Term
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Definition
| Important liability and control ramifications, tax consequences, etc... |
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Term
| Factors that Drive Business Entity/Form of Business |
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Definition
1) ownership and control
2) continuity of life
3) transferability of interest
4) tax implications
5) liability
6) cost
7) ability to attract |
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Term
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Definition
| has only ONE OWNER and it is merely an extension of that owner. He/she makes all management decisions, all profits are his/hers, he/she assumes greater liability (e.g. PERSONALLY liable for all obligations) |
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Term
| Other Attribute of Sole Proprietorship |
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Definition
-not considered to be a legal entity; thus can't sure or be sued
-automatically terminates on death of owner
-taxes: not a tax paying entity for federal income tax purpose (owner pays all taxes themselves as an individual; sole prop. not taxed) |
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Term
| Why Choose Sole Proprietorship? |
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Definition
| Because it's: easily formed, inexpensive to form, and few people consider their bus. form decision and it may occur by default |
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Term
| Partnership (Ordinary Partnerships) |
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Definition
| has TWO OR MORE OWNERS, called partners |
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Term
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Definition
1) Partners have equal rights to make all management decisions and share all profits
2) Partners assume PERSONAL LIABILITY for all obligations; all debts of bus. are debts of partnership
3) Liable for torts committed by partners or employees
4) Taxes: NOT a tax paying entity for fed. income tax purposes; all income is income to partners and must be reported on indiv. tax returns; same with losses
5)No life apart from its owners; when one partner leaves or dies it's dissolved
6) Partner's interest in partnership is NOT freely transferable; means purchaser of partner's interest in partnership not a partner of the partnership unless other partners agree to admit purchaser as partner |
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Term
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Definition
-Requires no formalities: normally formed by an agreement, may be formed by default (under Uniform Partnership Act it may be automatically created when two or more persons own a business together w/out selecting another form)
-Each partner's right to manage the bus. and deductibility of partnership losses on one's indiv. tax returns are also attractive |
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Term
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Definition
| has at least one general partner and at least one limited partner |
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Term
| LP Attributes-General Partners |
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Definition
1) Rights and responsibilities similar to partners in regular ordinary partnership; liability of general partner is unlimited; general partner often a CORPORATION
2) Tax rules that apply to general partners are same as w/partners in a regular partnership
3) When a general partner dies or withdraws, limited partnership is dissolved in absence of an agreement to the contrary
4) General partner's rights may NOT be transferred to another person unless the other partners agree to admit the new person as a partner |
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Term
| LP Attributes-Limited Partner |
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Definition
1) Ltd. partners usually have no personal liability once they have paid their capital contribution to the limited partnership
2) Ltd. partners essentially have the same rights as GPs (including access to partnership books and other info. regarding partnership bus.)
-NO right to manage the bus. and if they do then might lose their personal liability protection
3) Tax rules for ltd. partners: must pay fed. income tax on their share of profits, may deduct their share of losses only to the extent of their investment in business |
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Term
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Definition
1) Ltd. partnership may have a life span apart from its owners (EX: when ltd. partner dies or leaves, LP NOT dissolved)
2) LP dissolved in much the same way as ordinary partnership |
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Term
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Definition
| May only be created by complying w/a state statute permitting LPs (e.g. partners sign a CERTIFICATE OF LP); cannot be created by default |
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Term
| Why Choose a Limited Partnership? |
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Definition
1) No individual will have unlimited liability for the debts of the business
2) Losses of bus. are deductible on owners' indiv. fed. income tax returns
3) Investors may contribute capital to bus. yet avoid unlimited liability and obligation to manage business; thus LP has ability to attract large amounts of capital |
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Term
| Limited Liability Partnership (LLP) |
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Definition
| a reaction to the large personal liability sometimes imposed on PROFESSIONALS (usually attorneys and accountants) for the professional malpractice of their partners |
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Term
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Definition
1) Partner's liability for his partners' professional malpractice (i.e., negligence) is limited to the partnership's assets
2) BUT a partner retains unlimited personal liability for its OWN malpractice and for all NON-professional obligations of the partnership (EX: rent the LLP owes landlord for office space) |
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Term
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Definition
1) Essentially the same as a regular partnership
NOTE: to create there must be an agreement by the owners and they must comply w/the LLP statute |
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Term
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Definition
1) Allows professionals the flexibility of management, while insulating them in part from personal liability
2) Relatively easy to establish |
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Term
| Corporation (Regular C Corps) |
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Definition
| owned by shareholders who elect a Board of Directors to manage the business. the Board then often selects officers to run the day-to=day affairs of the business. Consequently, ownership and management of the corporation may be completely separate. |
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Term
| Corporation (C Corps) Attributes |
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Definition
1) No shareholder has right to manage corp.
