Business Law Frequently Asked Questions
Q: What is business law?
Business law consists of the many statutes, codes, regulations and rules that control commercial relationships and provide a legal framework within which businesses are conducted and managed. Business law is highly diverse and includes areas such as:
business formation and organization
transactional business law (contracts)
mergers and acquisition
Q: What factors are considered in choosing the type of business form for my business?
While there are a myriad of issues to consider in choosing the best business form for your business, some of the main considerations include (1) tax treatment, (2) how you intend to capitalize the business, (3) whether you plan to issue stock and trade it publicly, (4) how you intend to structure the management of your business and (5) the potential liability of the business owners. It is critical that your business be properly organized and that you work with someone who can assist you in choosing a form that will meet your needs.
Q: What is the difference between a subchapter C and S corporation?
The Internal Revenue Code allows for two different levels of corporate tax treatment. Subchapters C and S of the code define the rules for applying corporate taxes.
Subchapter C corporations include most large, publicly-held businesses. These corporations face double taxation on their profits if they pay dividends: C corporations file their own tax returns and pay taxes on profits before paying dividends to shareholders, which are subsequently taxed on the shareholders' individual returns.
Subchapter S corporations meet certain requirements that allow the business to insulate shareholders from corporate debts but avoid the double taxation imposed by subchapter C. In order to qualify for subchapter S treatment, corporations must meet the following criteria:
•Must be domestic
•Must not be affiliated with a larger corporate group
•Must have no more than one hundred shareholders
•Must have only one class of stock
•Must not have any corporate or partnership shareholders
•Must not have any nonresident alien shareholders.
Additionally, after a business is incorporated, all shareholders must agree to subchapter S treatment prior to electing that option with the Internal Revenue Service.
Q: What is an LLC?
An LLC (or Limited Liability Company) is a relatively new type of a business structure that is intended to provide (1) liability protection for its constituent members (while dispensing with many of the formalities required for either Subchapter C and S corporations) and (2) pass-through taxation similar to that associated with sole proprietorships and partnerships. While many of the details vary from state to state, an LLC is normally formed by filing articles of organization with the secretary of state. The relationship of the constituent members of the LLC to one another is established through a separate document known as an Operating Agreement.
Q: What are "the alter-ego doctrine” and “piercing the corporate veil?”
Sometimes, courts will allow plaintiffs and creditors to receive compensation from corporate officers, directors, or shareholders for damages rather than limiting recovery to corporate assets. This procedure bypasses the usual corporate immunity for organizational wrongdoing, and may be imposed in a variety of situations. Typically, the courts are concerned that the corporate form not be abused. The specific criteria for piercing the corporate veil vary somewhat from state to state and may include the following:
•Courts may not allow owners to benefit from a corporation’s limited liability if the underlying business is indistinguishable from its owners.
•If a corporation is formed for fraudulent purposes.
•Courts may impose liability on the individuals controlling the business if a business fails to follow certain corporate formalities in areas such as record-keeping.
Q: Is there a difference between a joint venture and a partnership?
Joint ventures and partnerships share certain characteristics. A joint venture is a sort of partnership where two or more entities join together for a particular "short term" purpose. In both partnerships and joint ventures, each partner has equal ability to legally bind the entire entity. A partner can represent the entire organization in the normal course of business and his or her legal actions on behalf of the joint venture or partnership create legal obligations.
Though the powers of individual partners in a partnership or joint venture can be limited by agreement, such agreements do not bind third parties. Because business contacts outside of the partnership may have no knowledge of the limitations, they may be entitled to rely on the apparent authority of an individual partner as determined by the usual course of dealing or customs in the trade.
Q: What is a non-profit corporation?
A non-profit corporation is a corporation formed to carry out a charitable, educational, religious, literary, or scientific purpose. A nonprofit corporation doesn't pay federal or state income taxes on profits it makes from activities in which it engages to carry out its objectives. This is because the IRS and state tax agencies believe that the benefits the public derives from these organizations' activities entitle them to a special tax-exempt status.
The most common federal tax exemption for nonprofits comes from Section 501(c)(3) of the Internal Revenue Code, which is why nonprofits are sometimes called 501(c)(3) corporations.
Q: How often should a corporation hold meetings and update its minutes?
Any time a corporation undertakes a major change or transaction, it should be reflected in its minutes. In addition, meetings of shareholders and directors should take place at least annually if for no other reason than to elect new officers and directors. Failure to adhere to the formality of regular meetings can jeopardize the corporation's ability to shield its officers, directors and shareholders from personal liability for the corporation's actions.
Q: Is it a good idea to have a Buy-Sell Agreement?
Corporations with more than one shareholder should seriously consider a buy-sell agreement. A shareholder's death, divorce, disability or termination of employment can create serious problems for a corporation and its other shareholders. A buy-sell agreement can help minimize these problems by providing for an orderly succession in such plans. Similar provisions are recommended for partnership.
Q: What is involved in a corporate merger?
Like most corporate law, mergers are regulated at the state level. While these laws vary by jurisdiction, many aspects of the merger process are the same across the nation. Generally, the board of directors for each entity must initially approve a resolution adopting a plan of merger that specifies the names of the entities involved, the name of the proposed merged company, the manner of converting shares of both entities, and any other legal provisions to which the corporations agree. Each entity notifies all of its shareholders that a meeting will be held to approve the merger. If the proper number of shareholders approves the plan, the directors sign the papers and file them with the state. The secretary of state issues a certificate of merger to authorize the new corporation.
While it is common to call the acquisition of another company a “merger,” in reality there are several ways that this can be achieved and each has its own set of tax and liability issues. For example, in a stock purchase agreement, the acquiring company will own all of the rights and responsibilities associated with ownership of stock in the company being acquired but the same corporate limitations on liability will continue. Another common merger technique is the acquisition of selected assets and liabilities of the company being acquired. This form of “merger” has as its primary benefit the avoidance of unexpected liability arising from the prior acts of the company being acquired.
Each state has its own corporate statutes that govern the procedure for mergers. Furthermore, state or federal agencies may wish to investigate the potential anticompetitive effects of a proposed merger. Because of the requirements and variables involved in merging, a corporation considering a merger should consult a lawyer who is experienced in mergers and acquisitions law.
Q: How long may a foreign national stay and work in the United States with an H-1B Visa?
The duration of stay with the H-1B Visa is three years, however, in many cases it may be extended for an additional three years. After the maximum period of six years has passed, the foreign national must leave and remain out of the United States for a full year before a petition for a second H-1B Visa may be approved.
Q: How can a properly established business entity such as a corporation shield me from personal liability for business debts and obligations?
Personal liability arising from business obligations can devastate the accumulated wealth of a lifetime of work. Personal liability may extend to business losses, but other obligations may also reach individuals, including:
•Damage awards in lawsuits
•Back wages and benefit payments
Limited liability offered by corporations and other business entities shelters business owners from personal liability. Nonetheless, if an owner or director performs certain personal acts, behaves illegally, or fails to uphold statutory requirements for corporate status, he or she may face personal liability despite the corporate shelter.