BLAW 101-110 Business Organizations II PDF

Legal Environment of Business BLAW110 Business Organizations II  Corporations Intro Definition: A corporation is a legal entity that is separate and distinct from its owners Corporations adopt bylaws, not a partnership/operating agreement Formation...

Legal Environment of Business BLAW110 Business Organizations II  Corporations Intro Definition: A corporation is a legal entity that is separate and distinct from its owners Corporations adopt bylaws, not a partnership/operating agreement Formation Process: (1) File articles with the Secretary of State (SOS); (2) Obtain employer identification number (EIN) from IRS; (3) File statement of information (SOI) with SOS; (4) (optional) File S-Corporation election with IRS; and (5) Enter into contracts and start running your business!  Corporate Liability Rule #1 of Corporate Law: Corporations are people! Enjoys all of the same legal rights and responsibilities of natural persons Separate legal existence from its owners and employees Owners and employees are not personally liable for the debts of the corporation Exception for fraud under an “alter ego” theory  Corporate Taxation Corporations have lower tax rates than individuals; however, corporations are double taxed First Level: On the corporation’s profits (at a corporate tax rate) Second Level: On an individual employee’s salary (at personal income tax rate) This is referred to as a “C” corporation The corporation can elect to be taxed as an “S” corporation, meaning they are taxed the same as a partnership (pass-through) taxation Must file S-corporation election with IRS within 75 days of formation S corporations are limited to (a) a maximum of 100 shareholders; (b) one class of stock; and (c) no corporate ownership  Directors and Officers Directors represent the board of directors and set the corporation’s strategy Elected by the shareholders to serve for a set term Officers are the day-to-day employees of the company (President, VP, CFO) Directors and Officers are not liable for the actions they take on behalf of the corporation unless they breach a fiduciary duty (of care/loyalty) OR act outside the scope of their employment Actions taken by directors, officers and employees within the scope of their employment are not personally liable  Financing and Shareholder Rights Corporations raise money to grow a company by taking on debt or issuing equity/stock Debt Financing – Allows company to retain ownership/control but responsible for paying the principal amount plus interest to a lender Equity Financing – Shareholders own a piece of the company through purchasing stock Number of shares authorized by a company are part of its articles Shares can include voting rights and distributions of corporate profits (dividends), but both are discretionary Shareholder Rights and Liabilities Shareholders are also not personally liable for the debts of the corporation Rights are set forth in a shareholder agreement Shareholders can sue the corporation, sue on behalf of the corporation and can be sued Drag-along/tag-along right – If a majority sells their stake in the corporation, minority shareholders have the right to participate in the sale Vesting Schedule – Shareholder increases their stake in the company over time (typically for high-level employees)  Financing Operations Venture Capital and Private Equity financing involves having an outside third party provide managerial expertise (and in some cases taking control) with the idea of taking the company public Crowdfunding (Kickstarter, IndieGoGo, GoFundMe) are private sources of financing Follows donation and equity-based models  Director Rights and Responsibilities Board of Directors must hold an annual meeting Each director receives one vote, and decisions made by a majority vote Directors who will be absent can assign a proxy to vote for them Directors also have the right to inspect the company’s books and records Indemnity – Corporation will hold harmless its directors and officers and pay all legal fees and judgments against them individually  Officer Rights and Responsibilities Officers (President, CFO, Treasurer) and Directors each owe the corporation a fiduciary duty of care and a duty of loyalty Duty of Care – Act in good faith and in the corporation’s best interest Duty of Loyalty – Putting the corporation’s interests above their own Directors and Officers are protected under the business judgment rule if they took reasonable steps to be informed of issues, had a rational basis for their decision and did not have any conflict of interest Can rely on the judgment of outside professionals (lawyers, accountants)  Duty of Loyalty Hypothetical Hypo: Stephanie is a director of a corporation with four other directors. She owns a building which the company is considering moving into, which would lead to her personally profiting from the transaction. If the board of directors wants to proceed with the transaction, what should Stephanie do?  Shareholder Powers Shareholders have the following five powers: 1) Voting Power – Can approve amendments to bylaws or articles, number of authorized shares, classes of shares, elect board of directors 2) Ownership/Transfer – Can buy or sell their interest in the company (stock) without requiring outside approval 3) Dividends – Right to receive distributions of corporate profits 4) Inspect Corporate Documents – Includes meetings, financial info 5) Right to Sue – If the corporation/directors/officers act wrongfully  Shareholder Lawsuits Direct Action – Shareholders appoint someone to be their class representative in a lawsuit against the corporation or its directors Derivative Action – Shareholders can bring a lawsuit in the name of the corporation against a third party Must make written demand on the corporation to sue first Direct and Derivative Action Hypothetical Hypo: Nicole is a shareholder in a company. She requests a copy of the company’s financial statements and sees an entry on personal or per diem expenses for the company’s directors. Managers have been using the corporate jet and recently bought a Lamborghini for the executives to drive around Santa Barbara in. Can Nicole bring a direct or derivative action? Nicole’s arguments (factual/legal/policy)? Company’s (director) defense? Conclusion – Who wins, and why?  Close Corporations Applies to corporations with fewer than 35 shareholders Company also cannot be publicly traded Directors and officers have fiduciary duty not to act oppressively towards minority shareholders Hypo: There are three shareholders in a close corporation. Two of the three shareholders are married, and control 90% of the voting rights, and the other shareholder controls 10%. The two majority shareholders reject every proposal to change the business from the minority shareholder and refuse to perform a valuation of the company so that the minority shareholder can sell their shares. What can the minority shareholder do?  In-Class Exercise: Corporations Search Using https://bizfileonline.sos.ca.gov/search/business Look up any California corporation and find out: (1) The name of the entity (2) The date the entity was formed; and (3) The number of shares that the corporation authorized in its articles