Lecture 1 the Formation of the Company

7/28/2019 Lecture 1 the Formation of the Company

1/31

Introduction to different forms of business

entities

1 sole proprietorships

2 partnerships

General Partnership, Limited Partnership, LLC

(Limited Liability Company)

3 corporations


2/31

Sole proprietorship

1. definition

A person doing business for himself or herself is a soleproprietor; the business organization is a sole proprietorship.The sole proprietorship is the oldest and simplest form of

business organization.

As a proprietor, a person may simply begin to do businesswithout formality in enterprises that do not require agovernment license or permit. The proprietor generally owns allor most of the business property and is responsible for thecontrol, liabilities, and management of the business.

In a sole proprietorship, legally and practically the ownerruns the business, and capital must come from the owners ownresources or from borrowed resources. The greatestdisadvantage of the sole proprietorship is the limitedalternatives for raising capital and the proprietor usually bears

unlimited responsibility to the enterprises debt.


3/31

2. characteristics

a. sole proprietorship is set up by one person;

b. the assets of proprietorship belongs to the investor;

c. the investor bears unlimited liability to theproprietorships liability;

d. the proprietorship is not a legal person.

3. merits a. it does not need large amount of capital;

b. it enjoys tax benefit;

c. its easy to organize and inexpensive to operate

4. demerits a. its very difficult to raise capital;

b. the investor bears unlimited liability;

c. the business scale is small.


4/31

Partnerships

1. definition A partnership is defined as an association of two or more

persons to carry on a business as co-owners for a profit. Thepartners or general partners share control over the businesssoperations and profits. Many attorneys, doctors, accountants,

and retail stores are organized as general partnerships. A partnership can begin with an oral agreement between

two or more persons to do business as partners or with animplied agreement that may be inferred from the conduct ofthe partners as they do business together.

The partnership agreement usually specifies such matters asthe business name, ownership interests of the partners, partnersresponsibilities, method of accounting, duration of the

partnership, and procedures for the partnerships dissolution.


5/31

2. characteristics

a. the admission of new partner needs unanimous consent

b. partners are liable for the partnerships obligation.

c. partners bear joint and separate liability.

3. merits

a. easy to organize and inexpensive to operate

b. enjoys tax benefits

c. keeps commercial secrete private

4. demerits

a. partners do not enjoy limited liability

b. a partner retirement, bankruptcy, withdraw or deathmay cause the partnership to dissolve


6/31

Case

10

2.6255%2.625


7/31

10

10

1.75

7.5

5%7.875

5.25

2.625


8/31

Corporations

1. definition

A corporation is owned by shareholders who elect aboard of directors to manage the business. Shareholdershave limited liability for the obligations of the corporation.

2. characteristics

a. Owners liability: the shareholders enjoy the limitedliability;

b. Existence: The existence of the corporation is

independent from the change of the shareholders. c.Legal Status: a corporation is a legal person and a

legal entity independent of its owners (shareholders) andits managers (officers and board of directors);


9/31

d. Management: the management of the corporation is

vested in the board of directors; e. Transferability of owners interest: the shares may be

sold or transferred to a third person without the approval of

the corporation.

f. Taxation: a corporation pays income taxes on itsincome. A shareholder would have personal income from

the corporation when the corporation pays him a dividend.

And the shareholders pay tax on the dividends.


10/31

3. merits a. the investor enjoys limited liability

b. the business is managed by professional managers

c. the shareholders can easily exit the corporation bytransferring the shares

d. it can easily get money from the bank or securitiesmarket

4. demerits

a. tax disadvantage b. more expensive to operate

c. complex structure


11/31

Case

20024302071

Questions:

1.

2.


12/31

formation of corporation

1. In general

The formation of corporation is the process that the

promoters tries to meet all the requirements in order to

obtain the legal personality.


