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Business Associations/Corporations
University of South Carolina School of Law
Barrett, John Q.

Corporations – Burkhard
 
I.              Introduction
A.     Choice of Form
1.      Corporation
a.       Types: Regular, Quasi-Close, Close
b.      Taxation: S. Corp. (“pass through” to owners) or C. Corp. (tax-paying entity).
1)      Partnerships are taxed as “pass through entities.”
2)      “Check the box” allows the owner to decide how to be taxed – L.L.P. & L.P.
3)      “S” Corp. – < 75 shareholders, all nonresident aliens, all natural persons, only one class of stock 2.      Limited Liability a.       Corporation – risk only the value of investment b.      Partnership – all partners liable c.       P.A. (Professional Association) – one person and business assets liable 3.      Centralized Management – corporation 4.      Transferability – can sell interest in corporation w/o dissolution, unlike partnership ·        The corporation exists as a person/ legal entity – own property, file lawsuits, enter into partnerships, etc. 5.      Through proper drafting, these benefits can be obtained in another form of business   B.     Agency Concepts – R2d Agency (constantly cited by S.C. courts) 1.      Formation of an Agency relationship a.       Elements 1)      Consent that another act on his behalf and subject to his control 2)      Acting on behalf of another 3)      Consent by the other party to act on his behalf b.      A veto power over acts of a debtor does not make him a principal – Cargill c.       Court focuses on the purpose of the relationship – Cargill ·        Traditional financing does not create an agency relationship ·        A relationship to ensure a supply of a product does – Cargill 2.      Authorization – (Principal is bound only by authorized acts of the Agent) a.       Actual Authority b.      Implied/ Incidental Authority – responsibilities implied by a position ·        What you reasonably think your job is ·        Focus on communication between agent & principal c.       Apparent Authority ·        Question of fact – Lee, R&G Construction (S.C.) ·        Has principal done something to lead 3rd party to believe agent had authority? ·        Focus on communication between principal & 3rd party ·        Must have reliance – may not rely if you know authority is lacking - Chase 3.      Liability for tort – must be principal-agent & master-servant   a.       Agency + right to control 1)      Principal has control over or right to control physical conduct & performance 2)      No control over an independent contractor b.      Factors in determining existence of master-servant: 1)      South Carolina ·        Direct evidence of right to or exercise of control ·        Method of payment ·        Furnishing of Equipment ·        Right to Fire 2)      R2d §219 – Within scope of employment a)      Time & space limits, purpose to serve master, use of force which was not unexpected by master b)      Outside scope also if intended conduct, principal was negligent, non-delegable duty, or purporting to act as master and reliance thereon accomplished a tort. 4.      Liability for physical harm a.       R2d Agency § 267 – represents someone as agent, justifiable reliance = liability b.      R2d of Torts §429 – reasonably believe person a person is an employer, subject to liability for physical harm.     II.           Partnership & L.L.C. Concepts A.     Partnership 1.      Formation of a Partnership a.       Elements – § 33-41-210 1)      Co-ownership – mutual right of control 2)      Business for profit 3)      Intent – (intent to co-own a business for profit, not intent to form a partnership) b.      Non-factors 1)      Need not have an agreement nor a writing 2)      Documents do not control, even if they say it is not a partnership – Martin 3)      Joint tenancy of real estate alone is not enough 4)      Sharing gross returns by itself is not enough c.       Receipt of a share of profits is prima facie evidence of partnership ·        This presumption may be rebutted d.      The rights of partners may be limited by agreement, but the rights of 3rd parties may not be altered e.       A purchaser of partnership rights is assignee, w/o the rights of a partner (the limited rights may show there is actually no partnership) f.        Partnership by estoppel – if you hold someone out as a partner, and a 3rd party relies, the partnership will be liable in contract (not tort) 2.      Partnership Duties a.       Partners owe one another fiduciary duties for actions related to partnership - § 33-41-540 1)      Duty of Loyalty – not honesty alone, but “the punctilio of an honor most sensitive;” the selfish interest may overstep this one. 2)      Duty to disclose things affecting partnership on demand - § 33-41-530 ·        Duty of disclosure also addressed in Meinhard – taking an opportunity offered to the partnership. b.      