Entities
Common Business Law Entities:
Sole proprietorship Oldest form-not a creature of statute. One person makes decisions. Upon death of the sole proprietor, the business ends. Person who receives their assets may or may not choose to continue the business. General Partnership Law does not require it to be in writing unless it falls under the equal dignity rule. Most people who don't enter into writing do not include enough. If it is not clear that there is a partnership, courts must look at informal documentation (e-mails, notes, memos). In some cases, a partnership is treated as a legal entity: a "person" separate from the partnership with a life of its own. It is often considered a legal entity when its sued or being sued. States determine whether the partnership can or cannot be named in the suit. Under the doctrine of marshaling assets, partnership assets are arranged in a certain order to pay any outstanding debts. Partnership creditors have first dibs on those assets while individual personal creditors have first dibs on the assets of the individual partners. THUS partnership assets are kept separate from the individual partner assets. Each partner has fiduciary duty- they must, in good faith, work for the benefit of the partnership. They should not take any action that will undermine it, such as engaging in business that competes with it. Partners must disclose any material facts affecting the business. Each partner has the duty of care to the other partner- each partner must perform their management functions to the best of their ability. An honest mistake will not hold the partner liable for the mistake. Each partner can serve as an agent for the other partners as well as for the partnership. As long as the partner has authority to act, each partner's act in performing business duties as well as making agreements with third parties is binding for the partnership. Partners are jointly liable for the partnership's debts Joint and several liability means that a third party can choose to sue the partners separately or all partners joined in one action. A partnership can be formed by: Articles of Partnership: a written agreement that creates a partnership. This must include: partner's names and names of partnership, duration of the partnership, the division of the profits and losses, the division of managerial duties, capital contributions each partner will make. Estoppel: If a third party is aware of and consents to a misrepresentation of partnership, a partnership can be formed. Or if a nonpartner acts as a partner and a third party reasonably relies on this information, the nonpartner can be considered a party and thus be liable for the third party's damages. Before a partnership can be completely terminated, it must go through a dissolution stage and winding up state. Dissolution is when a partner ceases to fulfil their role of partner. Winding up is taking account of the assets of the partner who left and redistributing them among the other partners. Distribution of liquidated assets must take this order: 1. Payment to creditors of the partnership 2. Payment of refunds or loans of partners for loans made to the firm
3. Payment to partners of the capital they invested 4. Payment of profits distributed to partners on the basis of the partnership agreement If the partners' liabilities for the partnership are greater than their liquidated assets, the partners are liable for the losses. Each partner must contribute his or her share of the losses to pay the creditors. After the dissolution, the remaining partners may continue the partnership. Business Trust Governed by a group of trustees, who operate the trust for the beneficiaries. A written trust agreement establishes the duties and powers of the trustees and the interests of the beneficiaries. As in a corporation, the trustees and beneficiaries have limited liability, and in most states business trusts are taxed like corporations.
Statutory Entities:
Limited Partnership An agreement between at least one general partner and at least one limited partner. The general partner has management responsibility for the partnership and assumes unlimited personal liability for the debts of the partnership. The limited partner assumes no liability for the partnership beyond the capital he/she invests in the business. The formation of a LLP must follow very specific statutory requirements. Both the general and limited partners must sign a certificate of limited partnership and file it with the secretary of the state to receive limited liability. Limited partners have all the rights given to partners in general partnerships. They have the right to share in profits and receive an account of the partnership. To add an additional partner, the general partner must have consent of all of the limited partners. Limited partners often recover their investment before general partners do. The general partner has unlimited personal liability for the debts of the partnership while the limited partner's liability is (as stated above) restricted to the amount of capital they have invested in the business. Limited partner is not an agent of the partnership. The limited partner has no right or power to dissolve the partnership. Death or bankruptcy of the limited partner does rarely dissolve it. After the limited partnership is dissolved, the limited partnership's assets are distributed in the same format as it is in a general partnership.
