Corporate Practice Law

Front 1

Sole Proprietorship Advantages

Back 1

1. Ease of Formation
-not required to file anything with the government
-No need for an agreement

2. Flexibility
-Can determine own hours
-Can determine business policies

3. Control
-Make all decisions by yourself

4. Business is closely associated w/ reputation of SP

5. Don't have to share profits
-can if you want

Front 2

Sole Proprietorship Disadvantages

Back 2

1.Unlimited personal liability
-All assets are available to creditors to satisfy debts and obligations of business


2. Limited ability to raise capital
-Can't admit new partners or sell stock

3. Limited continuity
-once sole proprietor dies or goes bankrupt, business is dissolved. If business is passed down or reassigned, it is considered a new entity in the eyes of the law.

4. Closely associated w/ the reputation of the SP
-bad if the person has an unfavorable reputation

5. No one to share losses with

6. Liability for acts of employees committed during the scope and course of employment

Front 3

Taxation of a Sole Proprietorship

Back 3

Single, pass-through taxation
-added to other income and paid at rate appropriate to tax bracket
-can be used to offset other income

Front 4

Limiting liability in a Sole Proprietorship

Back 4

1. insurance

2. agreement with people you're doing business with not to hold you personally responsible for debts in exchange for something

3. Exemptions: necessities (ex: watch to get to work), burial plots, homestead clauses (either complete exemption or exemption to first $2,500 of home)

Front 5

Things Sole Proprietor May Have to File

Back 5

1. Fictitious business statement if name of business doesn't include last name of sole proprietor
-Consequences of not filing dba statement include not being able to bring a lawsuit
-DBA statements are quick and easy, so when in doubt, fill one out

2. Sales tax

3. Employer identification number if hiring employees

4. License if industry requires a license to operate

Front 6

General Characteristics of Sole Proprietorship

Back 6

-Oldest, most common form of business enterprise

-Best for people with few assets and in a business with low liability

-Not good for wealthy people b/c it exposes all of their assets to creditors

Front 7

General Partnership Definition

Back 7

An association of two or more people engaged in business for profit as co-owners

-don't need to make money, but must have the expectation of doing so (unlike a non-profit)

Front 8

Advantages of a General Partnership

Back 8

1. Ease of Formation
-Don't have to file anything with the state
-Voluntary
-No written agreement is required (although it is better to have one to limit disputes)

2. Can raise money by admitting a new partner, asking for additional contributions

3. Someone to share losses with

4. Access to advice from other people

Front 9

Disadvantages of a General Partnership

Back 9

1. Unlimited, personal, joint and several liability
-Each partner is 100% liable for debts
-Creditors can satisfy debts with the personal assets of the partners in any combination and permutation
-Partners can't assign their liability to someone else unless the creditor has agreed not to hold the partners personally liable for debts and obligations

2. Sharing of profits

Front 10

Limiting Liability in a General Partnership

Back 10

1. Insurance

2. Contractual limitations: agreement with creditors not to hold partners personally responsible for debts and obligations

3. Marshaling of assets: requirement that creditors seize the assets of the partnership first to satisfy debts and obligations before seizing the assets of the individual partners

4. Absolute obligation to indemnify or reimburse partners for any out-of-pocket expense they have incurred in good faith on behalf of the partnership whether or not it has been agreed on by the partnership

5. Partners are liable for any debts incurred while they are involved with the partnership. Partners aren't liable for debts incurred before they were involved with the partnership or after they have left, but they might agree to be liable for those obligations in exchange for a full or partial waiver of the entrance fee into a partnership.

6.. Partners who are corporate entities have no personal liability for their owners, directors or officers.

Front 11

UPA and RUPA

Back 11

-National Conference of Commissioners on Uniform State Laws (NCC) studied the existing state statutes on partnerships, combined the best provisions of each statute into one law, and then tried to get each state to adopt it.

-Most states follow the RUPA but a few still follow the UPA. Every year, more states are moving over to the RUPA.

-All states have slight variations from the UPA and RUPA so it is important to check state laws

-Biggest difference between UPA and RUPA is dissolution of a partnership. Allowing partners to determine when their business will resolve by agreement ameliorates the harsh effects of the UPA's provision requiring a dissolution upon the withdrawal of any partner.

