Corporations
Moody
Fall 2011
CHOOSING A FORM OF ORGANIZATION
v Partnership vs. Corporation: Choosing a form of organization usually comes down to choosing between a partnership and a corporation
v Nature of partnerships: There are 2 types of partnerships: “general” and “limited”
Ø General: any association of 2 or more people who carry on business as co-owners. Comes into existence by operation of law—no formal papers signed or filed. Any partnership is “general” UNLESS “limited” requirements are complied with
Ø Limited: can only be created where: (1) there is a written agreement among the partners; and (2) a formal document is filed with state officials
§ Two types of partners:
· (1) general: each liable for the debts of the partnership
· (2) limited: not liable for debts of partnership beyond the amount contributed
¨ a limited partner will lose this limit on his liability if he actively participates in the management of the partnership
v Limited liability:
Ø Corporation: a s/h’s liability is normally limited to the amount he invested
Ø Partnership: liability of partners depends on whether the partnership is “general” or “limited”
Ø Limited Liability Partnership (LLP): each partner may participate fully in the business affairs without thereby becoming liable for the entity’s debts.
v Management:
Ø Corporation: follow the principle of centralized management: The s/hs participate ONLY by electing the BOD. The BOD supervises the corp’s affairs, with day-to-day control resting on Officers
Ø Partnership: Management is NOT centralized: all partners have equal voice. In limited partnerships, all general partners have equal voice and limited partners cannot participate in management
v Continuity of Existance: a CORP has “perpetual existence.” GP dissolved at death. LP is dissolved by withdrawal or death of Gen partner, but not Lim partner.
v Transferability: Ownership interests in CORPs are readily transferable (just sell stock). A part interest is NOT readily transferable (all partners must consent to admission of new partner)
v Federal Income Tax:
Ø Corporations: Taxed as separate entity. Files its own tax return, pays its own taxes independently of s/hs. “Double taxation” of dividends (corp-level tax on corp profits, & s/h-level tax on the dividend.)
Ø Partnership: not separately taxable. Actual tax is paid by each partner
Ø S Corporation:
§ Eligibility: Less than 100 s/hs, No non-resident alien or non-individual s/hs, Only 1 class of stock, Timely election, Filing IRS form 2553
§ S Corps are taxed on a modified pass-through basis—each s/h pays its portion
§ Termination of election: Majority of s/hs, Disqualification, Excessive passive income, Mid-year termination
CORPORATE FORM
v Where and how to incorporate
v Delaware v. Headquarter state:
Ø Closely Held: incorp should be where the corp’s principal place of business
Ø Publically Held: incorp in DEL is attractive (bcuz of Del well-defined, predicable, body of law, and its slight pro-management bias)
v Mechanics of incorporating
Ø Articles of Incorporation: filed with the Secretary of State.
§ Can be amended BUT any class of s/hs who would be adversely affected must approve the amendments by majority vote
Ø Bylaws: rule governing corp’s internal affiards. Not filed with Sec of State & usually amended by BOD or s/hs
v Ultra Vires & Corporate Powers
Ø Ultra Vires (UV):
§ Classical Doctrine: traditionally, acts beyond the corporation’s Articles of incorporation were held to be “UV” and were unenforceable abaings the corp or by it
§ Modern abolition: generally eliminated the UV doctrine
Ø Corporate Powers today: most modern corporations are formed with articles that allow the corporation to take ANY lawful action (charitable contribution, bonuses, stock options, fringe benefits)
v Pre-Incorp Transactions by PROMOTERS (promo)
v Liability of promoter: a promo is one who takes initiative in founding and organizing a corp. A promo can occasionally be liable for debts he contracts on behalf of the to-be-formed corporation.
Ø Promo aware, other party not: If promo enters into a K in corp’s name, prmom knows that corp has not yet formed (but other party doesn’t), promo is liable
§ Adoption: if corp later formed & adopts the K, then promo escapes liablilty
Ø K says corp no
empt to incorporate, a de facto corp would be found to have formed. Enough to shelter the incorporator for personal liability
§ Modern view: abolished de facto doc, and impose personal liability on anyone who purports otherwise
Ø Corp by Estoppel: where a creditor deals with business as corp, and who agrees to look to corp’s assets rather than the s/hs assets will be estopped from denying corp’s existence
THE CORP STRUCTURE
v General Allocation of Powers:
v Traditional scheme: (can be modified)
Ø S/hs: act principally by: (1) electing and removing directors; (2) approving/disapproving fundamental or non-ordinary changes (e.g. mergers)
Ø Dtrs: manage the corps business—formulate policy & appoint offcrs to carry out policy
Ø Offcrs: administer day-to-day affairs of the corp, under supervision of BOD
v Powers of s/hs:
Ø Elect and remove directors:
§ Election—s/hs normally elect dtrs at the annual meeting of s/hs. So dtrs normally serve 1 year terms
§ Vacancies—s/hs usually have right to elect dtrs to fill vacancies on the board, but BOD usually has this power too.
§ Removal—today most statutes allow the s/hs to remove dtrs even w/o cause
Ø Articles and bylaws: s/hs can amend AOI or bylaws
Ø Fundamental changes: s/hs can approve/disapprove fundamental changes not in the ordinary course of business (mergers, sales of all assets, dissolution)
v Power of Dtrs: “manage” affairs of the corp
Ø S/hs can’t give orders: thus s/hs can’t order the BOD to take any particular action
Ø Supervisory role: BOD does not operate the day to day stuff. It appoints offcrs, and supervises the manner in which offcrs conduct those affairs
v Power of Offcrs: appointed by BOD and can be removed by BOD. Carry out day-to-day
