What is a partnership and how does it work

corporations cont

-Limited liability- shareholders are only liable to the extent of their capital contribution -Generally separates management from ownership- resulting in more centralized management -Corps typically have an unlimited life- keeps on going even when owners leave -Corps have free transferability- if you don't like whats going on in the corp, you can sell your stock. (which presumes a secondary market for shares like NASDAQ)

How do owners of a partnership make money

Generally, an owner of a business makes money by (1) being paid a salary by the business, (2) receiving all or part of the profits from the business and/or (3) selling their interest in the business Salary Often, the partneship will have a partnership agreement that will specify the details about salaries

WSA 178.0603 effect of dissociation

If a person is dissociated as a partner, all of the following apply: A. the persons right to participate in the management and conduct of he partnerships business terminates, b. The persons duties and obligations end with regard to matters arising and events occurring aftr the persons dissociation A persons dissociation does not of itself discharge the person from any debt, obligation, or other liability to the partnership or the other partners which the person incurred while a partner

meinhard cont

Reasoning: the trouble about his conduct is that he excluded his coadventurer from any chance to compete, from any chance to enjoy the opportunity for benefit that had come to him alone by virtue of his agency. This chance, if nothing more, he was under a duty to concede. The price of its denial is an extension of the trust at the option and for the benefit of the one whom he excluded -he was much more than a coadventurer. He was a managing coadventure. For him and for those like him the rule of undivided loyalty is relentless and supreme. Here the subject matter of the new lease was an extension and enlargement of the subject matter of the old one -court views this as a continuing enterprise (even though theres only a couple months left of the agreement) Holding: there is a duty of loyalty plus salmon's managerial duty of disclosure -this is a partnership Andrews dissent There was no general partnership, merely a joint venture for a limited object, to end at a fixed time The new lease, covering additional property, was more nearly the purchase of the reversion than the ordinary renewal with which the authorities are concerned Under these circumstances, Mr. Meinhard is entitled to an interest in the second lease, he having promptly elected to assume his share of the liabilities imposed thereby

WSA 178.0102 definitions

Transferable interest means the right, as initially owned by a person in the persons capacity as a partner, to receive distributions from a partnership, whether o not the person remains a partner or continues to own any part of the right. The term applies to any fraction of the interest, by whomever owned

UPA Section 105. Partnership agreement; scope, function, and limitations.

(a) Except as otherwise provided in subsections (c) and (d), the partnership agreement governs: (1) relations among the partners as partners and between the partners and the partnership; (2) the business of the partnership and the conduct of that business; and(3) the means and conditions for amending the partnership agreement. (b) To the extent the partnership agreement does not provide for a matter described in subsection (a), this [act] governs the matter. (c) A partnership agreement may not: (1) vary the law applicable under Section 104(1); (2) vary the provisions of Section 110;(3) vary the provisions of Section 307; (4) unreasonably restrict the duties and rights under Section 408, but the partnership agreement may impose reasonable restrictions on the availability and 48use of information obtained under that section and may define appropriate remedies, including liquidated damages, for a breach of any reasonable restriction on use; (5) alter or eliminate the duty of loyalty or the duty of care, except as otherwise provided in subsection (d); (6) eliminate the contractual obligation of good faith and fair dealing under Section 409(d), but the partnership agreement may prescribe the standards, if not manifestly unreasonable, by which the performance of the obligation is to be measured; (7) unreasonably restrict the right of a person to maintain an action under Section 410(b); (8) relieve or exonerate a person from liability for conduct involving bad faith, willful or intentional misconduct, or knowing violation of law; (9) vary the power of a person to dissociate as a partner under Section 602(a), except to require that the notice under Section 601(1) to be in a record; (10) vary the grounds for expulsion specified in Section 601(5);(11) vary the causes of dissolution specified in Section 801(4) or (5); [email protected] © by LEG, Inc., d/b/a West Academic (12) vary the requirement to wind up the partnership's business as specified in Section 802(a), (b)(1), and (d); (13) vary the right of a partner under Section 901(f) to vote on or consent to a cancellation of a statement of qualification; (14) vary the right of a partner to approve a merger, interest exchange, conversion, or domestication under Section 1123(a)(2), 1133(a)(2), 1143(a)(2), or 1153(a)(2); (15) vary the required contents of a plan of merger under Section 1122(a), plan of interest exchange under Section 1132(a), plan of conversion under Section 1142(a), or plan of domestication under Section 1152(a); (16) vary any requirement, procedure, or other provision of this [act] pertaining to: (A) registered agents; or (B) the [Secretary of State], including provisions pertaining to records authorized or required to be delivered to the [Secretary of State] for filing under this [act]; or (17) except as otherwise provided in Sections 106 and 107(b), restrict the rights under this [act] of a person other than a partner.

UPA 105 cont

(d) Subject to subsection (c)(8), without limiting other terms that may be included in a partnership agreement, the following rules apply: (1) The partnership agreement may: (A) specify the method by which a specific act or transaction that would otherwise violate the duty of loyalty may be authorized or ratified by one or more disinterested and independent persons after full disclosure of all material facts; and (B) alter the prohibition in Section 406(a)(2) so that the prohibition requires only that the partnership's total assets not be less than the sum of its total liabilities. (2) To the extent the partnership agreement expressly relieves a partner of a responsibility that the partner would otherwise have under this [act] and imposes the responsibility on one or more other partners, the agreement also may eliminate or limit any fiduciary duty of the partner relieved of the responsibility which would have pertained to the responsibility. (3) If not manifestly unreasonable, the partnership agreement may: (A) alter or eliminate the aspects of the duty of loyalty stated in Section 409(b); (B) identify specific types or categories of activities that do not violate the duty of loyalty; (C) alter the duty of care, but may not authorize conduct involving bad faith, willful or intentional misconduct, or knowing violation of law; and (D) alter or eliminate any other fiduciary duty. (e) The court shall decide as a matter of law whether a term of a partnership agreement is manifestly unreasonable under subsection (c)(6) or (d)(3). The court: (1) shall make its determination as of the time the challenged term became part of the partnership agreement and by considering only circumstances existing at that time; and (2) may invalidate the term only if, in light of the purposes and business of the partnership, it is readily apparent that: (A) the objective of the term is unreasonable; or(B) the term is an unreasonable means to achieve the term's objective.