2) Shareholders have ltd. liability for obligations to corp. (i.e. ltd. to amount they paid for shares)
3) Directors and officers have no personal liability for the contracts they or the corp.'s employees negotiate in name of corp.
4) While managers have personal liability for own misconduct, shareholders generally have no personal liability for corp. torts committed by other corp. managers or employees
5) Taxes: usually tax paying entity for fed. income tax
-Shareholders do not report their share of the corp's profits on their indiv. tax returns; only report when corp distributes profits to shareholders in form of dividends, or, the shareholders sell their stock at a profit
-Creates double tax liability at corp level and again at shareholder level when dividends paid
-Shareholders don't deduct corp losses on indiv. tax returns; may deduct investment losses after they sold shares
6) Life separate from its owners and mangers
7) Shareholder may sell his shares of corp to other persons w/out limitation, unless contract or agreement contrary; purchaser then becomes shareholder w/all rights of selling shareholder |
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Term
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Definition
1) No human has unlimited liability for the debts of the business; thus risky businesses incorporate
2) Corp can attract large amount of capital b/c investors can avoid unlimited liability, escape responsibility of managing bus., and easily liquidate their investments by selling shares
3) With respect to S Corps, losses of bus. are deductible on indiv. fed. income tax returns, However, b/c S Corps are also limited to 100 shareholders, ability to raise capital is severely limited as it may be difficult to find investors willing to buy their shares, or may be restricted from selling shares pursuant to a previous agreement |
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Term
| Limited Liability Company (LLC) |
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Definition
| a relatively new business form intended to combine the non-tax advantages of corps. w/favorable tax treatment of partnerships. It is essentially a hybrid b/w partnership and corp. |
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Term
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Definition
1) owned by "members", who may manage or hire manager(s) to manage LLC
2) must have "LLC" in the name
3) no fed. income taxation at firm level
4)transfer of membership prohibited without consent of ALL members
5) death, retirement, or bankruptcy of any member dissolves and forces the liquidation of LLC, unless all remaining members vote to continue business |
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Term
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Definition
a) members are fiduciaries of the LLC
b) have limited liability for the obligations of LLC
c) LLC does not have the S-Corp's limits on the numbers or types of owners/members |
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Term
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Definition
LLC has the limited liability advantage and the management advantage of the corporation
-LLC and members receiver same fed. tax treatment as the S Corp. and its shareholders, but LLC has no limit on number of owners |
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Term
| Creation of a Partnership |
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Definition
1) no formalities necessary
2) two of more people through an express oral, written or conduct
3) when no oral or written agreement then courts use UPA test |
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Term
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Definition
| proposed by the National Conference of Commissioners on Uniform State Laws ("NCCUSL") for the governance of business partnerships by U.S. States |
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Term
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Definition
| used by courts to determine if partnership did exist; may determine partnership even if person didn't think there was |
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Term
| Elements of Partnership (Not Conclusive) |
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Definition
a) association of two or more persons; voluntary and consensual
b) can be any trade, occupation or profession
c) must co-own the business; no requirement that the capital contributions or assets of business be co-owned (factors: sharing of profits (vs. gross revenue)) and management of business
d) owners of an enterprise must INTEND TO MAKE A PROFIT
e) parties must intend to create a relationship that the LAW recognizes (even if parties create writing which states do NOT intend to form partnership, not conclusive if actions meet UPA test) |
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Term
| Doctrine of Partnership by Estoppel |
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Definition
SITUATION: two persons may not be partners, but in eyes of 3rd part they may appear to be one
GENERAL RULE: persons who are not partners as to each other are not partners as to third parties/persons |
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Term
| Exception by Estoppel Elements (all must be present) |
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Definition
1) a person holds himself out or consents to being held out as a partner of another person
2) third party justifiably relies on the holding out
3) third person is injured as a result of the reliance |
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Term
| Effect of Partnership by Estoppel |
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Definition
| person who held himself out as a partner or who consented to being held out is liable to the third party who was injured as though he were a party |
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Term
| Rights Among Partnerships |
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Definition
-governed largely by the specific terms of their partnership agreement
-in absence of provisions contrary to agreement, law imposes the rights (and duties, and authority) |
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Term
| Interest in the Partnership-Compensation |
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Definition
