Intricacies in Forming a Corporation

Business organizations have always been viewed as a convenient way of providing means to easier and more convenient transactions, this owing to the fact that business organizations have been created to foster a transaction separate and distinct from those that have created it.

Business organizations have always been viewed as a convenient way of providing means to easier and more convenient transactions, this owing to the fact that business organizations have been created to foster a transaction separate and distinct from those that have created it. This is what is known in corporation law as the veil of corporate fiction.

Corporations have been established in this nature, the fact that what is considered as a liability of those forming it, is not considered as a liability of the corporation, and the liabilities of the corporation are also not considered as liabilities of the people forming the same.

The convenient nature of corporations can be derived from the fact that the creation of corporations is also considered as one of the most tedious and taxing processes in the formation of business organizations.

There are several requisites that must be followed to the letter before a business organization may be considered, and wanting one of these requisites would actually lead to the non-approval of an application for incorporation.

A corporation may be either a stock corporation or a non-stock corporation. A stock corporation is one where the primary purpose for establishing the same is to promote an economic or business interest. Hence, the main reason why a stock corporation is established is in order to derive profit from its operations.

A non-stock corporation meanwhile is a corporation created for the primary purpose of uplifting a noble or a charitable cause. It is not created to acquire profit or to promote economic interest but it is actually created for social welfare reasons.

The creation of stock corporations is independent on so many requisites. One particular requisite is that it must comply with the minimum number of incorporators. Incorporators are those that initially compose the corporation. They are whose hands and names are included in the Articles of Incorporation as the original members of the corporation. To be named as an incorporator you need to have acquired at least one share of the capital stock.

Another essential requisite in the creation of corporations is the making of a valid Articles of Incorporation. An Articles of Incorporation actually includes all necessary data in the formation of the corporation, to include, the reason why it was created, the amount of capital stock, the amount of paid-up capital, and the names and addresses of the incorporators. These are merely some of the requisites in the formation of corporations.

For more information about corporation establishment, visit our Los Angeles Business Lawyers website at http://www.mesrianilaw.com/Corporation-Establishment.html

The Veil Doctrine in Company Law

A Glimpse at how Anglo-Saxon courts apply the principle

Forji Amin George

Doctoral Research Fellow, International law, Kent & Helsinki universities

I- The Veil Doctrine in Company Law

1.1: Introduction

A corporation under Company law or corporate law is specifically referred to as a “legal person”- as a subject of rights and duties that is capable of owning real property, entering into contracts, and having the ability to sue and be sued in its own name.[1] In other words, a corporation is a juristic person that in most instances is legally treated as a person, and empowered with he attributes to own its own property, execute contracts, as well as ability to sue and be sued.

One of the main motivations for forming a corporation or company is the limited liability it offers its shareholders. By this doctrine (limited liability), a shareholder can only lose only what he or she has contributed as shares to the corporate entity and nothing more.

Nevertheless, there is a major exception to the general concept of limited liability. There are certain circumstances in which courts will have to look through the corporation, that is, lift the veil of incorporation, otherwise known as piercing the veil, and hold the shareholders of the company directly and personally liable for the obligations of the corporation.

The veil doctrine is invoked when shareholders blur the distinction between the corporation and the shareholders. It is worthy of note that although a separate legal entity, a company or corporation can only act through human agents that compose it. [2]As a result, there are two main ways through which a company becomes liable in company or corporate law to wit: through direct liability (for direct infringement) and through secondary liability (for acts of its human agents acting in the course of their employment).[3]

The doctrine of piercing the corporate veil varies from country to country. In the opinion of two Corporate law scholars, apparently, there is a general consensus that the whole area of limited liability, and conversely of piercing the corporate veil, is among the most confusing in corporate law.”[4]

There are two existing theories for the lifting of the corporate veil. The first is the “alter-ego” or other self theory, and the other is the “instrumentality” theory.[5]

The alter-ego theory considers if there is in distinctive nature of the boundaries between the corporation and its shareholders. [6]

The instrumentality theory on the other hand examines the use of a corporation by its owners in ways that benefit the owner rather than the corporation. It is up to the court to decide on which theory to apply or make a melange of the two doctrines.[7]

 

Courts are generally reluctant to pierce the corporate veil, and this is only done when liability is imposed to reach an equitable result.

1.2: Meaning of Corporation in Company Law

To begin with, the word company will be used in this paper to refer to a legal entity with an identity different from that of its owners. It goes without saying that the owners in such an entity are not held liable for the firm’s obligations in excess of the value of their investment therein.[8] In fact, a company is equal in law to a natural person.

In different legal systems, corporate law and company law mean the same thing. In either circumstance, the term is used to denote the field of law concerning the creation and regulation of companies or corporations and other business organizations.

The important thing to note however is that although a separate legal entity, a company or corporation can only act through human agents that compose it. As a result, there are two main ways through which a company becomes liable in company or corporate law to wit: through direct liability (for direct infringement) and through secondary liability (for acts of it’s human agents acting in the course of their employment).

1.3: Veil Doctrine as derivative from Separate legal personality concept

As aforementioned, a company once incorporated becomes a legal personality or a juristic entity that has a separate and distinct identity from that of it’s owners or members, shareholder; and it’s further empowered with it’s own rights, duties and obligations, can sue and be sued in it’s own name, etc, etc

The most important ingredient that flows from the separate legal personality clause is that of limited liability. It is aimed at giving investors minimum insurance in their business over their own private lives. Hence, the most a member in the company can lose is the amount paid for the shares themselves and thus the value of his/her investment.[9] Thus, creditors who have claims against the company may look only to the corporate assets for the satisfaction of their claims as creditors and generally cannot proceed against the personal or separate assets of the members. This has the potential effect of capping the investors’ risk whilst, consequently, their potential for gain is unlimited.[10] Evidently, corporations exist in part, in the first place to shield their shareholders from personal liabilities for the debts of that corporation.[11]

The concept of limited liability was invented in England in the 17th century, and prior to this period, people were scared to invest in companies because any partner in a general partnership could be held responsible for all the debts of the corporation. As the capital needed to finance the largest projects grew, and along with it the necessity of raising money, investors were reluctant to invest because of the risk involved in essentially guaranteeing the entire debt of the business entity.

In fact, the concept of separate legal personality goes hand in hand with the doctrine of limited liability. The main importance of the limited liability concept is that it protects the company and its members, as well as to facilitate commercial ventures in which the company may be interested.[12] The principle further act to attract and encourage corporate investment, much needed in any society to speed up development. It is believed to be the springboard to raise managerial standards in a corporate organization. It goes without saying that it facilitates better investment strategies by the company question.

