Business Associations – Burkhard (Fall 2016)
Exam: short answer and multiple choice à last day of class he will ID cases that will appear on exam (4hrs)
NO QUESTIONS ON LIMITED P-SHIP
Most businesses are close corporations (small business)
Set of statutes that govern all corporationsà SC Corporation Statute: all focused on publically traded company BUT most companies are NOT publically traded
Prob: trying to fit rules for publically traded corp into a close corp prob (cause most close corps/not pub. traded)
WHAT DO BUSINESSES and THEIR LAWYERS DO?
Primary Purpose to own a business: to make $$$
3 ways that this can be done:
Make money w/o creating valueà just put $ in the bank (but % earning is nothing)
Create value w/o making moneyà reinvest
Not exist to make money but to help people
à purely for charitable purposes (not discussed)
Milton Friedman – Manager/corporate exec is an agent of the indiv’s who own corp., and his primary responsibility is to them.
Doctrine of Social Responsibility: the only thing a business should do is use funds it earns to pay owners/SHs w/out doing anything illegal à purpose of a business is to maximize SH wealth.
Views of courts and legislatures
SC is a Benefit Corporation State (NOT studing)– adopted statute 33-38-100 allowing corp. to put in corp doc provisions that corp. objectives include furthering community benefits
Restatement 3rd of Agency (E) – SC typically uses 2nd, but conceptually same
§1.01 Define AGENT– the fiduciary relationship that arises when a principal manifests assent to an agent that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.
A.P. Smith Mfg. Co. v. Barlow (New Jersey) Corp. donating to charity
Corps can act to further objectives other than earning $ à religious/charity purposes
Rule: Corps w/ 1+ owners can distribute and use funds in ways opposed by some other owners
Facts: Π BoD of Corp. adopted a resolution that was in co.’s best interest to give $1.5K to Princeton. BoD sued president trying to get NJ Sup. Ct. to say BoD contrib. was alright. Pres/SHs(∆) arguing director was not authorized by the articles of incorporation to make gift
Holding: gift was appropriate
Lawful exercise of corp’s implied and incidental powers under CL principles and express authority of the new NJ statute, which was applicable to the co.
Does NOT matter that corp formed before statute allowing donations
corporate charters are subject to change at the discretion of the legislature
Public policy: acknowledging social and private responsibilities modern corps have
Donation ok because:
Wasnt done to further a personal rather than corp. end (alma mater?)
Donated to preeminent institution of higher learning
Modest in amount
Voluntarily done to aid public welfare and advance the interest of Π as a private corp. and as part of the community in operates in
Entity Theory of Corporations – a corp is a separate entity/legal person w/ indiv. rights and should act in socially responsible ways including contributions; so just like an indiv., if it wants to make a donative contribution, should be allowed to do so. (diff than Friedman above)
Questions and Notes p9
: took required steps to form a business (filed necessary docs w/ right person)
Stockholder = shareholder
Certificate of incorporation = articles of incorporation
Intra viresà things the co. should be doing
Ultra Viresà things the co. should NOT be doing
– General Powers of a Corporation (C12-C13)
Allows companies to do anything a person can do limited only by the requirements that are necessary or convenient to running the company
(13): allows “donations for the public welfare or for charitable, scientific, or educational purposes.”
(15): allows other payments and donations that further co.’s interest (political donations)
Ultra Vires (C14)
Means beyond the scope of authority or power granted to a corporation (note w/out authority you needed) – Cannot challenge the acts of a corp on grounds it doesn’t have powers to act.
(b) A corporation’s power to act may be challenged only if: in a proceeding by a SH to enjoin the act, in a proceeding by the corporation (directly or derivatively against an incumbent, former director, officer, etc.), or in a proceeding by the Attorney General.
Someone that owns the residual value in the equity of the corporation.
Board of Directors (Requirements/Duties) (C38)
Corp is required to have a BoD
Has authority for exercising all corp. powers and managing corp.’s business and affairs.
Board will manage the company (true for large corporations, but not small ones)
Most peoplesay that the Board acts as a principal and not the agent and therefore makes the decisions (book says the board is agent for SHs)
Certificate of Existence and Articles of Incorporation –docs issued by a state authority granting a corp its legal existence and right to function as a corp – normally filed w/ the Sec. of State.
Certificate of Existence (C5) – says corp is in good standing. But, also check w/ Dept of Revenue tooà most probs business has will NOT be w/ Sec. of State.
Articles of Incorporation (C10) – lists what you have to do to set up a corp. Filed by a lawyer/business owner w/ the Sec. of State.
provides General Powers of a Corporation (C12):
Req. to forming a corp. Must be filed w/ Secretary of State. Articles must set forth:
A corporate name that satisfies the requirement of 33-4-101
The number of shares the corp. is authorized to issue, itemized by class
Address of Corp’s initial registered office and the name of registered agent.
