Differentiating Business Entities - Chapter 12

Par Value

An Arbitrary dollar value that an organization assigns to its shares.

Inside Director

A corporate officer that serves on the corporation's board of directors

Receivership

A type of corporate bankruptcy in which a receiver is appointed by bankruptcy courts or creditors to run the company

Takeover

The assumption of control by one corporation over another through merger, acquisition, or some other type of transaction

Partners' Relationships to One Another

The partnership agreement the UPA, and general principles of contract and agency law govern the relationship among partners. Unless contrary to public policy, however, the partnership agreement may deviate from UPA provisions.

limited liability partnership (llp)

a partnership limiting each partner's personal liability for acts or omissions of other partners

Corporations: Duties and Obligations

Corporations and by extension the people who own and manage them have legal rights and obligations. Risk management professionals must understand how a corporation functions to effectively manage commercial risks. Owning and managing a corporation include many responsibilities that extend beyond business operations.

Why corporations Cease to Exist

Corporations may cease to exist because of merger dissolution or reorganization. Merger - is the joining together of two or more corporations to become a new organization Dissolution - is a voluntary or an involuntary termination of a corporation Reorganization - occurs when a corporation becomes bankrupt

Corporate Ownership

Corporations raise funds by issuing two principal types of securities: debt securities and equity securities. A debt security, or bond, is a debt obligation. Equity securities are the corporation's capital stock and represent the stock holder's ownership of and equity or financial interest, in the corporation. Bondholders are creditors of the corporation, while stockholders are owners of the corporation.

Duties of Care and Loyalty

Directors and officers have a duty of care to the corporation. They must act honestly and in good faith and exercise a reasonable degree of care. They do not guarantee profitability of the business and are not required to have business skills. The law provides that a decision is proper if made within the range of reasonable "business judgement" Directors and officers also owe a duty of loyalty to the corporation that exceeds the general duty not to defraud others. A fiduciary has an affirmative duty to disclose all material facts as well as a duty to avoid misrepresentation. The Employee Retirement Income Security Act (ERISA) of 1974 also imposes duties on officers and directors. The act created fiduciary duties for pension and health benefit plan administrators, trustees, upper management, insurance brokers, and others with respect to how they invest and distribute plan funds and how they treat participants and beneficiaries. A director or officer who exercises discretionary control in such a plan's management or over its assets, or who gives investment advice, is a fiduciary under ERISA with specific statutory duties and liabilities. Directors and officers have these duties under ERISA: - To act solely in the plan participant's' interests - To exercise the care and skill of a reasonable person conducting a similar enterprise. - To diversify investments unless doing so is clearly unreasonable - To act in accordance with the plan documents

What do you know?

How do the liabilities of corporations differ from those of corporate officers and directors under tort law? Feedback: Under tort law, a corporation can be liable as a principal or an employer for any torts committed by its agents or employees (assuming the tort falls under the scope of agency or employment.) Corporate officers and directors, however, are not liable for any employee's or agent's tort.

What do you know? Chapter 12

A few members of the Topaz Social Club an unincorporated association created a series of social media ads that claimed that a candidate for local office was convicted of embezzling money from a business he founded years ago. Because the allegations are in fact unfounded the candidate wants to take legal action. Can he sue the people responsible for the ad? Feedback: Yes because the members of an unincorporated association may be held individually liable for the association's act he can sue the people responsible for the ad.

Limited Liability Company (LLC)

A form of business entity that provides its owners the limited liability of a corporation and the tax advantages of a partnership.

Joint Ventures

A joint venture is an unincorporated association of two or more persons (legally defined as individuals, groups, companies or corporation) established to conduct a single transaction or a series of related transactions, as compared with an ongoing business involving many diverse transactions. Examples include a business established to buy a single tract of land in order to subdivide it for sale to others or to drill for oil offshore The concept of joint venture and partnership have virtually merged. Because a joint venture can range from an association for a single transaction to a complex, long range association, joint ventures can differ more among themselves than they do from a partnership.

Common name statute

A law that permits service of process on a partnership by serving any one of the partners.

Derivative Suit

A lawsuit brought by one or more shareholders in the name of the corporation.

Outside Director

A member of a corporation's board of directors who is a corporate officer and who may not necessarily be connected with the corporation.

Stockholder Decisions

- Electing board members and in many states removing without cause. - Approving changes to the articles of incorporation - Making or amending byaws - Approving loans to the corporation's directors officers and or agents - Ratifying (approving) board actions. If a board explains specific actions and then obtains stockholder ratification, an approving stockholder cannot later sue the board regarding that action. If the stockholders have no knowledge of the board's action, a blanket shareholder resolution approving a board's actions for the past year is ineffective. - Suing directors for mismanagement. To exercise that right, stockholders may initiate a suit on behalf of the corporation called a shareholder derivative suit.

Winding Up the Partnership

If the partnership dissolves, the business is liquidated. The remaining partners or the last surviving partner's legal representative must then wind up the partnership's affairs. If a court has ordered the dissolution it may either appoint an outside person called a receiver or designate one of the partners to wind up the business. Unless the partnership agreements provides otherwise a dissolved partnership's assets are distributed in this order: 1. Partnership creditors 2. Partners' advance 3. Each partner's capital (If partnership assets are insufficient the loss of capital is deducted from each partner's capital contribution according to each partner's share of the profits.) 4. Surplus to the partners, dividend in the same proportion as profits. If the partnership has sufficient assets to pay creditors partners' advances and partners' capital contributions there are few problems. If the partnership is insolvent the partners face unlimited liability for partnership debts. If the partnership and all the partners are insolvent the case goes through liquidation proceedings in a bankruptcy court. Federal bankruptcy law permits partnership creditors to enter the full amount of their claims against the assets of both the partnership and each individual insolvent partner. If one or more of the partners are solvent and their assets are sufficient to pay both their creditors and the partnership's outside creditors they must do so.

Corporations: Mergers, Dissolution, and Reorganization

In 1896, there were 12 corporations in the Dow Jones Industrial Average, including General Electric and US Leather. Today, General Electric remains an independent corporation; in contrast, US Leather was dissolved in 1911. Some of the others were acquired were broken up or merged with other companies. A corporation may be conceived to last indefinitely, but some specific actions can terminate it. Just as the manner in which corporations (including insurers) form and operate can have insurance ramifications so too does the manner in which they can end.

Merger

In a corporate merger, two or more corporations join together to become a new single corporation. The new corporation owns all the assets and is subject to all the liabilities of the merging corporations. A true merger is considered a friendly transaction to which the boards of both (or all) merging organizations agree. Before a merger, the board of directors of each corporate party to the merger must adopt a plan of merger. The stockholders of the disappearing corporations (those corporations that will be dissolved as a result of the merger) must approve the merger plan but the stockholders of the new (or acquiring) corporation are required to approve the plan only if the number of voting or participating (sharing in corporate profits) shares increases substantially. Stockholders are entitled to dissent to a merger a share exchange, or the sale of all or substantially all of a corporation's assets that does not occur in the usual course of business. They are also entitled to an appraisal and to receive fair value for their shares in any merger that requires shareholder approval. If a stockholder files a written dissent to a merger before or during the stockholders' meeting , he or she must receive a written notice after the action giving rise to dissenters rights that provides a time period and procedure to file a buyout demand. A corporation that owns at least 90 % of another corporation's stock may merge that subsidiary corporation into itself without stockholder approval. The corporation need only send the merger plan to the subsidiary's stockholders. Many insurance corporation statutes require 95 %, rather than 90 %, ownership of a subsidiary before such a merger can occur, along with approval from the state department of insurance. Most states' insurance company merger laws mimic general corporation laws. However, there are also significant differences between insurance company mergers and general corporation mergers: - Regulated corporations, such as insurance companies, can engage in only one type of business; insurers can merge only with companies in the same business. - State departments of insurance must approve insurance company mergers.