Corporations Under US Law, corporations are legal entities; they exist separately from their shareholders. They, they can sue or be sued by others. They are seen as an "artificial person" Corporations are creatures of the state. State incorporation statutes establish the requirements for corporate formation. Each charter of a corporation (like in different states) creates a contract between that charter and the state.
Because corporations are legal entities separate from their shareholders, corporations assume liability for corporate actions. Shareholder liability is limited to their investment in the corporation. It is easy for shareholders to transfer their shares. They can sell them or give them to charity. If shareholders die, corporations do not dissolve. Even if corporation directors die or withdraw, the corporation continues to exist. The corporation files a document called the articles of incorporation with the state that explains the organization, perhaps including its duration. If it does not include the duration, corporations may exist indefinitely. Some states set a max life span for corporations and they must renew their corporate existence. Unless specified otherwise in the articles of incorporation, shareholders do not participate in corporate management. Shareholders elect a board of directors who elect officers to manage day-to-day business of the corporation. Because corporations are separate legal entities, government taxes their income directly. Corporations must pay federal and state taxes on their income BUT they have control over that income. They can distribute it to their shareholders through dividends though they don't receive tax deductions by doing so. In fact, the shareholders pay taxes on the dividends! Corporations can also keep profits, or retained earnings, to reinvest. This can raise their stock prices, benefiting shareholders when they sell their stock. The relationship between corporation and their directors, officers, and employees is an agency relationship. Thus, corporations are liable for torts and crimes committed by their agents during the scope of their employment. Because corporations are creatures of the state, they only have those powers that states grant them though state incorporation statutes. State incorporation statutes typically grant corporations the following express powers: Power to have perpetual existence Power to sue and be sued in the corporation's name Power to acquire property, power to make contracts and borrow money Power to lend money Power to make charitable donations Power to establish rules for managing the corporation Implied powers-usually given in the statement of corporate purpose in the articles of incorporation: Power to take whatever actions are necessary to execute express powers Power in given the statement of corporate purpose in the articles of incorporation (Statutory) Close Corporation Do not offer stock to the general public. Shareholders are usually family members and friends who are often active in or manage the business and maintain restrictions on the transfer of shares to prevent outsiders from gaining control. Subchapter S Corporation It is a particular type of close corporation that has the taxation of a partnership so S Corporation shareholders report their income from the corporation only once, on their personal taxes. Shareholders may deduct corporate losses from their personal income, reducing their taxes in case of loss. Also, when the shareholder is part of a lower tax
bracket than non-S corporations, the entirety of the corporation's income is taxed at the shareholder's lower rate, even if the dividends are retained and not distributed. The lower rate applies because of the relationship between the corporation and the personal income of the shareholders. S Corporations must meet 5 certain requirements: 1. It cannot have more than 100 shareholders 2. Only individuals, trust, and (sometimes) corporations can be shareholders *partnerships cannot be shareholders* 3. Can only issue one class of shares- but they don't have to have identical voting rights 4. All must be domestic corporations 5. No shareholder can be a nonresident alien Eleamonscinary (not for Profit Corporation) Within 9 months of formation, must file papers to IRS so they recognize you as a nonprofit and don't make you pay taxes. Not-for-profit organizations CAN DISCRIMINATE and choose their members. Remember the country club example-no blacks. Churches are not for profit. Non profits do not have shareholders. They provide services to their members and reinvest most of their profits in the business. P.A. (in South Carolina) or P.C. (in other states) Professional association/corporation. This is if a group of dentists, doctors, or other professionals want to practice as a corporation. All 50 states permit this. Because of the nature of professional work, courts sometimes impose personal liability on doctors in P.C. for medical malpractice performed under their oversight. Limited Liability Partnership Partner who commits the mal practice is liable but other partners who are innocent are safe. Limited Liability Company Similar to a limited partnership in that each member has limited liability dependent on the investment they make, while still receiving the tax breaks often given to those in partnerships. LLC, like the limited partnership, is created with an agreement between members. Each member gets a say in the management of the company. For an LLC to obtain limited liability, the owner (called the member) does not have to give up his right to participate in management of the LLC. Advantage of an LLC is the flexibility it offers members in terms of alternative ways it can structure its management. Each state has different statutory laws for LLC's concerning liabilities, rights and duties, etc. Hybrid. Like LP except it's available for non-professionals. How to form a corporation: Two key players responsible for the organization of the corporation: Promoters, who begin the corporate creation and organization process by arranging for necessary capital, financing, and licenses. They raise capital for the infant corporation by making subscription agreements with subscribers (investors) who agree to purchase stock in the new corporation.
