for information from those who have it, read reports, and review other written materials; directors and officers must investigate, study, and discuss matters and evaluate alternatives before making a decision, they cannot decide on the spur of the moment without adequate research; although directors and officers are expected to act in accordance with their own knowledge and training, they are also normally entitled to rely on information given to them by certain other persons; under the laws of most states and Section 8.30(b) of the RMBCA, such persons include competent officers or employees, professionals such as attorneys and accountants, and committees of the board of directors (the committee must be one on which the director does not serve, however); the reliance must be in good faith to insulate a director from liability if the information later proves to be inaccurate or unreliable

liability of directors and officers

directors and officers are exposed to liability on many fronts; they can be held liable for negligence in certain circumstances, as well as for the crimes and torts committed by themselves or by corporate employees under their supervision; additionally, if shareholders perceive that the corporate directors are not acting in the best interests of the corporation, they may sue the directors on behalf of the corporation; directors and officers can also be held personally liable under a number of statutes, such as statutes enacted to protect consumers or the environment

duty of care

directors and officers must exercise due care in performing their duties; the standard of due care has been variously described in judicial decisions and codified in many state corporation codes; generally, it requires a director or officer to act in good faith (honestly), exercise the care that an ordinarily prudent (careful) person would exercise in similar circumstances, and do what she or he believes is in the best interests of the corporation; if directors or officers fail to exercise due care and the corporation or its shareholders suffer harm as a result, the directors or officers can be held liable for negligence (an exception is made if the business judgment rule applies)

duty to exercise reasonable supervision

directors are also expected to exercise a reasonable amount of supervision when they delegate work to corporate officers and employees

dissenting directors

directors' votes at board of directors' meetings should be entered into the minutes; sometimes, an individual director disagrees with the majority's vote (which becomes an act of the board of directors); unless a dissent is entered in the minutes, the director is presumed to have assented; if the directors are later held liable for mismanagement as a result of a decision, ___ are rarely held individually liable to the corporation, so a director who is absent from a given meeting sometimes registers a dissent with the secretary of the board regarding actions taken at the meeting

illegal dividends

dividends are ___ if they are improperly paid from an unauthorized account or if their payment causes the corporation to become insolvent; generally, shareholders must return these only if they knew that the dividends were ___ when the payment was received (or if the dividends were paid when the corporation was insolvent); whenever dividends are this or improper, the board of directors can be held personally liable for the amount of the payment

duties and liabilities of directors and officers

duties of corporate directors and officers are similar because both groups are involved in decision making and are in positions of control; directors and officers are considered to be fiduciaries of the corporation because their relationship with the corporation and its shareholders is one of trust and confidence; as fiduciaries, directors and officers owe ethical and legal duties to the corporation and to the shareholders as a group; these fiduciary duties include the duty of care, duty to make informed decisions, duty to exercise reasonable supervision, and the duty of loyalty

stocks

equity securities, represent the purchase of ownership in the business firm; an ownership (equity) interest in a corporation, measured in units of shares

loyalty

faithfulness to one's obligations and duties

quorum in shareholder voting

for shareholders to act during a meeting, a quorum must be present; generally, a quorum exists when shareholders holding more than 50 percent of the outstanding shares are present; state laws often permit the articles of incorporation to set higher or lower quorum requirements, however; in some states, obtaining the unanimous written consent of shareholders is a permissible alternative to holding a shareholders' meeting; if a state statute requires specific voting procedures, the corporation's articles or bylaws must be consistent with the statute; a majority vote of the shares represented at the meeting usually is required to pass resolution, but sometimes, more than a simple majority vote is required, either by a state statute or by the corporate articles (eg, extraordinary corporate matters, such as a merger, consolidation, or dissolution of the corporation)

executive comittee

handles interim management decisions between board meetings; is limited to dealing with ordinary business matters and does not have the power to declare dividends, amend the bylaws, or authorize the issuance of stock

board of directors

in a corporation, the responsibility for the overall management of the firm is entrusted to this; the members are elected by the shareholders; makes the policy decisions and hires corporate officers and other employees to run the daily business operations

duties of majority shareholders

in some instances, a majority shareholder is regarded as having a fiduciary duty to the corporation and to the minority shareholders; this duty arises when a single shareholder (or a few shareholders acting in concert) owns a sufficient number of shares to exercise de facto control over the corporation; in these situations, the majority shareholder owes a fiduciary duty to the minority shareholders; when a majority shareholder breaches her or his fiduciary duty to a minority shareholder, the minority shareholder can sue for damages; a breach of fiduciary duties by those who control a close corporation normally constitutes what is known as oppressive conduct; a common example of a breach of fiduciary duty occurs when the majority shareholders "freeze out" the minority shareholders and exclude them from certain benefits of participating in the firm

duty of loyalty

in the corporate context, this requires directors and officers to subordinate their personal interests to the welfare of the corporation (eg, a director should not oppose a transaction that is in the corporation's best interest simply because pursuing it may cost the director his or her position); directors cannot use corporate funds or confidential corporate information for personal advantage and must refrain from self-dealing; cases dealing with this typically involve one or more of the following: competing with the corporation, usurping (taking personal advantage of) a corporate opportunity, pursuing an interest that conflicts with that of the corporation, using information that is not available to the public to make a profit trading securities (insider trading), authorizing a corporate transaction that is detrimental to minority shareholders, and selling control over the corporation

compensation of directors

in the past, corporate directors were rarely compensated, but today, directors are often paid at least nominal sums; in large corporations, they may receive more substantial compensation because of the time, work, effort, and especially risk involved; most states permit the corporate articles or bylaws to authorize compensation for directors; the RMBCA states that unless the articles or bylaws provide otherwise, the board itself may set the directors' compensation; directors also receive indirect benefits (eg, business contacts, prestige, stock options); in many corporations, directors are also chief corporate officers (such as president or chief executive officer) and receive compensation in their managerial positions; typically, a corporation's board of directors includes both inside and outside directors

Inc.

incorporated

audit commitee

is responsible for the selection, compensation, and oversight of the independent public accountants that audit the firm's financial records; the Sarbanes-Oxley Act requires all publicly held corporations to have one

proxy

it usually is not practical for owners of only a few shares of stock of publicly traded corporations to attend a shareholders' meeting, so the law allows stockholders to appoint another person as their agent to vote their shares at the meeting; authorization to represent a corporate shareholder to serve as his or her agent and vote his or her shares in a certain manner; from the Latin procurare, meaning "to manage or take care of"; ___ materials are sent to all shareholders before shareholders' meetings; management often solicits these, but any person can solicit them to concentrate voting power; have been used by groups of shareholders as a device for taking over a corporation; normally are revocable, unless they are specifically designated as irrevocable and coupled with an interest; is coupled with an interest when, for instance, the person receiving these from shareholders has agreed to buy their shares; under RMBCA 7.22(c), these are valid for eleven months, unless the agreement mandates a longer period