Front 12

Rights of Partners in a General Partnership

Back 12

1. Rights in specific partnership property (tangible items that can be assigned a specific value): Partnership property can't be seized by an individual partner's creditors and can't be assigned by an individual partner b/c that property is owned by the partnership and not by an individual partner.
-All property contributed to the partnership becomes property of the partnership and can't be taken back.

2. Interest in a partnership (share of profits): Can be assigned by an individual partner and can be attached by an individual partner's creditors

3. Right to participate in management: Cannot be attached or assigned.

Front 13

Management of a General Partnership

Back 13

-Can be managed in any way pursuant to the partnership agreement

-if no agreement is reached, all partners will have an equal percentage of the vote and most issues will be decided by majority vote

Front 14

General (Mutual) Agency in a General Partnership

Back 14

Definition: Act of any partner within the apparent scope of partnership business binds the partnership unless the person with whom a partner is dealing has knowledge that the partner has no authority to do that act.

-Other partners can distribute notices to the public informing them not to do business with this partner.

-Exists in a general partnership no matter what

-Protects the most innocent party first. The other partners can then resolve the dispute by suing the partner who performed the unauthorized act under breach of contract or breach of fiduciary duty.

Front 15

Fiduciary Duty

Back 15

Partners owe one another the utmost in good faith and candor.

-Partners are expected to devote their time and effort to the business and not to engage in any competitive activity.

-Fiduciary duty falls within the tort of general negligence.

Front 16

General Partnership Agreement

Back 16

1. Name of partnership

2. Names and home addresses of partners

3. Recital (of intention to do business as a partnership, to prevent partner from claiming later that (s)he didn't intend to enter into a partnership

4. Purpose
-should be broad enough so as not to limit growth of business but narrow enough to not cause disputes

5. Principal Place of Business

6. Duration
-can be a specified term for commencement and termination (most common)
-can be terminated upon fulfilling a specified purpose
-can be terminated contingent upon something (ex: 4 months of losses)
-can be terminated upon agreement by all partners

7. Capital Contributions
-should place a monetary value on any non-cash item
-Profits, losses and control are normally divided in proportion to capital contribution, but will be divided equally if no agreement is reached.
-Additional contributions, if needed, are also usually divided according to initial capital contributions
-Should specify how capital contributions are to be returned (how profits will be distributed, if all profits will be distributed or if some will be saved)

8. Salaries and expenses
-Specify if partners will receive salaries and what they will be (partners typically don't receive salaries)
-Specify how expenses are to be reimbursed

9. Profits and losses
-Most common approach is to divide profits and losses in same proportion as capital contribution, but if no agreement is reached, they'll be divided equally among the partners.

10. Books and records
-Discusses books, accounting, records, and insurance
-Specifies fiscal year (the most common is a calendar year, but it can be any consecutive 12-month period)

11. Meetings
-Specify when, how frequently and where meetings will be held
-Specify mechanism for calling a special meeting (any meeting between regular meetings)

12. Management
-Most common is for votes to be divided according to each partner's capital contribution
-Specify how many votes are needed to approve an action (most common and default under UPA and RUPA is majority vote)

13. Dissolution: what will cause a dissolution of the partnership
-Under the UPA, any withdrawal of a partner caused a dissolution
-Under RUPA, partners can determine what will cause a dissolution.

14. Admission of new partners
-Specifies how many votes are needed to admit a new partner.

15. Disputes
-Specifies how disputes are to be resolved

16. Amendments to agreement
-Best approach is to have a written amendment signed by all the parties.

Front 17

Dissolution of General Partnership Under the UPA

Back 17

1. Partners' agreement to dissolve
-Expiration of term
-Fulfillment of purpose
-Contingent phrase

2. Voluntary withdrawal by any partner

3. Operation of law
-if partners are from different countries and those countries declare war on one another
-if changes in the law make it no longer possible to carry on the business legally

4. Death or bankruptcy of one of the partners
-Partners have agreed to do business with the former partner, not with his or her heirs or creditors

5. Application to court by any partner to dissolve partnership
-When partnership is incapable of carrying on its own business
-Better to resolve disputes independently b/c partners are bound by court's decision whether they like it or not

