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Joint Ventures
An association of persons or entities for a single transaction or project. JV's are
treated as a partnership (P/S)
General Partnership
General Partnership - an association of two or more persons who agree to carry on as co-
owners of an ongoing business for profit
• Filing not required
• At least two owners of the partnerships
• Personally liable for all obligations of the business
• A partnership may be dissolved after a partner dies or otherwise dissociates from the
partnership unless the partners have agreed otherwise, or vote to continue the
partnership
• Taxes flow through the P/S to the partners (taxed at their rates)
• A partner cannot transfer his P/S interest without unanimous consent of the other
partners
• A general P/S may file for bankruptcy as a separate entity
In a general P/S
• All partners are general partners
• All partners share equally in mgmt, profits and losses unless agreed otherwise (even
when capital contributions are not equal)
• Within the ordinary course of business a majority vote is needed
• Matters outside the ordinary course of business require unanimous consent
- Admitting new partners
- Confessing a judgement or submitting a claim for arbitration
- Making a fundamental change in the business (sale of goodwill)
- Changing the P/S agreement
- Assignment of P/S property to others
• All partners have unlimited personal liability for obligations of the P/S
• All partners (individually) have the actual or apparent authority to bind the P/S with
respect to all normal partnership business transaction (except when a third party
knows the partner lacks actual authority)
- Actual authority - all authority that a principal expressively gives to an
agent plus any authority that is reasonable implied from the express grant
(Partner is store manager, reasonable to imply the partner has the authority
to hire employees, buy merchandise, etc)
- Apparent authority extends only to the ordinary course of business (sign a
lease, hire/fire employees, purchasing equipment, granting warranties)
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BEC - Notes Chapter 1
- The P/S may ratify an unauthorized act (if the P/S likes an unauthorized act
by partner)
Intent to form a P/S (either Express, orally or in writing, or Implied, in conduct) is the key
to general P/S formation. No express agreement is necessary. An agreement can be
implied from conduct showing intent to enter into a business for profit together. However,
if the P/S wants to exist for more than a year, an agreement is required under the statue of
frauds
Dissociation (P/S may or may not continue) of a partner does not necessarily cause a
dissolution (business it wound up and then terminated)
Events of a dissociation:
• A partner wants to withdraw
• An event set forth in the P/S agreement that causes a dissociation
• A partner is expelled by unanimous vote
• A partner becomes a debtor in bankruptcy
• A partner dies
When a partner dissociates actual authority ends but apparent authority continues for two
years until 3rd party is given notice.
For debts prior to dissociation, partners remain liable unless released by creditors
(novation)
For debts incurred after dissociation, partners are not liable if notice is filled with the state
or each 3rd party
Liability of an incoming partner is limited to financial contribution to P/S for debts prior
to his/her arrival, and is personally liable of all debts incurrent by the partnership after he
becomes a partner
Distribution of assets
• Step 1: Liquidate assets
• Step 2: Pay creditors (insiders or outsiders); if the liquidation of assets do not cover
the costs to pay the creditors, then the losses are split
• Step 3: If there is leftover after paying creditors, return capital to partners or split
losses
• Step 4: If there is anything left, divide profits
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BEC - Notes Chapter 1
Partners are generally liable for all contracts entered into and all torts committed by other
partners within the scope of the P/S business
The partners' liability is joint and several for the entire amount. Meaning if the other
partners flee the country, you are liable for all P/S obligations
Differences
• Not personally liable for debts of the P/S or acts/torts committed by
another partner, employee or agent, but you can lose your investment. But you are
still liable for your own acts\
• Must file with the sate
Limited Partnership
• Is comprised of at least 1 general partner who manages the business and is
personally liable (for all P/S debts) and at least one limited partner (whose liability
is limited to capital contribution)
• Unanimous consent required for either the GP or LP to sell their interest, or a new
partner be added
• Partners must make some type of capital contribution
• Absent an agreement, profit and loss allocation is based on capital contribution
• A LP is like a shareholder, no control power, may assign interest, does not owe
fiduciary duty, is not an agent, has not apparent authority
• A LP may be dissolved by
- Occurrence of time or stated time in the P/S agreement
- Written consent of all general partners
- Withdrawal or death of a general partner
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BEC - Notes Chapter 1
- Judicial decree
• A LP has a right to vote on fundamental changes, inspect the P/S books, transact