Limited partnership

A form of partnership made up of one or more general partners, who have unlimited liability, and one or more limited partners, whose liability is limited to the amount of capital they have contributed to the partnership.

Partnership Formation

A partnership also called a general partnership is a form of legal business ownership. The Uniform Partnership Act (UPA) a model law adopted by a majority of states in either its original or revised form, defines a partnership as "an association of two or more persons (legally defined as individuals, groups, companies, or corporations) to carry on as co owners of a business for profit. One advantage of a partnership is that income is taxable at each individual partner's tax rate rather than at a corporate rate. People can create a partnership through their actions as partners, by oral agreement or by written agreement. Two or more people are presumed to be partners if they agree to work together in any line of activity and share the profits and losses, whether equally or not. To be considered a partnership, the enterprise need not have physical assets but must have profit as its goal. Unlike corporations, partnerships do not need government approval to operate. However, if the partnership uses a fictitious name or any name other than all the partners' surnames, state laws require the partnership to register its name in a public records office.

Dissolution, Winding Up and Termination

A partnership dissolves whenever any partner ceases to be involved in carrying out the business, if it becomes unlawful to carry on the partnership, or if the partnership becomes bankrupt. Unless otherwise provided or agreed to partnership affairs are then wound up, or liquidated and the partnership is termindated. A partnership agreement can provide that the partnership will not dissolve on any partner's death but will continue with the surviving partners. In legal terms the partnership dissolves but is reformed immediately with the surviving partners.

Tender Offer

A purchase offer made directly to the shareholders of the target, typically at an offer price greater than the current market price

Apparent Authority (Estoppel) of Partners

Apparent authority is also called authority by estoppel. The esistence of partnership itself creates the appearance that a partner has authority to act on behalf of the partnership. A third party might assume that all partners can act in the partnership's day to day business. If a partner lacks authority or has been denied authority to act and a third party changes legal position because of the partner's actions, the partnership is estopped ( prevented) from later denying that partner's authority. For example assume that Megan, Kalus, and Adele are partners in the business of selling hunting and fishing equipment. Megan and Klaus vote against selling equipment for bow and arrow hunting but Adele wants to because local companies sell archery equipment. Despite the partnership's policy, Adele contracts to purchase bows and arrows from a supplier that is unaware of the restriction. The partnership is bound because the third party could have reasonably assumed that this partnership also sells such equipment and that Adele had the authority to make the purchase.

Formation and Financing

Associations are generally defined as voluntary, formed by a group of individuals for some common lawful purpose and financed as they desire. However involuntary associations may be established by statute or regulation. For example assigned risk automobile insurance plans, Fair Access to Insurance Requirements (FAIR) plans and insurance guaranty funds are involuntary associations because by law all insurers that write applicable lines of insurance in a given state must belong to that state's association. The statutes creating such involuntary associations frequently specify the means of formation, financing, and management or they may specify that state regulation governs those aspects of the association.

Example of a Partnership Financial Relationship

Assume that Megan and Klaus from a partnership with start up capital of $100,000. Megan contributes $90,000 in cash and Klaus contributes $10,000 in cash. Klaus also has a special skill the partnership will use. If the partnership makes a $10,000 profit in a given year, Megan and Klaus are each, unless otherwise provided, entitled to $5,000. If the firm dissolves and $70,000 remains after all liabilities are paid, Megan and Klaus must share the $30,000 loss unless the partnership agreement provides otherwise. How much would Megan and Klaus receive? Megan is entitled to $75,000 ($90,000-$15,000 her original contribution minus hafl of the $30,000 loss). Therefore Klaus must provide Megan with $5,000 ($10,000 - $15,000 his original contribution minus his half of the $30,000 loss) to augment the partnership's remaining $70,000. Megan then receives the full $75,000 and Klaus loses $5,000

Treassury Stock

A corporation stock issued as fully paid to a stockholder and subsequently reacquired by the corporation to use for business purposes.

Liability for Torts and Crimes

A corporation, its directors, and its officers can be liable for their actions under both tort and criminal law. Under tort law, a corporation is liable as a principal or employer under the doctrine of respondent superior (" let the master answer") for all torts committed by its agents or employees within the scope of their agency or employment. Corporate officers and directors, however, are not liable for any employee's or agent's tort. In addition to the corporation itself the actual tortfeasor (employee or agent) is always liable. Under criminal law, corporations can sometimes be found guilty of a crime even if they commit it without criminal intent. For such crimes, often called absolute liability crimes, lack of intent is immaterial. Crimes under this category include food and drug violations and restraint of trade. The test of corporate criminal responsibility for absolute liability crimes is whether the responsible employee or agent acted within the scope of employment to benefit the corporation. Other crimes, such as committing larceny, engaging in price fixing, and obtaining money under false pretenses, require specific criminal intent. The test for corporate liability is the same as that for absolute liability: whether the employee was acting within the scope of employment to benefit the corporation. A corporation can be held responsible for an employee's criminal activity if the corporation could have uncovered the activity through reasonably diligent supervision. Officers and employees are personally responsible for their criminal acts. In addition, under statutes that impose criminal liability for unintentional acts, an officer can be criminally responsible for failing to ensure that subordinates comply with the statute. Corporations may also have the right or duty of indemnification to directors, officers, and other employees. Under corporate law, indemnification means reimbursement of expenses incurred in defending a lawsuit instituted or threatened against a person in his or her official capacity with a corporation. Defense expenses include attorney's fees, judgments, fines, and settlement amounts. Some state statutes require indemnification only to directors and officers, while others extend the duty of indemnification to employees and agents. Some statutes permit reducing the statutory right of indemnification in the articles of incorporation; others do not permit reduction of rights. All states require indemnification, unless denied by the articles of incorporation, when a person is found not liable in a civil case or not guilty in a criminal case. If a court imposes civil liability, a corporation may choose to indemnify the person anyway, especially when the person acted in good faith and believed the action was in the best interest of the corporation.

Receiver

A disinterested person or business entity appointed to receive, protect, and account for money or other property due.

Relationships of Partners to Third Parties

A partner has neither the right not the power to contractually bind the partnership with a third party without either unanimous or majority consent of the partners. Third parties may therefore put themselves at risk by dealing with partnerships without understanding which decisions require unanimous consent. However any partner can make ordinary day to day contracts with third parties. Every partner is the partnership's agent for its business purposes so agency rules apply. A partner may have actual authority to bind the partnership (with express or implied authority or by ratification), but even without actual authority a partner can bind a partnership under the principles of estoppel.

Assignment of Partner's Interes in Partnership

A partner's share of the profits and losses and the right to receive distributions make up his or her transferable interest in the partnership. A partner can assign a financial interest in the partnership if the other partners agree (either in the original partnership agreement or when the assignment occurs) but cannot assign partnership status. Assigning a financial interest to another party does not give the assignee any right to participate in management, require information or an accounting, or inspect the partnership's books. On dissolution, however the assignee is entitled to the assignor's interest and can require an accounting from the date of the last accounting agreed to by all the partners.