Front 18

Dissolution of General Partnership Under the RUPA

Back 18

-Determined by partnership agreement

-Withdrawal of a partner usually triggers a buyout of that partner's interest and the partnership continues operating as usual

-Even if partnership is dissolved pursuant to the agreement, the members can vote to continue doing business within 90 days

Front 19

Liquidation of General Partnership

Back 19

Liquidation: typing up loose ends, collecting assets and transforming them into cash, satisfying debts and obligations

1. Partnership's outside creditors are paid first.
2. Partners who have claims for reimbursement (not as favored as outside creditors who are presumed to be more innocent b/c they have less knowledge of the partnership's operations)
3. Partners' capital contributions
4. Profits

Front 20

Taxation of General Partnership

Back 20

1. Single, pass-through taxation
-Partnership pays no taxes
-Profits and losses are passed through to partners and they pay according to their respective tax brackets
-Even if profits aren't distributed, partners must still declare them

2. Must file an informational tax return
-Used to make sure partners are reporting their profits and losses from the business accurately

3. Can elect to be double-taxed like a taxation
-Not a popular option, but some partnerships claim it to be eligible for certain claims to which only corporations are entitled

Front 21

Limited Partnership Definition

Back 21

A partnership formed by 2 or more persons under a limited partnership statute having as its members one or more general partners and one or more limited partners.

-can only be formed in compliance w/ relevant state statutes. if statutes aren't complied with, courts assume the partnership is a general partnership.

Front 22

Background of Limited Partnership

Back 22

-Relatively modern, developed in last 200 years

-Developed in France

-Purpose was to allow wealthy individuals to invest in an enterprise without exposing all of their personal assets to unlimited personal liability

-NY was first state to recognize LPs, but now they are recognized in all states

-Not a particular attractive business form b/c newer forms like LLPs and LLCs allow partners limited personal liability and management/control of the business

Front 23

Status of General Partners in Limited Partnership

Back 23

Same as general partners in a general partnership

-Unlimited personal liability
-Joint and several liability
-Fiduciary duties

Front 24

Differences Between Status of General Partners and Status of Limited Partners

Back 24

1. Liability of each general partner is limited to his agreed-upon investment, i.e. capital contribution

2. They may not participate in management or control of business

3. The last name of a limited partner can't be used in the name of the business except under certain circumstances
-if a general partner has the same last name
-if the partnership was operating under that name before the admission of the limited partner

4. Under ULPA, limited partners were paid before general partners.

5. Can freely come and go without causing a dissolution
-Rationale is that it makes no difference whose money the partnership is getting.

Front 25

Things that a Limited Partner Can Do in a Limited Partnership that don't Constitute Controlling or Managing the Business Under the RULPA

Back 25

Safe Harbor List

1. Being a contractor or employee of the business

2. Consulting or advising decision-makers

3. Requesting or attending a meeting

4. Inspecting books and records

-Other acts not specifically enumerated in the RULPA

Front 26

Organization of Limited Partnership

Back 26

1. Must file Certificate of Limited Partnership with appropriate secretary of state
-Certificate must be correct at all times
-Allows prospective investors to do a background check on the general partners
-If business is dissolved, a certificate of cancellation should be filed

2. Must appoint an agent for service of process in every state in which the limited partner does business

3. A signal denoting that the business is a limited partnership (like LP) is required to signal to the public that not all the partners' personal assets are available to satisfy the debts and obligations of the business.

4. A contract is required, but it doesn't have to be written.

5. Limited partnerships must comply with state statutes in all states in which they do business

Front 27

Agent for Service of Process for Limited Partnership

Back 27

Definition: person or company that is standing, ready and willing to accept service of process (complaint and summons signaling commencement of litigation) on behalf of the limited partnership.

