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Business types
When you want to transact business you have to choose a legal structure. One such structure is
the sole proprietorship (US) or sole trader (UK).
An individual person without partners who does business not in company form but by
themselves.
Advantages:
1- Owner does not share decisions about the company, and he decides by himself when to end
the business.
2- No sharing of profits. Not allocating profits with other people. Owner reaps the profits.
Disadvantages:
1- Absence of legal personality (no legal structure). If a person forms a company with somebody
else, said company is considered an artificial or legal person (persona jurdica de existencia
ideal). Theres no distinct personality between the structure and the legal person (that is, the
person doing business). All obligations, profits and losses are assumed by the same person.
2- No limitation of responsibility. Debts can be incurred by an individual person or a business:
- Personal debts: personal or individual responsibility. These debts are backed by
personal assets (personal assets are answerable for those debts).
- Business debts: backed by business assets. A person can have this type of debts only
by creating a legal structure. You limit responsibility by creating a legal personality.
In sole propietorships, the owners personal assets are answerable for personal and business
debts because sole proprietorships have no legal personality. Personal and busiess assets are
the same. Personal creditors and busness creditors fight over the same assets: they compete
over the same assets because there is no distiction of category.
Limitaion of responsilbility to the extent of some activity. When there is limited liability, if
business assets are not enough to cover business debts, personal assets cannot be used to
repay those debts.
When you create an airtifical person, you have fiscal advatages and disadvantages.
1. You will be taxed twice, both on a personal and on a corporate level. Sole proprietorships, on
the other hand, enjoy single taxation due to their absence of legal entity.
2. Your way of raising financing will be affected (you do not have a lot of money because you
are alone, whereas more people can raise more money together). Moeny sums up to form
corporate capital; creditors and people who want to fund the company are interested in
corporate captial. As a sole proprietor, your finantial position is not very strong.
Formation
Purpose: obtaining profit. Associating with a view of profit. Uniting efforts or using all yoir efforts
alone with a view of profit.
You may lose money (if the business is not prosperous), in which case you would be working at
a loss. If you work with a partner, you will share in the losses (contribute towards the losses).
The association of two or more persons who contribute their assets sharing in the peofits and
losses / sharing in the profits and contributing towards the losses.
SHARE: PARTICIPAR CONTRIBUTE: SOPORTAR
When you associate with somebody, you have to know their intentions and their contributive
capabilities so that you are sure they can contribute towards the losses.
Single-member companies (sociedad de un solo socio), is a a company without association.
This company bares the exact features as other companies composed by members. The fact
that this company is comprised of only one member must be disclosed to third parties in interest
somebody who deals with a company must be duly aware / put duly on notice of the
companys name and type.
Company names are sometimes a source of fraud, so the name of a company is not a minor
matter. It should not be misleading or confusing. Sometiems names must be registered. Names
that are confusing, misleading or similar to other registered names can cause problems.
In Argentina, a sole-member company is possible. Since the ACCC was passed, people may
form these types of companies.
The definition of a company or a business association before the ACCC prohibited the existence
of a SNC (there needed to be 2 or more persons). Now, there may be 1 or more persons to form
a company.
The SNC must be organized according to one specific type, the corporation type (sociedad
annima). It is governed by rules that govern corporations, which makes it a single-member
company limited by shares (UK) or a corporation (US).
Companies are formed to earn money out of an activity: a company may legally exists where 1
or more persons act together and bind themselves to make capital contributions for the purpose
of exchanging/producing goods or rendering services, with a view to sharing in the profits and
contributing towards the losses.
CONTRIBUTE TOWARDS/SHARE IN/BEAR A LOSS
There must be a mutual intention of sharin profits and making business. There is a difference
between a lender (funds the company) and a shareholder (shares profits).
Classification of companies:
1. Personal-type structures. Business associations taking into account the personal
element of the partners. Legal forms whereby the personal element is relevant and the
individual partners are essential.
Management and control: managed by members who control (member-managed
structures sociedades personalistas). The death of a partner may partially dissolve or
completely dissolve the company unless otherwise agreed by the members.
Partnerships are personal-type structures.
2. Capital-type structures. What really matters is what the partners contribute to the
company in terms of capital.
The personal element is irrelevant to how the structure of the company is composed,
capital must be carefully looked at, preserved and maintained. Capital is crucial.
Corporations are capital structures. LLCs are a hybrid between both types, but they have
more capital structure attributes.
Taxation
Double taxation. A corporation is taxed on an entity level (corporate level on its own profits), as
well as at the member level (dividends).