GENERAL RULE: partner's compensation is his/her share of the profits and he/she ordinarily NOT entitled to salary of wages
EXCEPTION: an agreement b/w partners to the contrary |
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Term
| Interest in the Partnership-Profits and Losses |
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Definition
| GENERAL: partners share equally, according to number of partners and not their capital contributions or amount of time each devotes |
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Term
| Interest in the Partnership-Losses |
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Definition
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Term
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Definition
-partner has ownership interest in the partnership
-part of personal property
-although partner may not give personal creditor any interest on separate items of partnership property, partner may sell or assign HIS/HER partnership interest to a creditor
EX: partner assigned his/her share of profits over to ex-spouse in divorce settlement) |
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Term
| Assignment of Partnership Interest Elements |
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Definition
-entitles buyer or assignee to right to receive the assigning partner's share of profits ONLY
-DOES NOT: make buyer or assignee a partner, right to inspect books, manage partnership, make him become liable to partnership creditors, etc.
-Assigning partner remains partner and can continue to manage business
-Assignment itself doesn't dissolve partnership; non-assigning may not exclude assigning partner from partnership, but can vote to assign partnership |
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Term
| Creditor's Lien on a Partner's Partnership Interest |
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Definition
| a) a judgment creditor who is chasing partner for money owed can forcibly and unilaterally (via court order) attach partner's interest in partnership by petitioning the court that entered the judgment to grant the creditor a CHARGING ORDER |
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Term
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Definition
| entitles creditor to the profits of the partner and to any asset available to partner on the firm's dissolution; it does NOT make creditor a partner in partnership |
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Term
| Charging Order vs. Assignment of a Partnership Interest (API) |
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Definition
-charging order is a court order
-API is not court ordered |
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Term
| Management Rights (under UPA law) |
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Definition
-all partners has equal rights in managing the partnership
-each partner has one vote in management matters regardless of the proportional size of their interest in the firm |
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Term
| Management Rule in Ordinary Partnerships |
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Definition
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Term
| Management Rules in Other Matters |
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Definition
-vote must be unanimous to bind the partnership
-Rationale: such actions are so important that the unanimous agreement of the partners is required |
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Term
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Definition
| partnership books and records must be kept accessible to all partners |
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Term
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Definition
-required to determine the value of each partner's share in partnership
-compelled voluntarily or by court order (under UPA) |
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Term
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Definition
| partner has ownership rights in any real or personal property owned by the partnership |
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Term
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Definition
1) all property originally brought into the partnership or subsequently acquired by purchase or otherwise, on account of partnership, is partnership property
2) unless the contrary intention, property acquired with partnership funds is partnership property |
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Term
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Definition
| -derived from and similar to agency law |
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Term
| Fiduciary Duties (10 duties) |
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Definition
PARTNERS MUST:
1) not secretly profit while transacting business for the partnership
2) not compete against the partnership (unless in completely unrelated type of business)
3) serve the partnership and help run the day-to-day operations of the partnership business
4) exercise the skill and care of the ordinarily prudent business manager
5) act within the actual (express and/or implied) authority possessed by the partner
6) account for the proper use and disposal of partnership property funds
7) indemnify other partners for expenditure they made from personal funds for liabilities they reasonably and in good faith incurred on behalf of partnership
8) maintain confidentiality of partnership information
9) dislose to other partners info. material
10) inform partners of notices he/she has received |
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Term
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Definition
| -each partner is a general manage which can bind the partnership and other individual partners for acts within the ORDINARY AFFAIRS OF THE PARTNERSHIP BUSINESS and thereby bind the partnership to a 3rd party |
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Term
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Definition
| -applies to authority of partners in that a partnership may RATIFY, after the fact, the unauthorized acts of any partner |
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Term
| If act in question not within "ordinary affairs of the partnership business"? |
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Definition
| -generally not binding on the partnership unless ratified by/with the unanimous consent of all of the other partners |
