This document discusses different types of business organizations including partnerships. It provides details on sole proprietorships, general partnerships, limited partnerships, and partnership agreements. Key points covered include:
- Partnerships involve two or more persons carrying on a business for profit as co-owners. Sharing profits or losses is evidence of a partnership.
- Partnership agreements should outline management structure, partner duties, profit/loss allocation, and dispute resolution. State laws provide default rules.
- Partners have unlimited liability for partnership debts, while limited partners only risk their investment amount. Exercising control can make a limited partner a general partner.
This document discusses establishing a US subsidiary for a German parent company. It compares corporations and LLCs as entity structures and notes Delaware as a preferred state of incorporation. It outlines important considerations for subsidiary management and when a court may "pierce the corporate veil" and hold a parent company liable for its subsidiary's actions. A spectrum of factors courts examine in "veil piercing" lawsuits is provided. The document also addresses litigation issues like discovery obligations and document retention policies.
This document provides an overview of partnership insurance. It discusses how partnership insurance can help avoid difficulties that may arise if a partner dies prematurely, such as the partnership being dissolved or the deceased partner's legal heirs asking for their share from the surviving partners. It describes how partnership insurance works and the eligibility conditions, tax benefits, and requirements for obtaining partnership insurance. It also addresses what would happen if the partnership firm dissolved before the death of any partners.
T1, 2021 business law lecture week 7 - partnership and agency lawmarkmagner
This document provides an overview of partnership law. It defines a partnership as a relationship between persons carrying on business in common with a view to profit. Key points include:
- Partnerships have advantages like simple structure and profit/loss sharing, but disadvantages like unlimited liability of partners.
- Several tests must be met for a partnership to exist, including an agreement to carry on business in common with a view to profit.
- Partners have mutual agency relationships and can bind each other in contract and tort within the scope of the partnership business.
- The Partnership Act 1891 provides statutory rules regarding partnership formation, duties between partners, and partner liability.
The document provides an overview of different business structures including sole proprietorships, partnerships, corporations, S-corporations, and limited liability companies. It discusses the key characteristics of each structure such as taxation, liability, and control. The document aims to help business owners choose the right structure for their needs and business by comparing the advantages and disadvantages of each option.
Spotting Financial Advisors' Conflicts of InterestDaniel Del Re
Recognizing potential conflicts of interest can present a challenge to affluent investors who often work closely with numerous, well-connected advisors. While the business or personal ties that financial and legal professionals possess do not always color the advice they provide, their clients should always be on the lookout for potential problems and, if they arise, be prepared to manage them. The document then discusses a case involving the Cailloux family estate where the family attorney and executor of the estate were found to have conflicts of interest that negatively impacted the family. It concludes by emphasizing the importance of investors understanding an advisor's potential conflicts and not being completely dependent on their advice alone.
This document summarizes key aspects of partnership law regarding when the acts of a partner can bind their other partners to outsiders. It discusses the four requirements under Section 7 of the Partnership Act for a partner's actions to bind the firm: 1) the act was by a partner 2) was within the scope of the firm's business 3) was conducted in the usual way and 4) the outsider knew or believed the person was a partner. The document analyzes several cases that further illustrate these requirements, such as when investment advice could be considered within a firm's usual business activities.
- The letter represents a law firm and concerns a dispute between their client Gordon Kraft, a member of the board of directors of Starpower Home Entertainment Inc., and the company.
- Starpower is attempting to replace an existing loan agreement with Gordon Kraft from 2005 with a new "Substitute Obligation" without Kraft's consent or additional consideration.
- The law firm asserts that Starpower cannot unilaterally replace the original loan agreement and that Kraft does not agree to a "novation." They also have concerns about how Kraft's original investment in Starpower was solicited and how the company has been managed.
Limited liability partnership a new business modelAurobindo Saxena
1. The document discusses limited liability partnerships (LLPs), a hybrid business structure that provides limited liability for partners like corporations but also allows flexibility in organization like partnerships.
2. It traces the development of LLP laws globally, including early adoption in the US and pressure from accounting firms that led to laws in Jersey and the UK. Key provisions and requirements of LLP laws in these jurisdictions are outlined.
3. Several important issues for consideration in establishing LLP laws in India are identified, such as whether to allow only professionals, what partnership agreement details to require filing, and whether to allow foreign individuals or general partners with unlimited liability.
This document discusses establishing a US subsidiary for a German parent company. It compares corporations and LLCs as entity structures and notes Delaware as a preferred state of incorporation. It outlines important considerations for subsidiary management and when a court may "pierce the corporate veil" and hold a parent company liable for its subsidiary's actions. A spectrum of factors courts examine in "veil piercing" lawsuits is provided. The document also addresses litigation issues like discovery obligations and document retention policies.
This document provides an overview of partnership insurance. It discusses how partnership insurance can help avoid difficulties that may arise if a partner dies prematurely, such as the partnership being dissolved or the deceased partner's legal heirs asking for their share from the surviving partners. It describes how partnership insurance works and the eligibility conditions, tax benefits, and requirements for obtaining partnership insurance. It also addresses what would happen if the partnership firm dissolved before the death of any partners.
T1, 2021 business law lecture week 7 - partnership and agency lawmarkmagner
This document provides an overview of partnership law. It defines a partnership as a relationship between persons carrying on business in common with a view to profit. Key points include:
- Partnerships have advantages like simple structure and profit/loss sharing, but disadvantages like unlimited liability of partners.
- Several tests must be met for a partnership to exist, including an agreement to carry on business in common with a view to profit.
- Partners have mutual agency relationships and can bind each other in contract and tort within the scope of the partnership business.
- The Partnership Act 1891 provides statutory rules regarding partnership formation, duties between partners, and partner liability.
The document provides an overview of different business structures including sole proprietorships, partnerships, corporations, S-corporations, and limited liability companies. It discusses the key characteristics of each structure such as taxation, liability, and control. The document aims to help business owners choose the right structure for their needs and business by comparing the advantages and disadvantages of each option.
Spotting Financial Advisors' Conflicts of InterestDaniel Del Re
Recognizing potential conflicts of interest can present a challenge to affluent investors who often work closely with numerous, well-connected advisors. While the business or personal ties that financial and legal professionals possess do not always color the advice they provide, their clients should always be on the lookout for potential problems and, if they arise, be prepared to manage them. The document then discusses a case involving the Cailloux family estate where the family attorney and executor of the estate were found to have conflicts of interest that negatively impacted the family. It concludes by emphasizing the importance of investors understanding an advisor's potential conflicts and not being completely dependent on their advice alone.
This document summarizes key aspects of partnership law regarding when the acts of a partner can bind their other partners to outsiders. It discusses the four requirements under Section 7 of the Partnership Act for a partner's actions to bind the firm: 1) the act was by a partner 2) was within the scope of the firm's business 3) was conducted in the usual way and 4) the outsider knew or believed the person was a partner. The document analyzes several cases that further illustrate these requirements, such as when investment advice could be considered within a firm's usual business activities.
- The letter represents a law firm and concerns a dispute between their client Gordon Kraft, a member of the board of directors of Starpower Home Entertainment Inc., and the company.
- Starpower is attempting to replace an existing loan agreement with Gordon Kraft from 2005 with a new "Substitute Obligation" without Kraft's consent or additional consideration.
- The law firm asserts that Starpower cannot unilaterally replace the original loan agreement and that Kraft does not agree to a "novation." They also have concerns about how Kraft's original investment in Starpower was solicited and how the company has been managed.
Limited liability partnership a new business modelAurobindo Saxena
1. The document discusses limited liability partnerships (LLPs), a hybrid business structure that provides limited liability for partners like corporations but also allows flexibility in organization like partnerships.
2. It traces the development of LLP laws globally, including early adoption in the US and pressure from accounting firms that led to laws in Jersey and the UK. Key provisions and requirements of LLP laws in these jurisdictions are outlined.
3. Several important issues for consideration in establishing LLP laws in India are identified, such as whether to allow only professionals, what partnership agreement details to require filing, and whether to allow foreign individuals or general partners with unlimited liability.
The webinar discusses the key factors to consider when choosing a business entity, including various types of entities like C corporations, S corporations, LLCs, partnerships, and sole proprietorships. It covers differences in liability, ownership restrictions, taxation of income, employment taxes, deductibility of fringe benefits, and implications of distributions and sales. The webinar analyzes these considerations and pros and cons for each entity type to help business owners determine the most suitable structure. It also reviews procedures for changing entity forms.
The document discusses the legal case of Foss vs Harbottle regarding minority shareholders of the Victoria Park Company. It summarizes that Richard Foss, a minority shareholder, claimed the company's property had been misapplied and mortgages improperly given. However, the court dismissed the claim based on the proper plaintiff rule that only the company itself can vindicate wrongs done to it, and the majority rule principle that the court will not interfere if a simple majority of members would confirm or ratify the alleged wrong.
The document discusses different business organization structures including sole proprietorships, general partnerships, limited liability companies, C corporations, and S corporations. It provides examples of different types of businesses that may choose each structure and highlights key considerations like costs, taxes, and legal liability for business owners.
Vinita Mehra and Jasmin Hurley took part in an event about launching businesses put on by the Greater Columbus Chinese Chamber of Commerce. They discussed U.S.-China trade relations, focusing on U.S.-bound investment, its structures and incentives. They also covered entry options for investors, detailing corporate structuring and taxability, and gave several tips to doing business in the U.S., especially related to IP protection.
T1, 2021 business law lecture week 9 - corporations lawmarkmagner
This document provides an overview of company law in Australia. It defines key terms like proprietary company, public company, directors, officers, and fiduciary duties. It explains that companies are distinct legal entities registered with ASIC. Directors owe statutory and common law duties to act with care, in good faith, and avoid conflicts of interest. The corporate veil protects shareholder liability but can be pierced for improper conduct like fraud.
While corporations are generally legally distinct from their shareholders, courts will pierce the corporate veil under certain circumstances, such as to prevent fraud or achieve equity. There are two main theories used by courts - alter ego and instrumentality. Alter ego focuses on the unity of ownership and interest between a corporation and its owners such that they cease to be separate entities. Instrumentality examines whether a dominant entity used a subservient corporation as a fiction for its own purposes. Factors like financial dependence, lack of separateness, and control help determine if the corporate veil should be pierced.
The Complex Commercial Litigation Law Review 2019, Ireland Matheson Law Firm
Commercial Litigation and Dispute Resolution partners, Julie Murphy-O'Connor, Claire McLoughlin and Karen Reynolds co-author the 2019 Ireland chapter of the Complex Commercial Litigation Law Review.
Chapter 41 – History and Nature of CorporationsUAF_BA330
The document discusses the history and nature of corporations, including how corporations evolved from special charters granted by states to modern enabling statutes, and covers key topics such as classes of corporations, state and federal regulation of corporations, what constitutes "doing business" in a state, and piercing the corporate veil. It also provides examples, definitions, and a short quiz.
2011 aia presentation the good bad and the ugly of strategic relationships (2)bhealey
The document discusses the benefits and risks of forming strategic alliances. It notes that strategic alliances can provide cost sharing, risk sharing, and allow companies to enhance their strengths and compensate for weaknesses. However, improperly formed alliances can create unwanted legal exposure, such as unexpected liability to third parties if a joint venture is determined to be a partnership under law. A partnership comes with obligations to other partners, questions around ownership of shared property, and potential regulatory violations. The document provides examples of cases where alliances resulted in large damage awards or disputes due to lack of clarity around the legal relationship.
1) The document discusses two cases from Ghana that highlight how the courts have failed to protect creditors' rights by strictly applying the doctrine of separate corporate entity from the Salomon v. Salomon case.
2) In the first case, Majdoub & Co. Ltd. v. Bartholomew & Co. Ltd., a limited company was formed to take over the assets and liabilities of a partnership to avoid paying a debt, and the court did not consider this a fraud on the creditors.
3) In the second case, Grant v. Tikobo (Ghana) Ltd., a company sold its assets without creditors' knowledge to avoid a debt, and again the court did not protect the creditors
The document provides information about the 2005 Centralized Bar Operations Executive Committee and Subject Chairpersons. It lists the overall chairperson, vice chairs, and subject heads for various bar exam topics. It also includes summaries of key concepts relating to partnership under civil law, including the definition of a partnership, requirements for partnership contracts, classification of partnerships, and details about universal partnerships.
The document discusses the key characteristics and formation of corporations. It identifies the major characteristics of corporations as separate legal existence, limited liability for stockholders, transferable ownership rights, ability to acquire capital through issuing stock, continuous life regardless of ownership changes, and corporate management structure. It also notes some disadvantages of corporations include additional taxes and government regulations. The document provides details on authorizing stock, issuing stock, and par and no-par values of stock.
This document discusses strategies for restructuring a company to minimize business risks through establishing corporate firewalls. It outlines forming a new holding company structure with separate operating subsidiaries to protect different classes of assets. The three-step process involves preliminary planning, completing the reorganization, and ongoing adherence to corporate formalities. Maintaining independent operations and adequate capitalization/insurance for each entity helps preserve limited liability between companies.
This document provides an overview of partnership law in India according to the Indian Partnership Act of 1932. It defines key terms like partnership and partner. The essential features of a partnership include the association of two or more persons through an agreement to carry on a business for profit, with profits shared and with mutual agency between partners. Partnership is distinguished from a joint Hindu family business. The rights and duties of partners are outlined, as well as the various ways a partnership can dissolve, including by agreement, certain contingencies occurring, or by order of the court.
The document discusses various aspects of corporate stockholders' equity, including paid-in capital. It defines paid-in capital as contributions by investors in exchange for capital stock. It also discusses how a corporation's stockholders' equity is increased in two ways: through paid-in capital contributions and through retained earnings. The document outlines the authorization and issuance of capital stock, including distinguishing between authorized, issued, unissued, and treasury shares. It also provides an example of how to record the issuance of par value stock.
This talk describes different types of strategic alliances small businesses may form. It also discusses the partnership law and tax issues that may be relevant to alliance members.
