Business Organizations Flashcards

1
Q

What is required to form a corporation?

A

Individuals must file articles of incorporation with the State Corporation Commission and pay the registration fee

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2
Q

What must the Articles of Incorporation include?

A

Articles must include:
- the name of the corporation;
- the number of authorized shares; and
- the registered agent and office.

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3
Q

Corporate Liability

A
  • Corporation Itself
  • Shareholders are generally not personally liable for the debts of the corporation
  • Directors and officers generally shielded by Business Judgement Rule, but may be held personally liable in some instances (piercing of corporate veil, personal misconduct, breach of fiduciary duties)
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4
Q

Piercing the Corporate Veil

A

A court can hold owners/directors & officers personally liable if they fail to observe the separateness of the corporation and use it to perpetrate fraud or injustice. (Corporation is merely an “alter ego” of the individual).

Virginia courts may pierce the corporate veil if:
- The corporation is inadequately capitalized.
- The corporation is used as a mere alter ego of its shareholders.
- The corporate form is used to perpetrate fraud or injustice (Klaiber v. Freemason Assoc., Inc., 266 Va. 491 (2003)).

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5
Q

Acting on behalf of unincorporated entity

A

Under the Code of Virginia, anyone who purports to act on behalf of a corporation knowing that the entity has not been incorporated is personally liable unless the other party also knew that there was no incorporation.

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6
Q

Duty of Care

A
  • Act in good faith and in the best interests of the organization;
  • exercise the care that an ordinary prudent person would use in similar circumstances

Includes: staying informed, reasonable reliance on experts, active participation in corporate governance

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7
Q

Duty of Loyalty

A
  • Put the corporation’s interests above personal interests;
  • No self-dealing;
  • No usurping corporate opportunnities;
  • No engaging with improper conflicts of interest
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8
Q

Duty of Good Faith & Fair Dealing

A
  • Act honestly and fairly toward the organization;
  • No engaging in fraud or deception;
  • No bad faith acts to harm the organization
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9
Q

Corporations Profits & Losses

A

Profits/Gains: The owners, or shareholdrs, would be issued shares of stock based on their percentage of ownership interest in the corporation. Directors may then issue dividends, generally payable in cash, to the shareholders based on the number of shares they hold.

Losses: Corporate shareholders generally do not bear losses directly, however, the valud of their shares could be affected. The corporation absorbs losses.

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10
Q

Direct Suit

A

Shareholder sues on their own behalf to redress an injury to their personal interest as a sharholder.

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11
Q

Causes of Action for Direct Suits

A
  • to compel payment of dividends;
  • to enforce the right to inspect corporate records;
  • to protect preemptive rights;
  • to enforce the right to vote;
  • to recover for breach of shareholder’s agreement
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12
Q

Derivative Suit

A

Shareholder(s) sues on behalf of the corporation to redress a wrong to the corporation.

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13
Q

Derivative Suit Requirements

A
  • Contemporaneous Ownership (shareholder at time, by operation of law from one who was shareholder at time, or became shareholder before public disclosure)
  • Adequate Representation (must fairly and adequately represent the interests of the corporation in enforceing its rights)
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14
Q

Derivative Suits commonly involve…

A

Breach of Fiduciary Duties

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15
Q

Business Judgment Rule

A

Shields directors from liability and insulates board decisions from review. Creates a rebuttable presumption that directors are acting honestly and in good faith.

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16
Q

When does the Business Judgment Rule not apply?

A

Where there is inexcusable lack of attention, diligence, or good faith or if the decision was illegal, egrigious, based on fraud, inolved a conflict of interes, or completely uninformed.

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17
Q

Corporate Liability Caps

A

Virginia allows corporations to cap liability of officers and directors in articles of incorporation, but not for willful misconduct

18
Q

LLC Formation

A

Parties must file Articles of Organization with the State Corporation Commission and pay the required fee.

19
Q

What must LLC Articles of Organization include?

A
  • Name of the LLC
  • Registered agent and office
  • Principal office of the LLC

The name must indicate that the entity is an LLC.