Limitations on duties owed 1)      No duty to remain partners/ no duty not to expel a partner – Bohatch 2)      The fiduciary duty does not apply to former partners – Bane 3)      No obligation to keep a business going – Bane [Business judgment rule] c.       Where one partner is liable on a mortgage, the others may owe him a fiduciary duty to protect the personally liable partner, despite the business judgment rule - Kuznik ·        Ultravirus – this agreement is not authorized by the agreement. 3.      Rights of Partners a.       Partners own specific property, right to manage, & partnership interest – 710 1)      Specific property owned as tenant in partnership: not assignable unless all partners are assigning 2)      Interest in partnership is share in profits, surplus, and is personal property b.      Subject to partnership agreement, these rules apply – 510 1)      Each partner gets repaid contributions, and shares profits and losses equally 2)      Equal rights in management 3)      Unanimous consent to become a partner 4)      Majority vote for ordinary matters; Unanimous if in contravention of agreement. c.       Absent some agreement, a partner gets no capital account credit for services.   4.      Ownership of Property by Partnership a.       Name on title is irrelevant b.      Partnership includes all property brought into partnership, or purchased with partnership funds. – § 230 c.       In order to sell real property: if in partnership name, any partner may convey title. If the partner was not authorized, the partnership may hold him liable. 5.      Liability a.       Contract – every partner liable unless 3rd party knows the partner has no authority – § 310(1) b.      Tort – If authorized and in the ordinary course, all partners are liable. - § 350 c.       Breach of trust (misapplies money or property) – all partners are liable - §360 6.      Dissolution a.       Dissolution occurs when any partner ceases to be associated w/ the partnership b.      Upon dissolution, the obligations to the former entity end. c.       Partnership continues until the winding up. d.      Causes – §930 1)      Rightful (not in contravention of agreement) – by express will of a partner 2)      Wrongful Dissolution 3)      Death of a partner 4)      Bankruptcy of a partner 5)      Court-ordered (§940) – insanity, disability, problems 6)      Partner retiring; new partner admitted – Fairway Development e.       What a partner gets upon dissolution 1)      Rightful dissolution a)      Value of assets at winding up, share of profits until winding up is completed b)      If you retire/die and business continues, you get whatever value your capital has contributed to the partnership until winding up – if the partnership consents to § 1080. c)      Estate may become a new partner or limited partner, if agreement allows. 2)      Wrongful dissolution a)      Remaining partners have rights under §1030, and a claim for damages b)      Partnership may continue, but they must pay other partner or bond property c)      Exiting partner gets value of his interest minus damages, but good will value of the business is not considered. f.        Liability of partners after dissolution 1)      Departing partner – a)      Contracts – i)         Existing liability remains, but may be discharged by agreement from creditors of partnership; may be discharged if creditor knows and assents to the alteration ii)       Acts appropriate in winding up – liable iii)     Continuing transactions – liable iv)     Other transactions – only if credit extended before dissolution or creditor knew of partnership and no advertisement that it was dissolved, unless creditor did not know he was a partner or reputation of business had nothing to do with his connection therewith.   b)      Torts – liable until winding up is complete (malpractice) 2)      New partner – liable for existing obligations, but they can only be satisfied out of partnership property. g.       Debts of partnership 1)      Paid in this order: creditors, partners/creditors, capital contributions of partners, profits. 2)      Losses are paid in the same proportion as profits (equally) 3)      This could leave the smallest investor owing the largest investor money.   B.     L.L.P. 1.      Liability a.       Tort – Only liable if you participate in wrongdoing, or negligent supervision b.      Contract – personal liability (malpractice may be brought as breach of contract) 2.      Becoming an L.L.P. a.       File w/ secretary of state (name, # of partners, address, signed, fees) YEARLY b.      No need to amend the filings c.       Name must include “L.L.P.” or “Limited Liability Partnership” d.      Must have $100K of insurance above the deductible e.       Foreign L.L.P.’s – must register, else a civil fine (not liability of a gen. part.) f.        The mechanics of applying for an L.L.P. are in § 1160. C.     L.L.C. 1.      Changing the Statutory provisions by agreement a.       May change portions dealing with each other – rights of owners, manage