-If there is no agent for service of process, the courts will dissolve the business

-Personal service: Giving documents directly to the person

-Substitutive service: Leaving documents at the person's place of business or some other agreed-upon place

Front 28

Taxation of Limited Partnerships

Back 28

-Same as for general partnership
-Single, pass-through taxation

Front 29

Dissolution

Back 29

-If all general partners or all limited partners withdraw, the partnership is considered dissolved

Front 30

Joint Venture

Back 30

Exactly like a general partnership except it is formed for a single venture, rather than for an ongoing enterprise. At the end of the venture, the entity will dissolve

Front 31

Joint Stock Company

Back 31

Partnership with huge number of partners

-Like a corporation: owners, typically called shareholders, get a stock certificate, management/control is centralized in a board of directors/managers
-double-taxation

-Like a partnership: Can be created with very little formality, shareholders have unlimited personal liability for business's debts and obligations

Not popular b/c it combines worst features of partnerships (unlimited personal liability) with worst features of corporations (double-taxation)

Front 32

(Massachusetts) Business Trust

Back 32

Business structure governed by the law of trusts

Front 33

Limited Liability Partnership (LLP) Characteristics

Back 33

1. First recognized in Texas and Florida, now recognized in all jurisdictions

2. Changes one thing about partnership law: Only partnership itself and partner who committed a wrongful act has liability for the act unless they supervised, participated in or knew about the act and failed to stop it.

3. Single, pass-through taxation

4. Flexible, every partner can participate in the management and control of business

5. Diametric opposite of joint stock company. Combines best features of corporation (no personal liability) with best features of partnership (single taxation)

Front 34

Popularity of LLP

Back 34

-Any business can convert to an LLP (all documentation has to indicate form of business entity)

-Any business can be an LLP, but they are most attractive to professionals like lawyers, doctors and accountants who are used to partnerships and are prohibited from forming LLCs in some states

Front 35

Full Shield vs. Partial Shield States

Back 35

Full shield (bulletproof): No personal liability for partner's negligence or contracts. Most states are full shield.

Partial shield: No personal liability for partner's negligence, but personal liability for partner's contractual obligations.

-Some states require LLPs to have a certain amount of insurance or a fund set away to pay for debts and obligations of partnership

Front 36

Organization of LLP

Back 36

1. Can only be formed in compliance with statutory formalities

2. Have to have an agent for service of process

3. Business name and all business documents must have a signal denoting that the business has adopted the LLP form

Front 37

Limited Liability Company (LLC) Background

Back 37

1. New form of business entity
-Has only been in existence for 10-15 yrs.

2. First recognized in Wyoming, now recognized in all jurisdictions.

3. Fastest-growing business entity (last year, more LLCs were formed than corporations)

4. Attractive b/c it combines best features of partnerships and corporations

5. Attractive to foreign investors b/c it is similar to business entities in other countries

Front 38

Characteristics of LLC

Back 38

1. Owners are called members.

2. Members have no personal liability for either negligence or contractual obligations of partners or partnership

3. Very flexible management
-Can be member-managed or manager-managed.

Member-managed: managed by all members.

Manager-managed: LLC elects managers who handle daily business operations. Can be either members or outsiders hired b/c they have more expertise than members.

4. Continuity: If a member leaves, the LLC continues to exist

5. Any member can easily transfer her economic interest to someone else.
-If the LLC agreement provides for it or if all members agree, a member can also transfer her ability to participate in the management of the LLC to someone else.

6. All states but one allow one-person LLCs.

7. Can only be formed with strict compliance with state statute.
-Must file Articles of Organization.

8. Single,pass-through tax status
-must file informational tax return

Front 39

Formation of LLC

Back 39

1. Must file fictitious name statement if its name doesn't include the last names of all members.

2. Must have appropriate signal indicating business is an LLC in business name and all of its documents

3. Must have registered agent for service of process.

4. Must have statement, called an operating agreement, indicating how it will be managed.
-Discusses meetings, management, profits and losses, dissolution, etc.

-Must comply with state laws in all states in which the LLC conducts business

Front 40

Financial Structure of LLC

Back 40

1. Determined by operating agreement

2. Typically, shares are distributed according to capital contributions.
-If the operating agreement is silent, all members are presumed to have an equal share.