cumulative voting

most states permit, and many require, shareholders to elect directors by this; a voting method designed to allow minority shareholders to be represented on the board of directors; each shareholder is entitled to a total number of votes equal to the number of board members to be elected multiplied by the number of voting shares that the shareholder owns; the shareholder can cast all of these votes for one candidate or split them among several nominees for director; all candidates stand for election at the same time

shareholders meetings

must occur at least annually; in addition, special meetings can be called to deal with urgent matters; a corporation must notify its shareholders of the date, time, and place of an annual or special shareholders' meeting at least ten days, but not more than sixty days, before the meeting date; the date and time of the annual meeting can be specified in the bylaws; notice of a special meeting must include a statement of the purpose of the meeting, and business transacted at the meeting is limited to that purpose; most corporations specify in their bylaws the acceptable methods of notifying shareholders about meetings; it usually is not practical for owners of only a few shares of stock of publicly traded corporations to attend a shareholders' meeting, so the law allows stockholders to appoint another person as their agent to vote their shares at the meeting

duties and liabilities of shareholders

one of the hallmarks of the corporate form of organization is that shareholders are not personally liable for the debts of the corporation; if the corporation fails, the shareholders can lose their investments, but that generally is the limit of their liability; in certain instances, a court will pierce the corporate veil and hold the shareholders individually liable; but these situations are the exception, not the rule; a shareholder can also be personally liable in certain other rare instances such as those related to illegal dividends or to watered stock; finally, in certain instances, a majority shareholder who engages in oppressive conduct or attempts to exclude minority shareholders from receiving certain benefits can be held personally liable

professional corporations

professionals such as physicians, lawyers, dentists, and accountants can incorporate; is typically identified by the letters P.C., S.C., or P.A.; in general, the laws governing the formation and operation of these are similar to those governing ordinary business corporations; there are some differences in terms of liability, however, because the shareholder-owners are professionals who are held to a higher standard of conduct; for liability purposes, some courts treat these somewhat like partnerships and hold each professional liable for malpractice committed within the scope of the business by others in the firm

removal for cause

removal for failing to perform a required duty

rights of directors

right to participation (directors are entitled to participate in all board of directors' meetings and have a right to be notified of these meetings; because the dates of regular board meetings are usually specified in the bylaws, no notice of these meetings is required; if special meetings are called, however, notice is required unless waived by the director), inspection (means that each director can access the corporation's books and records, facilities, and premises; essential for directors to make informed decisions and to exercise the necessary supervision over corporate officers and employees; this rights is almost absolute and cannot be restricted by the articles, bylaws, or any act of the board of directors), and indemnification (when a director becomes involved in litigation by virtue of her or his position, the director may have a right to reimbursement for the legal costs, fees, and damages incurred; most states allow corporations to indemnify and purchase liability insurance for corporate directors)

shareholder voting

shareholders exercise ownership control through the power of their votes; corporate business matters are presented in the form of resolutions, which shareholders vote to approve or disapprove; each common shareholder normally is entitled to one vote per share; the articles of incorporation can exclude or limit voting rights, particularly for certain classes of shares (eg, owners of preferred shares are usually denied the right to vote); if a state statute requires specific voting procedures, the corporation's articles or bylaws must be consistent with the statute; for shareholders to act during a meeting, a quorum must be present; the corporation prepares a voting list before each shareholders' meeting; usually, only persons whose names appear on the corporation's stockholder records as owners are entitled to vote

inspection rights

shareholders in a corporation enjoy both common law and statutory ___; the RMBCA provides that every shareholder is entitled to examine specified corporate records, including voting lists; the shareholder may inspect in person, or an attorney, accountant, or other authorized assistant can do so as the shareholder's agent; a shareholder has a right to inspect and copy corporate books and records only for a proper purpose, and the request to inspect must be made in advance; a shareholder who is denied this right can seek a court order to compel it

shareholders powers

shareholders must approve fundamental changes affecting the corporation before the changes can be implemented, so shareholder approval normally is required to amend the articles of incorporation or bylaws, to conduct a merger or dissolve the corporation, and to sell all or substantially all of the corporation's assets; some of these powers are subject to prior board approval; shareholder approval may also be requested (though it is not required) for certain other actions, such as to approve an independent auditor; shareholders also have the power to vote to elect or remove members of the board of directors (the first board of directors is either named in the articles of incorporation or chosen by the incorporators to serve until the first shareholders' meeting, from that time on, selection and retention of directors are exclusively shareholder functions); directors usually serve their full terms; if the shareholders judge them unsatisfactory, they are simply not reelected; shareholders have the inherent power, however, to remove a director from office for cause (breach of duty or misconduct) by a majority vote; some state statutes (and some articles of incorporation) permit removal of directors without cause by the vote of a majority of the shareholders entitled to vote

watered stock

shares of stock issued by a corporation for which the corporation receives, as payment, less than the fair market value of the shares; when a corporation issues shares for less than their fair market value, the shares are referred to as this; usually, the shareholder who receives ___ must pay the difference to the corporation (the shareholder is personally liable); in some states, the shareholder who receives ___ may be liable to creditors of the corporation for unpaid corporate debts

alter-ego theory

sometimes, courts pierce the corporate veil under the theory that the corporation was not operated as a separate entity, rather, it was just another side) of the individual or group that actually controlled the corporation.; this theory is applied when a corporation is so dominated and controlled by an individual (or group) that the separate identities of the person (or group) and the corporation are no longer distinct; courts use this to avoid injustice or fraud that would result if wrongdoers were allowed to hide behind the protection of limited liability

election of directors

subject to statutory limitations, the number of directors is set forth in the corporation's articles or bylaws; historically, the minimum number of directors has been three, but today many states permit fewer; normally, the incorporators appoint the first board of directors at the time the corporation is created, or the directors are named in the articles of incorporation; the initial board serves until the first annual shareholders' meeting; subsequent directors are elected by a majority vote of the shareholders; a director usually serves for a term of one year—from annual meeting to annual meeting; most state statutes permit longer and staggered terms; a common practice is to elect one-third of the board members each year for a three-year term, so that there is greater management continuity; a director can be removed for cause either as specified in the articles or bylaws or by shareholder action; when a vacancy on the board occurs, such as if a director dies or resigns, either the shareholders or the board itself can fill the vacant position, depending on state law and the bylaws; note that even when an election is authorized, a court can invalidate the results if the directors have attempted to manipulate the election in order to reduce the shareholders' influence

rules for proxies and shareholder proposals

the Securities and Exchange Commission (SEC) regulates the purchase and sale of securities; the SEC has special provisions relating to proxies and shareholder proposals; SEC Rule 14a-8 provides that all shareholders who own stock worth at least $1,000 are eligible to submit proposals for inclusion in corporate proxy materials; the corporation is required to include information on whatever proposals will be considered at the shareholders' meeting along with proxy materials; only those proposals that relate to significant policy considerations, not ordinary business operations, must be included; under the SEC's e-proxy rules, all public companies must post their proxy materials on the Internet and notify shareholders how to find that information; although the law requires proxy materials to be posted online, public companies may also send the materials to shareholders by other means, including paper documents and DVDs sent by mail

