BLAW EXAM 3 1 Chapters 30, 32 33 34 35

Ease of Formation

Some business associations can be created with no formality, others require filing of documents with the state.

If ease of formation is the primary concern, the owners would choose a general partnership.

Sole Proprietorship

An unincorporated business owned by just one person; formed with no formality and no documents to be filed.

It is not a separate taxable entity.

Owners have unlimited liability for all debts.

General Partnership

A partnership is an unincorporated business formed for profit, owned by two or more persons; formed with no formality and no documents to be filed

Limited partnership

An unincorporated business formed for profit, owned by at least one general partner and at least one limited partner;requires filing of certificate of limited partnership with the state.

t is usually not a separate taxable entity

General partners

have unlimited liability for all debts; limited partners have limited liability equal to the amount of their investment

Each general partner has equal rights to control, but limited partners have no right to participate in control.

Tip - Limited Partnership

Each partner, does NOT have equal rights in the management and conduct of the business of a general or a limited partnership.

Corporation

A legal entity distinct and separate from its owners

Formed by filing its articles of incorporation with the state

Shareholders have

limited liability

Partnership

An association of two or more persons to carry on as co-owners of a business for profit.

Any natural person having full capacity may enter a partnership

A "person" may include individuals, partnerships, corporations,joint ventures, business trusts, estates, trusts, and any otherlegal or commercial entity. Not adjudicated incompetent individuals.

Partnership as Legal Entity

an organization having a legal existence separate from that of its members;

A legal entity may

acquire, own, and dispose of property. It may enter into contracts, commit wrongs, sue, and be sued

Any partnership agreement should include (RUPA)

4. The capital contributions of each partner

5. The division of profits and sharing of losses

6. The managerial duties of each partner

Does not include an agreement to divide tax liability.

the formation of a partnership requires all of the following:

(1) Association - two or more persons with legal capacity agree to become partners.

2) Business for Profit, although not all are partnerships because not for profits such as: social clubs, charitable organizations, fraternal orders and civic societies.

When no formal agreement exists, sharing profits is prima facie (i.e. most convincing) evidence that a person is a partner in a business

Fiduciary Duty

Each partner owes a fiduciary duty of utmost good faith, fairness,and duty of loyalty to his partners

Duty of Obedience

The partner's duty of obedience means that they are to act in accordance with the partnership agreement and any business decisions properly made by the partnership

Any partner who violates this duty is liable individually to their partners for any resulting loss

For example, if a partner, in violation of a specific partnership agreement not to extend credit to relatives, advances money from partnership funds and sells goods on credit to an insolvent relative

that partner would be held personally liable to his partners for the unpaid debt.

Duty of Care

Each partner owes the partnership a duty of faithful service to the best of their ability.

There is no duty of control, only various rights ofcontrol

Right to Participate in Management

Each partner has equal rights in management of the partnership unless otherwise agreed

Right to Choose Associates

No person can become a member of a partnership without the consent of all of the partners, or as otherwise specified in the Partnership Agreement

The expression delectus personae literally means

"choice of the person" and indicates the right partners have to select any new members in the partnership

he liability of a limited partner for partnership debts or obligations is limited to the extent of

the capital(investment) they have contributed or agreed to contribute

Formation of a limited partnership requires

compliance with the applicable statute (i.e. must be formed under state statue)

Filing of Certificate- The certificate must include the following information

1. the name of the limited partnership,

2. the address of its office and the name and address of the agent for service of process,

3. the name and the business address of each general partner,

4. the latest date upon which the limited partnership is to dissolve, and

Name -

The surname of a limited partner may not be used in the name of the partnership

Contributions

partners may contribute to the firm cash, property or services, or a promissory note or other obligation to contribute cash or property or to perform services. They are not required to contribute anything specific, i.e. not just services

Limited partner is liable to

the partnership for the difference between the contribution actually made and that which is stated in a signed writing promising a certain contribution

Foreign Limited Partnerships

A limited partnership will be viewed as "foreign" in any state (not country) other than the one where it was formed

Drew is a general partner in a real estate investment firm. Matt andJim are limited partners. Drew, without the consent or ratification of Matt and Jim, can:

B. act as an agent of the partnership.

Control

the general partners have almost exclusive control and management of the limited partnerships

Limited partners cannot participate in control in management of the business, and they do so at the risk of losing limited liability.

