Chapter 9 leg and doc

pericing the corporate veil usually has two elements:

(1) misuse of the corporate form and (2) an unjust result if limited liability is allowed to stand.

Most corporations indemnify which is

(directly pay the costs of, or reimburse the costs incurred by) individuals for the expenses of defense.

Equity capital

(stock in the corporate context) has a long-term horizon.

everyone wants to minimize tax payments, by

- legal tax avoidance (careful planning within the law), -not by illegal tax evasion (engaging in fraudulent conduct).

As an agent, each partner is entitled to

- reimbursement for costs personally incurred in furtherance of the partnership's business. -the right to examine all partnership records and to demand a formal determination by a court of the value of the partner's equity interest (an accounting).

Upon termination, the corporation is liquidated, which involves

- satisfying all creditors and second distributing any remaining assets to the shareholders. -Articles of dissolution are then filed, officially ending the corporation's existence.

Preferred stockholders

-no vote -no control are paid their required annual dividend in full before any dividends are distributed to common stockholders. Upon the corporation's liquidation, after the creditors are satisfied, the preferred shareholders receive the next round of distributions, up to their stock's redemption value-a number stated on the stock. The common shareholders receive whatever remains.

Limited Liability Company (LLC)

A hybrid form of business enterprise that offers the limited liability of the corporation but the tax advantages of a partnership.

General Partnership

A partnership exists when two or more persons (partners) carry on a business as co-owners.

business judgment 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.

double taxation

After paying tax on its corporate income, when it later distributes some of its after-tax income to its shareholders as dividends, the shareholders are taxed on those amounts as well

the board of directors and shareholders must hold meetings

At least anually

Traditional corporations

C corporations

Limited partnerships come into existence only upon filing

Certificate of limited partnership

Partnerships are mutual agencies:

Every partner is an agent of the partnership with the capacity to bind it when acting within the scope of the partnership's business.

Limited partnerships: general and limited partnership

General partners have the same legal benefits and burdens as the partners of a general partnership. They (often only one) are the only managers. Limited partners invest in the entity but do not participate in control (except with respect to matters like dissolution). In exchange for having very little control, they receive limited liability.

General Partnership management structure

Not centralized Equal rights to participate in control

Inside directors

Senior executives

Management Structure

The degree to which control of the form is exercised in a hierarchical structure.

Duration of Existence

The events, including those impacting the business owners which will end the business entity's existence.

Duration of existence:

The events, including those impacting the owners personally (such as death), that will end the form's existence.

Limited liability:

The extent to which owners are personally liable for the form's obligations.

Capital structure:

The impact of form selection on the ability to access additional capital.

Formation and nontax costs:

The method of, and costs related to, bringing the form into existence.

Taxes:

The way the choice of form affects the income tax treatment of the business and its owners.

Taxes are

What we pay for civilized society

Transferability of ownership interests:

Whether the law restricts owners from freely transferring their interests.

closely held corporation

a corporation with relatively few shareholders, the stock of which has no readily available market

To bring an LLP into existence,

a document called a statement of qualification in RUPA is filed with the state.

Whereas corporate ownership interests are called stock or shares, the equity interest of a partner is called

a partnership interest.

If an individual starts a business and takes no active steps to house it within a legally recognized entity, the business form will, by default, be

a sole proprietorship.

debt covenant is

a term in the lending contract that makes the debt essentially immediately payable should the condition specified cease to be satisfied (such as exceeding a specified debt/equity ratio).

limited liability partnership

a type of partnership in which all partners are limited partners

Voluntary termination requires

a vote by the shareholders, who might do so, for example, if business prospects are no longer favorable.

hostile takeover

acquiring control of a company in the face of strong management resistance, often by encouraging other shareholders to join forces.

The duty of loyalty requires a fiduciary to

act in the best interests of the beneficiary.

partnerships create a centralized management structure by

adding provisions to the partnership agreement by which the partners yield many of their management rights to a subset of partners (perhaps to only one-a managing partner).

A tender offer

an offer to purchase the stock of a firm targeted for acquisition at a price just high enough to tempt stockholders to sell their shares

Officers are

are employees of the corporation, and they hire the other employees needed to operate the business.

To create an LLC, the owners, called members, file

articles of organization with the state. The ownership units are called members' interests. An operating agreement, which can be oral but is most likely written will be prepared that sets forth information similar to that found in well-drafted partnership agreements.

Proxy fights

battles between rival groups for proxy votes

When an employee or director commits a tort or crime while conducting corporate business,

both the actor and the corporation are liable for the consequences.

