A LLC is a relatively new form of business entity designed to offer the

limited liability of a corporation and the flow-through tax advantages of a

partnership.
Taxed as a partnership by default, unless it elects to be taxed like a
corporation
Can have unlimited number of members
Only drawback of LLC is the limited transferability of a members interest.
LLCs governed by statute (RULLCA) but members can adopt Operating
Agreement to govern the company. The Agreement controls unless contrary
to law.
An LLC is formed by filing Articles of Organization with the Secretary of
State
The Articles must include:
A statement that the entity is an LLC
The name of the LLC, which must include an indication that the company
is an LLC (ex: L.L.C., LLC or Limited Liability Company)
The street address of the LLCs registered agent for service of process The names of all the members
LLC must choose Member or Manager Managed status when formed.
Member managed- each member shares equal right to manage (similar to
partnership)
Has implied authority to carry on LLCs ordinary business
If actual authority limited, the member retains apparent authority to
transact business with a 3rd party who had no notice that the members
authority was restricted
If management Is by members:
A majority vote is required to approve most decisions
Each member is an agent of the LLC (meaning the LLC may be bound by
acts of any member)
Manager- managers may be elected or removed at any time by a majority
of LLC members
Each manager shares equal right to manage
Has implied authority to carry on LLCs ordinary business
If actual authority limited, the manager retains apparent authority to
transact business with a 3rd party who had no notice that the managers
authority was restricted
Each member/manager is a fiduciary to the LLC and its members
Same fiduciary duties apply
Duty to account, not to compete, reasonable care,
Manager Managed LLCs:
Managers owe LLC duties of care and loyalty
May not divert business opportunities of the LLC to themselves
May not profit secretly at the expense of the LLC
MEMBERS NOTE: Non-managing members of a manager-managed LLC
owe no fiduciary duty
Profits and losses are allocated on the basis of contributions
Members are compensated in the same way as partners in a partnership
They share profits equally absent contrary agreement
Not entitled to salary
Many LLC agreements provide that the managers of the LLC will receive
salary
Not entitled to distributions until DISSOLUTION of the LLC, but may
decide in operating agreement to make interim distributions
A members ownership interest in the LLC is personal property
Member cannot freely transfer all his rights in LLC (to allow free
transferability would disrupt the expectations of the other members who have
chosen the person they want to do business with)
Assignment of members interest in LLC transfers ONLY the members
right to receive profits and losses, management rights are NOT transferred
One can become a member (i.e. management rights also transferred)
ONLY with the consent of ALL members
LLCs business will generally continue upon the death or withdraw of
member
Members can request that the court expel another member for harming the
LLCs interests
Wrongfully dissociated member liable for damages caused to the LLC by
dissociation
Dissociated member loses management rights and duties, however
APPARENT AUTHORITY may remain
Eliminate by personal notice
File Statement of Dissociation with Secretary of State
Dissociated members cannot force LLC to dissolve or liquidate assets
Operating Agreement must state procedures for member buy-out
EXCEPTION: where LLC is at will (no term) the LLC must buy dissociated
members interest at fair value within 120 days of dissociation
If LLC is for a term and LLC not dissolved, LLC doesnt have to pay
until 120 days after end of its term
LP (Limited Partnership) is an entity comprised of one or more General
Partners (having unlimited liability) and one or more Limited Partners
(enjoying limited liability).
Liability of limited partners limited to their capital contributions
LP differs from Unlimited Partnership in two ways:
LP is created by filing document with Secretary of State
Liability for Limited Partners is limited to capital that she contributed to the
partnership
Certificate of Limited Partnership must be filed with Secretary of State and
contain:
Partnership name (must include indicator L.P., LLLP, etc.)
Name and address of registered agent for service of process
Name and address of each general partner (limited partners names need
not be included), and
Whether the limited partner is a limited liability partnership
If the parties want to form an LLLP, there is generally a box on the
form that can be checked to make the LLLP election.
LLLP is a modification of the LP where the General Partners have limited
liability for the obligations of the partnership
CALIFORNIA prohibits the organization of LLLPs in this state
A foreign LLLP may register to do business in CA, but it will be treated like
a LP
Frequently, the GP of an LP is a corporation or other limited liability entity,
to protect against the unlimited personal liability faced by GPs. Having a
corporate GP is not necessary in the LLLP as the GP has limited liability in
an LLLP.