business with P/S, bring derivative action
• A LP can lose limited liability is they do any 1 of the following
- Serve as a general partner
- Allowing name to be used in P/S name
- Participate in control (3rd party has reason to believe that the LP is a
general partner)
A limited partnership and corporation are both created under a state statute and require
filing with the state
Corporation
• Must file with state called articles of incorporation
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BEC - Notes Chapter 1
- Name of corporation
- Name and addresses of the corporations registered agent
- Name and addresses of each of the incorporators
- Number of shares authorized to be issued
- One of more classes of shares must have unlimited voting rights
• Directors are elected by shareholders, directors select executive officers to manage
day-to-day operations
• Stockholders, directors, and officers are not personally liable for obligations of the
corporation (just lose investment), but may be liable for torts the individual
commits
• Perpetual life, can continue after the death of resignation of owners or managers
• Stock holders free to transfer ownership interest whenever they want to whomever
they want\
C Corp - double taxation (if income is distributed to stockholders), corporate tax rates
lower than personal rates
S Corp - taxed like a partnership, flowthrough; however there are restrictions on S Corps
- Stock can not be held by more than 100 persons
- Shareholders must be individuals, estates or certain trusts
- The corporation must be domestic
- Can only be one class of stock
- Foreign shareholders are generally prohibited
Certain types of businesses (insurance companies and savings institutions) cannot file for
bankruptcy regardless of what type of entity they are formed as
Most aspects of corporate law are governed by state law, but some aspects (federal tax,
securities regulation) are governed by federal law. The state statue is called Revised
Model Business Corporation Act (RMBCA)
Promoters, who raise capital for the corporation, enter into contracts with third parties who
are interested in becoming shareholders (stock subscription)
- Promoters are generally personally liable on the contracts (B1-33 more detail on
this)
- Even if the corporation adopts a promoters contract, the promoter remains liable
unless the promoter is released by the third party (novation)
Ultra Vires Act - If the corporation has a narrow purpose cause (some states do not require
it) and the corporation undertakes business outside the clause, it is said to be acting "ultra
vires" and may effect the firm.
• A shareholder may seek an injunction (order from the court) prohibiting the
corp from the action
• The corp or shareholders may sue to recover damager from the directors or
officers who authorized the ultra vires act
• The state (usually the attorney general) may bring an action to have the corp
dissolved for committing the act
Bylaws - rules for running the entity. They are not part of the articles of incorporation and
are not required to be filed with the state
• Bylaws may not contain rules that conflict with the articles of incorporation
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BEC - Notes Chapter 1
De jure - all of the requirements for incorporation are met and it will be recognized for all
purposes
De facto corporation doctrine - requirements for incorporation are not met, but the
business might still be treated as a corporation, if the incorporators made a good faith
attempt to incorporate and operated as if they had incorporated, the business will be
treated as a corporation in all aspects
Doctrine of incorporate Estoppel - requirements for incorporation are not met, but the
business might still be treated as a corporation, if a party who treats a business as if it were
a validly formed corporation will be estopped (legally barred) from claiming in a legal
proceeding that the corporation was not validly formed
[if the 3rd party reasonably believes that they were dealing with a corp {not fraud}, then
the party can not claim the corp was not valid]
Defective corporation - entity did not make a good faith attempt to incorporate so
shareholders are personally liable
Piercing the corporate veil - courts hold shareholders, officers or directors, active in
operation of the business, of a de jure (properly formed) corporation will be held liable
(because the legislative privilege of conducting business is being abused). There are three
reasons the corporate veil will be pierced:
1. Commingling personal funds with corporate funds
2. Inadequate capitalization - corporation is under capitalized at the time of
formation
3. Committing fraud on existing creditors - if the corporation was formed to
defraud existing personal creditors
Foreign corporation - a corporation not incorporated within the state (Cali corp going to
NY to do business)
Domestic corporation - incorporated within the state
A foreign corporation may not transact business (maintain an office within the state or
conduct regular intrastate business) within a state it has registered with the state and has
obtained a certificate of authority. [So you don't need to file twice for incorporation]
Operation of a corporation
• A corporation only needs only one director
• The articles of incorporation usually name the initial director, who hold office until
the first annual meeting.