Front 41

Dissolution of LLC

Back 41

Operating agreement will typically have a term of duration and any member who withdraws prior to the expiration of the term is liable for damages for breach of contract

Front 42

Advantages of LLC

Back 42

1. Limited personal liability for all members (worst that can happen is you lose your capital contribution)

2. Single pass-through tax status

3. Ability to manage without being subject to personal liability

Front 43

Disadvantages of LLC

Back 43

1. Formalities involved in forming LLC

2. Not a lot of case law on it b/c it is a relatively new business form

3. May be difficult to transfer participation in management of business once interest is transferred if agreement doesn't provide for it

Front 44

Distinctions between LLPs and LLCs

Back 44

1. LLCs can be managed by people who aren't members.

2. In many states, LLCs need written agreements.

3. In LLPs, there is a distinction between full and partial shield protection.

4. Most states allow one person LLCs.

5. Non-profits can function as LLCs but not LLCs b/c partnerships must necessarily be formed for profit.

6. LLPs and LLCs have different filing fees.

Front 45

Definition of a Corporation

Back 45

A legal entity existing under the authority of the state legislature.

-One-person corporations exist.

-Incorporation creates a new person in the eyes of the law.

Front 46

Meaning of Corporation as a Person

Back 46

1. Artificial, not natural person.

2. Has the right not to be deprived of its property without due process, like a natural person.

3. Capable of committing torts like natural persons.

4. Client for purposes of the attorney-client privilege, like natural persons.

5. Can be defamed like natural persons.

6. Can't be convicted of a crime unlike natural persons b/c crime requires some type of mental intent

7. Can't represent itself in court unlike natural persons. Must be represented by an attorney.

Front 47

Powers and Attributes of Corporations

Back 47

1. Power to contract and to take hold and convey property in the corporate name.

2. Power to sue and be sued in the corporate name.

3. Management is centralized in a Board of Directors, not dispersed among shareholders.

4. Easy transferability of shares

5. Perpetual existence (if filings are done and filing fees are paid every year)

6. Limited liability for the owner-shareholders. (Owner-shareholders can only lose what they invested)

7. Double-taxation: Corporation must pay taxes when it receives money and once this money is distributed to owner-shareholders in the form of dividends, they must pay taxes on it.

Front 48

Where to Incorporate

Back 48

1. The state in which you will primarily do business unless that state's laws are particularly burdensome

2. A state with a well-developed body of corporate law

-Some states have a preference for domestic corporations when awarding contracts

-

Front 49

Incorporating in Delaware

Back 49

1. Delaware has no state sales tax

2. More than half of all companies on NYSE are incorporated in DE

3. In 1920s, DE wanted to bring money into the state and decided to make the state attractive to corporations

-DE required only 1 director whereas most states required 3
-Most states required corporations to hold their meetings in the state of incorporation, but DE didn't have this requirement

4. DE's filings are expeditious and inexpensive compared to other states

5. DE has very good customer service.
-first state to accept faxes
-office is open until midnight.
-website and forms are user-friendly
-sliding fee scale depending on how quickly the company wants to be incorporated (2 days, 1 day or 2 hrs.)

6. Other states have followed in DE's footsteps, but DE still has most well-known reputation for being business-friendly

Front 50

Foreign Incorporation

Back 50

1. Domestic corporation is formed within state borders and foreign corporation is formed outside of state borders.

2. A corporation can do business outside of its home state, but it must qualify formally (be authorized) to do business in that state and be subject to the laws in that state.

3. Corporation must then pay fees and filings in their home state and in any state in which they do business

4. Failure to do business before being qualified to do so results in penalties ranging from fines to voidance of all contracts created in the state
-Most states will allow company to cure the defect

Front 51

What Doesn't Constitutes Doing Business

Back 51

1. Maintaining, defending or settling a lawsuit

2. Holding meetings

3. Maintaining bank accounts

4. Having offices

5. Selling through independent contractors

6. Soliciting or obtaining orders

7. Engaging in an isolated transaction completed within 30 days

8. Owning real or personal property

Front 52

Pre-Incorporation

Back 52

Promoters make arrangements and do all the planning for incorporation

Before incorporation, they are considered joint venturers

Front 53

Contracts Made by Promoters Prior to Incorporation

Back 53

1. In common law, if the corporation wasn't formed, the contracts were void and all parties to the contracts other than the promoters were out of luck.

2. Now, if promoters enter into contracts and the corporation isn't formed, the promoters will have unlimited joint and several personal liability for damages caused by breach of contract.

3. If the corporation is formed, there are 2 ways to get the contract out of the promoter's name and into the corporation's name through ratification (also called adoption, novation or assignment)
-Express ratification of agreement either orally or in writing
-Implied ratification by not rejecting the contract and accepting the benefits of the contract without words.

