Business Entities
Partnership
-A (General) Partnership is an "association of two or more persons to carry on a business for profit as co-owners." -Uniform Partnership Act
Piercing the Corporate Veil
-A court, in the interest of justice or fairness, holds shareholders personally liable for corporate acts. -Court concludes that shareholders used corporation as a "shield" from illegal activity.
Limited Liability Companies
-An LLC is a hybrid entity that combines the limited liability of a corporation and the tax advantages of a partnership -More flexibility than corporation -LLC's are increasingly becoming the entity of choice for business
Corporation's First Meeting
-Approve the bylaws -Elect directors -Hire Officers (somone to run company-CEO, President, ect) -Adopt pre-incorporation contracts and activities
Shareholder Powers
-Approving all fundamental changes to the corporation: -amending articles of incorporation or bylaws -Approval of mergers or acquisition -Sale of all corporate assets or dissolution -Shareholders also elect and remove the board of directors
Duties of Officers and Directors
-As fiduciaries of the corporation, they owe to the corporation and shareholders
Limited Partnership (LP)
-At least one general partner (always has personal liability-no protection) and one limited partner (gets protection from liability) -Limits the liability of some of the limited partners to their investment -Filing a certificate with the Secretary of State is required
Ultra Vires Doctrine
-Beyond the Powers -Corporate acts are beyond the express or implied powers of the corporation as stated in state statute or the corporation's own articles of incorporations and are considered to be "ultra vires" -Corporate articles of incorporations now adopt very broad purposes to prevent lawsuits against the corporation
Board Meetings
-Business decisions are made at regularly scheduled or special board meetings. -Many decisions are made by a majority vote. A dissenting director is rarely held liable for mismanagement of corporation. Dissent must be registered with the corporate secretary and posted in the minutes of the meetings.
What is a corporation?
-By statue, an artificial "person" -Most states follow the Model Business Corporation Act (MBCA) or the RMBCA, that are model corporation laws -The shares (stock) of a corporation are owned by at least one shareholder(stockholder)
Process of Formation
-Choose and reserve a Corporate Name. -Name must have the proper suffix: "corporation," "corp," "incorporated," -Consider registering the corporation as a "dot com."
Shareholder voting
-Common shareholder entitled to one vote per share -Articles and by-laws can exclude or limit voting rights of certain classes of stock -Quorum must be present-shareholders representing more than 50% of outstanding shares must be present -Shareholders may vote on resolutions -Need majority present for most resolutions -Need a "super majority" (67%) for important matters: sale of assets, ect.
Duties Owed by Principal
-Compensation -Reimbursement and Indemnification -Cooperation
Limited Partner in the LP
-Contributes cash (is the investor) -No management rights(have to stay out of the running of the business) -Liability is limited to the amount of investment -They are protected from liability as long as they stay out of the management process -Can forfeit the "veil" of immunity by taking part in the management of the LP -Right to inspect the LP's books
Disadvantage of corporations
-Corporate Taxation
Dissolution by Operation of Law
-Death of a partner -Bankruptcy of a partner -Bankruptcy of a partnership -Illegality
Bonds-Corporate Financing
-Debt -Fixed ROI (return on investment) (variable/optional) -No votes(say in company) -Optional -Priority over stock(paid before shareholders)
Termination of Franchise
-Determined by contractual terms -Termination is usually "for cause" -Notice of termination is usually required -Good Faith and Fair Dealing -Remember: Franchisor owns the trademark (which is usually the business and good will) -Governed by federal and state laws
Social Purpose Corporations in CA
-Director shall consider: -overall prospects of the social purpose corporation -the best interests of the social purpose corporation and its shareholders -the purposes of the social purpose corporation as set forth in its articles of incorporation
Dividends
-Distribution of corporate profits or income -Only as ordered by the Board -Can be stock, cash, property, stock of other corporations -State laws control the sources of revenues for dividends, which may be paid from retained earnings, net profits and surplus.
Types of Franchises
-Distributorship -Chain Style Business Operation -Manufacturing or Processing Arrangement
Considerations (when starting a business)
-Ease of creation and maintenance -Owners' liability -Tax considerations -Need for Capital -Management -Duration and Transferability -Special requirements
Directors (of a corp.)
-Every corporation is governed by a board of directors -Individual directors are not agents of corporation. Only the board itself can act as a "super-agent" and bind the corporation. -A director can also be a shareholder, especially in closely-held corporations.
