fil 185 - exam 3

buy-sell agreement

- allows remaining partners to purchase the partnership interest of a withdrawing partner - helps ensure the continuity of the partnership business and can avoid legal disputes if a valuation methodology is provided

general parnership

- an association of two or more people - who are co-owners and co-managers of the business and - who share in the profits for their ongoing business

items covered under partnership agreements

- capital contributions - property provision - profits and losses - salary - management rights - buy-sell agreement

sole proprietorship - capitalization

- capitalization is how a business raises money - limited in their options for raising money - cannot sell ownership in their business venture - options to capitalize: • personal resources (sole proprietor's own money) • private loans (family members, friends) • commercial loans (banks) • usually the sole proprietor needs collateral (something of value) to secure the loan • commercial line of credit

choosing a business entity

- choice driven by risk management considerations, tax consequences, and operational objectives of the owner - owner of the entity is also known as the "principal" - individuals who are entitled to the profits of a business based on their percentage of ownership

publicly held

- corporation that is able to fund capitalization through the sale of ownership interest to the general public and commercial investors - subject to a substantial amount of federal and state legislation, primarily through securities laws and corporate governance statutes

corporate veil protection

- corporations provide limited liability for the personal assets of its owners and, with certain exceptions, for its officers and directors - corporate veil: shareholders, directors, and officers of a corporation are insulated from personal liability in case the corporation runs up large debts or suffers some liability

capitalization (limited partnership)

- funded through debt (borrowing money from the principals or a commercial lender) or through a sale of equity (buy selling a percentage of ownership rights in the partnership and any profits of the business) - may not sell ownership rights through the public markets (such as on the new york stock exchange)

personal liability of principles (limited partnerships)

- general partner is personally liable for all of the partnership's debts and liabilities, just as if the general partners were in a general partnership - general partner is typically a corporation in sophisticated LPs - limited partners do not have automatic personal liability; liability is limited to whatever the partner contributed to the partnership *exception: When a limited partner acts illegally or negligently within the scope of his partnership duties; limited partner is personally liable to pay damages to the injured party

management and operation (limited partnership)

- general partners manage the business and are permitted to bind the partnership - limited partners may not participate in daily management of the business, do not have authority to bind the partnership, and remain primarily investors - limited partners do have the right to access partnership information such as business or financial records - partners share in profits and losses in proportion to "the value of contributions made by each partner to the extent they have been received by the partnership and have not been returned"

rights of partners - general partnerships

- governed by the partnership agreement, RUPA, or UPA • partnership agreement takes precedent • RUPA - revised uniform partnership act • UPA - uniform partnership act - typical rights addressed in a partnership agreement: • right to share profits and losses equally • right to partnership property • right to co-manage the business • right to indemnity • right to vote • right to be informed **all rights can be modified from RUPA or UPA with a partnership agreement

personal guarantees (corporate)

- if a corporation is a start-up or has limited assets, creditors will almost always require that the shareholders provide a personal guarantee - personal guarantee allows the creditor to obtain a judgment against the personal assets of one or more shareholders in the event of a default by the corporation

right to indemnity

- if a partner, within the ordinary course of business, incurs a payment or liability made on behalf of the partnership, the partnership must reimburse that partner for the expense

what are the main features of stock purchase and asset purchase agreements?

- in a stock purchase, the buyer purchases equity interest in a target company from one or more selling selling sharholders. in an asset purchase, the seller sells business assets to the buyer. - stock purchase and asset purchase agreements are generally used to complete acquisitions, not mergers.

sole proprietorship : disadvantages

- lack of protection of the principal's personal assets for unpaid debts and liabilities of the business - personally liable for any business debts and lawsuits

corporation - start up issues

- liability of "promoters" - promoter - An individual or group of individuals who begin to carry out a business venture's activities before actually filing the articles of incorporation - If the promoter makes a contract on behalf of a not-yet-formed corporation, they may have some degree of personal liability to perform under the contract - typically if the promoter knows and the other party has no reason to know that the corporation is not in existence on the day of the contract signing - liability ceases at the moment that the corporation is formed and has adopted the contract

capital contribution (agreement)

