Business and corporate law encompasses all of the laws that dictate how to form and run a business. This includes laws that govern how to start, buy, manage, sell, or dissolve any type of business entity. Business laws establish the rules that all businesses should follow. The Member Firms of Pacific Lawyers have been involved in all levels of business and corporate law, from corporate formation, to assistance with expansion such as though mergers and acquisitions, to corporate governance issues, to shareholder disputes, and to winding up and dissolution of entities.
The formation of a business is generally subject to statutes and administrative rules that allow for the creation of corporations, limited liability companies, partnerships, and other forms of business entities. This area of law addresses company formation (incorporation or organization) and how shareholders or members, directors or managers, employees, creditors, and other stakeholders such as consumers, the community, and the government interact with each other.
There are different forms of business entities. The traditional business entity is the corporation that has shareholders and issues stock. Another form of entity is the limited liability company that has members and may be managed by its members or a manager. The right form of entity depends on the situation of the client. Your attorney will advise you on the differences in the types of entities and help you decide which form is right for you. Here are a few factors to consider:
- Sole proprietorship. This is the most common choice for new business, particularly for home-based or “mom and pop” businesses in which a single person or a family offers a service to others. The sole proprietorship is the easiest of the legal formats to set up and maintain over time. That is an advantage for many small businesses. From a liability standpoint, however, there is no way to separate the owner from the business. If the business is sued, all of the owner’s personal assets are at risk. This simple fact generally makes the sole proprietorship the wrong choice for a business, at least in the long run.
- Partnership. A partnership is a form of business with more than one owner. It is generally simple to set up and maintain and there can be certain tax advantages. But, like with a sole proprietorship, there is no separation of liability between the company and the partners. There are partnerships that have general partners and others that may include a limited partner. An investor who wants to share in the company’s profits but not be involved with the day-to-day operation of the business will often opt to be a limited partner. The rights and responsibilities between partners are generally spelled out in a partnership agreement. Partnership agreements create legal rights and duties and should be drafted by an attorney who practices in the area of business and corporate law.
- Corporation. The corporation has long been the mainstay of business organization. Setting up a corporation is a little more complicated than setting up either a sole proprietorship or a partnership. Corporations generally issue stock, have boards of directors, and established corporate officers. One advantage of a corporation is that its existence is perpetual. In other words, it will continue to exist until the entity is terminated. As shareholders pass away, or sell their stock, the stock can be transferred to new shareholders and the corporation continues to do business without any disruption. Corporations can also be used as vehicles to raise capital by issuing and selling shares of stock. A disadvantage relates to taxes.The classic corporation (often called a “C-Corp”) requires that taxes be paid on profits. C-Corps pay dividends to shareholders and the shareholders then must pay taxes on the money received as dividends. Consequently, with a C-Corp there is a double tax on profits. There is, however a special form of the classic corporation referred to as a Subchapter S Corporation (or “S-Corps”) that has special tax benefits. Subchapter S is a provision in the IRS Code that allows the profits of the S-Corp to pass through to the individual owners for tax purposes. That means there is no second layer of tax on the profits.
- Limited Liability Corporation. The Limited Liability Company (“LLC”) is a hybrid between a C-Corp and a partnership. The key feature of the LLC is that profits and losses pass through to the members, just like in a partnership. There is no double taxation concern as seen with C-Corps. But like a C-Corp, the owners of the LLC generally have no personal liability if the business is sued. LLCs are simpler to maintain than C-Corps. There is generally no requirement for LLC’s to have board meetings, and they often do not have officers but instead have a manager. However, for larger number of owners the structure of LLCs may not work as well as the C-Corp. It should, however, be mentioned that an LLC may elect to be taxed as corporation, and there are situation when that is appropriate.
Business formation is regulated by local law as opposed to federal law in most cases, with the exception being when securities that will be available to the public are involved (the public sale of stock on a market or directly to investors). Business formation can be simple or difficult depending on the needs of the parties and working with an attorney familiar with business and corporate law is encouraged.