Rights - Profit and Loss Sharing

profits and losses are allocated among the partners as provided in the partnership agreement; if the partnership agreement has no such provision, then profits and losses are allocated on the basis of the capital contributions each partner actually made, except that limited partners are liable for losses only to the extent of capital contributed.

If the partnership agreement makes no such provision in writing,

he profits and losses are allocated on the basis of the value of the contributions each partner has actually made, not necessarily equally.

Limited Partnership - Liabilities

the limited partners have limited liability (liability for partnership obligations only to the extent of the capital that they contributed or agreed to contribute)

Limited liability

means that a limited partner is not liable for partnership losses beyond the amount of her contribution, i.e. investment

Dissolution

Extinguishing a limited partnership involves three steps: Dissolution, winding up or liquidation, and termination.

The limited partners have neither the right nor the power to dissolve the partnership,

An Limited LiabilityCompany ("LLC") is (i) a noncorporate business organization that (ii)provides limited liability to all of its owners(Members) and (iii)permits all of its members to participate in management of the business (Managers).

A limited liability company is a non-corporate form of business organization that provide

limited liability to all of its owners (members), permits all of the members to participate in management of the business

Typically, among other things, members of a limited liability company have the right to vote on proposals to:

(i) adopt or amend the operating agreement.

(ii) admit any person as a member.

(iii) sell all or substantially all of the limited liability company's assets prior todissolution.

Members of member-managed LLCs and manager-managedLLCs are the same with respect to liability but not with respect to control, fiduciary duty or whether the member isan agent of the LLC.

As mentioned previously, a member who fails to make an agreed contribution is

liable to the LLC for the unpaid amount

Moreover, LLC statutes either

(1) provide that a member's disassociation does not cause disassociation or

(2) permit the remaining members, by either unanimous or majority vote, to avoid dissolution upon a member's disassociation

An LLC will automatically dissolve upon:

1) in some states the dissociation of a member if the remaining members do notchoose to continue the LLC,

(2) the expiration of the LLC's agreed duration or the happening of any of the eventsspecified in the articles,

(3) the written consent of all the members, or

(4) a decree of judicial dissolution.

Most LLC states have eliminated a member's dissociation as a mandatory cause of automatic dissolution

A merger of two or more entities is the

combination of all of their assets. One of the entities, known as the surviving entity, receives titleto all the assets and also assumes all debts, liabilities, and otherobligations of each merged entity. The other party or parties to the merger, known as the merged entity or entities, is merged into the surviving entity and ceases to exist as a separate entity.

Limited Liability Partnership (LLP)

Is a general partnership that, by making the statutorily required filing, limits the liability of its partners for some or all of the partnership obligations, generally reserved for licensed professionals like lawyers or accountants.

Liability Limitation

Some statutes limit liability only for negligence; others limit liability to partnership torts, malpractice, wrongful acts

The main difference between an LLC and a PLLC is

in a PLLC you can be sued for malpractice, requiring PLLCs to have malpractice insurance. Each member is personally liable formal practice, but not for the malpractice of any other member of the PLLC, unlike in a partnership.

Legal Entity

A corporation is recognized as having a legal existence separate from its shareholders

Limited Liability

A corporation is liable for payment of debts, and shareholders are usually held liable only to the extent of their investment.

Free Transferability of Corporate Shares

Corporate shares are readily transferable unless there is an agreement to the contrary.

Perpetual Existence

Where the articles of incorporation do not specify a limited duration,corporations have a perpetual existence

Centralized Management

The shareholders elect a Board of Directors to manage the business ofthe corporation. The board appoints Officers to run the day-to-day operations. Since management responsibility is separated from ownership, shareholders (as shareholders) do not participate in the running of the company.