Promoters prepare the corporation's incorporation papers. They can also enter into contracts if needed like to lease buildings for the corporation. If problems arise in these areas, courts usually hold the promoters liable and rule that the contracts don't bind infant corporations. Promoters are NOT agents of the infant corporation because they cannot serve as such for a principle that doesn't even exist! Once incorporated, the corporations can either accept of reject preincorporation agreements. Even if it is accepted, courts usually still hold promoters personally liable for the contract EXCEPT in these two cases: If the promoters include a clause in the contract stating that the corporation's adoption of the contract terminates their liability OR The corporation, the promoter, and the third party can enter into a novation, agreeing to substitute the third party for one of the two original parties in a contract and terminating the rights under it. Subscribers offer to purchase stock in a corporation during the incorporation process. A subscriber becomes a shareholder once the corporation incorporates or accepts his or her purchase offer, whichever occurs first. Subscribers cannot revoke subscription agreements for six months unless the agreements provide otherwise or all subscribers consent. Although a corporation can only incorporate in one state, it can file a certificate of authority to do business in other states. Next, you must select a corporate name Then you choose an incorporator who applies to the state for incorporation on behalf of a corporation. Only one incorporator is required although more are allowed. It is not required that the incorporator be a promoter or subscriber. Next comes the Articles of incorporation, which provides basic info about the corporation. Incorporators must sign and execute this and file this document with the secretary of the state. Once filed, they officially govern the corporation. Next the secretary of the state will issue a certificate of incorporation, a document certifying that the corporation is incorporated with the state and authorized to conduct business. Agent for server of processor- this is the person that gets served in the corporation is sued. Temporary Board of Directors: They come up with by laws, corporate seal. Necessary things to turn subscribers into shareholders. Then comes the initial meeting of shareholders. They vote on the bylaws. If they aren't accepted, they make them themselves. They elect a permanent board of directors. The shareholders meet once a year unless they call another one where they decide to... Merge: A+B=A or B Not both, one or the other Consolidate: C+D=E New corporation
Board of directors meet monthly; they elect officers. Piercing the cotporate viel: In some cases, courts will deny limited liability to a corporation because shareholders have used the corporation to engage in illegal or wrongful acts. Shareholders attempt to hide behind the "corporate veil" of limited liability to protect themselves from personal liability. In these cases, courts pierce the corporate veil, or impose personal liability upon shareholders.
Three major groups of individuals within a corporation are directors, officers, and shareholders. Each has different interests and in many situations their internal conflict. Statutory laws ensures that the directors, officers, and shareholders work together to the benefit of all. Directors & officers: play different roles within the corporation but they share the same goal: to attempt to ensure that their institution survives and they keep their jobs Shareholders: want to raise the value of the company's stock The duties and rights of directors, officers, and shareholders depend on the specific roles they play. Director's roles: -elections -meetings and voting -directors as managers Officer's roles:
-day-to-day business of the corporation -act as agents of the corporation, rules of agency apply to their work Shareholder's roles: -own the firm -though shareholder is not legally recognized as an owner of corporate property, every shareholder has an, equitable, or ownership, interest in the company. Directors and officers bear liability for failure to exercise a duty of care with respect to the management of shareholder assets. They can be held personally liable for their own torts and crimes and crimes of other employees that they supervise. Also for wrongful transactions involving company stock. Shareholders are liable for the debts of the corporation to the extent of their investment. They are liable for a breach of contract if a stock subscription agreement was signed and yet no stock was purchased. They are liable for watered stock and can be held personally liable for receiving illegal dividends.