Corporations
Choice of Form
a. The Corporation: Key advantages–Limited Liability, Free Transferability (ownership is represented by shares, and shares can be sold), Centralized Management, The corporation is a legal entity.
b. The Close Corporation
i. Small number of stockholders
ii. Lack of Market: lack of any market for the corp. stock.
iii. Stockholder participation: substantial participation by the majority stockholder in management, direction and operations of the corporation. NOTE: often there is a restriction on the transferability of shares.
1. Issues: even if the maj. Stockholder dies, the corporation lives on posing serious financial risks for the survivors. If a partner dies in a partnership, it is dissolved.
2. Taxation: if you expect a loss, the partnership may be the preffered choice.
3. Note: Cole says that there IS evidence that many people are starting to prefer LLC, LLP instead of “S” corps.
c. Partnership vs. Corporation
i. Two types: “general” and “limited”
1. General: association of two or more people who carry out business as co-owners. Don’t need to file, can come about by the operation of law.
2. Limited: (1) written agreement (2) formal document is filed with state officials. [2 types of partners: general– each are liable for the debts and limited–not liable for the debts.
d. Essential Terms and Concepts
i. Sole Proprietorship: owner of the business carries on the bus. As an individual. Debt–owner directly liable. Tax–reports tax as his own
ii. Partnership (see above):
1. General Partnership
a. Creation: by operation of law or by “estoppel” (i.e. if two people represent to the outside world that they are partners.
b. Life Span: dissolves upon death, bankruptcy or withdrawl.
c. Liability: unlimited liability, personal assets at risk.
i. LLP: limit liability of partners for partnership debts and obligation unless partner supervised another partner or agent engaged in wrongful conduct
d. Financial Rights: share equally in profits and losses
e. Governance: each partner is an AGENT of all other partners and can bind the partnership, either by transacting business agreed upon (actual authority) or appearing to carry on business (apparhent authority)
f. Control: majority vote neede to decide ordinary partnership matters.
g. Transferability: partner cannot transfer unless all remaining partners agree or partnership agreement permits it.
2. Limited Partnership
a. Formation: written agreement and certificate filed.
b. Nature: two kinds of partners (see above)
c. Liability: General and Limited (see above)
d. Governace: general partners have authority to bind the partnership to ordinary matters.
iii. Limited Liability Company (LLC): hybrid between corporation and partnership.
1. Partnership aspects: members not personall liable for the debts of the LLC
2. Lifespan: filing of a certificate or articles of organization
3. Liability: veil piercing: some LLC statutes have veil piercing ability
4. Governance: (1) member-managed (2) manager managed
Agency Concepts: (1) what is an agent and what charc. Distinguish the principal agent relationship (2) when does an agent have the authority to bind her principal to transactions with 3rd parties.
e. Gay Jenson v. Cargill (fiduciary:
i. farmer sells grain to grain elevator who sells to others, Cargill is ultimate buyer & finances grain elevator who goes out of business, court holds Cargill creditor liable for grain elevator, Cargill Ked to retain extensive control over grain elevator (informed of & reviewed lg expenditures, required approval to pay out dividends, unilateral power to end agreemt, couldint enter into other contracts without approval)
ii. Note: there must be consent between principal and agent, must be control by the principal and they must act on behalf of the agent. DEFINED: (1) agent acts on behalf of the principal 92) the agent acts with the consent, express or implied, of the principal (3) the agent acts subject to the control, or right of control o
arried on as co-owners of a business for profit. Respondents’ measures taken as precautions to safeguard the loan were ordinary caution and did not imply an association in the business.
i. Meinhard v. Salmon
i. In this case, one partner in a joint venture [Salmon] secretly entered into a new lease related to their business before their old lease had expired. Other partner [Meinhard] claimed that the new lease was property of the partnership.The opportunity for the new lease came about as a result of the partnership enterprise. Salmon should have disclosed the new opportunity to Meinhard, so the latter could have competed for the new lease.As the managing partner, Salmon owed a particular duty to his other partner.
ii. Lessons from this case:
1. Respond honestly to initial questions, or at least have a strategy for answering the question (e.g., evasion, stonewalling)
2. Write something into the partnership agreement concerning an exit strategy.
3. Note: you have a fiduciary responsibility to your partner.
j. Bohatch v. Butler and Binion
i. Facts: lawyer released as partner for ratting on another partner. Note: there is no fiduciary responsibility to remain partners. There is no duty, although they did breach their partnership agreement by not noticing and paying her the correct amount.
k. Bane v. Ferguson: Former partner tries to sue his partners for negligence has standing. Held: once the partnership ends, the fiduciary duty ends.
l. Schymanski
i. 50/50 partnership. Note: you don’t have to provide cash capital to form a partnership. It may come in the form of personal labor and
