Unit 6 & Unit 7 Seminar Business Organizations

Winter Break is Coming Winter Break runs from December 21 – January 2 That means it begins as soon as Unit 6 ends next week – This does not affect when your Unit 6 work is due That also means that Unit 7 lasts from January 2 – January 3 – You will have until the end of Unit 8 to submit any Unit 7 work Our next seminar will be for Unit 8 on January 5

Things to do this unit: UNIT 6 – Read Chapters 6 and 12 – Respond to the Discussion Board – Attend the Weekly Seminar – Complete the Learning Journal Activity – Complete the Quiz

Things to do this unit: UNIT 7 – Read Chapter 8 – Respond to the Discussion Board – Attend the Weekly Seminar (this is it) – Complete the Learning Journal Activity – Complete and Submit the Assignment – Complete the Quiz

Corporate structure choices Many different forms of businesses, make sure incorporating makes sense Consider: – Income tax implications – capital requirements – statutory requirements, and – desired management structure – the importance of limited liability – transferability of ownership – ease of forming and dissolving the business entity, – business continuity

Choosing a domicile Domicile refers to the state in which a corporation is incorporated (where the articles of incorporation are filed) – Can still do business in other states and countries When choosing a state, consider the state’s corporation laws – Costs, judicial policy, availability of name, liability, reporting requirements, etc incorporating in Delaware – Delaware’s corporation laws are the most liberal in the country (see page 196 of Chapter 6)

Issues regarding promoters the promoter does the preliminary work – organizes, promotes and forms the corporation – prepare incorporation papers and selling stock – Sometimes (for bigger corporations)draw up a registration statement to be filed with the Securities and Exchange Commission (SEC). – Investigate the corporation laws of each state to determine where to incorporate. An Incorporator is the person who actually signs the incorporation documents

Pre-incorporation agreements Agreements before a corporation is formed – Sets forth intentions regarding the formation of the corporation Usually not formal unless – A long time between decision to incorporate and actual incorporation – A lot of money is involved – Want to bind parties to invest more in the future – Promises of employment – Protect trade secret

Stock subscription agreements An agreement to purchase a certain number of shares in the future corporation at a stated price – Once corporation formed, the agreement is ratified and shared issued to the subscriber – Can be used at any time to get more shareholders Example on page 203 of chapter 6

Mandatory provisions in articles of incorporation Must be filed with the state (usually the Secretary of State) Also sometimes called a “charter” Describes the nature of the business and how the corporation will be set up Requirements governed by state statute, but the only 4 mandatory requirements are: – 1. A corporate name for the corporation that satisfies all statutory requirements. – 2. The number of shares the corporation is authorized to issue. – 3. The street address of the corporation’s initial registered office and the name of its initial registered agent at that office. – 4. The name and address of each incorporator.

Corporate name requirements State law governs how to name corporations. Generally, the corporate name must include the words Incorporated, Inc. (pronounced "ink"), Corporation, Corp., PA (professional association), or PC (professional corporation). – tells the general public that it is doing business with a corporation. – The word "Company" or "Co." in the corporate name is generally not enough to satisfy most state requirements. Corporate names that imply a governmental activity or connection, or the conduct of business that is specifically regulated by statute, are prohibited. – Examples are banks, insurance companies, or public utilities. – To use a specific name, special permission may be requested from the state regulatory agency directly responsible for the regulation of the particular business.

Authorized stock requirements Articles of Incorporation must state the number of shares of each class of stock that may be issued – If there is only one class, it is called common stock Sometimes it must include the value of the stock and the rights and privileges of owners of each class of stock

Corporate purposes and bylaws Articles of Incorporation often include the purpose of the corporation – Must be lawful – Informs the public of the nature of the corporation – Some state statute’s require the purpose “any lawful business” is often sufficient Example on pp of Chapter 6

Meeting requirements After Articles of Incorporation filed, an organizational meeting is held – Adopt bylaws, elect directors – Who’s there? Incorporators Initial board of directors (usually named in the Articles of Incorporation or elected at this meeting) Shareholders Requirements for how it is held (notice, etc) is included in the Articles of Incorporation

Shareholder resolutions State statutes may require shareholders to attend the organizational meeting or to hold a meeting of their own – First meeting of shareholders

The paralegal's role in corporate formation Paralegals can be very involved in incorporation – Prepare & file documents – Check name availability – Attend meetings – licenses

Dissolution State law governs the dissolution of a corporation. When a corporation is dissolved, all the creditors are paid off first. – Then the stockholders divide what is left of the corporation in proportion to their stock holdings.

