Business Organizations Outline

Intro
I. Corporation: A corporation is an entity that consists of intangible structure for the conduct of the entity’s affairs and operations, the essence of which is created by the state, and that possesses the rights and obligations given or allowed it by the state, which rights and obligations more or less parallel those of natural persons.
            A.   Federal Constitutional Rights: First Amendment Free speech rights, due process under the 5th and 14th amendments (but the protection is not necessarily as extensive as that enjoyed by a person), but corporations do not enjoy 5th amendment protection against self incrimination in the case of producing its books and papers for a grand jury ( Rationale: A corp is a creature of the state, the corporation received certain franchises from the state, and the state therefore has the right to inquire whether these franchises have been abused.
            B. Model Act § 3.01 Purposes (reread all of these – you shortened them)
            (a) Every corporation incorporated under this Act has the purpose of engaging in any lawful business unless a more limited purpose is set forth in the articles of incorporation.
            (b) A corporation engaging in a business that is subject to regulation under another statute of this state may incorporate under this Act only if permitted by, and subject to all limitations of, the other statute.
            C. Model Act § 3.02 General Powers: Unless its articles of incorporation provide otherwise, every corporation has perpetual duration and succession in its corporate name and has the same powers as an individual to do all things necessary or convenient to carry out its business and affairs, including without limitation power: 1-15 (sue, make/amend bylaws, buy/lease/hold property, sell, buy/sell/own interests in other entities, contract, lend $/invest receive property as security for repayment, be a member of another entity, conduct business in and out of the state, elect/appoint directors and officers, pay pensions/profit sharing, make donations, trans act lawful business, make payments/donations that further the business purposes. FULL Version is on page 164-5.
            D. Model Act § 3.04 Ultra Vires (unauthorized, beyond the scope of power allowed or granted by a corporate charter or by law)
            (a) Except as provided in subsection (b), the validity of corporate action may not be challenged on the ground that the corporation lacks or lacked power to act.
            (b) Power to act can be challenged (1) in a proceeding by a shareholder against the corp (2) by the corporation in several ways against an incumbent or former officer or (3) by the attorney general
            (c) The court can enjoin, and if equitable award damages because of the enjoining of the unauthorized act.
 
II. Types of Corporations
A.     Public Corporation: A corporation that functions as a government (city, town, etc)
B.     Government Corporation: Corporations that are wholly or partly owned by a government and were formed by the government to perform a special purpose (Amtrak or the Post Office)
C.     Non-Profit Corporation: A non-profit corporation does not have shareholders of any kind. In a non-profit corporation, profits may not be paid to members as dividends.
1. Eleesosynary (charitable) corporation: Benefits another group or groups
            a. Pays no taxes on its profits, and contributions to it are deductible by the donors
2. Mutual Benefit: Benefits the members of the corporation
            a. Pays no taxes, BUT contributions to it are NOT deducible for the contributors
3. Both types: The above tax treatments are only available when a corporation qualifies under the Internal Revenue Code and when the corporation files the proper application with the IRS.
4. All profits of both types of non-profit corporations that arise from essentially commercial activities are taxable in a manner comparable to profits of business corporations.
            D.   Business Corporations:
1. Publicly Held: The test is the ease with which the shares of the corporation trade in public markets (There is a ready market for the corporation’s stock).
2. Closely Held: The owner views himself as an owner of the corporation. The test is whether there is a ready market for the corporations stock. We should consider a corporation to be closely held even if its stock is sometimes publicly traded in the over-the-counter market, so long as its stick cannot be traded with any certainty. Are sometimes allowed greater latitude in their internal management (informal decision making). Shareholders stand in a fiduciary relationship to them.
3. EASY TEST: The test is whether the corporation is required to file the reports called for by § 13 of the Securities Exchange Act. The filing requirement arises in 3 ways: (Any 1 of these 3, it’s called a reporting company – publicly held – almost exactly).
A. The corporation has securities registered under § 12(b) of the Exchange act because the securities trade on a securities exchange
B. The corporation has securities registered under § 12(g) because it has assets exceeding $10 million and a class of equity security held of record by 500 or more persons,
C. The corporation is required under § 15(d) to file § 13 reports because it has in the past registered securities for public sale under the Securities Act.
            E. Model Act § 8.03 – 1 or more individuals on a board of directors
            F. Model Act § 7.32 and § 8.01(b) – A closely held corporation with a shareholder agreement authorized by § 7.32 may allocate management functions as it chooses.
 
