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Business Associations/Corporations
University of South Carolina School of Law
Burkhard, James R.

Business Corporations Outline
Professor Burkhard
Spring 2005

BUSINESSES

I. OWNERSHIP OF A BUSINESS OR INTEREST IN A BUSINESS
a. Epstein-Freer View
i. People own business or an interest in business to make money
ii. Purpose of Business: Create value for the owners
1. Make money without creating value: Earning a pecuniary profit without earning an economic profit (ex. Make the same amount as you would in a saving account)
b. Create value without making money: Some businesses require lots
c. Traditional View: Manager is the agent of the individuals who own the corporation and his primary responsibility it to them
i. Earn as much money without breaking rules of society
d. A.P. Smith Manufacturing Co. v. Barlow (1953)
i. Is the decision by the board of directors to give a donation to charity a violation of the board’s duty to the company? No, corporations have legal authority to make charitable contributions
ii. Intra vires: An action taken within a person’s or corporation’s scope of authority
iii. Ultra vires: Outside of the scope of authority
1. SC 33-3-104 (C21)
iv. Political Contributions: Generally, can be given, but subject to a cap
v. Corporation is a separate legal person
1. Real persons act as agents for the corporation
II. MAKING MONEY FROM THE BUSINESS
a. Distributions from the business’s earnings
b. Sell interest in business
III. WORTH OF THE BUSINESS
a. General Rule: Businesses must keep appropriate accounting records and make them available to the owners of the business (GAAP)
i. Matching: Costs or expenses should be booked in the same time period as the revenues those expenditures helped generate
ii. Conservatism: Data should be accurate, but err on the side of understating revenues and assets, and overestimating costs and liabilities
b. Income Statement
i. Computes profit during a given period based on revenues and costs
c. Cash Flow Statement
i. Measures the cash made available to a business from its operations during a given period
ii. Will differ from the income statement because of investment and depreciation
1. Cash Flow = Profit after Tax + Depreciation – Investment
2. Cash Flow = Profits from income statement + depreciation +/- net change in balance sheet asset accounts other than cash +/- net change in liabilities
d. Balance Sheet
i. Snapshot at a particular point in time (as opposed to the other statements which go over a period)
ii. 3 Main Sections
1. Assets
a. Equipment’s depreciation comes from this section
2. Liabilities
3. Owners’ Equity = Assets – Liability
a. Profits accrue to equity
iii. Insolvency: Liabilities exceed assets à Owner’s equity is negative
iv. Increase in a balance sheet asset other than cash à Decrease in cash flow
v. Increase in a balance sheet liability can lead to an increase in the cash account on the balance sheet and an increase in cash flow
e. Financial Statements and the Business’s Value
IV. LEGAL STRUCTURES FOR BUSINESSES
a. Available Structures
i. Sole Proprietorship
ii. Partnership
1. General Partnership
2. Limited Partnership à GA statute more desirable than SC
3. Limited Liability Partnership
iii. Corporation in SC
1. Regular Corporation à 33-8-101(C44)
2. Statutory Close Corporation à 33-18-101 (C94)
3. Quasi-Close à 33-8-101
iv. Start Up
1. 1st: Decide what type of corp for management structure
2. 2nd: Decide S or C for federal tax purposes
v. Limited Liability Company (LLC)
b. Differences
i. Tax treatment of the business’s profits
ii. Liability exposure of the owners for the business’s liabilities
c. Sole Proprietorship
i. Individual and the business are one and the same for tax and legal liability purposes
d. C Corporation
i. Corporation’s owners are generally protected from personal liability
ii. Corporation is a tax-paying entity
1. Pays taxes on its income
iii. Taxes on dividends
1. First paid by corporation as part of income
2. Then paid by the owners when they receive the dividend
e. Partnership
i. 2 or more owners
ii. Treated like a proprietorship for tax and liability purposes
iii. Earnings are distributed according to the partnership agreement
iv. Taxes are paid at the personal level according to the partner’s share of income
v. Each partner is jointly and severally liable
f. Limited Partnership
i. Partnership with both general and limited partners
1. General Partner: Assumes management responsibility and unlimited liability for the business
2. Limited Partner: No voice in management and is legally liable only for the amount of capital contribution + any other debt specifically accetped
ii. Tax Purposes: Like a partnership (sole proprietorship)
g. S Corporation (In SC may be motivated to go to LLC)
i. Tax Purposes: Partnership
ii. Liability: Protection of a corporation
iii. IRS Conditions
1. Only 1 class of stock
2. Domestic corporation, owned wholly by US citizens and derive no more than 80% of its revenues from non-US sources
3. 100 or fewer stockholders (family members count as 1 shareholder)
4. Derive no more than 25% of revenues from passive sources (interest, dividends, rents, and royalties)
5. No corporations or partnerships as shareholders
iv. Election requires the unanimous, timely consent of all shareholders
h. LLC (SC statute)
i. Liability: Owners are not individually liable
ii. Tax: Paid by owners when part of the company’s earnings are distributed to them
iii. Must comply with state statute
i. Deciding
i. Who will own the business?
ii. Who will manage it?
iii. Who will reap any profit?
iv. Who will bear the risk of any loss?
v. Who will pay income tax on any business profit?

