Business and Corporate Law

 

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Corporations

The corporation is the dominant form of business ownership in California today. A corporation is a distinct legal entity, existing apart and recognized separately from its owners as shareholders, and has all the powers of a natural person, including the rights to own property, sue in its corporate name, and make contracts. Under California law, a corporation may be formed to engage in any business activity. The rights and obligations of its directors, and its shareholders are clearly set by statute. In the case of a Close Corporation, these may be changed by agreement. A corporation is chartered by the state and may be formed by filing articles of incorporation with the Secretary of State. Owners of a corporation ordinarily are issued shares. A corporation is controlled by a board of directors who appoint officers to manage the day-to-day business.
All corporations share certain basic characteristics, including the following: (1) management and control by a board of directors and officers appointed at the board’s discretion; (2) limited personal liability; (3) greater availability of capital than generally exists for noncorporate business forms; (4) perpetual life; and (5) taxation as a separate entity, unless the corporation has elected to be taxed under Subchapter S of the Internal Revenue Code.
A corporation is under the control of its board of directors and is managed by officers appointed by the board.
If properly formed and operating, a corporate shareholder’s liability is limited to the amount of his investment in the corporation.
Further, its directors, officers, and employees ordinarily do not have any personal liability for the corporation’s debts or other obligations.
A corporation has perpetual existence, unless its articles of incorporation state otherwise. Generally, a corporation is a separate taxpaying entity for federal and state tax purposes.
In general a corporation is referred to as a "C" corporation in the Internal Revenue Code, to distinguish it from an "S" corporation which is a corporation that has elected to be taxed under Subchapter S of the Internal Revenue Code. A "C" corporation is subject to a corporate tax rate schedule, which applies graduated rates that differ from an individual’s income tax rate schedule. Taxation of "S" corporations is similar to taxation of partnerships. Therefore, this election avoids the double taxation imposed on "C" corporations in which income is taxed to the corporation and dividends are taxed to the shareholder.

Limited Liability Companies

A limited liability company "LLC" is a business entity that is essentially a hybrid of a corporation and partnership. The LLC form offers great flexibility. Areas in which the LLC structure are likely to be particularly useful include real estate, joint ventures and venture capital investments.
A California LLC can have the income tax treatment of a partnership on both the state and federal level, without the restrictions imposed on an “S” corporation. An LLC can also limit the liability of its owners to their investments. This limited liability is similar to that enjoyed by corporate shareholders.
A LLC is formed by filing articles of organization with the Secretary of State, and must have an oral or written operating agreement.
LLC’s are prohibited from engaging in some activities, including those services that may only be lawfully rendered under a license, certificate, or registration authorized by the Business and Professions Code.
The management and control of an LLC is extremely flexible. An LLC may be managed by all of its members, or by one or more managers.
A member of an LLC ordinarily is not personally liable for any debt, obligation, or liability of the LLC arising in contract, tort, or otherwise solely by virtue of that membership.

Under rules that took effect on January 1, 1997, an LLC with two or more members may elect to be taxed either as a corporation or as a partnership.
California taxation generally conforms to the federal entity classification rules.
LLC’s still are subject to the California annual minimum franchise tax and must pay a graduated entity level fee based on total income from all sources reportable to California.
Because of their customized nature LLC”s can be more costly to form and manage than a S corporation.

Bankruptcy

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A debtor’s involvement with the bankruptcy judge is usually very limited. A typical Chapter 7 debtor will not see the bankruptcy judge unless an objection is raised in the case. A Chapter 13 debtor may only have to appear before the bankruptcy judge at a plan confirmation hearing. Usually, the only formal proceeding at which a debtor must appear is the meeting of creditors. This meeting is informally called a “341 meeting” because section 341 of the Bankruptcy Code requires that he debtor attend this meeting so that the Trustee can question the debtor about debts and property.

A fundamental goal of the federal bankruptcy laws enacted by Congress is to give debtors a financial “fresh start” from burdensome debts. The Supreme Court made this point about the purpose of the bankruptcy law in a 1934 decision:

(I)t gives to the honest but unfortunate debtor...a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.

Local Loan Co. v. Hunt, 292 U.S. 234,244 (1934). This goal is accomplished through the bankruptcy discharge, which releases debtors from personal liability from specific debts and prohibits creditors from ever taking any action against the debtor to collect those debts.

Chapter 7, entitled Liquidation, contemplates an orderly, court-supervised procedure by which a trustee takes over the assets of the debtor’s estate, reduces them to cash, and makes distributions to creditors, subject to the debtor’s right to retain certain exempt property and the rights of secured creditors. Because there is usually little or no nonexempt property in most Chapter 7 cases, there may not be an actual liquidation of the debtor’s assets. These cases are called “no-asset cases.” A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court. In most Chapter 7 cases, if the debtor is an individual, he or she receives a discharge that releases him or her from personal liability for certain dischargeable debts. The debtor normally receives a discharge just a few months after the petition is filed. Amendments to the Bankruptcy Code enacted in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a “means test” to determine whether individual consumer debtors qualify for relief under Chapter 7. If such a debtor’s income is in excess of certain thresholds, the debtor may not be eligible for Chapter 7 relief.

Chapter 13, entitled Adjustment of Debts of an Individual with Regular Income, is designed for an individual debtor who has a regular source of income. Chapter 13 is often preferable to Chapter 7 because it enables the debtor to keep a valuable asset, such as a house, and because it allows the debtor to propose a “plan” to repay creditors over time – usually three to five years. Chapter 13 is also used by consumer debtors who do not qualify for Chapter 7 relief under the means test. At a confirmation hearing, the court approves or disapproves the debtor’s repayment plan, depends on whether it meets the Bankruptcy Code’s requirements for confirmation. Chapter 13 is very different from Chapter 7 since the Chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on the debtor’s anticipated income over the life of the plan. Unlike Chapter 7, the debtor does not receive an immediate discharge of debts. The debtor must complete the payments required under the plan before the discharge is received. The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. The discharge is also somewhat broader (i.e., more debts are eliminated) under Chapter 13 than the discharge under Chapter 7.

Chapter 11, entitled Reorganization, ordinarily is used by commercial enterprises that desire to continue operating a business and repay creditors concurrently through a court-approved plan of reorganization. The Chapter 11 debtor usually has the exclusive right to file a plan of reorganization for the first 120 days after it files the case and must provide creditors with a disclosure statement containing information adequate to enable creditors to evaluate the plan. The court ultimately approves (confirms) or disapproves the plan of reorganization. Under the confirmed plan, the debtor can reduce its debts by repaying a portion of its obligations and discharging others. The debtor can also terminate burdensome contracts and leases, recover assets, and rescale its operations in order to return to profitability. Under Chapter 11, the debtor normally goes through a period of consolidation and emerges with a reduced debt load and a reorganized business.