Class 6-7: Business Associations & Corporate Governance Flashcards
These are the key factors in choosing _______:
- Ease of Establishment and Maintenance
- Ease of Capital Formation (tradability)
- Limiting Liability
- Tax implications
Form of Business organization
Note: Choose wisely because changing forms can be a costly headache.
Name the Business Form:
- Created without state filings or formal agreements
- Business Income or losses on personal income tax
- Proprietor bears personal liability for losses
- Hard to form capital (i.e., no equity to sell, so must generally rely on personal funds & loans)
- Terminates on death of the proprietor
Sole Proprietorship
Registering a sole proprietorship as a “DBA” (Doing Business As) ______ insulate from personal liability.
DOES NOT
Name the Business Form:
- Express or implied agreement between 2 or more people to contribute to a business and share in profits and losses (not just salary).
- Unless agreed otherwise, each partner controls the business and has authority to bind the partnership w/r/t 3rd parties.
- It’s a separate entity, so the Partnership may own property in its own right, if it is listed as a party on the contract or the title refers to person taking title as a partner or refers to existence of a partnership.
- Big Tax Advantage: Pass-through entity for tax purposes; so 1 level of tax only.
- Not automatically terminated upon death or withdrawal of partner; rather majority partners may elect to continue.
- General partners face joint and several personal liability for obligations (i.e., judgment can be satisfied in full from any individual GP); so if partnership cannot satisfy its own debts, the general partners are personally on the hook!
General Partnership
Name the Business Form:
- One time partnership for specific purpose (e.g., constructing a power plant).
- Terminates after project is complete.
- Like a partnership, each ___ partner contributes, has rights to govern, and shares in profits and losses.
- Partners in ___ have more limited authority to bind the ___ than in a general partnership.
Joint Venture
Name the Business Form:
- To form, must file with State. But, fairly easy to convert from existing General Partnership to ___. Often used by Accts & Lawyers.
- ___ is separate legal entity, which insulates partners from vicarious liability for malpractice of other partners.
- But, partners still bear their own personal liability for torts and malpractice, including liability for failure to supervise other partners (~ negligent entrustment)
- Pass-through tax treatment
Limited Liability Partnership (LLP)
When a partners bear personal liability for failure to supervise other partners. Even when they are in an LLP
Negligent Entrustment
Name the Business Form:
- General partners (manage partnership and full J&S liability for partnership obligations) and limited partners (no liability for partnership obligations above their capital contribution and no right to participate in management– like corporate shareholders)
- Used to raise capital from others.
- More difficult to create than general partnership; must file Certificate of Limited Partnership with S.o.S.
Limited Partnership (LP)
Note: if strict certificate requirements are not met, court will assume it is a general partnership
Name the Business Form:
- Formed by filing articles of organization / certificate of formation with Sec’y of State, and business name must include “___”.
- It’s a separate legal person, so it can own property, enter K’s, etc
- Operating Agreement controls rights & duties of members
- Many states provide that managing members owe fiduciary duties to the ___ and other members (in the same way Directors owe duties to the Corporation and its Shareholders).
- may be taxed as a partnership (pass through)
- No limit on number of members, who may be members, or different classes of securities
Limited Liability Companies (LLC)
Operating Agreement (with in LLC) controls rights & duties of members including:
(Three things)
- Can flexibly allocate profits & losses.
- Some members are elected managers (like Board Directors).
- Fiduciary duties to other members and to the LLC generally may be limited/expanded under OA, except for the implied contractual duty of good faith & fair dealing.
IF YOU ARE A MEMBER-MANAGER IN AN LLC, YOU EXPRESSLY SIGN K’s ___________
ON BEHALF OF THE CORPORATION , AS ITS AGENT!
Name the Business Form:
- Separate Legal Entity from its owners (SHs).
- Stockholders (Usually) Not Personally Liable beyond their capital contribution.
- Ease of Capital Accumulation because ownership rights easily transferred.
- Perpetual Life, even if owners/directors/officers die.
Separation of Ownership and Management - Two Classes of Stock are Allowed
Corporation
(C Corp or S Corp)
Subject to double taxation on business income and dividend income
C Corp
(C Corp or S Corp)
Certain domestic corporations can opt for Pass-through tax treatment, if:
- 100 shareholders or less (who are US citizens or residents subject to tax, or are tax-exempt entities)
- One class of stock only
- File timely election for ____ treatment
S Corp
(Close Corporations or Closely-Held Corporations)
Benefits:
- Shareholders may directly manage
- Non-observance of formalities won’t destroy limited liability of SHs, by allowing “piercing of corporate veil”
Requirements:
- Must elect to be treated as close corp in charter
- 30 or less shareholders
Close Corporations
(Close Corporations or Closely-Held Corporations)
- Refers to private companies where there is a lack of a liquid market for stock
- This leads to Greater imposition of fiduciary duties upon SHs to each other.
Closely-Held Corporations
Name the type of Corporation:
- A for-profit corporation that uses corporate power to solve social and environmental problems
- No general duty to maximize SH value, or prioritize SH over other stakeholders when there is a change of control (no Revlon duties)
- SH get increased rights to demand social performance.
B Corp
Name the type of Corporation:
-Low profit LLC
L3C
These are the 5 steps for what..
- Select state of incorporation
- Secure the Corporate name
- Select agent for service of process
- Draft Articles of Incorporation (including Name, Capital structure incl. # of shares authorized to issue, Address of registered agent and office, Name/address of each “incorporator”)
- File Articles of Incorporation & Pay fee w/ S.o.S.
Incorporation
Early in the life of a corporation, an incorporator or a director will usually _____ amongst incorporators after written notice, or unanimous written consent.
Topics covered:
- Elect directors (if not already decided)
- Approve By-Laws
- Elect Officers
- Establish bank account under Corporate name.
- Adopt pre-incorporation promoters contracts by “novation”
- Set share price, authorize issuance of shares
First Organizational Meeting