The document discusses key concepts related to partnership law in Pakistan including the definition of a partnership, types of partnerships, tests to determine if a partnership exists, registration of firms, and dissolution of partnerships and firms. A partnership is a voluntary association of two or more persons who contribute money, property, time and skills to carry on business for profit and share losses. There are three types of partnerships: partnership-at-will, particular partnership, and limited partnership. For a partnership to exist, there must be an agreement to conduct business to share profits, with a principal-agent relationship among partners. A firm refers to the collective partners but has no separate legal identity. Dissolution of a partnership differs from dissolution of a firm, which
The Indian Partnership Act of 1932 governs partnerships in India. It replaced previous partnership laws that were part of the Indian Contract Act of 1872. The Partnership Act provides regulations around the formation, operation, and dissolution of a partnership. A partnership requires at least two people to form, an agreement to share profits of a lawful business, and a relationship where each partner can bind the partnership through their actions.
This document provides an overview of an escrow and why it is needed for a real estate transaction. An escrow guarantees concurrent performance by ensuring the deed and funds are transferred at the same time. It protects all parties by having a neutral third party, the escrow holder, manage documents and funds according to the escrow instructions. This minimizes the risk of fraud or terms not being met. The escrow holder has a legal obligation to safeguard everyone's interests. Escrow enables buyers and sellers to transact with minimal risk by placing responsibility for handling funds and documents with an impartial party unaffected by the outcome.
Regina Criminal Lawyer Will Advise You on the Best Defence at merchantlaw.com/regina-criminal-lawyer
A Criminal Lawyer is a law practitioner who specializes in criminal law. He is also called as a lawyer in the field of criminal law. There are lots of differences between a Criminal Lawyer and a Criminal Defense Lawyer. For starters, Regina Criminal Lawyer is the one who has to defend people charged with crimes. They have to do this by proving the person guilty.
Our Profile
https://www.slideshare.net/MerchantLawGroup
More Links
https://app.box.com/s/l8xrny9r5btj7h785ayz9twkaol3hrae
The webinar discusses the key factors to consider when choosing a business entity, including various types of entities like C corporations, S corporations, LLCs, partnerships, and sole proprietorships. It covers differences in liability, ownership restrictions, taxation of income, employment taxes, deductibility of fringe benefits, and implications of distributions and sales. The webinar analyzes these considerations and pros and cons for each entity type to help business owners determine the most suitable structure. It also reviews procedures for changing entity forms.
The document discusses the legal case of Foss vs Harbottle regarding minority shareholders of the Victoria Park Company. It summarizes that Richard Foss, a minority shareholder, claimed the company's property had been misapplied and mortgages improperly given. However, the court dismissed the claim based on the proper plaintiff rule that only the company itself can vindicate wrongs done to it, and the majority rule principle that the court will not interfere if a simple majority of members would confirm or ratify the alleged wrong.
The document discusses different business organization structures including sole proprietorships, general partnerships, limited liability companies, C corporations, and S corporations. It provides examples of different types of businesses that may choose each structure and highlights key considerations like costs, taxes, and legal liability for business owners.
Vinita Mehra and Jasmin Hurley took part in an event about launching businesses put on by the Greater Columbus Chinese Chamber of Commerce. They discussed U.S.-China trade relations, focusing on U.S.-bound investment, its structures and incentives. They also covered entry options for investors, detailing corporate structuring and taxability, and gave several tips to doing business in the U.S., especially related to IP protection.
T1, 2021 business law lecture week 9 - corporations lawmarkmagner
This document provides an overview of company law in Australia. It defines key terms like proprietary company, public company, directors, officers, and fiduciary duties. It explains that companies are distinct legal entities registered with ASIC. Directors owe statutory and common law duties to act with care, in good faith, and avoid conflicts of interest. The corporate veil protects shareholder liability but can be pierced for improper conduct like fraud.
While corporations are generally legally distinct from their shareholders, courts will pierce the corporate veil under certain circumstances, such as to prevent fraud or achieve equity. There are two main theories used by courts - alter ego and instrumentality. Alter ego focuses on the unity of ownership and interest between a corporation and its owners such that they cease to be separate entities. Instrumentality examines whether a dominant entity used a subservient corporation as a fiction for its own purposes. Factors like financial dependence, lack of separateness, and control help determine if the corporate veil should be pierced.
The Complex Commercial Litigation Law Review 2019, Ireland Matheson Law Firm
Commercial Litigation and Dispute Resolution partners, Julie Murphy-O'Connor, Claire McLoughlin and Karen Reynolds co-author the 2019 Ireland chapter of the Complex Commercial Litigation Law Review.
Chapter 41 – History and Nature of CorporationsUAF_BA330
The document discusses the history and nature of corporations, including how corporations evolved from special charters granted by states to modern enabling statutes, and covers key topics such as classes of corporations, state and federal regulation of corporations, what constitutes "doing business" in a state, and piercing the corporate veil. It also provides examples, definitions, and a short quiz.
2011 aia presentation the good bad and the ugly of strategic relationships (2)bhealey
The document discusses the benefits and risks of forming strategic alliances. It notes that strategic alliances can provide cost sharing, risk sharing, and allow companies to enhance their strengths and compensate for weaknesses. However, improperly formed alliances can create unwanted legal exposure, such as unexpected liability to third parties if a joint venture is determined to be a partnership under law. A partnership comes with obligations to other partners, questions around ownership of shared property, and potential regulatory violations. The document provides examples of cases where alliances resulted in large damage awards or disputes due to lack of clarity around the legal relationship.
1) The document discusses two cases from Ghana that highlight how the courts have failed to protect creditors' rights by strictly applying the doctrine of separate corporate entity from the Salomon v. Salomon case.
2) In the first case, Majdoub & Co. Ltd. v. Bartholomew & Co. Ltd., a limited company was formed to take over the assets and liabilities of a partnership to avoid paying a debt, and the court did not consider this a fraud on the creditors.
3) In the second case, Grant v. Tikobo (Ghana) Ltd., a company sold its assets without creditors' knowledge to avoid a debt, and again the court did not protect the creditors
The document provides information about the 2005 Centralized Bar Operations Executive Committee and Subject Chairpersons. It lists the overall chairperson, vice chairs, and subject heads for various bar exam topics. It also includes summaries of key concepts relating to partnership under civil law, including the definition of a partnership, requirements for partnership contracts, classification of partnerships, and details about universal partnerships.
The document discusses the key characteristics and formation of corporations. It identifies the major characteristics of corporations as separate legal existence, limited liability for stockholders, transferable ownership rights, ability to acquire capital through issuing stock, continuous life regardless of ownership changes, and corporate management structure. It also notes some disadvantages of corporations include additional taxes and government regulations. The document provides details on authorizing stock, issuing stock, and par and no-par values of stock.
This document discusses strategies for restructuring a company to minimize business risks through establishing corporate firewalls. It outlines forming a new holding company structure with separate operating subsidiaries to protect different classes of assets. The three-step process involves preliminary planning, completing the reorganization, and ongoing adherence to corporate formalities. Maintaining independent operations and adequate capitalization/insurance for each entity helps preserve limited liability between companies.
This document provides an overview of partnership law in India according to the Indian Partnership Act of 1932. It defines key terms like partnership and partner. The essential features of a partnership include the association of two or more persons through an agreement to carry on a business for profit, with profits shared and with mutual agency between partners. Partnership is distinguished from a joint Hindu family business. The rights and duties of partners are outlined, as well as the various ways a partnership can dissolve, including by agreement, certain contingencies occurring, or by order of the court.
The document discusses various aspects of corporate stockholders' equity, including paid-in capital. It defines paid-in capital as contributions by investors in exchange for capital stock. It also discusses how a corporation's stockholders' equity is increased in two ways: through paid-in capital contributions and through retained earnings. The document outlines the authorization and issuance of capital stock, including distinguishing between authorized, issued, unissued, and treasury shares. It also provides an example of how to record the issuance of par value stock.
This talk describes different types of strategic alliances small businesses may form. It also discusses the partnership law and tax issues that may be relevant to alliance members.
The document discusses key concepts related to partnership law in Pakistan including the definition of a partnership, types of partnerships, tests to determine if a partnership exists, registration of firms, and dissolution of partnerships and firms. A partnership is a voluntary association of two or more persons who contribute money, property, time and skills to carry on business for profit and share losses. There are three types of partnerships: partnership-at-will, particular partnership, and limited partnership. For a partnership to exist, there must be an agreement to conduct business to share profits, with a principal-agent relationship among partners. A firm refers to the collective partners but has no separate legal identity. Dissolution of a partnership differs from dissolution of a firm, which
The Indian Partnership Act of 1932 governs partnerships in India. It replaced previous partnership laws that were part of the Indian Contract Act of 1872. The Partnership Act provides regulations around the formation, operation, and dissolution of a partnership. A partnership requires at least two people to form, an agreement to share profits of a lawful business, and a relationship where each partner can bind the partnership through their actions.
This document provides an overview of an escrow and why it is needed for a real estate transaction. An escrow guarantees concurrent performance by ensuring the deed and funds are transferred at the same time. It protects all parties by having a neutral third party, the escrow holder, manage documents and funds according to the escrow instructions. This minimizes the risk of fraud or terms not being met. The escrow holder has a legal obligation to safeguard everyone's interests. Escrow enables buyers and sellers to transact with minimal risk by placing responsibility for handling funds and documents with an impartial party unaffected by the outcome.
Regina Criminal Lawyer Will Advise You on the Best Defence at merchantlaw.com/regina-criminal-lawyer
A Criminal Lawyer is a law practitioner who specializes in criminal law. He is also called as a lawyer in the field of criminal law. There are lots of differences between a Criminal Lawyer and a Criminal Defense Lawyer. For starters, Regina Criminal Lawyer is the one who has to defend people charged with crimes. They have to do this by proving the person guilty.
Our Profile
https://www.slideshare.net/MerchantLawGroup
More Links
https://app.box.com/s/l8xrny9r5btj7h785ayz9twkaol3hrae
A prenuptial agreement, or "prenup," is a written contract entered into before marriage that establishes how assets will be divided if the marriage ends in divorce or death. It should include details on dividing property and debts, spousal support, and inheritance. Signing a prenup is recommended if one partner has substantial assets or both wish to protect assets like a business, inheritance, or children from a previous marriage. Both partners must voluntarily sign the prenup in front of witnesses for it to be considered valid.
The document discusses key aspects of partnership under Indian law as governed by the Partnership Act of 1932. It defines a partnership as the relation between two or more persons who have agreed to share the profits of a business carried on by all or any of them acting for all. A partnership is based on a contract between the partners and involves mutual agency, with each partner acting as an agent for the firm and binding other partners with their actions. While profit sharing is an essential element, mutual agency is the true test of whether a partnership exists. The document outlines various provisions of the Partnership Act regarding the meaning of terms like "partner", "firm", and "firm name", as well as characteristics, formation requirements and exceptions for partnership.
Claims by acquirers sellers and unsuccessful biddersPolsinelli PC
This document summarizes key aspects of letters of intent and memoranda of understanding in mergers and acquisitions. It discusses whether parties should use letters of intent and the advantages and disadvantages. Key points covered include how to determine if provisions are binding or non-binding, sample language to use, and remedies if a court finds parties intended to be bound before a definitive agreement. It also discusses creating and disclaiming obligations to negotiate in good faith based on a letter of intent. The document provides an overview of important considerations and best practices for letters of intent in M&A transactions.
Insider Lease Agreements (Series: Fairness Issues in Real Estate-Based Bankru...Financial Poise
It is a common play in real estate to create a separate operating entity to serve as a tenant and execute a lease between the owner of the property and himself. Typically, this happens in assets which serve as a real estate-based business, such as a retail property. The structured enables the operator to reduce the taxable income of the business and also provide a liability shield for the property owner.
This arrangement can lead to some ethical issues, should the property owner become distressed. For example, is the lease amount above market and therefore being used to inflate the property valuation? Is rent actually being paid? Is there a proper lease in place or just an internal handshake? Attorneys need to understand the set-up in order to know what is in bounds and what is outside the lines.
To view the accompanying webinar, go to:https://www.financialpoise.com/financial-poise-webinars/insider-lease-agreements-2021/
Unincorporated Business Entities Section - Limited Liability Partnershipbrighteyes
1. The document discusses limited liability partnerships (LLPs), including their statutory foundation, formation, foreign qualification requirements, differences from general partnerships, and potential situations where partners may lose the limited liability shield.
2. Key points include that LLPs provide limited liability to partners for obligations incurred after the partnership becomes an LLP, but partners remain liable for pre-conversion obligations and those to which they provided personal guarantees. Partners may also be liable under narrow non-liability statutes or if directly involved in actions leading to liability.
3. Hypothetical examples are provided to illustrate scenarios where partners could lose limited liability protection, such as if mandatory contribution requirements in the partnership agreement are not followed.
The Indian Partnership Act of 1932 governs partnerships in India. It defines a partnership as the relationship between two or more people who jointly conduct business and share profits. The Act provides guidelines around partnership formation, the rights and duties of partners, and dissolution procedures. It aims to inform the public about their legal obligations when transacting with partnerships.
1Legal Issues for Managers 2007GIRLecture 9(Week 10)M.docxfelicidaddinwoodie
1
Legal Issues for Managers: 2007GIR
Lecture 9
(Week 10)
Module 3 (Part 2):
The Law of Business Associations
Law of Agency &
Law of Partnership
1
Administration
Ensure that you check the announcements on [email protected] ([email protected]) and your marks in My Marks.
You should now have your Mid-Semester Exam marks available in My Marks. If you want genuine feedback (not simply checking your grade as they have been scanned), you can see your exam papers this week during the times provided on [email protected] course site. A time will also be made available for the Deferred Mid-Semester Exams when we have received them back from scanning.
A notice about the time, date & place of the Deferred Mid-Semester Exam is now available on the course website.
IF you want to do well on the FINAL EXAM, in addition to making a genuine effort on the ASSIGNMENT continue practising your ILACs before you attend your seminars, add a few notes to your answers, download the seminar slides and try to attempt the answer again on your own. If you did not have a satisfactory answer, see your tutor in consultation and bring along your ILAC homework attempts. This is the most effective way to prepare for the Final Exam.
2
2
Recap of Last Week
The Law of Companies/Corporations
Summary
The essential characteristics of a ‘company’ and why they are important.
The different types of business structures available, in particular companies, and when can they be used to meet the needs of business & society.
The main duties imposed upon the directors of a company.
The concepts of insolvency and insider trading.
The way companies can be wound-up.
Quick Question:
The Corporations Act 2001 (Cth) prohibits trading in shares with the advantage of information that is not publicly available. This offence is also known as …………………………… and is prohibited by section ..........
