CHAPTER 32 FORMATION OF A BUSINESS

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CHAPTER 32FORMATION OF A BUSINESS
DAVIDSON, KNOWLES FORSYTHE Business Law Cases
and Principles in the Legal Environment (8th Ed.)
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HISTORICAL OVERVIEW OF PARTNERSHIPS

• Foundation of business organizations throughout
  history.
• U.S. followed English common law for
  partnerships.
• Today, partnerships governed by the Unified
  Partnership Act (UPA).
• Revised Uniform Partnership Act (RUPA) for
  general partnerships.

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HISTORICAL OVERVIEW OF PARTNERSHIPS

• RUPA 1997 amendments are
• Limited liability for partners registered in
  limited liability partnerships.
• Views partnership as separate entity.
• Dissolution no longer required every time a
  partner leaves.
• Permits, but not required, filing of statements
  when partnership formed, dissolved, merged, or
  limitations on partnership authority.

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HISTORICAL OVERVIEW OF PARTNERSHIPS

• Partnerships generally easy to form and have
  wider potential financial bases than
  proprietorships.
• Partnerships are not perpetual.
• Partners face unlimited liability for
  business-related conduct.
• No one formation of business organization is
  perfect.

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PARTNERSHIPS DEFINED

• Uniform Partnership Act defines partnership with
  five characteristics
• An Association mutual and unanimous assent to
  be partners jointly and severally at time of
  agreement.
• Of Two or More Persons identifiable entities
  that elect to associate.
• To Carry on a Business continuity of trade,
  occupation, or profession.
• As Co-Owners sharing of ownership of business.
  
• For Profit operate for profit (money).

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PARTNERSHIPS DEFINED

• Limited Partnership.
• Must have two or more persons with at least one
  limited partner.
• Limited partners have limited liability.
• Limited partner is not personally liable for
  partnership obligations.
• Limited partner cannot control the business of
  the partnership.

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PARTNERSHIPS DEFINED

• Limited Partnership (contd).
• Limited partner is precluded from management of
  the business.
• Revised Uniform Limited Partnership Act (RULPA)
  requires profits and losses to be shared based
  on
• capital contributions
• unless an agreement specifies otherwise

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PARTNERSHIPS DEFINED

• Limited Partnership.
• Distribution of assets upon termination of the
  entity and liquidation of its assets is treated
  differently under revised act than under ULPA
• Interesting aspect of RULPA is that it specifies
  if case not provided for under RULPA, are to be
  governed by provisions of ULPA.

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PARTNERSHIP PROPERTY

• The UPA defines partnership property as
• Property contributed as capital contributions.
• Property acquired on account of partnership.
• Property acquired with partnership funds.
• Any interest in real property acquired in the
  partnerships name.
• Any conveyance to the partnership in its name.

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THE PARTNERSHIP AGREEMENT

• Partnership created by agreement, either
  expressed (oral or written) or implied.
• Imposed Rules.
• Partners each entitled to an equal voice.
• Partners entitled to equal share of profits.
• Partners share losses in same proportion as they
  share profits.
• Books must be kept at central office of business.

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THE PARTNERSHIP AGREEMENT

• Regardless of what partnership agreement says,
  any attempt to modify rules will be deemed void.
• Imposed Rules
• Partners are agents of partnership.
• Partners have unlimited personal liability for
  torts/contracts which partnership has
  insufficient assets to cover debt.
• Partner is expected to devote service only to the
  partnership.

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THE PARTNERSHIP AGREEMENT

• Express Terms.
• Agreement should designate the name of the
  business.
• Partnership agreement should cover purpose and
  duration of partnership.
• How profits and losses are shared.
• Withdrawal procedures.

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LIMITED LIABILITY PARTNERSHIPS

• A growing number of states recognize the limited
  liability partnership (LLP).
• Partners personal assets are protected from
  liability claims against partnership.
• Partner in an LLP is not personally liable for
  malpractice, negligence, or other tort committed
  by a co-partner or agent.

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LIMITED LIABILITY PARTNERSHIPS

• Partners remain personally liable for their own
  negligence and for contractual obligations of
  partnership.
• RUPA amendments require election to become a LLP.
• 1997 RUPA amendments, treats LLPs as
  partnerships in all respects.

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TAXATION OF PARTNERSHIPS

• For taxation purposes, partnership form of
  business neither an advantage or disadvantage.
• Partnership is not taxed on its profits and
  losses.
• Partners are personally taxed on their share of
  the partnerships profits and losses.

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HISTORICAL OVERVIEW OF CORPORATIONS

• Concept of corporate personality may have been
  recognized as early as the time of Hammurabi.
• Canon law distinguished between corporation sole
  and aggregate.
• The fiction theory probably developed by the
  papacy.

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HISTORICAL OVERVIEW OF CORPORATIONS

• English monarchs tightened control over
  corporations, deemed to exist by virtue of
  concessionary grants of power from state.
• Careful regulation of corporations remains an
  essential characteristic of law of corporations.

