Business Corporations Outline
I. Business conduct and Operation
A. Means and sources of making money
B. Accounting control info
1. Income Statement
2. Cash Flow statement
3. Balance Sheet
4. Incorporating the statements to value the business.
C. The Major Business Organization Structures
1. Sole Proprietorship
4. Statutory Close Corp [Chapter 18 of Title 33] 5. Limited Liability Partnership
6. Limited Liability Company
D. Prof: Reasons for investing in a Corporation
1. Create value w/o making money- growth firms, IPOs
2. Pooling of resources to accomplish large scale objectives that benefit society.
3. To utilize the work and expertise of another who has a duty in agency to you
4. To influence the conduct of an organization
E. Considerations of the alternative business structures
a. For sole proprietors, all liabilities of the business are directly attached to the proprietor.
b. In partnerships, partners have joint and several liability individually, as well as the p’ship itself. However, partners are usually not personally liable to third parties for liabilities incurred before they became a partner.
c. Corporations- usually only the corporate entity is liable for its torts and creditors. Shareholders, officers and directors are usually exempt from personal liability. Officers are liable to the directors, and directors are liable to the shareholders
a. C Corp v. S Corp- C Corp dividends are taxed twice: once on the profits and once on the dividends. However, the taxation rate of the profits is lower than the rate on dividends. If the investors of a C corp are also employed by the corporation, then they can just pay themselves tax deductible salaries, and pay no dividends.
b. For sole proprietors, the taxation is the personal income tax of the proprietor.
a. Sole proprietorships- absolute personal control
b. Partnerships- partners must act w/in the parameters of their p’ship agreement.
c. Corporations- shareholders cede most control to the directors, who in turn delegate most operational control to officers. Shareholders elect directors, who in turn elect officers. Officers answer to the board, not the shareholders, absent any provision to the contrary in the articles. Many of the director’s decisions are shielded from interference from s/h due to the Business Judgment Rule.
II. Sole Proprietorships
A. Defined. A business owned by an individual person. [and technically, since a corporation is a person at law, it is possible for a corp. to own a business (that is not the corp itself)
B. Pros and Cons
1. Liability- once established, is unlimited to the sole proprietor unless a statute intervenes. A master is responsible for the torts and K binding of a servant (as below) but not for actions of independent contractors. There are however, non-delegable duties (see Rstmt Agency §214)
a. For Ks-[Rstmt of Agency § about the only way a business entity will not be liable for the binding of an employee or agent is if the agent is engaging in a transaction the third party knows or should know the agent has not authority to enter into
b. For Torts [Rstmt of Agency §219]- if foreseeable w/in the nature of the employment/type of work operations, and occurs while employee is conducting himself in the furtherance of the owner’s interests, the business owner shall be liable for the conduct of employees.
c. Non-delegable duties- courts use both a Rstmt of Torts approach and a Rstmt of Agency approach. See p. E- 17 for both.
2. Agency relationship- See Rstmt of Agency [E section of Supplement] a. Attorney- Client
b. Master, Servant, Independent Contractor, Rstmt § 2:
i. Master- a principal who employs an agent to perform service in his affairs who controls or has the right to control the physical conduct of the other in the performance of his service.
ii. Servant- an agent employed by a master whose physical conduct is controlled or subject to control by the master.
iii. Independent contractor – is under contract to perform services for another, but is not under the physical control of the other in the performance of the undertaking. He may or may not be an agent.
c. Authority is the power of the agent to affect the legal relations of the principal by acts done in accordance with the principal’s manifestations of consent to him. [§7]. There are four types of authority:
i. Express Authority- you know.
ii. Implied/ Incidental Authority]- the authority granted to perform a task encompasses a certain action as it is reasonably required to accomplish the task/ objective set forth to the agent
iii. Apparent Authority [§8]- principal’s manifestations to a third party regarding the agent make it apparent that the agent has the right/consent to bind the principal with the third party.
iv. Inherent Authority [§8A]- exists for the protection of harmed by or dealing with a servant or other agent. This is where you go if you have no other theory of authority to remedy the situation. It does not rely on manifestations by principal or agents, etc. but solely on the fact that the p/a rel’ship exists
v. Also, per §267, a person who makes it appear to a third party that another person is their agent may be held responsible for torts of that person to the same degree of an actual agency rel’ship. See the section for details.
d. Franchises – there is no definite statement addressing whether there is a agency relationship per se in franchises, but courts will apply theories of implied and apparent authority as reasonable.
e. BE CAREFUL when you see any problem that deals with an undisclosed principle or a agent who is a manager. There are situations where such principals shall be held to the conduct of their agents- even if directly against their directions!! See § 4, 195, 208, 304, 322, 328, 337
C. Funding Business Growth
1. By Owner- if you have the cash, this is your best option. You have no liability to a creditor for the $, and retain all control, you don’t pay interest (although there may be opportunity cost), and have no legal issues with liability for selling a security.
s a contrary intent appears.
2. No formal documents are required for formation of a p’ship.
3. A lawyer employed by the p’ship is not individually representing the partners. In start- up, each partner should have their own lawyer.
D. Legal issues with operations. UPA ’97 § 103 allows flexibility in how partners may choose to conduct their internal affairs, but lists 10 things that are non-waivable. Although its not the 1914 act, pay attention to
1. Ownership rights. UPA §24-26, pp B-3,4.
2. Decision Making. The right to participate in management per the UPA §24 is an actual property right of a partner. This is a default rule. Absent a contrary provision the UPA grants all partners equal rights in management, and the majority rules in differences arising out of and pertaining to ordinary business (there is no definition of what ordinary business is, but the less regular the event is or the more profound the impact on the partnership, the less likely it will be viewed as ordinary)
1. Of the partnership- all the rules of agency apply as the p’ship as the principal and the partners as agents, unless specifically stated otherwise in the UPA. Also, per §15-5-45 SC Code Ann, p’ship is an entity that may K with third parties to the full extent of an individual. Per the UPA (which has an “aggregate” view of a P’ship, this isn’t really possible.
2. Of the partners- in SC there is joint and several liability for both torts and contracts, to each other and third parties.
a. However, partners are not individually liable for liabilities of the p’ship incurred before they became partners, unless it is an ongoing rental K. However, they also have no claim to profits accrued before they joined either.
b. Meinhard v. Salmon- Cordoza’s immortal words: “ [Partners] owe to one another, while the enterprise continues, the duty of finest loyalty…. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.”
c. NOTE: the SC LLC statute has protections for several liability for certain situations.
F. Funding Business Growth. The pros and cons of the options are substantially the same as above for the sole proprietor, only that the liabilities of the sole proprietor apply to multiple persons- the partners.
1. Existing Owners- capital calls for operations and investment. Capital calls are also used to shore up cash flow deficiencies
2. Outside Lenders- such creditors have first priority to the p’ship assets in the event of dissolution. Most creditors will want to get each partner to individually pledge security for the loan.
3. Additional Owners/Investors
a. Financial issues
b. Legal issues