3
3
Business Structures
BUSINESS
STRUCTURES
Sole
Trader
Partnership
Joint
Venture
Incorporated
Associations
Trust
Company
Proprietary
Company
Public
Company
Large
Small
4
Seek the advice of a good accountant & lawyer when considering what form of business structure you may want to set-up. The main consideration should be liability – Not taxation. Thus, this message applies to today’s lecture and next weeks! Strategic planning is the key to business success.
44% of businesses fail in the first 3 years
Failing to plan, is planning to fail!
See separate mind-map on the types of companies in those lecture slides when available
http://www.business.gov.au/business- ...
The document discusses accounting for corporations. It covers key topics like characteristics of corporations, components of stockholders' equity, common and preferred stock, income statements, retained earnings, issuing and recording corporate stock transactions, cash and stock dividends, treasury stock, and corporate organization structure. The learning objectives are to understand these corporate accounting concepts and how to record related transactions.
Securities Law: An Overview (Series: Securities Law Made Simple (Not Really)) Financial Poise
This document provides an overview of securities law. It defines what constitutes a security, outlines the key laws governing securities offerings, and describes the registration process and available exemptions from registration. It also discusses the consequences of failing to comply with securities laws and how the JOBS Act and FAST Act have changed certain rules. The expert panel will provide practical guidance and examples to help explain securities law concepts.
Issue or ConsiderationSole Prop.General PartnershipLimited P.docxpriestmanmable
Issue or Consideration
Sole Prop.
General Partnership
Limited Partnership
Limited Liability Co
Subchapter “C”
Corporation
Subchapter “S”
Corporation
Liability
Unlimited personal liability
Unlimited personal “Joint and Several” liability for Partnership
Gen Partners (at least 1):unlimited liability
Limited Partners: Limited to investment
Shareholders- no personal liability beyond investment
Shareholders- no personal liability beyond investment
Ease of Formation
No formal requirements
No formal requirements
Requires formal filing
Requires formal filing
Requires formal filing and qualification and “election” with IRS
Ease of Operation
No issue
Limited concern- as agreed
ONLY General Partners operate
No participation of Limited Partners
Shared operation between Directors (major decisions) and Officers (day- to- day) and Shareholders (fundamental changes)
Shared operation between Directors (major decisions) and Officers (day- to- day) and Shareholders (fundamental changes
Taxation
No additional tax issue or burden
Partnership return with Pass through to individual partners
Partnership return with Pass through to individual partners
Possibility of double taxation
Avoids possibility of double taxation
Capitalization
Limited to loans (usually banks)
Limited to loans (usually banks)
Also have limited partner investment
Issue stock or Bonds
Issue stock or Bonds
Duration
Limited duration
Limited duration
Limited duration (gen. Partners) flexibility with limited partners
Perpetual
Perpetual
Alienation
No
No
No-General
Possible with Limited partners
Simple stock transfer
Simple stock transfer
Partnership Form of Business
The partnership is defined as the type of business operation formed between two or more persons interested in a common course: Making profits. The government recognizes a few kinds of partnerships (Lorette, n.d., para. 1). At the point when setting up an association, the first thing you will need to do is pick a name for the organization. While this may sound basic, it is imperative to make certain the name does not abuse the trademark privileges of another business. There are a few approaches to figure out whether another business as of now, has such a name. Firstly, one can do a name search online on the U.S. Patent and Trademark Office website. Also, one can conduct an inquiry of enrolled entrepreneurs. However, this procedure is followed via the legal office (secretary of state.)
Likewise, partners should decide the specifics of how the organization will be overseen, how much every accomplice will contribute, and how the benefits will be shared. While the more prominent the extent of the venture implies the bigger the rate of proprietorship, the greatest investor may not even need to maintain the business. Additionally, while you may confirm that all accomplices have equal force in choice making, certain accomplices ought to be recognized as having the power to settle on choices on everyday operations and the general ad ...
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2. 11-2
Corporate Governance
How BusinessHow Business
Organizations AreOrganizations Are
Operated, Led,Operated, Led,
GovernedGoverned
How Law ProvidesHow Law Provides
Regulation Of BusinessRegulation Of Business
OrganizationsOrganizations
REGULATIONS
3. 11-3
Size Of Ownership
Closely Held- FamilyClosely Held- Family
And/Or FriendsAnd/Or Friends
Publicly Held- TradedPublicly Held- Traded
On Public StockOn Public Stock
ExchangesExchanges
4. 11-4
Selecting a Form
Sole
Proprietorship
Forms of Legal
Organization of
Business Entities
Partnership
Corporation
General
Partnership
Limited
Partnership
Regular C
Corporation
Subchapter S
Corporation
Limited Liability
Company
Limited Liability
Company
Limited Liability
Partnership
Limited Liability
Partnership
5. Starting a Business
Some Other FormsSome Other Forms
• Joint VentureJoint Venture
• Strategic AllianceStrategic Alliance
• FranchiseFranchise
• CooperativesCooperatives
• Master Limited PartnershipsMaster Limited Partnerships
(M.L.P.) in some states, similar to(M.L.P.) in some states, similar to
L.L.CsL.L.Cs
6. Starting a Business
Sole ProprietorshipSole Proprietorship
• Business is operated as own personal propertyBusiness is operated as own personal property
• Unlimited personal liability for all debts/obligationsUnlimited personal liability for all debts/obligations
of the businessof the business
• Over 2/3 of U.S. businesses are soleOver 2/3 of U.S. businesses are sole
proprietorshipsproprietorships
• They are usually small, about 99% have revenues ofThey are usually small, about 99% have revenues of
less than $1,000,000.00 per yearless than $1,000,000.00 per year
• Sole Proprietors are allowed to establish tax-Sole Proprietors are allowed to establish tax-
exempt retirement accounts (e.g. Keough plans)exempt retirement accounts (e.g. Keough plans)
7. 11-7
Sole ProprietorshipSole Proprietorship
AdvantagesAdvantages
Ease of start/endEase of start/end
Be your own bossBe your own boss
Pride of ownershipPride of ownership
Retain profitRetain profit
No special taxesNo special taxes
DisadvantagesDisadvantages
Unlimited liabilityUnlimited liability
Limited financialLimited financial
resourcesresources
Difficulty in mgmt.Difficulty in mgmt.
Time commitmentTime commitment
Few fringe benefitsFew fringe benefits
Limited growthLimited growth
Limited life spanLimited life span
8. Starting a Business
PartnershipPartnership
• Voluntary AssociationVoluntary Association
• Between 2 or more legal competent personsBetween 2 or more legal competent persons
• No Express Agreement RequiredNo Express Agreement Required
• Typically governed by statutory law (e.g. Uniform PartnershipTypically governed by statutory law (e.g. Uniform Partnership
Act, except Louisiana)Act, except Louisiana)
• Sharing profits and losses = prima facie evidence ofSharing profits and losses = prima facie evidence of
partnershippartnership
• States differ on whether a partnership is viewed as a legalStates differ on whether a partnership is viewed as a legal
entity or aggregate of individuals for the purpose ofentity or aggregate of individuals for the purpose of
participating in legal actionsparticipating in legal actions
• Extent and Nature of personal liability variesExtent and Nature of personal liability varies
• General v.LimitedGeneral v.Limited
11. 11-11
Sharing Workload
Sharing Financial
Burden
Sharing Emotional
Burden
Procuring Executive
Talent
Companionship
Interpersonal
Conflicts
Dilution of Equity
Dissatisfaction
with Partner
Absence of One
Clear Leader
Frustration of Not
Calling Own Shots
Advantages Disadvantages
Advantages
and
Disadvantages
of
Partnerships
13. Partnerships
• Choose your partners wisely!!!Choose your partners wisely!!!
• A partnership is like aA partnership is like a
marriage, easy to get into,marriage, easy to get into,
sometimes difficult tosometimes difficult to
maintain, and generally messymaintain, and generally messy
to get out of!to get out of!
14. Partnerships
A voluntary agreement by two or more persons to carry on, asA voluntary agreement by two or more persons to carry on, as
co-owners, a business for profit.co-owners, a business for profit.
““Persons” may be natural or artificial (e.g. corporations)Persons” may be natural or artificial (e.g. corporations)
Requires intent to become partners (Tarnavsky v. Tarnavsky, 8thRequires intent to become partners (Tarnavsky v. Tarnavsky, 8th
Circuit, 1998 147 F.3d 674. And In Re Nielsen, 2002 Cal.App.Circuit, 1998 147 F.3d 674. And In Re Nielsen, 2002 Cal.App.
Unpub, LEXIS 5621 (Cal. Ct. App., 2d Dist., Div.3 2002))Unpub, LEXIS 5621 (Cal. Ct. App., 2d Dist., Div.3 2002))
• Intent can be express or implied (based on words or actions)Intent can be express or implied (based on words or actions)
• Though their must be an intent to carry on a business “forThough their must be an intent to carry on a business “for
profit” the business does not have to actually make a profit toprofit” the business does not have to actually make a profit to
be considered a partnership.be considered a partnership.
Partnership by estoppel may be found where one holds himselfPartnership by estoppel may be found where one holds himself
out as, creates a reliance upon, or fails to dispel a knownout as, creates a reliance upon, or fails to dispel a known
misrepresentationmisrepresentation
15. Partnerships
Is There a Partnership?Is There a Partnership?
A father and son each owned land and raised seed potatoes.A father and son each owned land and raised seed potatoes.
They each used their own equipment. Each raised about theThey each used their own equipment. Each raised about the
same amount of potatoes, and they were stored together andsame amount of potatoes, and they were stored together and
advertised for sale by Wilbur Kimm and Son. A loss arose.advertised for sale by Wilbur Kimm and Son. A loss arose.
Issue: Are the father and son partners such that they must shareIssue: Are the father and son partners such that they must share
this loss? Held: Yes. They were partners and must share thethis loss? Held: Yes. They were partners and must share the
loss. Although intent of parties is a major factor, if facts bringloss. Although intent of parties is a major factor, if facts bring
arrangement within definition of a partnership, parties cannotarrangement within definition of a partnership, parties cannot
escape liability incident to that relationship merely by saying thatescape liability incident to that relationship merely by saying that
no such relationship exists. If intended action of parties createsno such relationship exists. If intended action of parties creates
a partnership in fact, what parties call their arrangement ora partnership in fact, what parties call their arrangement or
intend their arrangement to be is irrelevant. The fact that theintend their arrangement to be is irrelevant. The fact that the
father and son split profits in a joint account that containedfather and son split profits in a joint account that contained
proceeds from their sale of seed potatoes was prima facieproceeds from their sale of seed potatoes was prima facie
evidence that a partnership existed between father and son.evidence that a partnership existed between father and son.
Truck Ins. Exchange v. Industrial Indem. Co., 688 P.2d 1243Truck Ins. Exchange v. Industrial Indem. Co., 688 P.2d 1243
(Mont. 1984).(Mont. 1984).
16. Partnerships
Sharing in profits or losses is primaSharing in profits or losses is prima
facie evidence of participation in afacie evidence of participation in a
partnership but receipt of funds:partnership but receipt of funds:
• in repayment of a debt orin repayment of a debt or
• as interest on a debt oras interest on a debt or
• as wages oras wages or
• as rent oras rent or
• as an annuity to heirs of a deceased partner oras an annuity to heirs of a deceased partner or
• as consideration for the sale of goodwillas consideration for the sale of goodwill
does not constitute evidence ofdoes not constitute evidence of
participation in a partnership.participation in a partnership.
17. Partnerships
Co-owners must register withCo-owners must register with
the state.the state.
Co-owners may need anCo-owners may need an
occupational license.occupational license.
18. Limited Partnerships
Partnership consisting of one orPartnership consisting of one or
moremore general partnersgeneral partners (who manage(who manage
the business and are liable to thethe business and are liable to the
full extent of their personal assetsfull extent of their personal assets
for debts of the partnership) & onefor debts of the partnership) & one
or moreor more limitedlimited partnerspartners (who(who
contribute only assets and are liablecontribute only assets and are liable
only up to the amount contributedonly up to the amount contributed
by them).by them).
19. Limited Partnerships
General PartnerGeneral Partner - In a limited partnership, a partner- In a limited partnership, a partner
who assumes responsibility for the management ofwho assumes responsibility for the management of
the partnership and liability for all partnership debts.the partnership and liability for all partnership debts.
Limited PartnerLimited Partner - In a limited partnership, a partner- In a limited partnership, a partner
who contributes capital to the partnership but haswho contributes capital to the partnership but has
no right to participate in the management andno right to participate in the management and
operation of the business. The limited partneroperation of the business. The limited partner
assumes no liability for partnership debts beyondassumes no liability for partnership debts beyond
the capital contributed.the capital contributed.
Note: Failure to comply with statutory requirementsNote: Failure to comply with statutory requirements
in forming a limited partnership results in thein forming a limited partnership results in the
creation of a general partnership.creation of a general partnership.
20. Limited Partnerships
The exercise of substantial controlThe exercise of substantial control
by a limited partner may result inby a limited partner may result in
his being declared a generalhis being declared a general
partner.partner.
21. Limited Partnerships
Not equal exercise of substantialNot equal exercise of substantial
control if only:control if only:
• Contractor for an agent or employee of theContractor for an agent or employee of the
partnershippartnership
• Consulting/AdvisingConsulting/Advising
• Acting as a suretyActing as a surety
• Approving or disapproving an amendmentApproving or disapproving an amendment
to a partnership agreementto a partnership agreement
• VotingVoting
22. 11-22
Partnerships
Partnership Agreements (Sometimes calledPartnership Agreements (Sometimes called
Articles of Partnership)- An agreement listingArticles of Partnership)- An agreement listing
and explaining the terms of the partnership.and explaining the terms of the partnership.
• Critical for preventing and resolving potential disputesCritical for preventing and resolving potential disputes
• Should state (at least)Should state (at least)
Who will make final decisions.Who will make final decisions.
What each partner’s duties are.What each partner’s duties are.
How much each partner will invest.How much each partner will invest.
How profits and losses will beHow profits and losses will be
apportioned to each partner.apportioned to each partner.
Methods for dispute resolution (e.g. arbitration)Methods for dispute resolution (e.g. arbitration)
How the partnership can beHow the partnership can be
expanded or dissolved.expanded or dissolved.
