Penney and Associates - Corporate & Business Law

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Frequently Asked Questions

What is business or corporate law?

Business law encompasses rules, statutes, codes, and regulations that are established which govern commercial relationships and provide a legal framework within which businesses may be conducted and managed. It is highly diverse and includes areas such as:

Banking and finance law,
Business formation and organization,
Business negotiations,
Business planning,
Transactional business law,
Acquisition,
Merger,
Divestiture,
Sale of businesses, and
Business litigation.

What is involved in properly setting up and maintaining your business as a corporation?

You should contact an experienced business attorney at Penney and Associates and a certified public accountant to be sure that corporate formation and maintenance are handled properly. The attorney will draw up articles of organization with language to protect you from personal liability.

What is a Limited Liability Company and how is it set up?

Your business may have the flexibility of a partnership and the legal protection of a corporation if it is a limited liability company ("LLC"). The LLC uses an operating agreement, similar to a partnership agreement, to control business, financial and tax provisions. The operating agreement may be oral, although it should be in writing and signed by all the LLC's members. Through its provisions, the operating agreement determines whether the LLC is taxed as a partnership or corporation.

What are the possible consequences of being personally liable for business debts and obligations?

Personal liability opens the individual to claims for a wide range of business obligations. Most people realize that personal liability may extend to business losses, but other obligations may also reach individuals, including:

Damage awards in lawsuits,
Tax deficiencies and penalties, and
Back wages and benefit payments.

The limited liability offered by incorporation shelters business owners from personal liability. Some insurance can also help cover business owners, directors, and officers. However, if an owner or director performs certain personal acts, behaves illegally, or fails to uphold statutory requirements for corporate status, he or she may face personal liability despite the corporate shelter.

How often should a corporation hold meetings and update its minutes?

Any time a corporation undertakes a major change or transaction, it should be reflected in its minutes. In addition, meetings of shareholders and directors should take place at least annually if for no other reason than to elect new officers and directors. Failure to adhere to the formality of regular meetings can jeopardize the corporation's ability to shield its officers, directors and shareholders from personal liability for the corporation's actions.

Is it a good idea to have a Buy-Sell Agreement for a corporation?

If a corporation has more than one shareholder, a buy-sell agreement is recommended. A shareholder's death, divorce, disability or termination of employment can create serious problems for a corporation and its other shareholders. A buy-sell agreement can help minimize these problems by describing what will happen in those events. Similar provisions are recommended for partnership agreements and operating agreements for limited liability companies.

Can corporations avoid consumer class actions?

Corporations often use arbitration clauses in consumer sales agreements in order to limit the types of dispute resolution available should difficulties arise. Such a clause requires that the parties to the agreement resolve any disputes through arbitration. Since a class action lawsuit involves direct judicial oversight, arbitration clauses thwart the development of a consumer class. Instead, each individual consumer must pursue his or her own arbitration procedure against the contracting business.

What is a breach of contract and what damages can I recover in the event of a breach of contract?

Failure to perform as specified in a contract, or provisions of a contract, without legal excuse is a breach of contract. The following damages can be recovered in the event of breach of contract:

Compensatory Damages - money to reimburse you for costs to compensate for your loss.
Consequential and Incidental Damages - money for losses caused by the breach that were foreseeable.
Attorney fees and costs - only recoverable if expressly provided for in the contract.
Liquidated Damages - these are damages specified in the contract that would be payable if there is a fraud.
Specific Performance - a court order requiring performance exactly as specified in the contract.
Punitive Damages - this is money given to punish a person who acted in an offensive manner in an effort to deter the person and others from repeated occurrences of the wrongdoing.
Rescission - the contract is canceled and both sides are excused from further performance and any money advanced is returned.
Reformation - the terms of the contract are changed to reflect what the parties actually intended.

What types of legal procedures should corporations maintain?

Once incorporated, an ongoing business's obligations include:

Obtain federal and state tax identification numbers, and file tax returns annually,
If a public company, issue shares of stock as mandated by the articles of incorporation and securities laws of the business,
Establish and maintain corporate records, including accounting ledgers, shareholder records, and corporate minute books,
Initial meeting of the board of directors to discuss business plans, and
Maintain annual registration with the state government as required by law.

Do shareholders have any legal responsibility to one another?

The traditional legal view states that shareholders have no special responsibilities to one another. In closely held businesses, however, majority shareholders can damage the interests of small shareholders. Since most investors do not want to buy closely held shares, minority shareholders have few options when their interests are compromised. In response, courts developed fiduciary duties among shareholders of closely held businesses. Contact Penney and Associates to discuss your shareholder responsibilities.

How do I terminate my LLC?

Limited liability companies are more fragile than corporate business organizations. As with partnerships, an outside occurrence can signal the end of a limited liability company's existence. A limited liability company formally terminates if an owner experiences:

Death,
Retirement from the company,
Resignation from the company,
Personal bankruptcy, or
Expulsion from the company by the other owners.

Once dissolution is brought on by one of these events, the remaining members typically must wrap up the company's remaining obligations and terminate the organization. However, if two or more members remain, they can avoid termination by agreeing to continue the business.

How do two corporations merge to form one company?

Generally, the board of directors for each corporation must pass a resolution adopting a plan of merger that specifies:

The names of the corporations that are involved,
The name of the proposed merged company,
The manner of converting shares of both corporations, and
Any other legal provisions to which the corporations agree.

Each corporation notifies all of its shareholders that a meeting will be held to approve the merger. If the proper number of shareholders approves the plan, the directors sign the papers and file them with the state. The secretary of state issues a certificate of merger to authorize the new corporation.

Do I need a lawyer to create a partnership agreement?

A partnership agreement allows you to structure your relationship with your partners in a way that suits your business. You and your partners can establish the shares of profits (or losses) each partner will take, the responsibilities of each partner, what will happen to the business if a partner leaves and other important guidelines. If you and your partners do not spell out your rights and responsibilities in a written partnership agreement, you will be ill equipped to settle conflicts when they arise, and minor misunderstandings may erupt into full-blown disputes. Hiring an experienced Penney & Associates attorney to handle the drafting of your partnership agreement is advisable. We can help you understand the legal jargon and solve disagreements.