As a Citizen

Corporations are citizens of the state(s) where they are incorporated and they have their principal office located for diversity jurisdiction purposes

What are the principal attributes of a corporation?

A. It is a legal entity on its own.

B. It owes its existence to a state, which alsoregulates it.

C. It provides limited liability to its shareholders.

D. Its shares of stock are freely transferable.

E. Its existence may be perpetual.

F. Its management is centralized, not byshareholders

Most states have statutes addressing

nonprofits

Domestic vs. Foreign - Domestic Corporation

one created under the laws of a given state in which is was incorporated.

Foreign Corporation

one created under the laws of any other State or jurisdiction; must obtain certificate of authority to do business.

A foreign corporation transacting business within a particular state without having first qualified cannot use the state court to maintain a lawsuit until the corporation obtains a certificate of authority.

Failure to obtain a certificate of authority to transact business in the state DOES NOT impair the validity of a contract entered into by the corporation.

Publicly Held

authorizes shareholders in closely held corporations to adopt shareholder agreements that depart from statutory norms by altering the governance of the corporation but which terminate automatically if the corporation's shares are traded publicly.

The requirements for a corporation to elect subchapter S treatment are:

(1) it must be a domestic corporation;

(2) it must have no more than 100 shareholders (previously 35 and 75);

(3) each shareholder must be an individual, an estate, or certaintypes of trusts, i.e. not a corporation or partnership;

(4) no shareholder may be a nonresident alien; and

(5) it may have only one class of stock, although classes of commonstock differing only in voting rights are permitted.

Promoters - The promoter

(i) Arranges for the capital and financing of the corporation,i.e. solicit investors to begin the corporation;

(ii) Assembles the necessary assets, equipment, licenses,personnel, leases, and services in the name of thecorporation; and

(iii) Prepare documents for the actual legal formation of thecorporation

They DO NOT continue to solicit capital whenever needed after incorporation.

Corporations have

formal organizations

Bylaws

• Contain the rules and regulations governing the company's internal management.

• Bylaws need not be publicly filed and generally may be altered without shareholder approval

Corporation de Jure

— Refers to a corporation that has been created in substantial conformance with state law and organizational procedure

Corporation de Facto

— One meaning - "existing in fact,although perhaps not intended, legal, or accepted."A failure to comply substantially with the incorporation statute.

A de facto corporation will be recognized if:

(i) a general corporation statute exists,

(ii) there is a bona fide effort to meet statutoryrequirements, and

(iii) the company transacts business demonstrating abelief that the corporation has been properlyformed.

De facto status may not be challenged by anyone otherthan the state

The possible consequences of a defective incorporation include the following:

A. The state brings an action against theassociation for involuntary dissolution.

B. The associates are held personally liable toa third party.

C. The association asserts that it is not liable on an obligation; or

D. A third party may assert that it is not liable to the association

PIERCING THE CORPORATE VEIL - General Rule

Reaching behind a corporate shield (disregarding) to preventin dividuals from insulating themselves against personal liability and the consequences of their wrongdoing is known as piercing the corporate veil

Piercing the corporate veil most often occurs in the follow situations :

Closely Held Corporations -

Creditors unable to recover completely againstthe corporation will often request that a court impose liability on theindividual shareholders. Courts have responded by piercing the corporate veil if (i) business was not conducted on a corporate basis (ignored the formalities), (ii) the company suffered from inadequate capitalization, or (iii)the corporation was used to defraud

Parent-Subsidiary

A subsidiary is a corporation in which another corporation(the parent) owns at least a majority of the shares.