Partnership obligations are paid in the following order:
-First: Third party creditors -Second: Partner loans to partnership -Third: Return of capital contributions -Fourth: Distribution of the balance, if any two partners
Laws Governing Franchises
-Governed by commercial sales and contract law -State and Federal laws regulate franchising to protect franchisee.
Dissolution of LP
-Handled similar to general partnership -Retirement, withdrawal, death bankruptcy or mental incompetence of a general partner will trigger dissolution unless the remaining GP's consent to continue -Creditors are paid first then partners -The limited partner is entitled to return of capital contributions -Limited partners' liability is limited to the capital investment (they do not have to give up personal assets for repayment)
Business Judgment Rule
-Immunizes a director or officer from liability from consequences of a business decision that turned sour. -Court will not require directors or officers to manage "in hindsight." -Applies as long as decision was reasonable, informed, made in good faith and in the best interests of the corporation.
Rights of Partners
-Inspection of the books -Accounting: when it is just and reasonable or other partners committing fraud, embezzlement, wrongful exclusion -Each partner has a property right which includes: -An interest in the partnership -A right in specific partnership property -A right to participate in the management of the partnership
Liability of Directors and Officers
-Liable for negligent acts that breach the standard of due cause -Crimes and torts committed by individually and/or those committed by employees under their supervision -Shareholder derivative suits (shareholder(s) sue directors or officers on behalf of corporation.
Advantages of corporations
-Limits on liability to owners (shareholders) -In most circumstances, stockholders have limited liability
Duty of Majority Shareholders
-Majority of shareholders own enough shares to exercise de facto (actual) control over the corporation -Majority shareholders owe a fiduciary duty to corporation and the minority shareholders and creditors when they sell their shares because of the possibility of transfer of control
Partnership Status
-Many states recognize the partnership as a separate legal entity for the following purposes -to sue and be sued (in some jurisdictions) -to have judgements collected against its assets and individual partners assents -ownership of property
Advantages of an LLC
-Member liability is limited to amount of investment -Can be treated as a "pass through" entity for tax purposes (tax docs show how much LLC makes, member must report their interest in the LLC, and they have to pay taxes as to their personal return) - "pass through" AKA double taxation-taxed at corporate level, and at the shareholder level -Profits can be distributed to members without the double taxation of a corporation. Members pay personal income tax on received dividends. Articles of Organization Agent for service of process Operating Agreement Members manage business Manager
Shareholders' Meetings
-Must occur at least annually -Voting requirements and procedures are: -Quorum of shareholders owning more than 50% of shares must be present to conduct business -Shareholders may appoint a proxy or enter into a voting trust agreement.
If a partner has violated the partnership agreement, the partner:
-Must pay damages -May not participate in winding up -But other partners may choose to continue
Liability in LLPs
-Not jointly and severally liable in tort (they are not responsible individually for each other's torts) -Avoid personal liability for the malpractice of other partners -Supervising Partner can be held liable for acts of subordinate (negligent supervision)
Officers
-Officers serve at the pleasure of the Board of Directors but have fiduciary duties to company as well -Their employment relationships are generally governed by contract law and employment law. -Officers may be terminated for cause.
How is a partnership formed?
