Incorporations: Legal Entities & Limited Liability

Incorporations

• Incorporating involves forming a separate legal entity by filing necessary legal documents with relevant authorities.
• Once incorporated, the entity is legally distinct from its owners.
• Incorporating grants an entity legal personality protecting the owner from risk via the Corporate Veil.
• Incorporation creates a separate entity allowing Perpetual Duration of the Company.
• Incorporation creates a separation between patrimonies.
• With limited liability, shareholders are only liable for the money they invest in the business.
• An exception to limited liability is if shareholders are involved in fraud or illegal activities.
• Not all entities can raise funding from financial markets with SAS & SARL unable to, and SA being able to.

Forms of Incorporation

• SARL is used for small to medium-sized businesses.
• SAS is popular for startups because of its flexibility to bring in investors.
• LLC (Limited Liability Company) equivalent: Amazon Inc.
• Ltd (Limited) equivalent: Marks & Spencer Ltd.
• GmbH equivalent: Volkswagen GmbH.

The Corporate Veil

• The corporate veil is a legal concept separating a company's financial and legal identity from its owners.
• The corporate veil means that shareholders are not personally responsible for the company's debts or legal obligations
• The corporate veil illustrates the separation of patrimonies and limitation of liabilities.
• XYZ Ltd. is a small company owned by Alice and Bob is an example.
• XYZ Ltd. takes out a loan but goes bankrupt; the bank can only seize XYZ Ltd. assets.
• Alice and Bob's personal assets are protected by the corporate veil.

Piercing The Corporate Veil

• Courts can "pierce" or "lift" the corporate veil.
• Piercing the corporate veil makes the shareholders personally liable for the company's debts.
• Courts will only pierce the corporate veil under certain conditions: fraudulent activities, non-compliance with corporate formalities, and undercapitalization.
• Fraudulent Activities: occurs if Alice and Bob use XYZ Ltd. to scam customers or creditors.
• Failure to Comply with Corporate Formalities: If Alice and Bob use XYZ Ltd.'s funds for personal expenses.
• Failure to Comply with Corporate Formalities: occurs if proper records are not kept, or meetings are not held.
• Undercapitalization: If Alice and Bob create XYZ Ltd. but never put enough money into the business to cover its basic obligations, creditors may argue that the company was never meant to operate as a legitimate business.

Importance of the Corporate Veil

• Separating business and personal finances protects personal assets via a clear boundary, making risk management easier
• Entrepreneurship is encouraged as business owners can take risks without the fear of losing their personal savings or property.
• The Corporate Veil prevents abuse, as courts can lift it in cases of abuse, ensuring companies aren't used for fraud or evasion.

Perpetual Duration of Companies

• In corporations, death, incapacity, or withdrawal of one of the associates cannot lead to the dissolution of the company; the company continues to exist no matter the changes in ownership of the shareholders
• Corporations are designed to have "perpetual duration"
• For example, if John owns shares in Auchan SAS then passes away, his shares are transferred transferred to his heirs.
• Auchan SAS will not cease operations or dissolve because John's ownership changes
• The existence of the company is independent of any single shareholder.

Advantages of Perpetual Duration of Companies

• Stability for operations: there is no disruption of the economy
• Ease of ownership (shares) transfer: shares can be easily bought, sold, or inherited, ideal for raising capital
• Safeguarding the company's future: the company can outlive its founders and focus on long-term goals

Exceptions to Perpetual Duration of Companies

• Not all businesses enjoy perpetual duration: Traditional Partnerships and Sole Traders.
• Traditional Partnerships: Without a formal agreement about what happens if one of the partners dies, the partnership will dissolve automatically, unless the surviving partner agrees to continue the business with the heirs of the dead partner.
• Sole traders: the company is entirely tied to the owner's life

Voluntary Liquidation

• Shareholders decide to end the company's operations for strategic reasons, like declining markets or better investment opportunities elsewhere.

Bankruptcy

• The company cannot pay its debts, it can be declared bankrupt and cease operations.

Scenario Study

• There are three key questions in the scenario study:
• Identifying the parties: Determining who is involved.
• Origin of the loan: Determining who gave a loan and to whom.
• Loan Reimbursement: Whether or not the loan will be reimbursed and under what circumstances
• Ms. Brown and Ms. Blue are natural persons, Ms. Brown's company is a legal person.
• Ms. Blue granted the loan to the company of Ms. Brown, not Ms. Brown herself.
• Ms. Brown implies that her company can not reimburse Ms. Blue, and unless can be proven otherwise, there is likely nothing she can do to redeem her money.

Separation Between Ownership and Control

• In a corporate structure, there is a separation between the ownership of the company (the shareholders) and the control/management of the company(executives or directors).
• Shareholders hold ownership, investing money in exchange for shares and maintaining voting rights on major decisions, but not managing the company's daily operations.
• The Board of Directors, elected by share holders, oversees strategic direction and appoints the executives to oversee the management and daily operations of the company.