directors

the board of ___ is the ultimate authority in every corporation; they have responsibility for all policy making decisions necessary to the management of all corporate affairs, but no one ___, can act to bind the corporation; they must act as a body in carrying out routine corporate business; the board selects and removes the corporate officers, determines the capital structure of the corporation, and declares dividends; each ___ has one vote, and customarily the majority rules; few qualifications are required; only a handful of states impose minimum age & residency requirements; a ___ may be a shareholder, but that is not necessary unless the articles of incorporation or bylaws require ownership interest

board of directors meetings

the board of directors conducts business by holding formal meetings with recorded minutes; the dates of regular meetings are usually established in the articles or bylaws or by board resolution, and ordinarily no further notice is required; special meetings can be called as well, with notice sent to all directors; most states allow directors to participate in board of directors' meetings from remote locations; directors can participate via telephone, Web conferencing, or Skype, provided that all the directors can simultaneously hear one another during the meeting; unless the articles of incorporation or bylaws specify a greater number, a majority of the board of directors normally constitutes a quorum; some state statutes specifically allow corporations to set a quorum at less than a majority but not less than one-third of the directors; once a quorum is present, the directors transact business and vote on issues affecting the corporation; each director present at the meeting has one vote; ordinary matters generally require a simple majority vote, but certain extraordinary issues may require a greater-than-majority vote

voting lists in shareholder voting

the corporation prepares a voting list before each shareholders' meeting; usually, only persons whose names appear on the corporation's stockholder records as owners are entitled to vote; contains the name and address of each shareholder as shown on the corporate records on a given cutoff date, or record date (under RMBCA 7.07, the bylaws or board of directors may fix a record date that is as much as seventy days before the meeting) and the number of voting shares held by each owner; is usually kept at the corporate headquarters and must be made available for shareholder inspection

certificate of limited partnership

the document that must be filed with a designated state official to form a limited partnership; must include certain information, including the name, mailing address, and capital contribution of each general and limited partner; must be filed with the designated state official—under the RULPA, the secretary of state; is usually open to public inspection

quorum

the number of members of a decision-making body that must be present before business may be transacted; unless the articles of incorporation or bylaws specify a greater number, a majority of the board of directors normally constitutes this; some state statutes specifically allow corporations to set this at less than a majority but not less than one-third of the directors

preemptive rights

the right of a shareholder in a corporation to have the first opportunity to purchase a new issue of that corporation's stock in proportion to the amount of stock already owned by the shareholder; generally, must be exercised within a specific time period, usually thirty days; a shareholder who is given these can purchase a percentage of the new shares being issued that is equal to the percentage of shares she or he already holds in the company; this allows each shareholder to maintain her or his proportionate control, voting power, and financial interest in the corporation; are most important in close corporations because each shareholder owns a relatively small number of shares but controls a substantial interest in the corporation; without these, it would be possible for a shareholder to lose his or her proportionate control over the firm; still, these do not exist unless provided for in the articles of incorporation

limited liability may allow businesses

to take more business risk, which is associated with the potential for higher profits

committees of the board of directors

when a board of directors has a large number of members and must deal with myriad complex business issues, meetings can become unwieldy, so the boards of large, publicly held corporations typically create these and delegate certain tasks to them; by focusing on specific subjects, these can increase the efficiency of the board; two common types of committees are the executive committee and the audit committee; the Sarbanes-Oxley Act requires all publicly held corporations to have an audit committee

director's failure to declare a dividend

when directors do this, shareholders can ask a court to compel the directors to do so; to succeed, the shareholders must show that the directors have acted so unreasonably in withholding the dividend that their conduct is an abuse of their discretion; often, a corporation accumulates large cash reserves for a legitimate corporate purpose, such as expansion or research; the mere fact that the firm has sufficient earnings or surplus available to pay a dividend normally is not enough to compel the directors to declare a dividend; the courts are reluctant to interfere with corporate operations and will not compel directors to declare dividends unless abuse of discretion is clearly shown

shareholder proposals

when shareholders want to change a company policy, they can put their ideas up for a shareholder vote; they do this by submitting a shareholder proposal to the board of directors and asking the board to include the proposal in the proxy materials that are sent to all shareholders before meetings

three types of defects that rise to product liability

design defects, manufacturing defects, and marketing defects (including improper labeling, inadequate safety warnings, and insufficient instructions)

formation of an llc

creatures of statute and thus must follow state statutory requirements; to form one, articles of organization must be filed with a central state agency, usually the secretary of state's office; typically, the articles must include the name of the business, its principal address, the name and address of a registered agent, the members' names, and how the LLC will be managed; the business's name must include the words Limited Liability Company or the initials LLC; although a majority of the states permit one-member LLCs, some states require at least two members; businesspersons sometimes enter into these on behalf of a business organization that is not yet formed (eg, preincorporation contracts)

securities

generally, stocks, bonds, or other items that represent an ownership interest in a corporation or a promise of repayment of debt by a corporation

de jure corporations

if a corporation has substantially complied with all conditions precedent to incorporation, the corporation is said to have ___ (rightful and lawful) existence; in most states and under RMBCA 2.03(b), the secretary of state's filing of the articles of incorporation is conclusive proof that all mandatory statutory provisions have been met; sometimes, the incorporators fail to comply with all statutory mandates, if the defect is minor, such as an incorrect address listed on the articles of incorporation, most courts will overlook the defect and find that this exists

formation of an LLP

must be formed and operated in compliance with state statutes, which may include provisions of the Uniform Partnership Act (UPA); the appropriate form must be filed with a central state agency, usually the secretary of state's office, and the business's name must include either the name or acronym for this; must file an annual report with the state to remain qualified as this in that state; in most states, it is relatively easy to convert a traditional partnership into this because the firm's basic organizational structure remains the same; additionally, all of the statutory and common law rules governing partnerships still apply, apart from those modified by the ___ statute, which are normally simply amendments to a state's already existing partnership law

P.A.

professional association

P.C.

professional corporation

dissolution

regardless of whether a member's dissociation was wrongful or rightful, normally the dissociated member has no right to force the LLC to do this; the remaining members can opt either to continue or to ___ the business; members can also stipulate in their operating agreement that certain events will cause this, or they can agree that they have the power to do this by vote; as with partnerships, a court can order an LLC to be __ in certain circumstances (eg, when the members have engaged in illegal or oppressive conduct or when it is no longer feasible to carry on the business)

incorporation procedures

select a state of incorporation, secure the corporate name by confirming its availability, prepare the articles of incorporation, file the articles of incorporation with the secretary of state and pay the specified fees

proportionate liability

separate determinations of the negligence of the partners

S.C.

