Business Organizations Flashcards
What is required to form a corporation?
Individuals must file articles of incorporation with the State Corporation Commission and pay the registration fee
What must the Articles of Incorporation include?
Articles must include:
- the name of the corporation;
- the number of authorized shares; and
- the registered agent and office.
Corporate Liability
- 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)
Piercing the Corporate Veil
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).
Acting on behalf of unincorporated entity
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.
Duty of Care
- 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
Duty of Loyalty
- Put the corporation’s interests above personal interests;
- No self-dealing;
- No usurping corporate opportunnities;
- No engaging with improper conflicts of interest
Duty of Good Faith & Fair Dealing
- Act honestly and fairly toward the organization;
- No engaging in fraud or deception;
- No bad faith acts to harm the organization
Corporations Profits & Losses
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.
Direct Suit
Shareholder sues on their own behalf to redress an injury to their personal interest as a sharholder.
Causes of Action for Direct Suits
- 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
Derivative Suit
Shareholder(s) sues on behalf of the corporation to redress a wrong to the corporation.
Derivative Suit Requirements
- 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)
Derivative Suits commonly involve…
Breach of Fiduciary Duties
Business Judgment Rule
Shields directors from liability and insulates board decisions from review. Creates a rebuttable presumption that directors are acting honestly and in good faith.
When does the Business Judgment Rule not apply?
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.
Corporate Liability Caps
Virginia allows corporations to cap liability of officers and directors in articles of incorporation, but not for willful misconduct
LLC Formation
Parties must file Articles of Organization with the State Corporation Commission and pay the required fee.
What must LLC Articles of Organization include?
- Name of the LLC
- Registered agent and office
- Principal office of the LLC
The name must indicate that the entity is an LLC.
Member-Managed LLC
All members participate in decision-making and day-to-day operations, essentially acting as managers themselves.
Who owes Fiduciary Duties in a Member-Managed LLC?
All members owe fiduciary duties to the LLC.
Manager-Managed LLC
Designated managers are responsible for running the business
Who owes fiduciary duties in a Manager-Managed LLC?
Manager(s) owes fiduciary duties to the LLC, but non-manager members do not.
Liability in LLCs
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.
Profits & Losses in LLCs
Unless the members have agreed otherwise, profits and losses are allocated according to the value of each member’s contributions to the company.
General Partnership Formation
The parties simply must intend and operate a business for profit as co-owners. No filing necessary.
General Partnership Liability
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.
General Partnership Profits & Losses
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).
Limited Partnership Formation
The parties must file a certificate of limited partnership with the State Corporation Commission and pay the required fee.
What must a certificate of limited partnership contain?
(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.
Requirements for converting a general partnership to a limited partnership
(1) approval of all of the partners; and
(2) filing the certificate
Limited Partner
Invest money but do not participate in management
Limited Partnership Liability
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.
Limited Liability Entity as General Partner
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.
Limited Partnership Profits & Losses
The default rule is that profits and losses are allocated according to the value of each partner’s contributions to the partnership.