General Partners of an LP or LLLP owe fiduciary duties to the partnership
and the other partners
Same fiduciary duties apply (see previous lectures and read text)
Limited Partners are not fiduciaries and owe no fiduciary duty
General Partners have no right to salary absent agreement (similar to
Partnership)
Interests in a LP or LLLP are NOT transferrable by either the General
Partner or the Limited Partners
They may ONLY transfer the right to receive capital or profits, no the right
to be a partner
Partner may withdraw at any time, HOWEVER they will not receive the
value of their interest under the ULPA. Partner only receives buyout if the LP
agreement provides for it, or the LP dissolves or liquidates. They are stuck in
this investment.
Agreement may further state that Limited Partners may not withdraw.
Cannot prohibit General Partners from withdrawing.
Death or withdraw of a partner does not dissolve the entity unless there is
no surviving General Partner
If no surviving General Partner, entity will wind up
LPs and LLLPs are taxed like partnerships by default
Taxed as a corporation ONLY IF the entity elects to be taxed like a corp
Partners share profits according to contributions unless agreement to the
contrary
Agreements frequently state LPs (usually silent financial partners) will take
all the losses- up to the limit of their capital contributions)
General Partners can use losses to offset income from any other source
Limited Partners can use losses to offset income only from other passive
investments and only to the extent of the capital contribution in the LP
GP of LP has unlimited liability to creditors of LP
GP of LLLP has liability limited to capital contribution
GP of LLLP has personal liability for torts committed while acting for LLLP
All General Partners and Limited Partners owning majority of all claims
vote to dissolve
General partners have power to wind up the business
Apparent authority issues arise
Assets are distributed in the same proportion as other distributions
IF an LP- if the assets are insufficient, the GPs have to contribute money
to the LP so that it can satisfy its creditors

Corporation- BENEFIT: Capital raising ability - investors able to invest

funds and own portion of corporation without any liability or management
responsibilities
Contrast Partnership, LLC, LP, LLP
For Profit
Publicly held corporations
Closely held corporations
S Corporation (special type of closely held corp. that permits the corp. to
be taxed as a partnership requires 100 or fewer shareholders)
Shareholders make money by distributions and by appreciation of their
shares
Non-Profit
Has members instead of shareholders
may not make any distributions to members
Government-owned
Legal Significance of Incorporation: corporation is a separate legal person
Sign and file Articles of Incorporation with State- Articles must include: Name -Must have corporate indicator -Must be unique
Maximum number of authorized shares and any separate classes
Purpose of the corporation - Agent for service of process -Incorporators
names
Domestic means the corporation is transacting business in the state in
which it was incorporated
Foreign corporations are those transacting business in states other than
the state of incorporation -DUE PROCESS CLAUSE protects corporations
from a states jurisdiction if the corporation doesnt have sufficient minimum
contacts
Benefit Theory: A foreign corp. should be required to pay for the benefit it
receives from a state
COMMERCE CLAUSE-gives the federal government the power to
regulate interstate commerce- any state regulation that is found to burden
interstate commerce will be invalid (unconstitutional)
TEST: State law regulating the activities of foreign corps does not unduly
burden interstate commerce if:
Law serves legitimate state interest
State has chosen least burdensome means to protect that interest
Legitimate state interest outweighs the statutes burden on interstate
commerce
Example: CA minimum wage laws.
LONG ARM STATUTES- foreign corporation may be subject to lawsuit in
foreign state so long as the corporation has sufficient minimum contacts with
the forum state
Notion of fair play and substantial justice- corp availed itself of the state
TEST: The court must weigh the corporations contact with the state
against the inconvenience to the corp. of requiring it to defend a lawsuit
within the state.
Note that virtually any contact with a state by a foreign or alien corporation
will justify that states courts' asserting jurisdiction over the corporation in
respect to matters arising out of the contact with the state -Ex: Driving
truck from AZ through NM toward FL provides sufficient minimum contacts
within NM to permit a suit in NM court about the drivers negligently causing
an accident in
What qualifies as doing business? Or, when does a corp. have to file
documents with the secretary of state of the foreign state to formally
QUALIFY to do business in that state?