service corporation

piercing the corporate veil

the action of a court to disregard the corporate entity and hold the shareholders personally liable for corporate debts and obligations; generally, courts do this when the corporate privilege is abused for personal benefit or when the corporate business is treated so carelessly that it is indistinguishable from that of a controlling shareholder; when the facts show that great injustice would result from a shareholder's use of a corporation to avoid individual responsibility, a court will look behind the corporate structure to the individual shareholders

secure the corporate name

the choice of a corporate name is subject to state approval to ensure against duplication or deception; most state statutes require a search to confirm that the chosen corporate name is available; a new corporation's name cannot be the same as, or deceptively similar to, the name of an existing corporation doing business within the state; all states require the corporation's name to include Corp., Inc., Co., or Ltd.

maturity date

the date when the principal, or face amount, of the bond is returned to the investor

corporate earnings

when a corporation earns profits, it can either pass them on to shareholders in the form of dividends or retain them as profits; these retained earnings, if invested properly, will yield higher corporate profits in the future; in theory, higher profits will cause the price of the company's stock to rise; individual shareholders can then reap the benefits in the capital gains they receive when they sell their stock

winding up an LLC

when an LLC is dissolved, any members who did not wrongfully dissociate may participate in this process; to do this, members must collect, liquidate, and distribute the LLC's assets and may preserve the assets for a reasonable time to optimize their return, and they continue to have the authority to perform reasonable acts in conjunction with this; the LLC will be bound by the reasonable acts of its members during the winding up process; once all of the LLC's assets have been sold, the proceeds are distributed; debts to creditors are paid first (including debts owed to members who are creditors of the LLC); the members' capital contributions are returned next, and any remaining amounts are then distributed to members in equal shares or according to their operating agreement

public corporation

a corporation owned by a federal, state, or municipal government—not to be confused with a publicly held corporation; (eg, cities and towns that incorporate are common examples; many federal government organizations, such as the U.S. Postal Service, the Tennessee Valley Authority, and AMTRAK)

jurisidictional requirements of LLCs

LLCs and corporations share several characteristics, but a significant difference between these organizational forms involves federal jurisdictional requirements; under the federal jurisdiction statute, a corporation is deemed to be a citizen of the state where it is incorporated and maintains its principal place of business, but this statute does not mention the state citizenship of partnerships, LLCs, and other unincorporated associations; the courts, however, have tended to regard these entities as citizens of every state of which their members are citizens; the state citizenship of an LLC may come into play when a party sues the LLC based on diversity of citizenship; when parties to a lawsuit are from different states and the amount in controversy exceeds $75,000, a federal court can exercise diversity jurisdiction, but total diversity of citizenship must exist

certificate of authority

a corporation does not have an automatic right to do business in a state other than its state of incorporation; in some instances, it must obtain this in any state in which it plans to do business; once it has been issued, the corporation generally can exercise in that state all of the powers conferred on it by its home state; if a foreign corporation does business in a state without obtaining this, the state can impose substantial fines and sanctions on that corporation; note that most state statutes specify certain activities, such as soliciting orders via the Internet, that are not considered "doing business" within the state (eg, a foreign corporation normally does not need this to sell goods or services via the Internet or by mail)

alien corporation

a corporation formed in another country but doing business in the United States

express powers

___ of a corporation are found in its articles of incorporation, in the law of the state of incorporation, and in the state and federal constitutions; corporate bylaws and the resolutions of the corporation's board of directors also establish these; the following order of priority is used if a conflict arises among the various documents involving a corporation: the U.S. Constitution, state constitutions, state statutes, the articles of incorporation, bylaws, resolutions of the board of directors; it is important that the bylaws set forth the specific operating rules of the corporation; state corporation statutes frequently provide default rules that apply if the company's bylaws are silent on an issue; on occasion, the U.S. government steps in to challenge what a corporation may consider one of its express powers

member-managed LLC

all of the members participate in management, and decisions are made by majority vote; however an LLC is managed, its managers need to be aware of the firm's potential liability under employment discrimination laws; those laws may sometimes extend to individuals who are not members of a protected class

foreign LLC

an LLC formed in another state

private corporations

are created either wholly or in part for private benefit (for profit); most corporations are this; although they may serve a public purpose (eg, as a gas utility), they are owned by private persons rather than by a government

registered office

is usually the main corporate office

the classification of a corporation depends on

its location, purpose, and ownership characteristics, as described in the following subsections

Ltd.

limited

corporate financing

part of the process of corporate formation; corporations normally are financed by the issuance and sale of corporate securities, which include stocks and bonds

incorporators

the person or persons who execute (sign) the articles of incorporation

s corporation

a close business corporation that has most of the attributes of a corporation, including limited liability, but qualifies under the Internal Revenue Code to be taxed as a partnership; a corporation will automatically be taxed under Subchapter C unless it elects this status); if a corporation has this status, it can avoid the imposition of income taxes at the corporate level while retaining many of the advantages of a corporation, particularly limited liability; among the numerous requirements for this status, the following are the most important: the corporation must be a domestic corporation, the corporation must not be a member of an affiliated group of corporations, the shareholders must be individuals, estates, or certain trusts and tax-exempt organizations, partnerships and nonqualifying trusts cannot be shareholders, corporations can be shareholders under certain circumstances, the corporation must have no more than one hundred shareholders, the corporation must have only one class of stock, although it is not necessary that all shareholders have the same voting rights, and no shareholder of the corporation may be a nonresident alien; this is treated differently than a regular corporation for tax purposes, it is taxed like a partnership, so the corporate income passes through to the shareholders, who pay personal income tax on it; this treatment enables this to avoid the double taxation imposed on regular corporations; in addition, the shareholders' tax brackets may be lower than the tax bracket that the corporation would have been in if the tax had been imposed at the corporate level; in spite of these benefits, this has lost much of its appeal; the newer limited liability business forms (such as LLCs, LPs, and LLPs) offer similar tax advantages and greater flexibility

Model Business Corporation Act (MBCA)

a codification of modern corporation law that has been influential in shaping state corporation statutes; today, the majority of state statutes are guided by the most recent version of this, which is often referred to as the Revised Model Business Corporation Act (RMBCA); keep in mind, however, that there is considerable variation among the laws of states that have used this or the RMBCA as a basis for their statutes, and several states do not follow either act; consequently, individual state corporation laws should be relied on to determine corporate law rather than either of these

crowdfunding

a cooperative activity in which people network and pool funds and other resources via the Internet to assist a cause (such as disaster relief) or invest in a business venture (such as a startup); sometimes, this is used to raise funds for charitable purposes, such as disaster relief, but increasingly it is being used to finance budding entrepreneurs; in 2016, new Securities and Exchange Commission (SEC) rules went into effect to allow companies to offer and sell securities through this; the rules removed a decades-old ban on public solicitation for private investments, which means that companies can advertise investment opportunities to the general public; according to the SEC, the new rules are intended to help smaller companies raise capital while providing investors with additional protections; companies are required to make specific disclosures and are limited to raising $1 million a year through this

