CORPORATIONS
The University of Chicago Law School
§1. Fundamentals
I. Historical Overview [K&C: 113–118; KRB: 280–85]
A. The Role and Purposes of Corporations
(1) A.P. Smith Mfg. Co. v. Barlow (KRB, 280–85)
II. Essential Terms and Concepts [K&C: 5–12, 104–13, 118–33]
A. Business Organization Choices
(1) Sole Proprietorship – Owner of the business carries on the business as an individual.
a. Debt – Owner directly liable for all debts of the proprietorship.
b. Tax – Owner reports the tax as his own.
(2) Partnership
a. General Partnership – UPA definition: “an association of two or more persons to carry on as co-owners a business for profit” §6(1).
(i) Creation
? By operation of law – Partnership can come into existence by operation of the law, without any filing of papers.
? Creation by ‘estoppel’– If two people represent to the outside world that they are in partnership. See UPA §16.
1. Limited scope – Applies only where 3d party extends credit to the partnership. Other reliances inapplicable.
(ii) Life Span – Dissolution: Dissolves upon death, bankruptcy, or withdrawal of any partner.
? Absent an agreement, any partner may withdraw and demand liquidation.
(iii)Liability to Outsiders – Partners have unlimited liability, personal assets at risk for partnership obligations.
? Under some statutes liability of partnership contracts is joint, so partnership assets must first be exhausted.
? LLP Statutes – Limit liability of partners for partnership debts and obligation, unless partner supervised another partner or agent engaged in wrongful conduct.
(iv)Financial Rights – Partners share equally in profits and losses, which are divided on dissolution.
? No statutory right to profits.
? No statutory right to compensation for services.
(v) Firm Governance –
? Binding the firm: Each partner is an agent of all other partners and can bind the partnership, either by transacting business as agreed by the partners (actual authority) or by appearing in the eyes of 3d parties to carry on partnership business (apparent authority).
? Control of firm – Unless otherwise agreed, majority vote needed to decide ordinary partnership matters.
1. Extraordinary matters or those contravening agreement – require unanimity.
(vi)Transferability of Ownership Interests – Partner cannot transfer interest unless all remaining partners agree or partnership agreement permits it.
? Partner may transfer his financial interest in profits and distribution, entitling the transferee to a charging order.
b. Limited Partnership –
(i) Formation – Must be created with written agreem
ficial.
(i) Many LLC statutes require at least two members.
(ii) Duration – Not limited by statutes.
d. Liability to Outsiders – LLC members, both as capital contributors and managers, are not liable for LLC obligations.
(i) Veil-piercing – Some LLC statutes suggest that members can become individually liable if equity or justice requires.
e. Firm Governance –
(i) Two Possibilities: (1) Member-managed; (2) Manager-Managed.
? Member-Managed – Members have broad authority to bind LLC in much the same way as partners;
? Manager-Managed – Members have no authority to bind.
(ii) Voting – Generally in proportion to members’ capital contribution.
f. Transferability of Ownership Interests – Most LLC statutes provide that members cannot transfer LLC interests without all other members’ consent.
(i) Standing Consent – Some LLC statutes permit the articles of organization to provide standing consent for new members.
Transfer of financial rights – Many LLC statutes permit transfer of financial rights to creditors, who can obtain charging orders against the members’ interest.