-Oral contract (unless statute of fraud requires) -Written contract -Implied by conduct
If partner dies
-Other partners act as fiduciaries -Accounting to deceased partner's estate -Survivors get paid for their services
Advantages of Sole Proprietorship
-Owner maintains control -Owner receives all profits -Flexibility -Ease of creation -Ease of maintenance
Disadvantages of Sole Proprietorship
-Owner personally liable -No continuity after death -Difficult to raise financing
Shareholders
-Ownership of shares grants a shareholder an equitable ownership interest in a corporation -Shareholders generally have no right to manage the daily affairs of the corporation -Shareholders are generally protected from personal liability by the corporate veil of limited liability
stocks-Corporate Financing
-Ownership/equity -Dividends (variable/optional) -Vote for management (board of directors) -Required (except NPOs) -Paid last
Right of Directors
-Participate in corporate decisions -Inspect corporate books and records -Compensation-nominal sum -Indemnification or corporation's liability insurance protects the board from personal liability
Disadvantages if Partnership
-Partners are personally liable -Dissolution upon death -Difficult to raise financing
Dissolution by Acts of the Partners
-Partners can agree to terminate -Partner's Withdrawal -Partnership for term-breach -No term-no breach -Admission of a new partner
Advantages of Partnership
-Partners share control -Partners share profits -Flexibility -Ease of creation -Ease of maintenance
Duties Owed by Agent
-Performance -Notification -Loyalty -follow lawful instructions -accounting (keeping proper financial records, informing principal of whats going on with the $)
Articles of Incorporation
-Primary enabling document filed with the Secretary of State that includes the basic information about the corporation -Person(s) who execute the articles are the incorporators
Limited Liability Partnerships
-Professionals (ex: lawyers) -Limits personal liability of the partners (the innocent partners' personal assets are not at risk if another partner is negligent) "Pass through" tax advantages (each individual partner must report their own income on tax returns)
Classifications of Corporations
-Publicly-held (stock exchange) (anybody can buy a share) -Public (gov run) (ex: US Postal service) and Private -Non-profit -Close Corporations -Shares held by few shareholders -More informal management, similar to partnership -Restriction on transfer of shares -Often within a family (to keep control of who owns the company) -"S" and "C" Corp -Professional
In CA, the board of directors for a Benefit Corp. may consider the impacts of any action or proposed action upon all of the following:
-Shareholders -Employees, subsidiaries, and suppliers -Customers -The community and societal considerations -The local and global environment -Short-term and long-term interests of the benefit corporation -The ability of the benefit corporation to accomplish its general, and any specific public benefit purpose.
Remedies for Ultra Vires acts
-Shareholders can bring action for corporation -Corporation can recover damages from its officers and directors -Attorney general of state may bring action to dissolve corporation for ultra vires acts
Inspection Rights
-Shareholders can inspect books for a proper purpose -But corporation can protect trade secrets, other confidential info -Shareholders must have held a min number of shares for a min amount of time -All shareholders can see list of other shareholders of record.
Shareholder Derivative Suits
-Shareholders can sue a third party on behalf of the corporation if the Directors fail or refuse to correct the wrong or injury. -Directors may refuse to take action because they might personally be liable -Any damages recovered to go corporation's treasury
Dissolution Rights
-Shareholders have right to pro-rata share of assets upon liquidation -Shareholder may petition the court for dissoltion of the corporation for following reasons: -Board mishandling corporate assets -Board deadlocked and irreparable injury will result -Acts of directors are illegal, oppresive, or fraudulent -Shareholders are deadlocked for 2 meetings and can't elect directors
Transfer of Shares
-Shares are freely transferable unless restricted by articles and noted on the stock certificate -Closely held croporations may have "right of ffirst refusal" or preemtive rights -Transfer accomplished by delivery or endorsement to corporate secretary, -New shareholder must be recorded on corporate books
Three elements of a Partnership
-Sharing profits or losses -joint ownership of the business -Right in the management of the business
Types of Business Entities
-Sole Proprietorship -Partnership -Limited Liability Entities -Corporations
General Partner in the LP
-The General Partner assumes all management(does the day to day work and makes the decisions) and personal liability -General Partners are personally liable to third parties for breach of contract and tort liability -However, a corporation (or an LLC) can be a general partner and have limited liability
Franchise Contracts
-The contract states parties' rights and duties and can include an exclusive "territory" to market goods/services -Franchise contract can specify Franchisee's type of business entity including capital structure, sales quotas, and record keeping -Quality Control is a legitimate issue for Franchisor because of good will, reputation and trademark value. -Courts will not question Franchisor's strict supervision but Franchisor may be liable for torts of agents
Election of Directors
-The number of directors is set forth in the articles of incorporation and limited by statute. -Directors are appointed at the first organizational meeting. -In closely help companies, directors are generally the incorporators and/or the shareholders -Term of office is generally for 1 year -Director can be removed for cause (for failing to perform a required duty)
What is an LLC?
-The owners are called members (not shareholders) and their ownership is called an "interest" (not stocks). -Members of an LLC enjoy limited liability (you can lose your investment, but your personal assets are always protected)
Factors Considered-Pierce the Veil
-Third Party tricked into dealing with a corporation rather than the individual. (fraud) -Corporation is set up never to make a profit or remain insolvent or is under capitalized -Statutory formalities are not followed -Corporation is "alter ego" of majority shareholder and personal and corporate interest are commingled such as that the corporation has no separate identity.