Incorporation Process

A promoter is a person who creates a corporation. The promoter can be one or more persons, corporations, or paid organizations. For example the promoter might be a shareholder in the organization that's being promoted. The promoter works to recruit interest, corporation, and financing in forming the corporation and completes the legal and practical steps required to create the corporation. State statutes requires a minimum number of incorporators (those who sign the formal articles of incorporation filed with the state.) Most states require three incorporators, and the promoter can be one of the incorporators. Along with articles of incorporations, states require appropriate filing fees, and some require proof of public notice via proof of publication in a newspaper or legal publication. Under the RMBCA, a corporation's existence begins when the articles of incorporation are filed with the state. In some states, however, corporate existence begins when the state issues the certificate of incorporation. A corporation formed in compliance with the law is called a de jure (in law) corporation. If, however, despite a food faith attempt to comply with the law the corporation failed to meet some minor requirements, it is a de facto (in fact) corporation. Only the state can legally challenge the existence of a de facto corporation. If a corporation is neither de jure nor de facto, then it technically does not exist, and individuals engaged in the business and aware that the corporation does not exist can be held personally liable for the debts and contracts of the business. However, a third party that has dealt with those individuals and assumed the corporation was valid may not be able to legally deny its existence. After the certificate of incorporation is issued, the corporate organizational meeting is held. The corporate bylaws are the formal provisions for the corporation's structure, regulation, and operation.

Unincorporated association

A voluntary association of individuals acting together under a common name to accomplish a lawful purpose.

Common stock

An ownership interest in a corporation that gives stockowners certain rights and privileges, such as the right to vote on important corporate matters and to receive dividends.

Characteristics of Unincorporated Associations

An unincorporated association is sometimes called a voluntary association, a voluntary organizations or an association. Although defined as "voluntary" some associations may actually be involuntary. In such cases membership is required by state law. Associations are the most common organizational form of not for profit organizations but associations can be organized as for profit entities as well. Some corporations particularly not for profit corporations can be described as associations, and some states statutes provide for the incorporation of associations. For purposes of this discussion the term "association" is used only in the sense of an unincorporated association Associations although unincorporated resemble corporations in their form and organization. The biggest difference between a corporation and an association is that in common law an association is not a legal entity separate from its members and managers. Corporations can sue and be sued in the corporate name but in many jurisdictions an association cannot. Because they are not legal entities unincorporated associations also cannot hold or transfer property in the name of the association. Associations are formed under the common law right of contract have no separate legal existence and do not legally possess perpetual life. Associations are not subject to franchise transfer and other taxes commonly levied on corporations. However not for profit associations enjoy tax exempt status similar to not for profit corporations. Unlike corporations associations do not need to register in the states in which they do business or file carious reports required of corporations; however they may have to comply with fictitious name statutes. An association resembles a partnership in that because an association is not a separate legal entity like a corporation its members may be individually liable for the associations activities.

Dissolution and Winding Up

Because no specific statutory provisions apply to the dissolution of associations, they can be dissolved in a variety of ways: - By members' vote - By the death or withdrawal of a majority of the members - By the court action on application of creditors or members or for illegal conduct - By the expiring of a period stated in the articles The person authorized to wind up association affairs liquidates the assets and pays all debts and obligations. That person distributes the remaining assets pro rate (proportionately) among the members unless the articles provide otherwise. Sometimes the articles state that the remainder of the liquidated assets will fo to a charitable or benevolent purpose.

Corporations: Formation

Business entities can be organized as corporations, partnerships, sole proprietorships, or unincorporated associations. The structure of a business entity may affect every aspect of the insurance transaction, including underwriting, coverage considerations, and contractual issues. Corporations have a legal existence separate from their owners. A corporation is a separate, legally recognized business entity organized under state law and entitled to the same rights as a person, distinct from its owners. A corporation can sue, be sued, own property, hire employees, and enter into contracts in its own name. As a separate legal entity, the corporation provides protection against liability to its owners. There are three main types of corporations: - Government corporations, such as cities, counties and state - Charitable or not for profit corporations such as colleges universities hospitals and religious institutions. - Business for profit corporations The corporation charter, also known as its articles of incorporation, defines the corporation's reason for existence and its powers. Corporate bylaws include more detail about the corporation's overall operations and determine how the organization will be managed. Business owners may incorporate for a variety of reasons; let's take a closer look at important aspects of incorporations

Exceptions to a Corporation's Limited Liability

Certain state Laws make exceptions to corporate owners' limited liability. For example, several states hold stockholders liable for employee wages and unemployment benefits earned but unpaid before a corporation's insolvency. Courts may also make exceptions for the corporation's wrongful acts. This typically occurs when a plaintiff alleges that a corporation is actually a sham-formed to advance the private interests of the owners or to commit a fraud. Courts may also hold the owners liable when the stockholders themselves ignore the separate identity of the corporation (for example, by commingling personal and business funds). When a court imposes personal liability on corporate officers, directors, or stockholders for the corporation's unlawful acts, such action is commonly described as "piercing the corporate veil" Finally, "thin financing" and inadequate capitalization can also defeat the limited liability of a corporation. Thin financing occurs when a corporation has inadequate equity capital and excessive loans. For example, investors may loan the corporation money for a start up venture. In the event of insolvency, those loans may be treated as investments rather than loans, meaning that outside creditors will have priority for repayment over the investors. Inadequate capitalization occurs when when a corporation creates a subsidiary without sufficient capital to ensure success. In the event the subsidiary fails, the courts may overlook the separate identities of the parent corporation and the subsidiary, requiring the parent to respond to the subsidiary's debts

Corporate Officers

Chief Executive Officer (CEO)/President Has power to bind the corporation to contracts Chief Operating Officer (COO)/President Responsible for the day to day running of the corporation Vice President Authority derives from related job functions Treasurer Receives and distributes corporate funds Secretary In charge of the company's official records

Stock

Common Stock may be issued as different classes of stock, where voting rights differ according to the class. Preferred Stock is an ownership interest that generally does not provide voting right to the stockholder. If the corporation dissolves, preferred stockholders will receive preference in corporate assets and are entitle to the stock's face value plus any accrued dividends after the corporation's debts have been paid. Stock certificates are evidence of the stockholder's interest in the corporation and are considered negotiable instruments under the Uniform Commercial Code (UCC). Thus stockholders are subject to the rights and obligations provided under the UCC and other federal and state laws with respect to such instruments. Stated capital is the total amount of capital contributed by stockholders. If a stock sells for less than its par value amount stated in the articles of incorporation, the stock is considered watered or diluted, and the directors and stockholders are liable to unsatisfied creditors for the difference. Capital surplus is the difference between the stock's purchase price and par value when stocks sell for more than par value. The difference is considered surplus for use against future liabilities. Capital surplus can be converted to stated capital by obtaining stockholder consent to amend the articles to increase the common share's par value to match the selling price. A corporation may reacquire issued securities by repurchasing them. This reacquisition is known as redemption. The original agreements between the corporation and the purchasers of debts securities ad preferred stock can include provisions to make the securities redeemable at the corporation's option or to provide for a mandatory retirement of the security. This type of agreement allows the corporation to reshape its financial structure at will when needed. A corporation may also provide for redemption of nonvoting stock but cannot provide for the redemption of all common voting stock. A corporation can redeem stock only if its assets exceed its liabilities, including any obligations to preferred stockholders in the event of dissolution. When a corporation with sufficient surplus buys its own shares in the market, it can either hold the stock without reissuing it or retire the shares. Stock issued as fully paid to a stockholder and subsequently reacquired but not retired by the corporation is called treasury stock. Treasury shares are considered authorized and issued but not outstanding and have no dividend or coting rights. Corporations may choose to repurchase stock for a number of reasons including these: - Reducing the number of issued shares may result in a stronger return on investment. If earnings are static, the earnings per share will increase with fewer outstanding shares. - Repurchasing shares can make a corporation less attractive for a takeover. Stock repurchases can reduce accumulation of excessive cash in the corporation and increase the market value of remaining outstanding stock. Both are deterrents to a takeover. In closely held (privately owned) or family owned corporations, there is generally no market for trading shares. Ownership may be retained by a few persons or even one. Without the ability to trade stock, such corporations may have a more difficult time raising capital. However, closely held or family owned corporations also have advantages. For example they do not have to comply with securities laws and may be able to make business decisions more quickly.

