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Corporations and Limited Liability Companies
Terms in this set (51)
An entity created by law whose existence is distinct from that of the individuals whose initiative, property, and control enable it to function.
A corporation is an entity apart from its shareholders, with entirely distinct rights and responsibilities.
Creature of the State:
A corporation typically may be formed only with substantial compliance with a State incorporation statute.
A shareholder's liability is limited to the amount invested in the business enterprise.
Free Transferability of Corporate Shares:
Unless the charter provides otherwise.
Shareholders of a corporation elect the board of directors to manage its business affairs; the board appoints officers to run the day-to-day operations of the business.
As a Person:
A corporation is a "person" under the 5th and 14th Amendments to the U.S. Constitution as related to the requirement that no person be deprived of "life, liberty, or property without due process of law" and under the Equal Protection Clause of the Fourteenth Amendment. However, a corporation is NOT a person with regard to the Fifth Amendment right to self-incrimination.
As a Citizen:
Corporations are citizens of the state(s) where they are incorporated and they have their principal place of business located for diversity jurisdiction purposes.
Person who takes the preliminary steps to organize a corporation.
Once upon a time in the 1800s
: Promoters remain liable on preincorporation contracts made in the name of the corporation unless the contract provides otherwise.
Such preincorporation contracts do not bind the corporation unless the corporation adopts the contract expressly, impliedly, or by knowingly accepting benefits under it.
Promoter's Fiduciary Duty
Promoters owe a fiduciary duty among themselves and to the corporation, its subscribers, and its initial shareholders.
Persons who agree to purchase the initial stock in a corporation.
initial early investors
An offer to purchase capital stock in a corporation not yet formed.
A preincorporation subscription is a continuing offer to purchase stock from a nonexisting entity, incapable of being accepted until the corporation exists. Thus, a subscriber can revoke his/her subscription any time before acceptance.
A subscription is irrevocable and is considered as a contract among the various subscribers.
A subscription agreement entered into after incorporation; the subscriber may withdraw an offer to enter into a subscription anytime before the corporation accepts.
Selection of Name
The name must clearly designate the entity as a corporation, and be a unique name (i.e., do not have the same name as an existing corporation doing business within that state).
The persons who sign the articles of incorporation. All State provide that only one person need act as the incorporator or incorporators, though more may do so.
Articles of Incorporation (Charter):
The basic organizational document of a corporation. It must include the name of the corporation, the number of authorized shares, the street address of the registered office and name of the registered agent, and the name and address of each incorporator.
Once it is complete, the articles of incorporation must be filed with the Secretary of State's office.
Almost all states require an organizational meeting be held to adopt the new corporation's bylaws (rules governing internal management of the corporation), appoint officers, and carry on any other business brought before it.
Need not be publicly filed and generally may be altered without shareholder approval.
not on test
* Common Law Approach:
1. Corporation De Jure
2. Corporation De Facto
3. Corporation by Estoppel
4. Defective Incorporation
not on test
* Corporation De Jure:
One formed in "substantial compliance" with the incorporation statute and having all corporate attributes.
not on test
* Corporation De Facto:
One not formed with substantial compliance, but treated as a corporation since a "bona fide" attempt to comply with the statute exists and the corporation actually exercised corporate power under the mistaken belief that a corporation had been formed.
not on test
* Corporation by Estoppel:
Prevents a person from raising the question of a corporation's existence; requires a holding out by a purported corporation or its associates and reliance by a third party.
not on test
* Defective Incorporation:
Corporation not recognized by the law; occurs when there is neither a de jure, de facto or estoppel situation that applies. The end result is all shareholders active in the "corporation's" management are personally liable.
not on test
* Statutory Approach:
Rule: Corporate existence begins either upon the filing of the articles of incorporation or their acceptance by the Secretary of State.
Functions of Board of Directors
Selection and Removal of Officers
Determine Capital Structure and Financial Policy: (Borrow money; issue notes and bonds; sell, lease or exchange assets of the corporation; fix the selling price of newly issued shares).
Dividends: Declare the amount and type of dividends.
Fix Compensation of Officers
Fill Vacancies on the Board: (By majority vote of the remaining members).
Quorum and Voting:
A majority of the Board of Director's constitutes a quorum; if a quorum is present at any meeting, the act of a majority of the board of directors in attendance is an act of the board.
Example: There are 19 directors in Fun Florida Corporation. 10 directors are present at a meeting; 6 votes (a majority of those present) would be enough to constitute an act of the board.
Actions Taken Without a Meeting:
Permitted if consent in writing is signed by all of the members of the board of directors.
Directors have the right to inspect corporate books and records.