23. 11-23
Partnerships
The Uniform Partnership Act, asThe Uniform Partnership Act, as
enacted by a particularenacted by a particular
jurisdiction, has default rulesjurisdiction, has default rules
covering matters not addressedcovering matters not addressed
in partnership agreementsin partnership agreements
24. Partnerships -
Management/Authority
General rule giving equal voice to all partners inGeneral rule giving equal voice to all partners in
management (even if differing contributions)management (even if differing contributions)
• Can be altered by agreementCan be altered by agreement
Why alter?Why alter?
In large/complex partnership may beIn large/complex partnership may be
cumbersome/inefficientcumbersome/inefficient
Decisions that significantly impact the nature of theDecisions that significantly impact the nature of the
partnership generally require unanimous consentpartnership generally require unanimous consent
Partnerships are generally not liable for agreements ofPartnerships are generally not liable for agreements of
individual partners acting outside of scope of theindividual partners acting outside of scope of the
partnership’s normal business, unless ratify,partnership’s normal business, unless ratify,
expressly or implicitlyexpressly or implicitly
25. Partnerships
Partnership PropertyPartnership Property
• All property originally contributed toAll property originally contributed to
• All property purchased on behalf ofAll property purchased on behalf of
• Purchasing property with partnership fundsPurchasing property with partnership funds
implies that it becomes partnership propertyimplies that it becomes partnership property
(unless contrary intention can be proved)(unless contrary intention can be proved)
• Any conveyance to the partnership by nameAny conveyance to the partnership by name
26. Partnerships
3 rules for liability in a partnership are:3 rules for liability in a partnership are:
• 1. Every partner is liable for his or her1. Every partner is liable for his or her
own actions.own actions.
• 2. Every partner is liable for the2. Every partner is liable for the
actions of the other partners (inactions of the other partners (in
course of business)course of business)
• 3. Every partner is liable for the3. Every partner is liable for the
actions of the employees of theactions of the employees of the
business (in course of business)business (in course of business)
27. Partnerships
Distribution of partnership incomeDistribution of partnership income
• How should the shares of partnershipHow should the shares of partnership
income be distributed?income be distributed?
Pro-rata?Pro-rata?
Based on financial contribution?Based on financial contribution?
Based on work performed on behalfBased on work performed on behalf
of?of?
• Usually determined by writtenUsually determined by written
agreementagreement
28. Partnerships
Creditors RightsCreditors Rights
• Can obtain the debtor’s share of theCan obtain the debtor’s share of the
income of a partnership, or in someincome of a partnership, or in some
cases can get the court to order thecases can get the court to order the
sale of the debtor’s share (Chargingsale of the debtor’s share (Charging
Order)Order)
• This does not give the creditor a voiceThis does not give the creditor a voice
in the management of the partnershipin the management of the partnership
• This does not give the creditor theThis does not give the creditor the
right to dissolve the partnershipright to dissolve the partnership
29. 11-29
Partnership DutiesPartnership Duties
DutiesDuties
• Loyalty/Good FaithLoyalty/Good Faith
• Care in PartnershipCare in Partnership
• To Inform/AccountTo Inform/Account
Note: However, partners can beNote: However, partners can be
compelled to sign confidentialitycompelled to sign confidentiality
agreements (Madison Ave. Investmentagreements (Madison Ave. Investment
Partners, L.L.C. v. American First RealPartners, L.L.C. v. American First Real
Estate Investment Partners, L.P., 2002Estate Investment Partners, L.P., 2002
Del. Ch. LEXIS 97 (Del. Ch. New CastleDel. Ch. LEXIS 97 (Del. Ch. New Castle
2002)2002)
DutiesDuties
• Loyalty/Good FaithLoyalty/Good Faith
• Care in PartnershipCare in Partnership
• To Inform/AccountTo Inform/Account
Note: However, partners can beNote: However, partners can be
compelled to sign confidentialitycompelled to sign confidentiality
agreements (Madison Ave. Investmentagreements (Madison Ave. Investment
Partners, L.L.C. v. American First RealPartners, L.L.C. v. American First Real
Estate Investment Partners, L.P., 2002Estate Investment Partners, L.P., 2002
Del. Ch. LEXIS 97 (Del. Ch. New CastleDel. Ch. LEXIS 97 (Del. Ch. New Castle
2002)2002)
30. Partnerships - Dissolution
Dissolution methodsDissolution methods
• Automatically after an agreed upon period of timeAutomatically after an agreed upon period of time
• Automatically when set objective has been attainedAutomatically when set objective has been attained
• By mutual agreementBy mutual agreement
• By unilateral decision of any partner (if at will)By unilateral decision of any partner (if at will)
• By court order (including by Bankruptcy)By court order (including by Bankruptcy)
• By death or incompetence of a partnerBy death or incompetence of a partner
• By disability of a partner that substantially impairsBy disability of a partner that substantially impairs
his ability to carry on dutieshis ability to carry on duties
• By wilful breach of a partnership agreementBy wilful breach of a partnership agreement
• By illegal acts of the partnership businessBy illegal acts of the partnership business
31. Partnerships - Dissolution
Dissolution of a partnership does notDissolution of a partnership does not
necessarily end the operation of anecessarily end the operation of a
business (e.g. it may continue as a solebusiness (e.g. it may continue as a sole
proprietorship, etc.)proprietorship, etc.)
The value of interests at dissolution isThe value of interests at dissolution is
usually determined by settlementusually determined by settlement
agreementsagreements
There are notice requirements uponThere are notice requirements upon
dissolution (Phillip Lithographing Co. V.dissolution (Phillip Lithographing Co. V.
Babich, 135 NW.2nd 343 (Wis. 1965))Babich, 135 NW.2nd 343 (Wis. 1965))
32. 11-32
Distribution of AssetsDistribution of Assets
Order/PriorityOrder/Priority
• Outside CreditorsOutside Creditors
• Debts to Partners forDebts to Partners for
Loans/Capital AdvanceLoans/Capital Advance
• Capital ContributionCapital Contribution
• Remaining Assets AccordingRemaining Assets According
to Partnership Agreementto Partnership Agreement
Order/PriorityOrder/Priority
• Outside CreditorsOutside Creditors
• Debts to Partners forDebts to Partners for
Loans/Capital AdvanceLoans/Capital Advance
• Capital ContributionCapital Contribution
• Remaining Assets AccordingRemaining Assets According
to Partnership Agreementto Partnership Agreement
33. 11-33
Seven Trigger Points That Can Destroy a
Partnership
1. A partner that is going through a divorce.
2. A partnership that is experiencing growing pains due to rapid growth.
3. A partner brings a spouse or a relative into the business.
4. A partner that wants to withdraw more money from the business.
5. A partner makes sexual advances toward another partner.
6. A partner experiences serious medical problems.
7. A partner begins doing business on the side with the partnership’s
customers.
Source: Used with permission, Inc. magazine, February 2001. Copyright 1998
by Gruner + Jahr USA Publishing, 38 Commercial Wharf, Boston, MA 02110.
Inc. is a registered trademark of Gruner + Jahr Printing and Publishing.
34. Corporations
A legal entity formed inA legal entity formed in
compliance with statecompliance with state
statutory requirements. Thestatutory requirements. The
entity is treated as a legalentity is treated as a legal
“person”, distinct from its“person”, distinct from its
shareholders.shareholders.
35. Starting a Business
CorporationCorporation
• Separate Legal EntitySeparate Legal Entity
• Ongoing Enterprise/LifecycleOngoing Enterprise/Lifecycle
• Limited LiabilityLimited Liability
• Close v.PublicClose v.Public
• ““C” v.“S”C” v.“S”
• Profit v.Non-ProfitProfit v.Non-Profit
• Domestic, Foreign, AlienDomestic, Foreign, Alien
• De Jure v. De FactoDe Jure v. De Facto
37. Corporations
A Corporation is “anA Corporation is “an
artificial being, invisible,artificial being, invisible,
intangible, and existingintangible, and existing
only in the contemplationonly in the contemplation
of law. Being the mereof law. Being the mere
creature of law, itcreature of law, it
possesses only thosepossesses only those
properties which theproperties which the
charter of creation conferscharter of creation confers
upon it, either expressly orupon it, either expressly or
incidental to its veryincidental to its very
existence.” - Chief Justiceexistence.” - Chief Justice
Marshall, Dartmouth v.Marshall, Dartmouth v.
Woodard (1819)Woodard (1819)
38. Corporations
Historical OriginsHistorical Origins
• Roman royal fiat.Roman royal fiat.
• 17th century English Royal Charter.17th century English Royal Charter.
• 1814, Francis Cabot Lowell, a Boston Merchant,1814, Francis Cabot Lowell, a Boston Merchant,
founded the first publicly traded company infounded the first publicly traded company in
America, a textile company. Lowell had smuggled aAmerica, a textile company. Lowell had smuggled a
plan for a power loom out of England and plannedplan for a power loom out of England and planned
to compete with the British Lancashire Mills. Sinceto compete with the British Lancashire Mills. Since
he personally lacked the capital to build and installhe personally lacked the capital to build and install
the machinery, he sold shares in the company to 10the machinery, he sold shares in the company to 10
other people.other people.
• The publicly traded company model also played aThe publicly traded company model also played a
key part in the financing of America’s railroads.key part in the financing of America’s railroads.
39. Corporations
Close corporationClose corporation——a corporationa corporation
whose stock is owned by awhose stock is owned by a
relatively few people and is not soldrelatively few people and is not sold
to the general public.to the general public.
Public/Open corporationPublic/Open corporation——aa
corporation whose stock is boughtcorporation whose stock is bought
and sold on security exchanges andand sold on security exchanges and
can be purchased by any individual.can be purchased by any individual.
40. Corporations
TypesTypes
• For ProfitFor Profit
• Non-Profit (e.g. Hospitals,Non-Profit (e.g. Hospitals,
Charities, Some Insurance Co.) -Charities, Some Insurance Co.) -
exempt from Corp. income taxexempt from Corp. income tax
• Municipal (e.g. Sewer Authority)Municipal (e.g. Sewer Authority)
(often have tax authority)(often have tax authority)
41. 11-41
Close CorporationsClose Corporations
ShareholdersShareholders
• FewFew
• Live Near Each Other Know One Another &Live Near Each Other Know One Another &
SkillsSkills
• Active in BusinessActive in Business
• No Market for SharesNo Market for Shares
Transferability of SharesTransferability of Shares
• Right of First RefusalRight of First Refusal
• Buy/Sell AgreementBuy/Sell Agreement
• Consent RestraintConsent Restraint
ShareholdersShareholders
• FewFew
• Live Near Each Other Know One Another &Live Near Each Other Know One Another &
SkillsSkills
• Active in BusinessActive in Business
• No Market for SharesNo Market for Shares
Transferability of SharesTransferability of Shares
• Right of First RefusalRight of First Refusal
• Buy/Sell AgreementBuy/Sell Agreement
• Consent RestraintConsent Restraint
42. 11-42
Corporations
• Types by place of incorporationTypes by place of incorporation
Domestic corporationDomestic corporation - a business- a business
incorporated in a stateincorporated in a state
Foreign corporationForeign corporation—a business—a business
incorporated outside of the state.incorporated outside of the state.
Alien corporationAlien corporation—a business—a business
incorporated in a foreign countryincorporated in a foreign country
and operating in the United States.and operating in the United States.
43. Corporations- “S” Corp
““S” CorporationS” Corporation
• A Federal Tax ElectionA Federal Tax Election
• Owners have limited liability, but areOwners have limited liability, but are
taxed as if the firm were a partnershiptaxed as if the firm were a partnership
44. Corporations- “S” Corp
““S” Corporation RequirementsS” Corporation Requirements
• Firm has 75 or fewer ownersFirm has 75 or fewer owners
• All stockholders must be individuals,All stockholders must be individuals,
estates, or certain trusts (not otherestates, or certain trusts (not other
corporations)corporations)
• Only one class of stock outstandingOnly one class of stock outstanding
• Must be a domestic corporationMust be a domestic corporation
• Must operate on a calendar year basisMust operate on a calendar year basis
• No nonresident alien stockholdersNo nonresident alien stockholders
• All shareholders must consent to havingAll shareholders must consent to having
the corporation taxed as a partnershipthe corporation taxed as a partnership
45. Corporations- “S” Corp
Tax Reasons for “S” Corp.Tax Reasons for “S” Corp.
• Corporation is losing moneyCorporation is losing money- Valuable to have losses- Valuable to have losses
flow through to individual tax return, but onlyflow through to individual tax return, but only
valuable if have other personal income to offsetvaluable if have other personal income to offset
against. Losses are limited to basis. Basis is stockagainst. Losses are limited to basis. Basis is stock
investment and loans to corporationinvestment and loans to corporation
• Corporation is highly profitableCorporation is highly profitable - Although double- Although double
taxation rarely applies, there is always the risk thetaxation rarely applies, there is always the risk the
IRS will deem salaries “excessive”. Excess salariesIRS will deem salaries “excessive”. Excess salaries
are treated as dividends. Issue of salary vs.are treated as dividends. Issue of salary vs.
dividend doesn’t matter with S corp., since nodividend doesn’t matter with S corp., since no
corporate level taxcorporate level tax
46. Corporations- Preincorporation
PromotersPromoters (also called Preincorporators) - persons(also called Preincorporators) - persons
who bring the corporation into being by pre-who bring the corporation into being by pre-
incorporation actionsincorporation actions
• Has personal liability for pre-incorporationHas personal liability for pre-incorporation
contracts (corporations may later adopt same)contracts (corporations may later adopt same)
• Not agents of corporation or shareholdersNot agents of corporation or shareholders
• But have fiduciary duties to both (e.g. full disclose,But have fiduciary duties to both (e.g. full disclose,
dealing in good faith, etc.)dealing in good faith, etc.)