4. Doctrine of Relation Back: if the contract was made before the corporation was formed, everything that happened after the contract was entered into relates back to the date the contract was entered into and it is as if the corporation was a party to the contract from the very beginning

Front 54

Pre-incorporation share subscription

Back 54

1. Offer from an investor to purchase shares of a corporation before the corporation is actually formed.

2. Used to be more common b/c some states required corporations to have a certain amount of money before they could start doing business.

3. Considered irrevocable contracts for a certain period of time to prevent people from revoking their offers once the corporation is formed.

4. The corporation can either accept the offer, reject it or do nothing for a period of time (i.e. "wait and see")

Front 55

Corporate Name Requirements

Back 55

1. Selection of name should occur relatively early to ensure that it is available.

2. Most states require "inc.," "co.," or "corp." to designate that it is a corporation

3. Almost all states prohibit names that appear to be affiliated with the federal or a state government

4. Cannot have a name that is deceptively similar to the name of another business even if it is one of the owner-shareholder's last names, whether a domestic corporation or foreign incorporation incorporated in that state.
-Doesn't have to cause consumer confusion, just be likely to cause consumer confusion.

5. Can't use the name "bank" or "trust" unless the corporation provides banking or trust services

Front 56

Name Reservation

Back 56

1. Check Department of Name Availability to check if name is available

2. Reserve name
-Fees are small
-For a period of time, usually 30, 60 or 90 days (if the corporate papers aren't received by the expiration of the reservation, the name is considered abandoned and the corporation loses its reservation.)

Front 57

Name Registration

Back 57

1. Allows a foreign corporation to register its name in other states for a much longer period of time than the name reservation (as long as 2 years)

2. A name can be used in a certain place and a reasonable area beyond
-A smaller company that is in existence before a larger company with the same name can continue using its name in the place it operates and a reasonable area beyond

3. Corporations can also operate under assumed names (d.b.a.)

4. Calendar docket name registration period.

Front 58

Articles of Incorporation

Back 58

Every state has statutes that specify what must be included in the Articles of Incorporation (called a Certificate of Incorporation in DE)

1. Name

2. Registered office in state of incorporation
-can't use a P.O. Box
-Can hire a company to receive communication if company is incorporated in one state and doing business in another

3. Registered agent for service of process
-In most states, failure to have an agent for service of process for 60 days will result in the corporation's dissolution

4. Corporate purposes
-Draft purposes broad enough to accommodate growth or use a full, general, or broad purpose clause for flexibility

5. Period of Duration
-Most states don't have this b/c it is presumed that corporations will exist in perpetuity

6. Authorized Capital
-Description of stock

7. Identification of Board of Directors
-Many corporations identify a dummy board, usually composed of an attorney, paralegal and legal secretary
-Most states don't require this to protect the safety and privacy of the actual directors
-Also problematic b/c the Articles will have to be amended if one of the directors moves

8. Identification and Signature of the Incorporator (person who creates the Articles)
-Required in all jurisdictions
-Some states require that the incorporator swear that all the information in the Articles is true to the best of her knowledge

Front 59

Authorized Capital

Back 59

1. Number of shares corporation will issue (authorized number of shares: what shares your articles authorize)
- Want to pick a number that's high enough to accommodate growth
-Also want to pick a number for which the filing fees aren't too high. Many states impose filing fees according to how many shares the corporation will issue. Some states also impose an annual filing fee depending on the number of stocks the corporation is authorized to issue.
-Between 10,000 and 20,000 shares is a good number
-Until all of the shares are sold, the corporation keeps them in a treasury and every share a corporation issues brings it one closer to its cap. Almost all corporations save some shares at the ready in case it needs to sell them for quick capital (like a rainy-day fund)

2. Classes of stock (common or preferred)
-Vast majority of stock issued in U.S. is common.
a) Common stock has no special privileges, rights or benefits
b) Privileged stock carries some special privilege, right or benefit that the common stock doesn’t have
i) Ex: Privileged stock might carry extra voting power.
-Must outline in Articles what privilege, right or benefit the preferred stock has
3. Whether or not stock has a par value
-Lowest amount for which stock can be sold
a) So almost all corporations make their par value a really low number so that they can sell them for any number higher than par value
b) Most corporations don't pick a really low number (i.e. less than a penny) b/c of the filing fees that come with it
c) Lowest price that the corporation can sell it for, but individuals can sell it for any price that they wish