Professor Marzen, who knows nothing about business, as a favor to one of his former students in RMI 4420, who is now the President of a major insurance company, accepts a director's post on the insurance company's board. President (former student) assures Professor Marzen that he will only be a "figurehead" who is not expected to have any significant function in the corporation's affairs.
Does Professor Marzen hold a duty of care to the insurance company?
yes, no such thing as a "dummy director", they should know a lot about the compete and what it is doing.They should not be on the board if they do not know these things, because it could be a liability for the company.
Duty of Care of Directors and Officers
A director or officer must exercise that degree of skill, diligence and care that a reasonably prudent person would exercise in similar situations.
However, the "business judgment rule" limits claims based upon a breach of the duty of care of directors and officers.
Business Judgment Rule:
a court will not second-guess the wisdom of directors' and officers' business judgments, and will not impose liability for even stupid business decisions so long as the director or officer (1) had no conflict of interest when he/she made the decision; 2) gathered a reasonable amount of information before deciding; and 3) did not act wholly irrationally.
Essentially, the effect of the business judgment rule is that courts will not substitute their judgment for that of the board or an officer acting in good faith with due care.
Most successful claims against directors and officers have come in cases where the director or officer simply fails to do the basic things that directors or officers usually do. This includes:
Failure to attend meetings;
Failure to learn anything of substance about the company's business;
Failure to read reports and financial statements given to him/her by the corporation;
Failure to obtain assistance (advice of counsel) when he/she sees or ought to see signals that things are seriously wrong with the business.
Liability can also be found in the case of:
Approval of a "no win" transaction (where a transaction at best could benefit a corporation slightly at all, and at worst could cause great harm).
Duty of Loyalty:
Officers and directors of a corporation owe a fiduciary duty of loyalty to the corporation.
However, if a conflict-of-interest arises, a director/officer may engage in the transaction if one of the three exceptions to the Duty of Loyalty applies:
1. The transaction is approved by a majority of disinterested directors (a majority of the directors also counts as a quorum), after a full disclosure;
2. The transaction is ratified by shareholders, after a full disclosure; and
3. The director/officer shows the transaction was fair when made.
Duty Not to Compete
An officer or director may not use corporate personnel, facilities, or funds for her own benefits nor disclose trade secrets of the corporation to others.
Limited Liability Company:
A limited liability company is a noncorporate business organization that provides limited liability to all of its owners (members) and permits all of its members to participate in the management of the business.
Limited liability companies are the most popular unincorporated business entity! They are used widely in real estate transactions, professional services, construction, finance and retail.
All profits and losses of an LLC "pass through" the business to LLC members (owners), who then are required to report income on personal tax returns.
Formation of an LLC
Rule: The formation of an LLC requires substantial compliance with a state's LLC statute. In Florida, it is the Florida Limited Liability Company Act.
LLC statutes typically require the central filing of articles of organization in a designated State office.
LLC statutes typically require the name of the LLC to include the words limited liability company or the abbreviation LLC.
The contribution of a member to an LLC may be cash, property, services rendered, a promissory note, or other obligation to contribute cash, property or to perform services.
Operating Agreement -
The basic contract governing the affairs of an LLC and stating the various rights and duties of the members.
Foreign Limited Liability Companies -
An LLC is considered "foreign" by any State other than that in which it was formed. A foreign LLC must be registered with a State before it can bring enforcement actions in that State's courts; however, a foreign LLC can defend itself in that State's courts without registration.
Liabilities in an LLC
No member or manager of an LLC is obligated personally for any debt, obligation, or liability of the LLC solely by reason of being a member or acting as a manager of the LLC.
Exception - "Piercing the LLC Veil" Theory
"Piercing the Veil" of an LLC
Rule: The general rule is that the members and managers of an LLC enjoy limited personal liability. However, in some situations the veil of an LLC can be "pierced."
Florida Limited Liability Company Act - Florida Stat. § 608.701
"In any case in which a party seeks to hold the members of an LLC personally responsible for the liabilities or alleged improper actions of the LLC, the court is to apply the case law which interprets the conditions and circumstances under which the corporate veil of a corporation may be pierced under the laws of this state.
In Florida, to "pierce" the veil of an LLC, it must be shown that the LLC was organized or used to mislead creditors or to perpetrate a fraud upon them. Rosy Blue v. Chad Davis & Davis & Associates, LLC, 2008 U.S. Dist. LEXIS 42637 (M.D. Fla. 2008).
Three factors must be proven by a preponderance of the evidence:
1) The member(s) - manager(s) dominated and controlled the corporation to such an extent that the LLC's independent existence was in fact non-existent and the member(s) - manager(s) were in fact alter egos of the LLC;
2) The LLC must have been used fraudulently or for an improper purpose;
3) The fraudulent or improper use of the LLC form caused injury to the claimant.
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