Farrar has described the concept of separate legal personality as “…essentially a metaphorical use of language, clothing the formal group with a single separate legal entity by analogy with a with a natural person”[13]

In fact, corporate law requires that company owners respond to organisational realities of the corporation as well as conforming with and making intelligible the treatment of organisations as legal actors.[14] In this sense, the conception of a corporation is analytical and ideological, descriptive and prescriptive.[15]

One scholar in the person of Blumberg has pointed out that the law’s conception that the company is at law a different person- in some ways seems proper and satisfying,[16] but then, the problem is far more complex. He argues that “in the law, concepts have a life of their own because their ability ex ante to influence the thinking of judges and ex post to be invoked by judges to justify their conclusion.”[17]

1.4: The Concept of Limited Liability

The main idea behind that the legal personality of a company is separate from that of it’s members. The most important ingredient that flows from he separate legal personality clause is that of limited liability. It is aimed at giving investors minimum insurance in their business over their own private lives. Thus, the most a member in the company can lose is the amount paid for the shares themselves and thus the value of his/her investment.[18] Thus, creditors who have claims against the company may look only to the corporate assets for the satisfaction of their claims as creditors and generally cannot proceed against the personal or separate assets of the members. This has the potential effect of capping the investors’ risk whilst, consequently, their potential for gain is unlimited.[19]

It is obvious that corporations exist in part, in the first place to shield their shareholders from personal liabilities for the debts of that corporation.

The concepts was invented in the 17th century, and prior to this date, people were scared to invest in companies because any partner in a general partnership could be held responsible for all the debts of the corporation. As the capital needed to finance the largest projects grew, and along with it the necessity of raising money, investors were reluctant to invest because of the risk involved in essentially guaranteeing the entire debt of the business entity.

In fact, the concept of separate legal personality goes hand in hand with the doctrine of limited liability. The main importance of the limited liability concept is that it protects the company and its members, as well as to facilitate commercial ventures in which the company may be interested.[20] The principle further act to attract and encourage corporate investment, much needed in any society to speed up development. It is believed to be the springboard to raise managerial standards in a corporate organization. It goes without saying that it facilitates better investment strategies by the company question.

1.5.1: The Courts’ treatment of Separate Legal Personality under Anglo-Saxon Jurisdictions

Under Anglo- Saxon jurisdictions, the doctrine of piercing the veil remains one of the primary method through which the courts mitigate the strenuous demands of the logical fulfilment of the separate legal personality concept.

The problems with finding some thread of principle through all the various court decisions basically stem from the false unity of the cases which, while involving vastly different underlying issues, are still linked under the metaphor of the ’veil’ concept.

Blumberg has written that the conceptual standards of entity law are frequently regarded as Anglo-Saxon principles and applied indiscriminately across the entire range of the law. [21]In other words, the application of the doctrine of separate personality in Anglo-Saxon jurisdictions is at the discretion of the judges and the courts. This is no surprising, given that Anglo-Saxon law is basically Judge-made law. [22]

The function of much of the Anglo-Saxon courts’ work in this area is to delineate the legitimate uses of the corporate form.

1.5.2: An Illustration of the Conceptual interpretation of Limited Liability versus lifting the veil: The decision in Salomon V. Salomon & Co. [23]

The case of Salomon V. Salomon & Co., commonly referred to as the Salomon case, is both the foundational case and precedence for the doctrine of corporate personality and the judicial guide to lifting the corporate veil.

The House of Lords in the Salomon case affirmed the legal principle that, upon incorporation, a company is generally considered to be a new legal entity separate from its shareholders. The court did this in relation to what was essentially a one person Company, which is Mr Salomon.

1..5.2.a: Facts and decision of the Salomon Case

Mr Aron Salomon was a British leader merchant who for many years operated a sole proprietor business, specialized in manufacturing leather boots. In 1892, his son, also expressed interest in the businesses. Salomon then decided to incorporate his businesses into a limited company, which is Salomon & Co. Ltd.

However, there was a requirement at the time that for a company to incorporate into a limited company, at least seven persons must subscribe as shareholders or members. Salomon honored he clause by including his wife, four sons and daughter into the businesses, making two of his sons directors, and he himself managing director. Interestingly, Mr. Salomon owned 20,001 of the company’s 20,007 shares – the remaining six were shared individually between the other six shareholders. Mr. Salomon sold his business to the new corporation for almost £39,000, of which £10,000 was a debt to him. He was thus simultaneously the company’s principal shareholder and its principal creditor.

At the time of liquidation of the company, the liquidators argued that the debentures used by Mr. Salomon as security for the debt were invalid, and that they were based on fraud. Vaughan Williams J. accepted this argument, ruling that since Mr. Salomon had created the company solely to transfer his business to it, the company was in reality his agent and he as principal was liable for debts to unsecured creditors.

The lord justices of appeal variously described the company as a myth and a fiction and said that the incorporation of the business by Mr. Salomon had been a mere scheme to enable him to carry on as before but with limited liability.

However, the House of Lords later quashed that Court of Appeal (CA) ruling, upon critical interpretation of the 1862 Companies Act.

The court unanimously ruled that there was nothing in the Act about whether the subscribers (i.e. the shareholders) should be independent of the majority shareholder. The company was duly constituted in law, the court ruled, and it was not the function of judges to read into the statute limitations they themselves considered expedient. The 1862 Act created limited liability companies as legal persons separate and distinct from the shareholders.

In other words, by the terms of the Salomon case, members of a company would not automatically, in their personal capacity, be entitled to the benefits nor would they be liable for the responsibilities or the obligations of the company. It thus had the effect that members’ rights and/or obligations were restricted to their share of the profits and capital invested.[24]

1.5.2.b: Significance of the Salomon Case

The rule in the Salomon case that upon incorporation, a company is generally considered to be a new legal entity separate from its shareholders has continued till these days to be the law in Anglo-Saxon courts, or common law jurisdictions. The case is of particular significance in company law thus:

Firstly, it established the canon that when a company acts, it does so in it’s own name and right, and not merely as an alias or agent of it’s owners. For instance, in the later case of Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners, [25]Lord Sumner said the following:

“Between the investor, who participates as a shareholder, and the undertaking carried on, the law interposes another person, real though artificial, the company itself, and the business carried on is the business of that company, and the capital employed is its capital and not in either case the business or the capital of the shareholders. Assuming, of course, that the company is duly formed and is not a sham…the idea that it is mere machinery for effecting the purposes of the shareholders is a layman’s fallacy. It is a figure of speech, which cannot alter the legal aspect of the facts.”[26]

Secondly, it established the important doctrine that shareholders under common law are not liable the company’s debts beyond their initial capital investment, and have no proprietary interest in the property of the company. This has been affirmed in later cases, such as in The King v Portus; ex parte Federated Clerks Union of Australia[27], where Latham CJ while deciding whether or not employees of a company owned by the Federal Government were not employed by the Federal Government ruled that:

“The company…is a distinct person from its shareholders. The shareholders are not liable to creditors for the debts of the company. The shareholders do not own the property of the company…”[28]

II-The piercing of the veil by Common Law Courts

2.1 How do Common Law courts pierce the veil?

Lifting the veil of incorporation or better still; “Piercing the corporate veil” means that a court disregards the existence of the corporation because the owners failed to keep one or more corporate requirements and formalities. The lifting or piercing of the corporate veil is more or less a judicial act, hence it’s most concise meaning has been given by various judges. Staughton LJ, for example, in Atlas Maritime Co SA v Avalon Maritime Ltd (No 1)[29] defined the term thus:

“To pierce the corporate veil is an expression that I would reserve for treating the rights and liabilities or activities of a company as the rights or liabilities or activities of its shareholders. To lift the corporate veil or look behind it, therefore should mean to have regard to the shareholding in a company for some legal purpose.”[30]

Young J, in Pioneer Concrete Services Ltd v Yelnah Pty Ltd,[31] on his part defined the expression “lifting the corporate veil” thus:

“That although whenever each individual company is formed a separate legal personality is created, courts will on occasions, look behind the legal personality to the real controllers.”[32]

The simplest way to summarize the veil principle is that it is the direct opposite of the limited liability concept. Despite the merits of the limited liability concept, there is the problematic that it can lead to the problem of over inclusion, to the disadvantage of the creditors. That is to say the concept is over protected by the law. When the veil is lifted, the owners’ personal assets are exposed to the litigation, just as if the business had been a sole proprietorship or general partnership.

Common law courts have the lassitude or exclusive jurisdiction “lift” or “look beyond” the corporate veil at any time they want to examine the operating mechanism behind a company. [33]

This wide margin of interference given common law judges has led to the piercing of the corporate veil becoming one of the most litigated issues in corporate law.[34]

But it should be worthy of note that a rigid application of the piercing doctrine in common law jurisdictions has been widely criticized as sacrificing substance for form. Hence, Windeyer J, in the case of Gorton v Federal Commissioner of Taxation, remarked that this approach had led the law into “unreality and formalism.”[35]

As aforementioned, when the judges pierce the veil of incorporation, they accordingly proceed to treat the company’s members as if they were the owners of the company’s assets and as if they were conducting the companies business in their personal capacities, or the court may attribute rights and/or obligations of the members on to the company.

The doctrine is also known as “disregarding the corporate entity”.

In his 1990 article, Fraud, Fairness and Piercing the Corporate Veil, Professor Farrar remarked that the Commonwealth authority on piercing the corporate veil as “incoherent and unprincipled”. [36] That claim has been earlier backed up by Rogers AJA, a year ago in the case of Briggs v James Hardie & Co Pty[37] thus:

“There is no common, unifying principle, which underlies the occasional decision of the courts to pierce the corporate veil. Although an ad hoc explanation may be offered by a court which so decides, there is no principled approach to be derived from the authorities.”[38]

Another scholar in the person of M. Whincop in his own piece: ‘Overcoming Corporate Law: Instrumentalism, Pragmatism and the Separate Legal Entity Concept’[39], argued that the main problem with the Salomon case was not so much the argument for the separate legal entity, but rather the failure by the English House of Lords to give any indication of “What the courts should consider in applying the separate legal entity concept and the circumstances in which one should refuse to enforce contracts associated with the corporate structure.”[40]

2.2: Basis for court lifting of the veil of incorporation under Anglo-Saxon Jurisdictions

As aforementioned, common law courts are empowered to; under limited circumstances ignore the limited liability rule, and “pierce the corporate veil”, so that the members of the company in question may become liable for the actions of the company, in spite of the limited liability rule that the two have separate identities. [41]

It’s worth re-iterating that the piercing of the corporate veil remains one of the most litigated issues in English company law.[42] There are however a number of general factors that Anglo-Saxon would normally take into considering before piercing the veil, since as much as possible, the courts will like to maintain the preserve of companies to keep separate identity from its owners.

By and large, the separate legal personality of a company will be disregarded only if the court deems that there is, in fact or in law, a partnership between companies in a group, or that there is a mere sham or facade in which that company is playing a role, or that the creation or use of the company was designed to enable a legal or fiduciary obligation to be evaded or a fraud to be perpetrated.[43]

In a nutshell, common law courts have ever since the Salomon case recognized a number of discrete factors that would prompt them to piercing the corporate veil. The most outstanding factors would be examined hereunder:

2.2.1Fraud

English courts would allege fraud where its owners of a corporation merely used it as a window dressing to evade either fiduciary or legal obligations. This will most notably be the case where the company owner intentionally used it to deny the creditors pre-existing legal rights.[44] These were the facts in issue in the case of Re Edelsten ex parte Donnelly,[45] even though the court could not ascertain fraud on a company owner who had apparently denied his obligations towards his creditors on the grounds of limited liability. The court was faced with the question of ascertaining whether the company was incorporated and then used for the purpose of evading a legal obligation or perpetrating a fraud, as argued by the trustee. The court ruled thus.

“The argument of fraud is, of course circular. It can only succeed if the argument of

sham succeeds, because if no property was acquired by, or devolved upon, Edelsten,

no duty capable of being evaded could arise under the Act…The submission that the

VIP Group had been used to perpetrate a fraud was coincident, and stood, or fell, with

the submissions which sought to have the transactions, by which the VIP Group

acquired property, treated as shams.”[46]

In other words, the court could not ascertain fraud for the reason that the corporation had not been created out of sham, and had merely taken adequate steps to ensure that any property acquired after bankruptcy did not fall into the hands of any of the trustee in bankruptcy.

It has been said that the more conspicuous the sham, the more likely it would be for the Anglo-Saxon courts to ascertain that fraud had been perpetrated. In the 1997 Australian case of Re Neo, the Immigration Review Tribunal took this view in a case where a decision to refuse an application for a visa by an employee, where sponsorship had been arranged by a company formed on the same day that the application was lodged, and interestingly, the company never carried out any business.