The following does not constitute doing business in the foreign state:
Soliciting orders that require acceptance outside the state
This is how Amazon.com (or Diapers.com) may conduct internet sales
outside its home state without having to qualify to do business in each state.
- Owning real estate (passive investment)
Conducting one isolated transaction completed within 30 days
Piercing the Corporate veil -General Rule: a shareholder is not liable
for the debts of a corporation
However, shareholders can be deprived of their limited liability in certain
circumstances -Piercing the corporate veil test - Requires:
Domination of a corporation by its share holders and
where shareholder causes corporation to act for their personal benefit and
not for the benefit of the corporation
ex: failure to hold directors meetings, failure to segregate accounts
Domination makes the corp the alter ego (other self) of the shareholder
Use of that domination for an improper purpose
Three ways: defrauding creditors, circumventing a statute or evading
existing obligations
Ex: thin capitalization/undercapitalization: failure to maintain sufficient
funds to cover foreseeable liabilities
Pre-incorporation: PROMOTERS are persons acting on behalf of a corp
not yet formed
The corp becomes liable on a promoters preincorporation contract when
the corp ADOPTS the contract by either
Express board or directors resolution, or
Implied adoption through knowledge of the contract and acceptance of its
benefits
Adoption of a K is similar to ratification in agency principles
The promoter (and any co-promoters are jointly and severally) liable on
pre-incorporation contracts until there has been a NOVATION.
NOVATION= an agreement between the promoter, the corporation, and
the other contracting party that the corp will replace the promoter under the
contract.
The promoter (and any co-promoters are jointly and severally) liable on
pre-incorporation contracts until there has been a NOVATION.
NOVATION= an agreement between the promoter, the corporation, and
the other contracting party that the corp will replace the promoter under the
contract.
Promoters are also jointly and severally liable on torts committed by copromoters before incorporation.
Promoters are FIDUCIARIES of each other, the corporation, and
prospective investors. Owe duty of honesty, good faith, fair dealing, full
disclosure, etc Therefore, promoters cannot make SECRET PROFIT on
their dealings with the corp. -must:
Act in good faith
Disclose
Obtain permission
SUBSCRIBERS- persons or entities who make written offers to buy stock
from a corporation not yet formed
Failure to Properly Incorporate can result in personal liability to
purported shareholders. Contracting parties may also attempt to avoid a
contract by arguing that the corp was defectively formed, thus nonexistent.
DEFECTIVE INCORPORATION results in unlimited liability (partnership
treatment)
Unlimited tort liability
Unlimited liability on Ks related to the business
SHARES IN GENERAL
AUTHORIZED- total amount permitted to issue as stated in the Articles of
Incorporation
ISSUED- number of shares that have ever been sold to a shareholders
(includes stock that has been repurchased by the corporation)
OUTSTANDING- only shares that are currently held by shareholders
Shareholders rights are a matter of CONTRACT and appear in the
articles of incorporation, bylaws and shareholder agreement and on the
share certificate
CONSIDERATION- what must a corp receive when it issues stock?
Par Value= a minimum issuance price
Shares issued for less than par value = discounted shares
Acquiring Property with Stock : Rule: Any valid consideration is fine so
long as the board values the consideration in good faith to be worth at least
par value.
