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

Business Corporations

Burkhard

Fall 2011

Businesses and Lawyers

Primary purpose of owning a business is to make money.

3 ways that this can be done:

· Make money without creating value; just put $ in the bank

· Create value w/o making money; reinvest

· Not exist to make money but to help people

Milton Friedman: as a corporate executive, the manager is the agent of the individuals who own the corporation and his primary responsibility is to the shareholders.

· Doctrine of Social Responsibility—use a company’s resources and engage in activities designed to increase its profits so long as it stay within the rules of the game, which is to say, engages in open and free competition without deception or fraud.

WHAT IS AN AGENT?

· Agent is the fiduciary relationship that arises when one person manifests assent to another person 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. (pg E1 §1.01)

Views of Courts and Legislatures

A.P. Smith Mfg. Co. v. Barlow, SCNJ, 1953

Facts: Corporation is seeking a declaratory judgment against chairman of the board. Board of directors had adopted a resolution that it was in the company’s best interest to give $1,500 to Princeton. Plaintiff says that the certificate of incorporation does not expressly authorize the contribution and under common law principles, the company does not have the implied or incidental power to make it; also, NJ statutes that expressly authorize contribution could not be applied because the company was created before it was enacted. Shareholders are complaining because this would lower their return.

Holding: Court says Yes. A lawful exercise of corporation’s implied and incidental powers under common law principles and it came under the express authority of the new statute, which was applicable to the company. Court said that public policy supports the change and that statute claims that corporate charters are subject to change at the discretion of the legislature. Court is also acknowledging the social and private responsibilities that modern corporations have.

This decision would be supported under the Entity Theory of the Corporation: a corporation is a separate entity/legal person with individual rights and should act in socially responsible ways including contribution but the Principal-Agent Theory of Milton Friedman- would say that corporation is to manage the private property of the shareholders and that agents should not do anything in violation of the employment agreement.

However, A.P. Smith, reviews the corporate structure as a separate entity and people acting for the corporation are agents.

SC Statutes:

33-3-102-pg C12 (General Powers)

· (12)- make donations for public welfare and to charities and (15) allows other payments and donations that will further the company’s interest, which basically is saying political donations are ok,

· Provides that corporation last indefinitely and that corporation has the same powers as an individual to conduct its business.

· Limited by necessary or convenience

33-3-104-pg C14 (Ultra Vires)

· Ultra vires­- means beyond the scope of authority or power granted to a corporation.

· Corporate action may not be challenged on the ground that the corporation lacks or lacked power to act except when a shareholder brings a proceeding to enjoin an act, proceeding by the corporation, or the Attorney General. Damages award if all persons are parties to the suit.

33-8-101-pg C38 (Board of Directors)

o This statute REQUIREs a corporation to have a board of directors and describes the duties that the board of directors has.

o Board of directors has the authority for exercising all corporate powers and managing the corporation’s business and affairs.

33-1-280- pg C5 (Certificate of Existence)

o Different than articles of incorporation but this statute allows for anyone to file with the secretary of state to get a copy of a corporation’s certificate of existence which proves that they exist.

33-2-102- pg C10 (Articles of Incorporation)

· Requirement to forming a corporation. The Articles must be filed with the Secretary of State. The articles must set forth:

o A corporate name that satisfies the requirement of 33-4-101

o The number of shares the corporation is authorized to issue, itemized by class

o Address of Corp’s initial registered office and the name of registered agent.

o Name and address of each incorporator and their signature

o And a certificate, signed by an attorney licensed in SC that all the requirements of this section have been complied with.

· Possibly more important is that the Articles may set forth provisions not inconsistent with the law regarding: managing the business and regulating affairs of the corporation and defining, limiting, and regulating the powers of the corp, board, and shareholders.

33-1-400- pg C6 (Shareholder)

o Shareholder is someone that owns residual value in the equity of a corporation.

How Does the Owner of a Business Make Money from the Business?

Three Ways of making money

· Receive distributions of all or part of the money the business has earned.

· Sell all or part of ownership interest in the business

· Salary/compensation (most important in small businesses)

How much is the company worth, how much has it made, and how does the owner know?

SC STATUTES:

33-16-200- pg C98 (Reports)

· Corporations shall furnish its shareholders annual financial statements.

o Balance Sheet

o Income Statement

o State of Changes in Shareholder’s Equity

o Should be accompanied by statement saying how it was calculated and should be sent to every shareholder with 120 days of the end of the fiscal year

33-16-220- pg C99 (Annual Report)

· Every corporation organized in SC and every corporation qualified to do business in SC shall file an annual report. This report has information about the company and is public record and has information for litigation.

FOR A PARTNERSHIP- 33-41-530- pg A7 (Right to Info)

· Partners shall render on demand true and full information of all thing affecting the partnership to any partner or legal representative of any deceased partner or any partner under a legal disability.

· 33-41-520- pg A7- (records)- says have to keep books in accordance with partnership agreement and all partners must have access to them.

FOR AN LLC- 33-44-408- pg B16 (Member’s Right to Information)

· LLC shall provide access to records if any access to records, operating agreement; no indication of exactly what LLC should maintain. (Practically most business keep the same three financial statements.

Sarbanes Oxley- heighten regulations post Enron that say the president of a company must certify that the information contained on the annual report is correct. It also regulates what accounting firms can do. Want to prevent fraud. Two main types are Off-Balance sheet fraud, which is moving liabilities off of your balance sheet and onto a subsidiary balance sheet. Other common ones are hiding costs, representing financial condition as better than it is, or misappropriating the wealth of the company for private gain.