Duty of care

-about how you work Don't be negligent, sloppy. Be focused -> pay attention (attentive) Investigate; research (diligence) Cooperation if needed / notify people if problem (do not ignore problem) Think; use knowledge and skill as a professional Identify problems

What are the legal steps in starting a corporation

. preparing and filing the articles of incorporation ªA corporation comes into existence when the appropriate state agency (usually the secretary of state) accepts for filing a doc known geneally as the articles of incorporation -The articles are executed by an incoporator or organizer and are then delivered to the secretary of states office. That office reviews the document -If properly executed, the secretary of states office files the articles. At that moment, the de jure corporation is formed •The articles are sometimes referred to as the companys charter, which reflects the fact that the state, by filing the doc, has granted its charter, its imprimatur, to the corporation •The delaware division of corporations provides the following guidance for drafting a certificate of incorporation: -The name of the corp -List the name and steet address of the registered agent located in delaware you are appointing to accept service of process for the corp -Total number of authorized shares -Name and mailing address of incorporator for the corp. Please note that the corp itself cannot be the incorporator

WSA 178.0602 power to dissociate as partner; wrongful dissociation

1. A person has the power to dissociate as a partenr at any time, rightfully or wrongfully, by withdrawing as a partner by express will 2. A persons dissociation as a partner is wrongful only if any of the following applies a. The dissociation is in breach of an express provision of the partnership agreement b. In the case of a partnership for a definite term or particular undertaking, the dissociation occurs befor the expiration of the term or the completion of the undertaking

WSA §178.0301 partner agent of partnership

1. Each partner is an agent of the partnership for the purpose of its business. An act of a partner, including the signing of an instrument in the partnership name, for apparently carrying on in the ordinary course of the partnership business or business of the kind carried on by the partnership binds the partnership, unless the partner did not have authority to act for the partnership in the particular matter and the person with which the partner was dealing knew or had notice that the partner lacked authority -partnership is liable for acts done by partners in the ordinary course of partnerships business OR which the partners have actual or apparent authority -a partnership can decide a managing partner (actual authority) . But another partner can bind the partnership unless the third party had notice that that partner had no authority 2. An act of a partner which is not apparently for carrying on in the ordinary course of the partnerships business or business of the kind carried on by the partnership binds the partnership only if the act was actually authorized by all the other partners

WAS 178.0307 actions by and against partnership and partners

1. a partnership may sue and be sued in the name of the partnership 2. To the extent not inconsistent with 178.0306, a partner may be joined in an action against the partnership or named in a separate action 3. A judgment against a partnership is not by itself a judgment against a partner. A judgment against a partnership may not be satisfied from a partners assets unless there is also a judgment against the partner 4. A judgment creditor of a partner may not levy execution against the assets of the partner to satisfy a judgment based on a claim against the partnership unless the partner is personally liable for the claim under 178.0306 AND any of the following is true: a. A judgment based on the same claim has been obtained against the partnership and a writ of execution on the judgment has been returned unsatisfied in whole or in part (if partnership assets are insufficient) b. The partnership is a debtor in bankruptcy c. The partner has agreed that the creditor need not exhaust partnership assets d. A court grants permission to the judgment creditor to levy execution against the assets subject to execution are clearly insufficient to satisfy the judgment, that exhaustion of partnership assts is excessively burdensome, or that the grant of permission is an appropriate exercise of the courts equitable powers e. Liability is imposed on the partner by law or contract independent of the existence of the partnership -people suing partnership have to go after partnership assets first. Can go after individual partners assets if the partner is liable and the partnership doesn't have any more assets (unless they are the tortfeasor. You can always go after/recover from the tortfeasor)

Possible legal issues in a partnership obtaining additional funding

A business obtaining funding by borrowing is commonly referred to as debt financing WSA 178.0402 becoming partner After formation of a partnership, a person becomes a partner in any of the following ways: as provided in the partnership agreement; with the affirmative vote or consent of all the partners 178.0306 partners liability A person that becomes a partner is not personally liable for a debt, obligation, or other liability of the partnership incurred before the person becomes a partner

Internal affairs doctrine

A choice of law rule that says that law of the statte of incorporation should determine issues relating to the internal affairs of the corp. -This doctrine ensures that issues like voting rights of shareholders, distributions of dividends and corporate property, and the relations among a companys investors and managers are all determined in accordance with the law of the state in which the company is incorporation •The foreign corp must qualify (or register) only if it is transacting business in the state •MBCA 15.05a list of activities that do not constitute doing business includes litigating, maintaining bank accounts, selling through independent contractors, owning property, or conducting isolated transactions instate. Delaware 373 contains a similar list •The foeign corp provisions apply to foreign corps engaged in intrastate activities within another state

Withdrawal

A partner always has the power to withdraw from a partnership •UPA 29- any time a partner leaves for any reason, the partnership dissolves •RUPA 601- withdrawal= dissociation. Dissociation leads to dissolution if the things in §801 occurs -Dissociation may result in either mandatory buyout or dissolution . ->If its an at will partnership -> dissociation will lead to dissolution. In almost every other case (death, bankruptcy, expulsion) partner leaving is entitled to a mandatory buyout ->Was dissociation wrongful? (ex. If it's a definite term partnership and the person leaves early) -> mandatory buyout -Mandatory buyout can be delayed to end of term (in definite term partnership); leaving partner may also be liable for damages to partnership -Death results in mandatory buyout to their estate -If a term partnership ends -> dissolution •A partnership cannot stop a partner from leaving (even if wrongful)

WSA §178.0105 partnership agreement (aka RUPA sec 105)

A partnership agreement may not do any of the following: •Alter or eliminate, or restrict remedies for the breach of, the duty of loyalty or the duty of care, except as otherwise provided •Eliminate, or restrict remedies for the breach of, the contractual obligation of good faith and fair dealing under the next section, but the partnership agreement may prescribe the standards, if not manifestly unreasonable, by which the performance of the obligation is to be measured If not manifestly unreasonable, the partnership agreement may do any of the following: 1. Alter or eliminate the aspects of, or restrict remedies with respect to the duty of loyalty 2. Identify specific types or categories of activities that do not violate the duty of loyalty or the contractual obligation of good faith and fair dealing Ex. Limiting the partners duty not to compete. This could benefit the partnership bc maybe the partner could refer clients to the partnership for other things they do (like if a hair dresser branches out from her salon and establishes her own clients separately. She could refer clients to the salon to buy hair products) 3. Alter the duty of care 4. Alter or eliminate any other fiduciary duty The contractarian school of economic thought advocates that people in business with each other ought to be free to agree ot the terms of their relationship, with minimal statutory imposition

Liability of the partnership for the debts of the partnership

A partnership is a legal entity- a legal person. A partnership can be held liable and be sued The partnership statute tells us that a partner is an agent of the partnership

WSA 178.0801. Events causing dissolution

A partnership is dissolved and its business must be wound up, upon the occurence of any of the folliwing: 1. In a partnership at will, any of the folliwing: the partnership knows or has notice of a persons express will to withdraw as a partner 2. In a partnership for a definite term or particular undertaking, any of the folliwing: within 90 days after a persons dissociation by death ot otherwise or wrongful dissociation , the affirmative vote or consent of at least half of the remaining partners to wind up the partnership business 6. The passage of 90 consecutive days during which the partnership does not have at least 2 partners

WSA 178.0601

A person is dissociated as a partner when any of the following applies: •An event stated in the partnership agreement as causing the persons dissociation occurs •The person is expelled as a partner pursuant to the partnership agreement •On application by the partnership or another partner, the person is expelled as a partenr by judicial orde because the person has done any of the following: -Engaged, or is engaging, in wrongful conduct that has affected adversely and materially, or will affect adversly and materially, the patnerships business -Committed willfully or persistently or is committing willfully or persisitently, a material breach of the partnership agreement or a duty or obligation under sec 409 -Engaged or is engaging in conduct relateing to the aprtnerships business which makes it not reasonably practicable to carry on the business with the person as a partner •Any of the following applies to the person: th person becomes a debtor in bankruptcy •The indivudual dies

