2021 handout company law ulis

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Sole proprietorship
Private enterprise
Corporation
Joint stock company
Shareholding company
Small corporation
Close corporation
Professional corporation
Partnership

Limited partnership
General partnership
Limited liability partnership
Limited liability limited partnership
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Forms of business
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Limited liability company (LLCs)
One-member limited liability company
Company limited by shares
Company limited by guarantee
Unlimited company >< limited company
No liability company
Public company >< private company
Public company >< proprietary company
Listed company >< non-listed company
State-owned enterprises
Corporate group
Shareholders
Members of a company
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Partners

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- Sole traders
- Partnerships
- Corporation
- Limited Liability Companies

4

3

Business entity run by one person.
No legal distinction between the
owner and the business.

SOLE PROPRIETOSHIP
SOLE TRADER
PRIVATE ENTERPRISE

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Sole Proprietorships

Sole traders/ proprietorships
• The simplest business form
• Finance: the necessary capital to run the biz
is provided by the sole owner
• Low set up costs
• Small enterprises and revenue
• Limited financial capacity
• Owners may lack some skills or resources

• Risk: the proprietor himself bears all the
risk. No one else has any stake in the biz
• Sole proprietorship is not a legal entity

A sole proprietorship is an
unincorporated business owned
by one person.
Sole proprietorships are easy
and inexpensive to create and
operate.
Earnings are reported on the
owner’s personal tax returns.

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7

Management of private enterprises
A

• The owner of a private enterprise has the full power
to manage all business activities of the enterprise;
• The owner of a private enterprise may himself or
employ other persons to manage and administer the

business operations.
• The owner of a private enterprise shall be the
plaintiff, defendant in arbitration or court proceedings
in disputes relating to the enterprise.
• The owner of a private enterprise shall be the legal
representative of the enterprise.

D

E

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Personal Liability for Owners
 Bob runs a small manufacturing business out of
his home, as a small proprietorship operation.
 Bob then orders $30,000 worth of supplies from
a packaging company. He signs a contract to
pay off the supplies over a period of 5
years. Then, in the middle of production, there
is a drop in demand, and Bob has to cease the
business operation.
Question:
 Can the packaging company sue Bob for the
remaining payments on the supplies?
 If Bob is unable to fulfill the debt using business
assets, whether or not the packaging company
can go after his personal property to fulfill the
debt? (This may include his personal bank
monies, his automobile, or even his home)

TAX

Schedule C (Form
1040) Example

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Sole traders

Sole trader

ADVANTAGES


Simple and inexpensive to

DISADVANTAGES


form

Owner is liable for all the

debts



No separate tax return



Uncomplicated management



Speedy in making decision



Limited options for financing
the business



One-tiered management

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Limited managerial skills

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Long working hours for the

manager



Lack of continuity

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Partnerships

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Characteristics
- « M.Smith and sons »

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- « Peter and friends »

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- « Brown’s brothers »
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- « Baker & Mc Kenzie »

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- « Flécheux, Ngo & associés »

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- « James and associates »

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
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Members/ partners
Capital contribution (When to contribute, proof of
contribution…)
Assignment/ transferability
Profit distribution

Legal capital
Increase or decrease in capital
Liability
Duties of partners
Management
18
...

3


Liability

Characteristics
• A partnership is an unincorporated association of two or more coowners who carry on a business for profit.
• Partnerships are easy to form (sometimes it happens
unintentionally!)
• Partnerships have unlimited liability
• Each co-owner is a general partner.
• General partners can be held personally liable for the partnership
actions and debts.
• A joint ownership of the business.
• Difficult for general partners to transfer their share of capital to an
outsider
• Unless otherwise agreed, partners share profits, losses and
management equally.

 Tort Liability – A partnership is liable for
intentional and negligent torts of a partner in
the ordinary course of business or when the

partner is acting with actual authority.
 Personal Liability – each partner is personally
liable for the debts of the partnership.
 Joint and Several Liability – a creditor may
sue the partners jointly as a group or
separately as individuals.

