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Business Associations/Corporations
Southern Illinois University School of Law
Gross, Leonard

Types of Enterprises
Sole Proprietorship
Partnership
Corporation
Ease of formation and operation
Can be formed by shaking hands; just go into business
More red tape – articles of incorporation; bylaws; etc.
Laws of agency apply to all types of enterprises
One level of taxation – Owner pays tax
One level of taxation – Partners pay taxes
C Corp – two levels of taxation
Subchapter S Corp – taxed similarly to a partnership
Not continuous – there is dissociation/dissolution/disruption of the business if one leaves
– you can draft a partnership in a way around this to allow the business to continue (around the “default rules”)
Continuous
Sole prop manages
Managed by partners
Board of Directors – set policy
Corporate Officers – appointed by the board and run the day to day operations
Shareholders – vote for the members of the board, who appoint the officers who run the business
 
Not readily transferable
Readily transferable – sell stock
*you can draft your way around the “default rules” to meet the desires of the investors
 
*subject to the laws of the state of incorporation
*agency principles apply regardless of the kind of entity that you form
 
Types of Business Forms
General partnership v. limited partnership v. corporation = scope of liability for the debts and obligations of the business.
1. The Proprietorship
·         business owned by a single individual
·         owner is personally liable
·         no legal separation between the owner and the business
2. The General Partnership
·         default form of businesses that are owner by more than one person
·         co-ownership does not have to be express à a partnership is formed if two or more persons of into a co-owned business without any thought or planning or understanding of what the relationship is
§         an oral agreement to share profits may be sufficient to establish even if initial financial contributions are not equal
·         can be dissolved by a partner at any time by a simple statement of his or her express will
·         don’t have to do anything to form a partnership
·         In a general partnership, all partners are individually liable for the obligations of the partnership.
3. The Limited Liability Partnership (LLP)
·         same as general partnership in al respects, except that the statute provides that partners have no personal liability for firm obligations that exceed the assets of the general partnership and must file with the sec of state and pay the filing fee
·         full personal liability for claims arising from own misconduct
·         elects by filing statement with Secretary of State
·         check the box taxation – partnership or corporation
4. The Traditional Limited Partnership
·         genera and limited partners
·         limited partners have no personal liability for the debts of the business (except to the extent of their capital contributions) and have only limited rights to participate in the management of the business (RULPA)
§         if the exceed the limited right of management, they become general partners and liable for the debts of the business
§         RULPA §303 has some safe harbors (supp page 121)
·         general partners are unlimitedly liable for the debts of the business and have general powers of management; the run the business
·          there is full personal liability for claims arising from their own misconduct
·         formed by filing document or certificate with the Secretary of State; failure to file = general partnership
·         In a limited partnership, the general partners are personally liable but the limited partners are liable only up to the amount of their capital contribution. (But a limited partner will lose this limit on his liability if he actively participates in the management of the partnership.)
·         Don’t use this if limited partner wants to participate in the control of the business
5. The Limited Partnership with a Corporate General Partner
·         uses the corporation as the sole general partner of the limited partnership
·         courts have accepted and allowed individuals and entities to be limited partners even though they are also officers, directors and shareholders of the corporate general partner
·         adaptable to publicly held and closely held enterprises
·         major advantage = combines limited liability for all and favorable tax treatment
6. The Limited Liability Limited Partnership (LLLP)
·         allowed in less than half the states
·         applies the LLP concept to a limited partnership where some or all of the general partners have no personal responsibility for obligations of the LLLP
·         if a limited partnership with general and limited partners, but the general partners have the protection of the LLP election
7. Limited Liability Companies (LLC)
·         four general characteristics àlimited liability; partnership tax features; chameleon management (ability to choose between centralized and direct member management); creditor protection provisions
·         provides limited liability for all participants, whether they are active in management or not, and permits total flexibility in internal management
§         provides the benefits of incorporations without the limitation and rules applies to corporations
§         you will always be personally liable for your own fraudulent actions
·         eligible for partnership taxation – check the box to be taxed as partnership or corporation
·         formed by filing a document with a state official
·         member managed = rules similar to partnership
·         manager managed = rules more analogous to corporation
·         favorable tax benefits – “check the box” – elect to be taxed by corporation or partnership
·         flexibility in decisions affecting the business – how profits divided, who runs the corporation, etc
·         separate legal entity – member who is not a licensed atty cannot represent the LLC (as an individual, you can represent yourself)
·         most agree that piercing will apply here
·         Entities that cannot make the LLC election:
§         entities organized under a federal or state statute that refers to the entity as a “corporation” or as “incorporated”
§         certain foreign entities that are specifically listed in the regulations as per se corporations
§         business entities that are taxable as corporations under other provisions of the IRC
8. The Corporation
·         formed with sec of state – then can elect S or C corporation by filing forms with IRS (C unless file election)
·         disadvantages = taxation and mandatory procedural requirements that may increase the cost of operation
·         MBCA §2.03 – “corporate existence” begins upon the filing of articles of incorporation
·         limited liability for all investors and participants, whether active or passive
·         corporation is an entity independent of its shareholders
·         assets of the corporation are subject to seizure by corporate creditors and t

elimination of all regulatory controls on the corporation, the adoption of “pro-management” stance whenever conflicts arose between managers and SH, and elimination of preemptive rights and cumulative voting
1. Closely held: For a closely held corporation, incorporation should usually take place in the state where the corporation’s principal place of business is located.
2. Publicly held: But for a publicly held corporation, incorporation in Delaware is usually very attractive (because of Delaware’s well-defined, predictable, body of law, and its slight pro-management bias.)
B. Mechanics of incorporating:
1. Articles of incorporation: To form a corporation, the incorporators file a document with the Secretary of State. This document is usually called the “articles of incorporation” or the “charter.” 
805 ILCS 5/2.10 – Articles of Incorporation (supp. I page 8)
2.10(a) – name must be distinguishable on the records of the sec of state; even if sec issues the name, may still be liable civilly for trademark violation or unfair competition.
2.10(a)(2) – can list all lawful business as purpose
5/2.20à Organization of the Corporation
                3.15 – corporation can’t assert ultra vires defense
5/2.05 – 2.25; 3.15; 3.20
2. Bylaws: After the corporation has been formed, it adopts bylaws. The corporation’s bylaws are rules governing the corporation’s internal affairs (e.g., date, time and place for annual meeting; number of directors; listing of officers; what constitutes quorum for directors’ meetings, etc.). Bylaws are usually not filed with the Secretary of State, and may usually be amended by either the board or the shareholders.
 
DOCTRINE OF ULTRA VIRES (beyond the scope of the purposes or powers of a corporation)
Ultra vires = acts beyond the corporation’s articles of incorporation were held to be “ultra vires,” and were unenforceable against the corporation or by it.
Modern corporate statutes have generally eliminated the ultra vires doctrine.
Most modern corporations are formed with articles that allow the corporation to take any lawful action.
5/3.15 – Defense of Ultra Vires not allowed
 
PRE-INCORPORATION TRANSACTIONS BY PROMOTERS
A. Liability of promoter: A “promoter” is one who takes initiative in founding and organizing a corporation. A promoter may occasionally be liable for debts he contracts on behalf of the to-be formed corporation. [22] activities of promoters = (1) must arrange for the necessary capital for the corporation; and (2) obtain the necessary assets and personnel so that the corporation can function
Three different situations concerning applicability of personal liability:
contracts executed in the name of the promoter – if promoter enters into contract in his own name without mention of the corporation, then the promoter is personally liable. Subsequent assignment of liability