Composition of capital accounts

A separate capital account shall be mainteained by the partnership for each partner. There shall be credited to each partners capital account (I) the amounts of money contributed by the partner to the partnership; (ii) the fair market value of the property contributed by the partner to the patnership; and (iii) allocations to the partner of partnership income. Each partners capital account shall be decreased by (I) the amount of money distributed to the partner by the partnership, (ii) the fair market value of property distributed to the partner by the partnership, and (iii) allocations of partnership operating loss Capital losses Patners shall share capital losses equally

WSA 178.0503 transferrable interest

All of the following apply to a transfer, in whole or in part, of a transferable interest: a. It is permissible b. It does not entitle the transferee to do any of the following: participate in the management or conduct of the partnerships business A transferee has the right to do all of the following: to receive, in accordance with the transfer, distributions to which the transferor would otherwise be entitled A transfer of a transferable interest in violation of a valid restriction on transfer contained in the partnership agreement is ineffective if that intended transferee has knowledge or notice or notice of the restriction at the time of transfer If a partner transfers a transferable interest, the transferor retains the rights of a partner other than the transferable interest transferred and retains all the duties and obligations of a partner If a partner transfers a transferable interest to a person that becomes a partner with respect to the transferred interest, the transferee is liable for the partners obligations known to the transferee when the transferee becomes a partner

Kovacik v reed

Facts: in this suit for dissolution of a joint venture and for an accounting, defendant appeals from a judgment that plaintiff recover from defendant one half the losses of the venture. Plaintiff told reed that plaintiff had an opportunity to do kitchen remodeling work for sears and asked reed to become his job superintendent and estimator in this venture. Plaintiff said that he had about $10,000 to invest in this venture and that if reed would superintend and estaimate the jobs, plaintiff would share the profits with reed on a 50/50 basis. Plaintiff did not ask reed to agree. to share any loss taht might result and reed did not offer to share any such loss. Plaintiff, who at the time had all of the financial records of the venture in his possession, infomed reed that the venture had been unprofitable and demanded contribution from reed as t amounts which plaintiff claimed to have advanced in excess of the income received from the venture. Reed refused to contribute to or pay any of the losses resulting from the venture. The venture was terminated. Plaintiff sued, seeking an accounting of the affairs of the venture and to recover from reed one half of the losses Rule: It is the general rule that in the absence of an agreement to the contrary, the law presumes that partners and joint adventurers intended to participate equally un the profits and losses of the common enterprise, irrespective of any inequality in the amounts each contributed to the capital employed in the venture, with the losses being shared by them in the same proportions as they share the profits -where, howveer, as in the present case, one partner or joint adventurer contributes the money capital as against the others skill anf labor, all the cases cited hold that neither party is liable to the other for contribution for any loss sustained. Thus, upon loss of the money the party who contributed it is not entitled to recover any part of it from the party who contributed only services

Giles v giles land company

Facts: kelly giles, a general partner in a family farming partnership, filed suit against the partnership and his partners, arguing that he had not been provided access to partnership books and records. The remaining members of the partnership then filed a counterclaim requesting that kelly be dissociated from the partnership. The dispute centers on a family owned and operated limited patnership. He received a letter explaining the familys interest in converting the partnership inro a LLC. Kelly did not sign the particles of organization for the proposed converstion and instead had his atty request production of all the partnerships books and records for his review. Kelly was notisatisfied with the records that the partnership provided Holding: kelly contends that the trial courts ruling regarding his dissociation from the partnership was improper. We disagree -we determine that the tial court properly held that kelly could also be dissociated Issue: did the trial court err in finding that kelly should be dissociated from the partnership Rule: RUPA 601 states a partner is dissociated from a partnership upon the occurrence of any of the following events: on application by the partnership or another partner, the partners expulsion by judicial determination because: (1) the partner engaged in wrongful conduct that adversely and materially affected the partnership business; (3) the partner engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with the partner -under the alternative theory of dissociation, the record must demonstrate that (kelly engaged in wrongful conduct and (2) that the wrongful conduct adversely and materially affected the partnership business

Mas associates LLC v. korotki

Facts: korotki (appellee) sought to initiate a merger with the mortgage lending company he owned, savings first mortgage, and two other licensed mortgage entities: greetree and MAS. Mr. Greenbery, though not a member of any individual LLC served as MAS's manage and CEO. Post-merger, the three companies were to operate as one . MAS had opened give new bank accounts that authorized appellee, mr. Greenberg, and mr. Wax to authorize checks and bind MAS to any financial obligations. All three had deposited their share of the contribution funds into the new MAS operating account Despite not signing the agreement, appellee, mr. Greenberg, and mr. Wax began to follow the agreement in principle. They underwent the process of physically meging their individual businesses. Savings first's and greentrees employees joined MAS's workforce; savings first sold its furnishingd to MAS and MAS's business operations moved to the office space, owned by wax properties. Appellee, mr. Wax and mr. Greenberg each contributed to the newly combined mortgage lending business, as required by the agreement Day to day executive functions of MAS were shared amongst appellee, mr. Greenberg, and mr. Wax. The three also shared profits. Appellee notified mr. Greenberg and mr. Wax of his decision to quit and claied that he was entitled to a disability-related buyout under the issues outline that he asserted replaced the agreement . When mr. Greenberg and mr. Wax allegedly refused to negotiate the terms of his departure, appellee filed a complaint Rule: a joint venture is created when two or more persons combine in a joint business enterprise for their mutual benefit with an understanding that they will share in profits and losses and have a voice in its management. Whether or not a joint venture exists, depends upon the intentions of the parties similar to partnership. There exists no real distinction between a partnership and a joint venture -a partnership is an association of two or more persons to carry on as co-owners of a business. Accordingly, there is no requirement that a partnership be formally established in a writing, as longa s the definition is met. -even when there exists no written agreement, this court could still find an intention to create a partnership, if there is profit sharing and a community of interest in the business. Although not every community of interest necessitates a partnership, it can be seen as evidence of a partnershup absent an agreement -because the existence of a partnership will not be presumed, but proven, there are several scenarios that can prove the existence or nonexistence of a partnership. Thus, we look at the community of interest in the business, to wit, te profits derived therefrom, any capital contributed, and control. RUPA states that a person who receives a share of the profits of a business is presumed to be a pertner in the business, unless the profits were received in payment of a debt, for services, or rent, of an annuity, of interest on a loan or for the sale of goodwill o property -nevertheless, the mere showing of a division of profits is not, in itself, sufficient to show a partnership. In fact,, if the decision of profits was received in payment of a debt, as wages of an employee, rent, annuity, or as interest on a loan, then it is not probative of a partnership -if a person does not have nay other interest in the capital of profits, they are an employee, not a partner -another scenario in which a person is deemed a partner includes, whether the organization accepts a parties capital contribution. A voice in the management of business can further be indicative of a partneship -if it appears that the transaction is a mere device to obtain the advantages of a partnership, without the responsibilities, it will be held to be a partnership, whatever the parties may have called it. The interest is usually to be found in the powers of control of the alleged lender. He has any voice or part in controlling the management of the business as a principal therein? He has, by virtue of the arrangement, such an interest in the business that he can be regarded both as principal and agent for the others -this cout is not holding that a business executive who only has, perhaps management rights and is paid a salary in wages, can acquire partnership interests through their work with the business. Rather, this court is holding that if there is no written doc to solidify what the parties intended, thereby leaving it to a court to sort through the facts, in which a writing would have certainly been helpful, then the evidence adduced at trial is all the ocurt has in making its determination