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Management Rights

Liability
A

B

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Each partner has equal rights in
management of the partnership unless
otherwise agreed.
Large partnerships are often managed by
a few designated managing partners or an
executive committee.
Unless agreed otherwise, partners have an
equal vote on matters of partnership

business.

C

D

E
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Management Duties

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Formation

 Duty of Care – duty owed by partners to manage
the partnership affairs without gross negligence,
reckless conduct, intentional misconduct, or
knowing violation of law.
 Duty of Loyalty – duty of utmost loyalty. Duty to
not compete with partnership, turn over any
profit to partnership, and avoid conflicts of
interest.
 Duty of Good Faith & Fair Dealing – duty to deal
with each other and the partnership in a fair way.

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Partnership by registration
Partnership by estoppel applies if:
 Participants tell other people that they are
partners (even though they are not), or they
allow other people to say, without
contradiction, that they are partners.
 A third party relies on this assertion; and
 The third party suffers harm.

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4

Termination of the
Partnership Business

Terminating a Partnership
 Dissociation occurs if a partner quits.
 When one or more partners dissociate, the
partnership can either:
 (i) buy out the departing partner(s) and continue in
business or
 (ii) wind up the business and terminate the
partnership.
 A partner always has the power to leave a
partnership but may not have the right.

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Ending a partnership business
involves three steps:
 Dissolution --decision to end business; can
be voluntary or automatic.
 Winding Up -- During the winding up
process, all debts of the partnership are
paid, and the remaining proceeds are
distributed to the partners.
 Termination -- the end; happens when
winding up is complete.

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Circumstances that Require
Dissolution

Founders and pre-incorporation contracts

 Partner is dissociated and half the other
partners vote to wind up business.
 All partners agree to dissolve.
 The term expires or partnership achieves its
goal.

– not making contracts until the company has been
incorporated; or
– making an agreement between the founders on how to share
the potential liability
– buying an “off-the-shelf” company

 Partners agree in advance on events that will
cause dissociation.
 Partnership business becomes illegal.
 A court determines that the partnership
cannot function successfully.

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Terms commonly included in a
partnership agreement

PARTNERSHIP AGREEMENT
( Articles o f p artnership)
- Include almost any terms that the parties wish
- U n less the term s are illeg al or con trary to public
policy or statue.

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• A founder is a person who takes the procedural steps
to get a company incorporated.
• Before incorporating, a founder who makes a contract
on the company’s behalf shall be personally liable on it.
• To avoid potential liability, the founders should:

 Partner withdraws from a partnership at will.

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+
+

+
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Basic Structure:
C apital C on tributions
Sharin g of Profits & L osses
Man ag ement & C on trol
Accoun t ing & Part n ers hip Records
Dis s ociation & Dis s ol ut ion
Arbitration

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2.2. Partnership

General partnerships
Advantages

Advantages:

Disadvantages

• Do not have • Liability: personal liability
to pay taxes
• Easy to form

• Funding: cannot sell shares; provides by
contributing from partners or by borrowing
• Management: difficult because, in the

Disadvantages:

absence of an agreement, all partners have
an equal rights in running the business
• Transferability: only has the right to
transfer the value of his partnership
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interest, not the interest itself

CASE STUDY: Gary Chavers operated Chavers Welding and Construction (“CWC”),
Gary's sons Reggie Chavers and Mark Chavers joined their father in the business
after graduating. Reggie and Mark served only as CWC employees, not as CWC
partners.
In February 1999, CWC entered into an agreement with Epsco, Inc., to provide
payroll and employee services for CWC. Epsco extended credit to CWC on its belief
that CWC was a partnership.
CWC's account with Epsco became delinquent, and Epsco filed a complaint against
Gary, Reggie, and Mark, individually, and doing business as CWC, to recover
payment for the past due account. Gary discharged a portion of his obligation to
Epsco due to his filing for bankruptcy. Epsco sought to recover CWC's remaining
debt from Reggie and Mark.
On May 21, 2002, the trial court entered an order stating that Reggie and Mark
were partners by estoppel as relates to Epsco. The trial court found that Reggie
and Mark were jointly and severally liable for the debt of CWC in the amount of
$80,360.92. Because the Chaverses represented to Epsco that CWC was a

partnership and Epsco relied on this representation when extending credit.

