Engler - Fall 2003 Corporations

Engler - Fall 2003 Corporations - Corporations Outline I...

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1 Corporations Outline I. Types of Business Associations a. Corporation i. Purpose 1. Wealth maximization for the SHs (the owners of the company’s residual financial rights) 2. The corporation’s other constituents such as creditors, employees, community are limited to their contractual and other legal rights. To the extent that these groups have unprotected interests that are inconsistent with the SHs, the interests of SHs prevail (See Dodge, Francis , and Wrigley ). Doing otherwise would dilute director accountability—Revlon suggests that, at least in DE, directors can take other constituents into account only if rationally related to promoting SH interest ii. Benefits 1. You can shield your assets from liability from the operations of the business (contractual liabilities, tort liabilities) business owners do NOT have personal liability—creditors cannot look to the owner’s personal assets. a. If it was a sole proprietorship/partnership—creditors can come not only to the assets of the business but can actually look to you the individual. 2. Free transfer of shares iii. Disadvantages 1. Double tax problem —As a corporation, the corporation gets taxed as a separate entity—consistent with the liability issue—the corporation is subject to tax on its profits as one entity and the investors who get paid dividends—they are taxed again on those profits at the individual rate. a. Example barb2right $1000 before taxes. There is a 40% tax rate as an individual—you get $600 to keep. As a corporation—you would get taxed at the corporate rate of 35% and then the $650 left is paid out to investors who then have to pay at the individual rate of 40%--and $260 in tax on top of that which leaves $390 left in the pot as opposed to $600. i. Footnote : Dividend rates have gone down from 40% to 20% (dividends are different than other assets now) barb2right so now instead of $390 you would get $520— but that is still significantly less than the $600. 2. You need a LOT of capital b. Close Corporation “S” i. A small tightly knit group (no more than 30-50)—an “Incorporated Partnership” ii. Undiversified participants who rely on dividends and salary unlike SHs in a large public corporation iii. No ready market for SHs to dispose of their shares—sometimes contractual limits on transferability iv. Planning, thus becomes highly desirable—lawyers will attempt to manipulate the statutory structure (default rules) by SH agreements, provisions in by-laws, and dispute resolution procedures v. Courts have become more willing to infer heightened FDs in CC contexts vi. See Control of CC section c. Partnership i. Partnership is an association of two or more persons to carry on as co-owners of a business for profit—each partner is an agent of the partnership and has the
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2 power to enter into contracts on behalf of the partnership and each partner is potentially liable for the debts of the partnership.
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