Appropriation of a Corporate Business Opportunity

Directors and officers may not appropriate a business opportunity that belongs to the corporation for their own gain. For example a director may not purchase a business that he or she knows the corporation is seeking to purchase. Similarly, a director or an officer may not compete with the corporation. Directors and officers are privy to confidential information about the corporation. Material information about a corporation's affairs that could, if made public, change the value of the corporation's stock is called insider information. It is illegal for directors or officers of a corporation to use insider information to their own advantage, such as to buy or sell stock to profit or to avoid loss. If they do, stockholders from whom they purchased or sold shares can sue for damages. In addition to the private right of action afforded to wronged stockholders, directors or officers who improperly use insider information for personal gain are also subject to stiff civil penalties. The Insider Trading Sanctions Act of 1984, amended by the Insider Trading and Securities Fraud Enforcement Act of 1988, imposes a civil penalty on anyone who deals in securities based on "material, nonpublic" information. This penalty is not based on a duty to the corporation's stockholders, but to the investing public. Information gained by legitimate research can be used freely in investment decisions. Information cannot be used from such sources as corporate insiders, investment firms entrusted with information for business purposes, or law firms representing a corporation.

Duties of Directors and Officers

Directors do not serve as a corporation's agents, but the law imposes similar duties upon them. Officers in contrast are agents of the corporation (their principal) holding related fiduciary duties to it.

Effect of Dissolution on Thrid Parties

Dissolution does not affect existing creditor's' rights against the partnership partners or estates of decreased partners. If new contracts arise such as those needed for orderly liquidation the partnership partners and decreased partner's estate are all liable for these contracts. A problem can arise if a partner enters into a completely new contract on the partnership's behalf after dissolution and without any authority. Even if the partner lacked actual authority to enter into the new contract, he or she might have had apparent authority. If however a third party has or should have had knowledge of dissolution the contract cannot be enforced. For example if a partnership dissolves because one partner has filed bankruptcy third parties are held to have notice of such matters of public record. A partner whose actions dissolve a partnership must give notice to the other partners unless the dissolution should be obvious to them. f a partner knowing of dissolution enters into a new contract the partnership and the other partners might be bound but they have rights against the partner who entered the contract. If a contracting partner has no actual knowledge of dissolution which might be the case if a partner falls ill but has received notice of dissolution (in the form of an unopened letter for instance) the partner is solely responsible for a contract he or she entered into after dissolution. A partner who has retired remains liable to third parties for obligations incurred while a member of the firm. Even the continuing partners' agreement to relieve the retiring partner of prior obligations does not change a third party creditor's rights. The be relieve of these obligations the third party must agree to obtain payment only from the remaining partners. Ther term "retiring partner" includes a decreased partner's personal representative.

Dissolution

Dissolution or termination or a corporation can be either voluntary or involuntary. Each method follows a different procedure and has different repercussions for the parties involved. Voluntary corporate dissolution begins with a board resolution to dissolve the corporation, approved by a majority of the stockholders. The corporation must also file a formal statement of intent to dissolve with the state. The corporation then proceeds with liquidation, for which it can request court supervision, if necessary. Involuntary dissolution occurs when the state of incorporation, the stockholders, or corporate creditors file for involuntary dissolution proceedings. State proceedings are unusual and occur only in cases of gross abuse of the corporate privilege or fraudulent acquisition of the articles of incorporation. A state might hold such a proceeding when a corporation has allegedly defrauded the public repeatedly. Stockholders can ask a court for involuntary dissolution on the basis of the right to protect stockholders. The court can then order liquidation of corporation assets and distribution of the proceeds, after payment of debts, to the stockholders. The RMBCA provides that stockholders can file suits to dissolve the corporation on these grounds: - The directors are deadlocked, the stockholders cannot break the deadlock, and irreparable injury to the corporation either has occurred or might occur. - The directors' or officers' acts are illegal, oppressive, or fraudulent. - The stockholders are deadlocked in voting power and have failed to elect directors for two successive meetings. - The corporate assets are being wasted or misapplied. If a judgement for a creditor's claim is unsatisfied, or the corporation admits insolvency in writing, the creditor can sue for dissolution of the corporation. The corporation need not be bankrupt, with its liabilities exceeding its assets. Insolvency means only that the current liabilities ( as opposed to total liabilities ) exceed current assets. Thus, a corporation that cannot meet its current obligations is insolvent, even though its total liabilities are less than its total assets. Because of the public interest in an insurance company's ability to pay its claims, courts designate the state department of insurance as the receiver in the insurer dissolution process known as receivership.

Dividends

Dividends are shares of corporate profits paid to stockholders. To stockholders, dividends are considered capital gains, or profits on owned stock. Some stockholders may prefer to invest these profits back into the corporation, while others may prefer to receive them as payments. Management decides whether to declare dividends in good faith and for a corporate purpose. Directors can also defer (postpone) distribution of dividends or employ and enforce bond call (redemption) provisions, which reinvest dividends into the corporation to provide expansion capital, build surplus, or accomplish other business goals. To force payment of dividends, stockholders must prove bad faith which has rarely been found by courts. Dividends are usually paid in cash but not always. Property dividends are shares of another corporation that the declaring corporation has acquired. Stock dividends are corporate profits issued in the form of additional shares of the issuing corporation and can be paid in treasury stock or from authorized but unissued shares. A board may also issue an extra dividend in addition to the usual and expected regular one. Distribution of assets during a corporate reorganization is often called a liquidating dividend; however such a distribution is not a true dividend because a dividend comes from corporate profits. Once the board formally declares a dividend, the stockholders become creditors of the corporation. If the corporation becomes insolvent before paying the dividend, stockholders participate equally with other creditors to the extent of the dividend. Because of the dividend creates a debtor-creditor relationship the board cannot revoke a declared dividend.

Fiduciary Relationship

Every partner has a fiduciary relationship with the other partners and the firm, meaning that each partner owes a duty of trust, loyalty, and good faith to the partnership, similar to the duty of an agent trustee. The fiduciary duties are implied in law and cannot be waived by contract. A partner who derives any personal benefit from a transaction connected with the partnership but made without the other partners' consent must account to the partnership for the benefit and hold any profits for the partnership as a trustee. For example, Nadia and Oscar are partners in a pet grooming business. Oscar's neighbor brings her dog to be groomed by Oscar who keeps the payment for himself instead of putting it in with the business receipts. Nadia can demand that he turn the payment over to the partnership. Partners are liable to the partnership for failing to render the services they originally agreed to perform. A partner is not however liable to the partnership for ordinary negligence or for loss caused by errors in judgment. The liable for gross negligence, fraud, or wanton misconduct.

Rights of Members in Association Property

Every voluntary association member has a property right in its assets. Because associations are not legal entities any property that an association ostensibly holds belongs jointly to its members as tenants in common,. Therefore unless state statute provides otherwise, common law gives members the right to dispose of the property at their joint pleasure. The articles of association however can give the right to control and dispose of property solely to the board of directors. Unless the articles or bylaws state otherwise members lose whatever interest they have when their membership ends. Dues and assessments paid by members become the association's property, free from any individual right or claim. An individual member cannot prevent use of his or her dues for objectives to which a majority of the members agree.