- lists how much value each partner has contributed to their individual capital accounts - this amount represents the initial equity investment into the partnership, made by each partner - contributions may be cash or other assets (ie - personal property) - this amount must be returned to each partner when the partnership assets are liquidated

fiduciary duties owed to members

- managers of an LLC owe fiduciary duties of care and loyalty to the other members of the LLC - controlling members (those with veto power or the ownership stake to block decisions by other members) also owe a duty of loyalty to the other members

choice of state of incorporation

- most corporations with a small number of principals choose to incorporate in the state in which they will locate their principal office and operate the business venture DELAWARE • allows flexibility in terms of how its managers (officers and directors) operate the business • gives officers and directors wide latitude in decision making that does not require shareholder consent • has adopted statutes that offer officers and directors strong protections from shareholder lawsuits alleging that managerial negligence has resulted in damages to shareholder interest (the business judgement rule) • well established body of case law

manager-managed LLC (similar to a limited partnership)

- named manager (or managers) generally has the day-to-day operational responsibilities, while the nonmanaging members typically are investors with little input on the course of business taken by the entity except for major decisions (such as a merger) • - nonmanaging members generally do not have the authority to act on behalf of the business venture

general partnership - express partnership

- no government filing is necessary - principals agree orally or in writing (typically a "partnership agreement" akin to a contract) to form an ongoing business relationship

sole proprietorship - management and organization

- no restrictions in terms of number of employees, and can operate in as many locations as the principal desires - proprietor has sole discretion and authority to bind the business or make any business decisions - no oversight committees (such as a board of directors) and do not require any agreements among principals

sole proprietorship - taxation

- not subject to corporate income tax - no tax return is needed/filed on behalf of the sole proprietorship business - principal reports all business income and expenses on their own individual tax return, and pays taxes on such income (or deducts business losses)

liability (limited liability partnerships)

- offers liability protection for ALL partners *exception: When a partner is engaged in some misconduct or tortious conduct (such as negligence)

which of the following are typically handled at the initial organizational meeting?

- officers and directors are appointed/elected - shares of stocks are issued

limited partnerships

- one or more partners manage the business while other partners participate only in terms of contributing capital or property - has at least one general partner (managing principal) and at least one limited partner (investing principal) - follows a partnership agreement, but in the absence of a partnership agreement the Revised Uniform Limited Partnership Act (RULPA) governs

right to vote

- partner has an equal voice when disagreements arise regarding the management of the business. disagreements are resolved through a vote, where each partner is entitled to one vote regardless of how much he or she contributed, and the majority generally wins. • unanimous decisions under RUPA include: • admission of new partners • acts outside the ordinary course of business • amendment of the partnership agreement

right to partnership property

- partners do not have rights to specific partnership property; instead they have equal rights to use any partnership property to conduct partnership business - partners cannot use partnership property for individual purposes - partnership property is property that is: • held in the name of the partnership • acquired in the name of a partner with their title listed as "partner" • purchased with partnership funds • used for partnership business

profits and losses (agreements)

- partners may wish to structure profits and losses to reflect their capital contributions or the level of work that will be required by each person - partnership agreements give partners wide latitude to structure these terms any way they see fit

general partnership - implied partnership

- partnership that is recognized due to the actions of the parties - courts look to see that the three partnership requirements are met: 1. An association of two or more people 2. People are co-owners or co-managers of the business 3. People share in the profits (or losses) of the business

taxation (limited liability partnerships)

- pass-through entities; profits or losses are reported in the principal's personal tax return, and tax is paid in accordance with each partner's individual tax rate - entity itself is required to file an information tax return, but no tax is paid at an entity level

taxation (limited partnership)

