Corporations and LLC's

Formation of a corporation

1. Name of corporation (e.g. Law office of Pete, LLC)

2. Number of authorized shares

3. Name and address of incorporators

4. Registered agent name and address

5. Articles of Incorporation

Corporation Existence

1. When AOI are filed by state

2. Promoters are generally liable for reincorporation contracts

3. Corporation does NOT become liable unless it adopts

Defects in Corporation:

1. A person who purports to act on behalf of the corporation knowing there was no valid incorporation is personally liable

2. NO liability for de facto corporations:

3. colorable compliance with incorporation statute AND

4. excercise of corporate privilege

5. No liability if corporation by estoppel - people trading business as valid corporation are estopped from denying corporations existence

6. Some states don’t recognize de facto and estoppel doctrines

7. Where no cooperation recognized. only those who acted on behalf of the corporation will be held liable; passive investors not liable.

Alter Ego Doctrine: Grounds - harm caused to 3rd party

1. Owners don’t treat corporation as separate entity

2. Commingle personal and corporate funds

3. Use corporate assets for personal purposes

4. Owners don’t hold meetings

Parents/subsidiary corporations or affiliated corporations can be held liable.

1. fraud

2. inadequate captailziation at inception - MUST start corporation with sufficient unencumbered capital to meet its prospective liabilities.

If court pierces - generally only active shareholders liable or liable for own tort.

Capital Structures: Corporation

1. Bonds - debt securities (create creditor- debtor relationship)

2. Equity securities (stock) create ownership interest

3. Subscription agreements - agreements to purchase shares from corporation.

4. Consideration for shares - acceptable firm. MBCA any benefit to the corporation.

Foreign Corporations: Doing Business in the State

1. Registration - certificate of authority to operate within the state.

2. Failure to hold certificate cannot bring suit within the state of business.

Shareholders: Vote

Shareholders do not run the corporation on day-to-day operations:

Exception: Closed corporations may dispense with board by shareholders agreements and run corporation through a different scheme.

1. Record shareholders - have right to vote by (1) annual meetings and (2) regarding fundamental changes within the corporation.

2. Notice of meeting - MUST be given to shareholders: (1) Annual meeting include date, time and location (2) Special meetings include date, time, location and purpose of the meeting.

3. Improper Notice - action taken at that time is void, but can be waived by attending the meeting and not objecting/

4. Proxies - written proxies valid for 11 months (2) generally revocable unless they specifically provide otherwise and are coupled with an interest (3) may be revoked by attendance or later appointments

5. Quorum - Genrally a majority of the outstanding voting shares must be present for valid vote. (2) once a quorum reached, shareholder leaving does not invalidate the voting.

6. Approval - MBCA if quorum present, action approved if voters cast in favor exceeds voters case against.

Shareholder Voting Restrictions

Voting Trust

1. Shareholders transfer share ownership to a trustee who votes shares as agreed (2) valid in most states for up to 10 years but renewable

Shareholder Management Agreements

1. Used in small corporations

2. Shareholders may agree to run the corporation in any way

3. Can even dispense with board

Share transfer Restrictions

1. Ownership interest (shares) generally are freely transferable

2. Share may conspicuously provide for restrictions

3. Restriction must be reasonable

Shareholder Inspection Rights

Limited - books, papers, accounting records

1. With five days written notice AND

2. Proper purpose (shareholder rights)

Preemptive Rights:

Right to purchase shares to maintain proportionate ownership interest.

1. MBCA exists if provider for

2. Where provided for, does not apply:

3. Shares issued as compensation

4. Shares issued within 6 months of incorporation

5. Shares issued for consideration other than money

6. Nonvoting shares with a distribution preference

Shareholders Bring Suit

Distinguish Direct Suits v Derivative suits

Direct suit - personal suit towards an individual shareholder

Derivative suit - to enforce a right belonging to a corporation

1. Must have owned shares at the time

2. Must maintain ownership throughout suit

3. Demand board to bring suit (unless futile in some states)

Dismissal:

If a majority of directors with no personal interest determine in good faith that suit is not in the best interest of the corporation.