• May be paid for reasonable chargesMay be paid for reasonable charges
• May be paid with sharesMay be paid with shares
47. Corporations-Preincorporation
IncorporatorsIncorporators - those who sign- those who sign
the articles of incorporationthe articles of incorporation
and deliver them to the stateand deliver them to the state
• May be a single personMay be a single person
• May be an attorneyMay be an attorney
48. Corporations-Preincorporation
Shareholder Agreements shouldShareholder Agreements should
address:address:
• Conflicts of InterestConflicts of Interest
• Key Man (e.g. Life Insurance)Key Man (e.g. Life Insurance)
• Buy/Sell (e.g. Right of FirstBuy/Sell (e.g. Right of First
Refusal to Purchase Shares)Refusal to Purchase Shares)
• Profit AllocationProfit Allocation
• IndemnificationIndemnification
49. 11-49
IncorporationIncorporation
StepsSteps
• Select Where to IncorporateSelect Where to Incorporate
• Prepare ArticlesPrepare Articles
• Sign/Authenticate ArticlesSign/Authenticate Articles
• File ArticlesFile Articles
• Receive CertificateReceive Certificate
• Hold Initial MeetingHold Initial Meeting
StepsSteps
• Select Where to IncorporateSelect Where to Incorporate
• Prepare ArticlesPrepare Articles
• Sign/Authenticate ArticlesSign/Authenticate Articles
• File ArticlesFile Articles
• Receive CertificateReceive Certificate
• Hold Initial MeetingHold Initial Meeting
50. 11-50
Corporations-Incorporation
Where to incorporateWhere to incorporate
• Businesses can incorporate in any stateBusinesses can incorporate in any state
they choose.they choose.
• Some states offer fewer restrictions, lowerSome states offer fewer restrictions, lower
taxes & fees, and other benefits to attracttaxes & fees, and other benefits to attract
businesses to incorporate with their state.businesses to incorporate with their state.
• Internet businesses present a sales taxInternet businesses present a sales tax
collection problem for states in which thesecollection problem for states in which these
businesses have no physical presence.businesses have no physical presence.
51. 11-51
Corporations-Incorporation
Issues to Consider when Selecting a State of Inc.Issues to Consider when Selecting a State of Inc.
• How many incorporators are required by the state, and whetherHow many incorporators are required by the state, and whether
the incorporator itself can be a corporation.the incorporator itself can be a corporation.
• The minimum number of people required to form theThe minimum number of people required to form the
corporation.corporation.
• The minimum capital requirement, if any.The minimum capital requirement, if any.
• The state's fees for filing the articles of incorporation.The state's fees for filing the articles of incorporation.
• The state's annual corporate franchise tax.The state's annual corporate franchise tax.
• The state's corporate income tax and whether earnings fromThe state's corporate income tax and whether earnings from
operations outside the state are taxable. The State of Delawareoperations outside the state are taxable. The State of Delaware
taxes non-Delaware resident shareholders of S corporations ontaxes non-Delaware resident shareholders of S corporations on
their distributive share of S Corporation income based on thetheir distributive share of S Corporation income based on the
percentage of that income derived from Delaware sources. If apercentage of that income derived from Delaware sources. If a
Delaware corporation has no Delaware source income, theseDelaware corporation has no Delaware source income, these
taxes should not be an issue.taxes should not be an issue.
52. 11-52
Corporations-Incorporation
Issues to Consider when Selecting a State of Inc. (Cont.)Issues to Consider when Selecting a State of Inc. (Cont.)
• Whether the corporation is allowed to keep its books andWhether the corporation is allowed to keep its books and
records outside the state.records outside the state.
• The state's court system's reputation of fairness in businessThe state's court system's reputation of fairness in business
cases.cases.
• Whether the corporation is allowed to have its principal placeWhether the corporation is allowed to have its principal place
of business outside the state.of business outside the state.
• Whether there is a state inheritance tax on non-residentWhether there is a state inheritance tax on non-resident
shareholders.shareholders.
• Disclosure/privacy - whether the state requires publicDisclosure/privacy - whether the state requires public
disclosure of the names of shareholders.disclosure of the names of shareholders.
• Whether the state requires a corporate bank account in thatWhether the state requires a corporate bank account in that
state (Delaware does not).state (Delaware does not).
53. 11-53
Corporations-Incorporation
DelawareDelaware- Delaware often is the preferred state of incorporation.- Delaware often is the preferred state of incorporation.
Initially, Delaware gave management better rights in the event ofInitially, Delaware gave management better rights in the event of
a takeover, so in the 1940's and 1950's many corporationsa takeover, so in the 1940's and 1950's many corporations
moved there. Delaware set up a court system that has expertisemoved there. Delaware set up a court system that has expertise
in commercial transactions and well-developed corporate lawin commercial transactions and well-developed corporate law
(equals predictability). Other states improved their corporate(equals predictability). Other states improved their corporate
legal systems, but virtually every corporate attorney is familiarlegal systems, but virtually every corporate attorney is familiar
with Delaware law. Delaware also has the Delaware Assetwith Delaware law. Delaware also has the Delaware Asset
Protection Trust, which permits one to set up a trust that cannotProtection Trust, which permits one to set up a trust that cannot
be touched by creditors but that allows one to get one's money.be touched by creditors but that allows one to get one's money.
Most other states require irrevocable trusts that prevent oneMost other states require irrevocable trusts that prevent one
from accessing one's money once it is in the trust. The state offrom accessing one's money once it is in the trust. The state of
Alaska responded with a similar trust, but added spouses andAlaska responded with a similar trust, but added spouses and
children to the list of creditors that could not get at the moneychildren to the list of creditors that could not get at the money
in the trust. Delaware responded likewise.in the trust. Delaware responded likewise.
54. 11-54
Corporations-Incorporation
Delaware v. Nevada-Delaware v. Nevada-
• Taxes on corporate earnings:Taxes on corporate earnings: Delaware taxes the proportion ofDelaware taxes the proportion of
corporate profits earned in Delaware. Nevada is tax-free, regardless ofcorporate profits earned in Delaware. Nevada is tax-free, regardless of
where the profits are earned.where the profits are earned.
• Annual franchise tax:Annual franchise tax: Delaware and most other states have an annualDelaware and most other states have an annual
franchise tax on corporations. Nevada does not.franchise tax on corporations. Nevada does not.
• Annual disclosure:Annual disclosure: Delaware requires an annual report of stockholderDelaware requires an annual report of stockholder
meeting dates, business locations outside of Delaware, and themeeting dates, business locations outside of Delaware, and the
number and value of shares issued. Nevada requires only the currentnumber and value of shares issued. Nevada requires only the current
list of officers and directors. In both Delaware and Nevada, the officerslist of officers and directors. In both Delaware and Nevada, the officers
and directors can be one person.and directors can be one person.
• Protection of officers and directors:Protection of officers and directors: Nevada provides broaderNevada provides broader
protection against personal liability of officers and directors than doesprotection against personal liability of officers and directors than does
Delaware.Delaware.
55. 11-55
Corporations-Incorporation
Delaware v. Nevada- (Cont.)Delaware v. Nevada- (Cont.)
• Shareholder disclosure:Shareholder disclosure: Nevada and Wyoming are two states that allow bearerNevada and Wyoming are two states that allow bearer
shares. When corporations first came into existence, their stock certificates wereshares. When corporations first came into existence, their stock certificates were
like cash in the sense that whoever was holding them at the moment legally waslike cash in the sense that whoever was holding them at the moment legally was
the owner. However, in order to protect their shareholders against theft of thethe owner. However, in order to protect their shareholders against theft of the
stock certificates, corporations began to maintain a stock ledger listing thestock certificates, corporations began to maintain a stock ledger listing the
shareholders. Eventually, the stock ledger became the authoritative record of theshareholders. Eventually, the stock ledger became the authoritative record of the
shareholders, and when stock was transferred it would have to be recorded in theshareholders, and when stock was transferred it would have to be recorded in the
corporation's stock transfer ledger. Most U.S. states no longer permit bearercorporation's stock transfer ledger. Most U.S. states no longer permit bearer
shares, with the notable exceptions of Nevada and Wyoming. Since bearer sharesshares, with the notable exceptions of Nevada and Wyoming. Since bearer shares
legally belong to the person holding them at the moment, the holder of bearerlegally belong to the person holding them at the moment, the holder of bearer
shares truthfully can deny ownership in the corporation if he or she does not holdshares truthfully can deny ownership in the corporation if he or she does not hold
the certificates. Bearer shares often are used for illegal purposes, such as taxthe certificates. Bearer shares often are used for illegal purposes, such as tax
evasion. They also are used for asset protection, which by itself is not illegal, butevasion. They also are used for asset protection, which by itself is not illegal, but
which often results in illegal actions when bearer shares are involved. Forwhich often results in illegal actions when bearer shares are involved. For
example, if you hand your bearer shares over to somebody else so that you canexample, if you hand your bearer shares over to somebody else so that you can
truthfully deny owning them in the future, gift tax is due on the transaction.truthfully deny owning them in the future, gift tax is due on the transaction.
Furthermore, when the other person ultimately hands them back to you, gift taxesFurthermore, when the other person ultimately hands them back to you, gift taxes
are due again. While bearer shares might have a few legitimate uses, in general itare due again. While bearer shares might have a few legitimate uses, in general it
is best to avoid them, so whether or not a state permits them probably should notis best to avoid them, so whether or not a state permits them probably should not
be a major criterion in the decision of where to incorporate.be a major criterion in the decision of where to incorporate.
56. 11-56
Corporations-Incorporation
Delaware v. Nevada (Cont.)Delaware v. Nevada (Cont.)
• Disclosure to IRS:Disclosure to IRS: Delaware and most other states share taxDelaware and most other states share tax
information with the IRS. Nevada does not. As with bearer shares,information with the IRS. Nevada does not. As with bearer shares,
non-disclosure to the IRS attracts those seeking to illegally evadenon-disclosure to the IRS attracts those seeking to illegally evade
taxes, so this should not be a criterion for legitimate businesstaxes, so this should not be a criterion for legitimate business
purposes.purposes.
• Note: There is a flip side to some of Nevada's perceivedNote: There is a flip side to some of Nevada's perceived
advantages. Some companies attempt to take advantage ofadvantages. Some companies attempt to take advantage of
Nevada's laws in order to evade taxes. As a result, NevadaNevada's laws in order to evade taxes. As a result, Nevada
corporations are more frequently audited by the IRS than arecorporations are more frequently audited by the IRS than are
corporations in other states. In this regard, however, the state ofcorporations in other states. In this regard, however, the state of
Wyoming has most if not all of the advantages that Nevada has, butWyoming has most if not all of the advantages that Nevada has, but
a lower audit rate, at least for now. There also are other intangiblesa lower audit rate, at least for now. There also are other intangibles
to consider. For example, if you incorporate in Delaware instead ofto consider. For example, if you incorporate in Delaware instead of
Nevada, your corporation may be seen as having slightly moreNevada, your corporation may be seen as having slightly more
credibility in the eyes of those who know about Nevada'scredibility in the eyes of those who know about Nevada's
corporation laws. This issue may have little or no ground, but it atcorporation laws. This issue may have little or no ground, but it at
least is worth considering.least is worth considering.
57. 11-57
Corporations-Incorporation
Advantage of Incorporating in One's Own StateAdvantage of Incorporating in One's Own State
• If the company does not plan to obtain ventureIf the company does not plan to obtain venture
capital funding, it may be best to incorporate in thecapital funding, it may be best to incorporate in the
state in which the company plans to do business.state in which the company plans to do business.
Doing so has the following advantages:Doing so has the following advantages:
• Local attorneys are familiar with the local lawLocal attorneys are familiar with the local law
• One can have an intrastate securities lawOne can have an intrastate securities law
exemption.exemption.
• There is the convenience of geographicalThere is the convenience of geographical
proximity.proximity.
• The corporation does not need to register as aThe corporation does not need to register as a
"foreign" corporation in the state of operation if it is"foreign" corporation in the state of operation if it is
incorporated there.incorporated there.
58. 11-58
Articles of Incorporation- ContentsArticles of Incorporation- Contents
Mandatory ElementsMandatory Elements
• Name of CorporationName of Corporation
• # Shares of Capital Stock Authorized to# Shares of Capital Stock Authorized to
IssueIssue
• Address of Registered Office/NameAddress of Registered Office/Name
Registered Agent (for service of process)Registered Agent (for service of process)
• Name/Address of IncorporatorName/Address of Incorporator
See N.C. Blank FormSee N.C. Blank Form
Generally should keep to a minimum becauseGenerally should keep to a minimum because
must file amendments to changemust file amendments to change
Mandatory ElementsMandatory Elements
• Name of CorporationName of Corporation
• # Shares of Capital Stock Authorized to# Shares of Capital Stock Authorized to
IssueIssue
• Address of Registered Office/NameAddress of Registered Office/Name
Registered Agent (for service of process)Registered Agent (for service of process)
• Name/Address of IncorporatorName/Address of Incorporator
See N.C. Blank FormSee N.C. Blank Form
Generally should keep to a minimum becauseGenerally should keep to a minimum because
must file amendments to changemust file amendments to change
60. Corporations - Defective
Incorporation
De Jure v. De FactoDe Jure v. De Facto
• Substantial compliance withSubstantial compliance with
all steps of the incorporationall steps of the incorporation
process = De Jureprocess = De Jure
• If serious defect, but goodIf serious defect, but good
faith effort and exercise offaith effort and exercise of
powers, may be found to be Depowers, may be found to be De
Facto.Facto.
61. Corporations - Duties
Ultra vires doctrineUltra vires doctrine: shareholders could: shareholders could
sue managers for embarking on projectssue managers for embarking on projects
contrary to the corporate purpose.contrary to the corporate purpose.