Rule: the buying shareholder is liable for ONE THING only- to pay full
consideration for its shares
TREASURY STOCK: is stock that was previously issued and then
reacquired by the corp. It can then be re-sold. Treasury stock is NO PAR
STOCK, and must simply be sold for fair value
4) Transfer restrictions: Right of First Refusal and Option
Corp gets right to match offer
Option- right to buy at a price determined by the agreement
Buy and Sell Agreements
Agreement states a formula for valuing shares and the corp must buy and
the shareholder must sell the shares back to the corp
Guarantees the shareholder a market for his shares
Can require a majority shareholder to buy minority shareholders shares
Prevents unwanted persons from becoming shareholders in close corps
Consent Restraints
Shareholder must first obtain consent before selling

Can restrain sales where it would result in disqualifying corp from S corp
status
Provisions Disqualifying Purchasers
Used to exclude unwanted people from corp (like a competitor, or a
mother-in-law)
Transfer restrictions must be
In writing (articles, agreement, bylaws)
Shareholder must expressly agree to the restriction or purchase with
notice of the restriction
Management of Corporations
Shareholders = owners of corp
Board of Directors = elected by SH to manage corp
Officers = directors delegate management power to officers to run corp
Corporate GOAL= enhance profits and SH gains
Shareholders own the corporation, but elect a board of directors to
manage the firm and, typically, the board delegates most management duties
to officers, who in turn hire managers and employees
Model Business Corporation Act (MBCA) states that a corporation has
power to do anything that an individual may do
Sue, bue sued, purchase, hold and sell real property, lend and borrow
money, donate to charity,etc.
Powers of Nonprofit Corporations- same as a for-profit corporation.
Frequently the NFP will have a limited purpose clause in the articles (in
contrast to the general purpose clause in For Profit Corps) and the Corp will
be limited to that purpose.
However, acts beyond the purpose will be enforceable and the corp will
not benefit from the lack of capacity (ultra vires) defense.
The board of directors supervises the actions of its committees, the
chairman, and officers to ensure the boards policies are being carried out
and the corporation is managed wisely
Some corporate actions require board initiative and shareholder approvalthese are MAJOR CHANGES, such as:
Amending articles of incorporation, mergers, and dissolution, sale of all or
substantially all of the corps assets
Corps are managed under the direction of the Board of Directors
Directors have no personal liability for debts or torts of corporation- still
liable for their own torts
Day to day management delegated to officers -POWERS-board has power
to: -Issue shares- Set price of shares - Repurchase shares - Declare
dividends - Adopt/amend bylaws - Elect/remove officers
Fill board vacancies -COMMITTEES- groups of inside and outside
directors to handle special issues
Audit Committee- appoints independent public accountants- required by
Sarbanes-Oxley and in response to Enron, Arthur Andersen issues from
1990s and early 2000s
Arthur Andersen was charged with and found guilty of obstruction of justice
for shredding the thousands of documents and deleting e-mails and company
files that tied the firm to its audit of Enron. The ruling was later overturned by
the USSC on a technicality - ENRON- by the use of accounting loopholes,
special purpose entities, and poor financial reporting, were able to hide
billions of dollars in debt from failed deals and projects. Chief Financial
Officer Andrew Fastow and other executives not only misled Enron's board of
directors and audit committee on high-risk accounting practices, but also
pressured Andersen to ignore the issues. - Other committees:
Compensation Committees- review compensation for directors and high
level employees and officers
Shareholder Litigation Committee: decide when and whether to sue
directors for mismanaging the corporation
WHO CAN BE A DIRECTOR? -Anyone. IN CA, there must be at least 3
directors- unless there is less than 3 SHs in which case there must be as
many directors as SHs
Voted in by SHs - Under straight voting, shareholder casts as many votes
for each nominee as s/he has shares and top vote-getters are elected
Permits SH owning more than 50% of shares to effectively control corp by
voting in directors they like
Class voting gives certain shareholder classes right to elect a specified
number of directors
Cumulative voting permits shareholders to multiply their shares by number