corporation

a creature of statute; an artificial being, existing only in law and being neither tangible nor visible; its existence generally depends on state law, although some, especially public organizations, are created under federal law; each state has its own body of ___ law, and these laws are not entirely uniform; a legal entity created and recognized by state law; a business entity that can have one or more shareholders and operates under a name distinct from the names of its owners; substitutes itself for its shareholders when conducting corporate business and incurring liability; its authority to act and the liability for its actions, however, are separate and apart from the shareholders who own it; is recognized under U.S. law as an artificial legal person, as opposed to a natural person, so it enjoys many of the same rights and privileges under state and federal law that U.S. citizens enjoy (eg, corporations possess the same right of access to the courts as citizens and can sue or be sued; constitutional guarantees of due process, free speech, and freedom from unreasonable searches and seizures apply)

dividends

a distribution of corporate profits to the corporation's shareholders in proportion to the number of shares held; can be paid in cash, property, stock of the corporation that is paying, or stock of other corporations; state laws vary, but each state determines the general circumstances and legal requirements under which these are paid; state laws also control the sources of revenue to be used (eg, all states allow these to be paid from the undistributed net profits earned by the corporation); a number of states allow dividends to be paid out of any surplus

disassociation and dissolution of a limited partnership

a general partner has the power to voluntarily dissociate from a limited partnership unless the partnership agreement specifies otherwise; under the RULPA, a limited partner can withdraw from the partnership by giving six months' notice, unless the partnership agreement specifies a term; in reality, though, most limited partnership agreements do specify a term, which eliminates the limited partner's right to withdraw; also, some states have passed laws prohibiting the withdrawal of limited partners; in a limited partnership, a general partner's voluntary dissociation from the firm normally will lead to dissolution unless all partners agree to continue the business; similarly, the bankruptcy, retirement, death, or mental incompetence of a general partner will cause the dissociation of that partner and the dissolution of the limited partnership unless the other members agree to continue the firm; bankruptcy of a limited partner does not dissolve the partnership unless it causes the bankruptcy of the firm; death or an assignment of the interest (right to receive distributions) of a limited partner does not dissolve a limited partnership; a limited partnership can be dissolved by court decree; on dissolution, creditors' claims, including those of partners who are creditors, take first priority; after that, partners and former partners receive unpaid distributions of partnership assets; unless otherwise agreed, they are also entitled to a return of their contributions in the proportions in which they share in distributions; disputes commonly arise about how the partnership's assets should be valued and distributed and whether the business should be sold.

limited liability company (LLC)

a hybrid form of business enterprise that offers the limited liability of a corporation and the tax advantages of a partnership; has become the preferred structure for many small businesses; governed by state statutes, which vary from state to state; share many characteristics with corporations, they must be formed and operated in compliance with state law, and like the shareholders of a corporation, the members enjoy limited liability; another similarity is that these are legal entities apart from their owners; as a legal person, this can sue or be sued, enter into contracts, and hold title to property; the terminology used to describe these formed in other states or nations is similar to that used in corporate law

limited liability partnership (LLP)

a hybrid form of business organization that is used mainly by professionals who normally do business in a partnership; is a pass-through entity for tax purposes, but a partner's personal liability for the malpractice of other partners is limited; almost all of the states have enacted statutes for this; the major advantage of the this is that it allows a partnership to continue as a pass-through entity for tax purposes but limits the personal liability of the partners; is especially attractive for professional service firms and family businesses

advantages of an llc

a key advantage is the limited liability of its members; the LLC as an entity can be held liable for any loss or injury caused by the wrongful acts or omissions of its members; members themselves generally are not personally liable; an LLC is flexible in regard to taxation; an LLC that has two or more members can choose to be taxed as either a partnership or a corporation; a corporate entity normally must pay income taxes on its profits, and the shareholders must then pay personal income taxes on any of those profits that are distributed as dividends, and an LLC that wants to distribute profits to its members almost always prefers to be taxed as a partnership to avoid the double taxation that is characteristic of the corporate entity; unless an LLC indicates that it wishes to be taxed as a corporation, the IRS automatically taxes it as a partnership, which means that the LLC, as an entity, pays no taxes, but that, as in a partnership, profits are passed through the LLC to the members, who then personally pay taxes on the profits; if an LLC's members want to reinvest profits in the business rather than distribute the profits to members, however, they may prefer to be taxed as a corporation; corporate income tax rates may be lower than personal tax rates; an LLC that has only one member cannot be taxed as a partnership; for federal income tax purposes, one-member LLCs are automatically taxed as sole proprietorships unless they indicate that they wish to be taxed as corporations; with respect to state taxes, most states follow the IRS rules; an LLC offers flexibility in terms of business operations and management; foreign investors are allowed to become LLC members, so organizing as an LLC can enable a business to attract investors from other countries (eg, many nations—including France, Germany, Japan, and places in Latin America—have particular business forms that provide for limited liability much like an LLC)

family limited liability partnership (FLLP)

a limited liability partnership (LLP) in which the majority of the partners are members of a family; a person acting in a fiduciary capacity for persons so related can also be a partner; all of the partners must be natural persons or be acting in a fiduciary capacity for the benefit of natural persons; probably the most significant use of this form of business organization is in agriculture by family-owned farms; this offers the same advantages as other LLPs with certain additional advantages (eg, in Iowa, these are exempt from real estate transfer taxes when partnership real estate is transferred among partners)

limited partnership (LP)

a partnership consisting of one or more general partners and one or more limited partners; originated in medieval Europe and have been in existence in the United States since the early 1800s; today, most states and the District of Columbia have adopted laws based on the Revised Uniform Limited Partnership Act (RULPA); consists of at least one general partner and one or more limited partners; from traditional (general) partnerships in several ways

factors that cause courts to pierce the coporate veil

a party is tricked or misled into dealing with the corporation rather than the individual; the corporation is set up never to make a profit or always to be insolvent or it is too thinly capitalized (it has insufficient capital at the time it is formed to meet its prospective debts or potential liabilities), the corporation is formed to evade an existing legal obligation, statutory corporate formalities, such as holding required corporation meetings, are not followed, personal and corporate interests are commingled to such an extent that the corporation has no separate identity; state corporation codes usually do not prohibit a shareholder from lending funds to her or his corporation; courts will scrutinize such a transaction closely if the loan comes from an officer, director, or majority shareholder, however; loans from persons who control the corporation must be made in good faith and for fair value

preferred stock

a security that entitles the holder to payment of fixed dividends and that has priority over common stock in the distribution of assets on the corporation's dissolution; holders usually have priority over holders of common stock as to dividends and payment on dissolution of the corporation but frequently do not have the right to vote and also have a stronger position than common shareholders with respect to dividends and claims on assets, but they will not share in the full prosperity of the firm if it grows successfully over time; do receive fixed dividends periodically, however, and they may benefit to some extent from changes in the market price of the shares

common stock

a security that evidences ownership in a corporation; a share gives the owner a proportionate interest in the corporation with regard to control, earnings, and net assets; is lowest in priority with respect to payment of dividends and distribution of the corporation's assets on dissolution; a shareholder's interest is generally in proportion to the number of shares he or she owns out of the total number of shares issued; the issuing firm is not obligated to return a principal amount per share to each holder, because no firm can ensure that the market price per share of its common stock will not decline over time; the issuing firm also does not have to guarantee a dividend; indeed, some corporations never pay dividends; holders of these are investors who assume a residual position in the overall financial structure of a business; in terms of receiving payment for their investments, they are last in line

