INTRODUCTION
I. Overview
A. Internal Relationships
1. This course is about the internal relationships within the corporation
2. Covers both Big Business and Mom & Pop Shops
3. Trust-like relationship (shareholders are like beneficiaries)
Corporation
Shareholders
Directors Officers
B. Governing Bodies of Law
1. State Corporation Code
a. Covers incorporation to dissolution (cradle to grave)
b. Each state has own code, but they are 99% the same
c. Some states use the Revised Model Business Corporation Act (TX and smaller states, not CA)
2. State Case Law
a. Judges fill gaps created by ambiguities in the code
3. Federal Securities Statutes and Rules
a. Securities Act of 1933
i. Governs new issues of securities (IPOs)
b. Securities and Exchange Act of 1934
i. § 10(b): Fraud in connection with the purchase or sale of securities
ii. § 14(a): Proxy voting and corporate elections
iii. § 14(e): Fraud and tender offers
iv. § 16(b): Short swing profits by statutory defined insiders
4. Rules of Stock Exchanges/Markets (“SRO Rules”)
a. SRO = Self Regultory Organization (eg. NYSE)
II. The Basic Business Forms
A. Types (study chart p192)
1. Sole Proprietorship
a. Definition: Business owned by single person as his/her own property
b. No distinction b/t person and business property
i. Thus UNLIMITED PERSONAL LIABILITY
c. Filing NOT required
d. **This is the default for enterprises with 1 person
e. Use: New personal business financed personally. Biz should be of low inherent risk
2. (General) Partnership
a. Definition: Association of 2 or more persons who carry on as co-owners a business for profit
b. Partners are liable for debts of partnership
c. Written agreement NOT required (but good idea)
i. With agreement can create classes of capitol, and allocate profits and loss
d. Filing NOT required
e. **This is the default for enterprises with 2 or more people when profits are shared
f. Use: Useful in expanding a sole proprietorship, or for biz with low assets and low risk.
3. Limited Partnership
a. Definition: partnership of 2 or more persons, with 1 or more general partners and 1 or more limited partners
i. Need at least 1 general partner and 1 limited partner
b. General Partner v. Limited Partner
i. General Partner furnishes $ or expertise
ii. Limited Partner furnishes $, but is not liable for obligations of partnership
(1) Can’t lose more than investment unless:
a. Limited partner participated in control of the business (but voting OK) AND
b. Creditor reasonably thought the limited partner was a general partner
c. Need to file with secretary of state
d. Use: Where risks of venture are high, use to limit liability. Good way to raise money
e. Profit/loss distribution: absent contrary agreement, share equally according to capital contributions.
4. Limited Liability Companies (LLC)
a. Definition: a limited partnership with no general partners, only limited partners (owners are called “members”)
b. To become LLC
i. Need to file with state AND
ii. Need to include LLC status in company name
c. Essentially a hybrid b/t partnership and corporation
i. Like partnership b/c taxed like partnership
ii. Like corporation b/c limited liability
iii. Use: avoid liability and double taxation.
iv. Profit/loss distribution: passes through to members according to contribution unless contrary agreement
5. Limited Liability Partnership (LLP)
a. Definition: general partnership except protects partners from liability based on acts/omissions of other partners
i. Still responsible for you own misconduct.
b. Need to file with state
c. Designed for professional partnerships (eg. law firms, accounti
i. “Jaws I”: Corp pays taxes at CIT rate
ii. “Jaws II”: If corp pays a dividend, the recipient of the dividend pays taxes on that dividend (PIT)
c. Can choose whether to be taxed as corp or partnership:
i. Old rule: Kinter regulations, if had 3 factors which looked like a corp, then IRS automatically taxed biz as a corp.
ii. Current Rule: “Check the box”—Any domestic, closely held firm can be taxed as partnership and not a corp at firm’s election
d. Avoiding Double Taxation
i. Make disbursements to reduce Corp income to owners that are deductible as business expense. (Reduces Jaws I).
(1) Dividends are not tax deductible, but other disbursements (eg. salary) are deductible to the corp.
a. Also this increases Jaws II for the SHs
(2) You can either pay SH’s salary, or repay interest to SH’s who have made loans to corp—both are deductible biz expenses which can “zero out” corp’s taxable income.
(3) IRS can challenge if disbursements are dividends in disguise.
ii. Label some stock as bonds(so they’re debt) (Reduces Jaws I).
(1) Interest on debt is deductible.
(2) IRS can challenge if the equity is masked as debt (need reasonable debt/equity ratio).
iii. Accumulate Dividends: If you don’t pay a dividend, then there is no Jaws II since SH’s not getting dividend as gain.
iv. Become an S-Corp (Eliminates Jaws I).
(1) Allows corp to be taxed as partnership; retains limited liability, but all corp income, losses, deductions and credits flow through to the SH’s.
(2) Limitation: need
