The statements on this website are not legal advice and are provided solely for informational purposes! These statements provide only a very general outline of the law. If you have any kind of legal concern, please contact an attorney.

Business Forms

Business Forms

By law, businesses can take many forms. Some forms require little or no formality to form and operate, while others require a great deal of formality. It is of utmost importance for anyone trying to do business in the marketplace consult with an attorney in order to figure out the best business form for one’s individual circumstances in order to best protect that individual’s assets. Some of the legally recognized business entities include:

• Sole proprietorship – This is a business form in which one person owns all of the business assets. All profits and losses flow through the owner. The plus side of this is that the owner gets to keep all the money the he or she earns, but the downside is that the owner is also personally liable for losses. In order to decide is this is the best business form for your business needs, an experienced attorney should be consulted.
• Partnership – This is a business form that is very similar to a sole proprietorship with the only major difference being that more than one person owns all of the assets and all profits and losses flow through the owners. There are no formalities required to form a general partnership, two or more people need only come together and conduct themselves in a manner that asserts that they are conducting a business for profit. However, it is very important that anyone seeking to form a business of any kind seek the guidance of an experienced attorney in order to come up with an asset protection plan that will fit his or her individual needs.
• Limited Partnership – This business form requires registration with some business regulation entity within the state in which the partnership business will be conducted. This business form includes at least one partner who will take personal responsibility for all debts and losses (this partner will also be doing most of the decision making because management rights will rest with him or her), while the rest of the partners are protected from personal liability.
• Limited Liability Company – This type of business provides limited liability for owners (like a corporation) but provides the tax benefits of a partnership, and is perhaps the most popular business form for small business. In order to do business under the umbrella of “LLC”, the proper paperwork must be filed with the business regulation entity within the state in which the company will be conducting its business.
• Corporation – This is perhaps the business form that we are all most familiar with. Entities with massive amounts of shareholders/partners/managers take the form of a corporation. The owners of a corporation are generally called shareholders and hold limited liability (meaning that they are not personally liable for the obligations of the corporation). The risk that is made when entering into a corporation is the percentage of ownership in the corporation (meaning that the person’s total loss is decided by the number of shares that each individual holds). One very important thing to remember when discussing the corporation business form is that the law does recognize corporations that do not follow all of the statutory requirements of formation (corporations that may not have filed the right paperwork yet exercise corporate privileges regardless), however, it is very important to remember that the safest route is to always speak with an experienced business attorney when seeking to enter the marketplace as a corporation (or any business entity for that matter). That way, you can be sure that all of the procedures necessary to form your business are done correctly (making for a better night’s sleep). There are several aspects of corporations that make them a truly unique business form.
  1. Limited Liability – like an LLC, owners of a corporation are not personally liable for any losses or other corporate liability.
  2. Management – a corporation is not managed by the shareholders, rather, a board of directors is elected to manage the day to day business operations.
  3. Ownership – a corporation is owned by the shareholders, and as a general matter, that ownership interest can be freely given away.
  4. Duration – a corporation, once properly formed, can exist in perpetuity despite any changes that may take place.
  5. Legal Recognition – Constitutionally, a corporation is considered a person entitled to due process and free from self incrimination. A corporation is considered a resident of the state on which it is incorporated and can also be considered a resident of its principal place of business (if different from the state in which it is incorporated).

Liability of Corporations

Liability of Corporations

• As stated above, individual owners of businesses conducting business under certain umbrellas enjoy a certain amount of limited liability. In corporations and LLC’s in particular, the owners/members of the business generally cannot be held personally liable for any business liability. However, as with anything in the legal realm, there are exceptions to the rule.
• Penetrating the corporate fortress – While not easy, it is possible for individual owners to find themselves personally liable when certain events take place. When the owners of a corporation ignore their own formalities (when owners put corporate assets in their own toy box so to speak) for example, some courts have been known hold owners personally liable. When corporations are inadequately funded at the time of formation, courts have been known to hold owners of corporations personally liable. Courts have also penetrated the corporate wall in order to prevent fraud. This route is usually available in tort cases, but becomes more difficult when contracts are involved.
• Corporation taxes – C-Corp – Massive business entities fall under this category. Under the Internal Revenue Code, a corporation is an entity in and of itself and is taxed as such. Also, shareholders are taxed on dividends they receive from stock that they own. This is what is called “Double Taxation”, and this is the defining characteristic of a C-Corp.- S-Corp – Under the Internal Revenue Code, certain corporations do not need to go through the “Double Taxation” filter. The characteristics of such corporations include having fewer than 100 shareholders, only having one class of stock, and shareholders only being individual persons. Once all of the conditions are met, the profits go into the pockets of the owners. In other words, the entity is only taxed once.
• Shareholders – Shareholders run the show in any corporation. While they may not make the day-to-day management type decisions, they are the ones who get to decide who makes those decisions. However, the powers of shareholders can be limited in the articles of incorporation. In most cases, however, shareholders hold some type of voting power that influences management decisions. Corporations must hold shareholders meetings no less than once a year, although the location of said meetings is flexible. Shareholders can also make agreements regarding how they vote as well as who has rights of first refusal when stock is put up for sale. Shareholders also hold the right to inspect corporate records

