University of Richmond UR Scholarship Repository Law Faculty Publications School of Law 2015 Business Structures David G. Epstein University of Richmond, depstein@richmond.edu Follow this and additional works at: http://scholarship.richmond.edu/law-faculty-publications Part of the Business Organizations Law Commons Recommended Citation David G. Epstein et al., Business Structures (4th ed. 2015). This Book is brought to you for free and open access by the School of Law at UR Scholarship Repository. It has been accepted for inclusion in Law Faculty Publications by an authorized administrator of UR Scholarship Repository. For more information, please contact scholarshiprepository@richmond.edu.
BUSINESS STRUCTURES Fourth Edition Ill Ill Ill by David G. Epstein George E. Allen Chair Professor of Law University of Richmond Richard D. Freer Robert Howell Hall Professor of Law Emory University School of Law Michael J. Roberts Senior Lecturer and Executive Director of the Arthur Rock Center for Entrepreneurship Harvard Business School (retired) George B. Shepherd Professor of Law Emory University School of Law AMERICAN CASEBOOK SERIES f WEST ACADEMIC PUBLISHING
The publisher is not engaged in rendering legal or other professional advice, and this publication is not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney or other professional. American Casebook Series is a trademark registered in the U.S. Patent and Trademark Office. West, a Thomson business, 2002, 2007 2010 Thomson Reuters 2015 LEG, Inc. d/b/a West Academic 444 Cedar Street, Suite 700 St. Paul, MN 55101 1-877-888-1330 West, West Academic Publishing, and West Academic are trademarks of West Publishing Corporation, used under license. Printed in the United States of America ISBN: 978-0-314-28703-8
PREFACE We understand that many of you are taking this course because your law school requires it or because the last bar exam had both a corporation question and a partnership question or because the class meets at 11 on Tuesdays, Wednesdays and Thursdays. Regardless of the reason, we are glad that you are taking the course. All law students and lawyers need to understand business structures. For law students, business structures are building blocks in other courses. For lawyers, business structures are building blocks in the lives of their clients, in the lives of their communities. And, like law students, lawyers, clients and communities, business structures have "lives." This book covers the life cycle of a business, Bubba's Burritos, from birth to death. We will see how Bubba's Burritos' life and legal issues change as the business changes from a sole proprietorship to a partnership, to a corporation, to a limited partnership, to a limited liability company. We will also consider how the life and legal issues of Bubba's Burritos differ from those of a larger, more mature business such as McDonald's. We will look not only at businesses but also at their owners. Generally, people buy a business or an interest in a business to make money. We will consider how the structure of a business affects the ability of its owners to make money from business operations or from the sale of ownership interests. February, 2015 DAVID G. EPSTEIN RICHARD D. FREER MICHAEL J. ROBERTS GEORGE B. SHEPHERD v
SUMMARY OF CONTENTS PREFACE... V ACKNOWLEDGMENTS... VII TABLE OF CASES... XXVII Chapter 1. Basic Business Propositions for Law Students... 1 A. Business Is About Making Money... 1 B. Financial Statements Help the Owner of a Business Understand Its Performance and Value... 12 C. Some Businesses Have Only One Owner and No Legal Structure: Sole Proprietorships... 25 D. Most Businesses Have More Than One Owner and a More Formal Legal Structure... 26 Chapter 2. Basic Concepts of Agency Law... 31 A. Agents Owe Fiduciary Duties and May Be Liable for Breaching Them... 31 B. Other Agency Relationships Your Clients and You Will Encounter... 46 Chapter 3. What Is a Partnership and How Does It Work?... 63 A. What Is a Partnership?... 63 B. What Is Partnership Law?... 65 C. What Are the Legal Issues in Starting a Business as a Partnership?... 66 D. What Are the Legal Issues in Operating a Business as a Partnership?... 74 E. What Are the Possible Legal Issues in a Partnership's Adding New Partners?... 88 F. How Do the Owners of a Partnership Make Money?... 89 G. What Is the "End Game"?... 92 Chapter 4. What Is a Corporation and How Does a Business Become a Corporation?... 121 A. What Is a Corporation and What Is Corporation Law?... 122 B. What Are the Legal Problems in Starting a Business as a Corporation?... 127 Chapter 5. How Does a Corporation Operate?... 147 A. Who Is Liable to the Corporation's Creditors?... 147 B. Who Makes Decisions for the Corporation?... 163 xi
xii SUMMARY OF CONTENTS Chapter 6. What Duties Do Corporate Decisionmakers Owe to the Corporation?... 199 A. What Are the Decisionmakers' Business Responsibilities to the Corporation?... 199 B. What Are the Decisionmakers' Legal Responsibilities to the Corporation?... 201 C. Enforcing the Duties Through Shareholder Derivative Litigation... 273 D. Shareholders' Right to Inspect Corporate Documents... 292 E. Who Really Pays?... 298 Chapter 7. Close Corporations... 305 A. What Is a Close Corporation?... 305 B. How Do the Owners of a Close Corporation Keep Outsiders Out?... 307 C. Fiduciary Duties Among Shareholders of a Close Corporation... 311 D. Receiving Salaries from the Corporation... 329 Chapter 8. Corporate Finance, Securities Regulation, and Dividends... 353 A. Corporate Finance... 353 B. Securities Regulation... 381 C. Dividends... 431 Chapter 9. What Happens When a Corporation Ends?... 447 A. Introduction to Fundamental Corporate Changes... 447 B. Dissolution... 450 C. Merger... 451 D. Sale of Substantially All the Assets... 477 E. Hostile Takeover... 484 F. Business Perspectives on Mergers and Acquisitions and Spinoffs... 486 Chapter 10. What Is a Limited Partnership and How Does It Work?... 493 A. What Is a Limited Partnership?... 493 B. What Is Limited Partnership Law?... 495 C. What Are the Legal Problems in Starting a Business as a Limited Partnership?... 496 D. What Are the Legal Problems in Operating a Business as a Limited Partnership?... 498 E. Legal Issues in the Transfer of Partnership Interests... 516 F. What Are the Legal Problems in Dissolving a Limited Partnership?.. 521 G. Limited Partnerships vs. Limited Liability Partnerships... 525 Chapter 11. What Is a Limited Liability Company and How Does It Work?... 529 A. What Is an LLC and What Is LLC Law?... 529 B. What Are the Legal Issues in Starting a Business as an LLC?... 530 C. What Are the Legal Problems in Operating a Business as an LLC?... 533
.. 305.. 305.. 307... 311... 329... 529... 529... 530... 533 SUMMARY OF CONTENTS xiii.. 199.. 199.. 201.. 273.. 292.. 298 D. What Is the "End Game" for Members of a Limited Liability Company?... 553 E. What Are the Possible End Games for the LLC Itself?... 556 INDEX... 559... 353.... 353... 381... 431... 447... 447... 450... 451... 477 " 484 " 486... 493... 493 "" 495... 496 "" 498 "" 516 " 521... 525