lawyers, doctors, and accountants

all members must be of the same profession

Ease of Formation

Management

Liability

Continuity of Existence

Transferability

Profits and Losses

Taxation

Formation of an Agency-Principal Relationship

1. Agreement

2. Estoppel

1. express agency – written or oral

implied agency – parties’ conduct shows existence of relationship

2. agency arising from acts that lead others to believe an agency relationship exists

Authority of Agents

1. Actual

2. Apparent

3. Ratified

1. express or implied

2. arises through words or conduct of principal leading others to believe agent has authority to act for principal

3. acceptance of an act (principal accepts the unauthorized acts of agent and becomes bound by them)

performance

notification

loyalty

accounting

compensation

reimbursement

indemnification

cooperation

Ease of Formation

Managerial

Discretion

Retention of Profits

Pass-Through Tax Status

Unlimited Personal Liability

Lack of Continuity

Difficulties in Raising Capital

Management

Vulnerabilities

1. licensing considerations

2. name considerations

• fictitious name must be registered with state or local officials, because it does not disclose the surname of the business owner (assumed name, DBA)
• not fictitious – no filing needed but contains owner’s surname and does not imply others are involved fictitious

cannot operate under a name likely to cause confusion business and sales tax permits

at least three - partner #1, partner #2, partnership

can be natural persons or entities

safety nets for partnerships

when partnership agreement is silent on some issue UPA or RUPA will govern the issue

RUPA governs most states and allows for more continuity when a partner leaves

ease of formation

flexible management

ease of raising capital

require additional contributions or admit new partners

pass-through taxation

not a separate taxing entity

1. unlimited personal liability

KNOW YOUR PARTNER

2. joint and several liability

each partner is 100% liable

PERSONAL DEBTS DO NOT BIND PARTNERSHIP

3. marshaling of assets

creditors must exhaust partnership assets before pursuing partners' individual assets put in contracts to give individual partners some protection

4. lack of continuity

partnership can end when a partner dies difficulty in transferring partnership interest

1. partnership agreement

should be written but can be oral

2. can use a fictitious name

MERGED LAST NAMES ARE NOT FICTICIOUS

3. must comply with any licensing requirements

fiduciary duty to each other

general agency - authority of a partner to act for and bind the partnership and other partners

Statement of Authority - document filed with SOS stating which partners may act on behalf of the partnership

Statement of Denial - document filed with SOS denying info in Statement of Authority

Management - each partner can have one vote or a percentage based on their initial contribution

Voting - mostly majority but some decisions require a unanimous vote

Profits - each partner receives an equal share of the profits unless the partnership agreement divides profits based proportionately on contribution

1. Name of partnership
2. Names and addresses of partners
3. Recitals - intent to form a partnership Purpose
4. Address
5. Term
6. Financial provisions
7. Profits and losses
8. Management and Control

Partnership Agreement

Term

1. at will - no specific term
2. mutual agreement
3. upon completion of purpose
4. upon notice of withdrawal of any partner

Partnership Agreement

financial provisions

1. initial contributions
2. under what circumstances additional capital will need to be contributed
3. early withdrawls of capital
4. loans or advances
5. profit retained for emergency

Partnership Agreement

Profits & Losses

1. equally
2. proportional to contributions
3. guaranteed for certain partners with no losses to bear
4. losses die to fraud or recklessness are retained by the guilty partner
5. salaries?
6. reimbursement for obligations or expenses

Partnership Agreement

Management and Control

General Partnership

Dissolution and Winding Up

Under UPA, any time a partner leaves, the partnership is dissolved unless other stated in agreement

Under RUPA, partnership may buy out the interest of the withdrawing partner and continue

settle all debts then distribute any remaining assets to the partners

If creditor’s can’t be paid in full, partners must cover any difference.

