Articles Posted in Entity Formation

bookThe structure of a corporation establishes a division of rights and responsibilities among at least three groups. Ownership of the corporation is vested in the shareholders, while directors are charged with its overall management. Officers are responsible for the corporation’s day-to-day operations. A shareholder who is not also a director or officer may not have much of a role in the operation or management of a corporation, but they have rights to information about the corporation’s financial status. The Delaware Court of Chancery recently ruled in favor of a shareholder seeking access to a corporation’s books. Rodgers v. Cypress Semiconductor Corporation, No. 2017-0070-AGB, order (Del. Chanc. Ct., Apr. 17, 2017). The court’s order offers useful guidelines for shareholders seeking access to corporate information.

New Jersey law defines “shares” as “the units into which the proprietary interests in a corporation are divided,” and a “shareholder” as “a holder of record of shares in a corporation.” N.J. Rev. Stat. §§ 14A:1-2.1(l), (m). Any shareholder has the right to request financial documents, including balance sheets and profit and loss statements, from the corporation. Certain shareholders “have the right for any proper purpose to examine…[the corporation’s] minutes of the proceedings of its shareholders and record of shareholders.” Id. at § 14A:5-28(3).

Delaware law goes further, giving shareholders the right to inspect a wide range of corporate documents upon a “written demand under oath stating the purpose” of the shareholder’s request. 8 Del. Code § 220(b). If the corporation denies the shareholder’s demand, the shareholder can petition the Court of Chancery to compel production. A plaintiff in such a case must establish standing as a shareholder, compliance with the “form and manner of making a demand for inspection,” and a “proper purpose” for the inspection.” Id. at § 220(c).

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stormtroopersIn closely held businesses, minority shareholders—generally meaning shareholders with less than 50 percent of the company’s voting shares—can easily find themselves at a disadvantage in disputes with majority shareholders. New Jersey’s Oppressed Shareholder Statute (OSS), N.J. Rev. Stat. § 14A:12-7 et seq., provides shareholders with a means to assert their rights when they suffer from bad-faith actions by other shareholders. They do not necessarily have to be in the minority to qualify as oppressed shareholders under the OSS, according to New Jersey courts. A recent decision illustrates how shareholders can benefit from this statute. RP v. SP, No. UNN-C-108-13, mem. op. (N.J. Super. Ct. Chanc. Div., Dec. 22, 2016).

Avoiding conflicts that lead to litigation is obviously the goal of any business owner. Still, it is useful to know which options are available should a company’s operating agreement fail to provide an adequate means for dealing with conflict. The OSS authorizes courts to intervene in a business for various reasons, with remedies ranging from the appointment of a custodian or provisional director to the dissolution of the business entity. If a corporation has no more than 25 shareholders, the OSS allows court intervention if “the directors or those in control…have acted oppressively or unfairly toward one or more minority shareholders in their capacities as shareholders, directors, officers, or employees.” N.J. Rev. Stat. § 14A:12-7(1)(c).

“Control,” in this context, refers to control of the corporation’s voting stock. A “minority shareholder” can include not only a shareholder with a minority of shares but also one who “does not have control of the corporate shares with respect to voting rights.” Berger v. Berger, 249 N.J. Super. 305, 317 (1991). A minority shareholder, under this definition, can also be an “oppressed shareholder” under the OSS, regardless of whether they actually own a minority of shares. Balsamides v. Perle, 313 N.J. Super. 7, 16 (1998).

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Brooklyn BridgeOne of the greatest advantages of organizing a business as a corporation, along with certain other types of business entities, is that it shields the business’ owners from liability for business debts and other obligations. Corporations and other business entities exist separately from their owners as distinct legal entities. Creditors and other claimants can only recover from the business entity, except in certain rather extreme situations. A court rarely may “pierce the corporate veil” by allowing someone to assert a claim against, or collect a business debt from, the owners of a business. New York and New Jersey have similar rules regarding when a court may do this.

Types of Business Entities

Not all business entities protect owners from liability. An individual who operates a business with no formal legal structure is known as a sole proprietor. Two or more people operating a business in this manner are considered to be in a general partnership with each other. In both cases, the owners of the business may be held personally liable for business debts.

Organizing a business as a corporation requires filing paperwork with the state. Owners of a corporation are known as shareholders. Provided that they abide by the requirements set out by state law and by the business’ own bylaws, shareholders are shielded from liability.

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PublicDomainPictures [Public domain, CC0 1.0 (https://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayThe word “license” comes up quite often in discussions of starting, owning, and running a small business, but it can be easy to get confused about what a business owner or entrepreneur must do to remain in compliance with the law. In a very general sense, “license” means the freedom to act. More specifically, it means official permission to engage in a particular activity, such as driving a car. In a business context, a license confers the right to engage in certain types of business or professional activities. A license may be held by an individual, as in the case of a professional or occupational license, or by a business organization. Operating without a required license can have serious consequences, ranging from substantial fines to criminal penalties. New Jersey and New York business owners should be aware of the various types of licenses in order to determine what they need for their own businesses.

Licensing Authorities

Most licenses needed to do business in New Jersey are issued and managed by local or state agencies. State agencies typically handle occupational and professional licenses based on qualifications and criteria that apply statewide. Licenses and permits that pertain to a specific location, such as construction or use permits, are often the responsibility of officials at the city or county level, who might have greater knowledge and understanding of local circumstances and issues. Businesses in certain industries might need licenses from one or more federal agencies.

