CORPORATIONS
§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 agreement among the partners and certificate filed with state official. RULPA §201.
? Dissolution – Limited partnership lasts as long as the partners agree or, absent agreement, until a general partner withdraws.
(ii) Nature – 2 kinds of partners
? General – Each liable for all debts of the partnership;
1. Corporate general partner – General partners may be corporations.
? Limited – Not liable for debts of partnership beyond their proportional share of contributions.
1. No mgmt. participation –
(iii) Liability to Outsiders –
? General Partner – Must be at least one ¬ unlimited liability
? Limited Partners – Liable only to the extent of their investment.
1. No participation in control
(iv) Firm Governance –
? Binding firm: General partners have authority to bind the partnership to ordinary matters.
1. Limited partners have voting authority over specified matters, but cannot bind the partnership.
(v) Transferability of Ownership Interests –
? General Partner – Cannot transfer interest unless all remaining partners agree or partnership agreement permits it.
? Limited Partner – Interests freely assignable.
? Both – can assign their rights to profits and distributions.
(3) Limited Liability Company (LLC) – Hybrid entity between corporation and partnership.
a. Partnership aspects – Members of LLC provide capital and manage the business according to their agreement;
(i) Interests are not freely transferable.
b. Corporation aspects – Members not personally liable for the debts of the LLC entity.
c. Life Span – LLC arises with the filing of a certificate or articles of organization with a state official.
(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.
(ii) Transfer of financial rights – Many LLC statutes permit transfer of financial rights to creditors, who can obtain charging orders against the members’ interest.
B. Tax Implications of Organizational Choice
Business Makes Money & Distributes
Business Makes Money & Retains
Business loses Money
Partnership
(1)
(3)
(5)
Corporation (Non-S)
(2)
(4)
(6)
(1) Tax paid once – Partnership acts as tax conduit, and income flows through to partners who pay tax.
a. Partnership files an informational tax return disclosing relevant information.
(2) Double tax –
a. Corporation taxed on income when earned.
b. If dividends are distributed to shareholders ® they pay tax on dividends.
(3) Tax paid once – Partnership’s income flows through to partners who pay tax.
(4) Deferred second tax –
a. Corporation pays tax when it earns income.
b. Tax on shareholders deferred until income is distributed or when shares are sold after appreciation. (Double tax unavoidable).
(5) Sheltered income – Partnership losses flow through to the partners, who can deduct them against other income.
(6) Carry over/back – Corporation can deduct ordinary business losses only against income the business generates.
a. So
Service co.’s – Corporation service companies will prepare articles, bylaws, stock certificates, and organizational minutes, file the proper documents, and act as registered agent in the state of incorporation and in other states where the corporation is qualified to do business.
C. Articles of Incorporation
(1) Name of Corporation – Articles must state corporation’s complete name and include a reference to its corporate statues, e.g. “Corporation,” “Incorporated,” or “Inc.”
a. Different from other names in state – Must be “distinguishable upon the records” (MBCA §4.01), or in some states it must not be “deceptively similar” to another.
(2) Registered office and agent – Articles must state the corporation’s address for service of process and for sending official notices. (MBCA §2.02)
a. Registered agent – Often, the Articles must also name a registered agent at the office on whom process can be served. (MBCA §§ 2.02, 5.01)
b. Changes – Change is registered office must be filed with the Secretary of State.
(3) Capital structure of corporation – Articles must specify the securities the corporation will have authority to issue.
a. Describe classes of authorized shares, no. of shares of each class, and privileges, rights, limitations, etc. associated with each class. (MBCA §6.01)
(4) Purpose and powers of the corporation – The Articles may (but need not) state corporation’s purposes and powers. Modern corporations can engage in any lawful business. (MBCA §§ 3.01, 3.02)
a. Ultra vires doctrine – With decline of this, a “purposes” clause far less important.
(5) Optional provisions – Articles can contain a broad range of other provisions to “customize” the corporation. (MBCA § 2.0(b))
a. Voting provisions – Calling for greater-than-majority approval of certain corporate actions, such as mergers or charter amendments;
b. Membership requirements – Example: Directors must be shareholders, or that shareholders in a professional corporation be members of a profession; or
c. Management provisions– Requiring shareholders approve certain matters normally entrusted to the Board, such as executive compensation.
D. Incorporators
(1) Role – Purely mechanical: sign the articles and arrange for their filing. If the articles do not name directors, the incorporators select them at an organizational meeting.
(2) Fade away – After incorporation, the incorporators fade away and have no more continuing interest in the corporation.
(3) Corporation as incorporator – In some states, the incorporators must be natural persons, but the trend is that a corporation may act as an incorporator. (MBCA §§ 2.01, 1.40(16))