Profits may be reinvested (capitalization of profits) in order to become more profitable, in
which case the company is not taxed at the member level because members do not receive
dividends. The company is not obligated to declare dividends periodically, it does not violate
the property rights of the members. The company decides whether to declare dividends or
capiralize profits at the meeting of corporate members. However, if a company unreasonably
retains dividends, it may turn out to be perjudicial to sharholders because the company would
be permanently preventing shareholders from perceiving dividends.
CLASE 31/3
Corporation single-member company (sociedad annima unipersonal)
Formar / constituir: constitute or form
Pluralidad de socios: plurality of members
Amendment to
Entered into force as from
Aplicado: introduced
Separate legal entity: personera jurdica
Members to a partnership
Partnership
- More than one member. Members are co-owners.
- Decisions are made jointly.
- Formal document as proof of existence.
- Members share in profits and losses. Members may agree on different ways to do this.
- Joint liability
A partnership is a separate legal entity distinct from its members. Claims must be brought
against the company. It is a personal-type structure, which means that if someone wants to
transfer or assign his shares to other members, it must be unanimously decided.
Partnerships have assets assign to them. Creditors will have claim against those assets.
A term of duration may be specified or not. If a term is decided, once the agreed term has
passed, the company can cease its existence or it can continue its activities. In the event that it
decides to continue past its fixed duration, the compmnay becomes a parnetship at will.
The partnerships profits is the only income the members have.
Members have to inform everything related to the company in the prper record. right of
information.
Duty of loyalty (deber de lealtad): members cannot start a business that competes with the
partnerships business. Evrything must be disclosed.
Secondary, joint and several liability
When the companys assets are not enought to cover the companys debts (the money owed to
creditors), the members personal assets will be used.
(Clusula de objeto social amplio evita que se incurra en la doctrina de ultra vires y hace que
la sociedad no deba reformar el estatuto y cambiar el objeto de la sociedad)
Ultra vires: the compnay is not bound by actions or acts not within the ordinary course of
business.
Intra vires: the companys directors bind the company to any acts that are part of the ordinary
course of business without the need of express powers (meaning that this is an implied power).
Express powers are granted through special resolutions -> special resolutions are issued when
thre is a change of company structure or purpuse, or when the company needs to buy property
or sell a substancial part of its assets or the totality of its assets.
The Board of Directors acts through the compnays legal representatives (the Board President
or CEO) in all actions or acts included within the corporation. The board is elected in the
corporations first organziational meeting (the first company act), held by incorporators. In this
meeting, the board is elected and the bylaws are adopted.
In the US, incorporators may or may not be shareholders, while in Argentina, suscribers to the
artitcls of incorporation are necessarily incorporators. There is no distinction between
sharehlders and incorporators in Argentina.
In Argentina, there are two types of incorporation methods:
1. Suscripcin nica: approval of articles of incorporation.
2. Suscripcin pblica: public issuance of shares. A company that publically issues its
shares to finance the future corporation when they do not jhave the money necessary to
do so.
When it comes to suscripcin nica, the suscribers of the articles are shareholders (suscripor o
fundador) (suscribers are incorporators as well). They are suscribers to the document (arts of
incorporation)and the suscribers of shares.
At th moment an incorportor suscribes, he undertakes/binds himself to take up shares in a
share-suscription agreement.
The company is the issuer of shares and the sharehlder is the holder of shares. Once a person
has acquired shares, he or she becomes an owner.
The articles of incoproration need to state the amount of captial with which the company intends
to do business and the division of said capital (the represantation of capital in shares). The
companys capital is divided into shares.
A share is represented by a certificate of shares, it is the legal representation and division of
capital. It is an item of property.
Share certificate
In Argenina, the captial may be materialized in a share capital - it is represented in a legal
document that a shareholder may have (accin cartular)- or it mayc be dematerialized -
acciones escriturales, also known as book-entry shares; they are not represented by a legal
document and to prove their existence, you need a copy of the book entry where the shares are
entered (constancia de accin escritural en el libro de registro de acciones).
Shareholders are issued shares because the have made contributions to capital instead of
otherwise (different frm creditors), so they are an economic resource.
Shares are different from bonds. Bonds are not contributions to capital. When somebody lends
money to the company, he or she is a creditor. A creditor does not share in on the companys
profits nd losses. Creditors are issued bonds. WIth bonds, creditors receive profits with mturity
date, as well as interest on the loan. They get profit regardless of whether the company is
prosperous or not. Unlike shareholders, bondholers are creditos. They do not run the risk of
companys vicissitudes. They are not concernded with the management of the firm or the firms
profits. Bondholders do not depend on dividends.
Bonds are considered company liabilities (deudas que forman parte del pasivo de la sociedad).
It is a debt incured by he company.
