Corporate bargain--limited liability
I.CHARACTERISTICS OF A CORPORATION
A.PRINCIPAL CHARACTERISTICS OF A CORPORATION
a)Entity Status--a corporation is a legal entity created under the authority of legislature
b)Limited Liability--as a legal entity, a corp is responsible for its own debts; its shs liability is limited to their investment;
c)Free Transferability of Interest--shares, representing ownership interests, are freely transferable;
d)Centralized Management and Control--a corps management is centralized in a board of dirs and officers. Shs have no direct control over the boards activities;
e)Duration--Continuity of Existence--a corp is capable of perpetual existence;
f)Taxation--a corp, as an entity, pays taxes on its own income; shs are taxed only on dividends;
g)Remember Attributes of the Corporation--CLIFF:
1)Centralization of management;
3)Forever (perpetual duration);
4)Freely alienable (shares can be sold).
B.CORPORATIONS DISTINGUISHED FROM OTHER FORMS OF BUSINESS ASSOCIATIONS.
1.GENERAL PARTNERSHIPS--in most states, pships are governed by the Uniform Partnership Act (UPA). However, the Revised UPA (RUPA) has been adopted by a few states
a)Aggregate Status--a pship is an aggregation of two or more persons who are engaged in business as co-owners. Although not a legal entity, a pship is treated as one for certain purposes, e.g., ownership and transfer of property. RUPA confers entity status on pships;
b)Unlimited Liability--every partner is subject to unlimited personal liability on pship debts;
c)Transferability of Interests--a partner cannot make a transferee a member of the pship. She can, however, assign his interest in the pship, thus permitting the assignee to receive distributions of profits. Because the assignee does not become a member of the pship, he is not entitled to participate in pship business or management.
d)Duration and Dissolution--a pship cannot have perpetual existence. It is terminable at will unless a definite term is expressed or implied, and is also dissolved by death, incapacity, or withdrawal of any partner.
1)Wrongful dissolution--pships can also be dissolved in contravention of the pship agreement, by the express will of any partner, by a court or by a partners conduct. Upon wrongful dissolution, nonbreaching partners may seek damages for breach and, if they choose to do so, may continue the pship upon payment to the breaching partner of the value of his interest.
1)Compare--dissociation under RUPA--termination results in either the winding up of the pship or buyout of the dissociating partner, depending on the event triggering the termination. A buyout may be reduced by damages if dissociation was wrongful.
e)Management and Control--absent a contrary agreement, every partner has a right to participate equally in the partnership management.
f)Autority--each partner, as an agent of the firm, may bind the pship by acts done for the carrying on, in the usual way, the business of the pship.
1)RUPA--a pship is bound by a partners act for carrying on in the usual way either the actual pship business or a business of the kind carried on by the pship.
g)Ownership of Property--title may be held in the name of the pship, but property is owned by the individual partners as tenants in pship. There is no tenancy in pship under RUPA, which provides that property acquired by pship is owned by pship, not individual partners.
h)Capacity to Sue and be Sued--under the UPA, a lawsuit may be brought by or against individual partners, rather than pship. Partners are jointly and severally liable for wrongful acts and breaches of trust; they are only jointly liable for debts and obligations of the pship.
1)Statutory reforms--many state statutes specifically allow a pship to be sued in its own name. Other states make all pship liabilities joint and several. Other reforms provide that not all joint obligors need to be joined in a suit.
2)RUPA--a pship may sue and be sued in its own name, and partners are jointly and severally liable for all pship obligations. A claim against the pship cannot be satisfied from a partners personal assets unless pship assets have been exhausted.
2.JOINT VENTURE--a pship formed for some limited investment or operation, as opposed to a continued business enterprise. Joint ventures are governed by the rules applicable to pships
3.LIMITED PARTNERSHIP--this is a pship consisting of two classes of partners: general partners (with rights and obligations as in an ordinary pship) and limited partners (with no control and limited liability).
4.LIMITED LIABILITY PARTNERSHIPS--in a LLP, a general partner is NOT personally liable for all pship obligations arising from negligence, wrongful acts, and misconduct absent his involvement in the misconduct. There is no exclusion for liability for contractual obligations.