- pass-through entities; profits or losses are reported in the principal's personal tax return, and tax is paid in accordance with each partner's individual tax rate - general partner is responsible for filing an information return with taxing authorities, but no tax is paid by the LP

corporation - formation

- principals files the corporation's "Articles of Incorporation" - document filed with a state authority, usually the corporation bureau of the secretary of state's office, that sets out the corporation's name, purpose, number of shares issued, and address of the corporation's headquarters - may be additional filing requirements with state taxing authorities

franchises: a method, rather than an entity

- should be thought of as a method of conducting business that centers on a contractual relationship rather than as a business entity - consists of a franchisor, a business entity that has a proven track record of success, selling to a franchisee the right to operate the business and use the business's trade secrets, trademarks, products, etc

franchise agreements

- term of agreement - franchise fees, payment terms, ongoing investment or buying requirements - territory rights that usually provide the franchisee with an exclusive geographic area - commitments from the franchisor for training, ongoing management support, and advertising - commitments from the franchisee to follow operating protocol - royalties and other fees that the franchisee must pay - franchise termination and/or cancellation policies

sole proprietorship - termination

- terminated either by: - express act of the principal - operation of law in the case of death or personal bankruptcy of the proprietor - although a sole proprietor may sell the assets of her business to another party, the proprietor's ownership interest in a sole proprietorship cannot pass to her heirs through a gift or an estate

april is starting a new business teaching ballet, she is trying to decide if she should incorporate or operate as a sole proprietorship. when making her decision, she should consider:

- the personal liability risk she is willing to take - personal tax situation, as she may be taxed personally for all the income of the business

partnership dissociation and partnership dissolution : what you need to do to leave

- typically, partnership dissociation and dissolution are laid out in the partnership agreement. - RUPA (for GPs) lists 10 events of dissociation, but the majority are: • voluntary separation from the partnership, whereby one partner gives specific notice to withdraw from the partnership; • expulsion by the unanimous vote of the other partners; or • the partner's inability to carry out her duties to the partnership (incapacity or death) or inability to have an economic stake in the business (individual bankruptcy) • RULPA (for LPs) • general partners may withdraw at any time without causing dissolution of the partnership as long as (1) there is still at least one remaining general partner; and (2) all the partners (both general and limited) agree in writing to continue the partnership • limited partners may not withdraw from a partnership before the partnership termination time agreed on by the partners

susan and mark form a general partnership. susan contributes $9,000 as her capital contribution, and mark contributes $1,000. they do not create a partnership agreement. if the partnership earns $100,000 in profits the 1st yr, mark will be legally entitled to:

50,000

all of the following are true about a sole proprietorship entity EXCEPT:

A. it does not protect the personal assets of the principal B. it is formed by filling a set of forms w the federal and state gov't C. provides pass-through taxation for the principal D. it is a single-person entity ANSWER: B

Abel and Baker formed AB Partners, L.P. Abel contributed $1,000 and became the managing general partner and Baker contributed $50,000 as a limited partner. AB Partners, L.P. was successfully sued for an injury they caused to a third party. What is the potential personal liability for Abel and Baker respectively? A) $1,000/$50,000 B) Unlimited/$50,000 C) $0/$50,000 D) $0/$0 E) Unlimited/$0

E) Unlimited/$0

formation of an LLC

LLC is formed by filing the "articles of organization" with the designated public official in that state (usually the Secretary of State's office) articles of organization contain name of entity, location of its principal place of business, and the names of its owners (members)

what is the main difference between a merger and an acquistions?

a merger is a type of acquisition in which acquire and the target combine to become one new legal entity

limited liability partnerships

all partner are limited in liability

dissociation

an individual member decides to exercise the right to withdraw from the partnership

asset purchases - types of acquisition

buyer buys the assets of the target company - leaves the target company as an empty shell if the buyer buys out all of its assets - buyer may structure a transaction as an asset purchase in order to cherry-pick the assets that it wants and leave out the assets and liabilities that it does not - may not carry the liability risk - asset purchases are preferable if there are foreseeable liabilities that may include future damage awards, such as those that could arise from litigation over defective products, employee benefits or terminations, or environmental harms

stock purchase - types of acquisition

buyer buys the shares and therefore control, of the target company being purchased - ownership of the company in turn conveys effective control over the assets of the company - carries with it all the legal liabilities accrued by that business over its past and all of the risks that company faces in its commercial environment

is the member personally liable?