Limited Partnership

Management & Liability

limited partners forfeit any management or control

general partners manage but have unlimited liability

• must have at least one fully responsible for managing the business
• joint and several liability
• fiduciary duty

• “silent partners” = passive investors
• no personal liability
• do not manage business but can bind partnership
• limited partners can be found by court to be general partner if they undertake managerial duties (piercing the LP’s veil)

Attracting Capital – new partners easily admitted without heavy personal risk

Limited Liability

Easy Transferability of Interest

Continuity of Existence – only one general partner needed to continue partnership, but limited partners may come and go Pass-Through Taxation – taxes allocated to individuals

• Lack of Control by Limited Partners
• Unlimited Liability for General Partner
• Formalities and Expenses of Organization

limited partnership certificate must be filed in the state (find on SOS website)

• contents
  • name office and registered agent
  • names and addresses of general partners
  • dissolution date
  • other matters
• filing
  • must be signed by all general partners
  • formed when form is filed with state

must be filed in 30 days when:

• admission of new partner
• withdrawal of a general partner
• continuation of business after withdrawal of a general partner

activities enumerated by a state that require an entity to qualify before entering the state to transact business

defending or bringing a lawsuit is not “doing business”

• Profits and Losses
• Rights and Duties of General Partner
• Admission of New General and Limited Partners
• Withdrawal of Limited Partners

Limited Partnership

profit interest v. partnership interest

Profit interest is easily transferable

Transfer of Partnership interest must be approved by other partners

LLP

vicarious liability

LLP eliminates vicarious liability (no personal liability for acts of other partners)

similar to shareholders in corporation

• partner supervised or directed the partner who engaged in the wrongful act
• partner was directly involved in the act giving rise to liability
• partner had knowledge or notice of the act of liability and failed to take reasonable steps to prevent or cure it

PARTNERS ARE ALWAYS LIABLE FOR THEIR OWN ACTIONS

• strict compliance with state statutes
• not available for all businesses
• filing fee
• renewal forms

file Statement of Qualification

application as foreign LLP

liability insurance may need to be obtained

identical to general partnership

can transfer profits but cannot substitute new partner

pass-through taxation

1. entirely new form of business enterprise

2. always full shield

3. one person LLC permitted

4. LLC may be formed for non-profit

5. usually used by emerging professions

• limited liability and full management
• flexibility management – member-managed or manager-managed
• one-person LLC
• pass-through tax status

• can transfer interest, but transferee will not become a member unless voted in
• little case law exists
• term of LLC may be limited
• variations among state statutes

similar to partnership agreement

must contain:

name of LLC

names and addresses of members

recitals

purpose

address

term

financial provisions (contributions, profits, losses)

operation of the LLC (who manages?)

meetings and voting

admission of new members and dissociation of members

transferability of interests

dissolution

miscellaneous provisions

• member provides notice of his express will to withdraw
• event agreed to in the operating agreement
• transfer of all of a member’s interest in the LLC
• member’s expulsion, bankruptcy, or death

• event specified in operating agreement
• all members consent to dissolve
• passage of 90 days without LLC members

• entities of statute
• exist separately from members
• death, withdrawal, bankruptcy of shareholders does not affect the legal existence of the corporation
• can be one or thousands of shareholders
• no personal liability for those involved in corporation
• governed by laws of state of incorporation
• if does business in another state, governed by laws of both states
• lots of case law for corporations

• sue and defend suit in own name
• make and amend bylaws
• purchase or sell real and personal property
• enter into contracts
• incur liabilities
• borrow money
• issue bonds
• lend money
• elect directors and appoint officers, employees, agents
• establish benefit plans for employees
• make donations
• become member of partnership or other entity
• transact any lawful business
• exist perpetually

Corporation

bylaws conflict with statute

• limited liability
• corporate deductions
• continuity of existence
• transferability of share ownership

• double taxation
• formalities of organization and operation
• must comply with statutes
• centralized management

S corporation - pass through taxation

small corporation whose shareholders are employees - distribute profits as salary increases and bonuses

Section 1244 stock - stock upon the sale of which (at a loss) receives favorable tax treatment and is taxed as an ordinary loss

Qualified small business stock - stock issued by a qualified corporation that provides certain tax benefits on the gain realized on the sale of the stock

involved in organizing a corporation

• joint venturer unitil corporation is formed
• joint and several liability
• fiduciary to others and the proposed corporation

• agreements entered into by promoters on behalf of a yet-to-be-formed corporation
• promoters liable for contracts if corporation does not form
• after corporation is formed, contracts approved by ratification or implied action (ex. moving into offices)
• contract will relate back to original signing date