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Term
| Liability of Partners-Torts |
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Definition
| -respondeat superior is applied |
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Term
| What about intentional torts? |
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Definition
General Rule: neither a partnership or any of its partners are liable for the intentional tort of a partner
Rationale: intentional torts are not normally w/in the course and scope of partnership business or with/in the ordinary authority of a partner |
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Term
| Intentional Torts and Partnership Exceptions (2) |
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Definition
1) a partner who authorizes a partner to commit an intentional tort is liable for such a tort
2) where a partner has a history of committing intentional torts (e.g., sexual harassment) and partnership allows him to engage in activities where such torts may foreseeably recur, the partners and the partnership are liable |
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Term
| Liability of Partners-Crimes |
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Definition
| General Rule: partners are not criminally liable for a crime committed by another person in the course and scope of transacting partnership business |
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Term
| Crimes and Partnership Exception |
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Definition
| -a partner participates in the act or authorized its commission; he knows of the other partner's criminal tendencies and still places him in a position in which he may commit a crime; OR the crime of a partner is foreseeable because of the past conduct of that partner |
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Term
| Liability of Partners-Joint and Several Liability |
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Definition
| -in most states, partners who are BOTH jointly and severally (individually) liable for partnership debts and contracts |
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Term
| Joint and Several Liability |
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Definition
| a third party may sue (or collect against) any one or more of the partners without suing all of them or the partnership |
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Term
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Definition
| where partner has both the power AND legal right to dissolve and doesn't violate partnership agreement |
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Term
| Non-Wrongful Dissolution Actions |
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Definition
-end of the term stated in agreement
-partnership's accomplishment of agreement
-withdrawal of a partner at any time from partnership at will
-withdrawal of a partner in accordance with the partnership agreement
-unanimous agreement of the partners
-illegality of the partnership business
-death of a partner
-insolvency (e.g., bankruptcy) of a partner
-judicial dissolution due to: adjudication insanity of a partner, inability of a partner to perform the partnership contract, inability to conduct business except at a loss
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Term
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Definition
| a partner has the POWER to disassociate from partnership at any time, but doesn't have the legal RIGHT to disassociate if it violates the agreement, or otherwise wrongful |
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Term
| Consequences of Non-Wrongful Dissolution |
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Definition
| -each partner may demand that the partnership be "wound up" |
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Term
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Definition
| 1) partner dissolves the partnership in violation of agreement (e.g., retiring before the partnership accomplishes its stated objective of completing a subdivision in SLO) |
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Term
| Wrongful Dissolution Actions |
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Definition
1) any dissolution that violates the agreement
2) judicial dissolution due to partner's conduct that pre-judicially affects affects the business
3) judicial dissolution due to a partner's willful and persistent breach of the agreement or his/her fiduciary duties |
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Term
| Consequences of Wrongful Dissolution (5) |
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Definition
| the "bad guy" partner cannot demand that the business be wound up; cannot participate in winding up;value of his share in partnership is reduced by any damage caused through wrongful act |
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Term
| Acts That Do NOT Normally Cause a Dissolution |
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Definition
1) partner's API (e.g., to a creditor)
2) creditor's obtaining a charging order against partnership interest
3) addition of new partner to partnership
4) disagreement among partners that does NOT threaten the partnership assets or profitability
5)death or withdrawal of a partner, when agreement states death or withdrawal shall not cause dissolution |
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Term
| Winding Up the Partnership Business |
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Definition
-the step after dissolution
-essentially involves the orderly liquidation of the assets of the business by: selling each asset separately, selling the business as a whole, or making distributions-in-kind to partners |
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Term
| Partner's Authority During Winding Up-Express |
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Definition
-has express authority to anything partners agree a partner may perform
-implied authority to do those acts reasonably and necessary to winding up |
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Term
| Partner's Authority During Winding Up-Implied |
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Definition
| to do those acts reasonably necessary to winding up |
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Term