Limited Partnerships

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2.3. Limited Partnership

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2.3. Limited Partnership
Limited partnership is set up by general
partners and limited partners

a - LP

A
General Partner

a - LP
Limited
partners

France
England
America

General
partners

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Characteristics

Limited Partnerships

Formation of limited partnerships
require a filed certificate of limited
partnership.
General partners have management
rights; limited partners do not.
Limited partners may transfer the
value of their interest, but the interest
itself only if the partnership
agreement permits.
Usually, limited partnerships have
perpetual existence.

Membership
 General partners
 Limited partners

Capital
 Legal capital
 Assignment
 Capital increase

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Characteristics

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Limited Liability Partnerships (LLPs)

Liability
 The limited partnership
 General partners
 Limited partners

Partners in an LLP are not
personally liable for debts of
the partnership (whether
arising from contract or
tort).

Management:
 Legal representative
 Structure
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Limited Partnerships & Limited Liability
Limited Partnerships

 Have general (active management) and
limited (money-only) partners.
 In a limited partnership, only the general
partners are personally liable.
 In a limited liability limited partnership,
the general partner is not personally liable
for the debts of the partnership.
 Limited partnerships are not taxable
entities.

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Corporation

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7


Some basic concepts

Shareholding company/ Corporation

Shareholding company or joint-stock
company or corporation
Since 17th century
 A shareholding company is established in
accordance with the laws, in which its
members become shareholders by buying
its shares and liable for the debts and the
property obligation of the company within
the amount of capital contributed to the

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company

Basic concepts

 Legal capital


Charter capital

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Business capital



Capital share

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Main issues

Share
Security
Bond
Share certificate
Dividend
Shareholder

• Characteristics

• Management
• Classes of shares

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Characteristics

Legal personality

 Capital contribution (When to
contribute, proof of contribution…)
 Assignment/ transferability
 Profit distribution
 Legal capital
 Increase or decrease in capital
 Liability
 Legal status
 Management
 ...

• A company is a legal person. A legal person is
an entity recognized by the law as capable of
having rights and duties.
• A company has a separate legal existence that
is distinct from that of its owners, managers,
employees and agents

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8


Salomon v A Salomon and Co Ltd [1897] AC 22
Facts: Salomon was a boot manufacturer who originally operated the business as a
sole trader. He converted the business into a company, as several of his sons
worked in the business and he wished to give each a share. The subscribers to the
memorandum were Salomon, his wife and five children. They each took one share.
However, evidence was raised to show that the wife and five children held their
shares as nominees for Salomon with the result that Salomon and Co Ltd was in
reality a “one man” company. He was also appointed the managing director of the
company and two of his sons were appointed as directors.
Salomon sold his business to the company and received more shares and securities in
the form of debentures and secured loans from the company in payment. The
company then experienced the difficulties and eventually went into liquidation.
The creditors of the company sued Salomon for the company’s debts. They argued
that Salomon should be liable for as it was just an alias for Salomon himself.
Salomon, on the other hand, argued that he was not the company and therefore
could not be made liable for its debts.
Decision: The court held that the company was a separate entity from its
shareholders. It had conducted business in its own right and was not just alias of
Salomon. Therefore, Salomon was not liable to indemnity the company.

Lee v Lee's Air Farming Ltd (1961) AC 12
Facts: Catherine Lee’s husband Geoffrey Lee formed the company through Christchurch accountants,
which worked in Canterbury, New Zealand. It spread fertilisers on farmland from the air, known

as top dressing. Mr Lee held 2999 of 3000 shares, was the sole director and employed as the
chief pilot. He was killed in a plane crash. Mrs Lee wished to claim damages of 2,430 pounds
under the Workers’ Compensation Act 1922 for the death of her husband, and he needed to be a
‘worker’, or ‘any person who has entered into or works under a contract of service… with an
employer… whether remunerated by wages, salary or otherwise.’ The company was insured (as
required) for worker compensation.
• The Court of Appeal of New Zealand said Lee could not be a worker when he was in effect also
the employer.
• The Court of Appeal recognised that a director of a company may properly enter into a service
agreement with his company, but they considered that, in the present case, in as much as the
deceased was the governing director in whom was vested the full government and control of the
respondent company he could not also be a servant of the respondent company.
• Appeal was allowed.
Decision:
• The Privy Council advised that Mrs Lee was entitled to compensation, since it was perfectly
possible for Mr Lee to have a contract with the company he owned. The company was a separate
legal person.

