Business Associations Outline
– What do Businesses do and What do Lawyers for Businesses do?
· A business is some form of activity that is organized to create value for its owners
Ø A business can “make money” without creating value
Ø A business can create value without making money
· The defining characteristic of a business is that economic activity is organized for the purpose of earning a profit
· Law makes careful distinctions between business structures based upon (1) who the owners are, (2) what rights and obligations the owners have, and (3) whether the business itself is a legal “entity” separate from the owners
· A.P. Smith Mfg. Co. v. Barlow:
Ø Directors of A.P. Smith Mfg. Co. voted to contribute $1,500 to Princeton University
Ø Some shareholders objected; declaratory judgment action filed to determine whether the contribution was ultra vires
Ø “Ultra vires” means beyond the scope of the powers of the corporation
Ø Should not be made indiscriminately or to a pet charity of the corporate directors in furtherance of personal rather than corporate ends
Ø Model Business Corporation Act § 3.02(13) – “Unless its articles of incorporation provide otherwise, every corporation [has the power] to make donations for the public welfare or for charitable, scientific, or educational purposes.”
a. Tax deductible under federal tax laws
Ø See N.C. Gen. Stat. § 55-3-02(13) (same)
· How does the owner of a business make money from the business:
Ø Can receive distributions of all or part of the money the business has earned
Ø Can sell all or part of her ownership interest in the business for more than she paid for it
· In corporation, there are three groups of persons or entities:
Ø The business
Ø Its managers
Ø Its owners
· Business entities are required to keep “appropriate accounting records” and to make those records available to the owners of the business (MBCA § 16.01(b))
Ø Typically maintain several financial statements that are provided to investors, the company’s managers, and in the case of large public companies – to the public and to public enforcement authorities
Ø Public Companies – from SEC filings
Ø Private Companies – shareholders/owners have rights to access information about the company’s financial performance (MBCA § 16.02(b); ULLCA § 408)
· Main financial statements:
Ø Income statement – computes profit during a given period (e.g., a month or year) based on data about revenues and costs
Ø Cash flow statement – measures the cash made available to a business from its operations during a given period
a. An increase in a balance sheet asset account other than cash results in a decrease in cash flow
Ø Balance sheet – shows the company’s assets liabilities and the owners’ equity in the business
a. Assets – things that the company owns that have value (ex. cash, land, buildings, accounts receivable, and machinery and equipment)
b. Liabilities – what the company owes (ex. accounts payable, wages payable to employees, interest on debt)
c. Owners’ Equity – what is left over after you subtract the liabilities from the assets; owners’ equity = assets – liabilities
d. Liabilities > assets = insolvency
· Generally prepared according to Generally Accepted Accounting Principles (GAAP)
Ø Matching: costs or expenses should be “booked” in the same period as the revenues those expenditures helped generate
Ø Conservatism – the data should be conservative; they should present the firm’s financial data in an accurate way (i.e., assets should appear on the balance sheet at the lower of cost or market)
Ø “Double Entry” System – every transaction has two effects, which always serve to balance
· Can we be confident that a company’s financial statements are accurate?
Ø Auditor tests (some of) the data that constitutes the basis of the financial statements
Ø Report of Auditors (p. 48) confirms their belief that the financial statements are accurate – staking their reputation
Ø Certification by CEO and CFO that to the best of their knowledge the financial
statements accurately reflect the company’s financial condition
· Sarbanes-Oxley Act
Ø Potential Cost of Liability for a Lawsuit – accounting policie
r a summary of common law agency principles.
Ø § 1 – Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and the consent by the other so to act.
a. The one for whom action is to be taken is the principal.
b. The one who is to act is the agent.
c. Agency is a result of conduct, and not of the words used
Ø § 7 – Authority is the power of the agent to affect the legal relations of the principal by acts done in accordance with the principal’s manifestations of consent to him.
a. Can bind a principal to 3rd party if agent had authority to do so
Ø § 26 – (Actual) Authority to do an act can be created by written or spoken words or any other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal’s account.
a. Can be either (1) actual express authority; or (2) actual implied authority (i.e., an agent has the authority to do what is reasonably necessary to get the assigned job done, even if it wasn’t spelled out in detail)
Ø § 27 – Apparent authority (“Implied Authority”) to do an act is created as to a third person by written or spoken words or any other conduct of the principal which, reasonably interpreted, causes the third person to believe that the principal consents to have the act done on his behalf by the person purporting to act for him.
a. Elements: the manifestation:
1. Must be attributable to the principal;
2. Must get to the 3rd party; and
3. Must lead the 3rd party to reasonably conclude that the actor is an agent for the principal