5.LIMITED LIABILITY COMPANIES--LLC is a non-corporate business entity whose owners (members) have limited liability and can participate actively in its management. An LLC may be either for a term or at will. It can be managed either by its members or nonmember managers. Depending on the statute, distributions are made either equally to each member or in proportion to each members contribution.
a)Withdrawal and Dissolution--some statutes provide that any event that terminates a members membership (death, resignation) causes dissolution. Other statutes distinguish between fault events(member misconduct...) and non-fault events (death, bankruptcy), and some provide that dissolution can be avoided by paying the withdrawing member fair value for his interest.
b)Advantages of LLCs--An LLC for a business association, not publicly held, has strong advantages: partnership taxation, virtually no restrictions in structuring ownership interests and management, limited liability for owners and managers, and no limitations on the number or nature of owners.
C.DISREGARD OF CORPORATE ENTITY--since a corp is a distinct legal entity, shs are normally shielded from corporate obligations. In certain instances, however, the corporate entity will be disregarded.
1.PIERCING THE CORPORATE VEIL--(Suits by corporate creditors against shs)--its more common in contract claims than in tort claims. The most important elements considered by the courts:
a)Commingling of Assets--commingling of corp assets and personal assets of shs (e.g., paying private debts with corp funds) may lead to piercing of the corporate veil;
b)Lack of Corporate Formalities--whether basic corp formalities (e.g., regular meetings, corporate records maintained, issuance of stock) were followed is also relevant. Statutory close corps are permitted more flexibility regarding corp formalities;
c)Undercapitalization--if the corp was organized without sufficient capital or liability insurance to meet obligations reasonably expected to arise, the corp veil may be pierced;
d)Domination and Control By Shareholder--the corp veil is often pierced when an individual or other corp owns most or all of the stock, so that it completely dominates policy or business decisions.
e)”Alter Ego,” “Instrumentality,” “Unity of Interest”--when no separate entity exists and the corp is merely the alter ego or instrumentality of its shs (could be a corporate shareholder), or when there is a unity of interest between the corp and its shs, the corp veil is often pierced. These terms are usually applied only if other grounds are present;
f)Fraud, Wrong, Dishonesty, or Injustice--generally, the veil will be pierced only if one of these elements is available, e.g., no piercing of veil if there is a lack of corp formalities without resultant injustice. Piercing the veil usually involves corps with a small number of shs.
2.PIERCING HAPPENS MOST OFTEN WHEN:
1)The number of shs is small--the chance of one sh dominating the corp is greater;
2)Deception--There is some kind of deception;
3)Agency--individual is a “principal” and corp is his “agent”
4)Estoppel--outsider was led to believe that he was dealing with an individual, while in fact he was dealing with the corporation.
5)Direct tort--individual and corp acted together and should be jointly/severally liable
6)Instrumentality requirement is satisfied:
I)control of a subsidiary by parent
ii)to commit fraud
iii)to cause loss or injury.
3.PIERCING THE WALL BETWEEN AFFILIATED CORPORATIONS--this occurs when a P with a claim against one corp attempts to satisfy the claim against the assets of an affiliated corp under common ownership. This type of aggregation is permitted only when each affiliated corp is NOT a free-standing enterprise but merely a fragment of an entity composed of affiliated corps.
4.USE OF CORPORATE FORM TO EVADE STATUTORY OR CONTRACT OBLIGATIONS--the corp form may be ignored when it is used to evade a statutory or contractual obligation. The issue is whether the contract or statute was intended to apply to the shs as well as the corporation. Only third parties, not the corp or its shs, are generally allowed to disregard the corp entity.
5.TWO EXTREMES TO AVOID IN PIERCING THE CORPORATE WALL:
a)Old model--Superman (sh) used corp as his puppet;
b)New Model--Superman (sh) and corp are inseparable (alter ego)
D.SUBORDINATION OF SHAREHOLDER DEBTS--”DEEP ROCK” DOCTRINE--if a corp goes into bankruptcy, debts to its controlling shs may be subordinated to claims of other creditors. When subordination occurs, sh