Business
Determining the right entity for a business is a crucial step in establishing the liability and control of any business owner. Depending upon a business owner's needs, The Law Office of Matthew A. Becker assists with the creation of most business organizations, including General Partnerships, Limited Partnerships, Limited Liability Partnerships, Limited Liability Corporations and Closely-Held Corporations. Moreover, the firm also handles dissolutions of any of the above-mentioned business entities.
New Entity Formation
Any business with an intent to make a profit consisting of at least two owners, where each owner makes a contribution to the business and possesses the right to co-manage and share profits will be deemed a partnership. Examples of contributions include capital, skills, or labor. Unless there is an agreement, each partner, regardless of the size of his or her ownership interest, has the right to manage the partnership.
Partnerships
Any business with an intent to make a profit consisting of at least two owners, where each owner makes a contribution to the business and possesses the right to co-manage and share profits will be deemed a partnership. Examples of contributions include capital, skills, or labor. Unless there is an agreement, each partner, regardless of the size of his or her ownership interest, has the right to manage the partnership.
The formation of a partnership does not require any formalities. In order to determine whether a partnership exists, the intent of the parties, as well as the way business was conducted, are essential factors. Other scenarios where a partnership may unexpectedly arise include an employee who is compensated with the profits of the business, notwithstanding wages, or a creditor that actively participates in the management of the business.
If a partner no longer wants to be a partner, that partner may sell his or her interest to a non-partner. In order for a partner to sell his or her interest to a non-partner, the selling partner must first give the other partners the “right of first refusal.” Consequently, each partner will need to decline the sale offer in order for the partnership interest to be sold.
Powers of Partners
As a general rule, every partner is an agent of the partnership and may enter into any transaction within the scope of the business. Enforcing a contract entered into a by a partner requires proof that the contract was for the purpose of carrying on the business in the usual manner for that particular partnership. Moreover, the partner must possess the necessary authority to enter into the transaction.
Three Types of Authority
Actual Authority any communication from the partnership to the partner that he or she possesses the power to act on behalf of the partnership.
Apparent Authority ny communications from the partnership to the transacting third party that the partner has the authority to enter into the agreement on behalf of the partnership.
* If the transacting third party knows that the partner lacks actual authority, then the partner does not have authority to enter into the agreement.
Inherent Agency Powers If there is no actual or apparent authority, a partner may have authority to enter into a transaction if the agreement is foreseeable and reasonable.
Example:
Employment RelationshipIf a partner possess the power to act on behalf of the partnership, it is essential to be well-acquainted with each partner. As demonstrated above, it is very easy for a partner, with authority, to enter into any transaction, thus binding the partnership.
Liability of Partners
All partners are liable for the wrongdoings of any partner, while acting in the ordinary course of business of the partnership. Consequently, victims of a partner's wrongdoing may file suit against all partners jointly, or against a partner individually. The injured party does not have to sue all the partners to recover his or her damages. If a partner acquires a debt or other obligation resulting from a particular agreement, then only the entire partnership may be held liable.
Property Rights of Partners
Every partner possesses three types of property rights.
1) Physical Assets
- Absent an agreement, all physical assets belonging to the partnership may use the asset for the good of the partnership. For example, notwithstanding an agreement, a condo owned by a partnership cannot be used by an individual partner for his or her personal use, without the consent of all partners.
- Moreover, partners only have a right to possess the partnership's assets, as opposed to an ownership interest. As a result, the right to possession can be given away or assigned to any non-partners.
- Additionally, a partner's right in partnership assets is not subject to attachment, unless it is a partnership debt.
2) Partner's Interest in the Partnership
- The interest in the partnership constitutes personal property.
- As personal property, the partner's interest or profits are fully transferable.
- If the partnership interest is transferred, however, the interest recipient cannot then act as a partner.
3) Partner's Right to Manage the Partnership
- Every partner has an equal right to management, unless there is a contrary agreement.
- The right to manage can be transferred to another party if that other party is accepted by all partners.
Duties of a Partner
Fiduciary Duty
- Each partner owes every partner the duty of the finest loyalty.
- Managing partners may have an even higher duty of loyalty, including the duty to disclose business opportunities available as a result of the partnership.
Duty of Loyalty
- Non-Competition
Without the unanimous consent of all partners, partners are prohibited from any conduct or obtaining profits from a business similar to that of the partnership.
* Any profits derived from such competing activities belong to the partnership.
- Usurping Business Opportunities
A partner may not utilize any opportunity that has come to his or her attention that is in the same line of business as the partnership.
- Using Partnership Property for Personal Gain
Partners may not use partnership property for personal gain.
- Conflict of Interest
Absent the unanimous consent of all partners, a partner cannot enter into any transaction with another party where that partner, arelative of that partner, or any entity involving the partner that has a substantial financial interest.
* If the conflict is disclosed from the beginning, then there is no breach of the fiduciary duty.
** Partners may also bypass their fiduciary duty, thus allowing competition.
Corporations
Depending upon the needs and interests of an entity corporations may be a preferable business organization. Although partnerships afford more ownership control to general partners, corporations provide more protection from liability.
Corporate Formation
Choosing a State of Incorporation
Delaware is the most common place to incorporate one's business, such that two-thirds of U.S. corporations are incorporated in Delaware. Delaware is such a popular state to incorporate because Delaware common law (judge- made law) is very expansive. Moreover, much of Delaware corporations law caters toward the needs of managers and directors.
If a business intends to only conduct business in one jurisdiction, or a limited number of jurisdictions, however, it is more desirable to incorporate in that jurisdiction. Notwithstanding the state of incorporation, a corporation must obtain a Aforeign corporation status@ in order to conduct business in a particular state.
Formalities
Incorporation
- An incorporator must deliver or send the Articles of Incorporation to the Secretary of State for filing.
* Usually, a clerical worker for the entity seek status as a corporation is the Aincorporator, i.e. the person who actually files the Articles of Incorporation with the Secretary of State.
** The corporation begins its existence upon the filing date.
- Articles of Incorporation
* There are both mandatory and optional elements.
- Mandatory Elements
- Name of the Corporation,
- Number of Shares that Corp is authorized to issue.
* If the number of shares changes, as is the case with a stock split, the Articles of Incorporation may be amended.- Street address of the corporation's initial registered office and the name of the initial registered agent at that office, AND
- Name and address of each incorporator.
- Optional Elements
- Shareholder Liability - An optional provision may be added to the Articles of Incorporation imposing liability for the corporation's debts on the shareholders.
* Although lack of shareholder liability for the corporation's debts is an appealing aspect of a corporation, this optional provision can be useful in attracting additional shareholders because only named shareholders will be liable.
- Director Liability -This optional provision may either limit or completely eliminate director liability.
* Although directors are usually personally liable, this provision can be useful in attracting directors to serve on the board.
- Director Indemnification - This optional provision will allow a director to be reimbursed by the corporation for any liabilities.
The Secretary of State's filing of the Articles of Incorporation is conclusive proof that the incorporators satisfied all mandatory requirements.