Meinhard v salmon

Facts: salmon leased the building from the buildings owner, elbridge gerry. Salmon also entered a separate agreement with morton meinhard, a wool merchant. Under this agreement, meinhard provided the money for renovations to the building in exchange for a share of the profits from the building over the course of the 20 year lease. Their agreement also provided that salmon and meinhard were to shaer any losses equally but that salmon had the sole power to manage the building. Gerry, the buildings owner, wanted someone to lease all of these properties, to destroy the existing buildings, and to put up a new, single, larger building. Salmon accepted gerrys proposal and entered into a lease and development agreement with gerry. Meinhard did not even know of this agreement. When meinhard learned of the deal, he initiated this litigation, suing fo an interest in the hew, expanded development Meinhard and salmon were coadventurers, subject to fiduciary duties akin to those of partners. The heavier weight of duty rested, however, upon salmon. He was manager as well. To the eye of an observer, salmon held the lease as owner in his own right, for himself and no one else. In fact, he held it as a fiduciary, for himself and another, sharers in a common venture Issue: is there a partnership? If so, is there a duty of loyalty/does salmon have a duty to carry meinhard along (and what is the nature of that duty) Rule: joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Not honesty alone, but the punctilio of an honor the most sensitive is the standard of behavior. -the vey fact that salmon was in control with exclusive powers of direction charged him the more obviously with the duty of disclosure, since only through disclosure could opportunity be equalized -one partner may not appropriate to his own use a renewal of a lease, though its term is to begin at the expiration of the partnership -a different question would be here if there were lacking any nexus of relation between the business conducted by the manager and the opportunity brought to him as an incident of management. If salmon had received from gerry a proposition to lease a building at a location far removed, he might have held for himself the privilege thus acquired, or so we shall assume

kovacik cont

Holding: we have concluded that inasmuch as the parties agreed that plaintiff was to supply the money and defendant the labor to carry on the venture, defendant is correct in his contention that the trial court erred in holding him liable for one half the monetary losses, and that the judgment should therefore be reversed -it follows that the conclusion of law upon which the judgment in favo of plaintiff for recovery from defendant of one half the monetary losses depends is untenable, and that the judgment should be reversed •The questio of liability to third parties for unpaid obligations of the partnership can arise at any time during the existence of a partnership -RUPA 306: all partners are jointly and severally liable for all obligations of the partnership •In kovacik, the partnership already paid its obligations to creditors; it had paid tese third parties with patneship funds that had been invested in the partnership by kovacik. The partnership had ended. It had no more debts -The question in kocacik was not whetehr creditors of the partnership would recover on their claims, but whether kovacik was not whether creditors of the partnership would recover on their claims, but whether kovacik would recover anything on his investment in the partnership (which lost the money he invested) -Unless it is answered In the partnership agreement, that question will be answered by RUPA 807

Mas associates LLC v. korotki cont

Holding: we hold, irrespective of the parties not signing the agreement, appellee and appellatns entered into a joint venture for the short period of time between not signing the agreement and when they could agree on the terms of a merger, or sign a new interim agreement -we hold that appellee sared in the profits of the business and had equal share in the management over the business Therefore, we hold that there was a joint venture between appellee and appellants, using MAS as the vehicle to conduct business until the parties could officiate thie merger and follow regulatory guidelines to change ownership of MAS -this is a partnership. As a consequence, appellant has an equal share in the business as a partner Reasoning: this is evidenced by the parties continuing to work towards merging their respective companies despite not having a signed agreement. Further, the parties did not legally merge their companies, choosing to work as an alleged joint venture instead of notifying the states in which they operate, of a change of owenrship. We interpret this behavior as an intention to create a joint venture, up and until the ownership of MAS was changed and regulatory requirements were followed (so its not a corporation bc they didn't file anything with the state) -in this case, the record establishes that the parties decided to, after an economic turnaround resulting in a profit for the business, began to distribute dividends to appellee and appellants. In an email presented at trial, appellee states that because the business was making a profit, the parties should meet to consider monthly salaries. This suggestion, made by appellee, was based in profit sharing -both appellants and appellee each contributed to MAS in an effort to fund the new venture. The purpose of the business arrangement was for the thee of them to merge their respective mortgage lending businesses, with MAS absorbing the other entitles and remaining as the surviving mortgage entity. The pur;ose of that money was to contribute to the new venture, regardless of the descriptive memo line on the instrument -appellee had equal management power as appellatns. They agreed to do all of the hiring and firing as a decision making team. -all parties agreed to share management of the day to day business decisions and operation of the venture Issue: we must next examine appellees community of interest in the alleged partnership- whether appellee contributed capital or shared control, to determine whether a partnership truly exists (and what is the consequence)

What is a corporation

Some corps are often called "close" or "closely held"/ they have relatively few shareholders and thee is no public market for buying or selling interests in them. -On the othe hand, large corps are often called public or publicly-traded because interests in them are traded each business day on stock exchanges such as the NY stock exchange or NASDAQ

giles cont

Reasoning: the trial court focused on a meeting between the partners in 2006, where kelly turned to each of the general partners and said that they would each die, and in turn he would be the last man standing and that he would then get to control the partnership. The trial court also relied on evidence that kelly said that paybacks are hell and that he intended to get even with his partners. The trial court also found this to be a threat Another fact that the trial court relied on in finding that the family relationship was irreparably broken was that it was impossible for any of the family members to communicate with kelly regarding the patnership. -In light of the animosity that kelly harbors toward his partners and his distrust of them (which distrust is mutual), it is clear that kelly can no longe do business with his partners and vice versa. The evidence indicated that most communications with kelly had to be conducted though his atty. Moreover, kellys statement predicting the deaths of his general partners, his statement that paybacks are hell, and his statement that he would get even showed a naked ambition on his part to control the partnership, contrary to the interests of the other partners -kelly is clearly not cooperating with the other partners and the distrust between kelly and his partnes runs both ways. Thus, even though there is no evidence that kelly has been dishonest, and even though the partnership has continued to be successful, this does not mean that the other partners should be forced to remain in partnership with an uncooperative and distrustful partner -because this is a family partnership, the evidence of kelly making threats or berating his parents to get them to give him what he wants qualifies as wrongful conduct. None of the partners were able to interact o communicate with kelly. The partnership was at a standstill because of the disputes between kelly and the rest of the partners. This is evidence that kelly was materially or adversely affecting the partnership -the court dissociating him is not necessarily a wrongful withdrawal, but it may be considered one