Front 60

Pre-emptive rights

Back 60

Definition: The right of a shareholder to have the first opportunity to purchase his or her pro rata portion of shares which the corporation may sell at a later date
-Not the obligation, to refuse purchasing additional stock before it is offered to outsiders)
-Typically all or nothing, i.e., a person w/ a 10% ownership in the corporation can't purchase 8% of additional stock sold at a later date. Must purchase 10% or 0%.
-Gives shareholders the right to maintain their control of the corporation
• Preemptive rights don't exist unless they're expressly included in the Articles
-Increasingly disfavored b/c it ties the corporations hands and prevents them from rapidly being able to raise money
-Have to notify shareholders and wait for their response
• Without preemptive rights, shareholders can attempt to maintain their ownership in the corporation by buying more shares on the open market

Front 61

Cumulative Voting

Back 61

Definition: The right of a shareholder who is voting for a director to multiply the number of votes to which the shareholder is entitled by the number of directors to be elected and then to take that number and distribute them among the candidates as he or she likes
-Only exists when voting for a director(s) (not when voting for a merger, not when voting for a dissolution, etc.)
-Purpose is to help minority shareholders get some representation on the board
-Only exists when it is expressly stated in the Articles
-Never used for large, publicly-traded corporations. Usually just used for small, Mom and Pop corporations

Front 62

Characteristics of Articles

Back 62

• Articles are completely controlled by statute.
-Always look at state statutes and write your Articles to comply with them.
-Can always include extra provisions, but they may only create problems later if they need to be changed.
-Articles are like Constitutions and if they need to be changed, there must be a shareholder's meeting, the changes must be voted upon by the shareholders, a filing fee must be paid, and the Articles might be changed.

-Some states make you publicize the Articles in the newspaper
-Some states make you file the Articles in the county of incorporation
-The vast majority of states just require you to file them w/ your Secretary of State

Front 63

Corporate Supplies

Back 63

1. Corporate minute book (3-ring binder)
2. Corporate seal (seldom used)
3. Stock certificate book (looks like a giant checkbook)
-Lots of companies that offer corporate kits

Front 64

Corporate By-Laws

Back 64

○ By-laws: rules that regulate the internal affairs of the corporation
○ Usually flexible b/c they're much easier to amend than the Articles
○ Sections (p. 667 Appendix G)
§ Corporate offices
□ Identify addresses
§ Shareholders
□ Specify annual meeting
□ Specify procedure for calling special meeting
□ Specify place of meeting
□ Specify procedure for notification of meeting
□ Authorize shareholders to vote by proxy (like an absentee ballot)
§ Directors
□ Authorize directors to manage the affairs of the corporation
□ Indicate number of directors
□ Specify tenure of directors
□ Specify qualifications for directors (like residence in the state of incorporation)
□ Specify directors' meetings
□ Specify procedure for calling special directors' meetings
□ Specify procedures for removal of directors
§ Officers
□ Indicate offices and duties of each office
® Most common are Pres. V.P., Secretary and Treasurer
§ Stock
□ Specify process for transfer of certificates
□ Specify procedure for loss of certificates
□ Discuss dividends
§ General/Miscellaneous
□ Fiscal year
□ Location of corporate records
□ Procedure for inspection of records
□ Specify procedure for amending by-laws
® Typically amended just by directors
□ Indemnification (reimbursement) of officers or directors in the event that they are sued

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Organizational Meeting

Back 65

• Organizational Meeting
○ Elect directors
○ Appoint officers
○ Review and approve by-laws
○ Review contracts made by promoters and ratify them
○ Review pre-incorporation share subscriptions and accept or reject them (or hold on to them for a while longer)
○ Authorize the directors to start selling stock
○ Miscellaneous
§ Who is responsible for opening bank accounts
§ Who is responsible for getting insurance
§ Who is authorized to sign checks and for what purpose
○ Best way to hold an organizational meeting is at the law firm under the supervision of the attorney
§ Attorney or paralegal prepares agenda and after the meeting, responds to questions and gives instructions/advice
§ Can also require written consent in liu of in-person meeting