• offer to purchase shares in a corporation before its formation
• irrevocable for a certain period of time
• simple written agreement
• when corporation is formed and accepts offer, subscriber must pay or will be liable for breach of contract

Delaware - pro-business and flexible statutes

Factors:

fees for multiple states
award of public contracts
well-developed body of case law
costs of incorporation, annual reports, and taxes

• must use corporate signal
• bank, trust, insurance precluded unless does business in the field
• cannot be confusing with another domestic or foreign corporation in the state, unless other party consents in writing

process of reserving a name in a foreign jurisdiction often valid for one year

if not permitted, form a subsidiary corporation as a name-saver

• document that creates the corporation
• corporation's constitution
• states provide forms online, but use of their forms is not necessary
• must meet statutory requirement
• difficult and costly to amend
• include optional provisions in bylaws not articles

• name
• registered address
• agent for service of process
• purpose: use broad purpose clause - states corporation may engage in any legal activity; allows for expansion without amendment to articles
• description of stock
  • restriction, privileges, restrictions of stock if more than one type
  • authorized shares - max shares it can issue without amendment to articles
  • par value - minimum amount for which stock can be sold
• incorporators
• optional provisions
  • may not want to be added due to necessity of amendment
  • preemptive rights - right of shareholder to buy pro rata share of newly issued stock before it's offered to nonshareholders; allows for proportionate control to remain
• File with SOS

• internal rules governing corporate procedures and operation
• easily amended
• not filed
• maintained by corporation

• introductory information
  • name of corporation
  • principal office address and any other locations
• information about directors
  • requirements for position
  • number, tenure, compensation
  • authority to manage
  • meetings
    • regular and special
    • quorum - minimum number of persons required to transact business
  • liability
• information about officers
  • duty
  • removal from office
  • filling vacancies
  • compensation
• information about shareholders
  • annual and special meetings
  • quorum requirements
  • method of voting and restrictions
  • authority to inspect corporate records
• miscellaneous information
  • issuance of shares
  • location and inspection of corporate records
  • tax year
  • banking info

seal

minute book

stock certificate book

• first corporate meeting held to launch corporation
• complete incorporation activities and commence business
• agenda
  • directors elected if not already named in articles (revote a first shareholders meeting)
  • officers appointed by directors
  • bylaws adopted
  • preincorporation contracts ratified
  • preincorporation share subscriptions accepted
  • seal and stock certificate are submitted for approval
  • banking, tax, accounting info dicussed (also possible S corporation status)
  • directors authorize officers to begin issuing stock and fix amount for each share

Defects in Incorporation Process

1. de jure corporation

2. de facto corporation

1. strictly complied with statutory requirements and cannot be assailed

2. did not strictly comply with statutory requirements and can only be challenged by state If neither, can allow for creditor to attack shareholders

• shares of a corporation representing ownership interest
• Board issues shares and determines price
• can be different classes of stock
• may vote and receive dividends and assets when corporation liquidates
• greater potential for return, but greater risk and fluctuation
• dilutes control of existing shareholders

number of shares the corporation has the authority to issue according to its articles

limit

carries certain rights and privileges

3 ownership interests of shareholder

1. right to vote

2. right to participate in dividend distributions

3. right to recurve net assets upon liquidation

lowest price for which a stock may be sold

[shares of same class issued at the same time should be priced the same]

• cash
• promissory notes
• services performed
• contracts for services to be performed

• issued without actual stock certificates
• recorded in corporate books
• same rights as owners with paper certificates
• reduces paperwork burden

certificates should contain:

• name of corporation and state of organization
• person who is being issued certificate
• number and class of shares

document showing ownership of a partial share owners of

fractional shares are entitled to fractional voting rights and dividends

ordinary stock of a corporation having no special privileges

if not metioned in articles, only common stock will be issued

no obligation except to pay consideration for shares

1. voting - may have different classes of common stock with different voting rights

2. distribution - at the discretion of the board

3. liquidation - proportion of coraporation's net assets after winding up

4. other - preemptive rights or cumulative voting rights

• has right or preference over another class
• must be authorized by articles and include preferences, limitations, and rights
• usually more conservative with steady and predictable returns