Consequences of separate legal personality (1)
• Entity: Is a legal entity separate to its members
• Liability: Members’ liability can be limited
• Size: May have any number of members (at least 2 for a public
company)
• Succession: Perpetual succession – change in ownership does
not effect existence
• Owners’ interests: Members own transferable shares

Lift of corporate veil
•
•

•
•

Failure to observe formalities
Commingling of assets
Inadequate capitalization
Fraud

Consequences of separate legal personality (2)
Assets: Company, not members, owns assets
Management: Company must have at least one director
Company must have a written constitution (charter).
Accounts: A company must usually deliver accounts to
registrar
• Security: A company may offer a floating charge over its assets
• Withdrawal of capital: Strict rules concerning repayment of
subscribed capital.
•
•
•
•

Characteristics of JSC
• The charter capital is divided into equal portions called
shares;
• Shareholders are liable for the debts of the enterprise within
the amount of capital contributed to the enterprise;
• Shareholders may freely assign their shares to other persons;
• Shareholders may be organizations or individuals; the min.
number is three no restriction on the max. number.

• Joint-stock companies may issue securities to the public
• Joint-stock companies have the juristic personality.

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Organizational and management
structure

Corporations
 Corporations offer limited liability – usually
the managers’ and investors’ personal
property is not at risk.
 Corporate stock can be bought and sold,
making investments easy to get.
 Corporations have perpetual existence; they
can continue without their founders.
 Corporations involve a lot of expense and
effort to create and operate.
 Profits are taxable.

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General Meeting of
Shareholders

Board of Directors

Inspection
Committee

CEO

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General Meetings

The Roles in a company
• Shareholders: the owners; by buying shares,
they provide the money for the company
• Directors: elected (and removed) by the
shareholders, they set the general policies for
the corporation (eg: determining the amount
of dividends)
• Officers: chosen by the directors, they run the
day-to-day operations (eg: chief executive
officer)

•

•
•
•
•
•

Matters being decided by GM
Right to call for a meeting
Procedure for calling for a meeting
Notice
Proceedings at meetings
Resolutions at GM

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Rights and duties of shareholders
•
•
•
•
•
•
•
•
•

Adoption of and amendment to the Company Articles
Changes of company name and type
Certain transactions affecting share capital
The issue of new shares

Buy-backs of existing shares
Appointment and removal of directors
Certain parts of the directors’ remuneration and benefits
Appointment and removal of the company’s auditors
Certain takeovers and reconstructions

Rights and duties of directors
• Duty of loyalty and good faith
• Duty to avoid conflicts of interest
• Duty to act in good faith in the interests of the
company
• Duty to use powers for a proper purpose
• Duty of care and diligence
• Duty to prevent insolvent trading

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Rights and duties of officers

Question

• Duty to avoid conflicts of interest
• Duty to act in good faith in the best interests of the
company
• Duty to use powers for a proper purpose
• Duty to act with reasonable care and diligence
• Duty not to make improper use of position or
information

A & B were each directors of a company which imported food
products. They were the only shareholders of this company, with A
holding 5/6 of the shares and B 1/6. B didn’t take any active part in
the running of the company, even though he was a director, and did
not attend meetings.
Disputes between A & B led to an agreement that B would sell his
shares to A and resign as a director.
However, what A didn’t tell B was that he had been approached by a
3rd party at a profit.
Question:
Can B make a claim for a part of the profit?

