CORPORATIONS OUTLINE
v Aspects of the Corporation
Ø Limited Liability
§ Investors of the corporate entity have limited liability up to the amount that they paid for their stock in the corporation and cannot be pursued by creditors of the corporation after insolvency. The personal assets of the investors are not at stake.
§ Limited Liability does not shield the individual’s assets from their own misconduct.
§ Limited Liability makes investing in corporation more attractive, indirectly drives the economy, and allows the company unlimited access to capital, and perhaps make a profit.
Ø Centralized Management
§ Power is concentrated in a group of individual known as the board of directors. All employees act only subject to the authority given to them by the board.
Ø Fee Transferability of Interest
§ All property, real and personal, tangible and intangible is held in the name of the corporation.
§ The transfer of the corporation stock from one person to another does not affect the conduct of its business making ownership readily transferable.
Ø Separate Legal Entity
§ Corporation has “perpetual existence”
· Corporation holds property in its own name
· Corporation can pursue litigation
· Corporation can enter into contracts in its own name and these lawsuits or contracts are unaffected by change in the board of directors or shareholders.
· Corporation is a separate entity in the eyes of the law.
Ø Taxation
§ Corporations are treated as a separate taxable entity, separate and distinct from its shareholders and are taxed under a separate corporate income tax, with a rate different from the personal income tax rate.
§ Corporate income is subject to double taxation:
· once at the corporate level on profits and
· once at the personal income tax level as taxable dividends.
v Types of Corporations
Ø Close Corporation
§ Generally consists of 35 or fewer shareholders, who often place restriction on the transfer of shares, such as giving existing shareholders the right of first refusal effectively giving shareholders in a close corporation control over their co shareholders similar to the rights of partners in a partnership.
§ A person seeking to get out of the corporation cannot easily dispose of her interest to create liquidity.
§ Centralized management is a problem b/c most of the stockholders are active participants in the business. Passive stockholders may be zeroed out of any corporate income b/c the active holder will take most of the income through the form of salaries or other fringe benefits, declaring small dividends.
Ø Subchapter “S” Corporation
§ Corporations that affirmatively elect this status are treated similar to partnerships for the federal income tax purposes and are not subject to the corporate income tax.
§ Must meet certain qualifications:
· there must be fewer than 75 shareholders
· all shareholders must be natural persons or theirs estates, i.e. not another business entity
· no shareholder may be a nonresident alien and
· only one class of stock may be issued
v Corporate Structure
Ø Shareholders-elects board of directors
Ø Board of Directors-maintains ultimate control over the corporation, represents the shareholders, and appoints day to day management.
§ When dealing with a corporation, assist on a resolution from the board of directors if settling a case.
§ Two Types of Directors:
· Inside Directors
¨ Director’s primary obligation is the corporation and the director works full time for the company.
¨ In a closed corporation an individual is generally a member of management, a shareholder, or director
· Outside/Independent Directors
¨ Directors work full time for the company but may work for another company, which provides more objectivity into the corporation.
Ø Management-runs the day to day operations of the company, but the board of directors must approve any major sale of assets or major changes in the company
Ø Public Company-sells stock to the public and solicit investors from the outside; traded publicly, may or may not be on a national stock exchange; must release information to the public
Ø Privately held companies- do not offer stock to the public (may be owned by family); never an IPO for the company, privately held companies do not need to release information to the public
Ø Parent Company-company that owns the stock in other companies and controls the company through such stock ownership
Ø Subsidiary Company-the companies in which the parent company owns and controls are subsidiary companies
Ø Affiliate Company-subsidiary companies that are both owned by the same parent.
Ø Holding Company-a company created by the parent company to mange subsidiary companies
Ø Operating Company-company under the control of a holding company
Ø Capital Structure-the debt/equity ratio that the company incurs
Ø Articles of Incorporation (Charter)-document filed with the secretary of state that making the corporation a legitimate legal entity.
Ø Bylaws-rules governing the corporation’s internal affairs (time and place for annual meetings; number of directors; listing of officers); usually not filed with the Secretary of State, and may usually be amended by either the board or the shareholders.
v The Agency Concept
§ In a partnership, every partner is an agent of the partnership and is authorized to bind the partnership in transactions with 3rd parties. The corporation, being an intangible legal entity, can function only through the efforts of agent whether officers, directors or employees.
§ There must be an agreement to create this relationship; but not necessarily a contract b/n the parties.
· An agreement may result in an agency relationship even though the parties did not call it an agency nor intend the legal consequences of the such a relationship.
§ Two primary actors
· Principal and
· Agent
· This principal/agent relationship is a fiduciary relationship
¨ A fiduciary relationship is a relationship in which the agent (fiduciary) must act in the principal’s best interest and put the principal’s interest first. This is a relationship of trust and confidence in arm lengths transactions
Ø Essential Elements of the Agency Relationship:
§ Agent acts on behalf of the principal
§ Agent acts with the consent of the principal
· consent by both parties is required
¨ agent consents to act on behalf of principal (agent may bind principal to 3rd party contracts) and principal consents that the agent will act on his behalf
§ Agent acts subject to the control of the principal.
Ø Beyond Debtor/Creditor- Gay Jenson Farms Co. v. Cargill, Inc
§ Focus on amount of control to determine relationship-common element of control aspect of agency is the ab
from the principal (Board of Directors), or express authority to enter into this contract
¨ Without approval, the agreement will not be binding on the principal.
¨ Generally involves a decision too important to delegate to an agent (officer)
· Agent must have express authority and the principal must always agree.
· Anything extraordinary should be followed by a board resolution, which automatically binds the principal.
§ Inherent agency power-no authority was actually manifest by the principal but the power to bind the principal stems form the agency relationship and the need to protect 3rd parties.
· i.e. inherent authority can bind the principal if the contract is the kind made by a general agent but in fact there is no authority to contact.
v Partnership Concepts:
§ Governed by the Uniform Partnership Act (UPA)
§ Partnership-an association of tow or more persons to carry on as co-owners and share the profits.
§ The intent to form a partnership is important but is NOT a pre-requisite for forming a partnership, rather the intent to do those thing that constitute a partnership is necessary.
· substance of the arrangement is important NOT the label.
§ Partnerships results for contract, express or implied: If denied it may be proven by:
· circumstantial evidence such as:
¨ written instruments, testimony as to some conversation
§ Under a partnership:
· Each partner is held joint and severally liable for all the debt incurred by the partnership, exposing each partner’s personal assets to creditor’s claims
· Each partner is an agent of the partnership and can act on its behalf, unless the partnership agreement provides otherwise.
· The death or withdrawal of any single partner operates as an automatic dissolution of the partnership, which requires a expeditious winding up of the partnership
¨ surviving partners may buy out the decedent’s interest in the partnership
· Sale of an interest in the partnership to a 3rd party, requires the consent of all the remaining partners
· There is not open market on which to sell a partnership interest.
· The partnership must file a tax return for informational purposes but is NOT viewed as a separate taxable entity and its income flows through and is taxed to the individual partners or in the case of losses could be used by the partners to offset income from other sources.
· The partners have a fiduciary relationship to the all the other partners
Ø Not Just Debtor/Creditor, Rather Partners-See Martin v. Peyton
§ Look at the level of Negative Control the lender has over the day to day operations of the company
· Loan has a fixed term, not just unlimited credit; lender has a right to be repaid