benefit corporation

a type of for-profit corporation, available by statute in a number of states, that seeks to have a material positive impact on society and the environment; differ from traditional corporations in purpose (although the corporation is designed to make a profit, its purpose is to benefit the public as a whole, while the purpose of an ordinary business corporation is to provide long-term shareholder value; the directors of a benefit corporation must, during the decision-making process, consider the impact of their decisions on society and the environment), accountability (shareholders of a benefit corporation determine whether the company has achieved a material positive impact and also have a right of private action, called a benefit enforcement proceeding, enabling them to sue the corporation if it fails to pursue or create public benefit), and transparency (a benefit corporation must issue an annual benefit report on its overall social and environmental performance that uses a recognized third-party standard to assess its performance; the report must be delivered to the shareholders and posted on a public Web site)

limited liability limited partnership (LLLP)

a type of limited partnership in which the liability of the general partner is the same as the liability of the limited partners; the liability of all partners is limited to the amount of their investments in the firm; a few states provide expressly for these; in states that do not provide for these but do allow for limited partnerships and limited liability partnerships, a limited partnership should probably still be able to register with the state as this

ultra vires

acts of a corporation that are beyond its express and implied powers to undertake; the Latin phrase means "beyond the powers;" in corporate law, acts of a corporation that are beyond its express or implied powers are ___ acts; in the past, most cases dealing with ___ acts involved contracts made for unauthorized purposes; now, because the articles of incorporation of most private corporations do not state a specific purpose, the ___ doctrine has declined in importance; today, cases that allege ___ acts usually involve nonprofit corporations or municipal (public) corporations; under Section 3.04 of the RMBCA, shareholders can seek an injunction from a court to prevent (or stop) the corporation from engaging in ___ acts; the attorney general in the state of incorporation can also bring an action to obtain an injunction against the ___ transactions or to seek dissolution of the corporation; the corporation or its shareholders (on behalf of the corporation) can seek damages from the officers and directors who were responsible for the ___ acts

liability in a LLP

allows professionals, such as attorneys and accountants, to avoid personal liability for the malpractice of other partners; of course, a partner in this is still liable for her or his own wrongful acts, such as negligence; also liable is the partner who supervised the individual who committed a wrongful act (this generally is true for all types of partners and partnerships, not just these); statutes vary from state to state, but generally each state statute limits the liability of partners in some way; the UPA more broadly exempts partners in an LLP from personal liability for any partnership obligation, "whether arising in contract, tort, or otherwise; " when an LLP formed in one state wants to do business in another state, it may be required to file a statement of foreign qualification in the second state; a question sometimes arises as to which law applies if the statutes in the two states provide different liability protection; most states apply the law of the state in which this was formed, even when the firm does business in another state, which is also the rule under UPA 1101; when more than one partner in an LLP commits malpractice, there is a question as to how liability should be shared (is each partner jointly and severally liable for the entire result, as a general partner would be in most states); some states provide instead for proportionate liability

operating agreement

an agreement in which the members of a limited liability company set forth the details of how the business will be managed and operated; in many states, this is not required for an LLC to exist, and if there is one, it need not be in writing; generally, though, LLC members should protect their interests by creating a written version; typically contain provisions relating to management and how future managers will be chosen or removed (although most LLC statutes are silent on this issue, the ULLCA provides that members may choose and remove managers by majority vote), whether the dissociation of a member, such as by death or departure, will trigger dissolution of the LLC, whether formal members' meetings will be held, how voting rights will be apportioned (if the agreement does not cover voting, LLC statutes in most states provide that voting rights are apportioned according to each member's capital contributions; some states provide that, in the absence of an agreement to the contrary, each member has one vote); if a dispute arises and there is no agreement covering the topic under dispute, the state LLC statute will govern the outcome; LLC members are bound by this if they make one

select the state of incorporation

because state corporate laws differ, individuals seeking to incorporate a business may look for the states that offer the most advantageous tax or other provisions; many corporations, for instance, have chosen to incorporate in Delaware because it has historically had the least restrictive laws, along with provisions that favor corporate management; for reasons of convenience and cost, though, businesses often choose to incorporate in the state in which the corporation's business will primarily be conducted

transfer of shares in close corporations

by definition, a close corporation has a small number of shareholders, so the transfer of one shareholder's shares to someone else can cause serious management problems; the other shareholders may find themselves required to share control with someone they do not know or like; to avoid this situation, a close corporation can restrict the transferability of shares to outside persons; shareholders can be required to offer their shares to the corporation or to the other shareholders before selling them to an outside purchaser, and in a few states close corporations must transfer shares in this manner under state statutes; one way the close corporation can effect restrictions on transferability is by spelling them out in a shareholder agreement

private equity capital

capital funds invested by a private equity firm in an existing corporation, usually to purchase and reorganize it; ____ firms obtain their capital from wealthy investors in private markets; the firms use thisl to invest in existing—often, publicly traded—corporations; usually, they buy an entire corporation and then reorganize it; sometimes, divisions of the purchased company are sold off to pay down debt; ultimately, the ___firm may sell shares in the reorganized (and perhaps more profitable) company to the public in an initial public offering (IPO); in this way, the ___ firm can make profits by selling its shares in the company

preincorporation contracts

contracts during the process of incorporation but before the corporation becomes a legal entity; the individual promoters who sign the contracts are bound to their terms; once the corporation is formed and adopts this (by means of a novation, which substitutes a new contract for the old contract), it can enforce the contract terms; in dealing with the preorganization contracts of LLCs, courts may apply the well-established principles of corporate law relating to these; when the promoters of an LLC enter one of these, the LLC, once formed, can adopt the contracts by a novation and then enforce them

bonds

debt securities; represent the borrowing of funds by firms (and governments); a security that evidences a corporate (or government) debt; are issued by business firms and by governments at all levels as evidence of the funds they are borrowing from investors; normally have a designated maturity date; are sometimes referred to as fixed-income securities because their owners (that is, the creditors) receive fixed-dollar interest payments, usually semiannually, during the period of time before maturity; because debt financing represents a legal obligation on the part of the corporation, various features and terms of a particular ___ issue are specified in a lending agreement; of course, not all debt is in the form of debt securities (eg, some debt is in the form of accounts payable and notes payable, which typically are short-term debts); are simply a way for the corporation to split up its long-term debt so that it can be more easily marketed

venture capital

financing provided by professional, outside investors (venture capitalists), usually groups of wealthy investors and securities firms—to new business ventures; capital provided by professional, outside investors (venture capitalists, usually groups of wealthy investors and securities firms) to new business ventures; these investments are high risk—the investors must be willing to lose all of their invested funds—but offer the potential for well-above-average returns at some point in the future; to obtain ___ financing, the start-up business typically gives up a share of its ownership to the ___; also may provide managerial and technical expertise, and they nearly always are given some control over the new company's decisions; many Internet-based companies, such as Google, were initially financed by this