1. voting - may or may not have this right

• at least one class must have unlimited voting rights;
• oftern no voting right

2. distribution

cumulative distribution: add up and must be paid once a corporation has funds to do so

• paid before common stockholders
• written into articles

noncumulative distribution: does not accumulate and is lost if it cannot be paid

3. liquidation - entitled to stated distribution

• paid after creditors but before common stockholders

4. conversion - convert preferred stock into some other form of equity security, usually common stock

5. redemption call: right of corporation to require shareholder to sell stock back to corporation

put: right of shareholder to require corporation to buy stock from shareholders

• collateral is pledged
• can be seized in the event of nonpayment
• financing statement filed with SOS
• provides notice of security interest

issued with intent of raising money for entity

real estate - mortgage bond

personal property - security agreement

• higher interest
• redemption terms - cannot pay off loan early depriving lender of interest to be earned
• coversion terms - allow to trade in for shares
• priority and subordination rights - assures that lender will be paid first
• voting rights - not common

Taxation on Corporations

To avoid double taxation:

• elect S status
• use debt financing - interest to creditors is deductible
  • IRS monitors to ensure corporations are not issuing too many debt securities
  • thin corporation: debts are disproportionately high to its equity

owners of corporation

indirect participation and usually limited to voting on directors and fundamental changes to corporation

no liability for corporate obligations besides paying for the stock issued to them

straight vote - 1 share = 1 vote

cumulative vote - method of voting in election for directors in which each share carries as many votes as there are directors being elected

Shareholders' Meetings

Types of Meetings

annual - election of directors; set forth in bylaws

special - Board or shareholders owning more than 10% of outstanding stock may call

Shareholders' Meeting

Notice

• shareholders must receive notice of all meetings
• notices must specify he date, time, and place of meeting and should be given a least ten days before the meeting
• defective notice may be attacked by shareholder

Shareholders' Meeting

record date

date owners are determined

anyone is a an owner as of the record date receives notice

Shareholders' Meeting

Shareholder List

• quorum of shareholders must be present to hold meeting, usually majority
• proxies can be used to meet quorum
  • can direct how to vote or can be left to proxy's discretion

Shareholders' Meeting

Conduct of Meetings

• resolutions are passed when the votes for the measure exceed the votes against it
• directors elected by plurality of votes, not necessarily a majority
• voting agreement: agreement among shareholders specifying how they will vote

Shareholders' Meeting

Minutes

minutes of meeting should reflect:

• notice was sent
• quorum was present
• what measure had sufficient vote

• written consent by unanimous consent of shareholders
• notice should be given to nonconsenting shareholders
• some states allow a majority

• preemptive rights
• receipt of dividends
• transfer shares
• small corporations have buy-sell agreements: agreement among shareholders regarding their rights to purchase and sell stock in a corporation and usually imposing some restrictions on those rights indicated by legend on stock certificate

proxy available online

householding: practice of sending only one report and proxy statement to shareholders with same surname at address

direct: initiated to address direct harm done to the complaintant

derivative: initiated to enforce a right owned by another; shareholder sues corporation to compel it to enforce corporate rights

holding individual shareholders liable for corporate obligations

alter ego: doctrine alleging separate corporate existence ignored by shareholders

examples of conduct that lead to piercing the veil:

1. commingling of assets

2. lack of formalities

3. inadequate capitalization

**usually happens with small corporations**

• derive from state statutes, articles of incorporation, and bylaws
• each director generally has one vote and need simple majority to take action
• written consent must be unanimous

• authorizing dividends

• filling vacancies on Board

• amending bylaws

• appointing and supervising officers

• determining all financial matters

• exercising responsibility for all corporate operations

• most states and MCBA allow at least 1 director
• range of directors and usually an odd number to avoid deadlock
• staggered system: all directors do not face election at the same time
  • promotes continuity and makes hostile takeover more difficult
• remaining directors full any vacancies
• directors can be removed with or without cause

both regular and special meetings 

• location- specified in bylaws or determined by directors
• notice - none for regular meetings; reasonable advance notice for special meetings
• quorum (majority) needed
• cannot vote by proxy
• if vote (usually by hand) is not unanimous, individual votes should be recorded in the minutes
• minutes should reflect any resolution or action taken

directors set their own compensation, but shareholders votes are a check and balance

can inspect books, but cannot inspect for an improper purpose

• discharge duties in good faith and in best interests of corporation
• reasonable person care
• conflict of interest: must disclose and a majority of disinterested directors must approve
• best judgment rule: immunizes directors and officers for action taken so long as they acted in good faith directors can reasonably rely on information and opinions of others