MBCA 2.02a articles of incorporation

The articles of incorporation must set forth: -A corporate name -The number of shares the corp is authorized to issue -The street and mailing address of the corporations initial registered office and the name of its initial registered agent at that office; and -The name and address of its incorporator •Statutes like the MBCA 2.02a list mandatory provisions- those that must be included in the articles. MBCA 2.02b lists permissive clauses •Note that both delawae and the MBCA require that the corporate name include an approved word (or abbreviation). Under MBCA the name must include corporation, company, incorporated, or limited (or an abbreviation of one. ) -The law of every state has a similar requirement

WSA §178.0105 standards of conduct for partners (like sec 409 RUPA)

The fiduciary duty of loyalty if a partner includes all of the following duties: a. The duty to account to the partneship and hold as trustee for it any property, profit, or benefit derived by the partner in or from any of the following: 1. The conduct or winding up of the partnerships business 2. A use by the partner of the partnerships property 3. The appropriation of a partnership opportunity (doing these things for the benefit of the partnership) b. The duty to refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a person having an interest adverse to the partnership c. The duty to refrain from competing with the partnership in the conduct of the partnerships business before the dissolution of the partnership A partner shall discharge the duties and obligations under this chapter or under the partnership agreement and exercise any rights thereunder consistently with the contractual obligation of good faith and fair dealing -when looking for partnership law, first look to partnership agreement (bc RUPA sec 105 says to) ; then look to state law if agreement is silent on an issue; then look to cases for interpretation of the state statutes -sec 409 of RUPA gives definition of loyalty

WSA 178.0401 partners rights and duties

Unless authorized by the partnership agreement or otherwise in accordance with this chapter, a partner is not entitled to renumeration for services peformed for the partnership, except for reasonable compensation for services rendered in winding up the business of the partnership 178.0105 partnership agreement Except as otherwise provided, the partnership agreement governs relations among the partners as partners and between partners and the partnership Partnership profits The law with respect to rights to partnership profits, like the law with respect to partnership salaries, is often found in the partnership agreement- not in the partnership statute or partnership case law 178.0401- Each partner is entitled to an equal share of the partnership distributions and , except in the case of a limited liability partnership, is chargeable with a share of the partnership losses in proportion to the partners share of the distributions

Termination and liquidation

Upon the expiration of the term of this partnership agreement, of it the partners should sooner agree to cause a termination of this partnership, the partners shall proceed with reasonable promptness to liquidate the business of the partnership. The assets of the partnership shall be sold and the proceeds of sale shall be application or distributed in the following order of priority: -To pay or provide for the payment of all liabilities of the partnership; -To return to the partners any credit balance in thei capital accounts

What are the issues a client of yours should consider if contemplating forming a partnership for the purpose of operating a business for profit

What is a partnership Partner-management control- which makes decisions, how vote Issues of capital contributions (how much, when, why ,type) How share profits and losses; issue of distributions Partner-partnership assets- how acquired? Who owns what, when, where Profit making and transferability- including salaries, employee contracts, sale to third party, buy-back agreements Fiduciary duties (any limitations?) Life of partnership, dissociation, partnership continuation after dissociation, dissolution, termination Issue of liability Tax consequences Merger as possible end game There are other possible end games for partnerships. For exmaple, in day v sidley and austin, the existence of the liebman firm ended with its merger into sidley and austin

What are the legal issues in operating a business as a partnership

Who owns what •Under all partnership statutes, partnerships can and do own property. The statutory provisions excerpeted below provide a partial answer: -WSA §178. Property acquired by a partnership is property of the partnership and not of the partners individually. -When is property partnership property. (1) property is partnership property if acquired in the name of any of the following (a) the partnership. ->Property is presumed to be partnership property if purchased with partnership assets, even if not acquired in the name of the partnership ->Property acquired in the name of one or more of the partners, without an indication in the instrument transferring title to the property of the persons capacity as a partner or of the existence of a partnership and without use of partnership assets, is presumed to be separate property, even if used for partnership purposes •RUPA- partnership is a separate legal entity . A partnership is a single legal entity, so it can own property •You cannot represent all three entities (both partners and partnership) due to conflicts of interest

Can a partnership continue after a partner withdraws

Yes, under RUPA, if: 1. Withdrawal is wrongful resulting in mandatory payout and remaining partners want to continue, then partnership continues. But if half of remaining partners want to dissolve, partnership must dissolve 2. Death, expulsion, etc result in mandatory payout, partners may continue 3. Partner that withdraws in a partnership at will can compel dissolution. After dissolution, if withdrawing partner agrees, the partnership can continue If a partner withdraws, and within 90 days a second person withdraws, the second withdrawal generally is not considered a wrongful withdrawal Upon dissolution, if a majority of the partners decide to continue the partnership with those participating, they can

Corporations

a corporation is whatever the relevant state law says it is -Every states corporation statute provides that (I) a corporation is a separate legal entity and (ii) its owners, usually called shareholders (or stockholders) are generally not personally liable for the debts of the corp -This means that while there is no statutory limit on how much money an owenr of a corp can make fom her investment in a corporation, the most that she risks is the amount she paid for the shares of stock. That is the limit of her liability. This is the concept of limited liability

WSA §178.0305 partnership liable for partners actionable conduct

a partnership is liable for loss or injury caused to a person, or for a penalty incurred, as a result of a wrongful act or omission or other actionable conduct of a partner acting in the ordinary course of business of the partnership or with authority of the partnership Was 178.0306 partners liability A. all partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law -both contractual and tort liability if conduct was within ordinary scope of business

What events cause a partnership dissolution

•A partners ceasing to be a part of the partnership (voluntarily or involuntarily through death or expulsion) is called dissociation •A partnership does not dissociate. A partnership dissolved •A partne does not dissolve. She dissociated •Dissociation of a partner does not always result in dissolution of the partnership in states that have partnership statutes based on RUPA WSA 178.0105 partnership agreement A partnership ageement may not do any of the following: vary the causes of dissolution specified in 178.0801(4) or (5)

mas associates notes cont

•A partnership can exist without a written partnership agreement •First, a partnership agreement is a contract and is enforceable to the same extent as contracts generally -Second, always remember that partnership agreements can change much of the statutory law that otherwise would govern •Definite (term) partnership- agree to working together for a set period of time; or conduct that implies the partnership will just be for a set period of time •At will partnership- partnership lasts for an indeterminate period of time. No end date

Contracting before incorporating

•A promotor is someone acting on behalf of a corp that is not yet formed •Once a corp is formed, what is the liability of the corp for a pre-incorporated contract? Assume the articles of incorporation are filed forming todos inc after baird signed the lease with L and L. is the corp liable on the lease? -No. The corp did not exist when the lease was entered, and does not become liable on the lease automatically simply by coming into existence •The corp will be liable on th elease only if it takes some action to adopt it. It might do so in one of two ways. -First, the corp itself might expressly adopt the contact. A corp generally acts through its board of directors -Second, the corp might impliedly adopt the lease. Suppose the board of directors does not take such a formal action, but a corporate official causes the corp to use the premises that are subject to the lease. By using the premises, the corp has adopted the lease, and is liable from that point