Recovery:

Direct suit - goes to shareholder

Derivitive suit - goes to corporation

Shareholders Distributions

Form of dividends or assets after dissolution. No rights to receive unless/until declared by board.

Insolvency limitations - no distribution if:

1. Corporation unable to pay its debts as they become due

2. Total assets are less than total liabilities

Perferences: shares may have a preference to distribution

1. Cumulative - if distribution not declared or paid in a certain year, it accumulates until paid

2. Cumulative if earned - preference accumulates only if profits for year were sufficient to pay preference

3. Participating - receive stated preference and a share of the distribution made to common shareholders

Directors Liabilty:

1. Director who votes for an unlawful distribution is personally liable for the excess

2. Directors may seek contributions form other directors who votes for distribution

3. Directors may recover from a shareholder who received a distribution knowing it was unlawful

4. Good faith defense p may rely on accountants or reliable officers and employees who indicate distribution was lawful.

Shareholders Liability

Shareholders not fiduciaries - may act in self -interest

EXCEPTION: Controlling shareholder cannot use control to obtain a special advantage at the expense of minority shareholders. (SEC)

Directors: Voting

1. Meeting - directors must attend in person (NO PROXIES) or through telecommunications equipment if all participating directors can simultaneously hear each other.

2. No particular notice required for regular meetings

3. Special meetings p typically require a 2 day notice of date, time, and location BUT NOT purpose.

4. Quorum - directors must be present at the time of vote is taken

5. Approval of action requires affirmative vote of a majority of directors

Directors: Liability

Directors owe fiduciary duties of care and loyalty to the corporation:

1. MUST act in good faith

2. With reasonable care of the business at hand

3. Best interest of the corporation

BJR protects directors from liabitly who acted with duty of care and/or loyalty.

Articles may limit liability to directors

Reasonable defenses - when director(s) acted with prudent care and claim reliance on opinions, reports prepared by experts or reliable employees.

Duty to prevent waste

No self-dealing without disclosures and approval - duty of loyalty.

Directors can be indemnified:

Successful indemnification - if direction is sued and successfully defends the suit - must indemnify for expenses

Unsuccessful indemnification- if director is unsuccessful in defending the suit, corporation has discretion to indemnity if the director complied with the business judgment rule standards.

Officers

Officers are not required but must be described in the bylaws.

1. One person may hold more than one office

Officers Removal:

1. Officers are removed by directors

2. officers are appointed by directors

3. Removal of officers are usually through breach of contract.

Officers Authority:

1. Actual authority unless a president (apparent authority unless stated otherwise)

2. Apparent authority to do whatever someone in their position would normally do.

Officers hold the same rights as directors.

1. Officers has rights to indemnification

Fundamental Corporate Changes

Amendments in AOI

1. Mergers (Nuisances: for merger MUST be approved by directors and shareholders)

2. Consolidations

3. Share exchanges

4. Disposition of substantially all assets outside of the regular course of business.

General Procedure Changes:

1. Board resolution

2. Notice to shareholders

3. Shareholder approvals

4. AOI change filed with state

Recognized Dissolution:

1. Voluntary

2. Shares that are not issued yet or commenced

3. After shares have been issued, corporation may dissolve by a corporate act approved under fundamental change

LLC’s Formation

LLC are taxed like partnerships but members enjoy limited liability - like shareholders in a corporation and LLC’s are treated as an entity distinct from its members.

Management:

1. ALL members manage except if stated in operating agreement

Duties:

1. Duty of care and loyalty

LLC Viel Pierced

1. Courts may pierce LLV veil to reach personal assets of members in circumstances similar to those justifying piercing in a corporation.

Distribution

1. Equal shares unless operating agreement states otherwise.

Dissociation

1. Members may dissociate at any time.

2. Wrongfully dissociated members may be liable for LLC damages

Dissolution:

1. Agreed-upon

2. consent of ALL members

3. Passage of 90 consecutive days during which LLC has no members

4. Judical Decree

5. Administrative dissolution by SOS