BUSINESS ASSOCATIONS OUTLINE
I. Business Principles
A. Course Fundamentals
B. Finance Issues
1. Accounting
2. Taxation
C. Other Business Law Principles
1. Agency Law
2. Property Law
II. Unincorporated Associations
A. General PS
1. Formation
2. Management
3. Duties
4. Property
5. Dissolution
6. Estoppel
B. Limited Liability PS
C. Limited Partnership
D. Limited Liability Company
III. Incorporated Associations
A. Corporations Generally
B. Formation of Closely Held Corporation
1. Where
2. How
3. Premature Commencement of Business
i. Promoters
ii. Defective Incorporation
C. Disregard of the Corporate Entity
1. Piercing the Corporate Veil
2. Reverse Piercing: “The Deep Rock Doctrine”
3. Successor Liability
D. Financial Matters
1. Debt & Equity Capital
2. Types of Equity Securities
3. Shares
i. Generally
ii. Common & Preferred
iii. Special Rights of Publicly Traded Preferred Shares
iv. Classes of Common Shares
4. Issuance of Shares: Herein of Subscriptions, Par Value & Watered Stock
i. Share Subscriptions & Agreements to Purchase Securities
ii. Authorization & Issuance of Common Shares under MBCA
iii. Par Value & Stated Capital
iv. Eligible & Ineligible Consideration for Shares
v. Par Value in Modern Practice
5. Debt Financing
i. The Concept of Leverage
ii. Tax Treatment of Debt
iii. Debt as Planning Device
6. Planning the Capital Structure for Closely Held Corp.
7. Public Offerings
8. Preemptive Rights
9. Dividends
10. Redemptions
11. Distributions
E. Management & Control of Corporation
1. SH Agreements
2. CHC Agreements
F. Publicly Held Corporation
I. Business Principles
A. Fundamentals of Course
1. 5 issues in every business agreement
· 1. Money
· 2. Risk
o What kind of risk are the owners going to have?
§ Did they limit their risk?
· General PS = huge risk to owners
o What is the risk to third parties to do business with the PS/assoc.?
§ Who are the 3rd parties?
· Are they (un)sophisticated?
o Should there be distinction?
§ General PS = little risk to 3rd parties
§ LLP = new client may not do business b/c no J/S liability
· Client may req’re P to sign a personal guaranty w/that affair
o What are the certainties of the various risks?
§ Taxation is a more certain risk than unlimited liability
· 3. Control
o Who is going to control the business and to what extent are they going to control?
· 4. Standards
o What are the relevant standards for things like ‘reasonableness’ and ‘good faith’?
· 5. End Game
o What happens if someone wants out?
o PS Dissolution à provide what will happen if P wants out
· Always ask w/cases: What could’ve been done to prevent the problem?
B. Financial Aspects
1. Accounting
· 3 different kinds of statements
o Income Statement
o Balance Sheet
o Statement of Cash Flows (SCF)
Balance Sheet
Income Statement
Left Hand Side = Assets
Right Hand Side = Liability & Equity
Income = revenues – expenses
Statement of income reflected in equity portion of balance sheet
Assumes business is an entity
Assumes continuing existence & activity of business enterprise as going concern
Records a situation at 1 instant in time
Results of operations over fiscal/accounting period
All entries in terms of dollars
Assets reflected at historical costs, not FMV
Balance Sheet
· Assets of business (left side) must always equal liabilities & owner’s equity (right side)
o A = L + E
· Account payable = promise to pay
o Listed under liabilities
· Accounts Receivable vs. Cash?