• violation of fiduciary duty may cause personal liability
• must supervise to avoid personal liability
• directors may require director and officer liability insurance to protect them
• statutory limitations may eliminate or limit liability of directors who act in good faith
• corporations may indemnify directors

• majority rather than plurality for electing directors
• reigning in executive pay
• moving away from staggered elections
• more shareholder proposal
• focus on social issues

• carry out day-to-day operations

• selected, supervised, and removed by Board of Directors unless employment agreement states otherwise

• actual- express authority
• apparent – authority that one believes another to possess due to the other’s conduct or position
• inherent – authority that naturally flows from one’s position

Officers have same standards of conduct, liability, and indemnification as directors

• cash
• DRIPS allow shareholders to reinvest cash distribution at no fee
• property – least common; distributes some sort of corporate property (product or shares of subsidiary)
• share – proportionate ownership remains the same dividends are allocated to shareholders in direct proportion to their respective ownership interest in the corporation shareholders within a class must be treated uniformly

protect creditors of corporation and ensure that a financially unhealthy corporation will not take its few profits and distribute them to its owners

Any contractual restrictions must be honored.

• decision made by Board of Directors, who may rely on corporate books and financial statements and other experts
• document reflecting decision is placed in minute book
• establish record date and identify shareholders
• ex-dividend: status of a shareholder without the right to receive a declared dividend

• Articles may be need to be amended to accommodate distribution of share dividends
• directors cannot be compelled to pay dividends
• may have sufficient money to pay but may save money for expansion
• once directors declare case or property dividends, the decision is irrevocable
• declaration of stock dividends is revocable until stock is issued

• illegal dividend: distributions paid when corporation is insolvent or from unauthorized accounts

• shareholders must return illegal dividends
• directors are personally liable, joint and severally, for the amount of the illegal dividend that exceeded the amount that could have been lawfully distributed

Tax Considerations

cash dividends

shareholder must declare and pay taxes on amount received for any dividend in excess of 50 cents

corporations must report to IRS any amount distributed to a shareholder in excess of $10

Tax Considerations

property dividends

Tax Considerations

share dividends

Tax Considerations

Corporations

• federal accumulated earnings tax of 15%

•  encourages corporations to pay dividends

Tax Considerations

small corporations

division of outstanding shares corporation

split stock to increase attractiveness of shares

price cuts in half and when it rises again, huge gains can be made

reduction of outstanding shares

used by corporations to eliminate smaller shareholders

• desire to increase the supply of stock and increase its price
• prevent shareholders from selling stock to others
• increase earnings per share by reducing the total number of outstanding shares
• exchange: corporation repurchases outstanding shares
  • treated as distribution and is limited by same restrictions of solvency or requiring assets to exceed liabilities after the purchase
• treasury stock: stock reacquired by a corporation that is considered issued but not outstanding

• proposed amendment discussed and adopted by the Board
• submitted for shareholder approval and recommended by the Board
• Board can make amendments about routine matters without shareholder approval
  •  address changes
    
  • minor change to corporate name
    
  • increase number of shares to permit a dividend issuance
• shareholders vote at regular or special meeting
• usually simple majority, but some states require 2/3, MBCA requires more votes for than against

• any requirements relating to the original articles must also be followed when amending articles
• if name or authorized shares change, new stock certificate and corporate seal needed
• check if changes need to be made in other states

• many amendments should be combined into one unified document – restated articles
• shareholder approval not needed, because no changes – only director approval needed

amended solely by director, unless not allowed by statute, articles, or the bylaws

majority at meeting or unanimous in writing

• negotiations between constituents
• letter of intent: sets forth basic understanding of parties to a transaction
• plan of merger: sets forth terms of planned merger
  • names of constituents and identity of survivor
  • terms and conditions of merger
  • manner of converting shares or cashing out
  • any amendments required to articles
• submitted to each Board for approval, then submitted to shareholders for approval
• usually simple majority, but some states require 2/3, MBCA requires more votes for than against
• shareholders of both constituents need to approve
  • survivor absorbs liabilities and extinguished corp’s shareholders
  • can cause shift of power in survivor corp
    