The Australian Immigration Review Tribunal ruled thus:

“The company was merely a vehicle used to circumvent Australian migration law. It was only a façade, its true purpose being to allow the applicants to remain in the country.”[47]

2.2.2: Agency

The doctrine of separate legal entity that the company is a legal entity with a different identity from that of its members means that a company does not exist to become an agent for its shareholders. Where this is the case, Anglo-Saxon courts would not hesitate to pierce the corporate veil. In Rowland J, in Barrow v CSR Ltd[48], where the court found out that a parent company was responsible for the actions of a subsidiary in relation to an employee, it did not hesitate to lift he veil. The court stated:

“Now, whether one defines all of the above in terms of agency, and in my view it is, or control, or whether one says that there was a proximity between CSR and the employees of ABA, or whether one talks in terms of lifting the corporate veil, the effect is, in my respectful submission, the same.”[49]

But Anglo-Saxon courts do not have any unique judicial approach to determining whether the company acted as an agent. Hence, it is a bit too difficult to rationalize the judgments. For instance, the court refused to pierce the veil in The Electric Light and Power Supply Corporation Limited v Cormack[50]: a one-man company that had contracted with the plaintiffs to use their power supply for his work during two years, and not to install any other alternative source of energy power during that period of time. But within that period, the defendant sold his company to another company of which he was both the manager and the main shareholder. The new company thereupon installed energy power other than he one contracted with the plaintiffs. The court refused to pierce the veil, considering the act as a personal undertaking.[51] Lord Rich AJ found no evidence that the sale of the business by the defendant was done with the object of evading his personal obligations.

It has been remarked that Anglo-Saxon courts are generally less prepared to pierce the separate legal status, in the case of very small companies, such as the one business. In the case of small businesses, they are rather more prepared to apply agency principles. This is particularly the case where control was absolute, that is where the business was an integral part of it’s owner, such that the company itself can properly be seen as a mere agent for the shareholder. Hence in Ampol Petroleum Pty Ltd v Findlay,[52] Fullagar J. was only willing to pierce the veil, only after the owner of a small private company sought the lifting of the veil himself to demonstrate that the losses of the company were in fact his losses. The learned judge stated:

“If the defendant does embark on establishing loss of profits (or capital or goodwill) at an enquiry as to damages, I consider on the present state of the evidence that the “corporate veil” may be pierced for these purposes, that is to say, I consider that the defendant will be entitled to include losses to his company or companies flowing from the breach, provided he establishes (in addition to causation) that the loss to the company was his loss…The evidence presently before me strongly suggests that the defendant wholly controlled the relevant companies and their monies and other assets, and dealt with the monies and assets as though they were his own.”[53]

In a nutshell, it can be said that the main reason while Anglo-Saxon courts in he case of small companies tend to prefer agency principles is because they want to reduce the severity of a penalty as a consequence of piercing the corporate veil.

2.2.3: Unfairness

One other serious ground under which Anglo-Saxon courts would be so ready to pierce the corporate veil is in cases where it is deduced that there was unfairness on the part of the company in question. The plaintiff may for example pray the court to pierce the corporate veil on the grounds that doing so would help bring a fair and just result. Such was the case in the Australian case of RMS Glazing Pty Ltd v The Proprietors of Strata Plan No 14442,[54] where a body corporate bringing in an action against a defendant company argued that he veil be pierced because it’s Managing Director, Mr. Lo Surdo had play a very active role in the court proceedings and would normally not have done so if the company was in effect not just a “a body of straw”. The court in he pronouncement of Cole J. rejected this argument, finding that with the company’s record of profitable trading it could not be said to be a body of straw. Cole J. said thus:

“Quite apart from that I am not satisfied that justice would require the making of such an order. The Body Corporate dealt with RMS over a period of more than a decade. It was prepared to deal with the company rather than Mr Lo Surdo personally and to enter into contractual relationships with the company resulting in the payment of many millions of dollars. I do not think that the interest of justice requires that it now be permitted to simply disregard the corporate veil.”[55]

2.2.4: Group Enterprises

The argument of group enterprises is to the effect that in certain cases, some companies that act as a corporate group, may operate to hide behind the advantages of limited liability to the disadvantage of their creditors. They may operate in a way that the parent entity is not clearly distinguishable from the subsidiaries. The argument in favor of piercing the corporate veil in these circumstances is to ensure that a corporate group which seeks the advantages of limited liability must also be ready to accept the corresponding responsibilities. This was the opinion of Doyle CJ in the 1998 case of Taylor v Santos Ltd. [56]

The most outstanding instance however where Anglo-Saxon courts would most probably pierce the corporate veil on the ground of group enterprises is where there exists a sufficient degree of common ownership and common enterprise. In the case of Bluecorp Pty Ltd v ANZ Executors and Trustee Co Ltd (supra)[57], the following Lord Justices identified the main grounds under which Anglo- Saxon courts would be prompt to pierce the corporate veil as a result of group enterprises. The court stated thus:

“The inter-relationship of the corporate entities here, the obvious influence of the control extending from the top of the corporate structure and the extent to which the companies were thought to be participating in a common enterprise with mutual advantages perceived in the various steps taken and plans implemented, all influence the overall picture.”[58]

The above hints notwithstanding, the common law courts may hesitate to pierce the corporate veil where the outcome would produce a different result.

2.2.5: Sham or Façade

A argument that he company under scrutiny is a sham or a façade is one of he strongest points that would prompt a common law court to lift the veil of incorporation. The argument is quite close to he argument of fraud, but usually stands on it’s own. In short, to say a company was merely a façade or a sham means the corporate form was incorporated or merely used as a mask to hide the real purpose of the corporate controller. In the English case of Sharrment Pty Ltd v Official Trustee in Bankruptcy[59], Lockhart J, stated that:

“A ‘sham’ is…something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive.”[60]

To say the least, a fraud argument is usually dependent upon a sham argument, and common law jurisdictions have indicated over the years that no fraud can be perpetrated where he corporate form is real and not a façade.

2.3: Recent Development of the Doctrine in Common law jurisdictions (Resume)

The doctrine of piercing the corporate veil is apparently in a transitory state in many common law jurisdictions. Current practice by he Anglo-Saxon courts demonstrates that he courts are increasingly becoming as interested with legal and equitable principles as they are with the traditional fraud requirement. In other words, what the Common law courts typically consider is injustice and impropriety. Where his is he case, the only motive of the courts in lifting he veil is the restoration of equity.

The fraud requirement however remains of very vital importance in many common law jurisdictions. But other courts such as in the USA have adopted a more liberal approach to veil piercing in favor of tests such as for instance: what is the veracity in he shareholder control of the corporation? , The shareholders’ improper conduct in controlling he corporation and the causal link between improper conduct and the plaintiff’s injury.

3.0-CONCLUSION

The act of piercing the corporate veil until now remains one of the most controversial subjects in corporate law, and it would continue to remain so, even for the years to come. By and large, as discussed in the essay, the doctrine of piercing the corporate veil remains only an exceptional act orchestrated by courts of law. Courts are most prepared to respect the rule of corporate personality, that a company is a separate legal entity from it’s shareholders, having it’ own rights and duties, and can sue and be sued in it’s own name.

As we move from jurisdiction to jurisdiction across the globe, it’s application narrows down to how that system of the law appreciates the subject. Common law jurisdictions are examples par excellence where the piercing of the corporate veil has gained notoriety, and as the various cases indicate, courts under this system of the law generally appreciates every case by it’s merits.