| Partner's Authority During Winding Up-Apparent |
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Definition
-normally will continue unless appropriate notice is given to appropriate parties, creditors, etc.
-partner may not have express or implied authority, but still have apparent |
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Term
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Definition
| -to protect themsevles,remaining partners need to provide some type of adequate and efficient notice to public that "bad guy" partner does NOT have authority to do certain things/anything on behalf of partnership |
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Term
| Rules of Dispute During Winding Up |
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Definition
1) for decisions in ordinary course of winding up, decision of majority of partners controls
2) when decision is an extraordinary one, unanimous partner approval is necessary |
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Term
| Successor Partnership's Liability for Predecessor Partnership's Obligations |
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Definition
1) creditors of old partnership are creditors of new one
2) original partners remain liable for obligations incurred prior to dissolution, unless agreement with creditors to the contrary |
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Term
| Outgoing Partner's Liability for Obligations Incurred by Partnership |
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Definition
| General Rule: such partners remain liable for partnership liabilities incurred while partners |
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Term
| Outgoing Partner's Liability Exception |
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Definition
| if a novation occurs they are not liable |
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Term
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Definition
an agreement b/w partnership, creditor and outgoing partner to release the outgoing partner from the debt or liability at issue
-express or implied |
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Term
| Outgoing Partner's Liability...After He Leaves the Partnership |
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Definition
| General Rule: an outgoing partner has no liability for such debts or claims |
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Term
| Outgoing Partner's Liability...After He Leaves the Partnership Exceptions |
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Definition
| -if doctrine of partnership by estoppel applies, he will be liable for such claims |
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Term
| How should outgoing partner protect themself? |
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Definition
| they should provide some type of notice that they are no longer with partnership to appropriate persons and parties |
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Term
| Liability of Incoming Partners |
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Definition
1) unlimited personal liability for all obligations incurred AFTER become partner
2) for obligations BEFORE become partner: liable as if he had been partner when obligations incurred, but limited to partnership's assets only; creditor can only come after personal assets when partnership assets have been exhausted |
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Term
| Rights of Outgoing Partners |
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Definition
-entitled to receive value of their partnership interest and they become a creditor of new partnership for value of their partnership interest
-claims subordinate to the claims of other creditor's of the partnership |
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Term
| Valuation of Outgoing Partner's Interest |
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Definition
-determined at time of dissolution
-includes goodwill; but exluded when valuing interest of a wrongfully discharged partner and valuation further reduced by damages that outgoing partners has caused due to causing wrongful dissolution |
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Term
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Definition
Under UPA:
1) those owing to creditors, other than partners (e.g., landlord who rented partnership office space)
2) those owing to partners other than for capital of contributions and profits (e.g., maybe one of partners was entitled to a salary (in addition to salary))
3) those owing to partners
4) those owing partners in respect to their share of profits |
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Term
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Definition
| automatically terminated after partnership assets have distributed |
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Term
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Definition
-allows infusion of capital from investors, but doesn't surrender managerial control to such investors
-investors relieved of management responsibilities
-investors can limit their liability to amount of their investment |
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Term
| LP Features-General Partners |
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Definition
| 1) contribute capital to business, manage it, share in its profits, and posses unlimited liability for obligations |
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Term
| LP Features-Limited Partners |
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Definition
| contribute capital and share profits, but posses no management powers, and have liability limited to their capital investment in the business |
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Term
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Definition
| primarily in tax shelter ventures |
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Term
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Definition
| -must comply with Revised Uniform Limited Partnership Act (RULPA) |
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Term
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Definition
1) certificate of partnership
2) any "person" may be a general or limited partner ("person" includes: natural person, partnership, LP, trust, estate, association, or corp.)