of directors to be elected and cast the resulting total for one or more directors
Permits minority SHs to obtain representation on the board
Once public ownership of shares exceeds 50 percent, management must
solicit proxies from passive shareholders to have a quorum and achieve a
valid shareholder vote
A proxy is a person designated to vote for the shareholder
Wall Street rule: either support management or sell the shares
Directors removed by:
By shareholder vote
BY COURT en (either 1-3 plus 4)
TEST: -Director engaged in fraudulent conduct with respect to corp or its
SHs, OR
Grossly abused position of director, or
Intentionally harmed corporation
AND Removal of director is in the best interest of the CORP
Quorum required to act
usually a majority but the bylaws can set forth a different number of
required board member in attendance
Meetings dont have to be in person technology okay
Laws vary by state- some do not require close corps to have boards- they
are instead managed by the few SHs
CALIFORNIA- permits close corps to be managed like partnerships
Close Corp may require SUPERMAJORITY voting requiring or
unanimous approval so minority SHs are protected
Officers of a corporation include the president, one or more vice
presidents, a secretary, and a treasurer
Officers are agents of the corporation, thus have express authority
conferred on them by the bylaws or the board of directors and implied
authority to do things reasonably necessary to accomplish duties
Apparent auth- when corp leads a 3rd party to reasonably believe that the
officer has the authority to act for the corp
Ratification: can be by express board resolution or implied by boards
acceptance of the benefits of the officers act
Officers are NOT personally liable for torts and contracts of the corporation
Directors and officers owe a fiduciary duty to the corporation, including
duty to act within the scope of the powers of the corporation
Officers must within authority conferred by the articles of incorporation,
bylaws, and board of directors
Directors and officers are liable for losses to the corporation caused by
their lack of care or diligence
TEST: board members and officers shall act
1: in good faith
2: in a manner the individual reasonably believes is in the best
interest of the corporation and
3: with the care that a person in a like position would reasonably
believe appropriate under the circumstances
requires a reasonable investigation and honest belief that acts are in the
best interest of corp
the test is evaluated based on the facts presented at the time the decision
was made- NOT HINDSIGHT
Breaching the DUTY OF CARE results in liability to the Corporation for
loss incurred.
Business judgment rule: absent bad faith, fraud, or breach of fiduciary
duty, the judgment of directors and officers is conclusive
A court or SH cannot substitute their own judgment for that of the decision
maker- managers protected from liability if they satisfy TEST:
Officer/director made informed decision (requires reasonable investigationusually hiring experts )
has no conflicts on interest, and
cannot benefit personally, other than as a SH
has a rational basis for believing decision is in best interest of the
corporation.
As agents, directors and officers owe the corporation duties of loyalty,
including the duty not to self-deal (a conflict of interest)
If a director has a conflict of interest, a court may void the transaction with
the corporation if it is unfair to the corporation
Intrinsic fairness standard: a transaction is fair if reasonable persons in an
arms-length bargain would have bound the corporation
Directors have a duty to manage the corporation
In managing the corp, directors are protected from liability by the
BUSINESS JUDGMENT RULE
Directors are fiduciaries who owe the corp duties of care and loyalty
Duty of Care- director must act with the care that a prudent person would
use with regard to her own business, unless the articles have limited her
liability for a breach of duty of care

5. Duty of Loyalty: A director/officer may not receive an unfair benefit to the

detriment of the corp or its SHs, unless there has been a material disclosure
and independent ratification
VIOLATIONS: self-dealing, usurp corporate opportunities, oppress
minority SHs, trade on inside information
CONFLICT OF INTEREST-director/officer on both sides of deal or
privately benefitting aside from SH interest in Corp:
TEST: Transaction must be fair to the Corp and, either of the
following:
a: transaction approved by majority of informed, disinterested
directors
b: transaction approved by majority of the shares held by informed,
disinterested SHs, OR
Fair: would a reasonable person in an arms-length transaction have bound
the corp to this deal?