Professional and Occupational Licenses

Licenses are reportedly required for more than 200 occupations in New Jersey, which is slightly below the national average. About 20 percent of New Jersey’s workforce need a license for their job.

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Dr_Martens,_black,_old.jpgNew York and New Jersey laws provide a wide range of options regarding the organization and structure of businesses, with recognition that the needs of a small, one- or two-person operation are likely to be substantially different from those of a much larger business. Businesses with no formalized legal structure are known as sole proprietorships if they have only one owner, and general partnerships if they have two or more. An informal business structure works for many business owners, but the business entities defined by state law have certain benefits that everyone should consider. Converting a business from a sole proprietorship to a limited liability company (LLC) can be an effective way for a business owner to protect both the business and themselves.

Sole Proprietorship vs. LLC

Operating a business as a sole proprietorship may offer some advantages:

– Simplicity: There is no need to file any specific paperwork with the state to maintain the business, aside from an assumed business name, also known as a “DBA.”

– Only one tax return: A sole proprietorship, unlike a corporation, does not file its own tax return. The business owner includes business income and expenses in a schedule attached to his or her personal return.

These possible advantages, however, come with some distinct disadvantages:

– The owner of a sole proprietorship is personally liable for any and all business debts.

– Similarly, business assets are susceptible to claims against the owner as an individual.

– A sole proprietor must keep meticulous records distinguishing personal and business assets, debts, and expenses.
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Fondos_archivo.jpgA business entity created under the laws of New Jersey or another U.S. state is, at the most basic level, a collection of legal rights and obligations aimed at specific business activities, usually with the goal of making a profit. Those rights and obligations depend on a substantial number of agreements that should be reduced to writing and stored where a business owner can easily find them.

The following list includes 15 types of documents you should keep with your business records. You might need any of them if you have a disagreement with a business partner, co-owner, contractor, or employee, if you want to do business with a government agency, if you are looking for venture capital or other new investors, if you are trying to wind the business down, or simply in preparation for the unexpected. A few ounces of paper might be worth many pounds of future regret.

1. Formation Documents

Forming a business entity requires filing documents with the state and paying a fee. In New Jersey, the Department of the Treasury’s Division of Revenue and Enterprise Services handles business formation. A document forming a corporation is often known as a Certificate of Incorporation, while one creating a limited liability company (LLC) is known as a Certificate of Organization.
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Sir_William_Blackstone_from_NPG.jpgThe U.S. Supreme Court’s recent decision in Burwell v. Hobby Lobby Stores, Inc., et al, No. 13-354, slip op. (Sup. Ct., Jun. 30, 2014), commonly known simply as the Hobby Lobby case, brought up the issue of corporate “personhood” once again. The decision has been highly controversial, and ultimately, it did not do much to resolve, or even clarify, the underlying question of what it means to say that a corporation or other business entity is a “person.” Corporations still cannot vote, but they do share a number of rights and privileges with individuals.

The simplest explanation of corporate personhood is that corporations are fictitious entities that can perform some of the same activities as individual people. Sir William Blackstone, writing in the 1760s, called them “artificial persons, who may maintain a perpetual succession, and enjoy a kind of legal immortality.” Commentaries on the Laws of England, Book 1, Chapter 18. Contracts and statutes may use defined terms as a shorthand, such as defining “person” to include other legal entities besides humans. The United States Code included corporations in its definition of “person” from the very beginning, in 1 U.S.C. § 1.

To include a corporation within the definition of “person,” one must also define a “corporation.” Each state has its own set of corporate laws, but they all have similar features. The New Jersey Business Corporation Act defines “corporation” in a rather circular fashion, as “a corporation for profit organized under this act.” N.J. Rev. Stat. § 14A:1-2.1(g). A corporation is essentially an organization composed of individuals and contractual relationships. The U.S. Supreme Court set the stage for this concept of the corporation by establishing limits on the government’s ability to interfere in private contracts. Fletcher v. Peck, 10 U.S. 87 (1810); Dartmouth College v. Woodward, 17 U.S. 250 (1819).
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800px-New_York_Harbor.jpgThe New Jersey Legislature passed sweeping reforms of the laws governing limited liability companies (LLC) in September 2012. The changes to the Limited Liability Company Act will take effect in March 2013, affecting newly-formed companies immediately. LLCs already in existence will continue to be governed by current LLC law until March 2014, when the new law becomes applicable to all LLCs in the state. The new law represents a major departure from current law, which is based on Delaware’s LLC laws. The Revised Uniform Limited Liability Company Act (RULLCA) forms the basis for the new law.

The new law began in the Assembly as AB 1542, where the RULLCA was introduced in January 2012. The Assembly passed it on May 24, 2012 by a vote of 77 to 1. The Senate passed a counterpart, SB 742, on June 21, 38 to 0. The Governor signed it into law as P.L. 2012 on September 19.

The RULLCA is the work of the National Conference of Commissioners on Uniform State Laws, commonly known as the Uniform Law Commission (ULC). The ULC prepares model statutes for a variety of purposes and proposes them to state legislatures in an effort to develop a standardized set of laws. It first developed the RULLCA in 1996, when LLCs were still a relatively new idea, and modified it in 2006. The New Jersey law is largely based on the 2006 version.
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