Federal and State Regulation of Corporations

Federal law plays a large role in many corporation operations. The Commerce Clause in the US Constitution provides Congress with the authority to regulate commerce among the states, and most corporations are involved in interstate commerce. State law governs the formation of corporations. All states have general laws that authorize corporate formation for any lawful purpose with the exception of certain business and the practice of a profession. The American Bar Association Revised Model Business Corporation Act (RMBCA) has been widely adopted by the states and is used as the reference point for this discussion. General business corporation laws prohibit professionals such as doctors, lawyers, and accountants from incorporating because of the personal and confidential relationship required with their clients. However, many states have adopted specific laws laws to allow members of the same or associated professions to form professional corporations (PCs). In a PC the members are liable for their own malpractice but they are not liable for the malpractice of other members (employees) of the corporation. Special incorporation laws apply to insurance, banking, railroads, telephone companies, savings and loans, and not for profit corporations. A corporation is a citizen of the state where it is chartered (incorporated), and that state is the corporation's domicile, or legal home. A corporation that confines its business to one state will usually find it advantageous to incorporate there; incorporating in a different state might increase organizational and operational costs and taxes. For a corporation that operates in several states, the incorporators choose the state in which to incorporate. A business may choose a particular state of domicile for business reasons, often because of attractive laws regarding incorporation and taxation. A corporation formed in one state is a foreign corporation in any other state, and a corporation chartered in one country is an alien corporation outside that country. A corporation may elect to maintain a principal place of business outside the state of domicile and may wish to do business in other states. However, a corporation is a legal entity only in the state of incorporation; no state can grant a corporation the right to operate in another state. If a corporation wants to do business in another state, it must comply with the other state's laws.

Apply your knowledge

For 12 years, Rachel has been the sole proprietor of a small chain of pizza shops, employing mostly family members. Most recently, Rachel's husband, Derek, and their three adult children co owners. Responding to the continued growth of the business, Rachel's accountant suggested she consider forming a corporation for the business. To help her make a decision, what are the advantages of incorporation that Rachel should consider? Explain why the family might decide to convert the business into a corporation. Feedback: The most immediate reason to form a corporation is to protect the family's assets from the corporation's potential contracts and torts. If Rachel converts the business to a corporation, she could lost the business in a worst case scenario, but her family's personal assets would not be exposed. Further, her accountant may recognize certain tax advantages if her business becomes a corporation, and she may someday find it easier to raise capital and to sell or transfer ownership. If Rachel wants the organization to continue beyond the death of the owners, incorporation also facilitates the goal of perpetuity.

Foreign Corporations

Foreign corporations (those incorporated and domicile in another state) must be admitted and recognized by a given state to do business in that state. For example, the RMBCA requires a foreign corporation to obtain a certificate of authority from the secretary of state before transacting business. A state can forbid or control the activities of a foreign corporation with respect to interstate (within the state) commerce but has no jurisdiction over interstate (between the states) commerce of any corporation. Federal laws apply to activities defined as interstate commerce. Congress and federal courts have consistently broadened the definition of interstate commerce. Activities that may occur outside the state of incorporation but are not considered interstate commerce include holding stockholders' or directors' meetings; maintaining financial accounts; conducting isolated, short terms transactions; suing or being sued; and other transactions not completed for profit. State laws governing insurance company admissions are stricter than those governing general business corporations. State laws may include requirements regarding deposits, reports, examinations, background checks on officers, and other requirements specific to insurance regulation. Out of state insurers generally apply to the state department of insurance rather than to the secretary of state for authority to conduct business. States have enacted so called long arm statutes that allow residents to sue in their own state's courts, people or entities (including corporations) that are not physically present in the state but that have minimum contacts there. These laws provide jurisdiction to local courts over foreign (out of state) defendants. Long arm statutes may apply to torts, contractors, or both. To sue a person or business, a plaintiff must accomplish service of process that is, physical delivery of a complaint and summons to a defendant. With respect to insurance, most states have enacted the National Association of Insurance Commissioners' (NAIC's) model Unauthorized Insurers Process Act, Which provides that service on a foreign insurer must be delivered to the state department of insurance.

Partnerships

From a humble start in a drafty barn, Ruchi has grown a start up farm to table cheese company into a robust operation with two production plants and 24 employees. Ruchi has been considering sharing ownership of her business with employees Erin and Kyle. When she suggest this to them, the three discuss the pros and cons of proceeding as a partnership. What specific elements of partnerships should they evaluate to make an informed decision? Forming partnerships enables individuals to pool their resources to pursue a business for profit. However, partnerships involve complex responsibilities and liability exposures for the owners that vary depending on the type of partnership structure. Partnerships, limited partnerships, limited liability partnerships, and limited liability companies are forms of business ownership that share some characteristics with each other but differ with respect to the owners' liability exposures. Insurance professionals who work with these businesses should therefore have a basic understanding of these partnership characteristics: - Partnership formation - Partnership liability - Partners' relationships to one another - Relationship of partners to third parties - Dissolution, winding up, and termination - Limited partnerships and limited liability partnerships - Limited liability companies

Share Exchange and De Facto Mergers

In a share exchange merger, a corporation acquires all of another corporation's outstanding shares in return for shares of the acquiring corporation. A share exchange plan must be adopted by the board of directors of the disappearing corporation and approved by that corporation's stockholders, but it does not have to be approved by the stockholders of the acquiring corporation. In another form of merger, a corporation sells all or most of its assets to another corporation in return for the purchasing corporation's shares for distribution to its stockholders. In this way two organizations are merged, but not necessarily in accordance with the statutory requirements for a merger. This transaction is known as a de facto merger - a merger in fact, if not in law. Under the American Bar Association Revised Model Business Corporation Act (RMBCA) which is widely adopted by individual states, a sale of all or substantially all of a corporation's assets not in the usual course of business requires stockholders' approval through a statutory merger or consolidation. When a de facto merger meets the structural changes of a statutory merger, the new corporation assumes the liabilities of the predecessor organizations. Courts will not necessarily find the new organization responsible for the liabilities of the acquired corporation if the successor organization is not a continuation of the prior business.

Transactions With The Corporation

In the course of business, directors and officers often enter into business transactions on behalf of the corporation. Sometimes, when beneficial, the corporation may enter into business with one of its own directors or with another corporation that shares some or all of the same directors ( referred to as interlocking directors). State statutes generally allow such contracts, even if the directors involved voted in factor of the contract, provided that the material facts of the relationship were known and voted on by the board or the stockholders and the contract is fair to the corporation.

Liability of Members to Third Parties

Individual members can be liable for both torts and contracts arising from the association's activities. Association members are jointly and severally liable for torts committed by the association's agents and employees acting within the scope of their employment. However under the Volunteer Protection Act , those who provide voluntary services are immune from liability in many instances. In common law an unincorporated association is not liable for the actions of its members because it is not a separate legal entity and cannot be sued. Many state statutes now allow unincorporated associations to sue and be sued; however the fact that an association might be sued in its own name does not eliminate the members' individual liability. A member who has suffered damage to his or her person, property, or reputation through the tortious conduct of another member or an agent of the association cannot sue the association but can sue the other member or agent individually. Absent statutes to the contrary members of an association organized for trade or profit are individually liable for contracts made by an authorized officer or agent in the association's name or incurred in the course of business party does not know the individual members' names. Members of not for profit associations organized for social, moral, partiotic, political, or similar purposes and not for trade or profit do not have individual liability to third parties unless they join in authorizing a contract. In this situation, agency rules apply and agency cannot be implied by the mere fact of association or paying dues.

Directors or Trustees

Individual members of the association normally do not participate in the day to day management of the association; that authority is usually given to the association's elected board of directors or trustees. Association directors and trustees have legal rights and duties almost identical to those of corporate directors. Association directors have no legal right to act individually on behalf of the association and can make decisions only as a group. One difference is that directors of not for profit associations do not have as high a standard of care as directors of corporations or associations engaged in business for profit. This is because their positions in not for profit associations are often part time and uncompensated. If they receive compensation their standard of care is higher.