However this doctrine is in declineHowever this doctrine is in decline
because of the broad interpretation ofbecause of the broad interpretation of
thethe Business Judgement RuleBusiness Judgement Rule whichwhich
shields some managerial actions fromshields some managerial actions from
substantive review by courts (especiallysubstantive review by courts (especially
in Delaware)in Delaware)
62. 11-62
Corporations- Dissolution
Types of Voluntary DissolutionTypes of Voluntary Dissolution
• End at specified time found in ArticlesEnd at specified time found in Articles
• Written consent of all shareholdersWritten consent of all shareholders
• Majority Vote of shareholders at aMajority Vote of shareholders at a
special meetingspecial meeting
• Merger or consolidationMerger or consolidation
• Vote of majority of incorporators ifVote of majority of incorporators if
corporation has not begun businesscorporation has not begun business
63. 11-63
Board of DirectorsBoard of Directors
Powers/DutiesPowers/Duties
• GeneralGeneral
• Actions RequiringActions Requiring
InitiativeInitiative
OnlineOnline
CommunicationsCommunications
Powers/Rights ofPowers/Rights of
Director as anDirector as an
IndividualIndividual
CompensationCompensation
Powers/DutiesPowers/Duties
• GeneralGeneral
• Actions RequiringActions Requiring
InitiativeInitiative
OnlineOnline
CommunicationsCommunications
Powers/Rights ofPowers/Rights of
Director as anDirector as an
IndividualIndividual
CompensationCompensation
ElectionElection
• NumberNumber
• QualificationsQualifications
• NominationNomination
• TermTerm
• VacanciesVacancies
RemovalRemoval
MeetingsMeetings
64. Board of Directors
In most jurisdictions, the board actingIn most jurisdictions, the board acting
alone can:alone can:
• Declare a dividendDeclare a dividend
• Establish the price for sale of sharesEstablish the price for sale of shares
• Elect and remove officersElect and remove officers
• Fill vacancies on the BoardFill vacancies on the Board
• Sell, lease or mortgage assets outsideSell, lease or mortgage assets outside
the normal course of businessthe normal course of business
65. Board of Directors
Actions byActions by Board InitiativeBoard Initiative areare
regarded as proposals forregarded as proposals for
shareholder approvalshareholder approval
Shareholders must all approveShareholders must all approve
certain extraordinary actions suchcertain extraordinary actions such
as amendment of articles, mergers,as amendment of articles, mergers,
sale or lease of substantially allsale or lease of substantially all
assets or dissolutionassets or dissolution
66. Board of Directors
Recent statutes in manyRecent statutes in many
jurisdictions now allow directors tojurisdictions now allow directors to
communicate and conduct businesscommunicate and conduct business
electronically.electronically.
• But , not allow electronic boardBut , not allow electronic board
meetingsmeetings
Why the distinction?Why the distinction?
67. Board of Directors
There are statutory and/or bylawThere are statutory and/or bylaw
requirements for qualification,requirements for qualification,
nomination, election, term,nomination, election, term,
vacancy filling, removal orvacancy filling, removal or
directors and officers as well asdirectors and officers as well as
for meeting frequency, notice,for meeting frequency, notice,
formality, quorumformality, quorum
68. Board of Directors
Is it realistic to expectIs it realistic to expect
directors to “manage” thedirectors to “manage” the
corporation, or should theircorporation, or should their
role be viewed as one ofrole be viewed as one of
more ofmore of
monitoring/evaluating themonitoring/evaluating the
actions of corporate officers?actions of corporate officers?
69. Board of Directors
The Board only has authority to act forThe Board only has authority to act for
the corporationthe corporation as a groupas a group
Most state law mandates directors mustMost state law mandates directors must
act in the best interests of theact in the best interests of the
corporation and its shareholderscorporation and its shareholders
• Courts have generally interpreted thisCourts have generally interpreted this
to mean maximizing share price.to mean maximizing share price.
• Is what’s best for the share priceIs what’s best for the share price
always what’s best for the company?always what’s best for the company?
71. Officers
Ex-officio authority =Ex-officio authority =
authority by virtue of officeauthority by virtue of office
Often a good idea to have anOften a good idea to have an
Assistant Treasurer and/orAssistant Treasurer and/or
Assistant Secretary forAssistant Secretary for
reasons of expediencyreasons of expediency
72. 11-72
Duties Directors/OfficersDuties Directors/Officers
Act WithinAct Within
AuthorityAuthority
Due Care andDue Care and
DiligenceDiligence
• Prudent PersonPrudent Person
• BusinessBusiness
JudgmentJudgment
• IncreasedIncreased
Director LiabilityDirector Liability
Act WithinAct Within
AuthorityAuthority
Due Care andDue Care and
DiligenceDiligence
• Prudent PersonPrudent Person
• BusinessBusiness
JudgmentJudgment
• IncreasedIncreased
Director LiabilityDirector Liability
Loyalty/GoodLoyalty/Good
FaithFaith
• Self-DealingSelf-Dealing
• UsurpUsurp
• Freeze-Outs,Freeze-Outs,
etc.etc.
• InsideInside
InformationInformation
Right to DissentRight to Dissent
73. 11-73
Duties Directors/OfficersDuties Directors/Officers
Optional limitations onOptional limitations on
liabilityliability
• Charter Option Statute (breachCharter Option Statute (breach
of duty)of duty)
• Self-Executing Statute (willfulSelf-Executing Statute (willful
or reckless)or reckless)
• Cap on Money DamagesCap on Money Damages
Optional limitations onOptional limitations on
liabilityliability
• Charter Option Statute (breachCharter Option Statute (breach
of duty)of duty)
• Self-Executing Statute (willfulSelf-Executing Statute (willful
or reckless)or reckless)
• Cap on Money DamagesCap on Money Damages
74. 11-74
Duties Directors/OfficersDuties Directors/Officers
IndemnificationIndemnification
• MandatoryMandatory (acting in good faith, pre-(acting in good faith, pre-
existing agreement)existing agreement)
• PermissiblePermissible (good faith, believed best(good faith, believed best
interest, unaware illegal, disinterestedinterest, unaware illegal, disinterested
agree)agree)
• ImpermissibleImpermissible (liable or bad faith or(liable or bad faith or
violate fed. Securities law)violate fed. Securities law)
IndemnificationIndemnification
• MandatoryMandatory (acting in good faith, pre-(acting in good faith, pre-
existing agreement)existing agreement)
• PermissiblePermissible (good faith, believed best(good faith, believed best
interest, unaware illegal, disinterestedinterest, unaware illegal, disinterested
agree)agree)
• ImpermissibleImpermissible (liable or bad faith or(liable or bad faith or
violate fed. Securities law)violate fed. Securities law)
75. Corporate Governance
““Directors can be out of touch with aDirectors can be out of touch with a
company's business and can fall prey to thecompany's business and can fall prey to the
temptation to simply be polite to a chieftemptation to simply be polite to a chief
executive while Rome is burning. A code ofexecutive while Rome is burning. A code of
silence develops in the boardroom. By thesilence develops in the boardroom. By the
time someone is willing to speak up, thetime someone is willing to speak up, the
company is in deep trouble.” - Bill George,company is in deep trouble.” - Bill George,
Former CEO, Medtronic Corp. in "AuthenticFormer CEO, Medtronic Corp. in "Authentic
Leadership: Rediscovering the Secrets toLeadership: Rediscovering the Secrets to
Creating Lasting Value," Jossey-Bass/Wiley,Creating Lasting Value," Jossey-Bass/Wiley,
2003.2003.
76. Corporate Governance
The Board of Directors ofThe Board of Directors of
Worldcom reportedly allowedWorldcom reportedly allowed
CEO Bernie Ebbers to ruleCEO Bernie Ebbers to rule
“practically unchecked”,“practically unchecked”,
generally “rubber-stamping”generally “rubber-stamping”
his decisions. Their auditshis decisions. Their audits
“rarely scratched below the“rarely scratched below the
surface” and they approvedsurface” and they approved
multibillion dollar mergersmultibillion dollar mergers
and acquisitions “with littleand acquisitions “with little
discussion.” (Report:discussion.” (Report:
Worldcom board passive, JimWorldcom board passive, Jim
Hopkins,Hopkins, USA TodayUSA Today, June, June
10, 2003, p. 3B)10, 2003, p. 3B)
77. Corporate Governance
First Board usually appointedFirst Board usually appointed
by incorporatorsby incorporators
Who nominates/elects theWho nominates/elects the
board thereafter?board thereafter?
• Typically the ExecutiveTypically the Executive
Officers by Proxy ElectionsOfficers by Proxy Elections
78. 11-78
Make-up of
Corporate Boards
Retired officer of another firmRetired officer of another firm 89%89%
CEO at another companyCEO at another company 87%87%
Major company shareholderMajor company shareholder 73%73%
Ex-government officialEx-government official 53%53%
AcademiciansAcademicians 50%50%
Corporate boards average 11Corporate boards average 11
Directors.Directors. Most Directors byMost Directors by
percentage are:percentage are:
79. Corporate Governance
But, on April 14, 2003, the SEC said itBut, on April 14, 2003, the SEC said it
would review rules that make it tough forwould review rules that make it tough for
shareholders to nominate directors toshareholders to nominate directors to
corporate boards. SEC Chairmancorporate boards. SEC Chairman
William Donaldson asked staffers toWilliam Donaldson asked staffers to
come with recommendations to make itcome with recommendations to make it
easier for shareholders to run their owneasier for shareholders to run their own
candidates. Changes may be adopted incandidates. Changes may be adopted in
time for the 2004 proxy season.time for the 2004 proxy season.
80. Corporate Governance
Criteria for Who should sit on the Board ofCriteria for Who should sit on the Board of
Directors?Directors?
• Competence?Competence?
• Knowledge of/Experience in, the industry?Knowledge of/Experience in, the industry?
• General business knowledge/experience?General business knowledge/experience?
• Note: One of the requirements of Sarbanes-Note: One of the requirements of Sarbanes-
Oxley is that a company must haveOxley is that a company must have
individuals who are certified financialindividuals who are certified financial
experts on the board.experts on the board.
81. Corporate Governance
Independence?Independence?
• Inside vs. OutsideInside vs. Outside
Self-Interest (Good or Bad?)Self-Interest (Good or Bad?)
Some corporate bylaws requireSome corporate bylaws require
board members to be shareholdersboard members to be shareholders
Should the company maintain aShould the company maintain a
certain % of independent directors?certain % of independent directors?
If so, what %?If so, what %?
82. Corporate Governance
Independence?Independence?
• In Britain, the 1992 CadburyIn Britain, the 1992 Cadbury
Committee report recommendedCommittee report recommended
that boards of directors of publicthat boards of directors of public
companies include at least 3companies include at least 3
outside directors as members andoutside directors as members and
that the CEO and chairman poststhat the CEO and chairman posts
be held by different individuals.be held by different individuals.
83. Corporate Governance
Should There beShould There be PluralismPluralism onon
Board (interest group reps. e.g.Board (interest group reps. e.g.
Labor, Environmental,Labor, Environmental,
Consumer Watchdogs, etc.)?Consumer Watchdogs, etc.)?
• e.g. Volkswagon’s “Group Works”e.g. Volkswagon’s “Group Works”
CouncilCouncil
84. Corporate Governance
Ethical Orientation?Ethical Orientation? - C-bridge,- C-bridge,
a rapidly emerging leadera rapidly emerging leader
among Internet-based businessamong Internet-based business
solution providers, appointed tosolution providers, appointed to
Joseph L. Badaracco, Jr.,Joseph L. Badaracco, Jr.,
Professor of Business Ethics atProfessor of Business Ethics at
the Harvard Business School tothe Harvard Business School to
its Board.its Board.
85. Corporate Governance
Should a Chairman of the Board & CEO be the sameShould a Chairman of the Board & CEO be the same
person?person?
• In the UK, the role of chairman of the board andIn the UK, the role of chairman of the board and
CEO are now generally held by different people,CEO are now generally held by different people,
unlike the U.S., where it is estimated that in 70-80%unlike the U.S., where it is estimated that in 70-80%
of companies in the Standard and Poor’s 500, oneof companies in the Standard and Poor’s 500, one
person wears the hats of both CEO and chairman.person wears the hats of both CEO and chairman.
• However, recent studies suggest that companies inHowever, recent studies suggest that companies in
which the chairman and CEO positions are held bywhich the chairman and CEO positions are held by
two different people perform no better thantwo different people perform no better than
companies in which the roles are combined. Incompanies in which the roles are combined. In
other words, it’s no guarantee against futureother words, it’s no guarantee against future
scandals.scandals.
87. Executive Compensation
The traditional argument is that executiveThe traditional argument is that executive
responsibilities and skills call for higherresponsibilities and skills call for higher
salaries (e.g. Michael Capellas recentlysalaries (e.g. Michael Capellas recently
received judicial approval for “scaled down”received judicial approval for “scaled down”
$20 million 3 year pay package. This was 23%$20 million 3 year pay package. This was 23%
below originally proposed package. The judgebelow originally proposed package. The judge
called the package “fair and eminentlycalled the package “fair and eminently
reasonable”. The company had difficultyreasonable”. The company had difficulty
attracting candidates. Capellas will make lessattracting candidates. Capellas will make less
than could have earned elsewhere.)than could have earned elsewhere.)
88. Executive Compensation
According to the judge, the packageAccording to the judge, the package
was “Quite startling in itswas “Quite startling in its
magnitude but reasonable for amagnitude but reasonable for a
management challenge that wasmanagement challenge that was
unprecedented. The challenge, tounprecedented. The challenge, to
save tens of thousands of jobs andsave tens of thousands of jobs and
satisfy tens of millions ofsatisfy tens of millions of
customers.”customers.”
89. Executive Compensation
According to Richard Lambert, AccountingAccording to Richard Lambert, Accounting
Professor at Wharton Business School, if theProfessor at Wharton Business School, if the
level of executive compensation is put in thelevel of executive compensation is put in the
context of overall company finances, it seemscontext of overall company finances, it seems
less of a problem. Compared with the value ofless of a problem. Compared with the value of
most public companies, the amount of moneymost public companies, the amount of money
being given to executives is not that large.being given to executives is not that large.
“Even if you cut the CEO’s salary in half, the“Even if you cut the CEO’s salary in half, the
effect on shareholder wealth would be veryeffect on shareholder wealth would be very
small.”small.”
90. Executive Compensation
If a company does well or poorly, toIf a company does well or poorly, to
what extent is the CEO responsible forwhat extent is the CEO responsible for
this?this?
• It's clear that CEOs' pay has risen farIt's clear that CEOs' pay has risen far
faster than the corporate profitsfaster than the corporate profits
they're paid to generate. Profits rosethey're paid to generate. Profits rose
78% in the last decade, much less than78% in the last decade, much less than
the 212% increase in CEO pay over thethe 212% increase in CEO pay over the
same period.same period.
91. Executive Compensation
The chief executives at 23 corporationsThe chief executives at 23 corporations
under investigation for improperunder investigation for improper
accounting pocketed $1.4 billion, or anaccounting pocketed $1.4 billion, or an
average of $62 million each, in the lastaverage of $62 million each, in the last
three years. Meanwhile, their companies'three years. Meanwhile, their companies'
stock values plunged $530 billion, orstock values plunged $530 billion, or
about 73% of their total value, and theirabout 73% of their total value, and their
companies laid off a total of 162,000companies laid off a total of 162,000
workers.workers.
