CHAPTER 32 FORMATION OF A BUSINESS

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

2. 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.

3. 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.

4. 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.

5. 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).

6. 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.

7. PARTNERSHIPS DEFINED • Limited Partnership (cont’d). • 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

8. 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.

9. 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 partnership’s name. • Any conveyance to the partnership in its name.

10. 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.

11. 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.

12. 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.

13. LIMITED LIABILITY PARTNERSHIPS • A growing number of states recognize the limited liability partnership (LLP). • Partner’s 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.

14. 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 LLP’s as partnerships in all respects.

15. 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 partnership’s profits and losses.

16. 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.

17. 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.

18. 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.

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

20. 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.

21. FORMATION OF A CORPORATION • Promoters. • Help form the corporation by procuring subscribers for stock. • Take other affirmative steps toward incorporating.

22. 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.

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

24. DE JURE vs. DE FACTOCORPORATIONS • 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.

25. 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.

26. 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.

27. 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 .

28. TAXATION OF CORPORATIONS • Tax treatment of corporation stems from law’s 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.

29. 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.

30. 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.

31. LIMITED LIABILITY COMPANIES • History of Limited Liability Companies. • Purpose to provide limited liability to investors. • Member’s 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.

32. 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.

33. 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.

34. 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.

35. OTHER TYPES OF BUSINESS ORGANIZATIONS • Mining Partnerships. • Selling of an interest or bequeathing of an interest by will is permitted.