The above notwithstanding, there are general categories such as fraud, agency, sham or façade, unfairness and group enterprises; which are believed to be he most peculiar basis under which the common law courts would pierce he corporate veil. But these categories are just a guideline and by no means far from being exhaustive.

Bibliography

BOOKS

Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, (1985). 52 U.CHI.L.REV. 89

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JOURNALS AND MAGAZINES

SM Bainbridge, Abolishing Veil Piercing, 26 J. Corp Journal of Corporate Law Spring 2001 .479

Dan-Cohen M, Rights, Persons and Organizations: A Legal Theory For Bureaucratic Society, University of California Press- Berkeley, (1987) , 44.

 

Blumberg P. “The Corporate Entity in ~n Era of Multi-National Corporations,’ 15. Delaware Journal of Corporate Law , 324.

Cheong – Ann Ping, Corporate Liability, A Study in Principles of Attribution, Kluwer Law International (2001)

Ramsey M. Ian & David B. Noakes, Piercing the Corporate Veil in Australia, Melbourne University Press, , 2005. Paper for the Melbourne Centre for Corporate Law and Securities Regulation

H A J Ford, R P Austin and I M Ramsay, Ford’s Principles of Corporations Law, 9th ed, 1999

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Journal 474.

M Whincop, ‘Overcoming Corporate Law: Instrumentalism, Pragmatism and the Separate Legal

Entity Concept’ (1997) 15 Company and Securities Law Journal

J Payne, ‘Lifting the Corporate Veil: A Reassessment of the Fraud Exception’ (1997) 56 Cambridge Law Journal

 

 

 

 

 

STATUTES

 

Section 3 (02) of the American Bar Association’s Revised Model Business Corporation Act (RMBCA)

 

 

 

 

 

 

-ONLINE SOURCES

– Piercing the Corporate Veil. Wikipedia. (Online). 2003. (Assessed: 2.4.2007)

< http://en.wikipedia.org/wiki/Piercing_the_corporate_veil&gt;

 

Ben C. Ball, Jr., Matthew S. Miller & Christine S. Nelson. The corporate veil. When is a subsidiary separate and different from it’s parent? . Cornerstone Research Foundation. (Online). 1997. (Assessed. 4.4.2007)

<www.cornerstone.com/pdfs/corp_vl.>

See Section 3 (02) of the American Bar Association’s Revised Model Business Corporation Act (RMBCA)

[1] Piercing the Corporate Veil. Wikipedia. (Online). 2003. (Assessed: 2.4.2007)

< http://en.wikipedia.org/wiki/Piercing_the_corporate_veil&gt;


[1] See Section 3 (02) of the American Bar Association’s Revised Model Business Corporation Act (RMBCA)

[2] See Piercing the Corporate Veil. Wikipedia. (Online). 2003. (Assessed: 2.4.2007)

< http://en.wikipedia.org/wiki/Piercing_the_corporate_veil&gt;

[3] ibid

[4] See Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, (1985). 52 U.CHI.L.REV. 89

[5] Judith Waltz and Dan Reinberg, Foley & Lardner, Am i my company’s alter ego? theories of alternative liability for debts to the medicare program.

< http://www.foley.com/FILES/tbl_s31Publications%5CFileUpload137%5C1290%5Cliability.pdf&gt;

[6] ibid

[7] ibid

[8] See Ben C. Ball, Jr., Matthew S. Miller & Christine S. Nelson. The corporate veil. When is a subsidiary separate and different from it’s parent? . Cornerstone Research Foundation. (Online). 1997. (Assessed. 4.4.2007)

<www.cornerstone.com/pdfs/corp_vl.>

 

[9] See N Hawke, Corporate Liability, London Sweet and Maxwell 2000 p108.

 

[10] See Gower and Davies Principles of Modern Company Law (7Ed) London Sweet and Maxwell (2003) at 176.

 

[11] ibid

[12] See SM Bainbridge, Abolishing Veil Piercing, 26 J. Corp Journal of Corporate Law Spring 2001 .479

 

[13] See ibid, 72.

[14] See Dan-Cohen M, Rights, Persons and Organisations: A Legal Theory for Bureaucratic Society, University of California Press- Berkeley, (1987), 44.

[15] ibid.

[16] Blumberg P. “The Corporate Entity in an Era of Multi-National Corporations,’ 15. Delaware Journal of Corporate Law , 324.

[17] ibid

[18] See N Hawke, (Supra). p108.

 

[19] See Gower and Davies Principles of Modern Company Law (7Ed) London Sweet and Maxwell (2003) at 176.

 

[20] See SM Bainbridge, (Supra) .479

 

[21] ibid.

[22] ibid.

[23] Salomon V. Salomon, House of Lords. (1896), [1897] A.C. 22 (H.L.)

See also: R Grantham and C Rickett, Corporate Personality in the 20th Century, 1998.

[24] See Cheong – Ann Ping, Corporate Liability, A Study in Principles of Attribution, Kluwer Law International (2001)

 

[25] Case: Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners, (1923) AC 723 at 740 – 741 [25].

[26] Ibid.

[27] Case: The King v Portus; ex parte Federated Clerks Union of Australia (1949) 79 CLR 42,

[28] See Ramsey M. Ian & David B. Noakes, Piercing the Corporate Veil in Australia, Melbourne University Press, , 2005. Paper for the Melbourne Centre for Corporate Law and Securities Regulation, 4.

 

[29] Case: Atlas Maritime Co SA v Avalon Maritime Ltd (No 1) [1991] 4 All ER 769.

[30] Atlas Maritime Co SA v Avalon Maritime Ltd (No 1) [1991] 4 All ER 769.

Cf: Ramsey M. Ian & David B. Noakes, Piercing the Corporate Veil in Australia, Melbourne University Press, , 2005. Paper for the Melbourne Centre for Corporate Law and Securities Regulation,6.

[31] Case: Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254 (SCNSW, Young J).

 

[32] Case: Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254 (SCNSW, Young J).

Cf: Ramsey M. Ian & David B. Noakes (Supra).

[33] H A J Ford, R P Austin and I M Ramsay, Ford’s Principles of Corporations Law, 9th ed, 1999

[34] See Robert B. Thompson, Piercing the Corporate Veil, an Empirical Study, 76 Cornell L. REV. 1036, 1991

[35] Case: Gorton v Federal Commissioner of Taxation (1965) 113 CLR 604

[36] J Farrar, ‘Fraud, Fairness and Piercing the Corporate Veil’ (1990) 16 Canadian Business Law

Journal 474.

Also on page 478.

[37] Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549

[38] Ibid.