carlos is the sole member of a single-member LLC. After one year, despite his best efforts, the business fails and the bank that extended the LLC a loan sues for repayment. Is Carlos personally liable for the loan? carlos is a member of an LLC, along with three other members. After one year, despite their best efforts, the business fails and the bank that extended the LLC a loan sues for repayment. Is Carlos liable for all or part of the loan? *In either situation, unless Carlos signed a personal guarantee, he will not be personally liable for the loan

officers

carry out the directors' set course of direction through management of the day-to-day operations of the business - the corporation's officers are appointed by, and may be removed by, the board of directors - officers carry out day-to-day operations of the corporation and execute the strategy and mandates set out by the board of directors - offers have both express and implied authority - express authority - comes from the bylaws or by a board of directors' resolution, which gives specific authority to a particular officer - implied Authority - certain corporate officers have implied authority to be agents of the corporation\ - types of officers: • president - Implied authority to bind the corporation in ordinary business operation transactions and has oversight of nonofficer employees • vice president - may have some limited implied authority • treasurer - little or no implied authority • secretary - implied authority to certify the records and resolutions of the company

c corporations (taxation)

considered a legal, taxable entity that is separate from the owners for income tax purposes • c corps pay tax on their earnings, and then shareholders pay tax on any corporate earnings distributed to them in the form of dividends (ie - double taxation)

right to share profits and losses equally

each partner is entitled to receive an equal share of the partnership's profits (and losses) regardless of the partner's degree of involvement in the success of the business

john and marcos agree to start a technology-based partnership. john will provide his patients to launch the venture, and the venture, and marcos will provide financing. as a best practice, what should john and marcos do?

express their arrangement in a written partnership agreement

franco is a sole proprietor who does business as franco's computer consulting. after starting up the business out of his basement, he lends a big client and begins to lease office space at a local office complex. he loses the big client in one month and can no longer generate enough business revenue to sustain the lease payments. he ends up owing his landlord $5,000. assuming no business assets exist.

franco is personally liable for the lease payments

formation (limited partnership)

general partner files a certificate of limited partnership with the state government authority (usually the secretary of state's office)

fiduciary duties of officers, directors, and controlling shareholders

officers and directors owe the corporation's shareholders a: • duty of care; and • duty of loyalty *breaching these duties may result in personal liability for the officer or director

corporate formalities

once the corporation has been properly formed and post formation organizational matters have been attended to, the corporation's officers commence business operations

limited partnership

one or more partners manage the business while other partners participate only in terms of contributing capital or property

shareholders

owners of the corporation and act principally through electing and removing directors and approving or withholding approval of major corporate decisions - rights of the shareholders: • power to elect and remove directors at the annual shareholders meetings • veto any fundamental changes to the corporation that are proposed by the directors and officers • Sale of substantial assets • mergers • issuing more capital stock • pursuing venture capital financing • issuing bonds • must approve any changes in the structure of the corporation by amending the articles of incorporation or bylaws voting vs non voting stock - some corporations issue voting stock to some shareholders and nonvoting stock to other shareholders; this is done to ensure that a certain shareholder or group of shareholders can control the corporation

salary (agreement)

partners are generally only entitled to an equal share of profits under the default rules; however, they can receive a guaranteed salary for the work they will perform on behalf of the partnership

management rights (agreements)

partnership agreement can modify which partners have rights to enter into contracts, and what kind of contracts partners may enter into on behalf of a partnership

partnership agreement

partnership agreement is similar to a contract for the partnership; it governs the partners' relationship with one another and modifies the standard partnership rights

principal (employer)

person (legal or natural) who authorizes an agent to act on his behalf; a relationship in which one person has legal authority to act for another

agent (employee)

person who has been legally empowered to act on behalf of another person or entity ex - Attorney who is hired to represent their client in a legal matter

which of the following is NOT considered a factor by a court when judging whether fairness demands that the corporate veil be pierced?

personal wealth of the principles

corporation that do not sell ownership interests through a broker to the general public or financial institutions are categorized as

privately held corporations

which of the following typically is found in an LLC operating agreement?