Dissolution There are two ways a corporation can dissolve. – 1. Voluntary dissolution of the corporation. Stockholders vote, and if 66 to 75 percent (depending on the state) vote to dissolve it, the state issues a certificate of dissolution after all state taxes have been paid.

Dissolution There are two ways a corporation can dissolve. – 2. Involuntary dissolution, which can be done in three ways: Creditors force the corporation into bankruptcy due to the corporation not paying its debts. The state forces the corporation to involuntarily dissolve due to fraud or the non-payment of taxes. A petition of the minority stockholders proving fraud, mismanagement, or stockholder dissension, makes it impossible to continue the business of the corporation.

Dissolution A dissolving corporation must surrender its certificate of authority in every state in which it is qualified to do business as a foreign corporation. A dissolving corporation must file a Form 966, Corporate Dissolution or Liquidation, with the IRS, and it must file a final income tax return. In some states the corporation is dissolved by filing articles of dissolution or a certificate of dissolution with the secretary of state. All state statutes provide procedures for notifying a corporation’s creditors of its dissolution.

Paralegal’s Role in Dissolution Work with client to make sure statutory requirements of dissolution are met Draft plans of dissolution, articles of dissolution or other documents Obtain information from client See checklist on p 487 of Chaper 12

Unit 7 Raising capital for the corporation Equity Securities (an ownership interest) – Stocks – Dividends paid to holders of equity securities Debt securities – A loan to the corporation that must be paid back From banks, shareholders, bonds – Interest paid to holders of debt securities

Types of Stock Common stock – Ordinary shares of ownership of a corporation – shares of stock without special preferences. – Each share entitles the holder to one vote and to share in the profits of the corporation in the form of dividends. Treasury stock – Stock sold to stockholders and then repurchased from the stockholder and held by the corporation. Unissued stock – Stock that was authorized in the articles of incorporation for the purpose of sale to stockholders, but that has not been sold.

Types of Stock Preferred stock: – Stock, authorized in the articles of incorporation, which allows the owners of this stock to have a preferred status over holders of common stock when it comes to dividends. – Preferred stockholders get more of the money from the dividend than the common stockholders, and they are paid first. – If no money is left after the preferred stockholders have been paid, then the common stockholders do not get any.

Types of Stock Convertible stock: – This is preferred stock with the added attraction that it can be converted into or exchanged for common stock at a predetermined price. Redeemable stock: – Preferred stock that the corporation has the option to repurchase at a predetermined price. Cumulative stock: – Preferred stock that accumulates dividends. – If you own preferred stock, you will receive a dividend every year. – If you do not receive one for several years, the dividends to which you were entitled accumulate. – When there is money for dividends, you are paid first before the holders of common stock.

voting rights - common stock vs. preferred stock Common stock holders are entitled to one vote per share There can also be common stock that does not entitle the holder to a vote Preferred stock may be issued with voting rights, limited rights or no rights

liquidation rights – common stock vs preferred stock Common stock holders are generally entitled to their proportion of the corporation’s net assets at the time of dissolution Preferred stock holders may be granted preference over common stock holders at time of dissolution

Par Value A nominal value assigned to shares of stock – On face of stock, but stock value fluctuates – Par value and actual value are not the same – Trend toward eliminating par value

The general requirements for a corporation to declare dividends A corporation generally is not legally obliged to pay undeclared dividends to shareholders But once declared, a dividend must be paid Dividends are approved by the board of directors and declared as an act of the corporation – Sometimes requires shareholder approval

Paralegal’s Role in Financial Matters Research issues regarding debt and equity financing Draft relevant documents (articles of incorporation, stock subscription agreements, resolutions of the board of directors regarding financing, etc)

Unit 7 Assignment As part of the final project, you will determine which business formation best fits your clients' needs. Now you must determine the cost. Continuing with the Final Project Fact Scenario from Unit 1, Attorney Phil asks you, the paralegal, to compose a two to four page memo explaining how the start up cost and tax implications impact the analysis of selecting a business formation. The lawyer bills $325.00/hour and the paralegal services are billed at $125.00/hour. Be mindful that paralegals prepare the forms and the lawyer renders the legal advice. Each form preparation will take at least thirty (30) minutes and fifteen (15) minutes of lawyer consultation. Determine the cost of the formation you recommended.