Advantages of Separation Between Ownership and Control

• Efficiency: Because shareholders often lack the time and expertise to manage daily operations
• Scalability: Allows companies to grow large and attract investors
• Risk Management: Protects shareholder liability through the company's investments unless fraud

Disadvantages of Separation Between Ownership and Control

• Potential Conflict of Interest when executives and directors may begin to pursue their own goals
• Complexity, Higher administrative burden, higher costs

How to Establish Separation Between Ownership and Control

• Filing Articles of Association formally creates the company, containing company information like purpose, shareholder/director structure.
• Compliance with local laws, like appointing directors, share issuing and setting up accounting systems

Scenario Study: Misuse of Corporate Assets

• Josiane owns a hair salon Josiane Coiffure SASU (a single-person corporation).
• She is both Présidente (Director) and Owner of the business, controlling 100% of the structure.
• Josiane uses the company's money for personal needs which a "Misuse of Corporate Assets".
• The Tax Authorities may have issues because Josiane the VAT is supposed to be collected from customers, and company profit taxes are not being paid.
• As the sole owner, no one else is directly harmed by the misuse of assets, but other shareholders would be affected by such actions.

Shareholder Influence Based on Ownership Percentage

• 75% of Shares = full power to pas special resolutions like changing constitution, approving mergers, and liquidating voluntarily.

• >50% of Shares = control over ordinary resolutions like appointing and removing directors, or authorizing new share issue.
• >25% of Shares = blocking minority with capacity to prevent special resolutions (require 75% approval).
• Blocking powers mean capacity to prevent structural and renaming changes.

Transferable Shares

• Transferable shares allow ownership of a company to be sold, transferred, or inherited without affecting the business.

Freely Tradable Shares

• Freely tradable shares(open/public corporations) can be bought/sold on the stock market regardless of a buyers identity (intuitu pecuniae).
• Companies like Google or Apple and SAS default to freely tradable shares.

Restricted Shares

• Restricted shares(closed private corporations) may only be sold to someone approved by shareholders as the identity of a buyer is important (intuitu personae).
• Family businesses may require all family members' approval to sell shares
• SARL need the agreement of others to sell shares to people not already associated.

Shares vs Stock

• Stocks are issued by Joint Stock Companies (Société anonyme (SA), Société par action simplifiée (SAS), Société en commandite par actions (SCA))
• Stock can confer different rights for the associates (Preferred stock), include (Economic Advantages and non-economic advantages (double voting and enhanced information rights)
• Negative Preferred stock is also possible (no voting rights)
• Stock cannot represent more than 50% total number of stocks
• Goal is is to raise substantial funds, investor is relatively unimportant (Intuitu Pecuniae).
• Stocks are easy to sell without written document. Registration fee is 0.1%
• Shares can be transferred to all other entity types (Limited liability companies (SARL, EURL), General partnerships (SNC), and limited partnerships.
• Shares allows for rights to all associates as (take part in collective decisions, information benefit and receive dividends)
• Investor is important (intuitu personae)
• Shares are more difficult and require written document. Transfer is only permitted between associates.
• Company articles of association can still ask approval even when internal sales are made. Registration fee here is 3% after certain abatement.

Basic Corporate Tax

• Double Taxation System:
• At the corporate level: when profits generated, they are taxed under Corporate Tax.
• Profits distributed, shareholders recognize dividends or capital gains (if sold).
• Individual Level: Shareholders pay taxes on dividends or realize capital gains at a set PEU rate or according to Individual Rates/Revenu

One Person Corporation vs Self Employed

• One Person Corporation can be a positive or negative.
• In some countries it is difficult to form a corporation because it is bureaucratic (Italy and or Germany) France or the UK incorporation is easy making it more accessible.

Pros and Cons to One Person Corporation

• Pros include protection against corporate veil actions, and potential tax credits.
• Cons include complex paperwork and the not always cheaper rates depending on income
• Simplicity in self employed life allows stay simpler, but legal and tax benefits may also indicate needs for corporation.

Shareholders' Pact:

• An Article of Association defines shareholder rights and obligations.
• An Associates’ Pact allows for private regulation for shareholder relationships beyond what is already stated in the official company document. (Only necessary when there is a limited number of shareholders).

Rules of a Shareholders' Pact:

• Article of Association is public, and may be accessed by multiple parties.
• Shareholders’ pacts are private, meaning term agreements remain confidential.
• Shareholders’ pacts can protect smaller shareholders by preventing an overrule by a majority owner.
• For example, with A and B owning 20% each, if shares were sold to C, they could then control more than 75% and can pass special resolutions themselves.
• To prevent, A and B share sign an agreement stating “If we sell we must offer them to other” This allows control between A and B as opposed to C This also prevents taking place, due to a Preemption Classe