Business Structure Flashcards
Sole Proprietorship
o Single-owner business
o Assets/liabilities belong solely to owner
General Partnership
o Association of 2 or more persons to carry on as co-owners for profit
o Profits are allocated and taxable directly to the partners (flow-through)
o Viewed as a legal entity for most purposes
Joint Venture
o One-shot general partnership
o E.g. - buy property, build, sell
Limited Partnership
o Having at least one general and one limited partner
Limited partner gives up right to engage in the general management in exchange for limited liability (can only lose investment)
LLP - Limited Liability Partnership
o Carry greater protection from liability than general/limited partnerships
o Primarily created to protect professionals from undue malpractice arising from errors of their partners (e.g. accounting firms)
o IF LLP, partners are only liable for their own malpractice and those they supervise
o Most states protect partners for contractual obligations
o Must carry minimum levels of malpractice insurance
LLLP - Limited Liability Limited Partnership
o Allows general partners to enjoy limited liability, just like the limited partners
o Can become this through ONE line statement in their certificate of limited partnership filed with the state
o BOTH remain liable for TORTS committed while carrying out partnership business
o AUTHORIZED in only 20 states or so
Corporation
o Artificial legal entities, whose owners enjoy limited liability
o SUFFER double taxation – corporate income tax, pays out dividends, personal income tax
S-Corp - Subchapter S Corporation
o Can eliminate double taxation by meeting certain requirements of Subchapter S Corp
1. No more than 100 shareholders
2. Unanimous election
3.Only certain types of shareholders
LLC - Limited Liability Company
o 1990ish – owners gain limited liability advantage of the corporate form while enjoying the single pass-through tax benefits of the partnership form of business
o Member managed LLC – Like GENERAL partnership
o Manager-managed LLC – Like CORPORATION
o All States, VIRTUALLY allow single-member LLCs
o MOST POPULAR FOR SMALL BUSINESSES
PC - Professional Corporation
those corporate entities for which many corporation statutes make special provision, regulating the use of the corporate form by licensed professionals such as attorneys, architects, engineers, public accountants and physicians.
Formation
• DO NOT REQUIRE formal filing
o Sole proprietorships
o General partnerships
Certificate of partnership authority (can file this, not necessary)
o Corporations – articles of incorporation
o LLCs – Operating agreement (designed to forestal and resolve disputes among owners)
o LP/LLP/LLLP – Partnership agreement
Articles of Incorporation - Requirements
o 1. Name of Corporation (e.g. Corp., Inc. included)
o 2. Number of authorized shares
o 3. Address of registered office
o 4. Name of registered agent at office
o 5. Names and addresses of incorporators
Novation
The substitution of a new contract for an old one. The new agreement extinguishes the rights and obligations that were in effect under the old agreement.
- ordinarily arises when a new individual assumes an obligation to pay that was incurred by the original party to the contract. It is distinguishable from the situation that occurs when another individual makes a guarantee that a debtor will pay what he or she owes to a creditor. **In the case of this, the original debtor is totally released from the obligation, which is transferred to someone else. The nature of the transaction is dependent upon the agreement between the parties.
- **IT also takes place when the original parties continue their obligation to one another, but a new agreement is substituted for the old one.