Information of L.L.C., + shares (description of each class)
3)      Optional provisions
4)      Signature of incorporator (paralegal), and attorney (need one, unlike L.L.C.)
b.      File Initial Annual Report
·        Subsequent filings are with Dept. of Revenue
c.       Minutes to form corporation – do not need an actual meeting
d.      Minutes of organizational Meeting
1)      Issuance of shares, opening of bank account
2)      Adoption of a seal, appointment of officers
3)      Method of accounting, tax choices, etc.
4.      S.C. follows the Revised Model Business Corporation Act – Title 33
 
B.     Defective Incorporation
1.      Securities issues – Attorney is liable for failing to properly handle these – Wartzman
2.      Promotor liability –
a.       Promoters of a corporation have a fiduciary duty to the other promoters.
b.      Personally liable to 3rd parties for pre-incorporation action, unless 3rd party agrees to look only to the future corporation for payment or releases promotor
c.       Burden of proof is on the promotor
3.      Personal liability for acting before incorporation
a.       If a person believes in good faith that the articles have been filed, he is not liable
b.      The good faith requirement probable adds constructive knowledge
c.       Person who acted has the burden of proof
4.      What about post-dissolution action?
a.       Secretary of State may dissolve corporation for failure to file report
b.      Actors may be personally liable here, as well
5.      Limiting Liability of Actors
a.       De Facto Corporation – Attempted to create a corporation, but failed
·        Ended by S.C. Statute
b.      Corporation by Estoppel – One who has recognized a corporation in dealings may not later quibble. – Is this abolished???
6.      Liability of Corporation for pre-incorporation action
a.       Adoption – shown by acceptance of benefits w/ knowledge of terms or express adoption – Ill. Controls
b.      Promotors remain personally liable as well
7.      Personal Liability where you sign documents in your personal capacity
 
C.     Piercing the Corporate Veil
1.      Common law principles
a.       Seperated into voluntary dealings and involuntary dealings (basically, tort & contract)
b.      May be different standards for the two, although it is not clear
c.       May focus more on social policy on the involuntary (tort) side – Walkovszky (cab cos.)
d.      Piercing to get to Corporation/owner, reverse piercing to get into other subsidiaries.
2.      Equitable action
a.       Burden is on person who wants to pierce
b.      De novo review
3.      Test
a.       Lack of observance of corporate formalities – Sturkie (S.C.) – eight factors
1)      Intermingling of funds, treating assets together, under-capitalization, inadequate records
2)      Sturkie adds – paid no dividends, lacked corporate records
3)      Problem – parent always exercising control over subsidiary
b.      Element of Injustice or Unfairness if corporate form is kept
1)      D acted in a self-serving manner w/ regard to company property, disregarding the P’s claim – Stukie
2)      Do not need to prove actual fraud (something less)
3)      Some “wrong” beyond simple inability to pay
4)      May be satisfied by the tort in involuntary dealings – In re Silicone Implants
c.       (Sometimes in Contract Cases) – lack of diligence by creditor – Kinney Shoes
1)      Not mandatory; countervailing reasons may cause it not to apply
2)      Not only failing to meet formalities, but doing nothing (pure dummy corp.) can be a reason it does not apply – Kinney Shoes
4.      CERCLA liability of parent
a.       Only liable if an operator
b.      Control over facility, joint venture into facility, agency (operator is an agent of parent, not subsidiary)
5.      Controlling persons – not always liable under Unfair Trade Practices (Toal disagrees)
·        Liable if participate in, authorize, or direct activity