Takeovers and Tender Offers

One corporation may wish to gain control of another corporation for various business purposes, such as an increase in market share or acquisition of assets. A corporation may use various methods to achieve a takeover of another corporation. When one corporation wants to control or acquire another corporation against the will of that corporation's board, the acquiring company can attempt a hostile takeover. Often, a hostile takeover attempt subsequently becomes a friendly takeover when the terms offered by the acquiring corporation improve or the acquiring corporation gains the endorsement of the target corporation's board. One corporation can gain control over another by bypassing the target corporation's board and acquiring sufficient proxies from the target corporation's stockholders to elect its own board of directors or to vote for a merger. US Securities and Exchange Commission (SEC) rules and regulations govern proxy solicitation in these situations. Another method a corporation may use to acquire a corporation that is unwilling to merge is purchasing sufficient shares of the target corporation to become eligible to vote on its board of directors. To purchase shares, the prospective acquirer will make a tender offer. Federal law requires mandatory disclosure of certain information in a tender offer. Any person or group that acquires, or intends to acquire, more than 5% ownership of a class of securities registered with the SEC must file a statement with the SEC and send a copy of the statement to each offeree and to the issuing company. This information enables stockholders to make an informed decision about whether to sell their shares in the target company.

Partnership Liability

Only a legal entity can be a part to a lawsuit, but common law traditionally did not consider partnerships to be legal entities. Therefore, for a partnership to sue or be sued, all the partners had to be joined individually in legal actions by or against the partnership. A plaintiff suing a partnership would have to serve papers on each partner. Because of the burden of determining every partner's identity and then serving papers to all of them, some states passed common name statutes, permitting suits against the partnership in its name. Some state laws permit satisfaction of judgement only from the firm's assets and not from those of the individual partner who was served personally. Typically, when the partnership is the plaintiff, all partners must join inn the suit. When more than one person was at fault, the common law distinguished between contract and tort liability. If two or more people, such as partners, were liable under a contract the liability was joint and a plaintiff had to sue all of those at fault. For tort cases, however the liability was joint and several. The plaintiff could choose to sue all the partners or any number of them. Many states have adopted laws amending the common law rule so that liability on all obligations both contract and tort are joint and several. The laws of agency govern liability of a partnership and of the individual partners for torts committed by one of the partners. If a partner's act or omission in the ordinary course of the partnership's business causes loss or injury to a third person, the partnership, that partner, and each of the other partners are liable and the partners' private property can be used to satisfy the judgment. The acting partner is ultimately liable. If the partnership or any other partner is forced to respond in damages to the third party, the acting partner must theoretically reimburse the other partner or the partnership. In reality, however insurance usually covers the liability. A partnership is not usually responsible as a business entity for a crime; only a partner who has participated in a crime is held criminally responsible. Vicarious liability, or holding the partnership legally responsible for the actions of a partner, does not usually exist in criminal law.

Rightful and Wrongful Dissolution

Partnerships may dissolve voluntarily, or the courts can declare dissolution (also called dissocation). A partner can apply to the court for a decree of dissolution in certain situations such as when one partner becomes incapable of performing his or her part of the contract (for example because of illness) or is guilty of conduct that harms the business. A dissolution is either rightful or wrongful. A rightful dissolution occurs in accordance with the partnership agreement and is not any partner's fault. Upon a rightful dissolution the partnership is liquidated. If the partnership is solvent at the time of dissolution, the parties share in any surplus remaining after payment of debts and partners' equity. If the partnership is insolvent the partners share the losses. If dissolution is wrongful the innocent partners can choose the either wind up the business and hold the at fault partner liable for breach of contract damages or continue the business for the remainder of the partnership term. If they choose to continue the remaining partners must pay the wrongful partner his or her share of the assets less any damages the wrongful dissolution caused. The remaining innocent partners must then release the wrongful partner from all liability for existing debts.

Ability to Convey Real Property

Real property that a partnership owns is held in the name of the partners and the partnership, such as in the name of "Patel Maradona and Park partners doing business as The Excelsior Company". In such a case all the partners must sign a deed to transfer legal ownership to a purchaser. Partnership property might also be titled in the name of one or more partners without naming the partnership. Those partners are the propetry's apparent owners. If a third party does not know of the partnership's interest in property and pays a partner full value for it, the partnership would be estopped from preventing the sale. The same principles apply to other types of property for which a written document indicates ownership such as a bill of sale of an automobile title.

Corporate Powers

State corporation statutes define and limit the powers of corporations. Laws require corporations to file corporate charters, also called articles of incorporation, which specify the type of business the corporation will engage in and its goals and objectives. Traditionally, the charter stated the corporation's precise purpose; however, most states now permit the stated purpose to be written as "for any lawful purpose" In addition to the powers given by law and those stated in the charter, corporations have implied powers to do all things necessary or convenient (and not in violation of law or regulation) to achieve the corporation's purpose. For example, a corporation has implied power to sue, purchase property, or invest funds. A corporation can exercise its powers, express or implied, only to further its primary purpose. A corporation that exceeds its chartered powers acts ultra vires. Under corporate law, a contract entered into ultra vires is illegal. If a corporation has a restricted purpose per its articles of incorporation, stockholders can sue to enjoin (stop) the corporation's directors from engaging in ultra vires activities. For example, stockholders might sue if the corporation's charter states that business will be limited to book publishing, but the corporation begins to manufacture tires. Additionally, if the corporation loses money in an ultra vires activity, the directors who authorized that activity are personally liable for the loss. Today, ultra vires is rarely an issue for private corporations because states now permit corporations to be chartered with broad, rather than specific, stated purposes. Corporations can also amend their charters, or articles of incorporation, as needed to recognize changes to their business.

State Regulation

States have statutes concerning many aspects of associations. Some state have laws that address specific matters such as suits by or against associations in the association's name. Associations such as labor unions, insurance organizations, and credit unions are also subject to any specific laws governing such operations. State laws do not restrict the formation of associations for any legal purpose. The constitutional guarantee of freedom of assembly implies the right to form and or join associations and no legislation can eliminate that right. Any law affecting associations cannot unreasonably inhibit free speech or assembly, however it may forbid activities that pose a clear and present danger to society. The National Conference of Commissioners on Uniform State Laws (NCCUSL) adopted a model law in 1996 the Uniform Unincorporated Nonprofit Association Act (UUNAA) to address unincorporated profit associations. This act was revised in 2008 as the Revised Uniform Unincorporated Nonprofit Association Act (RUUNAA). The model act addresses tort and contractual liability of members owning and conveying or property and suits by and against an unincorporated nonprofit association. Additionally the model law recognizes an unincorporated not for profit association as a separate legal entity distinct from its members meaning that it may own and transfer property and sue and be sued in its own name. The model law also provides that liability stemming from contract or tort is solely the liability of the association and not of its members. Although the model law has been enacted in only a few states it contains provisions similar to those found in most states' statutes.

Preferred Stock

Stock that is generally nonvoting but that has priority over common stock, usually regarding dividends and capital distribution if the corporation ends its existence.

Stockholders' Action

Stockholders may file one of three types of civil lawsuits to pursue complaints: - Class action suits: When a transaction damages many people, one or more of them can file a representative, or class action, suit on behalf of all, thus avoiding multiple suits on the same factual and legal questions. A common example is a stockholder class action suit against directors and officers for damages for fraud, such as failure to make a full disclosure in connection with a public stock offering. - Derivative Suit: One or more stockholders may initiate a suit on behalf of the corporation for damages incurred by the corporation. For example, they might file a derivative suit if an outstanding auditing firm negligently audited their books. Any recovery from the suit would benefit the corporation, the directly injured entity, although successfully plaintiffs may also be reimbursed for litigation expenses. - Direct action suits: The least common stockholder suit, direct action suits allow stockholders to seek remedy for direct harm. For example a stockholder might file a direct action for harm sustained while engaged in company business.

