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Business Associations/Corporations
University of California, Hastings School of Law
Wang, William Kai-Sheng

Corporations
Professor William K.S. Wang
Spring 2005

Introduction

I. What Is Corporations Law?

a. Deals with internal corporate relationships (e.g., directors’ duties to the corporation and shareholders)

i. Does not deal with external relationships with third parties outside of corporation (e.g., trot law, labor law)

b. Triangle: Corp.

Dir./Off. Shareholders

c. Not limited to big business, applies to mom-and-pop operations
d. A corporation is just one way to do business

i. E.g., Could operate as a business trust instead (board of trustees run the business trust, investors in business trust who are the beneficiaries, trust certificates instead of stock)

II. Bodies of Law Governing Internal Relationship Within the Corporation

a. State Corporation Code

i. Covers corporation from incorporation to operation to dissolution (cradle to grave)
ii. Each state has its own corporations code, but corporations 99% the same

1. E.g., January 1977, California legislature completely revamped the California corporations code to make it more like other jurisdictions (e.g., Delaware)

iii. Other states use the Revised Model Business Corporations Act (RMBCA): adopted by Texas and mostly smaller states

b. State Case Law

i. Codes have gaps and ambiguities that are filled in by case law
ii. Although corporations law is statutorily based, it has some common law

c. Federal Securities Statutes and Rules, As Interpreted By Cases

i. Two federal New Deal era statutes regulate corporations

1. Securities Act of 1933: Governs newly issued securities (IPO)
2. Securities Exchange Act of 1934

a. 14(a): governs voting and corporate elections
b. 14(e): governs fraud in tender offers
c. 10(b): governs fraud in purchase or sale of securities
d. 16(b): governs short-swing profits by statutorily defined insiders in their own companies’ stock

d. Interaction Between Federal and State Law

i. Statutes were a response to the perceived inadequacies of state regulation pre-Depression
ii. Until 1975, there was a trend towards gradual expansion of federal law of corporations under the federal statutes at the expense of state law
iii. Since 1975, restrictive Supreme Court opinions appear to have halted and possibly even reversed the trend

e. Rules of Stock Exchanges and Stock Markets:If publicly traded company, must comply with rules of the stock market on which you trade

Chapter 1: The Basic Business Forms

I. The Principal Forms of Business Associations

a. Sole Proprietorship: Business held in the name of one person as his or her personal property (owned and controlled by one person); e.g., used book business operating from trunk of car

i. Note: No distinction between personal and business property

b. Partnership: (Uniform Partnership Act) Informally created association of two or more persons to carry on, as co-owners, a business for profit. No filings necessary for this business form to exist.

i. Note: This is the default form a business takes (a.k.a. “General partnership”)

c. Limited Partnership: A partnership formed by two or more persons (under the Uniform Limited Partnership Act or similar state provision) and having as its members (1) one or more general partners and (2) one or more limited partners

i. Limited partner: Not bound by the g

and accounting firms
iii. Note: The terms LLC or PLLC must appear in the firm’s name

f. Corporation: Separate existence from the shareholders, with perpetual duration (unlike partnerships)

II. Advantages of Incorporation Over Partnership or Sole Proprietorship

a. Limited Liability: How Important An Advantage

i. Definition: Corporate shareholders’ personal assets are not subject to corporate obligations (i.e., shareholders of a corporate are not personally liable for a corporation’s debts or tort liabilities)

ii. Assessment of Advantage: Although limited liability is advantageous, it is not always a determinative factor

1. Insurance: (1) Partners may protect themselves from personal liability by buying insurance; (2) although shareholders are insulated from personal liability, corporations should buy insurance anyway to protect the business assets

a. BUT sometimes partnerships cannot get adequate insurance

2. Banks: Although corporate shareholders have no personal liability on bank debts whereas general partners do, banks usually demand a personal guarantee of the debts of a corporation

a. BUT there are certain creditors who do not demand personal guarantees (e.g., not banks, but landlords, suppliers, employees, tax authorities)

Piercing the Corporate Veil may also dilute the advantage of limited liability