Completing the organization of the corp

•Completing the orgnaization of the corporation consists of two steps: appointing the initial officers and adoipting the initial bylaws of the corporation. These tasks are undertaken at the organizational meeting (or can be done by written consent) •Who holds this meeting? If the initial directors were named in the articels (which is permitted but not required), they will hold the organizational meeting -IF THE INITIAL DIRECTORS WERE NOT NAMED IN THE ARticles, the incorporator undertakes these organizational steps (or they can elect the initial directors and let them complete the organization) •The board of directors appoints officers to carry out the boards policy -Officers are agents of the corp, and may bind the corporation to agreements for which they have agency authority •Unlike the articles, bylaws are not filed by the secretary of state; the bylaws are internal to the corp and comprise essentailly an operating manual for how things will be done. For instance, bylaws may prescribe tasks for various officers

Delaware issuing stock

•Delaware 152- the BOD may authorize capital stock to be issued for consideration consisting of cash, any tangible or intangible property or any beenfit to the corp, or any combination thereof. The BOD may determine the amount of consideration or approving a formula by which the amount or min amount of consideration is determined. In the absence of actual fraud in the transaction , the judgment of the ditectors as to the value of such consideration shall be conclusive -not specified whether you can issue in exchange for services to be performed, but you can make an argument bc its in the benefit of the corp •Delaware 153. Consideration for stock. (a) shares of stock with par value may be issued for such consideration, having a value not less than the par value therof, as deterined from time to time by the BOD, or by the stockholders if the certificate of incorporation so provides (b) shares of stock without par valye may be issued fro such consideration as is determined from time to time by the BOD, or by the stockholders of the certificate of incorporation so provides

What is dissolution

•Dissolution is not itself the termination of partnership activities, I.e. the end of the partnership •Comment 2 to RUPA 801- under RUPA, dissolution is merely the commencement of the winding up process. The partnership continues for the limited purpose of winding up the business -Winding up the partnership business entails selling its assets, paying its debts, and distributing the net balance, if any, to the partners in cash according to their interests -When the winding up is completed, the partnership entity terminates •When a partner withdraws under UPA 29= dissolution of the partnership Ex. Partner dies, decides to withdraw, goes into bankruptcy

choosing the state cont

•Either way- whether qualifying or registering- the foreign corp must provide the state with info- largely, the kind of info set out in its articles -In addition, the foreign corp must prove that it is in good standing in its state of incorporation -Among other things, this means that it si current on the payments of fees and taxes in its home state. But that is not all. The foreign corp will be required to maintain a registered office and a registered agent in the state in which it is qualifying or registering -And it must pay fees to the state and file annual reports there as well •Why do so many companies incorporate in delaware? The delaware court of chancery is a business that has written most of the modern US corporation case law. Delaware's state gov is business friendly and accessible -You don't have to live in delaware to have a delaware corp. Delawae laws requires every corp to have and maintain a registered agent in the state who may be either an individual resident, a domestic corp, or a foreign cop authorized to transact business in delaware whose business office is identical with the corporations registered office -You don't need an atty to incorporate. -If youre incorporated in another state or Jx, you need to qualify to do business in delaware. Must submit a completed foreign qualification form with the division of corporations along with a certificate of existence issued by that state or Jx -How quickly can I incorporate or receive back my request? The division of corporations offers a variety of services including 1 hour, 2 hour, same day and next day expedited services which are designed to meet your business needs •yet another reason that corps choose delaware is that their lawyers are familiar with delaware law

WSA 178.0806 disposition of assets in winding up

•First, In winding up its business, a partnership. shall apply itss assets, including contributions required by this section, to discharge the partnerships obligations to creditors, including partners that are creditors •If a partnerships assets are insufficient to satisfy all its obligations under the first subsection, with respect to each unsatisfied obligation incurred when the partnership was not a limited liability partnership, the following rules apply: -Each person that was a partner when the obligation was incurred shall contribute to the partnership for the purpose of enabling the partnership to satisfy the obligation (so if they owe money to creditors or partner investments, partners have to contribute to pay that)

Defective incorporation

•If The proprietors did not form a de jure corp (because the secretary of state never filed the articles), courts developed the doctrine of de facto corp -They concluded that if the propietors were acting in good faith and came very close to forming a de jure corp (usually said to have reached colorable compliance with the formation requirements), there was a de facto corp -As a result, the proprietors would not be personally liable •De facto corp is a broad doctrine- it applies in contact and tort. It appies in all cases except an action brought by the statte against the proprietors -De facto corp is an equitable doctrine, so one seeking to sue it must act in good faith. That means she must be unaware of the failure to form a de jure corp •Some states have abolished the de facto corp doctrine •MBCA 2.04- all persons purporting to act as or on behalf of a corp, knowing there was no incorporation under this act, are jointly and severally liable for all liabilities created while so acting •The official comments to 2.04 state that situations may arise in which the protection of limited liability arguable should be recognized even though the simple incorporation process established by the act has not been completed •A related but narrower doctine is corporation by estoppel. It is noarrower because it generally applies in contract cases only, not tort. It is basically just estoppel •The corporation by estoppel argument is that epstein dealt with the business as a cop and treated it as such, and thus should be estopped fom denying that it is

WSA 178.0701 purchase of interest of person dissociated as partner

•If a person is dissociated as a partenr without the dissociation resulting in a dissolution and winding up of the partnership business, (generally dissociation does not result in both a dissolution and a winding up) the paetnership shall cause the persons interest in the partnershpi to be purcahsed for a buyout price detemined pursuant to sub 2 •The buyout price of the interest of a person dissociated as a partner is the amount that would have been distributable to th person if, on the date of dissociation, the assets of the partnership were sold and the partnership were wound up, with the sale price equal to th greater of the liquidation value or the value based on a sale of the entire business as a going concern without the person •A person that wrongfully dissociates as a partner before the expiation of a definite term or the completion of a particular undertaking is not entitled to payment of any part of the buyout price until the expiration of the term or completion of th undertaking, unless the person establishes to the satisfaction of the court that earlier payment will not cause undue hardship to the business of the partnership. A deferred payument must be adequately secued and bear interest

contracting cont

•If incorporators makes a contract before its incorporated, incorporators are jointly and severally liable to the contract •Assume the articles of incorporation are filed forming todos inc after baird signed the lease with L and L- regardless of whether the corp adopts the lease. Can L and L enforce the lease against baird? -Yes. The only way for baird to get off the hook for personal liability at this point is for the parties (todos, L and L, and baird) to enter a novation. -A novation here would be an agreement that todos would replace baird under the lease with L and L