liabilities of partners in a limited partnership

general partners are personally liable to the partnership's creditors, so at least one general partner is necessary in a limited partnership so that someone has personal liability; this policy can be circumvented in states that allow a corporation to be the general partner in a partnership; because the corporation has limited liability by virtue of corporation statutes, if a corporation is a general partner, no one in the limited partnership has personal liability; the liability of a limited partner is limited to the capital that she or he contributes or agrees to contribute to the partnership; limited partners enjoy this limited liability only so long as they do not participate in management; a limited partner who participates in management will be just as liable as a general partner to any creditor who transacts business with the limited partnership; liability arises when the creditor believes, based on the limited partner's conduct, that the limited partner is a general partner; however, the extent to which a limited partner can engage in management before being exposed to liability is not always clear

de facto corporations

if a defect in formation of a corporation is substantial, such as a corporation's failure to hold an organizational meeting to adopt bylaws, the outcome will vary depending on the jurisdiction; some states recognize the common law doctrine of ___; in those states, the courts will treat a corporation as a legal corporation despite a defect in its formation if the following three requirements are met: a state statute exists under which the corporation can be validly incorporated, the parties have made a good faith attempt to comply with the statute, and the parties have already undertaken to do business as a corporation; many state courts, however, have interpreted their states' version of the RMBCA as abolishing the common law doctrine of ___; in those jurisdictions, if there is a substantial defect in complying with the incorporation statute, the corporation does not legally exist, and the incorporators are personally liable

foreign corporation

in a given state, a corporation that does business in that state but is not incorporated there

domestic corporation

in a given state, a corporation that is organized under the law of that state

general partner

in a limited partnership, a partner who assumes responsibility for the management of the partnership and has full liability for all partnership debts

limited partners

in a limited partnership, a partner who contributes capital to the partnership but has no right to participate in its management and has no liability for partnership debts beyond the amount of her or his investment

Uniform Limited Liability Company Act (ULLCA)

in an attempt to create more uniformity, the National Conference of Commissioners on Uniform State Laws issued this; less than one-fifth of the states have adopted it, so the law governing LLCs remains far from uniform, but some provisions are common to most state statutes

formation of a limited partnership

in contrast to the private and informal agreement that usually suffices to form a general partnership, the formation of this is a public and formal proceeding; the partners must strictly follow statutory requirements; not only must a limited partnership have at least one general partner and one limited partner, but the partners must also sign a certificate of limited partnership

promotional activities

in the past, preliminary steps were taken to organize and promote a business prior to incorporating; contracts were made with investors and others on behalf of the future corporation; today, due to the relative ease of forming a corporation in most states, persons incorporating their business rarely, if ever, engage in preliminary promotional activities, but businesspersons should still understand that they are personally liable for any preincorporation contracts made with investors, accountants, or others on behalf of the future corporation; personal liability continues until the newly formed corporation assumes liability for the preincorporation contracts through a novation

when liability may be imposed on a member of a LLC

members can lose their limited personal liability in certain circumstances (eg, when an individual guarantees payment of a business loan to the LLC, that individual is personally liable for the business's obligation, and if an LLC member fails to comply with certain formalities, such as by commingling personal and business funds, a court can impose personal liability); under various principles of corporate law, courts may hold the owners of a business liable for its debts (eg, on rare occasions, courts ignore the corporate structure to expose the shareholders to personal liability when it is required to achieve justice); there must normally be some flagrant disregard of the LLC formalities, as well as fraud or malfeasance on the part of the LLC member

dissociation

occurs when a partner ceases to be associated in the carrying on of the partnership business; the same concept applies to LLCs, and like a partner in a partnership, a member of an LLC has the power to ___ at any time but may not have the right to; under the ULLCA, the events that trigger a member's ___from an LLC are similar to the events causing a partner to be dissociated under the Uniform Partnership Act (UPA), including voluntary withdrawal, expulsion by other members, court order, incompetence, bankruptcy, and death; generally, if a member dies or otherwise ___ from an LLC, the other members may continue to carry on the LLC business unless the operating agreement provides otherwise; when a member___ from an LLC, he or she loses the right to participate in management and the right to act as an agent for the LLC; the member's duty of loyalty to the LLC also terminates, and the duty of care continues only with respect to events that occurred before this; generally, the ___ member also has a right to have his or her interest in the LLC bought out by the other members; the LLC's operating agreement may contain provisions establishing a buyout price; if it does not, the member's interest is usually purchased at fair value; in states that have adopted the ULLCA, the LLC must purchase the interest at fair value within 120 days after this; if the member's ___ violates the LLC's operating agreement, it is considered legally wrongful, and the ___ member can be held liable for damages caused by this

corporate liability

one of the key advantages of the corporate form is the limited liability of its owners; normally, corporate shareholders are not personally liable for the obligations of the corporation beyond the extent of their investments; in certain limited situations, however, a court can pierce the corporate veil and impose liability on shareholders for the corporation's obligations, and, creditors often will not extend credit to small companies unless the shareholders assume personal liability, as guarantors, for corporate obligations; under modern criminal law, a corporation may be held liable for the criminal acts of its agents and employees; corporations cannot be imprisoned, but they can be fined ( hundreds of millions of dollars under sentencing guidelines), and corporate directors and officers can be imprisoned; a corporation is liable for the torts committed by its agents or officers within the course and scope of their employment under the doctrine of respondeat superio, which applies to corporations in the same way as it does to other agency relationships

shareholders

owners of a corporation; both individuals and other businesses can be shareholders; when an individual purchases a share of stock in a corporation, that person becomes a shareholder and an owner of the corporation; unlike the partners in a partnership, the body of shareholders can change constantly without affecting the continued existence of the corporation; a shareholder can sue the corporation, and the corporation can sue a shareholder, and under certain circumstances, a shareholder can sue on behalf of a corporation; although they have no legal title to corporate property, such as buildings and equipment, they do have an equitable (ownership) interest in the firm; as a general rule, they have no responsibility for the daily management of the corporation, although they are ultimately responsible for choosing the board of directors, which does have such control; ordinarily, corporate officers and other employees owe no direct duty to individual ___ unless some contract or special relationship exists between them in addition to the corporate relationship; the duty of officers and directors is to act in the best interests of the corporation and its ___

holding company

parent company; a company whose business activity is holding shares in another company; some U.S. corporations use these to reduce or defer their U.S. income taxes; typically, this is established in a low-tax or no-tax offshore jurisdiction (eg, Hong Kong or Panama); sometimes, a U.S. corporation sets up one in a low-tax offshore environment and then transfers its cash, bonds, stocks, and other investments to this; generally, any profits received by this on these investments are taxed at the rate of the offshore jurisdiction where the company is registered; once the profits are brought "onshore," though, they are taxed at the federal corporate income tax rate; any payments received by the shareholders are also taxable at the full U.S. rates

