Looking for Quiz 39 :
Corporate Formation and Financing
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Incorporation Jonathan, Gary, and Ricardo are active members of a partnership called Swim City. The partnership manufactures, sells, and installs outdoor swimming pools in the states of Arkansas and Texas. The partners want to continue to be active in management and to expand the business into other states as well. They are also concerned about rather large recent judgments entered against swimming pool companies throughout the United States. Based on these facts only, discuss whether the partnership should incorporate.
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The partners should consider forming a corporation. The key advantage here, based on the increased number of suits against swimming pools, is the limited personal liability of the partners. That means that if the partners happened to be sued, they would not be held liable (as long as there was no evidence of fraud.) Corporations enjoy rights to the court, due process, free speech, and freedom from unreasonable searches and seizures. Corporations last indefinitely, unlike partnerships.
There are some cons to corporations, including double taxation. The corporation's profits are taxed and then once dividends are distributed to shareholders, their profits are also taxed.
Since the partners want to expand and grow their business as well as be protected from liability, incorporating would be a good move.
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CASE PROBLEM WITH SAMPLE ANSWER: Torts and Criminal Acts.
Thomas Persson and Jon Nokes founded Smart Inventions, Inc., in 1991 to market household consumer products. The success of their first product, the Smart. Mop, continued with later products, which were sold through infomercials and other means. Persson unci Nokes were the firm's of cers and equal shareholders, with Persson responsible for product development and Nokes in charge of day-to-day operations. By 1998, they had become dissatisfied with each other's efforts. Nokes represented the firm as financially "dying," "in a grim state, … worse than ever," and offered to buy all of Persson's shares for $1.6 million. Persson accepted. On the day that they signed the agreement to transfer the shares, Smart Inventions began marketing a new product-the Tap Light-that was an instant success, generating millions of dollars in revenues. In negotiating with Persson, Nokes had intentionally kept the Tap Light a secret. Persson fled a suit in a California state court against Smart Inventions and others, asserting fraud and other claims. Under what principle might Smart Inventions be liable for Nokes's fraud Is Smart Inventions liable in this case Explain. [ Persson v. Smart Inventions, Inc., 125 Cal.App.4th 1141, 23 Cal.Rptr.3d 335 (2 Dist. 2005)]
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Torts and Criminal Acts:
In the case of Persson v. Smart Inventions, Inc. , 125 Cal.App.4th 1141, 23 Cal.Rptr.3d 335 (2 Dist. 2005) the court awarded damages, fees, and costs to Persson. The state intermediate appellate court affirmed.
The Court stated Smart Inventions is liable under the doctrine of respondeat superior for torts of its agents or employees committed while they are acting within the scope of their employment.
The Court further stated that Nokes acted on behalf of Smart Inventions when he signed the agreement on behalf of Smart Inventions. The fact that he concealed information relevant to the agreement as an agent of the company within the scope of his employment created the liability.
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Torts and Criminal Acts Greg Allen is an employee shareholder, and director of Greg Allen Construction Co., and its president. In 1996, Daniel and Sondra Estelle hired Allen's firm to renovate a home they owned in Ladoga, Indiana. To finance the cost, they obtained a line of credit from Banc One,. Indiana, which required periodic inspections before it would disburse funds. Allen was on the job every day and supervised all of the work. He designed all of the structural changes, including a floor system for the bedroom over the living room, the floor system of the living room, and the stairway to the second floor. He did all of the electrical, plumbing, and carpentry work and installed all of the windows. He did most of the drywall taping and finishing and most of the painting. The Estelles found much of this work to be unacceptable, and the bank's inspector agreed that it was of poor quality. When Allen failed to act on the Estelles' complaints, they filed a suit in an Indiana state courtagainst Allen Construction and Allen personally, alleging,in part, that his individual work on the project was negligent. Can both Allen and his corporation be held liable for this tort Explain. [ Greg Allen Construction Co. v. Estelle , 798 N.E.2d 171 (Ind. 2004)]
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Torts and Criminal Acts:
In the case of Greg Allen Construction Co. v. Estelle, 798 N.E.2d 171 (Ind. 2004) the trial court granted breach of contract damages against the corporation, but not against the corporation's president, who did most of the work.