Mas associates LLC v. korotki notes

•In a partnership with two people, there are three entities total- the two partners and the partnership itself •Martin v peyton- peyton made a loan of $2.5 mil to martin. Martin became insolvent. Martin's ceditors argued that (I) peytons sharing in prpfits coupled with peytons power to veto certain business decisions made peyton a partner with martin and (ii) peyton, as a partner, was liable for the partnerships debts. -In finding that peyton was not a partner, the court distinguished between active control and reactive control. Specifically, the court emphasized that peyton may not initiate any transactions as a partner may do •Ultimately, the question of whether a partnership has been formed is a totality of the circumstances inquiry -Profit sharing and control tend to be the most important factors in this inquiry •The court uses the phrase "partnership for a single transaction o cetain period of time". The more commonly used term is "term partnership" -A term partnership is a partnership in which the partnes have agreed explicitly or implicitly to remain partners for a definite term or until the completionn of a particular undertaking -An at will partnership is one in which the partners have not agreed to remain partners until the expiration of a definite term or a particular undertaking. It is the default form of partnership

common stock

•In the event that a corp only has one class of stock, then all of its stock would be common stock •Par value is the min price for which a corporation can issue its shares •Par value is just a min issuance price, not a fixed price -Par value affects only the issuance price. It would have no effect on the price for which roger could later resell his shares -Such later sale, because it is not made by the corp, is simply not an issuance, and issuance rules such as par vlaue therefore do not apply -Par value doesn't apply to people selling stocks on the secondary market. It only binds the corp •States do not require that corps issue par stock. Rather, they permit the corp to do so if desired. MBCA 2.02b2 •States in which par value stock is routinely usd (and they are dwindling) also generally provide for the corps keeping separate funds or accounts- stated capital and capital surplus. -Stated capital includes the aggregate par value of all issued shaes of par value stock. If, for ex, todos had issued 50 shares of $1000 par value stock, then its stated capital would be $50,000 -The stated capital amount cannot be distributed to shareholders. It is a cushion to protect creditors, to ensure that the company retains at least some money to pay its bills

Partners sale of their transferable interest to a third party

•Partnership statutes limit what a partner can sell to a new investor: only the partners transferable interest can be sold •Remember that a partner has both the right to share in the profits of the partnership. A right to participate in the management of the partnership, as well as other rights, such as the right to get access to info -Unless all of the other existing partners agree to the sale, a partner can sell only his financial rights- the partners transferrable interest- not the other rights •You are selling your rights to distribution, not your right to managing power or control . The transferring partner would still have control/managing powers -Why would the selling partner want control still? Bc they are still jointly and severally liable -If a partner wants out completely, they can say theyre done and demand for the winding up of the business and to pay that them the Entirety of their share in the partnership. So a partner can always withdraw

Who decides what the partnership will do

•Patnership statutes such as the one below provide a default answer- an answer unless the partnership agreement otherwise provides -WSA §178. Partners rights and duties ->Each partner has equal rights in the management and conduct of the partnerships business ->A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners. An act outside the ordinary course (ex. Bringing in a new partner) of business of a partnership, an amendment to the partnership agreement, may be undertaken only with the affirmative vote or consent of all the partners. •"ordinary course of business" is fact specific •Cannot vary in partnership agreement powers to dissociate (cant change a partners ability to leave the partnership)

preferred stock

•Preferred stock is a creature of the articles of incorporation -If the articles provide that a class of stock is to be treated more favorably than the other class of stock, then it is preferred stock. The other class that does not enjoy special treatment is called the common stock •Generally, the more favorable treatment relates to one or more of the following financial attributes of ownership: (1) dividend rights, (2) liquidation rights, or (3) redemption rights •A more typical type of dividend preference would be a dollar amount- like $1 per preferred share -The corp would be obligated to pay each preferred share a dividend of a $1 before it could pay even one cent of dividends to the common shareholdes •A common type of preference utilized in venture capital (VC) financings is a liquidation preference. -The preference is often the original purchase price per share -The preference is designed as a form of downside protection so that if the company is ultimately sold for a relatively low value, the VCs will get all their money back before the founders get any proceeds at all

Issuing stock

•Shares of stock are the units of owenrship in a corp •MBCA 6.03a- a corp may issue the number of shares of each class or series authorized by the articles of incorporation. •Shares that are issued are outstanding shares until they are reacquired, converted, or cancelled In short: -A corp can sell its own stock -A corps sale of its own stock is called an issuance -The articles of incorporation determine the number of shares a corp may issue ->This number is the number of authorized shares ->Ultra-virus act is something outside the authority of the articles. Ex, if you issue more shares than youre authorized ->Intra-virus act is something within their authorization based on articles -A corp is not required to issue all of tis authorized shares -Shares that the corporation actually does issue are called issued shares -Outstanding shares consist of issued shares that the corp has not reacquired (the corp can buy stock back from shareholders, and those shares that have been issued and not reacquired are outstanding) and -A corp can have more than one type (class or series) of stock

What are the legal issues in starting a business as a partnership

•Starting a business as a partnership requires no formal legal steps. Nothing needs to be filed in any state office to create a partnership •Both sole proprietorships and partnerships can be viewed as residual or default business structures -If two or more people own a business and they do not take any action to qualify it as a corporation or some other particular for of business structure, it will be a partnership •In order for a plaintiff to prove that they are a partner in a business that is a partnership, the plaintiff must prove that they are one of several owners •Conduct can create a partnership (doesn't necessarily need any express terms that say you are in a partnership)

par

•Suppose todos has received funds for its issuance in excess of par. Such excess goes into an account called capital surplus or additional paid in capital and may be distributed back to shareholders in dividends •Because states have eliminated any requirement for par stock, most have jettisoned a requirement that the company maintain a stated capital account -Even in the states that require stated capital (or just "capital") corps have reduced the importance of the concepts by setting par value at a penny or even a fraction of a cent •MBCA 6.21b- the board of directors may authorize shares to be issued for consideration consisting of any tangible or intangible property or benefit to the corp, including cash, promissory notes, services performed, contracts for sevices to be performed, or other securities of the corp (in deciding, BOD must vote majority) (so corp can issue stock in exchange for land. Goodwill may be harder to put value on so as to be used for consideration in exchange for shares issued. If you can argue it has some sort of value, then maybe. Can exchange for a release of a claim against the corp- this has value) ( c) - before the corp issues shares, the BOD shall determine that the consideration receivedd or to be received for the shares to be issued is adequate. That determination. by the BOD is conclusive insofar as the adequacy of consideration for the issuance of shares relates to whether the shares are validly issud, fully paid, and nonassessable

What is a corporation and what is corporate law

•The need for an entity that outlives its owners, shields its owners fron legal liability, and in which the assets of the entity itself cannot be pursued to satisfy claims against individual owners of the business- such a forom permits raising capital from large groups of unaffiliated investors, provides them with a liquid investment that is freely tradable, and provides some means for the disparate group of owners to exerse voice and control over an entity run by a professional class of managers, as opposed to owenrs -The modern corporation is the ultimate manifestation of these practical requirements •The overwhelming majority of corps are not publicly traded •The general corp law of most states are one size fits all; they apply to all corps •Corporation is separate legal entity formed under the laws of a state in which the owners are not personally liable for debt of the entity •One or more persons may become incorporations of a corp by delivering the articles of incorporation to the secretary of state fo filing. A person= individuals and entity such as corps, ass'n, partnerships, gov't