20
Q

Member-Managed LLC

A

All members participate in decision-making and day-to-day operations, essentially acting as managers themselves.

21
Q

Who owes Fiduciary Duties in a Member-Managed LLC?

A

All members owe fiduciary duties to the LLC.

22
Q

Manager-Managed LLC

A

Designated managers are responsible for running the business

23
Q

Who owes fiduciary duties in a Manager-Managed LLC?

A

Manager(s) owes fiduciary duties to the LLC, but non-manager members do not.

24
Q

Liability in LLCs

A

Members enjoy limited liability and are not personally liable for the debts of the business.

However, the members of an LLC can lose limited liability protection if they fail to treat the LLC as a separate entity and misuse the limited liability form to perpetrate fraud or injustice.

25
Q

Profits & Losses in LLCs

A

Unless the members have agreed otherwise, profits and losses are allocated according to the value of each member’s contributions to the company.

26
Q

General Partnership Formation

A

The parties simply must intend and operate a business for profit as co-owners. No filing necessary.

27
Q

General Partnership Liability

A

Partners have unlimited personal liability for the debts of the partnership; i.e. each partner is jointly and severally liable for the debts of the business.

28
Q

General Partnership Profits & Losses

A

The default rule is that partners share profits equally and they share losses the same way that they share profits (thus, equally if they have not agreed otherwise).

29
Q

Limited Partnership Formation

A

The parties must file a certificate of limited partnership with the State Corporation Commission and pay the required fee.

30
Q

What must a certificate of limited partnership contain?

A

(1) the name of the limited partnership, including a designation that it is a limited partnership;
(2) the registered agent and office;
(3) the principal office of the limited partnership; and
(4) the name and address of each general partner.

31
Q

Requirements for converting a general partnership to a limited partnership

A

(1) approval of all of the partners; and
(2) filing the certificate

32
Q

Limited Partner

A

Invest money but do not participate in management

33
Q

Limited Partnership Liability

A

Limited partners enjoy limited liability and typically are not liable for debts of the partnership.

General partners have unlimited liability for debts of the partnership.

34
Q

Limited Liability Entity as General Partner

A

In Virginia, the general partner may be a limited liability entity, so the investors could effectively limit their personal liability for business debts by forming another limited liability entity, e.g. a corporation or an LLC, to serve as the general partner in a limited partnership.

35
Q

Limited Partnership Profits & Losses

A

The default rule is that profits and losses are allocated according to the value of each partner’s contributions to the partnership.

36
Q

Non-Stock Corporation

A

A business structure that does not have owners, but may have members. Non-stock corporations are often used by nonprofit organizations.

37
Q

Board Approval Requirement

A

Under the Virginia Non-Stock Corporations Act, an action by the Board of Directors must be approved by a majority of the Directors in a vote taken when a quorum is present. If the quorum is not met, the action is not properly approved.

38
Q

Quorum Requirement in Bylaws

A

A corporation’s bylaws may set specific requirements for quorum. If the quorum specified in the bylaws is not met (e.g., fewer directors present than required), any decisions or actions taken by the Board are not valid.

39
Q

Conflict of Interest Transactions

A

A conflict of interest transaction is defined under Virginia law as a transaction with the corporation in which a director has an interest that prevents them from being a disinterested director. Such transactions are permissible only if:
- Disinterested directors approve the transaction after full disclosure of material facts; or
- The transaction is determined to be fair to the corporation.

40
Q

Sale of Substantially All Assets (Non-Stock Corporations)

A

The sale of substantially all of the assets of a non-stock corporation outside the regular course of business requires approval by the membership of the corporation. This type of sale is considered a fundamental corporate change and cannot be completed without the consent of the corporation’s members.

41
Q

Successor Liability for Corporate Debts

A

A corporation acquiring another company’s assets is not automatically liable for the predecessor’s liabilities unless:
- The purchase agreement assumes liabilities.
- The transaction is a de facto merger.
- The transaction is fraudulent.

42
Q

When is shareholder approval required?

A

Required for fundamental corporate changes (e.g., mergers, dissolution). Not required for simple asset purchases.