13/31

2. The conditions for the formation of corporation

There are only a few requirements for incorporation. The

conditions prescribed by different countries vary, butusually include:

a. the corporation shall have qualified and adequatepromoters

b. the corporation shall have minimum legally requiredcapital

c. the promoters shall make the articles of corporation d. the corporation shall have its own corporate name and

corporate structure

e. the corporation shall have its corporate domicile


14/31

3. Promoters

3.1 Definition

A person who takes the initiative in developing andorganizing a new business venture.

3.2 The activities of promoters

a. arrange necessary capital for the corporation

b. obtain necessary assets and personnel

c. arrange the procedures for the formation of thecorporation


15/31


16/31


17/31

4. Articles of association Introduction

Articles of incorporation, frequently called corporate

charter: or certificate of incorporation, are at the heart of

the incorporation process. They must be filed with the

company registration authority in order to provide certain

key information to the government and to any party

dealing with the corporation.


18/31

the memorandum of association Another constitutional documents of a corporation in

UK and Hong Kong is memorandum of association. Thememorandum of association contains the name of the

corporation, the registered office, the objects of thecorporation, the liability of its members and the amountand division of shares with which the corporation proposesto be registered, while the articles prescribe regulations forthe internal management of the corporation. In UK and

Hong Kong, a corporation has both memorandum andarticles, while in US, these two have been combined in onedocument, articles of association.


19/31


20/31

transactions beyond business scope

a. in China

(1) the transaction is effective if it needs no special

permission from the government

(2) the transaction is not effective if it needs special

permission


21/31

b. in United States and England:

(1) in history, its not effective due to the principle of

Ultra Vires (

Historically, an act of a corporation beyond its powers

was a nullity, as it was ultra vires, which is Latin for

beyond the powers. Therefore, any act not permitted by

the corporation statute or by the corporations articles of

incorporation was void due to lack of capacity.


22/31

Ashbury railway Carriage and Iron Co Ltd v. Riche

A corporation was incorporated with the followingobjects:

to make, sell, or hire railway carriages and wagons;

to carry on the business of mechanical engineers and

general contractors; and to purchase, lease, work, and sell mines, minerals, land

and buildings.

The Directors contracted to purchase a concession tobuild a railway in Belgium and to provide Riche with

finance for the construction of the railway. It was held thatthe contract was ultra vires and void.


23/31

(2) nowadays, its usually effective Today, the ultra vires doctrine is of small importance

for two reasons. First, nearly all corporations have broad

purpose clauses, thereby preventing any ultra vires

problem. Secondly, most statutes do not permit a

corporation or the other party to an agreement to avoid an

obligation on the ground the corporation action is ultra

vires.


24/31

20036GOSTGOST20036245800012358000712B158000


25/31

GOST


26/31

2003623

GOST

58000


27/31

6. Preincorporation Contracts

In common law system:

Contracts executed in the name of the promoter

If the promoter enters into contract in his or her own

name without referring to the corporation with the thoughtof subsequently assigning the contract to the corporation,

personal liability on the part of the promoter clearly exists.The subsequent assignment of the contract to thecorporation does not release the promoter of personal

liability unless the creditor agrees, to release the promoterand look only to the corporation for performance. Therelease of a party to a contract when it is assumed byanother is called a novation.


28/31

In China:

If the incorporation procedure fails, the promoters bearjoint liabilities on the contracts.

If the corporation is finally established, the corporation

bears the liabilities on the contracts.


29/31

7. Defective incorporation

7.1 the reasons for defective incorporation

a. the promoters have no civil capacity to form a

corporation

b. the incorporation does not satisfy the requirements.


30/31

7.2 the effects of defective corporation

a. De facto corporation (

Failure to achieve the statutory requirements forincorporation does not lead to imposition of personalliability on the shareholders if the court believes that de

facto corporation status had been achieved.

The requirements for recognition of de facto status are(1) existence of a statute under which the corporationmight have been validly incorporated, (2) a good faithattempt at compliance, and (3) some use or exercise ofcorporate status.

b. Compulsory dissolution If the establishment of the corporation is for some illegal

purpose and the incorporation procedure is not complete,the corporation will be compulsorily dissolved .


31/31

30

18

8509

1.

2.

Documents

Lecture 1 the Formation of the Company