3) permits partners to make capital contributions of cash, property, services rendered, promissory note, or binding promise to contribute cash, property, or services |
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Term
| Rights and Liabilities Shared by General and Limited Partners |
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Definition
| -obligated to make capital contributions (enforced by LP itself or creditors) |
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Term
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Definition
General Rule: under RUPLA, shared on basis (or %) of value of each partner's capital contribution to LP
Exception: written agreement to contrary |
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Term
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Definition
-may provide that certain transactions be approved by general partners, limited partners, or both
-RULPA states that limited partners have no inherent right to vote as a class; can only receive such right via an agreement of the partners |
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Term
| Admission of New LP Partners |
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Definition
| each partner must consent to the admission (or in accordance with LP agreement) |
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Term
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Definition
| each partner owns a partnership interest, which is their personal property that they may sell or assign to others |
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Term
| Right to Withdraw from LP |
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Definition
| can withdraw and entitled to receive fair value of partnership interest so long as it does not impair the LPs ability to pay its creditors |
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Term
| Other Rights of General Partners in LP |
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Definition
| same as ordinary partnership (e.g., agency powers) |
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Term
| Other Rights of Limited Partners in LP |
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Definition
-kept informed about partnership affairs by general partners
-sue to enforce an LP right of action against person(s) who harmed the LP (derivative suit)
-limited partners can appear on behalf of LP and assert defense when LP sued and general partners fail to defend it |
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Term
| Other Liabilities of Limited Partners |
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Definition
| General Rule: one the limited partners have contributed their capital, they normally no longer have any further liability for partnership losses or obligations |
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Term
| Other Liabilities of Limited Partners Exception |
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Definition
| when limiteds engage in "too much" management activity, they lose limited liability |
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Term
| RULPA Law for Ltd. Partner Engaged in "Too Much" Management Activity |
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Definition
| liable only to those persons who transact business w/LP reasonably believing, based on the ltd. partner's conduct, that the ltd. partner is/was a general partner (3 elements need to be satisfied) |
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Term
| RULPA Law for Ltd. Partner Engaged in "Too Much" Management Activity Elements (3) |
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Definition
1) ltd. partner must particiape in the "control" of LP
2) the participation leads a person to reasonably believe that the ltd. is a general partner AND
3)that person must transact business with ltd. partner while holding that belief |
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Term
| Activities under RULPA that may be perfomed my ltd. partner without becoming personally liable for partnership debts |
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Definition
1) being an agent, an employee or contractor for LP of general partner, or being officer, director, or shareholder of a general partner that is a corp.
2) being a consultant or adviser to a gen. partner
3) acting as a surety for LP or guaranteeing or assuming specific obligations of LP
4) pursuing or attending meeting of partners
5) proposing or voting on such partnership matters (dissolution, sale of assets, etc.)
