Biz Org Outline Han Spring 2009
· Introduction to corporations
o Rights and obligations of corporations
§ MBA 3.01 – organized for any lawful business
§ MBA 3.02 – allows 14 specific powers such as own and deal in property, make contracts, sue, etc and 1 general power to “do any other act, not inconsistent with law, that furthers the business and affairs of the corporation”
§ MBA 3.04(a) – prohibits the validity of corporate action being challenged on the ground that corporation lacked the power to act
§ Definition of persons under statutes commonly include corporations
§ Have most constitutional rights, but not to the extent of natural persons
§ Do not have the 5th A. right to not self-incriminate
o Types of corporations
§ Public corporations
· Corporations that function as governments
· Include cities towns, villages, airport authorities
§ Government corporations
· Corporations wholly or partly owned by a government and that were formed by that government to perform some special purpose
· Include USPS, Amtrak and Tennessee Valley Authority
§ Nonprofit corporations
· Do not have shareholders or owners
· Can be eleemosynary (charitable) or mutual-benefit
· Eleemosynary include hospitals, private universities, and charities
o Don’t pay taxes on profits, and contributions are deductible by the donors
· Mutual-benefit include social clubs
o Don’t pay taxes on profits, but contributions are not deductible by the donors
· Profits that arise from essentially commercial activities are taxable in a manner comparable to profits of business organizations
§ Business corporations
· Two types: publicly held and closely held
· Closely held: (1) corporation’s stock is held in a few hands or families, and (2) stock is never or only rarely dealt in by buying or selling as there is no ready market for the stock, and (3) management and ownership of the corporation are substantially identical
· Publicly held have a duty to file the reports under Section 13 of the SEC Act of 1934, which arises when: (1) the corporation has securities registered under 12(b) because these securities trade on a securities exchange, (2) the corporation has securities registered under 12(g) because it has assets exceeding $10 in a class of equity security held of record by 500+ persons, or (3) the corporation is required by 15(d) to file section 13 reports because it has in the past registered securities for public sale
· Sole proprietorships
o Business owned directly by one person who has sole decision-making authority, an exclusive claim to profits, and direct ownership of all assets
o Can have many employees if there is only one owner
o No business entity to form and no formalities are required to operate the business
o Pros
§ Costs are saved by absence of formation and operational formalities
§ Absence of legal requirements gives owner maximum flexibility in structuring and operating the business
§ Freely transferrable
o Cons
§ Only suitable for small businesses with a few employees
§ Hard to develop a management structure as the company grows
§ Owner has unlimited liability for the company’s obligations
§ As the business becomes more complex, the owner assumes vicarious liability for the acts of its managers and workers
§ Only lasts as long as the owner retains capacity
· General Partnerships
o A few members with personal relationships who will fully participate, sharing management responsibility and liability
o Not suitable for large associations with many members and passive investors
o Pros
§ Relatively easy to organize
§ Inexpensive to operate
§ Only taxed once as the income to the partners is taxed, but no double tax (e.g. no tax on the corporations’ earnings first)
o Cons
§ Partnership under UPA (1914) is generally not treated as an entity with a legal identity separate from the individual partners, but treated as an aggregate of its principals
· Company’s rights and obligations accrue to its owners and not to the business itself
§ Retirement, bankruptcy, withdrawal or death of one partner dissolves the business and the Uniform Partnership Act (1914) requires the business be dissolved and its assets distributed unless the remaining partners and the estate of the deceased agreed to form a new partnership
§ UPA (1997) now expressly confers entity status on the partnership and allows remaining partners to continue when one dies or withdraws, but the partners are still personally liable for partnership debts
§ Decisions, unless provisions are made otherwise, need to be unanimous since all partners are joint and severally liable
o Partnership formation
§ Can arise through express agreement or by operation of law when parties enter an agreement having the legal attributes of a partnership
§ No formalities required to form, through some states require trade name registration and certain filings are permitted
§ Martin v. Peyton (NY SSC 1927)
· Partnership can result from contracts, express and implied
· If existence is denied, it can be proved by the production of: (1) a written instrument, (2) testimony of conversation, (3) circumstantial evidence, or (4) receipt of a share of the business profits
· If a contract on a whole contemplates an association of 2+ persons to carry on as co-owners of a business for profit, a partnership was established under UPA 1914
· Profit sharing is a factor, but not determinative of a partnership
§ Existence of a partnership requires: (1) the parties clearly manifest their intent to associate themselves as a partnership, (2) each party contributing something that promotes the enterprise, (3) each party having a right of mutual control over the subject matter of the enterprise, and (4) the parties agreeing to share the profits of the enterprise (MacArthur Company v. Stein (MN 1997)
· (1) Intent requirement is not of
or in other manners specified in the operating agreement
o Cons
§ Need to file an article of organization with the secretary of state
o Members
§ Have the right of access to company records and are subject to fiduciary obligations of due care and loyalty
§ Scope of obligations depend on whether the company is managed by members or by managers
o Operating agreement
§ ELF Atochem North America, Inc. v. Jaffari and Malek LLC (DE SSC 1999)
· For an LLC, its members are the real parties in interest, and the LLC is simply their joint business vehicle
· LLCs need not sign its own operating agreement when its members have
· An operating agreement can impose forum selection clauses on its members
§ Advanced Orthopedics, LLC v. Moon (LA SCoA 1995)
· An LLC can exist without: (1) an operating agreement, (2) its members understanding what an LLC is, and (3) one or more members intending to form an LLC
· A certificate of organization is conclusive evidence of the fact that the LLC has been duly organized
§ McConnell v. Hunt Sports Enterprises (OH SCoA 1999)
· A person can be a valid member of an LLC without having had executed the agreement if they appear in the company’s records as a member
o Management of an LLC
§ Broyhill v. DeLuca (VA Bankruptcy 1996)
· Managing members can be removed, but if those members were the only managing members, the remaining members must elect a new manager within 90 days (if allowed by the operating agreement) or the LLC is dissolved
· Unless otherwise specified, any provision to vote in a manager or split profits is mirrored in the requirement of voting percentage to remove a manager or share in bearing the burden of losses
§ Anderson v. Wilder (TN SCoA 2003)
· A fiduciary relationship exists between members of a partnership or closely held corporation that imposes a requirement of good faith and integrity in dealings
· Majority shareholders of an LLC have a fiduciary duty to the minority, just as in corporations, even when there is no statutory requirement
· Members have a duty to act in way that a person reasonably believes is in the best interest of the LLC
o Dissociation and dissolution
§ Poore v. Fox Hollow Enterprises (DE TC 1994)
· Partnerships may represent themselves in court, but a corporation (which only has agents) must be represented by legal counsel