procedures to follow in the event of the death of a key member

propert provision (agreement)

property used for the partnership business may become subject to either partnership ownership or to the partnership's claim to its use; therefore, partners must decide whether the property they owned individually prior to starting the business will become partnership property in the event it is used by the partnership and was not identified as a capital contribution

acquisition (or takeover) - type pf corporate

purchase of one company by another company; the acquiring corporation takes over the target corporation by stepping into the shoes of the target, while the target company disappears by operation of law - can be either private or public

directors

responsible for oversight and management of the corporation's course of direction - election - shareholders elect directors • bylaws set terms for directors, procedures for the election, quorum requirements, number of directors (influenced by state law) - removal - directors may be removed by a shareholder vote (with or without cause) or court order • Bylaws set out the removal process - meetings - acts of the board of directors take place only at official meetings that occur at a regular annual or semiannual time as specified in the corporation's bylaws or statute - special meetings may be called as long as notification procedure is followed in accordance with the bylaws - many states also allow unanimous written consent for a board to take action on a routine decision (eg - choice of accounting firm) • committees - Small groups of board members who are charged with oversight or to perform a given task and make a recommendation to the full board • Ie - compensation committee

s corporation (taxation)

some corporations may qualify for and elect subchapter s status, and will be taxed as a flow through entity (similar to a partnership or an LLC)

which of the following is not true about an LLC?

there is no personal liability for a member's own negligence

entity types are not set forever. businesses can change entity types if their objectives change.

true

sole proprietorship (1)

unincorporated business with only one owner

source of financing (capitalization)

- Debt • Borrow money from commercial lenders or private investors to fund day-to-day operations, usually evidenced by loan agreements and promissory notes • Issuing bonds - Equity • Corporations sell equity to private investors or groups of investors - Venture Capital Firms • Venture capital is funding provided by a group of professional investors for use in developing business; VC firms have substantial resources and are also a source of expertise in operations and expansion of the corporation - Public Offerings • IPOing and selling shares to the general public and to financial institutions

limited liability of the owners/members

- LLC members are insulated from personal liability for any business debt or liability (contract or tort) if the business fails - two factors to keep in mind: • landlords and other creditors often require a personal guarantee from the members whereby the members pledge personal assets to guarantee payment of the business venture's obligations • court may discard the protection in a case where the court finds that fairness demands that the LLC members should compensate any damaged party when the entity is without resources to cover the full amount owed, such as a case where the members engaged in fraud

capitalization of the LLC

- LLCs are capitalized primarily through: 1. debt via private lenders or commercial lenders; or 2. sale of equity ownership in the LLC itself - typically, the operating agreement of the LLC controls the amount and methods of capitalizing the business

taxation of the LLC

- LLCs are treated as pass-through entities (ie - partnerships) for tax purposes • All income/loss is taxed to the LLC's members - LLCs may elect to be taxed as a corporation if they consider the corporate tax structure to be more favorable

laws governing LLCs

- LLCs were first introduced in 1977 in Wyoming. Known as a "hybrid" for owners who wished to avoid the double taxation of a corporation but still desired legal liability protection for their personal assets - in 1988, the Internal Revenue Service (IRS) decided to classify LLCs as a partnership for tax purposes - each state has its own laws governing LLCs, but most states follow either: • the uniform limited liability company act (ULLCA), OR • revised uniform limited liability company act (RULLCA)

initial organization

- after filing the articles of incorporation, the principals typically hold an organizational meeting - bylaws - state statutes govern some of the internal rules of a corporation, but some issues are left to the principals; these rules are articulated in the corporation's bylaws • date and time of the annual shareholder's meeting • Number of officers and directors of the corporation • Process for electing the board of directors • Listing of each officer along with description of that officer's duties - Board of directors and officers • Board of directors may change the list that is reported in the articles of incorporation and appoint or elect new individuals for these positions - Issuance of shares • Official issuance of ownership interest consistent with the articles of incorporation filing • Issuance of shares is recorded in a stock register and kept by the secretary of the corporation along with other corporate records of the business

agency

- agency relationships set out rules and standards for situations in which one party hires another party to act on the hiring party's behalf - when business owners understand the obligations and liabilities of such a relationship, they are better able to limit their company's liability to both the hired party and third parties - ex: employer/employee relationship

operating agreement (LLC)