6) winding up the LP
7) suing to enforce the fiduciary duties that other partners owe the LP |
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Term
| Dissolution of LP Causes (5) |
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Definition
1) expiration of term specified in certificate of LP
2) upon happening of events specified in writing in agreement
3) consent of all partners
4) withdrawal of a GENERAL partner
5) court order |
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Term
| Events NOT Causing Dissolution of LP |
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Definition
1) death, bankruptcy, insanity, or withdrawal of a limited partner; UNLESS Certificate of LP compels it in such circumstances
2) addition of a partner (ltd or general) |
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Term
| Winding Up an LP Basic Rules |
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Definition
1) generals who have not wrongfully dissolved an LP may perform it
2) ltd's may wind up if no surviving generals
3) any partner may ask a court to perform it
4) other principles the same as ordinary partnerships |
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Term
| Distribution of Assets for LP (under RULPA, highest to lowest priority) |
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Definition
1) to firm creditors (including partners who are creditors), except for unpaid distribution to partners
2) to partners for unpaid distributions (including return of capital to previous withdrawn partners)
3) to partners to extent of their capital contributions
4) to partners in proportion in which they share distributions |
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Term
| Continuation of LP Business |
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Definition
| usually assets are sold; could be sold to someone who desires to continue the business |
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Term
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Definition
| introduction, corporate personnel, taxation |
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Term
|
Definition
-shareholders own the corporation
-they elect a Board of Directors to govern corp.
-B of Dir. hires corporate officers and other employees to run daily business of corp. |
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Term
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Definition
-Corp. pays fed. income tax on net profits
-Shareholders pay income tax on declared and disbursed dividends that they receive from corp. |
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Term
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Definition
1) issue stock to shareholders, who hope to earn and be paid profits
2) can be "publicly-held"
3) can be a "close corp.", where controlling shareholders are managers of the business (most family-based) |
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Term
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Definition
-cannot have more than 100 shareholders
-eliminate the double-taxation penalty of ordinary corps, |
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Term
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Definition
-must comply with state incorp. statute
-if corp.'s business is primarily interstate corp. may benefit from incorporation in a different state than where corp. has its business (Delaware most common) |
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Term
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Definition
1) Preparation and signing of the Articles of Incorporation
2) signing of A of I by one or more of the incorporators
3) filing A of I with Sec. of State with payment fees
4) holding organizational meeting for purpose of adopting bylaws, electing officers, and transaction of other business |
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Term
| Articles of Incorporation Mandatory Elements |
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Definition
MUST CONTAIN:
-name of corp.
-number of shares that corp. has authority to issue
-address of initial registered office of corp. and name of registered agent for service process
-name and address of each incorporator |
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Term
| Articles of Incorporation Non-Mandatory Elements |
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Definition
1) names and addresses of individuals who are to serve as initial directors
2) purpose of corp.
3) duration of corp.
4) par value of shares
5) additional provisions not inconsistent with law for managing, regulating internal affairs, and est. powers of corp. and its directors |
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Term
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Definition
a) supplement the A of I by more precisely defining rights and responsibilities of parties involved in corp. structure
b) MUST contain:
-authority of officers and directors, specifically
-time and place where annual shareholders meetings will be held
-procedure for calling special meeting of shareholders
-procedures for shareholders' and directors' meetings (including whether more than majority required for approval of actions)
-provisions for special committees of the board, defining their membership and scope of their activities
-procedures for maintenance of share records
-machinery for transfer of shares
-procedures of standards for declaration and payment of dividends |
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Term
| Equity Securities (aka shares) |
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Definition
-subject to min. guarantees contained in state corp. law
-shareholders' rights are matter of contract, appear in A of I, bylaws, shareholder agreement, and/or on share certificates |
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Term
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Definition
-inferior position to other investors (mainly creditors and preferred shareholders)
-their claims are subordinate to claims of creditors and other classes of SHs
-these SHs have exclusive claim to corp. earnings and assets that exceed claims of creditors and other SHs
-bear the most risk, but profit more
-have exclusive right to elect the directors |
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Term
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Definition
-have preferences w/regard to assets or dividends over other share classes
-given liquidation and dividend preferences over common SHs
-may have different classes of preferred stock |
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Term
| Intro to Consideration for Shares |
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Definition
B of Directors has power to:
-issue shares on behalf of corp.