Partners sale of their ownership interest back to the partnership

•The partner might also make money by selling their share of the partnership back to the partnership itself -Such agreements are commonly referred to as buy-sell agreements •Any buy-sell agreement should answer the following questions: 1. Are the other partners or the partnership obligated to buy, or do they instead have the option to buy 2. What events trigger this obligation or option 3. How is the selling partners interest to be valued 4. What is the method of funding the payment •Special attention should also be given to the tax effects of the payout (but not in these materials) •Even if there is no buy-sell agreement, a partner has the power to compel the partnership to pay for their partnership interest by withdrawing from the partnership

partnership interest

•The value of a partnership interest is a function of the future cash flow that the ownership interest will generate -That is usually a guess as it involves making predictions about the success or failure of the business over a long period of time -But the value is a function of the future performance of the business, and not simply driven by the value of the capital contributed by the partner •Calculating the value of a partners interest in a business first requires determining the value of the business overall. Then , one can address the question of what fraction of that value the partner has a claim on -That fraction need not be the same as the fraction of capital committed by the partner

Corporation law

•There are four primary sources of corporate law: (1) state statutes, (2) articles of incorporation, bylaws and other agreemenrs, (3) case law, and (4) federal statutes •Each state has its own general corporation statute -More than half of the states have modeled their statutes in some measure on the model business corporation act (MBCA) •In addiiton to the MBCA, delaware corporation law is important. 2/3 of large corporations are formed there •Some of the provisions in any states statutes are mandatory. Others are default rules that apply only if the articles of incorporation or bylaws of the corp do not contain a different provision •Case law serves two separate corporate law functions. Fist, cases interpret and apply the provisions in corporate statutes and in a corporations articles and bylaws -Second, cases fill gaps in the law. Perhaps the most important judicial gap-filling involves the fiduciary duties of directors, officers and shareholders •There is no general federal corporation statute

What is a partenrship

•There are three important differences between a sole proprietorship and a partnership: (1) the number of owners, (2) the importance of state statutes, and (3) the number of legal entities •A partenrship is a business with two or more owners •No state has a sole proprietorship statute. Every state has a partnership statute •Every states partnership statute treates a partnership as a legal entity- separate from its owners- for some purposes •For example, under all state partnership statutes, the partnership itself can own property that its partnerships do not own, and the partners can own property that the partnership does not also own -By contrast, a sole proprietorship cannot own property that the sole proprietor does not also own, and the sole proprietor cannot own property that the sole proprietorship does not also own •Despite a partnerships being technically a separate entity, in two of the most important aspects, a partnership is indeed an aggregate •In every state, the state partnership act makes partners personally liable for the debts of the partnership •The Internal revenue code does not treat a business structured as a partnership as a taxpayer, I.e. a separate legal entity •The partnershp itself does not pay tax on its provits -Only the partners pay tax on the business's profits. This is called flow-through taxation

completing the organization cont

•Though adopting bylaws is not a condition precedent to forming a corporation, most states require that they by adopted •MBCA 2.06b, like the provisions in all states, is expansive about the contents of a corp's bylaws: the bylaws may contain any provision that is not inconsistent with law or the articles of incorporation. Delaware 109b provides the same •Only the articles can change the general rule that each outstanding share of stock is entitled to one vote. MBCA 7.21a. -Thus, if a provision were put in the bylaws, it would be ineffective •But the bylaws may fix the record date for determining which shareholers will vote at a particular shareholder meeting. Accordingly, there is no need to put such a provision in the articles -Bylaws bind the corp •The articles and the bylaws should never contain conflicting provisions because they should not address the same topics -If there is a conflict, however, the articles will prevail

Choosing the state of incoporaiton

•To paraphrase a former secretary of defense, what is good fo general motos is good fo the rest of the country. Since GM is incorporated in delaware, why should todos incorporate in delaware? -Consider the fees that have to be paid to delaware. Businesses incorporated in delaware pay a filing fee of $89 and a certificate of good standing costs $50. In addition, each year the company pays the state of delaware an annual report filing and franchise tax, which is a minimum of $175. And you need to maintain a registered agent and office -And there are reporting requirements, including an annual report to the state regarding the condition of the company •If todos incoprates in delaware but operates in another state, it will be requied to make filings in and make payments to both states -It will be incorporated in delawae but will have to qualify to do business as a foreign corp in other states. (foreign with respect to an entity means an entity governed as ti its internal affairs by the organic law of a jurisdiction other than this state) •Every state requires foreign corps to get their permisison to transact business -Historiccally, and in most states still, the foreign corp must qualify to transact business. -Under MBCA, and the law of several states, instead of qualifying, the foreign corp must register to do business

distributions

•Who decides Distrubutions? Look to partnership agreement. If it doesn't say, partners make that decision through voting (majority) •As a flow-through entity, the partnership is not itself taxed on its profits. The partners pay taxes on the partnerships profits •Profits flow to the partners in proportion to their partnership interest. So two eaual partners would share the profits 50/50 -The 50% of the business's profits would be added to the individual partners taxable income on their personal tax retuns •Note that the partners have to pay tax on their share of the businesses profits, regardless of whether the business actually gives them any case or not- called a distribution -Distributions of cash are not in and of themselves taxable •Note that losses are also portioned out to partners, and they may also have value -So assume that a partnership is formed by two equal partners, and the business loses $100,000 in its first year. Each partner receives $50,000 in losses. -These losses may well offset other personal income, and thus the losses can shelter income and lower overall taxes •Finally, profits and losses need not be allocated in fixed percentages -Whatever can be specified in writing and the math performed unambiguously an work as long as the partners agree to it

How does a partnership grow

•evidence of business growing: more profits, more customers, more employees, business owns more things (equipment, etc), more locations •How do we get there -Loans (debt) -> creditors have the RIGHT of repayment ->Want steady cash flow so you can pay your monthly loan bills ->Can be problematic for seasonal businesses -Investments (equity- investors become owners in part) -> don't have the right of repayment necessarily ->Investors get paid out last -Retained earnings (reinvesting profits) ->Often, banks want to see this before they give you a loan •Managing partners make decisions on growing business. Partnership agreement should address this •What happens when 4 out of 5 partners vote to each partner to contribute $100,000 extra. What happens to the 1 partner that didn't want to/cant contribute the extra money? -One thing that can happen is the people who pay can increase their stakes in the business at the expense of the non-paying partner -Another thing that could happen is we treat the 4 partners money as loans and the paying partners turn into creditors

What is partnership law

•statutes (state level) -UPA- uniform partnership act; RUPA- revised uniform partnership act (focus on RUPA) -These are default laws. You can draft an agreement that has contrary agreements . So these only apply if you are silent on an issue •So long as the question involves only the rights and obligations of the partnership and its partners, the primary source of partnership law will not be a statute or case law at all. It will be the partnership agreement •Ex. Alpha contributes 7-% of the capital to start the business. Alpha may naturally expect to receive 70% of any profits. Unless such understandings are reflected in a partnership agreement, alpha is subject to the default rules of UPA and RUPA, which provde that management decisions are to be made by majority vote of the partners and that pofits will be shared equally •The partnership agreement is in essence a contract between the partnership and its partners -People other than partners are not parties to the contract and their rights cannot be restricted -So a partnership agreement cannot bind a provision that says "my partner and I cannot be liable fo any partnership business" •Existence of a corporation rules out that entity being a partnership. But a corporation can be a partner to a partnership