92. Executive Compensation
TheThe Financial TimesFinancial Times recently reported on arecently reported on a
study of what they called “The Barons ofstudy of what they called “The Barons of
Bankruptcy” – a privileged group of topBankruptcy” – a privileged group of top
business leaders who made extraordinarybusiness leaders who made extraordinary
fortunes even as their companies werefortunes even as their companies were
heading for disaster. They examined theheading for disaster. They examined the
largest 25 business collapses since the startlargest 25 business collapses since the start
of last year and, according to their figures, theof last year and, according to their figures, the
executives and directors of these doomedexecutives and directors of these doomed
companies walked away with over $3.3 billioncompanies walked away with over $3.3 billion
in compensation and proceeds from stockin compensation and proceeds from stock
sales.sales.
93. Executive Compensation
Revenue at Tyco's electronics unit fellRevenue at Tyco's electronics unit fell
from $13.6 billion in fiscal 2001 to $10.5from $13.6 billion in fiscal 2001 to $10.5
billion in the following year.billion in the following year.
Nevertheless, division presidentNevertheless, division president
Juergen W. Gromer earned a bonus ofJuergen W. Gromer earned a bonus of
almost $3.4 million. Gromer's salary wasalmost $3.4 million. Gromer's salary was
increased by $35,500, to $695,500. In theincreased by $35,500, to $695,500. In the
previous year, Gromer earned a bonusprevious year, Gromer earned a bonus
of $6.85 million.of $6.85 million.
94. Executive Compensation
Former Kmart CEO CharlesFormer Kmart CEO Charles
Conaway received nearly $23Conaway received nearly $23
million in compensation during hismillion in compensation during his
2-year tenure. When Kmart filed for2-year tenure. When Kmart filed for
bankruptcy in 2002, 283 stores werebankruptcy in 2002, 283 stores were
closed and 22,000 employees lostclosed and 22,000 employees lost
their jobs. Their total severancetheir jobs. Their total severance
pay: $0.pay: $0.
95. Executive Compensation
In 2002, the total compensation ofIn 2002, the total compensation of
CEO Scott McNealy of SunCEO Scott McNealy of Sun
Microsystems, rose 31% to $31.7Microsystems, rose 31% to $31.7
million while his shareholders’million while his shareholders’
return plunged 74.7%, according toreturn plunged 74.7%, according to
Equilar, an independent provider ofEquilar, an independent provider of
compensation data.compensation data.
96. Executive Compensation
At Honeywell, CEO David CoteAt Honeywell, CEO David Cote
made $68.5 million, about 80% ofmade $68.5 million, about 80% of
which was a sign-on bonus forwhich was a sign-on bonus for
taking over the top job in Februarytaking over the top job in February
2002. Meanwhile, Honeywell2002. Meanwhile, Honeywell
shareholders saw the value of theirshareholders saw the value of their
investments slide by 27.3%.investments slide by 27.3%.
97. Executive Compensation
Steve Jobs of Apple Computer,Steve Jobs of Apple Computer,
pulled in $78.1 million while hispulled in $78.1 million while his
investors’ return slumped by 34.6%.investors’ return slumped by 34.6%.
In 2002, while the S&P 500 plungedIn 2002, while the S&P 500 plunged
22%, median CEO compensation22%, median CEO compensation
rose 14% .rose 14% .
Bottom Line:Bottom Line: There is little correlationThere is little correlation
between pay and performance, nobetween pay and performance, no
linkagelinkage
98. Executive Compensation
Executive vs. Worker Pay DisparityExecutive vs. Worker Pay Disparity
• 20 years ago the CEO got about20 years ago the CEO got about
40 times what the average worker40 times what the average worker
did. It's now, according to them,did. It's now, according to them,
541 times.541 times.
• The earnings of CEO's haveThe earnings of CEO's have
grown 10 times faster than thosegrown 10 times faster than those
of the average worker.of the average worker.
99. Executive Compensation
Executive vs. Worker Pay DisparityExecutive vs. Worker Pay Disparity
• Among Fortune 500 companies CEOs earn moreAmong Fortune 500 companies CEOs earn more
than 100 times the average employee’s salary.than 100 times the average employee’s salary.
• Compensation for CEO’s rose at 27 out of 30Compensation for CEO’s rose at 27 out of 30
companies in 1993 with the largest staff reductions.companies in 1993 with the largest staff reductions.
• 60% of managers recently surveyed said CEOs60% of managers recently surveyed said CEOs
make too much.make too much.
• 64% of respondents to a recent SHRM online poll64% of respondents to a recent SHRM online poll
indicated that they did not believe that executiveindicated that they did not believe that executive
pay in their organization was in line in comparisonpay in their organization was in line in comparison
to pay in the rest of the organization.to pay in the rest of the organization.
100. Executive Compensation
Executive vs. Worker Pay DisparityExecutive vs. Worker Pay Disparity
• Hershey CEO Richard Lenny was paid moreHershey CEO Richard Lenny was paid more
than $22 million last year. An average unionthan $22 million last year. An average union
worker at Hershey makes $18 per hour,worker at Hershey makes $18 per hour,
about $37,440 a year. Lenny's compensationabout $37,440 a year. Lenny's compensation
could support 598 of these averagecould support 598 of these average
workers. Hershey employees went on strikeworkers. Hershey employees went on strike
earlier this year when management doubledearlier this year when management doubled
the cost of co-payments for health care.the cost of co-payments for health care.
101. Executive Compensation
Executive vs. Worker Pay DisparityExecutive vs. Worker Pay Disparity
• Gaps between exec/worker increasing.Gaps between exec/worker increasing.
• The growing disparity between executiveThe growing disparity between executive
compensation and that of other employeescompensation and that of other employees
is leading to a trust gap, which threatens tois leading to a trust gap, which threatens to
seriously impair morale.seriously impair morale.
• Bottom Line: When executive pay increasesBottom Line: When executive pay increases
faster than the economy other people'sfaster than the economy other people's
share decreases.share decreases.
102. Executive Compensation
Perks/Other non-salary compensationPerks/Other non-salary compensation
• Stock OptionsStock Options
Options allow executives to buy theirOptions allow executives to buy their
company's stock in the future at thecompany's stock in the future at the
current price.current price.
After less than six months on the job,After less than six months on the job,
Tyco International Ltd.'s chief executiveTyco International Ltd.'s chief executive
Ed Breen earned $49 million in paperEd Breen earned $49 million in paper
profits just in his Tyco stock options,profits just in his Tyco stock options,
according to the company's proxyaccording to the company's proxy
statement.statement.
103. Executive Compensation
Qwest's CEO JosephQwest's CEO Joseph
Nacchio, cashed out $300Nacchio, cashed out $300
million in stock options whilemillion in stock options while
the company's stock droppedthe company's stock dropped
from $51 a share to $8. At thefrom $51 a share to $8. At the
same time he fired 17,000same time he fired 17,000
employees and shut down aemployees and shut down a
$25 million charity program.$25 million charity program.
104. Executive Compensation
Life insurance, pension plan,Life insurance, pension plan,
IRA, club memberships, carIRA, club memberships, car
allowances, stock options.allowances, stock options.
Jack Welch from GE got luxuryJack Welch from GE got luxury
apartment, entertainment and aapartment, entertainment and a
private jet.private jet.
““Golden parachutes”Golden parachutes”
105. Executive Compensation
Under his current contract, ifUnder his current contract, if
Home Depot CEO RobertHome Depot CEO Robert
Nardelli is fired he willNardelli is fired he will
receive an $82 millionreceive an $82 million
severance package (Fortuneseverance package (Fortune
Magazine)Magazine)
106. Executive Compensation
SERP (supplemental executive-retirement plan) is aSERP (supplemental executive-retirement plan) is a
steroid-enhanced version of the traditional defined-steroid-enhanced version of the traditional defined-
benefit pension plan, in which a company sets aside abenefit pension plan, in which a company sets aside a
given % of an executive's pay every year to produce agiven % of an executive's pay every year to produce a
guaranteed payout. SERPs are now offered by aboutguaranteed payout. SERPs are now offered by about
1/2 of all big publicly traded companies, usually only1/2 of all big publicly traded companies, usually only
to the CEO and the next dozen or so officers. Andto the CEO and the next dozen or so officers. And
while the combination of a collapsing stock marketwhile the combination of a collapsing stock market
and low interest rates have placed pension plans forand low interest rates have placed pension plans for
ordinary Joes in jeopardy that's not the case for topordinary Joes in jeopardy that's not the case for top
execs. In fact, now that the stock market bubble hasexecs. In fact, now that the stock market bubble has
burst, compensation experts predict that companiesburst, compensation experts predict that companies
will actually increase their use of SERPs to pick up thewill actually increase their use of SERPs to pick up the
slack. ” (Fortune, April 28, 2003)slack. ” (Fortune, April 28, 2003)
107. Executive Compensation
How did this happen?How did this happen?
• Who usually decides on compensationWho usually decides on compensation
packages?packages?
Compensation Committees of CorporateCompensation Committees of Corporate
BoardsBoards
• Based on what?Based on what?
Fair Market Value as demonstrated byFair Market Value as demonstrated by
disclosed information, recommendationsdisclosed information, recommendations
ofof executive search firmsexecutive search firms and “other”and “other”
factors.factors.
108. Executive Compensation
Collusion?Collusion?
• When most big companies name outsideWhen most big companies name outside
directors they tend to draw from a familiardirectors they tend to draw from a familiar
pool of corporate luminaries close to home.pool of corporate luminaries close to home.
• A University of Michigan Business SchoolA University of Michigan Business School
study determined that there is about 4.6study determined that there is about 4.6
degrees of separation on average ondegrees of separation on average on
corporate boards. Business is run by thecorporate boards. Business is run by the
“connected few”.“connected few”.
109. Executive Compensation
What about the shareholders,What about the shareholders,
the supposed “owners” of thethe supposed “owners” of the
corporations?corporations?
• Vodafone recently putVodafone recently put
executive compensation up forexecutive compensation up for
a shareholder vote.a shareholder vote.
• Good idea?Good idea?
• This is highly unusual.This is highly unusual.
110. Starting a Business
Limited Liability Company (L.L.C.)Limited Liability Company (L.L.C.)
• A hybrid form of business enterprise that offers theA hybrid form of business enterprise that offers the
limited liability of the corporation but the taxlimited liability of the corporation but the tax
advantages of a partnershipadvantages of a partnership
• 47 States permit (including N.C.)47 States permit (including N.C.)
• Separate Legal Entity like corporationSeparate Legal Entity like corporation
• Require filing Articles of IncorporationRequire filing Articles of Incorporation
• All investors able to share in managementAll investors able to share in management
• No restrictions on number or types of membersNo restrictions on number or types of members
• No one member has liability for wrongful acts ofNo one member has liability for wrongful acts of
others (makes attractive to doctors, lawyers, etc.)others (makes attractive to doctors, lawyers, etc.)
111. Starting a Business
Limited Liability Partnership (L.L.P.)Limited Liability Partnership (L.L.P.)
• Similar to L.L.C., but designed forSimilar to L.L.C., but designed for
professional groups who normally doprofessional groups who normally do
business as partnersbusiness as partners
• Started to shield uninvolvedStarted to shield uninvolved
professionals’ personal assets fromprofessionals’ personal assets from
malpractice claimsmalpractice claims
• Must maintain adequate professionalMust maintain adequate professional
liability insuranceliability insurance
112. Starting a Business
Joint VentureJoint Venture
• A joint undertaking of a specific commercialA joint undertaking of a specific commercial
enterprise by an association of persons (.e.g.enterprise by an association of persons (.e.g.
construction of a tunnel, Wheatley v. Halvoson, 323construction of a tunnel, Wheatley v. Halvoson, 323
P2d 49 (Ore. 1958)P2d 49 (Ore. 1958)
• A joint venture is normally not a legal entity and isA joint venture is normally not a legal entity and is
treated like a partnership for federal income taxtreated like a partnership for federal income tax
purposespurposes
• Normally lasts until venture is completed orNormally lasts until venture is completed or
becomes impossible to completebecomes impossible to complete
113. Starting a Business
Strategic AllianceStrategic Alliance
• A strategic alliance is anA strategic alliance is an
organizational relationship thatorganizational relationship that
links two or more independentlinks two or more independent
business entities in a commonbusiness entities in a common
endeavorendeavor
114. Starting a Business
FranchiseFranchise
• Business owner (franchisor), usually a corporation,Business owner (franchisor), usually a corporation,
allows another (the franchisee) to use itsallows another (the franchisee) to use its
trademark, trade name, or copyright, undertrademark, trade name, or copyright, under
specified conditions.specified conditions.
• Each franchise operates as an independentEach franchise operates as an independent
business.business.
• Franchise Agreements are often viewed as one-Franchise Agreements are often viewed as one-
sided or “Contracts of Adhesion” (Body Shopsided or “Contracts of Adhesion” (Body Shop
Example)Example)
• Clayton Act “tie-in sales” questionsClayton Act “tie-in sales” questions
• Sherman Act price control questionsSherman Act price control questions
115. Starting a Business
Franchise (Cont.)Franchise (Cont.)
• Government disclosure requirementsGovernment disclosure requirements
• Law of state of franchisor typically controls inLaw of state of franchisor typically controls in
contract disputes (e.g. Burger King, Florida)contract disputes (e.g. Burger King, Florida)
• Often “turn-key” operationsOften “turn-key” operations
• Typically owned by a sole proprietor.Typically owned by a sole proprietor.
• Examples (McDonald's, Dairy Queen)Examples (McDonald's, Dairy Queen)
• Advantages - Proven management style, NameAdvantages - Proven management style, Name
recognition, Strong marketing resources, Oftenrecognition, Strong marketing resources, Often
involve financial supportinvolve financial support
• Beware, overblown or “fly-by-night” franchises!Beware, overblown or “fly-by-night” franchises!
116. Starting a Business
Types of FranchisesTypes of Franchises
• DistributorshipDistributorship- Dealer is allowed to sell a- Dealer is allowed to sell a
product produced by a manufacturer.product produced by a manufacturer.
• Chain-Style BusinessChain-Style Business - Firm is allowed to use- Firm is allowed to use
the trade name of a company and followsthe trade name of a company and follows
guidelines related to the pricing and sale ofguidelines related to the pricing and sale of
the product.the product.