Liability of Shareholders

Liability of Shareholders

• As a general matter, shareholders are not personally liable for any liability that the corporation incurs. Shareholders can incur liability if he or she is a party to a shareholder agreement that is breached. Shareholders generally hold no fiduciary duty to other shareholders, although shareholders that hold the majority of the controlling stock do hold a duty to not cause the corporation to take any action that would unfairly prejudice the minority shareholders.
• Board of Directors – These are the folks within a corporation that are elected by the shareholders and hold the responsibility of managing the day to day affairs of the business. If there is no provision in the articles of incorporation or bylaws regarding director qualifications, a director need not be a shareholder in order to hold such a position. The only amount of directors required by law for a corporation is one, however, the number of directors that can be set forth in the articles of incorporation or bylaws is unlimited. Generally, directors can be removed with or without cause.
• Director Duties – Reasonable Care: Directors must act to the best of their ability, in good faith, in a manner that a reasonable person would in a like position, and in the best interests of the corporation (note that this duty does not only apply in corporations, but also with decision makers in any business).- Loyalty: Directors must always act in the best interests of the corporation. If there are any transactions that arise in which a conflict of interest is involved, the director must either abandon his or her involvement in the transaction, or must gain the approval of the shareholders.
• When Change has taken place in the corporation – When changes in the business structure are set in motion, the following things must occur: resolution being set before the board, notice to shareholders, shareholder approval, changes filed with state business regulation entity.
• Articles of Corporations changes – Any change can be made to the corporation’s articles of incorporation if the new provision would be permissible under the original articles. If the new provision would not be permissible under the original articles, shareholder approval is required.
• Merger and other changes Any change can be made to the corporation’s articles of incorporation if the new provision would be permissible under the original articles. If the new provision would not be permissible under the original articles, shareholder approval is required.Shareholders that are against changes taking place can dissent and vote against the decision. Some of the procedural things to consider include the following:
  1. Notice – shareholders must be given notice, in writing, of any changes that the corporation is contemplating. Part of the notice must generally include a statement regarding the shareholder’s right of dissent. If any changes are approved, the shareholders must be given notice of those changes and of the right to cash in their stock.
  2. Demand of Payment if Action is Taken – Once a shareholder receives the necessary notice, any shareholder can demand payment for his or her shares. Notice of such demand generally must be made before any vote is taken on the matter. Once any action is approved, shareholders must be given notice of the decision and their right to reimbursement for their stock.
  3. Notice of Dissatisfaction with Stock Value – If the dissenting shareholder is dissatisfied with the amount of reimbursement, that shareholder must generally give notice of such with his or her own estimation of the value of the stock. If the corporation does not want to pay that amount, the corporation must contest that amount in a court action. If the corporation does not file a court action, the amount demanded by the shareholder must be paid.

Demise of the Business

Demise of the Business It is an unfortunate fact that not all businesses are successful and that there are times when things go south and the business fails. There are a few things to keep in mind when this happens:

1. Dissolution Can Take Place Voluntarily – the incorporators can dissolve the business by filing articles of dissolution with the state business regulation entity. For this to take place, there must be no shares issued, and the entity cannot do any business.
2. Dissolution After Shares Have Been Issued – Once shares have been issued, or business transactions have been undertaken, dissolution is treated like a fundamental corporate change with the same type of notice requirements.
3. Once Dissolution Takes Place, No Business Can Be Conducted – Once the articles of dissolution have been filed, the affairs of the corporation our wound up and the assets are liquidated.
4. Debts and Other Obligations Are Paid Before Shareholders – After dissolution takes place, the corporation’s assets must be liquidated. Debts and other obligations get paid from those proceeds. Shareholders get paid from the leftovers.
5. State and Federal Business Regulation Entities Can Dissolve Corporations – Anyone that has formed their own company has had to deal with some kind of administrative agency at one point or another. If a company is not following the rules (not paying fees, not having an agent in the state, failure to report to the agency etc.), the agency must give notice to the company and the company must be allowed to defend itself (i.e. show compliance)
6. Courts Can Dissolve Corporations – law enforcement officials can apply to have a corporation dissolved if the corporation is involved in obtaining fraudulent articles of incorporation or if corporate authority is being abused. Shareholders can also seek dissolution if the directors are at an impasse among other reasons. Creditors may also seek dissolution when seeking payment on a claim.