•  Exceptions to Shareholder Approval
  •  short-form merger: between parent and subsidiary
  • small-scale merger: less than 20% of survivor outstanding shares are effected
• Rights of Dissenting Shareholders
  • appraisal right: have shares purchased at their fair value
    • elaborate procedure
    • some states allow partial appraisal rights
• Articles of Merger: filed with state to effect merger
• Effect of Merger
  • survivor absorbs all assets and liabilities
  • stocks issued to absorbed shareholders or get cashed out

• one corporation acquires all of the shares of one or more classes of target
• target receives acquiring stock or cash
• both entities may continue to exist
• same procedures as a merger

• buy all assets for cash or stock
• no shareholder approval needed for buyer, because no change in status of the legal entity
• shareholder approval needed for seller if selling more than 25% of assets
• “goes shopping” – pick assets, but not liabilities

• purchase stock instead of assets
• no shareholder approval required, and shareholders are free to sell their shares
• may deal directly with target shareholders to acquire majority
  • tender offer: public offer made by bidder to acquire shares in a target corporation
  • higher than stock market value

Hostile Takeover

Tender Offer

toehold – buy 4.9% on open market (5% requires SEC notification)

Williams Act: federal law regulating tender offers and takeovers

Hostile Takeover

Proxy Contest

Hostile Takeover

Defensive Strategies

strategies implemented by target to thwart a takeover

• Staggered Boards - directors stand for election at different times
• Golden Parachutes – huge compensation for managers that are ousted; expensive for aggressor
• Poison Pills – triggered by tender offer and shareholders are given additional rights
• Crown Jewel – sell off valuable assets, but could backfire
• Suicide Pacts – all managers resign if one is fired

Hostile Takeover

Government Regulation

ensure that transactions do not impair competition and result in monopolies

Hart-Scott-Rodino Act: federal statute requiring notification to government before mergers involving certain amounts or parties

• domestic corporation has no legal existence beyond its incorporation state
• foreign corporation must be approved by other state’s secretary to do business in that state
  • ensures citizens have some basic information about the corporation and are able to sue the corporation and serve its registered agent in the state
  • board passes resolution to authorize officers to take action to transact business in other states

statutory lists of activities in which a corporation may engage in a foreign state without being required to qualify to do business therein

• maintaining, defending, or settling any proceeding
• holding meetings of the board or shareholders or carrying on other activities of internal corporate affairs
• maintaining bank accounts
• maintaining offices for the transfer, exchange, and registration of the corporation’s stocks and bonds
• selling through independent contractors
• soliciting or obtaining orders if the orders require acceptance outside the state before they become contracts
• creating or acquiring indebtedness, mortgages, and security interests in real or personal property
• securing or collecting debts
• owning, without more, real or personal property
• conducting an isolated transaction completed within 30 days and that will not be repeated

transacting business in interstate commerce

•  process of seeking permission from foreign jurisdiction to do business therein
• Application must include:
  • Name – cannot be similar to another corporation and must include corporate signal
  • State of Incorporation
  • Date of Incorporation and Duration
  • Principal Address and Agent – SOS may receive service if no registered agent o Identities of Directors and Officers – allows for investors to investigate managers of the corporation
• should also include certificate of good standing – document issued by state of incorporation verifying corporation is in compliance with state requirements

•  foreign corporation will be subject to any restrictions imposed on domestic corporations
• foreign corporation will be subject to service of process in new state
• corporation must pay various fees and taxes to the state that has permitted it to transact business within its borders
• corporation must usually file annual reports with the state

• foreign corporation may not maintain a proceeding in any court in the foreign state until it obtains a certificate of authority
• monetary penalties will be imposed for each day the corporation was not properly qualified
• some states make unqualified corporation’s contract unenforceable and impose fines on directors and officers
• MBCA allows corporation to defend a legal action but not maintain; contracts are still valid