Stockholders' Power and Duties

Stockholders normally delegate management powers of the corporation to the board of directors. The board and officers appointed by the board have the power to create and implement business policy. Stockholders have the power to make decisions on issues likely to fundamentally affect them. Stockholders have a right to the corporation's financial statements, which they receive by mail or electronically, at least annually. Stockholders also have the right to inspect certain books or records, such as some types of financial records, minutes of stockholder meetings, and lists of stockholders' names and addresses. Stockholders have no fiduciary relationship to the corporation and therefore can vote in their own best interests. However, majority stockholders may not manipulate corporate affairs to the disadvantage of minority stockholders.

Stockholders' Meetings

Stockholders' meetings are held annually for the purpose of giving stockholders as the corporation's owners, an opportunity to vote on corporate matters over which they have power. To determine which stockholders are eligible to vote, state laws permit the establishment of a cutoff date before the meeting. Only those stockholders owning stock and holding voting rights as of the cutoff date are eligible. Most state laws require an annual meeting but leave it to the bylaws to specify meeting details. If no annual meeting occurs within a statutory time limit, a stockholder can apply to the court to hold a meeting. In addition to annual meetings called by the corporation, holders of a certain percentage of the outstanding shares may call special meetings when permitted by statute, articles of incorporation, or bylaws. The articles of bylaws may also permit others, such as the president, to call meetings. Meeting notice is provided to stockholders in writing, along with information on specific board proposed actions, such as amendments to the articles that require stockholder approval. A quorum, established by statute, articles, or bylaws, is needed to transact business lawfully at the meeting, In other words, the specified proportion of outstanding shares of voting stock must be represented, either in person or by proxy.

unincorporated association

The First Amendment of the US Constitution has been interpreted to protect freedom of association thus it protects the right of individuals to form unincorporated associations to accomplish a common legal purpose. Risk management professionals need to understand the nature of such associations, especially regarding the liability of members. Unincorporated Associations share characteristics with both corporations and partnerships. Examples include trade associations, labor unions, religious organizations and clubs.

Articles of Association and Bylaws

The contract of association is embodied in an instrument usually termed the "Articles of association", "constitution" or "charter". Like a corporate charter, this instrument is the fundamental body of rules governing the association. A voluntary association can adopt bylaws to serve as the rules of the association and provide regulations concerning discipline, doctrine, or internal policy. Association members are bound by the provisions of the bylaws. The bylaws of an unincorporated association typically include provisions addressing these issues: - Qualifications, selections, and terms of directors and trustees - Meetings - Qualifications for membership - Acquisitions and transfer of property - Rights and duties of members - Dissolution The association has the right to interpret and administer the bylaws and regulations. However courts will not enforce them if they compel a person to lose rights in accumulated assets or to forgo basic constitutional rights or if they are illegal, immoral or against public policy.

Limited Liability Companies

The owners of a limited liability company (LLC) are called members. The members appoint managers to conduct the LLC's business operations. Members may also serve as managers. The structure of an LLC appeals to real estate firms, high tech start up companies and other entrepreneurial businesses with small numbers of active investors. Not all businesses can operate as LLCs, however. State laws generally prohibit banking trust and insurance industry businesses from forming LLC's and some states also prohibit professionals (such as doctors and accountants) from forming LLCs. Many states have created alternative forms of ownership, such as professional corporations (PCs) and professional LLCs to meet the needs of such professionals as accountants lawyers engineers and physicians. The structures of these ownership schemes are often complex. For example it may be advantageous for each doctor in a practice to incorporate as a PC then for each PC to become a partner in general partnership. So if there are five doctors a partnership consisting of five PCs is formed

Board of Directors

The corporation's board of directors makes two types of decisions: It decides the corporation's structure and form, and it determines business policy. The fire requires stockholder approval while the second does not. Board decisions that would change the terms of the contract between the corporation and its stockholders require stockholder approval. These are examples of such decisions: - Amendments to the articles of incorporation, including capital structure, purpose, name, or preemptive right limitations - Mergers or consolidation - Dissolution of the corporation Board decisions that do not requires stockholder approval (provided that they are not otherwise limited by the articles of incorporation) include these: - Issuing stock or borrowing money - Electing and assigning officer duties - Declaring dividends - Purchasing or selling property in the normal course of business - Decisions concerning insurance coverage - General policy decisions regarding company operations State statutes may establish the minimum number of directors required, if a board is required at all. In some states, the articles specify the number of directors, while other states allow the articles of incorporation to state how the number will be set ( for example, in the bylaws). Statutes may also specify whether directors must be stockholders or meet residency requirements. Directors can be inside directors or outside directors. For example, an outside director may be a respected businessperson who can provide perspectives on the organization that are distinct from those of persons involved in the day to day operations of the business. Directors whether inside or outside, have no legal right to act individually on behalf of the corporation and can make decisions only when acting together in a meeting. An exception may occur if all directors have consented in writing to a decision. Unanimous written consent has the same legal effect as a unanimous vote at a meeting. While directors are concerned with corporate form and decisions relating to business policy, corporate officers, in turn, implement the policies determined by the board of directors. Officers of the company manage the corporation's internal affairs and deal with persons outside the organization.

Partnership by Estoppel

The doctrine of partnership by estoppel protects innocent third parties who have relied on the appearance of a partnership. A partnership by estoppel results if three elements are present: - A person who is not a partner purports to be a partner or permits others to think he or she is a partner. - The third party deals with the entity in justifiable reliance on a belief that it is a partnership or that the person who purports to be a partner is actually partner. - The third party changes his or her legal position because of reliance on that belief for example entering into a contract Under these circumstances the person who has permitted the appearance is liable to the third party to the same extent that an actual partner would be. In addition the purported partner has the power to bind the partnership, just as an actual partner would. If all the partners consent to the representation, the apparent partner's transaction is a partnership act or obligation. If fewer than all the parties consent the act is the joint obligation only of the consenting partners and not of the partnership itself. Risk of partnership by estoppel may occur when a retired partner has not provided appropriate notice of the retirement to people who previously

Acts Outside the Usual Scope of Business

The phrase "usual scope of business of the partnership" refers to not only what the partnership usually does but also what similar partnerships in that area ordinarily do. These practices create appearances on which the third party might rely thus estopping the partnership from denying liability. A partner's act outside the partnership's usual scope of business does not expose the partnership to liability because the partnership created no appearances. Instead the third party merely relied on its own perceptions. Referring to the example of Megan Klaus and Adele, who sell hunting and fishing equipment, if Adele enters into a contract to purchase a line of guitars, the partnership would bot be bound to the contract unless Megan and Klaus had given Adele this actual authority. Adele not the partnership created the appearance of her authority in this case so the partnership can deny Adele's binding authority. The third party could however sue Adele for breach of the implied warranty of authority (for giving the impression of authority where it did not exist) under the law of agency

Advantages of Incorporation

The primary advantage of incorporation is that it limits the owners' liability for the corporation's contracts and torts. For example, if the corporation goes bankrupt, or if a tort claim exhausts the corporation's available insurance and assets, the owners (stockholders in a for profit corporation) are generally not liable for any remaining debt. However, in closely held (privately owned) or family owned corporations, loan contracts may be written to bypass the stockholders' immunity from liability for corporate debts. Banks lending money to such corporations can demand from stockholders, as collateral, signed notes to secure the obligation with their credit as well as with the corporation's credit. Bypass stockholders' immunity from tort liability is much more difficult than bypassing their immunity from contractual liability. Therefore, a corporation or even a private individual , may choose to incorporate a particularly hazardous business, or part of a business, separately to isolate loss exposures that might otherwise affect the main business, In addition to the advantage of limited, other advantages of incorporating include: - Potential tax advantages - Easier to sell or transfer ownership - Easier to raise capital - Perpetuity beyond the death of owners

Corporate Mergers

There are a number of reasons that one or more organizations may initiate a merger, including the desire to increase market share, achieve operational efficiencies, and expand marketing and distribution channels. These are the most common types of mergers: Horizontal Merger - A merger between businesses that directly compete with each other Vertical Merger - A merger between an organization and a customer or supplier. An example is a merger between an ink company and a printer manufacturer. Conglomerate Merger - A merger of two organizations that are not competitors or linked as customer and supplier. An example is a merger between a paint retailer and a carpeting retailer.

