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

 
Burkhard – Fall 2014 – Business Corporations
 
 
Chapter 1 – What Do Businesses Do & What Do Lawyers for Businesses Do?
I.         Types of Corporations:
a.       Close Corporation
                                                              i.      Typically have very few owners
                                                            ii.      Stock is not publicly traded
b.      Public Corporation
                                                              i.      Publically traded
c.       Every corporation is governed by the corporations statutes
                                                              i.      SC has a version of the Model Act
1.      SC has a special chapter that addresses close corporations, but for the chapter to apply, the lawyer for the corporation has to opt in when the close corporation is formed
                                                            ii.      SC is a benefit corporation state
II.        Why does someone own a business or an interest in a business?
a.       Authors Epstein and Freer say to “make money”
                                                              i.      Authors Roberts and Sheppard say to “make money without creating value”, but you can also put money in the bank without risk and make money
1.      Ex: purchase business for $100,000, profit of $5,000/year – making money, but no real value created
2.      Could’ve put money in bank and earned same 5% interest without a risk
                                                            ii.      Create value without making money
1.      Ex: Microsoft took a long time to start making money, but still doing very well
2.      Purchasers’ willingness to pay higher price signifies value created
b.      To help people– non-profit organizations
                                                              i.      Friedman: corporations have no business utilizing the money they earn in social in charitable projects
c.       Doctrine of social responsibility – fundamentally subversive doctrine in free society
                                                              i.      Only responsibility is to use resources and engage in activities designed to increase its profits so long as it stays w/in the rules of the game à free and open competition without deception or fraud
d.      Friedman Quote: “In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be able to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom. The key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation and his primary responsibility is to them. There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
e.       Acting as a principal v. acting as an agent
                                                              i.      Agent owes fiduciary duty to principal – acting on behalf of principal
                                                            ii.      Pg. E1: Agency in the Restatement
f.       3 views of Courts and Legislatures
                                                              i.      A.P. Smith Mfg. Co. v. Barlow
1.      Defendant corporation made a donation to Princeton. Shareholders sued arguing that he was not authorized by the articles of incorporation to be able to make this gift.
2.      Held: Corp shouldn’t have been blocked re: donation. In modern times (where wealth has shifted from individuals to large corps and taxation has become a burden) corporations have social and private responsibilities to communities in which they are located. (Further, NJ law doesn’t apply because state has authority to amend previously issued corporation charters via legislation)
a.       Court said that laws enacted after incorporation that allowed directors to make charitable gifts without approval form shareholders applied to this corporation as long as the gifts contributed to the corporate interests, they were appropriate.
3.      Directors are PRINCIPALS because they are calling the shots à officers are agents
4.      Shareholders complaining about the donation because they’re losing money
g.      Statutes
                                                              i.      § 33-3-102 General Powers
1.      Corporation can “make donations for the public welfare or for charitable, scientific, or educational purposes.”
a.       Expressly allows charitable donations.
2.      Corp has the power to do anything that an individual can do, provided that it is limited to carrying out business and affairs
3.      (13): Make donations for the public welfare or for charitable, scientific, or educational purposes
4.      (15): Make payments or donations, or do any other act, not inconsistent w/ law, that furthers the business and affairs of the corporation
a.       Ought to be limited to business activities
5.      **Political contributions are one difference between (13) and (15)
                                                            ii.      § 33-3-103 Emergency Powers
                                                          iii.      § 33-3-104 Ultra Vires
1.      Ultra Vires: beyond the scope of authority or power granted to a corporation (would void an action beyond the scope of authority)
a.       Intra Vires: with the legal power or authority
                                                                                                                                      i.      Of little practical significance today. Corporations are now deemed to have the power to engage in any lawful business activity.
                                                                                                                                    ii.      Cannot challenge acts of corporation on the grounds that it doesn’t have the powers to act.
2.      (b)(2): officer will be required to pay back money he took
3.      Purpose of ultra vires statute is to prevent challenges of validity of corporate actions based on inconsistencies w/ the corporate charter
4.      But, how can corporation sue officer/director under this statute when previous statute they were given power to do anything an individual can do?
a.       Answer lies in phrase “necessary or convenient to carry out business and affairs” of § 102
                                                          iv.      § 33-16-101 Corporate records – compared to § 33-44-408 (LLC Member’s right to info)
                                                            v.      § 33-16-200 Financial Statements for SHs
                                                          vi.      § 33-1-400 (26): Shareholder
1.      A person in whose name shares are registered in the records of a corporation or the beneficial owner of shares to the extent rights granted by a nominee certificate are on file w/ corporation. Creditors may have rights of SH as allowed in articles of incorporation.
                                                        vii.      § 33-2-102 Articles of Incorporation – Sets forth a list of rules/guidelines which get a corporation started
                                                      viii.      § 33-1-280 Certificate of Existence
1.      Doc prepared by Sec of State – says whether or not corporation is generally complying w/ stat. requires
2.      Fees, filing requirements, etc.
3.      In SC, not enough to just get a certificate of existence – need CONFIRMATION of payment of taxes due to tax and business statutes
h.      Agency
                                                              i.      Restatement (3d) of Agency § 1.01 Agency Defined
1.      Agency is fid. relationship that arises when one person (principal) manifests assent
2.      To another (agent) that the agent shall act on the principal’s behalf and subject to the
3.      Principal’s control, and the agent manifests assent or otherwise consents so to act.
i.        Boards of Directors
                                                              i.      Three levels of ownership
1.      Officers – carry out decisions
2.      Directors – set policy and make decisions
3.      Shareholders – owners
                                                            ii.      § 33-8-101 – one of the MOST important code sections à Requirement for and duties of board of Directors
1.      Unless otherwise provided in
a.       Ch. 1-20 of this Title;
b.      The articles of incorporation; or
c.       An agreement unanimously approved by the SHs and disclosed in Articles and on share certificates:
2.      All corporate powers must be exercised by or under the authority of, and the business and affairs of a corporation must be managed under the direction of, a board of directors.  If the authority of the board is dispensed w/ or limited by a provision in the articles under (b) or by a shareholder agreement under (c), articles or agreement shall describe WHO is to perform some or all of duties of board.
3.      Can range in # of people
4.      All policy decisions to made in role as director in theory, but doesn’t often happen
5.      In SC, not uncommon to change structure under 33-3-101(b) or (c)
6.      Board is NOT an agent for SHs à considered the PRINCIPAL
7.      If corporation doesn’t like what board is doing – SELL
III.      How Does the Owner of a Business Make Money from the Business?
a.       Distributions of money that business has made – dividends
b.      Sell all or part of ownership interest
c.       Give themselves a salary
d.      In a typical SC corporation, most owners make money by getting a salary
IV.     How Does the Owner of a Business Know How Much $ the Business has Made & How Much it’s Worth?
a.       What Records Must Companies Maintain?
                                                              i.      Partnerships
1.      Pg. A7 § 33-41-520 Partnership books
a.       Partnership books shall be kept, subject to agreement, at principal place of biz of partnership and every partner shall at all times have access to and may inspect and copy any of them
b.      Partnership stuff – says nothing about what is required – simply says if you’ve got financial docs, you must share them w/ partners
                                                            ii.      LLC
1.      Pg. B16 § 33-44-408 Member’s Right to Information
a.       Parallel LLC statute that deals w/ company records
b.      Almost silent re: what you have to provide à used to require filing annual report w/ Sec of State, but didn’t have money to monitor and evaluate what’s coming in
                                                          iii.      Corporations
1.      § 33-16-101 Corporate Records
2.      § 33-16-200 Records Provided by Corporations to SHs
a.       Must give annual statements – balance sheet, income statement, statement of changes in SH equity
b.      **Most SC corps don’t follow Generally Accepted Accounting Principles (GAAP)
c.       Doesn’t have to be prepared by acct, but have to state reasonable belief that they were prepared per GAAP
3.      § 33-16-220 Annual Report
a.       Every corporation organized under the laws of this State and every corporation qualified to do business in this state shall file an annual report as provided in Title 12
b.      Annual report is part of tax return
c.       Two obligations: give SHs info and