-decide price and for what type of consideration will issue shares (statutes restrict discretion of board in accepting kinds of consideration and valuation of stock) |
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Term
| Quality of Consideration for Shares |
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Definition
| -statutes require legal consideration to have REAL VALUE |
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Term
| Quantity of Consideration for Shares |
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Definition
-board required to issue shares for an adequate $ amount of consideration
-adequate $ amount depends on par and fair value of shares |
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Term
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Definition
-assigned by A of I
-does NOT reflect fair market value, but is min. amount of consideration for which shares may be issued
-attempts to protect creditors by ensuring corp. has min. equity cushion |
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Term
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Definition
-Model of Business Corp. Act (MBCA) eliminate concept of pay value as it affects issuance of shares
-MBCA ensured by board
-Board's judgment is CONCLUSIVE when/if acts in good faith, exercises care of ordinarily prudent directors, and acts in best interest of corp. |
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Term
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Definition
-when B of Dir. impermissibly overvalues consideration given for shares
-both board and SHs liable to corp. for difference |
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Term
| Effect of Piercing the Corp. Veil |
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Definition
| may cause one or more of corp's SHs to lose his/her limited liability |
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Term
| Piercing the Corp. Veil (PCV) |
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Definition
| when court goes after individual SHs when they over-manage the corp. |
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Term
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Definition
1) domination of the corp. by its SHs
2) using that domination for improper use |
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Term
| Directors' and Officers' Duties to the Corp. |
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Definition
-act within authority conferred by A of I
-exercise due care ("ordinarily prudent person in the same circumstance") |
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Term
| The Business Judgment Rule |
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Definition
| -absent bad faith, fraud, or breach of fiduciary duty, the judgment of the the board of directors is CONCLUSIVE, and as a consequence, a court will NOT sub. its judgment for the judgment of management |
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Term
| BJR Application Requirements |
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Definition
Managers MUST:
1) make an informed decision
2) not have any conflicts of interest AND
3) have rational basis for believing that the decision is in the best interest of the corporation
-Elements: logical connection to the facts revealed by a reasonable investigation, or that the decision not be manifestly unreasonable |
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Term
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Definition
| directors are not liable for opposing a tender offer b/c BJR applies to a board's decision to oppose a tender offer |
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Term
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Definition
BJR won't apply when the directors make a decision to oppose the tender offer before they have carefully studied it and/or oppose tender offer to sace their jobs
-directors held liable to corp and its SHs |
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Term
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Definition
| directors and officers cannot self-deal,usurp a corp. opportunity, oppress minority SHs, trade on inside infor. , etc. |
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Term
| Corporation Liability-Torts |
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Definition
General Rule: liable for torts committed by its agents, officers, or directors w/in course and scope of their employment
Exception: tort not committed by such a person in course and scope of their employment |
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Term
| Corporation Liability-Crimes (Traditional View) |
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Definition
| an "entity" could not be held liable for crimes b/c it, as an entity, could not form the requisite of criminal intent and/or corp. not a "person" for purposes of criminal liability |
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Term
| Corporation Liability-Crimes (Modern View) |
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Definition
most courts have little difficulty finding an entity liable for a crime (and be fined) for criminal acts of its agents, employees, partners, etc.
-In certain situations, officers, employees, partners, etc. may be held personally liable for crimes |
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Term
| Liability of Directors and Officers- Own Torts |
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Definition
| -a person is always liable for his OWN torts, even when committed on behalf of his principal |
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Term
| Liability of Directors and Officers-Torts of Others |
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Definition
| -NOT liable unless they authorized the tort of participated in its commission |
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Term
| Liability of Directors and Officers- Own Crimes |
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Definition
| -always liable, even when committed on behalf of principal |
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Term
| Liability of Directors and Officers- Crimes of Others |
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Definition
| -has criminal liability only if he/she requests, authorizes, conspires, or aids and abets the commission of a crime by another employee |
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