Name and address of each incorporator and their signature
Certificate, signed by licensed SC attorney that all reqs of this § complied w/
Articles may set forth provisions not inconsistent w/ law regarding: managing and regulating affairs of the corp. and defining, limiting, and regulating powers of BoD and SHs
What can a SH do if he doesn’t like what the company does? à sell the stock.
General Building Block Concepts:
Law views a business/corp. as a separate entity, separate legal person (Burnwell v. Hobby Lobby)
Real persons act for the corporation – as agents.
A Corp. w/ more than one owner can distribute and use its funds in ways that are opposed by at least some of its owners.
Each corp. is incorporated under a specific state statute –
Owner’s make money from business in 3 general ways:
By receiving distributions/dividends of all or part of the $ business has earned
By selling all/part of ownership interest in the business for more than paid for it (sell stock)
Receiving a salary (if you’re working for the business – common in SC)
How does owner know how much $ business has made and how much it’s worth?à financial statements
Financial Statements for Shareholders (C98). A corp. must keep certain financial documents for SHs (balance sheet, income statement, statement of changes in SHs’ equity.) (owners/CPA preparing these not you)
Should be accompanied by statement saying how it was calculated and should be sent to every SH w/in 120 days of the end of the fiscal year
) – If an accountant reports financial statements, his report must accompany them; if not, president’s records must be provided. (c): reports must be mailed to the SHs.
– Annual Report – must file Title 12 report.
P-ship Books (A7)
Partners shall render on demand true and full info of all things affecting the p-ship to any partner or legal rep. of any deceased partner or any partner under a legal disability.
Records(A7) – Must simply keep books in accordance w/ p-ship agrmnt and all partners must have access to them. Not much guidance, more like LLC statute than Corp’s
LLC Records (
limited liability for the business
you would make a corporation a general partner so individuals are protected
Limited partners: investors, liable only for their capital contributions to bus. like SHs
Examples: Hedge fund, SC: Used in Estate Planning (other juris. would set up LLC)
Only owners pay taxes; not the business itself.
Limited Liability limited P-ship (LLLP)
Two types for IRS (Tax Purposes)
Most common for large businesses– EVERY publically traded co. is C-Corp.
: major advantage: owners and SHs protected from personal liability
Double Tax: Corp. must pay taxes on earnings realized by the corp and again when paid out to SHs
Incentive – if pay all $ out as salaries àavoid double taxation
S-Corp and Not for profit Corps –
like a p-ship (S Corp not taxed as a separate entity) àProfits are distributed directly to partnersà taxed only as income of the partners
protection of a corp.
Must FILE with IRS and meet the RESTRICTIVE CONDITIONS of IRS – nonprofits usually qualify.
Only one class of stock, must be domestic, cannot have any nonresident alien SHs, no more than 80% of revenue from non-US sources, no more than 100 stockholders, no more than 25% of revenue from passive sources, only individuals, estates, certain trusts may be SHs.
Accountants: will try to say you can avoid Social Security taxes by doing thisà NOT sound argumentà SS tax only payable for compensation, in S corp take $ out as dividend NOT compensation (BUT THIS WILL NOT PREVENT YOU FROM HAVING TO PAY SS TAX)
SC adopted LLCs to avoid problems of S corp.
Five types in SC:
Statutory close corporation
Quasi close corporation
Professional Corporation/Association (P.A. or P.C.)à medicine, dentistry law
structured like C-Corp
Non-profit corps – operate for public benefit and don’t have to pay taxes Superior
Owners want to limit their liability
free transferability of interests is important
centralized mgmt is important
continuity of existence in the face of w/drawal or deal of an owner is important
Limited Liability Company (LLC)
: like S corpà Owners protected from liability
: (no double tax) not tax-paying entity – owners only taxed when they get income
à don’t need attorney to create LLC; don’t have to file annual report.
Uncommon in SE region
Certain businesses automatically formed as a trust: real-estate investment trust
How do you choose?
Tax and liability are biggest issues
Who will investors and owners be?
If investors/owners are a small groupà LLC best option
If co wants to attract professional investorsà corporation
What are the capital requirements and cash flow characteristics
If business will take large short-term losses or large short-term gains, LLC better
If business will need capital (from selling stock) over long term, corporation
Questions to ask: pg 30
Who will own business?
Who will manage it?
Who will reap profit?
Who will bear risk of loss?
Who will pay taxes on profits?
Article on westlaw: Tax considerations in choice of entity decisions (AU: Mcnulty and Kwon)