The Court of Appeals held that the corporation's president was individually liable for the negligent work. The Supreme Court affirmed the trial court's judgment regarding Allen's personal liability.
The court stated that Allen's duty to perform the contract. The negligence Allen committed was in the course of his duties as an employee of the corporation. Under the traditional respondeat superior doctrine, if Allen is liable in negligence to the Estelles, then so is his principal, the corporation.
Under the contract, only the principal has agreed to perform the obligations of the contract. To impose the same liability on the agent would create a covenant not in the contract. The parties had arranged to put the principal, and only the principal, on the line.
Therefore, only the principal or the corporation is liable for damages due to negligence.
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Ultra Vires Doctrine Oya Paka and two business associates formed a corporation called Paka Corp. for the purpose of selling computer services. Oya, who. owned 50 percent of the corporate shares, served as the corporation's president. Oya wished to obtain a personal loan from her bank for $250,000, but the bank required the note to be cosigned by a third party. Oya cosigned the note in the name of the corporation. Later, Oya defaulted on the note, and the bank sued the corporation for payment. The corporation asserted, as a defense, that Oya had exceeded her authority when she cosigned the note on behalf of the corporation. Had she Explain.
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A QUESTION OF ETHICS: Improper Incorporation.
Mike Lyons incorporated Lyons Concrete, Inc., in Montana, but did not file its first annual report, so the state involuntarily dissolved the firm in 1996. Unaware of the dissolution, Lyons continued to do business as Lyons Concrete. In 2003, he signed a written contract with William Weimar to form and pour a certain amount of concrete on Weimar's property in Lake County for $19,810. Weimar was in a rush to complete the entire project, and he and Lyons orally agreed to additional work on a time-and-materials basis. When scheduling conflicts arose, Weimar had his own employees set some of the forms, which proved deficient. Weimar also directed Lyons to pour concrete in the rain, which undercut its quality. In mid-project, Lyons submitted an invoice for $14,389, which Weimar paid. After the work was complete, Lyons sent Weimar an invoice for $25,731, but he refused to pay, claiming that the $14,389 covered everything. To recover the unpaid amount, Lyons filed a mechanics lien as "Mike Lyons d/b/a Lyons Concrete, Inc." against Weimar's property. Weimar filed a suit in a Montana state court, to strike the lien, and Lyons filed a counterclaim to reassert it. [ Weimar v. Lyons, 338 Mont. 242,164 P.3d 922 (2007)]
(a) Before the trial, Weimar asked for a change of venue on the ground that a sign on the courthouse lawn advertised "Lyons Concrete." How might the sign affect a trial on the parties' d spute Should the court grant this request
(b) Weimar asked the court to dismiss the counterclaim on the ground that the state had dissolved Lyons Concrete in 1996. Lyons immediately filed new articles of incorporation for "Lyons Concrete,
Inc." Under what doctrine might the court rule that Weimar could not deny the existence of Lyons Concrete What ethical values underlie this doctrine Should the court make this ruling
(c) At the trial, Weimar argued, in part, that there was no "fixed price" contract between the parties and that even if there were, the poor quality of the work, which required repairs, amounted to a breach, excusing Weimar's further performance. Should the court rule in Weimar's favor on this basis
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VIDEO QUESTION: Corporation versus LLC.
Go to this text's Web site at www.cengage.com/blaw/darkson and select "Chapter 39." Click on "Video Questions" and view the video titled Corporation or LLC: Which Is Better Then answer thefollowing questions.
(a) Compare the liability that Anna and Caleb wouldbe exposed to as shareholders/owners of a corporation versus as members of an LLC.
(b) How does the taxation of corporations and LLCs differ
(c) Given that Anna and Caleb conduct their business(Wizard Internet) over the Internet, can you thinkof any drawbacks to forming an LLC
(d) If you were in Anna and Caleb's position, would you choose to create a corporation or an LLC Why
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QUESTION WITH SAMPLE ANSWER: Preincorporation.