Steps to Organization - Corporation
o 1. Execute articles of incorporation and file w/ secretary of state
o 2. Hold organizational meeting – elect board of directors, and directors adopt or reject contracts entered into by promoters
PROMOTERS – people who take initiative in founding and organizing a corporation
• Owe fiduciary duty to the proposed corp., other promoters, and contemplated investors
• MAY profit in contracts with corporation — IF approved by board or majority vote of shareholders
• FIRM liable on promoter contracts if adopted (expressly or impliedly)
RMBCA - Revised Model Business Corporation Act
a model set of law prepared by the Committee on Corporate Laws of the Section of Business Law of the American Bar Association and is followed by twenty-four states
Operations/Termination - Sole P
o Sole owner makes decision, unless delegated otherwise
o T - When sole owner dies or otherwise departs from the business
Operations - General Partnership/LLP
o All partners have legal rights in the management and conduct of business affairs
o Majority vote governs all ordinary course of business matters
o Unanimity is needed to take actions that are contrary to the partnership agreement OR to take action regarding “extraordinary matters”
E.g. Admitting new partner, assigning partnership property, disposing of goodwill, any other act that would make it impossible to carry on the ordinary business of the partnership
Operations - LP/LLLP
o One or more general partners make management decisions while limited partners generally sit on the sidelines playing the role of passive investors
o IF LPs leave sidelines, may forfeit their limited liability
Operations - LLC
o Operate in one of two ways
Owner managed – enjoy limited liability and take active role in the business
Manager managed – delegate managerial powers
Operations - Corporation
o Operate by triangle
Bottom of triangle are shareholders (own company and get to elect directors)
Next is Directors who select officers and make broad corporate policy
Finally, officers run things day to day
o Shareholders sit on sidelines and enjoy limited liability
Piercing the Corporate Veil
Because corporations are distinct legal entities, their obligations are typically not visited upon their shareholders personally
When dealing with SMALL closely held corporations, may pierce the veil, WILL not pierce public corporations
Factors in consideration
• Commingling of funds and other assets of the corporation with those of individual shareholders
• Diversion of funds/assets to personal use of the shareholders
• Failure to maintain necessary corporate formalities
• Failure to adequately capitalize the corporation for the reasonably foreseeable risks of the enterprise
COURTS tend to apply comparable factors in deciding issues in LLCs and LLPs
Termination - General Partnership
o Rules laid out in RUPA (LPs, LLPs, LLLPs, & LLCs are fairly similar)
RUPA - Revised Uniform Partnership Act
Addition or subtraction of partners does not automatically lead to dissolution of the partnership
Causes of DISSOSIATION
• Express will, death, bankruptcy, expulsion
AFTER dissociation, partnership dissolves OR departing partner is bought out
BUY-OUT formula = value of account on day of dissociation* - damages caused (if dissociation was wrongful)
• *valued by greater of liquidation value or going concern value
• 90day waiting period between dissociation and liquidation
Termination by Liquidation
1. Creditors (including partners)
2. May have to reach into partners pockets to pay off creditors
3. Rest of profits go to partners
Termination by Dissolution
o VOLUNTARY DISSOLUTION
o INVOLUNTARY DISSOLUTION
By SOS, for: taxes, file yearly reports, maintained a registered agent/office
Judicially, for: fraudulently obtained approval for articles or abused legal authority
Shareholders, for: deadlocked management, un-functional, legal/oppressive management
Creditors, for: sue if claim in unsatisfied, corp is insolvent OR corp admits in writing that the creditors claim is due and owing and that it is insolvent
o Shareholder protected interests
For other major changes
• Procedures – directors must propose/approve in a vote
• Appraisal rights – dissenting shareholders may request their shares be purchased at a court—valued rate
Financial Structure - Partnership
o Under RUPA, each partner has a CAPITAL ACCOUNT (credited w/ the amount) = money plus the value of any other property, net of the amount of any liabilities, the partner contributes to the partnership, and the partner’s share of the partnership profits
Contribution + share of profits – share of liabilities = balance
OVERTIME balance may be reduced by distributions + partners share of losses
o REIMBURSED for
Payments made and indemnified for liabilities incurred in the ordinary course of business
Advances made to partnership beyond agreement
o SHARE profits and losses equally
Financial Structure - Corporation
o Raise money by issuing shares
o ISSUING shares
1. Quality test – can be issued in exchange for cash, prom. notes, any other tangible/intangible value to the corporation
2. Quantity test – for at least par, face value, or price authorized by board
• IF sold for less than this amount, creditors/other shareholders may sue
o Directors who authorized sale
o Buyers who paid too little
o Transferees of original buyer
o DIVIDENDS/OTHER DISTRIBUTIONS
Authorized by boards of directors
MUST be consistent with shareholders’ rights
Not render corp unable to meet its bills (bankruptcy insolvency)
Not leave corp with fewer assets than liabilities (equity insolvency)
Financial Structure - LLCs
o Tend to reflect comparable corporate/partnership provisions
Contributions may be in cash, property, or other services
MAY not make distributions to members if after, the firm would be dissolvent
Rights and Duties - General Partnerships; • LPs, LLPs, LLLPs are roughly the same
