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

The Basic Business Forms
·         The Sole Proprietorship
o       Owner is personally liable for all business obligations, b/c no legal separation btw Owner and Business
·         The Partnership
o       General partnership is default form for businesses owned by more than one person
o       Partners are jointly and severally liable
o       Need not be expressly created
o       Easily dissolved w/ statement of “express will”
·         The Limited Partnership
o       (At least) One General Partner, One Limited Partner
o       Limited Partner = No personal liability
§         Unless he takes part in the control of the business
·         However, he is liable only to those who transact business w/ the limited partnership reasonably believing that the limited partner is a general partner
·         Or if creditors extend credit on Limited Partner’s name w/out knowing he is limited partner
o       Formal Organizational Procedures, filing of certificate
o       Avoids double taxation
o       General Partner can be Corporation
·         The Limited Liability Company (LLC)
o       Limited Liability to all
o       Flexibility in internal management
§         Corporation-like, or
§         Partnership-like
o       Benefits of Corporation w/out limitations
·         The Limited Liability Partnership (LLP)
o       Like general partnership, except no liability
§         Except for claims arising from their own misconduct (misrep., fraud, breach of duty)
o       Encourages passive investment
·         The Corporation
o       Separate existence from s/h, perpetual duration
o       C = double tax, S = Pass through
·         Limited Liability – How Important is it?
o       Advantages can be offset by insuring against losses
·         Types of Corporation Securities
o       Shares
§         “Units into which the proprietary interests in a Corporation are divided”
§         Can have different classes:
§         Common Shares:
·         Right to receive dividends
·         Negotiability (capable of being transferred)
·         Ability to be Pledged (as security for debt)
·         Conferring of voting rights in proportion to the number of shares owned
·         Capacity to increase in value
·         Common s/h rights (MBCA 6.01(b))
o       Entitled to Vote for election of Directors and other matters
o       Entitled to Net Assets of the Corporation (dividends)
o       Also:
§         Inspect books, sue on behalf of Corporation, financial info, etc.
§         Preferred Shares MBC 13.01(6)
·         > than Common Shares
o       Get their $ before the common s/h do (priority)
·         Scope of rights in preferred share (defined by AoI)
o       Cumulative Dividend Rights
§         cumulative dividend = carries over if not paid
§         noncumulative dividend = if not paid at end of year, preferred s/h loses that dividend
§         Partially = both
o       Voting
§         Usually non-voting (but not always)
o       Liquidation Preferences
§         fixed at specified price per share, payable upon dissolution of the Corporation before anything is paid to common shares
o       Redemption Rights
§         shares redeemable by Corporation at fixed price
o       Conversion Rights
§         Preferred shares may be made convertible at the option of the s/h into common shares at a fixed ratio specified in AoI
§         Allows preferred s/h to get in on long-term appreciation of Corporation’s assets
o       Protective Provisions
§         Sinking fund provisions
·         Participating Preferred
o       “CLASS A COMMON”
o       Get priority, and after common s/h get a certain amount, they get further share of distribution
·         Corporation can issues different classes of Preferred Stock, w/ differing div. rates
·         Series of preferred
o       BoD continually carves out a set of preferred, sets standards so as not to have to amend AoI every few years when market conditions change
§         Flexible Rate = amount that preferred gets paid is set by objective criteria (like fed. Interest rate)
§         Dividend
·         “distribution from current or retained earnings”
§         Distribution
·         “payments to s/h out of capital”
§         Preferred can become common, most states don’t allow common to become preferred
o       Debt Financing
§         “Debt Securities” = evidence of long term indebtedness, promise to pay principal, interest
§         More important than Equity Financing
·         Used more often to raise capital
§         Bonds
·         Secured by lien/mortgate on Corporation property
·         “Registered Bond”
o       In name of specific individual
o       Interest paid directly to registered owner by check
·         “Zero Coupon Bond”
o       No interest
o       Sell at deep discount, upon maturity owner gets face value
·         “Junk Bonds”
o       Below investment grade debt instruments
§         Debentures
·         Unsecured Corporation obligation
·         Income Tax Considerations
o       Double Taxation
§         Tax Treatment comes from business form
§         Proprietorship is not a separate taxable entity
§         LLPs, GPs, LPs, all generally classified as partnership
·         Not taxed separately from individuals
·         Pass-through

d not reflect Corporation statuts (outside CA)
§         Reserve the Name
§         Pre-incorporation subscription agreements and Ks to buy shares
·         Traditionally used to raise capital, called at time of actual formation
·         Recently subscriptions have been replaced by Ks to purchase
§         Prepare Articles of Incorporation, describing:
·         Name of Corporation
·         Agent for Service of Process
·         Purpose of Corporation
·         Share Provisions
o       # of shares available, different classes, etc.
·         Close Corporation Statement (if closely held)
·         Optional Provisions
o       Select the Incorporator, Sign and File Articles
§         Not party in interest: lawyer, paralegal, anyone
o       Draft Bylaws
§         Lengthy document, full of nitty-gritty details of Corporate governance
§         Often boilerplate
o       Order Corporate Supplies
§         Minute books, seal share certificates, etc.
o       Adopt Bylaws and Elect BoD
o       1st Meeting of BoD
§         Formalistic Pageant of Technicalities
o       CA Securities Law
§         Atypical focus on fairness and disclosure
§         Need permit from state agency to sell securities
·         Must be “fair, just, and equitable”
o       Can’t inflate price
§         A tad paternalistic
§         Exempt if Corporation is particularly big or small
o       Statement of Domestic Corporation
o       Federal Securities Law
§         FSA 1933
·         Must file registration statement w/SEC
§         Intrastate Exemption
·         If shares end up in one state
·         Narrowly construed
·         The Decline of the Doctrine of Ultra Vires
o       Ultra Vires = Beyond the Power
§         When Corporations try to avoid K b/c it falls outside their charter
o       Ashbury – rail line in Belgium
§         Look at the competency and power of Corporation to make K
o       Modern codes give wide latitude to purpose clause
§         “any lawful activity”
§         Even a railway Corporation owning a hotel
o       King’s Highway = remedies for ULTRA VIRES
§         S/h can enjoin future activity