Capital Structure – how to add value to business
· Debt – fixed payment from business (interest in the business)
· Equity – holders interest in the company
Sole proprietorship – one person biz, no filing, no legal status, everything you own is part of the business b/c biz creditors all deal w/ you as individual – No separation between person and biz they run.
· Don’t want clients to do this!
· Don’t generate lawyers fees
o Protect against “foolish” risks sole proprietorships take.
· If you have a claim on the biz, you have a claim on personal assets of proprietor.
3 Ways – 3-legged stool
· Insurance – Specific Insurance that could come to claims of biz.
o 4 Weaknesses
§ Loss not covered
§ Loss exceeding coverage limits
§ Claim denied
§ Insurer failed
· Indemnification – protect employee by employer taking responsibility
o It obligates the business to pay any liabilities of the employee arising out of his employment. Employee can still be held liable and can be held financially responsible.
· Limited liability – protection (think veil)
Communicate to clients you can add value, they could not add on their own. Show you can protect them.
Move house out of reach of creditors – Go with limited liability
· Partnerships and Sole Proprietorships – don’t offer limited liability
o No intention, just kind of land into it (by not organizing something else)
Contracts – Negotiated Duties
· Trade Creditors – people who provide goods to make widgets. (VOLUNTARY CREDITOR)
o Less sympathy for voluntary creditors who have chance to evaluate the business.
· Creditor – People who have claims on the business.
Torts – Non-Negotiated Duties
· Involuntary Creditor – didn’t get a chance to evaluate prior to taking interest in company. Fell or injured and now is owed by the business.
o Better chance of recoveries b/c didn’t get chance to evaluate risk.
· Gov’t telling what to do
Keep Respondeat Superior in mind! (TORT)
· Client can also be the executive b/c nobody is the corporation… Confusing duty to entity and person who you are working with.
· Personally liable for committing the tort.
· LLC protection works as to the shareholder, not the tortfeasor.
· Clients exposed individually via tort.
Trade Creditor brings Complaint – Debtor makes Motion to Dismiss
· If unable to dismiss, try to settle because goes into discovery and it is super expensive and risky.
· Getting over MTD, settlement goes up!
· Not about outcomes, but litigation risks (likelihood of X)
Limited Liability – can aggregate capital and not risk the house. Can’t get money from people if they are going to be held personally liable. If putting in $10k, then the exposure is $10k.
Owner just owns it! (EQUITY CLAIM)
How like a person!!!!
• It can sue and be sued.
• It can own assets.
• It can enter into contracts and assume debts and other liabilities.
• It can commit torts.
• It can make campaign contributions.
• It even has first amendment rights.
Chancy will get stock certificate.
· Big companies don’t issue, they just handle it in the books.
· Put garage into the “box”
o Real Estate Transactions
Real property may not be valued at actual market value on the balance sheet!!!! NOT WHAT ACCOUNTING IS ABOUT.
· We are worried about looking at the BUSINESS as a GOING CONCERN!
· What does a jump in property value have to do with a widget making biz?
Security – what you own when you have an interest in a business (stock, bond, otherwise an interest in business you are not actually running).
· Heightened commercial laws that apply w/ transactions involving securities
· Public reporting for public companies (admin law)
Issuance of shares/stock – company is giving shares to someone in return for assets put into the box
Financial Accounting – understand and read financial statements
Capital – assets that have been put into the business to run the business. (usually referred to as to the money for long-term).
· 30-day loan doesn’t really “capitalize” the business.
Debt/Bondholders – limited claim in company
· Think about this vs stockholder (stockholder gets residual, bondholder get priority!)
Indenture – contract between someone loaning biz money and the biz.
Leverage – borrowing against assets! More money from money already invested!
Priority – someone is going before someone else! Creditors go first, one being the bank.
2 types of interests: Creditor, Equity
Forms of Organization
· Taco Stand (on exam)
o Why should it be limited liability company (LLC)
§ Indemn, Ins, Lim Liability
§ If Limited Liability, you set up a box, creditor can get whatever is in the box.
· Forms Choice
o Look at
§ Limited liability
§ Simplicity & Cost
· Form Choice
§ Limited liability
· Scratch SP and Partnership b/c unlimited liability
· Rule out LP – Unlimited liability for GP and limited general partnership. (For limited partnership, GP can be limited on the second level. If GP is an LLC or so
etermining when corporate liability attaches to pre-incorporation activities; and
· Liabilities of the corporation to investors for fraudulent promoters’ activities.
o QUICK FIX – incorporate before any org activity takes place
O’Rorke v. Greary
Facts: Contract to build a bridge. Greary (D) representing company signed for yet to be incorporated company.
Issue: Whether or not Greary bound himself or the company to be incorporated for the building of this bridge.
Rule: When a party is acting for a proposed corporation, he cannot, of course, bind it by anything he does at the time but he may:
1. Take on its behalf an offer from the other, which being accepted after the formation for the company, becomes a contract;
2. Make a contract at the time binding himself, with the stipulation or understanding that if a company is formed it will take his place, and that then he will be relieved of responsibility; or
3. Bind himself personally without more, and look to the proposed company, when formed, for indemnity.
Holding: Greary is personally liable to O’Rorke and is not indemnified.
Reasoning: looks like #3. Greary intended to pay the 75% monthly himself. Said incorporated before completion, but doesn’t say incorporated before Oct 1, 1901, the due date. No substitution for responsibility.
Cox & Hazen on Corporations James D. Cox & Thomas Lee Hazen
5 theories on how liability of the corporation on promoter’s contracts can arise:
1. Ratification – Corporation’s acceptance of an act purportedly made on its half by an agent.
2. Adoption – when a corp takes the K rights and obligations for the promoter to make them its own.
a. VS RATIFICATION – used loosely – can be shown by any words/acts of responsible corp officers showing assent/approval. Ratified contract relates back to the date the promoter made it, adopted cebomes binding on the corp on the date of adoption.
3. Acceptance of continuing offer – continuing proposal that the corp may accept when it comes into existence.
4. Formation of a new contract – making of a new contract (adoption)
5. Novation – Substitution and anticipating it.