Remedies for Ultra Vires Acts - Include;

a) injunctive action by shareholder to enjoin an ultra vires act,

b) action on behalf of the corporation or shareholders against officers or directorscausing the unauthorized act, and

c) a dissolution or injunctive action brought by the Attorney General of the state ofincorporation

The board of directors may issue bonds

without the authorization or consent of the shareholders

Unsecured Bonds

Referred to as debentures, and are backed by only the promise of the corporation.As a result, debenture holders are unsecured and will recover their claims on an equal footing with other general creditors

Equity securities represent a claim on

on the earnings and assets of a corporation,

while debt securities are

investments in debt instruments

Shares

Proportionate ownership interest in a corporation, with no vesting of ownership of corporate property (assets).

Shares - Do convey rights in corporation

(1) right to participate in control,

(2) right to participate in earnings,

(3) right to participate in residual assets on dissolution.

Preemptive Rights

A shareholder's right to purchase a pro rata share of any additional stock offering in order to prevent his interest from being diluted

Preemptive rights refer to the right available to the shareholder to maintain their ownership stake by giving them the chance to buy a proportional interest in any additional issuance of common stock in the future.

Common Stock

This type of stock has no unique or special contract rights and commonstock-holders generally bear a more significant risk of loss should the corporation fail

Common stockholders share more in the upside if the corporation should prosper.

Dividends

may be paid only if the cash flow and balancesheet tests are satisfied. Insolvency in the equity sense means that a corporation is unable to meet its debts as they come due

The business judgment rule

provides a director of a corporation immunity from liability when a plaintiff sues on grounds that the director violated the duty of care to the corporation so long as the director's actions fall within the parameters of the rule

In suits alleging a corporation's director violated their duty of care to the company, courts will evaluate the case based on the business judgment rule

Under business judgment rule a court will uphold the decisions of a director as long as they are made:

1) in good faith,

(2) with the care that a reasonably prudent person would use, and

(3) with the reasonable belief that the director is acting in the best interests of the corporation

The role of shareholders generally

is restricted to electing directors,approving certain extraordinary matters, approving corporate transactions that are void or voidable unless ratified, and bringing suits to enforce rights.

Voting

is a fundamental right of shareholders in corporations

Quorum and Voting

In order for a vote to be valid, quorum of all outstanding shares (not counting unissued shares and treasury stock)entitled to vote must be presented at the entire meeting, either in person or by proxy.

Cumulative Voting

multiply the number of votes the yare entitled to cast by the number of directors for whom they are entitled to vote

EXAMPLE OF CUMULATIVE VOTING

Approval of Fundamental Changes -

Extraordinary matters involving fundamental changes in the corporation require shareholder approval

Restrictions on Transfer of Shares

In the absence of an agreement, shares are freely transferable.

Directors, Generally

Directors are neither trustees nor agents of the shareholders or thecorporation. But they are fiduciaries who must perform their duties in good faith, in the best interests of the corporation, and with due care

Board of Directors - The board's tasks are :

(1) selecting and removing officers,

(2) determining the corporation's capital structure,

(3) initiating fundamental changes,

(4) declaring dividends, and

(5) setting management compensation

Selection and Removal of Officers -

In most states, the board is responsible for choosing the corporate officers and may remove any officer at any time. Officers are agents of the corporation; their responsibilities are delegated to them by the board

Capital Structure

Determining the capital structure and financial policy of the corporation may include the power to fix the selling price of newly issued shares (unless the charter reserves that right to the shareholders);

Check more for Slide 32 in Chapter 35

Fundamental Changes

The board has the power to amend or repeal the bylaws, unless the articles of incorporation reserve this power exclusively to the shareholders

Check more for Slide 32 in Chapter 35

Dividends 2

The board declares the amount and type of dividends, subject to the restrictions imposed by the state incorporation statute, articles of incorporation, and corporate loan and preferred stock agreements.

• The board also may purchase, redeem, or otherwise acquire shares of the corporation's equity securities

Management Compensation

The board usually determines the compensation of officers. In addition, a number of states allow the board to fix the compensation of board members.

• Both the Dodd-Frank Act and the Sarbanes-Oxley Act place requirements on corporations regarding management compensation. The Dodd-Frank requires that shareholders have a vote on the issue; the Sarbanes-Oxley Act penalizes officers of companies that violate securities laws.