SOLE PROPRIETORSHIPS

I. GENERALLY
a. Business structure without a legal structure
b. Business and its owner are the same actual and legal person
II. AGENCY
a. Restatement of Agency à E1
b. Types of Authority à 26 and 27 (E5)
c. Causes of Actions by 3rd Parties
i. Respondeat Superior (219-20 (E19))
1. All agents are not servants (ex. Independent contractor, person running errand gratuitously)
2. All servants are agents
ii. 140 (E9)
III. AGENCY PROBLEMS
a. Employees à Agency Relationship
i. Relation between the owner and employee is a matter of contract law
ii. 3rd Parties à Agency Law
1. Restatement of Agency
2. Based on conduct, not words used
3. Fiduciary Relation: Agent owes duties to the principal in discharging the act
4. Must be manifestation of consent by the principal to the agent that the agent shall act on the principal’s behalf and subject to the principal’s control
5. Must be consent by the agent to act
6. 3rd Party Issues
a. Do agent’s acts bind the principal to the 3rd party?
i. Yes, if agent had authority to bind the principal
ii. Actual Express Authority
1. Created by express manifestations from P to A
a. Can be direct or indirect
iii. Actual Implied Authority
1. A has the authority to do what is reasonably nece

Legal Problems
i. Ownership
1. Partnership property is owned by the partnership as an entity, not by the individual partners
ii. Decisionmaking
1. Disputes between partnership and outside 3rd party
a. Partnership statute, then CL agency principles
2. Disputes among partners
a. Partnership agreements, the partnership statute, then CL agency principles
3. Meinhard v. Salmon (1928)
a. What things a partner has the right to do
b. What are the right things for a partner to do
i. Duty of disclosure to other partner
c. Many things that are okay for those acting at arm’s length are forbidden to those bound by fiduciary ties
i. Trustee is held to something stricter than the morals of the market place
ii. Not honesty alone, but the punctilio of an honor the most sensitive is the standard of behaviour
4. Rule: One partner may not appropriate to his own use a renewal of a lease, though its term is to begin at the expiration of the partnership
5. Important Factor: Subject-matter of the new lease was an extension and enlargement of the subject-matter of the old one
iii. Mandatory Fiduciary Duties
1. RUPA 404
2. UPA 21 and 22
iv. Liability
1. Liability of the Partnership
a. Partnership is a legal person: Can sue or be sued
b. UPA 13 and 14 (B1)
2. Liability of the Partners
a. In SC: Partners are jointly and severally liable in contract and in tort
b. Plaintiff can sue one or more partners
3. Enforcing Judgement (Statutes at end)
a. 15-5-45: Can collect against partners if partnership is sued
b. 15-35-170: Can go for judgment against a co-partner of an unincorporated business (aimed at unions)
c. SC: Join partners as such + individually by name
IV. GROWTH OF PARTNERSHIP
a. Existing Owners
i. Capital contribution: Further investments in the partnership
ii. Partners agree on capital contributions, no statutory requirement
iii. Considerations
1. Vote or events that trigger the obligation to contribute
2. Amount of each partner’s contribution obligation
3. Time in which to make the additional contribution
4. Consequences of a failure to contribute
iv. Partners can make loans to the partnership
b. Outside Lenders
i. Will often request guarantees from individual partners
c. Additional Owners (Investors)
i. Selling a part ownership interest in the business
ii. Financial Issues
1. Return on Equity = Cash flow / Investment
2. Leverage: Use of debt to finance a business à more debt leads to riskier short- and long-term return on equity
iii. Legal Issues
1. All existing partners approve any new partner, unless the partnership agreement provides otherwise (UPA 18 & RUPA 103)
2. New partner is not personally liable for partnership obligations incurred before the person’s admission as a partner (RUPA 306(b))
d. &nbs