Implied Powers
-To perform all acts reasonably necessary to accomplish its corporate purposes -Borrow and lend money -Extend Credit -Make charitable contributions -An officer can bind corporation in contract in matters connected with the ordinary business affairs of the enterprise
Shareholders' Rights
-To vote -To have a stock certificate -To purchase a newly issed stock -To dividends, when declared by board -To inspect corporate records -To transfer shares, with some exceptions -To a proportionate share of corporate assets on dissolution -To file suit on behalf of corporation
A corporation may act and enter into contracts as any natural person, except as limited by:
-US Constitution -State Constitutions -State statutes -Its own articles of incorporation -Its own corporate bylaws -Resolutions by its own board
Failure to Declare Dividends
-When directors fail to declare a dividend, shareholders can sue. -Directors do not have to declare if they have a rational basis for withholding a dividend(on a bona fide purpose) -Often, profits are retained for expansion, research or upgrades
Benefit Corporations
1) Corporate purpose-positive impact on society and the environment 2) Consider the impact of their decisions on shareholders, workers, community, and the environment 3) generate a public report on their social and environmental performance
Duty of Care
Act in good faith: -Act in the best interests of the corporations -Make informed and reasonable decisions -Rely on competent consultants and experts -Exercise reasonable supervision -Failure to exercise due care may be subject individual directors or officers personally liable
"S" Corporations
Avoid the federal "double taxation" of regular corporations at the corporate level. Only dividends are taxed to the shareholders as personal income. -Corporation is domestic, fewer than 100 shareholders, only one class of stock, limits who can be a shareholder (no non-resistant aliens, corporations, partnerships). -Certain corporations are ineligible (some insurance, finance, international sales)
"C" Corporations
Corporate profits are taxed under federal and state law as a separate "person" from its shareholders -Shareholders also pay taxes on dividends (double taxation)
Duty of Loyalty
Duty of Loyalty: subordination of personal interests to the welfare of the corporation -No competition with Corporation -No taking of a "corporate opportunity" -No conflict of interests -No insider trading (someone takes inside info and using it in a way that it affects the sale of stock within a company) -No transaction that is detrimental to minorty shareholders
FBN
Ficticious business name (need to file for this when naming your business unless the name of the business is your name)
Differing Obligations in Benefit Corporations
In addition to officer and directors owing a fiduciary duty to shareholders, their decisions may reflect the impact on other stakeholders including the community and the environment.
Franchisee
Licenses the right to use the trade mark, trade name or copyright in the sale of goods or services
Limited Liability Entities and Corporations
Limited liability entities or Corporations are creatures of statute. the business is an artificial "person" for purposes of contracting, litigation, and many constitutional rights.
Liability of Partners-Liability of Incoming Partner and Outgoing Partner
Newly admitted partner has no personal liability for existing partnership debts and obligations
Franchisor
Owner of trademark, trade name or copyright
Law Governing Partnerships
Partners are agents and fiduciaries of one another, but differ from agents in that they are also co-owners and have rights to manage and share in the profits and losses. -Oral or written contract: Contract law principles apply -No contract or contract silent on an issue: State statues/Uniform Partnership Act: -Management: equal, one vote each, majority wins; unanimous consent for some actions. -Partnership Interest: equal share of profits and losses
Winding Up
Partners have no authority after dissolution occurs except to: -Complete transactions already begun -Wind up by collecting and preserving partnership assets, discharging liabilities, and accounting to each partner for the value of his share.
Liability of Partners-Joint and Several Liability for Torts
Plaintiff can sue either one or all partners and may collect against personal assets of any or all partners, even partners who did not commit the tort
Liability of Partners-Joint Liability for Contracts
Plaintiff must sue all partners as a group but each partner can be held liable for the full amount.
Limited Liability Entities
Protecting personal assets -Limited Liability Partnerships -Limited Partnerships -Limited Liability Companies
DBA
doing business as... (trade name)
Fiduciary duty
legal duty to act solely in another party's interests. They also have a duty to avoid any conflicts of interest between themselves and their principals or between their principals and the fiduciaries' other clients. A fiduciary duty is the strictest duty of care recognized by the US legal system.
Agency Relationship
relationship between two parties in which one party(agent) agrees to represent or act for the other(principal).
De Facto
statutory requirements not met, but promoters made good faith effort to comply with corporate law; corporate status can only be attacked by state.
De Jure
substantial statuary requirements are met; cannot be attacked by state or third parties
Sole Proprietorship
the owner of the business. Anyone who does business without creating a separate business organization has a sole proprietorship.