- akin to a partnership agreement for partnerships • RULLCA establishes the primacy of the operating agreement, and also lists 17 nonwaivable statutory provisions related to liability of the entity and its members - operating agreements cover many of the internal rules for the actual operation of the LLC, including: • structure of governance and voting rights • death incapacity and dissolution - structure of governance and voting rights • typically sets forth a structure for managing the entity through a single member or a board of "managing members" (akin to a board of directors) • spells out voting rights of the members, procedures for voting, transactions that require a vote of the members, and procedures for the admission of any new members - death incapacity and dissolution • sets forth procedures in the event certain contingencies or what-if scenarios occur, such as death or incapacity of a member • sets forth the procedure of dissolution of the LLC

piercing the corporate veil

- court will pierce the corporate veil when it believes that fairness demands it; courts may sometimes hold some or all of the shareholders personally liable - most courts have used four factors to consider whether to pierce a corporation's protective veil (typically if two or more are present, a court is more likely to hold shareholders personally liable for corporate debts): • Inadequate capitalization • Nature of the claim • Evidence of fraud or wrongdoing • Failing to follow corporate formalities - Inadequate capitalization - Whether the corporation was adequately capitalized • When a corporation is merely a shell with nothing invested, or when a corporation had initial capitalization, but the shareholders siphoned the profits and assets, a court will view this as an inadequately capitalized corporation - Nature of the claim • When a claim involves a • creditor (eg - a trade creditor who provides inventory for a corporation based on credit), courts generally are not inclined to pierce the corporate veil because these creditors had an opportunity to mitigate the risk of loss (such as requiring a personal guarantee) • When a claim involves some sort of tort such as negligence by the corporation's employees or even by the principals themselves, courts are more likely to pierce the corporate veil. This is because the victims of negligence (such as a pedestrian struck by a delivery truck operated by a corporate employee) have become involuntary creditors and never had the opportunity to mitigate the risk of loss - Evidence of fraud or wrongdoing - If the shareholders, officers, or directors have committed fraud or have engaged in some type of serious and willful wrongdoing, this is an important factor in a court's decision to pierce the corporate veil • Examples: (1) Misrepresentation to creditors regarding important facts about the financial condition of the company; (2) lying to investors about potential liabilities of the corporation - Failing to follow corporate formalities - The corporation's adherence to the statutes, rules, and practices governing a corporation • Courts may look at whether there is a proper separation between the corporation and the individual shareholder(s), whether stock certificates were ever issued, if shareholders meetings were ever held, and if proper corporate records were maintained

privately held - types of corporation

- do not sell ownership interests through sales to general public - substantial flexibility in terms of their internal operating procedures and do not generally have to comply with rigorous corporate structures of formalities - often have a small number of shareholders (but are not limited to a certain number) *The flexibility of a privately held corporation outweighs any desire of the principals to be able to capitalize the business through a sale to the general public

fiduciary duties - duty of care

- duty of care: officers and directors must: • (1) always act in good faith; • (2) act with the care that an objectively prudent person in a like position would exercise under similar circumstances; AND • (3) carry out their duties in a manger that is reasonably calculated to advance the best interests of the corporation - courts have held that a director breaches their duty of care when they have failed to fulfill their role in oversight. This may occur through: • negligence • failure to act with diligence • rubber stamp - business judgement rule - protects officers and directors from liability for decisions that may have been unwise but did not breach the duty of care • insulates directors from liability when, based on reasonable information at the time, the transaction or course of action turns out badly from the standpoint of the corporation - directors must have acted in good faith by requiring directors and officers to clear three hurdles in order to obtain the protection of the business judgment rule: • no private interest • best information • rational belief