FINANCIAL STATEMENTS

Income Statement

· Profit before taxes – revenues – costs

o Shows the profits for a corporation over a given period based on data about revenues and costs.

· Formula= Income – Expenses – Depreciated Value of assets- Taxes= Net Income

o Two methods of depreciation straight line and accelerated.

Cash Flow Statement

· This is a measure of how much more or less cash a business has at the end of the year than at the beginning of that year; it is the difference in Profits after taxes plus depreciation minus investment.

Balance Sheet

· A snapshot of the value of a business at a particular time. It shows assets on one side and liabilities on the other side.

· Formula- Assets = Liabilities + Stockholder Equity or Owner’s Equity

o Owner’s equity = assets – liabilities

ROLE OF THE BUSINESS LAWYER

Business lawyers help: make money, get money $ from business, and protect money from the claims of others. The lawyer represents the company not the individuals unless representing them on behalf of the company but their primary role is to protect the company. Cannot represent 4-5 people trying to set up a business would be a conflict of interest.

Legal Structures for Businesses

Five Choices: Sole proprietorship. Partnership (general or limited), limited liability partnership, trusts, corporation, or Limited Liability Company.

Sole Proprietorship

· Single person and for tax/liability purposes, the person and the business are treated as the same person.

· Profits are taxed as personal income.

· Liability of company goes straight to the owner. No need to file with the state.

Corporations

C- Corporation

o Most common legal structure for large businesses.

o Owners/shareholders are protected from personal liability.

o Corp. pays taxes on income and the recipients of distributions pay taxes on them (double taxation)

o Incentive for forming a C-corp is that if you can pay out all of your income as salaries, then company will not show a profit and it will avoid the double taxation problem.

S-Corporation- 33-18-103- pg C100

· This entity is taxed like a partnership but has the liability protection of a corporation.

· Profits are distributed directly to partners, and as such are taxed only as income of the partners.

· IRS places a bunch of restriction on who can be an S-Corp

o Only one class of stock ,must be domestic and wholly owned by US citizens, no more than 80% of revenue can come from non-US sources, No more than 100 stockholders, no more than 25% of revenue from passive sources (rent, interests, royalties), only individuals, estates, and certain trusts can be shareholders (NOT OTHER CORPS.)

Limited Liability Company

· Just like the S-Corp

· Rather than complying with IRS laws, LLCs are governed primarily by state law.

· Offers the liability protection and double taxation protection.

·

rincipal. Unless the Principal later ratifies the act.

o Agent for partial undisclosed or unidentified principal under §6.03 the agent would be a party to the contract and therefore liable for it.

o Agent who purports to act on his own behalf but is in fact acting on behalf of an undisclosed principal, the agent is liable for the contract under RSA §322 as well

Sole Proprietorship and Tort Liability

· Two Important QUESTIONS TO LOOK AT IN THIS SCENARIOUS:

o Master-servant relationship?

o Scope of employment?

· Under the doctrine of respondeat superior, Principal can be liable even though Principal is not personally negligent. IF agent is negligent and injures a Third Party, this doctrine will impose liability on principal, even though principal did nothing wrong.

o This doctrine applies ONLY in master-servant relationships or Employer-employee relationships.

§ A master servant relationship must show that the master has the right to control the details of how the servant/employee does the job, which goes beyond basic control inherent in all agency relationships.

o DISTINGUISH a servant/employee from an Independent Contractor. An independent contractor is hired for a job, but not told how to perform this job. Dividing line is always fact specific.

All employees are agents, but not all agents are employees.

o §7.07(3)- pg. E15- an employee is an agent whose principal controls or has the right to control the manner and means of the agent’s performance of work. The fact that the work is performed FOR FREE does NOT relieve a principal of liability.

· An independent contract may be an agent or non-agent for CONTRACT purposes only. If the IC receives actual authority, he is an agent independent contractor. One example is normally attorneys.

o If an agent independent contractor commits any torts, the principal is NOT LIABLE FOR ANY TORTS, only in CONTRACT.

§ Without actual or apparent authority the Principal would not be liable under either.

· When Finding an Employer-employee relationship look for:

o Extent of control the employer can exercise over details of the work.**

o Whether or not the person employed is in a different kind of business than the master

o Whether the work is generally done with or without supervision

o Skill needed by the employee

o Length of time of employment

o Whether the work is regular business of employer

o Whether principal is in business

o Whether the employer supplies the tools (important in SC)

o Method payment- per time or per job (Imp in SC)

o Express manifestation of creation of employer/employee relationship (SC)

o Whether the principal has the right to fire the employee (SC)

§7.07-E14- An employer is liable for an employer’s torts ONLY if the tort was committed within the scope of employment. In determining if the conduct was in the scope of employment look at:

· §7.07-pg. E8- (2)- an employee acts w/in the scope of employment when performing worked assigned by the employer or engaging in a course of conduct subject to the employer’s control. An employee is not in the scope of employment when it occurs within an independent course of conduct not intended by the employee to serve any purpose to the employer.

o Is it what he was hired to do?

o Did it occur within time and space limits of employment.

o Was work done to serve employer

o How much different was this done from the normal way

o Was the act outside of the enterprise of the master

o Foreseeable that an act would be done.

o IF use of force part of the job, then intentional torts might not be unexpected.

· Coming and Going Doctrine- travel to and from work is not within the travel part of the job.

· Frolic v. Detour- generally depends on how different what the employee was doing from acting in the service of the employer. Detour would hold employer liable but Frolic would not.

· DIFFERENCE BETWEEN 2d and 3d restatement is 2d looks at foreseeability of the act and 3d looks at the intentions of the employee.