A shareholder, on the other hand, shares in profits and losses and may get dividends according
to the companys profits (should the company declare dividends). Bondholers do not participate
in the declaration of dividends, because they receive a fixed and perioidical rate. It is periodical
because bondholders always receive their rate, and it is fixed because the creditor will get
payments and if he does not he can bring an actiion agaisnt the company witout having to wait
until the companys dissolution. Shareholders have an interes on remaining assets on
dissolution (CUOTA LIQUIDACIONAL), a claim on dividends and the entitltement to vote.
Shareholders hav e financtial rights (collection of dividends and return on dissolution) and
political rights (entitlement to vote). Creditors have no intervention in the companys political
decisions. Thy do not have the right of say and the right to vote.
Shareholders have an interest upon the company being liquidated, but to a residual position -
they are at the end of the line when it comes to collecting money upon liquidation. Shareholders
have to wait for preferred creditors to get payment first after the company has liquidatd its
assets, and then they get the remaining assets, which often means they get nothing.
There are secured and usecured creditors (privilegiados y quirografarios).
It is an eventual (in expectancy) and residual right.
The residual character of the shareholder in expectancy
+ Common shares:
Single-vote shares: one vote per share (acciones ordinarias).
Privileged common shares: common shares may be issued with privileges regarding politica
power, such as pluraliry of votes) (acciones privilegiadas o acciones ordinarias de voto plural).
In Argentina, these types of shares cannot confer more than 5 votes per share. They are also
known as plurality-voting shares.
Preferred shares: preferred shares have priority over other common shares (acciones
preferidas). Shareholders who hold them have priority in collecting dividends and priotity in
collecting assets upon liquidation. These shares put shareholders in a position similar to that of
bondholders. They can also offer cummulative dividends which accumulate dividends
(dividendos fijos o acumulativos), which give shareholdeers the right to collect undeclared
dividends.
In Argentina, shares cannot entitle shareholders to voting privileges and patrimonial preference
at the same time.
CLASE 7/4
Sole proprietorship
- One person is primarily responsible for the companys activities.
- It is more difficult to finance the company at the beginning.
- There is no sharing of profits and losses.
- Pass-through taxation.
- No separate legal entity.
In Argentina, with the amendment of the ACA, a new type of single-member corporation was
created: the SAU. SAUs are legal entities. It is a company divided by shares. They only thing
SAUs have in common with SPs is that they are comprised of only one member. When it comes
to liability, creditors are not able to attack the members personal assets, instead, they can only
go after those assets which he has contributed to the corporation.
General partnership
- More than one person involved. Members of a partnership are subject to secondary, joint
and several liability.
- It is easier for partners to raise money.
- Sharing of profits and losses.
- Pass-through entity, single taxation (different from Argentinas Sociedades Colectivas).
- Separate legal entity. Standing to sue and be sued.
- Partners may choose to enter a partners areement. If they do not enter an agreement,
the UPA will settle anything that is not covered by the law.
Fiduciary duties in general partnership. The duty of care and the duty of loyalty are essential to
creating a sense of trust among the members. Partners cannot waive these duties. The key
element in partnerships is disclosure, partners cannot do anyhtjing that affects the other
partners inrtests without consulting with them first.
Authority of partners (legal powers). Although a partner may be legally entitled to do something,
this does not mean that he or she is not falling into a breach of parnters agreement, which
holds the partner liable against other partners and against third parties.
Limiting liability. A partner may limit liability by filing a statement of partnership authority with the
secretary of state. This statement protects the partnership and all the partners have to sign it.
Third parties may not be aware of the partners statement, but the partnership is still liable
against them. These agreements protect the partnership because partners know what they can
and cannot do.
Authorized actions are implied or express actions that bind the company, while unauthorizeed
actions are those which exceed the partners authority.
Liability of the partners (according to the UPA).
A creditor has to go after the partnerships assets first in order to satisfy his or her credit. If the
partnerships assets have already been exhausted and the debt has not been fully covered, the
creditor can then go after the partners personal assets. This is called the EXCUSIO BENEFIT,
and it means that the partnerships assets must be exhausted before attacking the partners
assets jointly.
Some states have not adopted these changes.
Liability does not apply to incoming partners on debts that were incurred in before said partner
joined the company.
Dissociation (desvincular si es voluntario, remover si es involuntario) means that the partner no
longer belongs to the partnership, he or she ceases to be partner. If it is voluntary, the parnter
needs to serve notice to withdraw from the partnership (depending on the partnership
agreement) and the remaining partners have to decide whether to continue doing business as a
partnership. Dissociation can also happen when an event that was contemplted in the
partnership agreement takes places, when the partners unanimously vote for a partner to
dissociate, when there is a court order to remove a parnter, when the partner suffers from
mental or physical disability that prevents him or her from continuing being a partner, when the
partner declares bankruptcy or when a partner dies.