USURPING CORPORATE OPPORTUNITY
RATIFICATION: directors may defend a claim by obtaining independent
ratification through a majority vote of independent directors or SHs
Oppression of Minority Shareholders - Courts treat oppression the same
was as they treat Director Self-Dealing
Transactions must be FAIR to the corporation AND to the minority SHs
CORP may be liable for employees torts and crimes under RESPONDEAT
SUPERIOR TEST: requires that employee acted within scope of her employment
Directors criminal liability - Always liable for OWN torts and crimes
May also be liable if he authorizes, aids and abets, conspires, etc
Not usually liable for torts and crimes of other employees
NOTE: Criminal Liability imposed on CORPORATION where- criminal act
requested, authorized or performed by:
Board of directors
An officer
Employee with responsibility for formulating Company policy
High ranking employee with supervisory responsibility over the subject
matter of the offense and acting within scope of employment
Because officers and directors have a risk of liability, corporations often
indemnify those who serve as a director or an officer
Indemnify: to protect or insure; refers to practice by which corporations
pay expenses of officers or directors named as defendants in litigation
TEST- Director will be indemnified where:
Director acted in good faith and
Reasonably believed she was acting in best interest of corp
(IF indemnity is for a criminal fine, add third element: director had no
reasonable cause to believe her conduct unlawful)
Shareholders (SH) OWN but have no right to MANAGE corporation
SH Powers and Duties - Elect and remove directors
Vote on important issues
Must pay promised value for their shares
Controlling SHs owe duties to minority
Properly Noticed Annual Meeting
Every corp must have an annual meeting at which time at least 1 director
is up for election
Notice must include TIME and PLACE
Special Meetings may be called by the board of directors, the president
or chairman, or any SH owning 10% or more of the corp
Vote on any pressing issues- ex: merger
Purpose required in notice for Special Meeting because nothing else can
happen at that meeting
Quorum of outstanding shares must be present- Quarum= a majority of
shares outstanding, unless Articles require more
If a quorum is present, action is approved if the votes cast in favor of the
proposal exceed the votes cast against the proposal
TEST:
Writing
Signed by record SH
Sent to secretary of corporation
Authorizing another to vote the shares
Valid for only 11 months
Voting Trusts (OLD WAY): a formal agreement delegating voting power to
a trustee enforceable for up to 10 years
SH voting trust (New Way): agreement in writing to vote shares as
required by the agreement itself which is now binding and enforceable on all
signers.
Corp may have numerous classes of shares with varying voting rights
Each class is entitled to elect one or more directors helps to balance the
power of the corporation
MERGER- one corp merges into a second corp. The second is the
survicing corp. the first merges out of existence & dissolves
Surviving corp takes all business, assets, debts and liabilities of both corps
SH of dissolved corp become SH of surviving corp
SH of both corps must approve the merger
DISSENTERs RIGHTS: A SH who does not vote in favor of a
fundamental change has the right to force the corp to buy her shares at fair
value
TEST:
Before the SH vote, Sh must file a written notice of objection and intent to
demand payment
Do not vote in favor of the proposed change
Make prompt written demand to be bought out
Question: What if SH and corp cannot agree on fair price?
SH may need information to make informed voting decisions and value
propriety of declaring dividends (before suing)
SHs have a right to inspect corporate books and records
Corp must maintain them for 3 years
Information to be inspected includes:
List of SHs and # shares owned
Articles, bylaws, minutes of SH meetings
Financial statements (balance sheets, income statement and statement of
changes in SH equity)
PREEMPTIVE RIGHTS: (1121) the right of a SH to maintain her
ownership interest in a corp by having the right/option to buy additional
shares if additional shares are issued
retain proportionate interest in the corp
this right/option is transferrable
Dividends- usually paid in CASH
Declared by board of directors- once declared, the dividends are debts of
the corp and must be paid- SH may sue to force payment of declared
dividends
Declaration protected by Business Judgment rule
Preferred SHs paid first, then payment to common SHs
SH can sue personally, in own name, for personal injury- such as to
recover dividends or to enforce right to inspect books
CLASS ACTION: several SH can join together
Recovery paid to all members of the class of plaintiffs
Numerosity
Commonality
Typicality
Adequacy
Superiority
SH DERIVATIVE SUIT- when corp has been injured, the right to sue
belongs to the corp and the recovery belongs to the corp. the SH will bring a
lawsuit for the benefit of the corporation
Derivative suits may be against individuals within the corp or outsiders
REQUIREMENTS:
1. Must be current SH who held shares at time of injury
2. SH must fairly and adequately represent interest of SH similarly situated
3. Must first make demand on Board of Directors
if board agrees to sue, SH may not bring suit
if demand would be futile, this requirement is waived
Board of Directors will create Special Litigation Committee to evaluate SHs
demand and decide whether to sue on behalf of the Corp
This committee can also decide whether to ask the court to dismiss
previously filed SH derivative suits
WATCH OUT!- If SH LOSES- must pay the defendants legal fees
If SH wins, corp must reimburse SH for legal fees out of award.
If derivative suit fails, and court finds that suit was brought without
reasonable cause, SH must pay defendants legal fees
PUNISHES SH who litigate in bad faith