Profession Corporations

Profession Corporations As stated above, corporations provide limited liability for their shareholders. For this reason, most states have drafted legislation to prevent professionals, such as physicians, from forming corporations in order to prevent being personally liable for their own malpractice. Many states have drafted legislation that allows professionals to form business entities that that provide the same tax benefits of corporations while still holding the professionals out to be personally liable for their own malpractice. These types of businesses are known as professional corporations. Again it is important to remember that while professional corporations provide a lot of the same tax benefits of a corporation, the professional will still be personally liable for malpractice under this business form.

Foreign Corporations

Foreign Corporations

The term “foreign corporation” does not mean that the company was formed in another country per se. More often than not, this term refers to a company that was formed in one state and wants to do business in another state. The safest route here is to apply to the state business regulation entity and seek a certificate authorizing the company to conduct business in the state. Failure to obtain such authorization generally does not render acts of the company or contracts entered into by the company invalid.

Limited Liability Companies

Limited Liability Companies

• This is perhaps the most popular business form. LLC’s are a relatively new business form and can best be described as a hybrid of a general partnership and a corporation. What that means is that an LLC is taxed like a general partnership, yet at the same time, it provides that limited liability for its owners that a corporation provides for shareholders. What appears to make most people want to have their business take this business form is that LLC’s do not have to go through the double tax filter that a C-Corp does, so it has the appearance of an S-Corp.
• Formation – An LLC is formed by filing the proper paperwork with the state business regulation agency. The articles of organization that are filed must state that the entity is an LLC, the name of the company, address of the office and name of the registered agent, and a list of the names of the LLC members.
• Management – Unless stated otherwise in the articles of organization, management rights are given to all members. Any manager of the LLC acts as the agent of the business meaning that the actions of that person can bind the corporation to debt and other obligations.
• Dividends – The dividends of an LLC are divided equally unless stated otherwise in the articles of organization. The burden of losses is bourn the same way.
• Demise of an LLC – Any of the following events that involve LLC members can bring about the company’s demise:
  1. Death
  2. Retirement
  3. Resignation
  4. Bankruptcy
  5. Incompetence

Agency

Agency

• When a business hires employees, those employees can sometimes bind the business to obligations that the owner(s) do not agree to expressly. This is what we in the legal field agency. For example, a doctor (the principal) may decide he is hungry one afternoon and send his/her receptionist (the agent) out for a pizza to be paid for with a company check. While the doctor did not deliver the company check personally, the company will still be liable through the actions of the agent. There are times when transactions are not authorized, yet the company can be held liable regardless.
• Relationship Formation – In order to form a principal/agent relationship, the following things are necessary:
  • Capacity – the parties must have at least the capacity required to form a contract.
  • Assent – both parties must agree to the arrangement
  • Documentation – at times, some type of writing memorializing the agreement
• Obligations for breach – An agent acting on behalf of another person holds the following obligations by law: obedience to instructions, loyalty, and reasonable care. Most of the time, an injured principal must sue in contract in order to recover. The principal must abide by the contract entered into between the agent and the principal as well as compensate the agent reasonably and pay for expenses incurred. An agent that suffers a breach at the hands of the principal usually must sue in contract in order to recover.
• Authority of Agent – An agent’s authority to bind the principal comes in two varieties:
  1. Actual Authority – This type of authority comes during the course of dealing between the agent and the principal. In other words, the agent can be given authority to act expressly, such as through a written contract. Such authority can be implied through prior dealings between the agent and the principal as well (such as acting in an emergency or custom). Such authority can be terminated by time lapse, certain events coming to pass, or by law (such as death of one of the parties).
  2. Apparent Authority – This type of authority is based solely on any reasonable belief held by a third party that the one acting as an agent holds the authority to bind the principal. In essence, if a party appears to have the authority to bind the principal, than the principal can be held liable even if no such authority to act was given.
  3. Principal Can Ratify – Any action that the agent takes that binds the principal for which the agent did not have authority can be ratified by the principal at a later time. For example, if the principal did not give the agent the authority to purchase paintings for the office, the agent picks up and expensive Italian art piece, and the principal decides later on that the painting looks good in the office and decides to keep them, the non authorized purchase can be said to be ratified.
  4. Tort Issues in Agency Law – The most common scenario in which tort issues may arise in terms of a principal agent relationship is when the agent is an employee of the principal. Someone has to answer for the actions of the employee, and this is what is called respondent superior. In essence, this means that the principal (employer) is responsible for the actions of his or her employee to a certain degree. For example, a restaurant may be liable for a negligent delivery driver who runs over a child playing in the street. As a general matter, this rule does not apply if the person committing the tort is an independent contractor. Also, any tortuous act by an employee in which respondent superior applies must have been undertaken while the employee was in the scope of his or her employment. For example, the employer of a person that goes bar hopping after clocking out for the weekend will not be responsible for injuries that the employee inflicts in a bar fight (the bouncer may be liable for injuries that he or she inflicts breaking up the fight, however).