• must file an application for withdrawal
• ensures that the corporation is no longer subject to service of process, taxes, or annual reporting requirements

• triggered by some unlawful act of the corporation or its failure to comply with the state’s law
• failure to file annual reports, pay taxes, or have a registered agent
• corporation has time to cure defect after delinquency notice is served

•  initiated by directors and approved by shareholders
  • notice given to all shareholders whether or not they are entitled to vote and must state dissolution is being considered
• corporation should file notice of intent to dissolve with SOS

• final document filed with the state effecting termination of an entity
• some states (California) require full winding up before final document is filed
• must complete form for tax clearance

MBCA allows a corporation to revoke its decision to dissolve within 120 days of the effective date of the dissolution

as if dissolution never occurred

after articles of dissolution filed, “dissolved corporation” still in existence to wind up corporation

in California, liquidation precedes dissolution; assures debts have been paid and assets distributed

• failure to pay taxes, file annual reports, have a registered agent, notify of change, or operating after expiration
• under MCBA:
  • not brought to court but is handled by SOS, because technical default
  •  allows 60 days to cure defaults
  • can be reinstated for 2 years after dissolution (only if technical grounds for dissolution)

procured the articles of incorporation through fraud

exceeded or abused the authority given to the corporation by the state

directors act fraudulently or waste corporate assets

cannot get unanimous shareholder consent, because directors usually own shares

• directors are deadlocked and corporation is suffering irreparable damage
• corporate management has acted illegally or fraudulently
• shareholders are deadlocked and have failed to elect directors twice in a row
• corporate assets are being waster or misapplied
• corporation has failed to conduct business for some statutorily specified period of time if shareholder alleges one of the preceding grounds, corporation or other shareholder may buy the shares at fair market value, if stock is not publicly traded

1. collect assets

2. dispose of properties that will not be distributed to shareholders

3. discharge liabilities or make provisions for discharging liabilities

4. distribute the remaining property to the shareholders according to their respective interests nonjudicial (voluntary) vs. judicial (receiver is appointed by court)

Claims Against Corporation

Known Claims

• notify claimants in writing of dissolution
• inform creditor of where to submit claims
• allow 120 days for creditor to make claim
• inform the creditor that the claim will be barred if not timely submitted to the corporation

Claims Against Corporation

Unknown Claims

• publish in newspaper
• allow 3 years for creditor to make claim
• if assets distributed, shareholders may be liable to the extent of their distributions
• to prevent, may purchase insurance or set aside assets

directors are personally liable for distributing assets to shareholders without first paying off claims to creditors and taxes

assets liquidated and shareholders will receive cash payments

shares are held by a small group that is active in managing the corporation

must follow special statutes for close corporations

Close Corporations

Characteristics

• limitations on the number of shareholders
• shareholders enter into agreements restricting the transfer of shares, so outsiders cannot easily enter the entity
• shareholders participate in the management of the corporation

Close Corporation

Formation

file articles stating that it is a close corporation

stock certificates must state it is a close corporation

Close Corporation

Operation

• less formal than larger corporation
• many states allow:
  • elimination of board of directors and annual meetings
  • omit bylaws
• failure to observe usual corporate formalities is not enough to pierce corporate veil
• buy-sell agreements- shareholders must offer shares to corporation and other shareholders before outsiders

• formed for a purpose other than to earn a profit
• no federal taxation if approved by IRS
• types:
  • public benefit – formed for charitable purposes
  • religious
  • mutual benefit – formed for the benefit of its members

Nonprofit Corporations

Formation

• file articles of incorporation
• some restrictions of name
• may need to identify specific purposes
• separate application with IRS for tax-exempt status

Nonprofit Corporations

Operation

• board of directors and bylaws
• no shareholders or stocks sold
• one membership per individual or business member
• any profits should be devoted to the purposes of the corporation
• corporation may be dissolved if excessive salaries or spends little of income for its purposes

Nonprofit Corporations

Exemption from Taxation

• apply for status with IRS
• no state income or real property tax, but still must file annual report and pay usual fees
• contributions to public benefit corporations are deductible

Subsidary Corporation

Formation

• parent treats subsidiary’s accounts as its own
• commingles funds
• shares personnel or business departments
• files consolidated statements or returns