[39] M Whincop, ‘Overcoming Corporate Law: Instrumentalism, Pragmatism and the Separate Legal

Entity Concept’ (1997) 15 Company and Securities Law Journal 411

[40] ibid

[41] See Pickering, The Company as a Separate Legal Entity, (1968) 31 M.L.R. 482

 

[42] See Robert B. Thompson, Piercing the Corporate Veil, an Empirical Study, 76 Cornell L. REV. 1036, 1991

[43] As per Jenkinson J. in Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267

 

[44] See J Payne, ‘Lifting the Corporate Veil: A Reassessment of the Fraud Exception’ (1997) 56 Cambridge

Law Journal 284

[45] Case: Re Edelsten ex parte Donnelly (Unreported, Federal Court, Northrop J, 11 September 1992).

[46] See J Payne (Supra).290.

[47] Case: Re Neo (Unreported, Immigration Review Tribunal, Metledge M, 30 July 1997).

[48] Case: Barrow v CSR Ltd (Unreported, 4 August 1988, Supreme Court of Western Australia, Rowland J).

[49] Ibid, 5

[50] Case: The Electric Light and Power Supply Corporation Limited v Cormack (1911) 11 NSWSR 350

[51] ibid

[52] Case: Ampol Petroleum Pty Ltd v Findlay (Unreported, Fullagar J, Supreme Court of Victoria, 30 October

1986).

 

[53] Case: Ampol Petroleum Pty Ltd v Findlay (Unreported, Fullagar J, Supreme Court of Victoria, 30 October

1986).

[54] Case: RMS Glazing Pty Ltd v The Proprietors of Strata Plan No 14442 (Unreported, Supreme Court of

New South Wales, Cole J, 17 December 1993).

[55] ibid

[56]Case: Taylor V. Santos. Corporate Law Electronic Bulletin. No. 13, September 1998

[57] Case: Bluecorp Pty Ltd (in liq) v ANZ Executors and Trustee Co Ltd (1995) 18 ACSR 566

[58] ibid

[59] Sharrment Pty Ltd v Official Trustee in Bankruptcy (Unreported: Federal court, 3rd June 1988)

 

[60] ibid

Ninth Circuit Court Of Appeals Narrows Application Of The Foreign Sovereign Immunities Act

Businesses hoping to take advantage of provisions of the Sovereign Immunities Act need to appreciate a recent ruling of the Ninth Circuit Court of Appeals deemed to limit the extent and application of that Act. A garnishment action that has been lodged against the Republic of Congo has been dismissed by the U.S. Court of Appeals in Af-Cap, Inc., v. Chevron, 475 F.3d 1080 (9th Cir. 2007); 2007 U.S. App. LEXIS 1638. In so ruling, the Court concluded that the so-called intangible obligations that were at the heart of the cause of action were not utilized for commercial activities within the United States and thus were protected from execution or collection pursuant to the terms of Section 1610(a) of the Foreign Sovereign Immunities Act (“FSIA”), 28 U.S.C. � 1610(a). The case arose from Congo’s default on a loan agreement for $6.5 million that included a waiver of the sovereign immunity defense. The agreement also contained a consent to execution against “any property whatsoever.” Af-Cap, which is the the judgment creditor, attemtped to execute on funds held by Chevron on the theory that those funds were owed to the Congo under various other and unrelated agreements between Chevron and the Congo.

The Ninth Circuit Court of Appeals held that the waiver of immunity by the Congo within the loan agreement did not effectively waive the protections against execution found that are duly enumerated in FSIA. Rather, the clauses in the agreement were deemed to serve as a starting point for the analysis.

The court examined whether the property at issue was “used for a commercial activity in the United States.” The court went on to interpret “used for” and concluded it was intended to create a specific exception to the general immunity from attachment for property that is employed for a commercial activity in the U.S.. However, this immunity was determined not to extend to property merely connected with a commercial activity in the U.S, which determined was the situation in the case at hand.

The court dismissed Af-Cap’s contention that the obligations from Chevron to the Congo were pledged as security. The Court made this determination because the obligations were not actually in existence at the time the Congo signed the loan agreement in the first instance. Therefore, they assets simply could not have been pledged as security.

Af-Cap argued that it was entitled to garnish funds because of Chevron’s obligations to pay bonuses to the Congo under a “Participation Agreement” between the oil giant and the African nation. Af-Cap went on to argue that these obligations were utilized as security for a purported “loan” from Chevron in the form of a $25 Million Prepaid Crude Oil Sales Contract. Af-Cap went on to argue that this constituted commercial activity in the U.S. as contemplated by the statutory scheme in question.

Nonetheless, the Court ultimately held that the agreements included set-off provisions such that the obligation was Chevron’s property alone and not that of the Congo. The property in question could not be garnished as a result.

Af-Cap argued further that Chevron’s obligations to pay over $7 million to the Congo in order for that company to participate in a Congolese joint venture was formed as a result of what Af-Cap called “substantial activities” in the U.S. As referenced earlier, the court held that the property was not “used for” commercial activity in the U.S. as contemplated by the governing statutes. Therefore, the property was immune from execution under FSIA. The court additionally concluded that Chevron’s obligations under its agreement with the Congo to fund social programs in the Congo also were not used for commercial activity in the U.S.

Finally, Af-Cap sought to attach property of SNPC, which is an instrumentality of the Congo. In this instance, Af-Cap argued that FSIA Section 1610(b) provided an exception from immunity for property of an “instrumentality of a foreign state engaged in a commercial activity” in the U.S., rather than property “used for” commercial activity, as required by Section 1610(a). As to this contention, the Court held that the parties had stipulated that SNPC was the Congo’s alter ego, rather than a separate legal entity, so the more restrictive “used for” standard necessarily had to be applied by the Court. The Court concluded that initial dismissal of the case by the lower court had to be upheld.

Robert Masud, Esq. is the principal of Masud & Company LLC, a law firm for the world of business, finance and the internet. Find out how http://www.masudco.com can help you.

Protect Your Assets With A Limited Liability Company

Asset protection is something most people never consider. You should. Because civil lawsuits in this country are out of control. Both legitimate and frivolous suits are filed to the tune of billions of dollars every year. The legal system loves it because this situation allows lawyers to keep making a lot of money.

According to various statistics, the average person gets sued three times during their life. Some of these suits are minor and due to disputes with neighbors or family members. Small claims courts is where most of these legal battles are settled. On the other hand, some of the civil lawsuits filed are for millions of dollars.

Someone could fall in front of your house and sue you. If you don’t have the proper asset protection you could end up between a rock and a hard place. Attorneys usually check the public records to see if someone is worth suing. They look to see what kind of assets they can forcibly take from you. These assets include equity in real estate, bank accounts and wages that can be garnished.