II. Sole Proprietorships & Agency Principles
            A. Introduction to Forms of Business Entities
                        1. A company can be formed in 11 ways: 1) a sole proprietorship, 2) a general partnership, 3) a limited liability partnership 4) a limited partnership, 5) a partnership association, 6) a general corporation, 7) a closely held corporation,8) a limited liability company, 9) a business trust, 10) an unincorporated association such as a joint stock company, and 11) if certain requirements are met, a professional corporation.
2. Ask these questions when thinking about what type of organization to form:
            a. What is required to form and operate the business?
            b. Who will manage the business?
            c. To what extent will the investors be personally liable for the company’s obligations?
            d. How will the business be financed?
            e. How do investors receive a return on their investments?
            f. What are the tax consequences of forming a business?
            B. Sole Proprietorships – A sole partnership is a business owned directly by one person who has sole decision making authority, an exclusive claim to business profits, and direct ownership of all business assets. There is no business entity to form. No formalities are required to operate the business. (Absence of formalities is a cost saving to the owner. The absence of legal requirements give the owner maximum flexibility in sutructuring and operating the business. It is suitable for business with only a few employees.
                        1. Problems: Unlimited liability of the owner for the company’s obligations. As the operation of the business becomes complex (more managers and workers), the sole proprietor becomes subject to an expanding risk of vicarious liability for the acts of others. These risks can be reduced by contract or by buying insurance.
            C. Agency Law and the Legal Relationships Between Sole Proprietors and their Employees – When a sole proprietor employs another person to act on the owner’s behalf, the common law of agency controls the relationship. The proprietor is the principal, the person on whose behalf the action is to be taken. The person acting on behalf of the principal is the agent. An agency relationship may be created expressly by an agreement between the parties or may arise as a matter of law when the parties enter into an association that has the legal attributes of an agency relationship.
                        1. Formation of An Agency Relationship
                                    a. A. Gay Jenson Farms v Cargill (Minn. 1981)
 (Warren is Cargill’s agent)
Facts: Warren (grain elevator owner) had contracts with Cargill for financing. Certain rights were given to Cargill (first refusal on grain). Contract renewed (Warren gives Cargill financial statements and Cargill keeps books for Warren. Warren also needed Cargill’s consent to make improvements or repairs, and couldn’t encumber its assets w/o Cargill’s permission. Cargill would make recommendations for improvements. Memo to Cargill (needs paternal guidance).   Warren acted as Cargills agent in the grow sunflower seeds and wheat seed. Warren’s financial problems get big. Cargill takes control of the elevator. Warren was indebted to the plaintiff’s. Warren ceases operations. – Cargill was found to be the principal.
AGENCY CREATION RULES:
Rule: Agency is the fiduciary relationship that 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 consent by the other so to act. 
Rule: In order to create an agency, there must be an agreement, but not necessarily a contract between the parties.
Rule: An agreement may result from the creation of an agency relationship although the parties did not call it an agency and did not intend the legal consequences of the relation to follow.(Agent/principal relationship can be created by law)
Rule: The existence of the agency may be proved by circumstantial evidence which shows a course of dealing. When an agency relationship is to be proven by circumstantial evidence, the principal must be shown to have consented to the agency since one cannot be the agent of the other except by consent of the latter.
 
 
CREDITOR BECOMING A PRINCIPAL – Restatement 2nd § 14 O – MAIN RULE.
Rule: A creditor who assumes control of his debtor’s business may become liable as principal fo