Corporations Outline
Bullard
Spring 2016
Business Associations
Agency and Partnerships
Corporations – Formation and Finances
Limited Liability and Ultra Vires
Board of Directors
Corporate Democracy
Derivative Actions and Indemnification
Duty of Care
Duty of Loyalty
Duties of Controlling Shareholders
Closely Held Corporations
SEC Regulation
Business Associations we talked about this first
Sole Proprietorship You NEVER want to form this entity.
Advantages
Direct control
Simplicity
Lower expenses
No double taxation
Disadvantages
Unlimited liability
Dependent on the management of the owner (death business lost)
Not easily transferred
Not a legal entity with the state
Partnership Also NEVER want this
Advantages
No separation of ownership and control (agreement)
Flexible and simple
Lower expenses
No double taxation
Disadvantages
Unlimited liability. One partner liable for the actions of the other
Partner cannot sell his interest; if a partner dies then the partnership is dissolved
Limited Partnership – general partner + one or more limited partners
Advantages
Limited liability (not for general partner)
Separation of ownership and control
Lower expenses
Disadvantages
Unlimited liability (for general partner)
Transferability
Limited Liability Company (LLC)
Advantages
Limited liability
Separation of ownership and control
Lower expenses
No double taxation (no federal corporation tax) (only individual taxes, which must be paid whether the income is distributed or not)
Disadvantages
Transferability restricted by agreement and laws
Interview questions when forming an LLC
Percentage interests
Exit strategy
Decision making
Legal duties and indemnification
Capital contributions
distributions
financing
Limited Liability Partnership (LLP)
Advantages
Limited liability against partner
Lower expenses
No double taxation
Disadvantages
Not easily transferred
Not protected from all liability. Only partial shield.
Corporations(C-corporation)
Advantages
Limited liability
Separation of management and control
Interest easily transferred (securities)
Perpetual life
Don’t have to worry about ghost income (income that’s taxed even with no distribution)
Disadvantages
Double taxation – profits and dividends taxed (not in S-corp.)
Management – may manage for their own interests (e.g. higher salaries and perquisites)
Expensive reporting and registration
S-Corporation
Advantages
Pass through taxation: does not pay federal taxes at the corporate level
Protected assets
Straight forward transfer of ownership
Disadvantages
Less than 100 (real people only) investors
Only one class of stock
Lack of flexibility: Because of the one-class-of-stock restriction, an S corporation cannot easily allocate losses or income to specific shareholders. Allocation of income and loss is governed by stock ownership, unlike a partnership or LLC where the allocation can be set in the operating agreement.
Why would a firm choose double taxation?
To get benefits of corporate form
To exploit differences in tax rates
To eliminate taxes on ghost income
Form of organization this will be on the test. Know how to explain each one
Key factors:
Limited liability
Tax
Simplicity and cost
Flexibility
Default rules
Agency and Partnerships we talked about this third
Agency Definition
Fiduciary relation which results from the manifestation of consent by one person [the principal] to another [the agent] where the agent will act on the principal’s behalf and will be subject to the principal’s control and consent by the agent
3 Elements of Agency Relationship:
Consent to act on principal’s behalf (implied or expres
ere not
Can exist in the absence of actual authority where the principal gives a third party reason to believe that actual authority exists (RPP standard?)
Apparent authority alone is sufficient to support a finding that a person is acting as a principal
Policy
Allows third parties to rely on “reasonable perceptions of agency” w/out having to investigate the validity of the agency before every transaction
Butler v. McDonald’s
Facts: a child cut his hand when a glass door shattered at a McDonald’s leased under a franchise agreement. The parents sued McDonald’s claiming that the franchisee 1) held himself out as McDonald’s agent and 2) P believed and relied on this.
Apparent authority applies when:(factors)
The franchisor’s “image of uniformity” led a reasonable person to think that he or his employees were employees or agents of the principal (McDonald’s)
P actually believe employees were agents
P relied to his detriment on agents’ care and skill
Inadvertent Partnership
Martin v. Peyton – lenders have terms as part of the loan to protect their investment. Terms included, having veto power, lenders appointed trustees, Not considered control, just protecting themselves. The trustees were in charge only of transactions affecting their collateral.
Are the terms such as may be properly inserted to protect the lenders? Or do they go further?
A partnership is not formed unless two or more parties are closely associated so as to be co-owners carrying on a business for profit.
we talked about this second
Exam Tip
Bullard combines pre-incorporation; defective or de facto corporation; and piercing the corporation into one factual scenario