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CORPORATE NATURE

• Corporations are artificial persons created under
  statute of state or nation.
• Organized for the purpose set out in application
  for corporate existence.
• Corporation is an invisible, intangible,
  artificial person.
• Corporations enjoy most rights natural persons
  possess.

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CORPORATE NATURE

• Advantages of Corporate Form
• Insulation from liability.
• Centralization of management functions.
• Continuity of existence.
• Free transferability of shares.

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FORMATION OF A CORPORATION

• Process of forming corporation involves complex
  issues that demand the attention of well-versed
  professionals.
• Types of Corporations
• Public-issue private corporation.
• Close corporation.
• Professional corporation.
• Municipal (also called public or quasi-public)
  corporation.

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FORMATION OF A CORPORATION

• Promoters.
• Help form the corporation by procuring
  subscribers for stock.
• Take other affirmative steps toward incorporating.

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FORMATION OF A CORPORATION

• Articles of Incorporation is a document that
  signals official existence of corporation and
  contains
• Name of corporation
• Its purpose
• Its duration
• Location of its principal office or registered
  agent
• Its powers, its capital structure
• Its directors and names and
• Signatures of the incorporators.

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FORMATION OF A CORPORATION

• Corporate Charter/Certificate of Incorporation
  officially begins a corporations existence.
• Organizational Meeting where the bylaws are
  adopted, pre-incorporation agreements approved,
  and officers elected.
• Bylaws regulate the internal affairs of a
  corporation.

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DE JURE vs. DE FACTO CORPORATIONS

• A de jure corporation is valid by law if slight
  defect in formation.
• Corporation has serious defect may be considered
  de facto corporation unless
• Law under which the corporation could have been
  incorporated exists.
• There was a good faith effort to comply with
  statute.
• There was some use or exercise of corporate
  powers.

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CORPORATE POWERS

• Articles of Incorporation set forth powers of the
  corporation.
• Provisions redundant as states express what
  entity can do
• Ability to conduct business.
• To exist perpetually.
• To sue and be sued.
• To use corporate name and seal.
• To make bylaws.

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CORPORATE POWERS

• Corporations have implied power to do anything
  reasonably necessary to conduct business.
• Typically implied powers consists of
• Holding or transferring property.
• Acquiring stock from other corporations.
• Borrowing money or effecting loans.
• Statutes may enumerate these and other implied
  powers.

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ULTRA VIRES ACTS

• Ultra vires is beyond the scope or legal power of
  a corporation.
• When sued corporations could use ultra vires as
  defense to enforce contract.
• State statutes abolished ultra vires defense
  allowing suits in three situations
• Shareholder injunctive action.
• Shareholder suit to recover damages .
• State proceedings to dissolve corporation .

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TAXATION OF CORPORATIONS

• Tax treatment of corporation stems from laws
  recognition of corporation as separate entity for
  federal income tax purposes.
• Profits and losses of a C corporation are taxed
  to the corporation.
• Profits and losses of an S corporation
  (Subchapter S corporation) are taxed to the
  shareholders.

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DISREGARDING THE CORPORATE ENTITY

• In order to serve justice it will be necessary to
  pierce the corporate veil.
• Law may impose personal liability on shareholders
  if
• The shareholder is sole shareholder in an
  association so thinly capitalized that it cannot
  meet its obligations.
• If shareholder is draining off corporate assets.

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LIMITED LIABILITY COMPANIES

• State statute that allows LLPs is often the same
  that authorizes LLCs.
• Concerns about federal and state tax structures.
• State statutes vary.

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LIMITED LIABILITY COMPANIES

• History of Limited Liability Companies.
• Purpose to provide limited liability to
  investors.
• Members liability limited to capital investment.
• State statutes generally dictate
• Two or more members.
• Stated term of duration less than 30 years.
• All members must have limited liability.
• Shares not freely transferable.
• Central management elected by members.
• Indication in its name that it is an LLC.

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LIMITED LIABILITY COMPANIES

• Taxation of Limited Liability Companies
• IRS examines whether enterprise has
  characteristics of a corporation or not.
• LLC is an association.
• LLCs article of organization and state statutes
  determine characteristic of an LLC.
• IRS and courts decide if partnership taxation is
  appropriate if LLC lacks continuity of life,
  centralized management and transferability of
  shares.

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LIMITED LIABILITY COMPANIES

• Flexibility and Variance.
• LLC statutes vary from state to state.
• LLC statutes vary is whether professional service
  associations can form LLC.
• Many states will not permit an LLC to continue
  perpetuity as a corporation can.
• Most LLC statutes greatly restrict
  transferability of shares.

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OTHER TYPES OF BUSINESS ORGANIZATIONS

• Partnership by Estoppel. To use estoppel, three
  facts must be shown
• Someone who is not a partner was held out to be a
  partner by the firm.
• Third person justifiably relied on the holding
  out.
• Person will be harmed if no liability is imposed.
• Joint Ventures set up to carry out a limited
  number of transactions, or a single deal.

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OTHER TYPES OF BUSINESS ORGANIZATIONS

• Mining Partnerships.
• Selling of an interest or bequeathing of an
  interest by will is permitted.