Delaware permits indemnification for

breaches of the duty of due care, although not for breaches of the duty of loyalty or for intentional misconduct or knowing violation of the law.

Foreign Corrupt Practices Act (FCPA) has made it illegal for a U.S. company to

bribe a foreign official to violate local law in order to obtain or maintain business or to secure an improper advantage. It also prohibits false accounting for payments

Transferability of Ownership interests: A common contractual restriction in closely held corporations is a

buy-sell agreement, which, at a minimum, forces a shareholder to offer the stock to be sold to the corporation or the other shareholders before selling it to a third party.

publicly held corporations

corporations with publicly traded shares

The three traditional business forms are

corporations, general partnerships, and sole proprietorships.

Capital structure: Capital is of two types

debt and equity

A general partnership is the

default form for any business with two or more owners.

some of the shareholders are also

directors and/or officers-perhaps even holding multiple executive positions.

All publicly traded corporations are C corporations and subject to federal income taxes. This leads to what many would say is the corporation's greatest disadvantage:

double taxation.

Both directors and officers have

fiduciary duties to the corporation.

To create a corporation, an incorporator

files articles of incorporation with the state.

stateless income

income that is purportedly beyond the reach of taxation by any country in the world.

Once the articles are filed, the corporation comes into existence. An organizational meeting will be held at which the

initial members of the board of directors are appointed. The board will then meet to undertake the corporation's initial business. Among other things, it will appoint officers and adopt bylaws.

partners are

jointly and severally liable for both contract obligations and torts. If a partnership is found liable, the victorious claimant must first exhaust the partnership's assets, but then can proceed to collect the remainder from any or all of the partners.

Bylaws contain

key policies and procedures, such as the percentage of shareholders that must approve major corporate actions like mergers.

S corporation (hybrid form) For state corporate law purposes, it is a corporation like any other; but for income tax purposes, the legal entity is

largely ignored and virtually all of the entity's tax consequences flow through onto the tax returns of its shareholders.

Under the doctrine of respondeat superior the partnership, and therefore the partners, are

liable for all torts committed by partnership employees and for the unintentional torts committed by partners

A general partnership does not offer

limited liability. The general partners are personally liable for the partnership's obligations should it default. This is widely viewed as the greatest disadvantage of the general partnership form

Partners owe each other the fiduciary duties of

loyalty, due care, confidentiality, and sharing information.

Outside directors

not employed by the firm

Management structure - To actually run the company boards appoint

officers, often a CEO (chief executive officer), secretary, CFO (chief financial officer, and possibly vice presidents. Centralized management

If the debt/equity ratio is too low,

opportunities for positive financial leverage (employing borrowed funds at a rate of return that exceeds the interest rate) may be forfeited.

independent directors-

outside directors without conflicts of interest-at least one of whom must be a financial expert.

A fiduciary is a

person who acts on behalf of another (a beneficiary) and is required to do so with great integrity. (Another fiduciary relationship is parent to minor child.)

Closely held corporations also face the loss of limited liability under the doctrine of

piercing the corporate veil

There are two principal classes of stock:

preferred and common.

If one partner pays the debt, that partner is entitled to

recoup an appropriate share from the other partners pursuant to the right of contribution.

The legal doctrine that makes an employer liable for an employee's acts is

respondeat superior.

Shareholder liability is

restricted to the loss of their investment, which is the essence of limited liability-perhaps the most cherished characteristic of the corporate form.

Debt capital may be

short- or long-term. -bonds

The owners of a corporation are called

stockholder or shareholders because the ownership interests are called shares of stock.

Involuntary terminations are caused by

the action of a court or of the state corporation regulator. A court might end a closely held corporation's existence if, there is an irreconcilable deadlock among the shareholders.

Corporations carefully manage their capital structures, If the debt/equity ratio is too high,

the corporation may be exposed to severe risk because debt obligations must be timely paid without regard to how profitable business operations are.

Common reasons for the state to terminate a corporation are

the failure to pay annual fees and make required annual filings.

franchise is

the right to exploit the franchisor's intangible assets (such as trade names and business systems) and to partake of the franchisor's marketing, purchasing, and other services.

Three property rights are associated with stock ownership:

the rights to participate in earnings (that is, dividends), receive assets upon liquidation, and control (through voting).

limited liability company (LLC) are often referred to as a hybrid form because

they are specifically designed to combine certain desired corporate characteristics with those of general partnerships.

Common stockholders

typically share all three property rights in proportion to their holdings,

The termination of a corporation can occur

voluntarily or involuntarily

A proxy is

written permission to vote a shareholder's stock on an issue, such as the election of directors.