Classes of share

Corporation

• Ordinary
• Preference
– Redeemable
– Dividend preference
– Voting preference



Advantages



Disadvantages

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Close Corporations

“S” Corporations

“Close corporation” and “closely held
corporation” refer to a corporation
whose stock is not publicly traded on
a stock exchange.
Common provisions of close
corporations:
 Protection of Minority Shareholders
 Transfer Restrictions
 Flexibility
 Dispute Resolution

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Shareholders of S corps have the
best of all worlds: the limited
liability of a corporation and the
tax status of a partnership.
The disadvantages of an S corp

are:
 There can only be one class of stocks.
 There can be no more than 75
shareholders.
 Shareholders cannot be partnerships or
other corporations.
 Shareholders must be U.S. citizens or
residents.
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Professional Corporations
Most states let professionals
incorporate.
In many states, PCs provide more
liability protection than a partnership.
The corporation may be liable for an
individual member’s mistakes, but the
innocent professionals are not at risk.

Doctors

……..

Architects

Professional
Services
Accountants

Consultants

Lawyers

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Limited Liability Company
LLCs

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Limited liability companies with two or more
members
• Characteristics of LLC with two or more
members
• Capital contribution

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Characteristics
 Capital contribution (When to
contribute, proof of contribution…)
 Assignment/ transferability
 Profit distribution
 Legal capital
 Increase or decrease in capital
 Liability
 Legal status
 Management
 ...

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Characteristics of LLC with two or more members

•
•
•
•

Members of the company may be individuals or legal persons
The minimum number of members is two and maximum is 50.
The company is not allowed to issue shares to the public.
The company has juristic personality and the members are
liable for the debts of the company within the amount
committed to contribute to the company

Limited Liability Companies
 An LLC offers the limited liability of a
corporation and the tax status of a
partnership, without the disadvantages
of an S corporation.
 The LLC offers:
 Limited liability, Favorable tax status, Flexibility in

management and membership, Duration even
after a member withdraws
 The biggest disadvantage with LLC is the
legal uncertainty involved since state
laws vary and organization forms are not
standardized.

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Capital contribution
• Members shall have to contribute capital fully and on
time as committed.
• The amount of capital not yet contributed on time shall
be considered a debt that member owes the company.
• Member shall have to compensate for any damage
arising from such failure to contribute capital fully and on
time as committed.

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Organizational and management structure

Members’
Council

Director/

General
Director

Inspection
Committee

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Members’ Council of LLC
• comprises all members
• is the highest decision-making body of the
company.
• The frequency of meetings of the Board of
members shall be specified by the company’s
charter but meet at least once a year.

Voting rights of a member of the Council
• The company’s development orientation;
• Amendments to the company’s charter;
• Decide the annual business plan and development strategy of
the company;
• Decide development investment projects of the company
• Election, dismissal of the Chairperson of the Members’ Council;
designation, dismissal of Director/General Director;
• Approval for the annual financial statement;
• Restructuring or dissolution of the company.
• Decide the increase or decrease of charter capital; decide the
time method for raising additional capital;

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Director/ General Director

Rights of Director/ General Director

• The Director or General Director of a company
is the person who administer the everyday
business operation of the compay;
• responsible to the Members’ Council for the
performance of his/her rights and obligations.
• the legal representative of the company if
provided so by the company charter.

• Organize the implementation of Resolutions of Members’
Council;
• Decide the issues related to the company’s everyday
business operation;
• Organize the implementation of the company’s business
plans and investment plans;
• Promulgate the company’s rules and regulations, unless
otherwise prescribed by the company’s charter;
• Designate, dismiss the company’s managerial positions,
except for those within the competence of the Members’
Council;

One member Limited liability companies
• A one-member limited liability company is a
company which is owned by one organization
or individual

• can’t issue shares

Joint Venture
A joint venture is a partnership for a
limited purpose.
Non-profit enterprises do not qualify
as a joint venture.

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Other Forms of Organization
 Business Trusts – an unincorporated
association run by trustees for the
benefit of investors
 Cooperatives – groups of individuals or
businesses that join together to gain
the advantage of volume purchases or
sales
 Franchises are not actually a separate
form of business – they can take almost
any one of the ones discussed already.
 Franchising is a popular method of starting a business
that is a compromise between employment and starting
your own business.

 Franchisees have freedom to make many choices, but
are limited in other ways.

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