Five Things Every Lawyers Should
Know about Corporate and Business Law
By Gordon F. Gault
1. Choice of Entity
There are many different 'types of business' entities, the most prevalent of which are corporations, general partnerships, limited partnerships, limited liability companies, and sole proprietorships.
A corporation is a legal entity separate from its shareholders, directors and officers, and is able to act independently. Once effective, a corporation is a C Corporation for tax purposes. A C Corporation is taxed at both the corporate and shareholder levels (double taxation). In some instances, a 'corporation may qualify to file far Subchapter S status Under the Internal Revenue Code, Subchapter S status is often seen as more beneficial than C Corporation status, because taxation is solely at the shareholder level.
General Partnerships are formed when two or more people associate to conduct business as co-owners for profit. Partners are jointly and severally liable for all partnership obligations and all tax consequences flow through to the partners. A Limited Partnership is composed of a general partner who controls the business, and limited partners who do not have control over the partnership and are not personally liable for partnership obligations. The tax consequences flow through to the partners.
Finally, a limited liability company is an entity that provides its members with limited liability and partnership tax consequences. The limited liability company offers tax planning and organizational flexibility. There may be some additional risks for this entity regarding "piercing the entity veil."
2. Required Organizational Documents for each Business Entity
Articles of Incorporation create a corporation. (805 ILCS 5/2.10). Corporations must have bylaws (805 ILCS 5/2.25), minutes ('805 JLCS 5/7.75), and issue stock. Furthermore, most corporations contain shareholder agreements in which shareholders agree about matters concerning the management of a corporation.
A Partnership Agreement controls a general partnership. (805 ILCS 206/103). This agreement should be in writing to determine the characteristics of the partnership. For a limited partnership, a Certificate of Limited Partnership is required in addition to a Limited Partnership Agreement. For a limited partnership to be effective, this executed certificate must be on file in the Secretary of States Office. Articles of Organization create a limited liability company, for which an operating agreement and annual minutes are helpful documents. Most business entities will also have employment agreements concerning confidentiality and non-compete covenants far higher ranking employees and various finance agreements documenting the funding of the business.
3. Protection and Concerns for Minority Shareholders
The elected directors and officers manage a corporation. They have fiduciary duty to act on behalf of the shareholders. Their business decisions should be made with the goal of improving the value of the corporation for the benefit of the shareholders.
Minority shareholders have various means to protect their rights including demanding disclosure of financial information. Shareholders can institute derivative actions against officers and/or directors in many instances including but not limited to: misappropriation of funds diversion of corporate funds and fraudulent conduct. The best way to protect minority shareholder rights is through a shareholder's agreement. The agreement can protect such rights as employment, compensation, officer and director positions 'and supermajority voting requirements.
4. Piercing the Entity Veil
Generally, owners of corporations, limited liability companies and limited partnerships are not liable for obligations of the entity. But there are instances where a court will "pierce the entity veil" and hold directors, officers or shareholders personally liable for an entity obligation. This usually occurs with situations of unfairness, fraud or failure to follow corporate formalities, especially where entity and personal business is commingled.
5. Sale or Purchase of a Business
In the sale of a business, there can be a stock sale or an asset sale. With most small businesses, the sale occurs through an asset sale to avoid having the debts of the seller attaching to the purchaser. There are certain debts that cannot be avoided by an asset sale. They are liens that have attached to the assets, and can be voluntary liens such as chattel mortgages, or involuntary liens such as judgment or tax liens. The purchaser should also be concerned about obtaining clearance from the Illinois Department of Revenue, the Illinois Department of Employment and the City of Chicago Department of Revenue if the assets of a Chicago business are purchased. Other purchaser concerns include permits, leases and licenses, and other factors that are necessary LO operate the business where it is located.
Gordon F Gault chairs the Corporation &
Business Law committee, which meets on the
1st Wednesday of the month. Cary R. Rosenthal
serves as Vice-Chair of the committee.