right to co-manage the business

- each partner has an equal right to co-manage the business - right to be involved in conducting business operations - right to sign contracts on behalf of the partnership - right to enter into agreements that are reasonably necessary to accomplish the tasks within "the ordinary course of business of the partnership" - contract that is outside the ordinary course of business requires the unanimous consent of all the partners

right to be informed

- each partner has the right to be informed of the partnership's business. This includes requesting and reviewing partnership records, including contracts, minutes taken during meetings, and financial information

sole proprietorship : advantages

- ease of formation and maintenance -typically no business filing requirement, or an easy business filing requirement (in DBA cases) with the state or local governmental authority and a small fee - no annual fees or renewals - top choice for start ups with low annual revenues and expenses

corporation

- fictitious legal entity that exists as an independent individual separate from its principals - created through state law filing, and formation is governed through state statutes - over half of states have adopted the Revised Model Business Corporation Act (RMBCA)

duties of the partners

- fiduciary duties: duties used to ensure that each partner is acting in the partnership's best interests - duty of loyalty: prohibits a general partner from engaging in competition with the interests of the partnership and also prohibits other conflicts of interest such as using partnership property for personal gain. cannot take personal advantage of business opportunities that would have benefited the partnership - duty of care: must treat business affairs with diligence; specifically, partners must refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law - duty of good faith: exercise appropriate discretion in dealing with other partners and third parties concerning the partnership's business

fiduciary duties - duty of loyalty

- fiduciary duty owed to shareholders by officers, directors, and controlling shareholders - focused on providing protection to shareholders when a transaction occurs in which there is a possibility of self-dealing • self-dealing occurs when an officer, director, or controlling shareholder has some personal financial stake in a transaction that the corporation is engaged in and the officer, director, or controlling shareholder helps to influence the advancement of the transaction

LLCs - generally

- flexible type of business entity that offers its owners easy formation, flexible operation, limited legal liability of the owners, and passthrough taxation - the owners are called "members"

formation (limited liability partnerships)

- formed when a general partnership files a statement of qualification with the appropriate public official - conversion from a GP to LLP requires an approval by a majority of the ownership

capitalization (limited liability partnerships)

- funded through debt (borrowing money from the principals or a commercial lender) or through a sale of equity (buy selling a percentage of ownership rights in the partnership and any profits of the business) - may not sell ownership rights through the public markets (such as on the New York Stock Exchange)

merger - type of corporate

occurs when two or more companies combine to form a new entity altogether, and neither of the previous companies remains in existence

exceptions to limited liability in asset purchases

general rule: company that acquires a seller's assets is not responsible for the seller's liabilities simply due to the ownership of those assets exceptions: express or implied agreements on the part of the buyer to assume the liabilities of the seller • de facto merger doctrine: essentially a merger or consolidation between the buyer and seller. Courts will consider: • continuity of management, personnel, physical location, and general business operations • continuity of ownership • dissolution of the seller as soon as possible after the transaction • assumption by the buyer of the seller's obligations necessary for uninterrupted operation of the business - mere continuation exception: applies when the asset buyer is a "mere continuation" of the seller; courts will look for common ownership between the buyer and seller as well as the common identity of officers or directors • factors considered: Continued use of the seller's name, facilities, and employees - fraudulent transaction used to evade liability for debts • generally, if a transaction is conducted at arm's length and is reasonable it will not be considered fraudulent; however, if the seller was insolvent at the time of the transfer, if inadequate consideration was paid, or if the seller was undercapitalized, courts might consider the transaction as fraudulent

types of partnerships - (2 or more)

general, limited, limited liability

dissolution

liquidation process triggered by an event that is specified in the operating agreement (such as the death of a key member) or by the decision of the majority of members (or the percentage called for in t he operating agreement) to dissolve the company

management (limited liability partnerships)

management and operational structure typically laid out in the partnership agreement

member-managed LLC (similar to a general partnership)

management structure of the entity is similar to that of a general partnership, with all the members having the authority to bind the business

jose, curt, and drew are all principles in JCD associates, LLC. in the operation agreement, they agree that any principle is permitted to bind the LLC, JCD associate is:

member-managed