Mergers and Acquisitions (M&A)
Corporate law is sometimes defined as everything about a business that is not litigation or tax. The larger the company, the more corporate law becomes synonymous with mergers and acquisitions. Mergers and acquisition refers to the laws affecting the purchase of one company by another (an acquisition), or the blending of two companies into a new entity (a merger). It is a branch of business formation law and involves corporate law.
Corporate governance is the system of rules, procedures and practices through which a company is directed and controlled. Corporate governance essentially involves balancing the interests of shareholders and management so that the company can function. Corporate governance is generally regulated by the corporate documents that established the company, such as a partnership agreement for a partnership, articles of incorporation and bylaws for a corporation, and the operating agreement for a LLC. Corporate governance is also regulated by statute and administrative rules. Corporate governance became an important aspect of business and corporate law following the 2002 enactment of the Sarbanes-Oxley Act, intended to restore public confidence in corporations after the Enron and WorldCom financial disasters.
Owners have rights. Very often shareholders in a corporation, a partner in a partnership, or a member in a LLC, (collectively, “shareholders”) will feel that their rights as an owner of the business have been violated. A significant part of the Practice Area of Business and Corporate Law deals with addressing shareholder disputes.
Shareholder disputes may arise related to the “appraisal rights” provided to minority shareholders that allow them the opportunity to dissent from extraordinary corporate actions that will adversely impact their interests. Appraisal rights are generally triggered by a significant business event, such as a merger, the sale of the businesses’ most valuable asset or assets, or an exchange of shares. When this sort of event occurs, a minority shareholder may object. An objecting shareholder may have appraisal rights if their rights are perfected by following certain, specific procedures. If perfected, the minority shareholder is generally paid the fair value of their shares.
Shareholder disputes may arise in connection with so called “minority oppression actions.” Some statutes allow minority shareholders who have been “oppressed” to file for judicial dissolution of a corporation and recover for acts by majority shareholders or directors of a company that are determined to be illegal, fraudulent, oppressive, or serve to waste the assets of the company. Many jurisdictions have adopted statutory provisions that allow for the buy-out of a minority shareholder’s interest at fair value as a remedy for oppression as an alternative to the standard remedy of judicial dissolution of the company.
Dissolving a company means more than locking the door and hanging out an “Out of Business” sign. To officially and formally close a business requires, like almost all things, paperwork. Assets and liabilities must be properly dealt with, in much the same way, and often with the same emotion, as settling the affairs of a deceased family member.
The first step to dissolving a business is generally for the shareholders or board of directors to pass a resolution to dissolve the company. The company generally must file articles of dissolution with the government office in charge of corporate registration. The filing of the articles of dissolution provides formal notice that the business is closing. Further notice beyond this simple filing is often required and varies from place-to-place and also can depend on the nature of the business that is closing. Notice generally must be sent out to all creditors, shareholders, employees, and any other interested party. The laws on what parties must be notified and how much notice they must be given varies by jurisdiction, but one universal requirement is to notify the Internal Revenue Service that the business is closing and will no longer be filing tax returns.
Property that is owned by the corporation dissolving must be “liquidated,” which means sold. A business may not be able to liquidate all its assets at the time of dissolution if it is insolvent at the time of dissolution and the assets are encumbered. In such a case, filing bankruptcy might be required.
After the assets are sold, the next step in dissolving a business is to settle outstanding liabilities. Liabilities are any obligations the business has incurred before closing and may include payment for goods or services that have been delivered, as well as any short or long-term debts. All final taxes must be paid. After the liabilities have been settled, any remaining cash in the business can be distributed to the individual owners or shareholders.
The Practice Area of Business and Corporate Law involves advising business clients from cradle to grave: from formation of the entity, to raising capital, selling, acquiring and combining businesses, to looking at the overall operations framework and advising the board of directors on governance and special transactions, to dissolution and windup at the end of the life of the business.
Areas of focus in the Business and Corporate Law practice area include:
- Corporate governance
- Corporate bonds
- Secured transactions
- Shareholder lawsuits
Foreign Corrupt Practices Act
Jumpstart Our Business Startups (JOBS) Act