Cummings, Okawa, and Taft are recent college graduates who want to form a corporation to manufacture and sell personal computers. Peterson tells them he will set in motion the formation of their corporation. First, Peterson makes a contract with Owens for the purchase of a piece of land for $20,000. Owens does not know of the prospective corporate formation at the time the contract is signed. Second, Peterson makes a contract with Babcock to build a small plant on the property being purchased. Babcock's contract is conditional on the corporation's formation. Peterson secures all necessary subscription agreements and capitalization, and he files the articles of incorporation.
(a) Discuss whether the newly formed corporation, Peterson, or both are liable on the contracts with Owens and Babcock.
(b) Discuss whether the corporation is automatically liable to Babcock on formation.
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Corporate Powers InterBel Telephone Cooperative, Inc., is a Montana corporation organized under the Montana Rural Electric and Telephone Cooperative Act. This statute limits the purposes of such corporations to providing "adequate telephone service" but adds that this "enumeration … shall not be deemed to exclude like or similar objects, purposes, powers, manners, methods, or things." Mooseweb Corp. is an Internet service provider that has been owned and operated by Fred Weber since 1996. Mooseweb provides Web site hosting, modems, computer installation, technical support, and dial-up access to customers in Lincoln County, Montana. InterBel began to offer Internet service in 1999, competing with Mooseweb in Lincoln County. Weber filed a suit in a Montana state court against InterBel, alleging that its Internet service was ultra vires. Both parties filed motions for summary judgment. In whose favor should the court rule, and why [ Weber v. InterBel Telephone Cooperative , Inc., 2005 MT 320, 318 Mont. 295, 80 P.3d 88 (2003)]
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Schultz argued that even if the corporate veil should be pierced, the $450,000 judgment against him was too much and should be reduced. How might the court have responded to this argument
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Improper Incorporation Denise Rubenstein and Christopher Mayor agreed to form Bayshore Sunrise Corp. (BSC) in New York to rent certain premises and operate a laundromat. BSC entered into a twenty-year commercial lease with Bay Shore Property Trust on April 15,1999. Mayor signed the lease as the president of BSC. The next day-April 16-BSC's certificate of incorporation was filed with New York's secretary of state. Three years later, BSC defaulted on the lease, which resulted in its termination. Rubenstein and BSC filed a suit in a New York state court against Mayor, his brother-in-law Thomas Castellano, and Planet Laundry, Inc., claiming wrongful interference with a contractual relationship. The plaintiffs alleged that Mayor and Castellano conspired to squeeze Rubenstein out of BSC and arranged the default on the lease so that Mayor and Castellano could form and operate their own business, Planet Laundry, at the same address. The defendants argued that they could not be liable on the plaintiffs' claim because there had never been an enforceable lease-BSC lacked the capacity to enter into contracts on April 15. What theory might Rubenstein and BSC assert to refute this argument Discuss. [ Rubenstein v. Mayor , 41 A.D.3d 826, 839 N.Y.S.2d 170 (2 Dept. 2007)]
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Piercing the Corporate Veil Smith Services, Inc., was a corporation solely owned by Tony Smith. Bear, Inc., owned and operated Laker Express, a fueling station in Kentucky. Smith charged fuel to an account at Laker Express and owed approximately $35,000. There was no written agreement indicating who was liable on the account in the event of default, but all invoices had been issued to Smith Services. Smith later dissolved Smith Services and continued to run his business as a sole proprietorship. When Laker Express sued Smith Services to collect on the debt, there were no assets in the corporation. Laker Express sued Tony Smith personally and asked the court to pierce the corporate veil, claiming that Smith was engaged in fraud and was using the corporate form only to protect himself. The trial court dismissed the case, and Laker Express appealed. Should the court pierce the corporate veil and hold Smith personally liable for the unpaid corporate debt Why or why not Or should Laker Express have been more careful when dealing with clients Explain. [ Bear, Inc. v. Smith , 303 S.W.3d 137 (Ky.App. 2010)]
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Suppose that Schultz had turned over the proceeds from the sale of his properties to his corporation, Intra-Med, and used them to pay part or all of GE's judgment. In this situation, if the funds were insufficient to cover the debt, would the court have pierced the corporate veil to obtain the balance from Schultz personally Explain.
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