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Business Associations/Corporations
University of Oklahoma College of Law
Cleveland, Steven J.

Corporations
Cleveland
Fall 2016
 
2. Types of Organizational Forms
Internal Affairs Doctrine
·         The laws of the state of organization govern any internal disputes
Corporations
·         Formalities to organization, corporate constitution must have specific items/magic words, if doesn’t have these no corporation
·         If you don’t have a corporation lose benefits, i.e. limited liability.
·         DE has a form sheet for forming a corporation.
·         Default rule is that corporations enjoy perpetual existence.
·         Corporate veil exists shields SHH from liability for corp.’s actions
·         Freely transferable
·         Centralized management, Many SHH centralize management w/ few directors/officers
·         Double Taxation, corporate and shareholder levels
General Partnerships
·         No formalities to organization, no perpetual existence, ends when one partner dies
·         Unlimited liability for investors
·         Restricted transferability of ownership interests
·         Decentralized management, each partner equal rights in management of business, serves as an agent and fiduciary
·         Single taxation, shareholder/partner level only
Limited Partnerships
·         LPs act commonly by default rules, parties deviate by agreement
·         Formalities to organization for certification of LP laid out in state law
·         LP has perpetual existence, LP is entity distinct form its partners
·         Unlimited liability for general partner, limited for limited partner
o   LP must have at least 1 general and 1 limited partner
o   General run ops, limited just investors with no control
o   Gonzalez: Liability for limited partner who was sole SHH and director of corporate general partner
o   Frigidaire: No liability for limited partner who was officer of corporate general partner
·         Uniform LP act has no default rules for sharing of profit/loss among partners. Act directly apportions rights to distributions by sharing based on value, as stated in required records
·         Most LPs allocate profit/loss in compliance w/ tax, etc. requirements
·         Freely transferable unless partnership agreement says otherwise
o   General Interests:
§  After initial LP certificate partners can only added with written consent of all partners
§  Transfer of managing partner interest requires consent or vote of LPs and transferee assumes all responsibility
o   Limited Interests:
§  Person becomes limited partner as provided by LP agreement, as result of conversion or merger, or with consent of all partners
·         Centralized management in hands of general partners, may be required to get approval of limited for fundamental changes
o   General Partners:
§  Agent of partnership for actions, partnership bound by moves unless partner didn’t have authority to act
§  Act not kind of carrying ordinary course of partnership activities or kind of activities of the partnership only binding if authorized by all other partners
§  Consent required to amend LP agreement, dispose of all or substantially all of LPs property
§  Fiduciary Duty and Good Faith Duty to LP
§  Cannot freely transfer interest
o   Limited Partners
§  No right to act for or bind the partnership
§  No fiduciary duty to the partnership
§  Good faith duty to the partnership
§  No violation if actions further own interest
§  Generally not freely transfer, differ based on contract
·         Dieckman: Upheld liberty of contract, states investors must be careful to read agreements and understand limitation on their rights
·         Single level taxation
·         In re USACafes: General who knowingly causes entity to commit breach of trust causing loss is personally liable 
Limited Liability Companies
·         Formalities to organization
·         Operating agreement governs relations among members as members and between members and the LLC; the rights and duties of managers; activities of the company and the conduct of those activities; means/conditions for amending the operating agreement
·         LLC has perpetual existence, entity distinct from its members
·         No liability for managers or members solely for being such
·         Pepsi–Cola Bottling: Only protected from liability if sued in capacity as member/manager, are instances that LLC members have liability
·         Racing Investment: Any assumption of personal liability must be in unequivocal terms leaving no doubt that the members intended to forego a principal advantage of LLC entity. Creditor of LLC no recourse personally against members absent assumption language
·         Free transferability for interest, but assignment of managerial powers requires LLC agreement provision or co

on worth of target, with regards to amount of liabilities, making merger/stock acquisition impossible, purchaser can just buy some of target’s assets
ú  Purchaser of assets not liable for seller obligations UNLESS
·         Purchaser express or implied assume liabilities
o   Want to assume liability of trade creditors
·         Transaction is fraud attempt to avoid such liability
·         Transaction constitutes a de facto merger
o   Merger in fact, purchaser acquires all target assets, target dissolves, appears as if 2 businesses become 1, same outcome as statutory merger
·         Transaction amount to buyer as mere continuation of the target
o   Really looking to continuation of SHH interests
o   Crutchfield v. MP Engine (2009)
§  Mere continuation of business to pierce the corporate veil cannot be just continuation of business operations must be continuation of corporate entity. Same SHH, same officers/directors, must be a continuation of the corporate entity to be mere continuation of business.
·         Defective Incorporation
o   Commonly involves failure to properly incorporate, thru lack of some formalities, involved parties incorrectly believe that the corporation was properly organized, but no limited liability
o   De Facto Corporation: Colorable, good faith attempt to incorporate under state statute and had actual user exercise of corporate power, promoter not liable
o   Estoppel Cranson v. IMB (1964)  
§  If creditor believes they were dealing with valid corporation they are estopped from holding officer of defective corporation personally liable
o   Estoppel Revisited AVS v. Morse (1994)
§  UT law and model code eliminate idea of de facto corporation stating that only power to act as corporation comes from laws saying how to create one and is simple and clear how to become de jure corporation so do it that way and UT extinguishes corporation by estoppel.