• Manufacturing ArrangementManufacturing Arrangement- Firm is allowed- Firm is allowed
to manufacture a product using the formulato manufacture a product using the formula
provided by the franchisorprovided by the franchisor
117. Starting a Business
CooperativesCooperatives
• Group of 2 or more independentGroup of 2 or more independent
persons that cooperate for a commonpersons that cooperate for a common
objective (e.g. farmers poolingobjective (e.g. farmers pooling
produce for sale)produce for sale)
118. Starting a Business
Factors in Selecting a FormFactors in Selecting a Form
• LiabilityLiability
• Tax TreatmentTax Treatment
• Formalities/ComplexityFormalities/Complexity
• Access to Funds/FinancingAccess to Funds/Financing
• Distribution of Profits/LossesDistribution of Profits/Losses
• Management/ControlManagement/Control
• LifecycleLifecycle
• Liquidity/Ease of TransferLiquidity/Ease of Transfer
• PrivacyPrivacy
• Fringe BenefitsFringe Benefits
119. Starting a Business
LiabilityLiability
• Why Limit Liability?Why Limit Liability?
Incentive to InvestIncentive to Invest
LawsuitsLawsuits
• Can’t insurance cover liability?Can’t insurance cover liability?
• Personal Guarantees/Co-Signing CanPersonal Guarantees/Co-Signing Can
Expand/Reimpose Liability (Often requiredExpand/Reimpose Liability (Often required
by lenders, especially with new, smallby lenders, especially with new, small
companies)companies)
120. Starting a Business
LiabilityLiability
• Sole ProprietorSole Proprietor
Sole and complete unlimited liabilitySole and complete unlimited liability
• General PartnershipGeneral Partnership
Joint liability for debts and contracts (“in theJoint liability for debts and contracts (“in the
ordinary course of business”, Help instill v.ordinary course of business”, Help instill v.
Regions Bank, Texas Court of Appeals, 2000, 33Regions Bank, Texas Court of Appeals, 2000, 33
S.W.3d 401)S.W.3d 401)
Joint and several unlimited liability for tortsJoint and several unlimited liability for torts
(unless “marshalling” requirement(unless “marshalling” requirement
• Marshalling = liabilities first paid out of theMarshalling = liabilities first paid out of the
partnership assetspartnership assets
121. Starting a Business
Partnership LiabilityPartnership Liability
Orel Koelling was a partner in a partnershipOrel Koelling was a partner in a partnership
that employed Martin Martinez. Mr. Martinezthat employed Martin Martinez. Mr. Martinez
died as the result of an accident whichdied as the result of an accident which
occurred in the course of the partnership'soccurred in the course of the partnership's
business. Mrs. Martinez filed suit againstbusiness. Mrs. Martinez filed suit against
Koelling to recover for her husband's death.Koelling to recover for her husband's death.
Koelling moved for summary judgment on theKoelling moved for summary judgment on the
grounds that the partnership was the employergrounds that the partnership was the employer
and liable, if anyone was. Issue: Shouldand liable, if anyone was. Issue: Should
Koelling be dismissed from this litigation?Koelling be dismissed from this litigation?
Held: No. Partners are jointly and severallyHeld: No. Partners are jointly and severally
liable for the actions of the partnership. Thus,liable for the actions of the partnership. Thus,
Koelling, as a partner, was a proper defendant.Koelling, as a partner, was a proper defendant.
Martinez v. Koelling, 421 N.W.2d 1 (Neb. 1988).Martinez v. Koelling, 421 N.W.2d 1 (Neb. 1988).
122. Starting a Business
Liability (Cont.)Liability (Cont.)
• Limited PartnershipLimited Partnership
Some partners have personal liability that is limitedSome partners have personal liability that is limited
to the cash or property they invested in the firm.to the cash or property they invested in the firm.
One or more general partners who actively manageOne or more general partners who actively manage
the business, receive a salary, share in profits andthe business, receive a salary, share in profits and
losses, have unlimited liability.losses, have unlimited liability.
• Limited Liability PartnershipLimited Liability Partnership
Unlimited liability for general obligations, limited forUnlimited liability for general obligations, limited for
malpracticemalpractice
• Corporation, S Corporation, Limited LiabilityCorporation, S Corporation, Limited Liability
CorporationCorporation
Liability limited to the assets of the CorporationLiability limited to the assets of the Corporation
123. Starting a Business
TaxationTaxation
• Sole ProprietorSole Proprietor
Reports profits on personal income tax returnReports profits on personal income tax return
• Partnership/”S”Corp./L.L.C./L.L.P.Partnership/”S”Corp./L.L.C./L.L.P.
Pass through (not taxed at business entity level) -Pass through (not taxed at business entity level) -
Personal earnings received from the partnership arePersonal earnings received from the partnership are
subject to personal income taxes.subject to personal income taxes.
• ““C” CorporationC” Corporation
““Double Taxation” - Corporation pays tax on its incomeDouble Taxation” - Corporation pays tax on its income
and Shareholders pay income tax on dividends (Possibleand Shareholders pay income tax on dividends (Possible
solution: Don’t pay dividends. Profits can be paid out assolution: Don’t pay dividends. Profits can be paid out as
salary or other forms of deductible compensation)salary or other forms of deductible compensation)
• ““Income Splitting”Income Splitting”
Always good idea to seek advice of Accountant or Tax AttorneyAlways good idea to seek advice of Accountant or Tax Attorney
on this!on this!
125. Starting a Business
Formalities/Complexity (Cont.)Formalities/Complexity (Cont.)
• Limited Partnership, L.L.P., S Corporation, L.L.C., CorporationsLimited Partnership, L.L.P., S Corporation, L.L.C., Corporations
All have statutory requirements and require writtenAll have statutory requirements and require written
agreements.agreements.
• Corporation has the most required formalities/complexityCorporation has the most required formalities/complexity
(Must file Articles of Incorporation, Adopt Bylaws, Hold(Must file Articles of Incorporation, Adopt Bylaws, Hold
periodic meetings, Keep Minutes, etc.) (Failure toperiodic meetings, Keep Minutes, etc.) (Failure to
maintain formalities may result in involuntary dissolutionmaintain formalities may result in involuntary dissolution
and thus a loss of limited liability! Burlington v. Palangio,and thus a loss of limited liability! Burlington v. Palangio,
Arkansas Supreme Court, 2001, 345 Ark. 320, 45 S.W3rdArkansas Supreme Court, 2001, 345 Ark. 320, 45 S.W3rd
834)834)
• Limited Partnerships covered under N.C.G.S. 59Limited Partnerships covered under N.C.G.S. 59
• L.L.C.s are covered under N.C.G.S. 57CL.L.C.s are covered under N.C.G.S. 57C
• Corporations covered under N.C.G.S. Chapter 55Corporations covered under N.C.G.S. Chapter 55
(Professionals under, 55B Non-Profits, under 55A)(Professionals under, 55B Non-Profits, under 55A)
126. Starting a Business
Access to Funds/FinancingAccess to Funds/Financing
• Sole ProprietorSole Proprietor
Generally has the least access toGenerally has the least access to
funds/financingfunds/financing
• PartnershipPartnership
Generally has a greater access toGenerally has a greater access to
funds/financing than Sole Proprietorshipfunds/financing than Sole Proprietorship
• L.L.P’s, S CorporationsL.L.P’s, S Corporations
Generally somewhat better access to fundsGenerally somewhat better access to funds
127. Starting a Business
Access to Funds/FinancingAccess to Funds/Financing
• Limited Partnerships and L.L.C.sLimited Partnerships and L.L.C.s
Generally better access to fundsGenerally better access to funds
Note: Limited Partnerships often offer the bestNote: Limited Partnerships often offer the best
tax shelters for investors!tax shelters for investors!
• CorporationCorporation
Generally has greatest access to funds/financingGenerally has greatest access to funds/financing
(e.g. Can sell equity/debt securities (stocks &(e.g. Can sell equity/debt securities (stocks &
bonds),, limited liability encourages investors,bonds),, limited liability encourages investors,
stock can be offered as collateral, etc.)stock can be offered as collateral, etc.)
128. Starting a Business
Distribution of Profits/LossesDistribution of Profits/Losses
• Sole ProprietorSole Proprietor
Gains all profits, suffers all lossesGains all profits, suffers all losses
• PartnershipPartnership
Distribution of profits and lossesDistribution of profits and losses
generally set by agreement or pro-ratagenerally set by agreement or pro-rata
• CorporationCorporation
Distribution of profits determined byDistribution of profits determined by
management/market, received asmanagement/market, received as
dividends or increased value of stock.dividends or increased value of stock.
129. Starting a Business
Management/ControlManagement/Control
• Sole ProprietorSole Proprietor
Sole & complete management/controlSole & complete management/control
• PartnershipPartnership
Management/control determined byManagement/control determined by
agreementagreement
Partnership books and records must bePartnership books and records must be
kept accessible to all partnerskept accessible to all partners
130. Starting a Business
Management/Control (Cont.)Management/Control (Cont.)
• CorporationCorporation
Nature of control/management determined by bylaws,Nature of control/management determined by bylaws,
actual persons in control determined by vote.actual persons in control determined by vote.
Corporate shareholder have no management authorityCorporate shareholder have no management authority
unless elected to board or as officerunless elected to board or as officer
““Freeze-outs” are a common problem in CloseFreeze-outs” are a common problem in Close
CorporationsCorporations
• L.L.P.L.L.P.
Management shared unless altered by agreementManagement shared unless altered by agreement
Purchasing an existing members interest does notPurchasing an existing members interest does not
automatically confer managerial authority. Other partnersautomatically confer managerial authority. Other partners
must unanimously agree to.must unanimously agree to.
131. Starting a Business
LiquidityLiquidity
• Sole ProprietorshipSole Proprietorship
Poor liquidityPoor liquidity
• Limited partnershipLimited partnership
Interest sales are technically easy, but generallyInterest sales are technically easy, but generally
not particularly attractivenot particularly attractive
• General partnershipGeneral partnership
Interest sales are difficult, requiring agreement ofInterest sales are difficult, requiring agreement of
other partnersother partners
132. Starting a Business
Liquidity (Cont.)Liquidity (Cont.)
• ““S” CorporationS” Corporation
Fair liquidity, but it may be restrictedFair liquidity, but it may be restricted
• CorporationCorporation
Easy transfer, sell shares (note: minority interestEasy transfer, sell shares (note: minority interest
shares less attractive in close corporation)shares less attractive in close corporation)
• L.L.C.L.L.C.
Transfer restrictionsTransfer restrictions
133. Starting a Business
LifecycleLifecycle
• Sole ProprietorshipSole Proprietorship
Often ends with the death or incapacity of theOften ends with the death or incapacity of the
sole proprietorsole proprietor
• CorporationCorporation
Continues to function unless/until formallyContinues to function unless/until formally
dissolved, voluntarily or involuntarily, regardlessdissolved, voluntarily or involuntarily, regardless
of the death or incapacity of individualof the death or incapacity of individual
shareholders (makes easier to preserve goodwill)shareholders (makes easier to preserve goodwill)
• L.L.C.L.L.C.
Often required to have a stated durationOften required to have a stated duration
134. Starting a Business
LifecycleLifecycle
General Partnerships, L.L.P.’s, L.L.C.’sGeneral Partnerships, L.L.P.’s, L.L.C.’s
Often dissolved by loss of any member, butOften dissolved by loss of any member, but
remaining members can unanimously agree toremaining members can unanimously agree to
continue operationscontinue operations
• Limited PartnershipsLimited Partnerships
Often dissolved by loss of a general partner, butOften dissolved by loss of a general partner, but
remaining members can unanimously agree toremaining members can unanimously agree to
continue operationscontinue operations
Life Insurance, especially for a “key man” canLife Insurance, especially for a “key man” can
be a key factor in maintaining operations!be a key factor in maintaining operations!
135. Starting a Business
PrivacyPrivacy
• Sole Proprietorships, Partnerships andSole Proprietorships, Partnerships and
Close CorporationsClose Corporations
Have very limited requirements forHave very limited requirements for
disclosure of private/financialdisclosure of private/financial
information.information.
• Public CorporationsPublic Corporations
Have extensive requirements forHave extensive requirements for
disclosure of private/financialdisclosure of private/financial
information.information.
136. Starting a Business
Fringe BenefitsFringe Benefits
• Historically, fringe benefit lawsHistorically, fringe benefit laws
have favored “C” corporationshave favored “C” corporations
For example, generally, healthFor example, generally, health
insurance is fully deductible forinsurance is fully deductible for
a “C” corporation, partiallya “C” corporation, partially
deductible for sole proprietor,deductible for sole proprietor,
not deductible for partners ornot deductible for partners or
for an “S” corporationfor an “S” corporation
138. 11-138
Basic Forms of Ownership
Sole ProprietorshipSole Proprietorship
PartnershipPartnership
CorporationCorporation
NumberNumber SalesSales
74%74% 5%5%
8%8% 5%5%
18%18% 90%90%
139. 11-139
Basic Forms
of Ownership
Basic Forms
of Ownership
18%
5%
74%
5%8%
90%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Number Sales
Sole Proprietorship
Partnership
Corporation
140. 11-140
Relative Percentages of Sole Proprietorships,
Partnerships, and Corporations in the U.S.
Sole proprietorships
16,955,000
73.0%
Corporations
4,631,000
19.9%
Partnerships
1,654,000
7.1%
Sole proprietorships, the
most widespread form of
business ownership, are
most common in retailing,
agriculture, and the service
industries.
Source: U.S. Bureau of the Census, Statistical Abstract of the
United States, 119th ed., Washington, D.C., 1999, p. 545.
141. Changing Popularity of Business
Forms
0
2000
4000
6000
8000
10000
12000
14000
16000
S. Prop C Corp S Corp Part.
1980
1992
143. Some Form Trends
Historically, maximum individual tax rate >Historically, maximum individual tax rate >
than maximum corporate rate createdthan maximum corporate rate created
incentive to keep income in corporate formincentive to keep income in corporate form
1986 Tax Act made maximum individual rate <1986 Tax Act made maximum individual rate <
maximum corporate rate & companies becamemaximum corporate rate & companies became
” S” corps in droves” S” corps in droves
But 1993 Tax Act increased individual rates,But 1993 Tax Act increased individual rates,
thus, “S” corps no longer as advantageousthus, “S” corps no longer as advantageous
New kid on block - L.L.C., more flexible thanNew kid on block - L.L.C., more flexible than
“S” Corp and better that L..L.P. in that not“S” Corp and better that L..L.P. in that not
require a general partnerrequire a general partner