Nature of the Corporation
Corp
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BOD: oversees Corp, O&D’s, acts on behalf of SH; Manage the corp’s business, formulates policy, appoints and removes O’s, fill vacancies on BOD
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Officers-agents of BOD: day-to-day managerial activities; no automatic right to bind corp
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SH: voting powers; elect & remove BOD; dis/approve fundamental changes, sue derivatively or directly, call special meetings, amend by laws and AIC; c/n give orders to BOD; fill vacancies on BOD
CORPORATIONS, LLC, PARTNERSHIP BASICS
CORPORATION
LLC
PARTNERSHIP
Examples
1. Closely Held Corporations
2. Public Corporations
Examples
1. Lots of companies now; also, Lawyers, Doctors, Medical Firms
2. Increasingly the way to form bus. orgs.
1. Intent to Carry on Business (now d/n matter)
2. Profit Sharing
3. Right to Co-ownership
4. (Results in) Joint and Several Liability
Examples:
1. General Partnerships
2. Limited Partnerships
3. Limited Liability Limited Partnerships
4. Sole Proprietorships
5. Joint Ventures
Liability
· Limited liability for investors
· Exception: Piercing the Corporate Veil
· Limited liability for members: members not liable for obligations of the org b/c it’s a distinct legal entity
· Personal liability exists. Manager not liable for tort merely by performing a general admin duty. Must be some participation in tortuous act
· Piercing the veil: one way creditor could—co-mingling of personal and LLC assets
· Sharp Contrast to above, liable for torts, etc of other partner—jointly and severally liable
· Even passive and silent partners liable
Management
· Centralized
· Ability to pool vast amount of capital
· Members have equal management rights (can agree otherwise in an operating agreement)
· Each partner has equal management authority/rights
Free Transferability of Ownership Interest
· Can get out whenever, the sale of your individual shares d/n reduce the capital of GM one bit, just transferring it to another investor
· Corporation has no veto/blocking right to prevent your share
· Advantage only works in a large-scale corporation
· Ownership interests not freely transferable
· ??
· Partnership: opposite rule, if you attempt to transfer your interest, then dissolution of the original partnership results
· Small family business: head honcho dies, his money is died up in the corporation, remaining members need that money, can’t go to Meryll Lynch and sell the shares, how do the survivors get their money out of the corporation?
Legal Entity
· Separate Entity
· Separate entity
· Not a legal entity
Taxation
C Corp: standard; double tax on corporate income, and SH assets
S Corp: for small business that qualify
· “Pass through” tax: LLC’s income is taxed to the members on pro rata basis in proportion to ownership of each
· Only taxed once; pro rata basis
CORPORATION
LLC
PARTNERSHIP
Authority & Liability
· Corp only acts by and through its agents authorized by its BOD
· Must play by the rules of apparent, actual, express, implied authority
· Default rule??
· Op agreement: can spell out any rights/duties you want it to have—management rights, can limit it to a committee, can est dif classes of membership, etc
· Every partner is an agent of the partnership and can bind such, a partner has a great deal of power, not necessary to have specific and whole partnership collusion
· Every partner is an agent of the partnership and could bind it; great deal of power here
· Even passive and silent partners liable
FD
· BOD owe FD to SH
· BOD d/n owe FD to creditors b/c would trap the BOD into working for both sides; duty BOD owes to BH is only through the face of the K-indenture
· “A ttee is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive, is then the std. of behavior. As to this there has developed a tradition that is unbending and inveterate” –Cardozo in Meinhard v. Salmon.
· LLC members owe each other FD, but a K may define the scope of FD
· A partner is a fiduciary of his partners but not his former partners, for the withdrawal of a partner terminates the partnership as to him—Bane v. Ferguson
· FD in joint ventures last until JV lasts—Meinhard v. Salmon (strong Andrews dissent however, close case)
Duty of Care
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Duty of Loyalty
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· JV: duty of disclosure really
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Self Dealing
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Advantages Disadvantages of Each (applied to Law Student Book Store Problem)
Advantages
Disadvantages
Corporation
Centralized Management
Not every BOD/O&D can bind, takes a SH vote or BOD resolution
Perpetual Duration
Free transferability of shares
Market to get out
Automatic right of corp to buy back shares when SH dies
Only liable for what you contributed
Upon dissolution, no squabbling of who contributed what, just look at funding from bank, shares in corp, everyone paid what they put in)
Centralized Management
Double tax
Perpetual Duration
Automatic right of corp to buy back shares when SH dies
Only liable for what you contributed, unless PCV factors apply!
If you loose confidence in a O/D, you can NOT get out easily; meetings, vote to remove, etc.
Partnership
One time Tax
Auto-dissolution by intent; death
Every partner gets mgmt say, power
At will by nature
If you loose confidence in a partner, you can get out easily (whistleblower cases offer not protection to whistleblower)
No BLR on dissolution of who gets what; absent agreements, personal skills and services may be valued by court upon dissolution.
Every partner binds the corp
Auto-dissolution by intent; death
Every partner gets mgmt say, power
Can’t freely transfer shares
No market to get out easily
No automatic right of corp to buy back shares when
partner dies, partnership just dies too
Liable for all debts of contribution, no security against other partner screw ups
Fragile and Tenuous Business Relationships
If you loose confidence in a partner, you can get out easily (whistleblower cases offer not protection to whistleblower-bad for whistleblower!)
No BLR on dissolution of who gets what; absent agreements, personal skills and services may be valued by court u
s
* UPS driver (agent) is liable for running over innocent bystander; if an individual is negligent, the agent has no right to indemnification from the principal (UPS corporation)
*Unless UPS drivers were told to drive faster, thereby implied authority and encouraging tort
Debtor-Creditor Relationships; Creditor Rights
If a profit sharing element part of Debtor-Creditor relationship, might be found to be a partner—intent not to be partners is irrelevant legally
Right to inspect, veto power, etc, no managerial power; Negative powers over management not affirmative right to control business; (Blurry line!)
Right to demand resignation of any firm member at anytime (fire, not name partners)
Lendor Liability Cases becoming more frequent
Partnership Whistleblowers
Not offered much protection b/c partnerships are at-will by their nature; Partnerships are fragile and tenuous business relationships; any partnership can dissolve his partnership even if it violates the partnership agreement at will (may be liable for damages, but right to leave remains) this ties into the joint and severally liability of the partners, therefore if you loose confidence in one then you should be able to get out; Corporation presumption is opposite; No right to remain in partnership even if in good faith one believes another partner is a wrongdoer because personal confidence & trust within the partnership trumps ethical, public policy argument; Factors matter: Size of firm (5 members) definitely matters –Bohatch v. Butler & Binion
Policy wise: Threat of tort liability would tend to force partners to remain in untenable circumstances –suspicious of and angry w/each other—to their own detriment and that of their clients whose matters are neglected by lawyers distracted w/intra-firm frictions
No right to remain, but proper notice procedures must be given!
Partnership Dissolution
Skill and services are non-cash contributions to the partnership—Schymanski v. Conventz; Personal services of a partner may constitute a capital contribution to the partnership; skill and service pay be entitled to share equally in the profits of the partnership; Contribution by parties to a partnership need not always be in the form of tangible assets or capital
Generally, absent an agreement, a partner contributing only personal services is ordinarily NOT entitled to any share of partnership capital pursuant to dissolution; Personal services may however qualify as capital contributions to a partnership where an express or implied agreement to such effect exists; To be distinguished from non-cash capital contributions to a partnership is compensation or remuneration for a partner’s personal services performed in the course of day-to-day affairs of the partnership
Changing the membership of a partnership automatically dissolves the original partnership regardless of intent
