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Business Law FAQs

What is business law?

Sometimes also referred to as corporate law, transaction law and/or commercial law, this is the specialized area of law related to the organization, operation, regulation and termination of businesses.

What should be considered in choosing the type of business form for my business?

Although there are many important things to think about when choosing a business form, some of the main considerations include your preference of tax treatment, how you intend to capitalize the business, whether you plan to issue stock and trade it publicly, how you intend to structure the management of your business and issues surrounding the liability of the business owners, among other things. It is very important to plan your business and to work closely with someone who can help you choose the business form that will meet your needs.

What does it mean to “pierce 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. 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.
In such cases, 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, cash flow separation and management, accounting, payment of taxes and related matters.

What is the 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.

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.

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.

What is involved in a corporate merger?

Like most other areas of corporate law, mergers are most often 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.

Each state has its own corporate statutes that govern the procedure for mergers. Furthermore, state or federal agencies may wish to investigate the potential anti-competitive 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.

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
  • Tax penalties
  • 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.