management of a close corporation

resembles that of a sole proprietorship or a partnership, in that control is held by a single shareholder or a tightly knit group of shareholders; as a corporation, however, the firm must meet all specific legal requirements set forth in state statutes; to prevent a majority shareholder from dominating the company, this may require that more than a simple majority of the directors approve any action taken by the board; in a larger corporation, such a requirement would typically apply only to extraordinary actions (such as selling all the corporate assets) and not to ordinary business decisions

corporation by estoppel

sometimes, a business association holds itself out to others as being a corporation when it has made no attempt to incorporate; in those situations, the firm normally will be estopped (prevented) from denying corporate status in a lawsuit by a third party; this doctrine most commonly applies when a third party contracts with an entity that claims to be a corporation but has not filed articles of incorporation; it may also apply when a third party contracts with a person claiming to be an agent of a corporation that does not in fact exist; when justice requires, courts in some states will treat an alleged corporation as if it were an actual corporation for the purpose of determining rights and liabilities in particular circumstances; recognition of corporate status does not extend beyond the resolution of the problem at hand

misappropriation of close corporation funds

sometimes, a majority shareholder in a close corporation takes advantage of his or her position and misappropriates company funds; in such situations, the normal remedy for the injured minority shareholders is to have their shares appraised and to be paid the fair market value for them

articles of incoroporation

the document that is filed with the appropriate state official, usually the secretary of state, when a business is incorporated and that contains basic information about the corporation; the primary document needed to incorporate a business; includes basic information about the corporation and serve as a primary source of authority for its future organization and business functions; vary widely depending on the jurisdiction and the size and type of the corporation, but generally must include the name of the corporation, the number of shares of stock the corporation is authorized to issue (large corporations often also state a par value for each share, such as $0.20 per share, and specify the various types or classes of stock authorized for issuance), the name and street address of the corporation's initial registered agent and registered office, and the name and address of each incorporated; may set forth other information, such as the names and addresses of the initial members of the board of directors and the duration and purpose of the corporation; a corporation has perpetual existence unless these state otherwise; a corporation can be formed for any lawful purpose; the RMBCA does not require the articles to include a specific statement of purpose, so these often include only a general statement of purpose; by not mentioning specifics, the corporation avoids the need for future amendments to the corporate articles; similarly, the articles do not provide much detail about the firm's operations, which are spelled out in the company's bylaws; once these have been prepared and signed, they are sent to the appropriate state official, usually the secretary of state, along with the required filing fee; in most states, the secretary of state then stamps the articles "Filed" and returns a copy of the articles to the incorporators; once this occurs, the corporation officially exists

bylaws

the internal rules of management for the corporation; cannot conflict with the state corporation statute or the articles of incorporation; under the RMBCA, the shareholders may amend or repeal these; the board of directors may also amend or repeal these, unless the articles of incorporation or provisions of the state corporation statute reserve this power to the shareholders; the bylaws typically describe such matters as voting requirements for shareholders, the election of the board of directors, and the methods of replacing directors; also frequently outline the manner and time of holding shareholders' and board meetings

disadvantages of an LLC

the main disadvantage is that state LLC statutes are not uniform, so, businesses that operate in more than one state may not receive consistent treatment in these states; generally, most states apply to a foreign LLC the law of the state where the LLC was formed; difficulties can arise when one state's court must interpret and apply another state's laws

manager-managed LLC

the members designate a group of persons to manage the firm; the management group may consist of only members, both members, and nonmembers, or only nonmembers; however an LLC is managed, its managers need to be aware of the firm's potential liability under employment discrimination laws; those laws may sometimes extend to individuals who are not members of a protected class

registered agent

the person who can receive legal documents (such as orders to appear in court) on behalf of the corporation

retained earnings

the portion of a corporation's profits that has not been paid out as dividends to shareholders

a potential problem for close corporations

the potential for corporate assets to be used for personal benefit is especially great in a close corporation; in such a corporation, the separate status of the corporate entity and the shareholders (often family members) must be carefully preserved; practices that invite trouble for a close corporation include the commingling of corporate and personal funds and the shareholders' continuous personal use of corporate property (eg, vehicles); typically, courts are reluctant to hold shareholders in close corporations personally liable for corporate obligations unless there is some evidence of fraud or wrongdoing

first organizational meeting to adopt bylaws

this must be held after incorporation; if the articles of incorporation named the initial board of directors, then the directors, by majority vote, call the meeting; if the articles did not name the directors (as is typical), then the incorporators hold the meeting to elect the directors and complete any other business necessary; usually, the most important function of this meeting is the adoption of bylaws

comingled

to put funds or goods together into one mass so that they are mixed to such a degree that they no longer have separate identities

Revised Model Business Corporation Act (RMBCA)

today, the majority of state statutes are guided by this; the most recent version of the Model Business Corporation Act (MBCA); keep in mind, however, that there is considerable variation among the laws of states that have used the MBCA or this as a basis for their statutes, and several states do not follow either act; consequently, individual state corporation laws should be relied on to determine corporate law rather than either of these

fiduciary duties in an LLC

under the ULLCA, managers in a manager-managed LLC owe the duty of loyalty and the duty of care to the LLC and its members; this same rule applies in corporate law); because not all states have adopted the ULLCA, though, some state statutes provide that managers owe these only to the LLC and not to the LLC's members; to whom these are owed can affect the outcome of litigation

implied powers

when a corporation is created, it acquires certain ___; barring express constitutional, statutory, or other prohibitions, the corporation has the ___ to perform all acts reasonably necessary to accomplish its corporate purposes; for this reason, a corporation has the implied power to borrow and lend funds within certain limits and to extend credit to parties with whom it has contracts; most often, the president or chief executive officer of the corporation signs the necessary documents on behalf of the corporation; corporate officers such as these have the implied power to bind the corporation in matters directly connected with the ordinary business affairs of the enterprise; there is a limit to what a corporate officer can do; a corporate officer does not have the authority to bind the corporation to an action that will greatly affect the corporate purpose or undertaking, such as the sale of substantial corporate assets

corporate taxation

whether a corporation retains its profits or passes them on to the shareholders as dividends, those profits are subject to income taxation by various levels of government; failure to pay taxes can lead to severe consequences; the state can suspend the organization's corporate status until the taxes are paid and can even dissolve the corporation for failing to pay taxes; another important aspect is that corporate profits can be subject to double taxation; the company pays tax on its profits, then, if the profits are passed on to the shareholders as dividends, the shareholders must also pay income tax on them (unless the dividends represent distributions of capital, which are returns of holders' investments in the stock of the company); the corporation normally does not receive a tax deduction for dividends it distributes; this feature is one of the major disadvantages of the corporate form

rights and duties in a limited partnership

with the exception of the right to participate in management, limited partners have essentially the same rights as general partners; limited partners have a right of access to the partnership's books and to information regarding partnership business; on dissolution of the partnership, limited partners are entitled to a return of their contributions in accordance with the partnership certificate; they can also assign their interests subject to the certificate and sue an outside party on behalf of the firm if the general partners with authority to do so have refused to file suit