Examples of Rightful and Wrongful Dissolutions

These are examples of rightful dissolutions: A partnership's term ends - A partnership without a term (a partnership at will) is dissolution by one or more partners. - All the partners agree to dissolve even if the partnership has a term. - A partner has been declared incompetent in a judicial proceeding or is shown to be of unsound mind - A partner has become incapable of performing his or her part of the partnership contract - The partnership business can continue only at a loss These are examples of wrongful dissolutions - A partner becomes bankrupt - A partner is guilty of conduct that harms the operation of the business, such as competing with the partnership embezzlement or breach of the fiduciary relationship - A partner willfully or persistently breaches the partnership agreement

Types of Associations

These are the 6 major types of associations: 1. Trade associations - The largest group of unincorporated associations is composed of more than 10,000 American trade associations. These organizations foster their members' interested by exchanging and compiling information, lobbying, setting standards, and issuing publicity. They include boards of trade, chambers of commerce, and other business organizations 2 Labor unions- The next largest group of associations is labor unions. Local unions as well as national organizations representing multiple smaller unions may be formed as associations. Any benefits such as health insurance, provided by the union are regulated according to relevant state and federal law. Labor unions are also subject to applicable state and federal employment laws. The group liability of unions organized as associations is limited in most states. . Benevolent and Fraternal associations - Fraternal and Benevolent societies have long taken the form of associations. If these organizations provide insurance or credit for their members they must comply with state laws governing such issues. Benevolent and fraternal associations that conceal their activities from nonmembers are referred to as "secret societies" Special statutes in many states regulate secret societies. 4 Religious organizations- Religious associations may be unincorporated associations or may choose to incorporate. 5 Clubs - A club is an association of person for some common objective such as social purposes or the pursuit of literature, science, or politics. For example a local sports league or a club of antique auto owners may be structured as an unincorporated association. Clubs follow agency rather than partnership rules. A club member therefore is liable tp pay money beyond the required subscription if that person expressly or impliedly authorizes a contract. The club's limitations on its agents bind third parties. 6 Condominium owners' associations- Most states have statutes regulating condo associations activities. Some Condo associations are incorporated although statutes do not require incorporation. State statutes usually specify limitations on the formation, powers, finance, and operation of Condo associations. All unit owners within the Condo are association members and the association is responsible for the Condo's operation and the care and preservation of the common areas (the shared area of the property)

Limited Partnerships and Limited Liability Partnerships

To form a limited partnership the partners must comply with state statutes and file a certificate of limited partnership with the appropriate public official. Limited partners receive a return on their investment as agreed upon in the partnership agreement. If a limited partner exercises any control over management, the limited partner might face an unlimited liability exposure. The firm can employ a limited partner but this practice can raise difficult questions concerning when the limited partner's advice or review of management decisions becomes actual participation in management A limited partnership can provide tax advantages to investing partners. Federal income tax laws treat a limited partnership as a partnership. The partnership itself is not taxed and the income attributable to each partner is taxed at the partner's personal tax rate. However in businesses with high up front costs (such as theatrical productions) or high depreciation allowances (such as some real estate developments) paper losses (unrealized losses) are attributable to each partner each taxable year. These losses are particularly valuable to high bracket taxpayers who under some circumstances can use them to reduce their taxable income while the limited partnership develops its business. A limited liability partnership (llp) differs from a limited partnership in that it limits liability for each partner. This limitation however does not apply in situations such as these: - Individual negligent or wrongful acts by a withdrawing partner - Debts or obligations of the partnership for which a withdrawing partner has agreed to be liable - Debts and obligations expressly undertaken in the partnership agreement. States differ with respect to the extent of liability protection granted to LLPs. Some states referred to as limited shield states, significantly reduce their liability protection. In such states partners have limited liability only with respect to actions of their partners but still have unlimited personal liability in all other situations.

Articles of Incorporation

Typical items includes in articles of incorporation: - Corporate name - Duration (usually perpetual) - Purpose (usually broadly stated) - Number, classes, and par (face) value of shares - Provisions, in any, for the stockholders' right to purchase a proportionate share of newly issued stock - Provisions, in any, restricting the transferability of shares - Registered office or place of business and registered agent - Number, names, and addresses of the initial board of directors - Names and addresses of incorporators

Reorganization

Under Chapter 11 f he Bankruptcy Reform Act of 1978 a corporation may be placed under federal bankruptcy court supervision for reorganization purposes. Chapter 11 proceedings may be voluntary or involuntary and may end in either a restructured organization or termination through bankruptcy liquidation. Chapter 11 filings are the most common way for corporations to restructure debt. Corporations will typically restructure by changing the ownership or operational structure of the organization in order to be more profitable. Under Chapter 11, the bankruptcy court must appoint a committee of creditors and also might appoint a committee of stockholders to work under its supervision. The court can permit the current managers to continue controlling the business and may appoint an examiner to investigate and monitor the reorganization. The court can appoint a case trustee, separate from the US Trustee, to take control of the business if it finds management guilty of fraud, dishonesty, incompetence, or gross mismanagement or if it finds that the appointment of a trustee is in the best interests of the creditors, stockholders, or other persons. In the absence of a satisfactory reorganization or other plan, the bankruptcy court may convert the case to a regular bankruptcy liquidation proceeding under Chapter 7 of the federal bankruptcy laws.

Apply your knowledge Chapter 12

Unincorporated associations often adopt bylaws to provide guidance for members regarding discipline, doctrine or internal policy. Identify the issues typically addressed by provision in an unincorporated association's bylaws. Feedback: the bylaws of an unincorporated association typically include provisions addressing these issues: - Qualifications, selection, and terms of directors and trustees - Meetings - Qualifications for membership - Acquisition and transfer of property - Rights and duties of members - Dissolution

Partnerships' Books and Property

Unless otherwise provided, the partnership's books must be kept at the partnership's principal place of business. All partners have the right of access to the partnership's books for purposes related to the partnership

Financial Relationship

Unless the partnership agreement says otherwise, each partner shares equally in profits, losses, and any surplus that remains if the partnership is dissolved (after satisfaction of all liabilities) even when the partners' capital or service contributions are unequal. The partnership indemnifies each partner for payments made or personal liabilities incurred in the course of business when a partner has acted within the scope of his or her authority. However, a partner who is guilty of gross negligence, fraud, or wanton misconduct that gives rise to damages is solely liable and is not entitled to indemnification.

Partnership

a for-profit business entity jointly owned by two or more persons who share ownership and profits (or losses) although not necessarily on an equal basis

bond

a long-term debt instrument that requires the issuer to pay a set annual rate of interest and to repay the borrowed sum on a specified date.