art restaurant – come to you for advice on how to structure biz
1.      Who’s the client? – can you represent all 5 of them from the get-go?
2.      Highly likely that they’ll have divergent interests – probably will only rep 1 person
b.      Also need to worry about TAXES
                                                              i.      Ex: whether you form a corporation as a C corporation or an S corporation might be due to taxes
                                                            ii.      Consider tax ramifications and potential liability exposure of the owners
c.       Help business make money
d.      Help owner get money from business
e.       Protect business from claims of others
f.       REPRESENTS THE CORPORATION ITSELF – it is its own legal entity
VII.    What are the legal structures for businesses?
a.       Decision involves the importance the client places on (1) tax treatment of profits; (2) liability exposure of owners; and (3) flexibility in the operation and financing of the business
b.      Types of structures
                                                              i.      Sole proprietorship – no protection from liability
1.      Individual and business are one and the same – not a separate entity
2.      Earnings taxed as personal income
3.      Claimants can pursue all assets of owner
                                                            ii.      Corporation – feature is that the statute at least says SHs are insulated from liability
1.      TAXED AS ITS OWN ENTITY
a.       Dividends to SHs taxed as personal income (double taxation)
b.      Owners might just pay themselves a salary so they can deduct expense on corp taxes
2.      Owners are protected from liability
3.      Three types in SC
a.       Regular corporation
b.      Statutory close corporation
c.       Quasi-close corporation
4.      Two types for the IRS
a.       S-Corporation
                                                                                                                                      i.      Tax status of partnership, but protection of corporation (like LLC)
                                                                                                                                    ii.      Must comply w/ certain IRS restrictions
                                                                                                                                  iii.      Disadvantages? à more tax rules to pay attention to in order to qualify for status
1.      Can’t have foreign investors or trusts as investors
2.      Must be less than 100 owners/stockholders
b.      C-Corporation à everything else
5.      Corporate form is superior
a.       Where owners want to limit their liability
b.      Where free transferability of interests is important
c.       Where centralized management is important
d.      Where continuity of existence in the face of withdrawal or deal of an owner is important
                                                          iii.      General partnership
1.      One or more owners – treated like sole proprietorship for tax/liability purposes
2.      Earnings distributed to each partner taxed as PERSONAL income
3.      Jointly and severally liable – claimants may pursue all assets of all owners
4.      Often used for estate planning
5.      Superior where:
a.       Simplicity and inexpensiveness of creating/operating enterprise important
b.      Tax advantages significant, such as avoiding double taxation and/or sheltering income
                                                          iv.      Limited partnership – still important in SC!!
1.      Hybrid of partnership and corporation
2.      General partner – manager, may be liable
3.      Limited partners – investors, not liable – like SHs
                                                            v.      LLCs – income taxed once at owner level
1.      Not a tax-paying entity – owners only taxed when they get income
2.      Owners protected from liability
3.      Statutes vary state to state       
4.      Can elect to be taxed as C corporation
                                                          vi.      Limited Liability Partnership
                                                        vii.      Limited Liability Limited Partnerships (not in SC)
                                                      viii.      Business Trust
                                                          ix.      Non-profit corporations – operate for public benefit and don’t have to pay taxes
                                                            x.      Professional Corporation/Association (allowed in SC) à structured like C-Corp