Here’s where having a limited liability company can help. From a strict asset protection perspective you can use a limited liability company to protect yourself and your property from civil lawsuits. How? Well, first of all, let me say that I am not an attorney and am not dispensing legal advice. What I am about to tell you is for educational purposes only. You are responsible for your own actions and should seek competent legal advice before doing anything.

Anyway, here’s the deal. Attorneys only sue if they know they will have an easy time collecting… or… if they feel you have enough assets to warrant a legal battle. If you don’t show any assets worth going after most attorneys don’t bother.

You can set up a limited liability company which owns your personal assets. This includes real estate, bank accounts, etc. The limited liability company takes ownership of your property and creates a “veil” of protection. You can also create a land trust for your real estate that is owned by the limited liability company. And you can create a living trust that is also owned by the limited liability company.

Should someone want to sue you they would have a hard time finding anything in the public records tied directly to you. There are more complicated ways to protect your assets using a limited liability company. The idea is to own nothing that is tied to you… but… to control everything. Personal ownership of property and assets (despite popular belief) is in and of itself a liability.

By creating a limited liability company that owns your assets you are to a great extent personally protected. Anyone who wants to sue you would have to dig very deep and pay a lot of money to an attorney to get to you. You may want to check into personal asset protection further by doing some research online and at the library. Because odds are you will be sued at some point in your life.

John Anghelahce owns and operates http://www.limited-liability-company-info.com Limited Liability Company

What are Articles Of Incorporation

What Are Articles Of Incorporation? Anyone who steps into the world of business in the Americas, must have come across the term Articles of Incorporation. But what are articles of incorporation? They are simply legal documents that need to be filed with the territorial, provincial, or federal government, which underlines the basic functioning of and the purpose of your business. This document is mandatory to the process of incorporation.

You can get the form for filing the articles of incorporation of your company from government bodies such as the office of the secretary of state of the concerned state. Such offices even have websites, which allow you to download this form, which you may require to incorporate your business. For filling out the form in accordance with articles of incorporation law, you can take the help of samples of articles of incorporation or articles of incorporation examples and then take the help of an attorney to check the correctness and for filing it. So, through the attorneys help you will get to know as to how to file articles of incorporation. After filing, the articles of incorporation document creates your corporation. It also sets out important details such as the number of directors and the type of shares that the company will issue.

So now you may wonder as to why the incorporation of your business is so essential. There are several advantages to incorporating your business. They are as follows:

Limited liability: An incorporated company has limited liability. In other words, an individual share holder’s liability is limited to the amount that he/she has invested in the company. In the case of debts, if you are a sole proprietor, your personal assets, such as your house and car, may be seized to pay the debts. However, if you are a share holder, you cannot be held responsible for the debts accumulated by the corporation, unless of course, you have given a personal guarantee. A corporation however, has all the benefits that an individual has that include the ownership of property. Corporations carry on: Incorporation of a business also ensures its continuance. A corporation typically has an unlimited life and continues to thrive even with a change of ownership or business.

Money raising made easier: Corporations typically have more ability to raise money and this ensures the constant growth and development of your company. While they can borrow and incur debt like a normal individual they also have options to sell shares, and raise equity capital. Typically, equity capital does not have to be repaid and also does not incur interest. However, issuing shares may lower your ownership percentage in a company.

There are several other benefits to incorporating a company. This includes income control, potential tax deferral, income splitting and increased business. For small companies, there is the added possibility of being eligible for small business tax deduction. This is an annual tax credit which is calculated at $16,000 on the first $200,000 of the income that is taxable. This may just be a much lower tax rate than the one applied to your personal income.

So now that we know what are articles of incorporation and their many benefits, your business will be better off by being incorporated and it will also ensure a smooth and headache-free corporate life for yourself.

Keith Evans owns and operates http://www.articlesofincorporationfacts.com Articles Of Incorporation

How To Effectively Blow The Whistle Against Company Fraud

The US Government loses billions of tax money annually due to some companies incorrectly declaring their tax returns. In an effort to save money companies may resort to fraudulent transactions such as falsifying reports about the quality of their goods and services, stealing corporate resources and other schemes that constitute accounting fraud. To address this issue, the US General Accounting Office started the whistle-blowing initiative in 1979 as a mechanism to combat fraud and abuse in the private and federal sector. Since then there had been thousands of cases that were filed against businesses that cheat with their income tax returns, and many honest citizens have been rewarded for disclosing information about corporate crime and false practices. The government usually awards the whistle blower about 10 to 30 percent of the recovered money, depending on the participation of the person in resolving the case. Many companies also take part in actively campaigning against accounting and insurance fraud and informing their employees to report immediately to any of their whistle-blowing hotlines to uncover hidden fraud.

If you know of some fraudulent activity that is happening at your workplace, remember that it’s your responsibility to stop the employer from continuing to be liable of any theft or fraud to its employees or from the US Government. As a witness and a whistleblower, you are entitled to rights of non-disclosure, until a lawsuit is filed. If your employer retaliates or fights back because of your whistle blowing, you can sue your employer and recover punitive damages.

To effectively report any corporate fraud or crime, contact a third-party whistle-blower hotline to report of such. Under no circumstances should you use your company’s telephone or e-mail system to report of such – it is advised to use a different communication system outside your company’s network. When in doubt, you can also arrange for confidential legal counseling with an attorney who handles whistle blowing cases to discuss your options.

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Our Los Angeles Accident Attorneys specialize in all fields of personal injury, business law, social security, and employment cases

John Luke Matthews is a regular contributor of relevant articles about the jurisprudence of businesses and employment. He is part of the Mesriani Law Group and is currently taking information technology studies as well.

How To Create A Partnership

Partnership refers to an artificial being brought about by the expedient act of collaborating or pooling of interests, industry or capital of at least two or more persons intended primarily to serve or perform a particular business undertaking or enterprise. In a partnership set up, partners act as agents of each other and of the partnership. Each partner is bound by the acts and representations made by their co-partners in dealing and transacting with third persons. Partnership formation may take various forms depending on how the partners agree to create it and to carry out their objects and purposes. There are no fixed parameters and strict formalities as regards the formation of a partnership. The king of partnership established relates closely to the kind of liability a partner is assuming. As a general rule, the liability of the partnership is likewise the personal liability of each and every partner. However, partnership agreements may specify the kind liability undertaking that each of the partners is bound to assume. A partner may have a limited liability only which means he is not bound to answer for the liabilities of the partnership beyond his interest or contribution. He cannot be held personally liable for partnership debts. In partnership however, it is a settled rule that despite the concept of limited liability, a partnership should always have at least one general partner to shoulder the partnership liability at his personal expense.

Moreover, a partner may contribute not only money or capital contribution. He may likewise put in his industry in the partnership. Unlike a general partner, an industrial partner cannot be held personally liable for partnership obligations. But despite the multifaceted liabilities of each and every kind of partner comprising a partnership, partnership creditors as well as third persons dealing with the partnership remains fully protected.