· Assumptions
o Assumes business is an entity
o All entries in terms of dollars à only includes assets/liabilities w/monetary value
o Every business transaction must be recorded in at least 2 ways
o Records situation at one instant in time
o Bottom line may not be meaningful figure
· Not good guide to balance of business
o Accounts receivable might not be paid & cant judge credit worthiness from face of sheet
o Inventory may not reflect market value b/c reflected at historical costs
· Calculating depreciation of asset
o (Purchase price – Salvage Value of asset)/ asset’s useful life
Income Statement
· Gross Profits: Amount of sales less cost of sales
o Subtract other expenses of business
Resources for the Prospective Business Purchaser
· Owner’s Return on Investment (ORI)
o Essential intangibles may not be reflected in number
§ E.g., effective manager
· Return on Sales (ROS)
o Profit/Sales = ROS %
· Turnover
o How quickly does inventory turn over or does it sit on shelf for long time?
§ Illustrates how quickly business generates profit
2. Taxation
Computing the Tax & Other Tax Basics
· Taxable income = receipts – business expenses
o Marginal tax rates = rate applicable to taxable income earned above 1st taxable amount
§ Average tax rate = percentage on base before amount over
· Capital assets = assets held for profit making or investment purposes
o Long term capital gains/losses = on assets held for more than 1 yr
§ Short term capital = taxed at ordinary income tax
· Basis = Seller’s original investment in property (purchase amount)
o Substituted basis = acquired by gift à same basis as donors
§ Stepped up basis = acquired by inheritance à FMV of asset on death
· Adjusted basis = Basis + S’s costs – Capital Returns
o Costs: Cap. Improvem
e than 1 class if rights differ re: distribution
· Subchapter K = Pass thru taxation for PS
· Check the Box
o Unincorporated forms may elect to be taxed under subchapters K, S, or C
o Entity will be classified as corp. for tax purposes if created under statute that describes entity as a corporation, body corporate, body politic, joint stock company, or joint stock association
§ Must be taxed as C corp. or S corp.
o Entity not corp. w/2+ members can be corp. or PS by making election at time of 1st file
§ Default = PS
o Entity w/1 member
§ May elect corp. or ‘nothing’
o If entity wants to change classification, may not change back w/in 5 yrs w/o permission
o Conversion of entity from corp. to PS is itself a taxable event
§ As though corp. dissolved & reconstituted itself as PS
§ Conversion from PS to corp. usually tax free
· LLP couples limited liability & pass thru taxation
o In TX: broad shield statute
C. Other Business Law Principles
1. Agency Law
· A = Agent
· P = Principal
· T = Third Party
Breach of K Analysis: A enters into K w/T acting on behalf of P
· 1. Did A have actual authority at time of K?
o Express or Implied (P’s conduct vis a vis the A)
§ What does written K say about A’s authority?
· 2. If not, did A have apparent authority at time of K?
o Look for apparent authority vis a vis the T
§ Variety of sources
· 3. If not, did so called P ratify or adopt the K after the fact?
o Look for express or implied adoption
§ Look for K’ual capacity at time of K
· 4. Is A liable to T for breaching a “warrant of authority” or misrepresentation of authority?
o Did A suggest he had authority when he didn’t?
Actual Authority = Authority actually conferred by P on the A
· Often K w/consideration, but consideration not necessary for agency relationship to exist
· Actual Authority can be express or implied
o Express = P verbally said to go and do x
o Implied = From P’s conduct vis a vis the A
§ A reasonable inference drawn by the A from what P did
· KEY = Focus on P’s conduct/words & what P did/did not do vis a vis the A
o P can always destroy actual authority
Apparent Authority = A seemed to have authority
· P created impression that A had authority in the mind of a reasonable T
o A alone cannot create apparent authority, P must do something
§ But, focus on T’s mind re: the specific act: what did T think? What did T know?
· Apparent authority is an equitable doctrine designed to protect an innocent T
o P held liable to T b/c P did something to create impression that A had authority
§ Very difficult for P to destroy apparent authority
· Factors giving rise to apparent authority: i. Title, ii. Past Course of Business, iii. How other similar businesses in area operate à A r’ble person could draw inference about how this particular business would operate in light of other similar ones in area