The effects of dissociation are:
- When it comes to management, the leaving partner cannot vote or make decisions
regarding the company.
- One or more of the remaining members of the partnership have to buy out the leaving
partners interes in the partnership.
- The partnership will be liable to third parties for two years after the partner leaves,
unless they fille a statement of dissociation, in which case it will only be held liable for 90
days.
Termination of a partnership
The company no longer exists. The events that may lead to dissolution are: dissociation, when
the rest of the parnters decide not to continue, operation of law or a court order.
After dissolution, the winding up process commences. Creditors will collect assets and the
company will be liquidated. During liquidation, the assets hace to be preserved, collected and
liqidated. Moreover, employers need to be paid.
Distibution of assets:
1. Creditors and employees.
2. Partners in proportion to their contribution.
External funding: issuance of new shares. The company resorts to outside parties asets
(tangible or intangible) rather than to its own resources. It may occur when the company obtains
disbursements in cash by existing shareholdrs or new investors. The company rasies its capital
amount by a new issuance of shares. It can also be externally funded when funds are brought
into it as the businss entity exercises its borrowing powers and issues debentures convertible
into shaes. If the company excercises its borrowing powers, it does not raise its capital because
it has to return the capital later.
Debenture holders are firm creditors. They are tntitled to be paid back the amount of mony lent
to the company with interest, irrespective of the finanicial position of the company. They are not
afforded voting rights and they do not exercise influencial control over the companys business.
Shareholders are investors. They run the risk of commercial trade in respect of collecting
dividends. They are vested with management and control powers through voting rights.
Corporate powers
- Express powers allow a corporation to issue bonds and stocks, to executer contracts and
negotiable instruments, to buy and sell property, to pay employee benefits and to make
charitable contributions.
- Implied powers allow a corporation to perform all acts reasonably appropriate to accomplish its
corporate purposes and to borrow funds within certain limits, to lend funds and to extend credit
to those with whom the company has a legal or contractual obligation.
Ultra vires doctrine: beyond the power (express or implied). Ultra vires acts are those attempted
by a corporation that are beyond the scope of its express or implied powers, granted by the
corporations articles if incorporation or the company bylaws.
Internal equity funding
Internal equity funing occurs when the companys nominal capital is increased in order to reflect
the real value of depreciated assets as a result of flcutiations in the purchase power of money
due to inflation. In a case of internal equity funding by a dividend or reserve capitalization,
shareholders are not ntitled to exercise pre-emption rights (equity holding) and they are not
afforded rights of accretion, either.
- Preemptive rights: shareholders are entitled to purchading newly issud corporate stock of the
same class as those they hold before outsiders. This right prevents management from depriving
shareholdrs of their proportion of control of the corporation by incrasing the number of shares in
the company.
- Appraisal rights: rights of shareholders granted by state statutes to receive a fair value for their
shares when a merger orr consolidation takes place. Itt is an exceptional way of being returned
your contribution.
- Dividend capitalization: a form of cancelling a debt (different from debt capitalization). Nominal
capital incrase would take place. The members right to collect dividends is transformed into
fully paid-up shares alloted to them, as if they were creditors of the company. It is an internal
fudning method.
Internal funding you want to be more powerful from a financial and commercial point of
view. A corporation can increaase capital without disenbursement of money on the part of the
shareholdes. .
Reserve capitalization and other reserves capitalization of reserves.
The issuance of shares has to be made in the proportion that each shareholder holds. Othrwise,
you change the shareholders participation in the company. The corporation has to respct the
proportion that eah shareholder holds to keep the same degree of control and political sand
financial ecisions.
There is no issuance of new shares beause they have already been paid-up (bonus shares). It
is a a way of rationalizing your resources.
External funding shareholders suscription agreement made betwen the corporation and
eihtr outsiders orr other shareholders with preemptive rights (priority to obtain newly issued
share capital).
Preemptive rights are different from rights of first refusal. Rights of first refusal are not related to
raising the corporations capital. The corporation member is capable of acquiring shares by
transrence - another shareholder transfers his or her equity hodling to the remaining
shareholders of the company first, and then to outsiders.
Preemtive rights are a priority rught. Shareholders have the priototiy when it comes to obtaining
newly issued share capital. In Argentina, you may only suiscribe to newly issued shares of the
sam class and in proportion to the shaes that you already hold.
In Argentina, rights of first refulsa l are related to incrasing holding over undersuscribed shares
of other shareholders.
Accretion rights entitle shareholders to iincrease their proportion of shares by suscribnning to
other shares not suscribed by any other person.