o Entitled to equal management rights
o Right to have capital contribution repaid
o Share equally in profits
o Certain property rights – entitled to use/possess property on BEHALF of the partnership
o CREDITORS – of individual partners may NOT seize partnership property to satisfy individual debts of partners
Can go to court and obtain a charging order
Charging order = judge orders other partners to pay any distribution due to the debtor partner to that creditor instead
o COMPENSATION
Partners NOT entitled to work performed for the partnership
Unless special arrangement/agreement
o Delectus Personae –
Partners may veto admission of potential new partners (NEED unanimous consent)
o INFORMATION RIGHTS
Entitled to partnership books/records
Each partner MUST furnish to partners/legal reps without demand: any information concerning the partnership’s business and affairs reasonably required for proper exercise of partners’ rights
o STANDARDS OF CONDUCT
RUPA says only fiduciary duties
• 1. Duty of loyalty – don’t take more than share, avoid conflicts of interest, and refrain from competing w/ partnership business
• 2. Refraining from grossly negligent conduct, intentional misconducts, or knowing violation of the law
Rights and Duties - Corporations
o Shareholders have few duties, several important rights
1. Vote for corporate DIRECTORS
2. Right to inspect corporate records (proper purpose/time/location)
3. Right to have their financial priorities respected (e.g. if they hold preferred shares)
4. Right to Exercise appraisal rights
5. Right to file derivative lawsuits
o Directors/Officers
1. Directors must direct – attend board meetings, basic familiarity, study financials
2. BOTH have duty of care
• Good faith, best interests of corporation
3. BOTH duty of loyalty
• Avoid conflicts of interest; transactions will be scrutinized
4. DIRECTORS
• Respect the corporate opportunity doctrine
o BY NOT appropriating for themselves business opportunities that rightfully belong to the corporation
DIRECTORS’ RIGHTS
• Right to rely on the reports of officers and other directors unless they have reason to be suspicious
• Business judgment rule – erroneous decisions (if in good faith) meaning bad decision will not be challenged by shareholders (courts NOT business experts)
Rights and Duties - LLCs
o Owe duties or care and loyalty
o Operating agreement may limit but NOT totally eliminate these fiduciary duties
o RULLCA
Provides that members shall discharge their duties consistently with contractual obligations of “good faith and fair dealing”
o Courts may protect members to escape an operating agreement by convincing them that
1. Provisions are “manifestly unreasonable”
OR
2. Provide judicial dissolution if those managing the firm are guilty of “oppressive conduct”
Authority of Owners and Managers
• AGENCY law provides the basic rules for the authority of owners and managers of various forms of business to bind their firms
Authority - Partnerships LPs, LLPs, LLLPs
o An act of a partner, for apparently carrying on in the ordinary course of business the partnership business binds the partnership
UNLESS the partner had no authority
o An act that is UNUSUAL
Will bind only if specifically authorized by other partners
o AUTHORITY
Actual authority (expressed or implied)
Apparent authority
• CANNOT exist where the third party knows of a partner’s lack of authority OR the partner’s action is one that requires unanimity, such as admitting new partner
EVEN if it lacks either of these can still bind partnership by being ratified through acceptance of other partners of the act or its benefits
o TORT LIABILITY
Consistent with agency law, partnerships are generally liable for the torts committed by their partners or other agents within the scope of their employment
INTENTIONAL torts – a partnership is usually liable if a partner commits an intentional tort while trying to advance partnership interests, even if he or she does so in a wrongful way
o LIABILITY
Joint and Several Liability
• Under RUPA, a creditor may sue ANY general partner and hold solely liable without suing the others
• The assets of the partnership must be exhausted FIRST before proceeding against the individual assets
LATE ARRIVERS
• If a general partner joins an existing partnership, he or she is PERSONALLY liable for all subsequently-incurred debts, BUT is liable for preexisting debts ONLY out of his or her partnership contribution
Authority - Corporations
o Directors Manage the business in a “big picture” sense Broad authority to borrow money, sell corporate property, hire/fire officers other employees, declare/refuse to declare dividends, make/refuse to make other distributions to shareholders;, set the salaries of employees, officers, and even themselves, & propse for shareholder approval major changes o Officers Day-to-day management Express authority derived from • Articles of incorporation • By-laws • Directors’ resolutions • Statutes Implied authority • Derived by virtue of their offices Always board ratification
Authority - LLCs
o Member or manager managed – per operating agreement
o Absent provision - assumed that member managed (much like general partnership)
1. Each member has equal rights in management
2. Ordinary business decision – need majority vote
3. Outside ordinary business – need unanimous approval
4. Operating agreement may only be amended with approval of all members
o IF manager managed –
WILL operate much like a limited partnership – managers assuming the role of the general partner
• RULLCA – matters related to the activities of the company will be decided exclusively by the managers
• Managers have equal rights in management and conduct of the firm
• Issues arising in the ordinary course of business are decided by majority vote of the managers
• Consent of ALL the managers is required in extraordinary transactions
• Majority vote of members to remove manager