Our Los Angeles Accident Attorneys specialize in all fields of personal injury, business law, social security, and employment cases

Purchasing an existing business – Legal Do’s and Don’ts

Purchasing an existing business can be a very rewarding endeavor. The first thing that comes to mind about purchasing an existing business is the avoidance of “start-up” costs. The initial costs of creating a new business can be staggering, in addition to the costs for advertising that new business, with no guarantee of a return on your investment. The existing business, however, will have a track record that you can look at as far as income and expenses. While previous performance is no guarantee, it at least gives you a ballpark reference as to what you can expect. There are many legal considerations when purchasing an existing business. First and foremost is to know exactly what you are purchasing. Are you purchasing the entire business and all of its components, or are you merely purchasing the assets of the business? This is an important issue because you want to make sure that you are not purchasing another person’s mistakes. If you are purchasing the entirety of another business, you may be assuming responsibility for all of that business’ debts and liabilities, known or unknown. For that reason, we usually recommend that the purchase only include the assets of the existing business. There are exceptions to this rule which are based upon the size, goodwill and standing of the existing business, but that is to be considered on a case by case basis.

When making an Asset purchase, it is extremely important to set forth in writing exactly what the assets are, so there is no confusion after the transaction closes. Make a list of the physically identifiable assets, i.e. the copy machine, the customer list, the desks and chairs, etc… You should also make a list of the intangible assets, i.e. the phone number of the existing business. The failure to consider the exact assets included in the purchase account for many of the business transaction claims that are brought into my office.

The next legal consideration regards the type of business that you are purchasing. Whether it’s a Pizza shop or an Insurance business, you want to make sure that the Seller will not open up a similar business right next door to the business that you are purchasing. This is where a Covenant Not to Compete is essential. Almost every type of business purchase transaction should include such a covenant. The Covenant Not to Compete should prevent the Seller from doing many things, including opening a similar establishment, using client or customer lists of the established business, hiring employees of the existing business or advising others to use a competing business. These Covenants are typically limited in time and location. If the Seller is unwilling to enter into such an agreement, the business may not be worth purchasing.

Take the time and effort to consult with your local attorney if you are considering purchasing an existing business. It may save you thousand of dollars and hours of time in the long run.

Greg Artim is an Attorney located in Pittsburgh Pennsylvania. For more answers to your legal questions, please visit his website at www.gregartim.com

Starting a Business with Multiple Owners

Starting a business with multiple owners is fairly commonplace. If you are not careful, however, it can lead to major problems down the line. A business is really an idea when you get down to the fundamental aspects of it. While practically everyone wants to make money, businesses are usually started because somebody has an idea. More accurately, it is often because two or more people come up with something they think people will be interested in.

While the collaborative effort is great for thinking out an idea, potential problems and so on, it can ultimately lead to disaster. Ironically, this is particularly true if the business is successful. The problem? Sharing power.

If multiple people start a business, they often refer to it as “our business”. At the outset, this isn’t really a problem. As time passes, however, each owner may start to have very different ideas about what “our” business should be doing, how it should grow, niches it should get into and so on. When this occurs, “our” business soon becomes “my” business. The problem, of course, is each owner is saying this. Conflict soon follows.

If you start a business with others, it is very important to understand that you are essentially getting married. This is true even if you had the original idea, work harder than they do and so on. Ownership is ownership. Much like a marriage, you should give consideration to the business equivalent of a prenuptial agreement.

At the outset of any business venture with multiple owners, time should be taken to discuss what happens if there are problems. What if someone dies? What if someone stops working? What if a majority of owners want to go in one direction, but one person does not? How will each of these issues be handled? Whatever your decision, it needs to be put in writing. Depending on the structure of your business, it may come in the form of a buy-sell agreement. Regardless, the idea is to make sure you cover these issues up front.

At this point, you might be thinking you really would be uncomfortable discussing these issues. After all, everyone trusts each other, right? Maybe, maybe not. What tends to happen is you find out that maybe some of the owners have some very different ideas than you do. It is always best to find this out before revenues start coming in. Why? People are not eying the business bank account. They will be reasonable in discussing matters. In a worse case scenario, you may not be able to work things out. If that occurs, at least you found out before spending a lot of blood, sweat and tears on the business.

It is common to start a business with more than one business owner. Such businesses often do very well since the workload is shared. To avoid problems, just make sure everyone is on the same page up front and get it in writing!

Richard A. Chapo is with SanDiegoBusinessLawFirm.com – providing services to those who need to incorporate in California.

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Partnerships Compared to Limited Liability Partnerships

There are a variety of ways to structure the formation of a business. Partnerships and limited liability partnerships are two of the choices. If you are currently running a business, you might be in for a surprise. If the business has two or more owners and no specific business entity has been formed, you are in a partnership! Why? Under long standing law, any business with two or more owners is automatically considered a partnership unless affirmative steps are taken to form the business as something else.

A partnership is a form of business that has great benefits and horrendous negatives. Personally, I believe it should be used sparingly as a form of business. Why? Well, a partnership provides no protection to its owners. If the partnership gets sued, all the partners are liable for the debt. This liability is total. If you only own 10 percent of the partnership, you can still be required to pay 100 percent of the debt if you are the one with money. For this sole reason, I believe partnerships should be avoided like the plague as a business entity choice.

So, why would anyone form a business as a partnership? In a word – taxes. Partnership entities do not pay taxes. Instead, the finances of the partnership pass down to the partners in accordance with their ownership percentages. It makes life easy from a tax perspective and avoids a lot of the complexities of business taxation.

So, is there any way to take advantage of the tax benefits of a partnership while avoiding the potential liability problems? Many people think a limited liability partnership is the answer.

A limited liability partnership is just like a general partnership with one big exception. The limited partners are shielded from personal liability. The “LLP” takes the following form. There is one general partner that actually runs the business on a day to day basis. There are then multiple limited partners that make capital contributions to the partnership in the form of cash, products and so on. If the LLP is sued, the general partner has no protection. The limited partners, however, can only lose their investment in the business.

So, why doesn’t everyone just form a limited liability partnership? Well, the limited partnership position is really restricted. As a limited partner, you can not be involved in the running of the business. You are essentially limited to contributing capital to get the business up and running. If you don’t like the way things are being done, there isn’t a lot you can do. If a limited partner becomes active in the running of the business, he or she loses all protection from liability.

All and all, partnerships should be used sparingly. They can be excellent choices for very particular business situations. If you are considering this form of business, make sure to speak with an experienced business attorney so you know exactly what you are getting into.

Richard A. Chapo is with SanDiegoBusinessLawFirm.com – providing limited liability company formation in California.

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