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Introduction

Forms of Busi. Ass'n

  1. Overview of 5 Types
    1. Corp's
    2. Sole Proprietorship
    3. Partnership
    4. Limited Liab. Co. (LLC)
    5. Limited Liab. Partnership (LLP)
  2. Corp's
    1. Min. Form: 20% of Busi. But Most Revenue
    2. Pub. Corp
      1. Many dispersed owners / shareholder (SH) & no 1 SH control
      2. Owners & managers distinct
      3. Est'ed mkt that helps buy & sell stock
      4. Ownership int. change freq'ly b/c ez exit
    3. Close Corp.
      1. Few owners actively managing & controlling busi.
      2. Hard 2 sell int. b/c no ez exit
    4. Legal Charact's
      1. Legal entity indep. of owners
      2. Created by observing formalities
      3. Stock shares R evid. of ownership int. & freely transferrable
      4. Corp. mgmt centralized
        1. SH elect bd. of dir., who appts officers
      5. Unlimited life which is killed by dissolving
      6. Limited liab. so SH not liab. 4 corp's debts
      7. No uniformity of law b/c each state has stt. law
      8. Corp. law mandatory so can't change structure by K
      9. Double tax on SH so soln's
        1. Not incorp.
        2. Can keep $ in busi.
        3. Can have expenses (salary) 2 lwr taxable income
        4. Subchp. S 4 closely held corp. 2 elect not 2 B taxed 4 some purpose
          1. SH taxed dir'ly
          2. If keep profit in busi. 2 reinvest, pay div. 2 pay tax
  3. Sole Proprietorship
    1. Charact's
      1. Most busi. R sole propietorship
      2. Unincorp'ed busi. owned by 1 person so no sep. legal entity
      3. Unlimited liab.
      4. No formalities / double tax
  4. Partnership
    1. Ass'n Of 2 / more People as Owners 2 Carry On Busi. 4 Profit
    2. General Partn. (GP)
      1. Uniformity of law b/c states adopted UPA & few adopted RUPA
      2. No legal entity but ass'n of indiv. / rel. btwn people
        1. Liab. vicariously, indiv'ly, & fully
        2. No formality but express / implied intention
        3. Int. not freely transferrable but req. consent (could B implied)
        4. No double tax & tax losses pass through
        5. Rel. as K'al & can change structure
        6. Fragile so dsln anyX member changes by operation of law & busi. cont's by new partn.
        7. No central mgmt & agent 2 each other but can create mgmt
    3. Limited Partn. (LP)
      1. At least 1 active liab. GP & @ least 1 passive LP
      2. Formalities req'ed
      3. Centralized mgmt where GP active
      4. Stt. law where gov'ed by UPA & RULPA
      5. Soln 2 LP's passivity
        1. Form corp.
        2. Advise GP
        3. LP can B ee
        4. Form corp. as GP
  5. Limited Liab. Co. (LLC)
    1. Hybrid of Corp & Partn
      1. Tax by partn. but limited liab., cont. life, & no dsln by member change
    2. Adv's
      1. Approximates result of LLP w/o awkward structure
      2. No double tax
    3. Disadv's
      1. New so legal uncert. & IRS can change its mind
      2. Works 4 small busi. but not 4 large
      3. Can't keep $ in busi. b/c owners still taxed
      4. Varies from state 2 state
  6. Limited Liab. Partn. (LLP)
    1. Newest Category: Specie of GP
      1. Limited 2 prof'l model 2 limit liab. of malpract. claims
      2. Modernly defer 2 leg. but few state req. state sup ct 2 approve
      3. Can sue 4 entire asset of partn. busi. but no pers. recourse 4 all partn.

Advisability of Incorp.

  1. Factors 2 Consid.
    1. Limited Liab.
      1. Limit liab. only 4 K claims & pract'ly still some liab. (loans)
      2. Can limit tort liab. through ins.
    2. Double Tax
    3. Size
      1. Corp. 4 large busi.

Jxn of Incorp.

  1. Corp. Stt's Replaced Charger
    1. Ez Incorp. W/O Consent
  2. Place of Incorp.: Choice of Law
    1. DL As Best Jxn Choice
      1. Conscious policy 2 B jxn of choice 4 revenue of fee & DL bar
      2. Favor mgmt over SH, maj. SH over min. SH, SH over creditor, & pub. corp. over close
      3. Try 2 catch also @ reincorp.
    2. CA 211.5 Limit Close Corp. 2 CA Law if Strong Cnxn

Incorp. Process & Design of Cap. Structure

  1. Setting Up Corp.
    1. File Articles of Incorp & Fee w/Sec. of State
      1. Initial bd. of dir'or & basic stuff
      2. Can elect 2 B stt. close corp. which relax cert. formalities
    2. Bylaws of Corp.: Specif. Rules Gov'ing Corp.
    3. Appt Officers @ 1st Bd of Dir'or Mtng
    4. Dir'ors Auth. Stock Issue & SH Gives Consid. 4 Stock
  2. Fund'al Structural Issues
    1. Address Through
      1. Articles of Incorp.
      2. Bylaws
      3. Sep K indep of corp.
    2. Customize
      1. Protection 4 min. SH
      2. Restrictions on Bd. of dir'ors auth.
      3. Req. bd. 2 solicit aproval of dec. / indep
      4. Restrict permissive activity of corp.
      5. Transferrability of share
  3. Common Stock
    1. All Corp. Has This: Unit of Asset Not Corp's Asset
    2. Articles of Incorp. Address
    3. Owns Corp.
      1. Gen'ly not take dividend
      2. Not sole claimant but undef'ed residual claim so upside potential
  4. Sr. Sec. 2 Common Stock
    1. Pref'ed Stock
      1. Articles of incorp. auth.
      2. No legal oblgn but if div. payment by bd's discretion, pref'ed SH gets def'ed share before common
      3. Not vote gen'ly
      4. Equity claim holder
      5. Get liquidated pref. when corp. liquid.
    2. Creditor / Bank
      1. Highest priority
      2. Get principal loan + accrued int. if corp. dslv
    3. Debt Securities
      1. Sr. 2 all stock & there's legal oblgn 2 pay annual amt as creditor
      2. Def'ed rate of int. by articles of incorp.
      3. Mostly larger corp.

Ultra Vires Doc.

  1. Dying Doc.
    1. Gen. Incorp. Stt So No Need 2 Specify Activity
    2. Voidable Act If Corp. Goes Beyond
      1. Unanimous SH consent can cure
    3. Three Areas Where Still Alive
      1. Corp. as partner where possibility of div'ed loyalty
      2. Corp. as guarantor of 3rd party's debt where CA stt. can rq. SH 2 approve guarantee if officer / dir'ors debt
      3. Corp's pwr 2 make gifts
        1. No real prob. 4 recog'ed charitable causes b/c pub. image / pub. policy 2 do so
        2. More prob. 4 indiv. gifts like gift 2 deceased ee's spouse
  2. Using Ultra Vires as Planning Opp.
    1. Can Incl. Restrictive Cl. in Article of Incorp.
    2. 3rd Party 2 Corp. Can Protect from Restrictive Cl. By
      1. Make corp. prod. all doc's
      2. Make corp. prov. own guarantee
      3. Outside person assures / guarantees, gen'ly corp. atty

This material is copyrighted by the author. Use of this material for profit is strictly prohibited without written consent from the author.

12/2/1996

Ms. Haeji Hong

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