Quiz 44: Corporation Formation

Business

Facts to this case: • Plaintiff is suing owners of a corporation for unpaid balance of gasoline supplied to their corporation. • The gasoline was sold to the corporation. Case Issue: The issue is whether the owners themselves are liable for the debt of their corporation. Relevant Terms, Laws, and Cases: Corporation - a company that limits liability (owners lose their investment only) of their owners. Corporations are treated as a separate person from their owners; debts owed by the corporations are not necessarily owed by the owners. Piercing the corporate veil - a tactic courts use to hold owners of limited liability companies personally liable for the company's debts. Courts consider factors such as fraud by owners, lack of corporate formalities (lack of meetings, no bookkeeping), mingling assets between company and the shareholder, undercapitalization of business, etc. Analysis and Conclusion Normally owners are not liable for their corporation's debts. Note the court in the case opinion mentioned "piercing the corporate veil", the plaintiff needs this in order to make the plaintiff's themselves liable. However, plaintiff failed to show evidence sufficient to pierce the veil. The court held for the owners. They argued that: • Running a corporation or doing the buying and selling of operations for their corporation don't make the owners personally liable for their corporation's debt. • Plaintiff failed to show that the corporation was used for fraudulent means. • Thus, not enough to pierce the corporate veil. Therefore, as separate legal entities the owners are not liable for their corporation's debts.

Facts to this case • Two owners with equal share of their corporation wishes to dissolve it. • The owners had a deadlock with disagreement on the business's management. • Based on procedure set forth by the Revised Model Business Corporation Act (RMBCA) the court was unable to sell the corporation. • The court proceeded to liquidate the corporation based on procedures of the RMBCA. • One of the owners appealed to stop the liquidation of the corporation. Case Issue The issue is whether the corporation can be prevented from liquidation. Relevant Terms, Laws, and Cases Corporation - a company that limits liability (owners lose their investment only) of their owners. Corporations are treated as a separate person from their owners; debts owed by the corporations are not necessarily owed by the owners. Piercing the corporate veil - a tactic courts use to hold owners of limited liability companies personally liable for the company's debts. Courts consider factors such as: • Fraud by owners • Lack of corporate formalities (lack of meetings, no bookkeeping) • Mingling assets between company and the shareholder • Undercapitalization of business, etc. Revised Model Business Corporation Act (RMBCA) - a set of laws adopted by some states in the U.S. concerning corporations. RMBCA Section 14.30 - concerns the dissolution of a corporation. Analysis and Conclusion The court affirmed the liquidation procedures. They argued that: • The owners were in a deadlocked position with both having equal shares in the company. • The procedure set by their state's RMBCA allowed sale of the company to the highest bidder. • However, this sale failed. • Then, the proper procedure was for the court to commence liquidation. Liquidation of the business w as affirmed.

Consolidation, Mergers, and Conglomerates are similar in that they concern the relationships between multiple companies. In consolidation two or more smaller companies forms a larger company. The smaller companies cease to exist. In mergers, one company purchases smaller companies. The smaller companies cease to exist but the purchaser continues to exist. Thus, the difference between these two is that after consolidation there is a new company but after mergers continue an old company continues to exist. However, a conglomerate is a large parent company which owns many subsidiaries companies with diverse or different business from the parent company. Thus, conglomerate describes many different companies and not just one company as in the case of consolidation or mergers.

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