• Directors may be removed by shareholder vote with or without cause
• Director's meetings are only valid if a quorum is present, and action may be taken
with a majority of vote of those present, so if 4 of the 6 approve the action, it would
be valid
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BEC - Notes Chapter 1
• Individually, directors have no right or power to act, they are not agents, they owe a
fiduciary duty
• Directors may not vote by proxy, must be there physically
• Individually, officers have powers, they are agents and have fiduciary duties
Fundamental changes require both board and shareholder approval, examples are:
• Amendments to the articles of incorporation
• Mergers
A+B=A; both A&B's boards and shareholders must approve the fundamental
change
• Consolidations
A+B=C; both A&B's boards and shareholders must approve the fundamental
change
• Share exchanges
A acquires all the outstanding shares of B; A needs only the board approval, B's
boards and shareholders must approve the fundamental change
• Sale of all or substantially all of the corporations assets (purchasing company, buy
side, only needs board approval)
• Dissolutions - termination of corporate existence (could be involuntary through
judicial proceedings)
Merger of a subsidiary (parent owning 90% or more of a subsidiary) - Parent needs only
boards approval. Parent's board makes decision unilaterally
Par value - minimum price the stock can be issued for legally (to ensure the corporation
would be capitalized to a certain level
Under RMBCA, board of directors can issue the stock price at any level and be issued in
exchange for any benefit to the corporation (services rendered, services to be performed,
real estate, etc)
If property is accepted for stock, the board must value the land in good faith
Unpaid stock - a subscriber has promised, but failed, to pay for stock, the subscriber may
be liabel to either the corporation or its creditors
Watered stock - stock that has been issued in exchange for property worth less than the
part value
7
BEC - Notes Chapter 1
Cumulative Preferred shares - gets paid dividends in arrears. Gets paid before
noncumulative preferred
Stock dividends - authorized shares owned by the corporation but unissued, because no
assets are issued, shareholder do not owe federal taxes
Cumulative voting - each share is entitled to one vote for each director position being
filled in any way, so can cast all votes for one single candidate (protects minority
shareholder)
B1-46 example of cumulative voting
Shareholders may vote only is a quorum is present, and they may vote by proxy
(appointment valid for 11 months)
Shareholders in small corporations (closely held corporations) can put restriction on the
transfer of stock, but they can not put an absolute bar against selling shares. Examples of
restrictions include:
• Right of first refusal - giving specified persons the option to buy shares before selling
to an outsider
• Requiring that specified persons approve the transfer of stock
• Prohibiting the transferring of shares to a certain type of persons, such as competitors
Shareholders have the right to inspect the books and records upon request if its for a
proper purpose. Improper purposes to personally benefit the inspecting shareholder
include obtaining the contact information of shareholders to create a commercial mailing
list
Pre-emptive rights - the right to purchase additional shares to maintain their proportionate
voting strength.
No pre-emptive right unless articles of incorporation provide for them
Dissenting shareholder - vote on a fundamental change and lose. The shareholder may
dissent and demand that the corporation pay them fair value of their shares (buy them out)
Derivative action - the corporation has legal cause of action but refuses to bring action, the
shareholder may that the right to bring derivative action to enforce the corporations rights
if three prerequisites are met:
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BEC - Notes Chapter 1
1. Shareholder must have been a shareholder during time of the alleged wrong
2. The shareholder must be suing in the best interests of the corporation
3. The shareholder must have made a demand on the board
Board of directors
• Job to initiate fundamental changes
• Declare dividends
• Uses good faith (talks and relies on the officers, auditors, consultants to make
decisions)
• Should not profit from material inside information
• Can not serve on the board of a competitor
• Should disclose conflicts of interest and abstain from voting
- Only liable of the deal is unfair and causes damage to the
corporation
• Directors may remove officers with or without cause. The removal can occur even if
it breaches the officers' contract, but the corporation may be liable for damages (not
the stockholders or directors)
Corporations are allowed to indemnify (repay) directors for expenses for any lawsuit (for
accidents or negligence, not intentional torts) brought against them in their corporate
capacity
For tax purposes, if a company desires a fiscal year (instead of calendar year), that year
end must be approves by the IRS
Corporations may defer taxes, up to three months, by switching from calendar year end to
fiscal year end, must be approves by IRS
9
BEC - Notes Chapter 1
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