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Business Law

What is business law?

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

What is the difference between a C corporation and S corporation?

What does it mean to “pierce the corporate veil?”

What is the difference between a joint venture and a partnership?

What is a non-profit corporation?

How often should a corporation hold meetings and update its minutes?

Is it a good idea to have a Buy-Sell Agreement?

What is involved in a corporate merger?

How long may a foreign national stay and work in the United States with an H-1B Visa?

How can a properly established business entity such as a corporation shield me from personal liability for business debts and obligations?

Does it matter who purchases the stock under a Buy-Sell Agreement?

Should the Buy-Sell Agreement be funded by life insurance?





Q: What is business law?

Business law encompasses the many statutes, codes, rules and regulations that exist to provide a legal framework within which businesses may be formed and managed and commercial transactions may be conducted. Business law is highly diverse and includes areas such as:

  •     business formation and organization
  •     transactional business law (contracts)
  •     business planning
  •     business negotiations
  •     mergers and acquisition
  •     divestitures


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Q: What factors should be considered in choosing the 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:

  • 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
  • issues surrounding the liabilities of the business (actual and contingent)    

In addition, each business is unique and will have considerations specific to that business that will be important when selecting the business form that will best serve your needs. Contact us so that you discuss all these considerations with you.


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Q: What is the difference between a C corporation and S corporation?

There is no difference between a C corporation and an S corporation under state law (Texas law or the law of any other state of formation). The difference between a C corporation and an S corporation is strictly a matter of federal income tax law.

The Internal Revenue Code has two different sets of rules for corporate taxation, which are set forth in Subchapters C and S of theax Code.

Subchapter C corporations include most large, publicly-held businesses. These corporations face double taxation on their profits. C corporations file their own tax returns and pay taxes on profits before paying dividends to shareholders. Then, when a C corporation pays a dividend to its shareholders, they are taxed on their shareholders' individual returns. Thus, with a C corporation, there are two levels of taxation on the corporate earnings: first at the corporate and again at the shareholder level.

The system of taxation for Subchapter S corporations is quite different. The corporation files a return, but generally does not pay any tax on its income. Instead, the income and losses (subject to certain limitations) of the S corporation are reported on the returns of the shareholders of the S corporation, whether or not the earnings are distributed to the shareholders. Upon distribution of the earnings to the shareholders, generally there is no additional tax. Due to this system, there is only one level of taxation on corporate earnings, rather than double taxation as is the case with C corporations.

To qualify for subchapter S treatment, a corporation:

  •     Must be domestic
  •     Must not be affiliated with a larger corporate group
  •     Must have no more than one hundred shareholders
  •     Must have only one class of stock
  •     Must not have any corporate or partnership shareholders
  •     Must not have any nonresident alien shareholders.


Additionally, the corporation must a Form 2553 with the IRS electing S corporation status, and all shareholders must sign the Form 2553 agreeing to the election prior to it being filed with the IRS. Any S corporation with multiple shareholders should have a shareholders agreement to prevent termination of the S election.


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Q: What does it mean to “pierce the corporate veil?”

Sometimes, courts 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 or overrides the usual limited liability for organizational wrongdoing. The specific criteria for piercing the corporate veil vary somewhat from state to state, but usually include the following:

  •     Courts may not allow owners to benefit from limited liability if the underlying business is indistinguishable from its owners or if a corporation is formed for fraudulent purposes.
  •     Courts may impose liability on the individuals controlling the business if a business fails to follow certain corporate formalities such as record-keeping.


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Q: 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.


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Q: What is a non-profit corporation?

A non-profit corporation is a corporation formed under state non-profit corporate law to carry out a charitable, educational, religious, literary, or scientific purpose. A non-profit corporation doesn't pay federal or state income taxes on the profits from the activities in which it engages to carry out its objectives. Special tax-exempt status is granted as a matter of public policy to further the various purposes of these entities. To obtain this special tax-exempt status, it is necessary to file an application with the IRS.

The most common federal tax exemption for non-profit corporation is Section 501(c)(3) of the Internal Revenue Code, which is why non-profit corporations are sometimes called 501(c)(3) corporations. Other exemptions are set forth in Section 501(c) of the Code.
 


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Q: How often should a corporation hold meetings and update its minutes?

Any time a corporation undertakes a major change or transaction, it should be reflected in its minutes. In addition, meetings of shareholders and directors should take place at least annually if for no other reason than to elect new officers and directors. Failure to adhere to the formality of regular meetings can jeopardize the corporation's ability to shield its officers, directors and shareholders from personal liability for the corporation's actions.


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Q: 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 a partnership or limited liability company.


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Q: What is involved in a corporate merger?

Like most corporate law, mergers are regulated at the state level. Each state has its own corporate statutes that govern the procedure for mergers. While these laws vary by jurisdiction, many aspects of the merger process are substantially similar 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.

Before considering a merger or acquisition, consult us because of the requirements and variables involved in these types of transactions.


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Q: How long may a foreign national stay and work in the United States with an H-1B Visa?

The duration of stay with the H-1B Visa is three years, however, in many cases it may be extended for an additional three years. After the maximum period of six years has passed, the foreign national must leave and remain out of the United States for a full year before a petition for a second H-1B Visa may be approved.


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Q: 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.


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Q: Does it matter who purchases the stock under a Buy-Sell Agreement?

The purchaser of the stock under a buy-sell agreement (the corporation or its shareholders) is always an important consideration for the following reasons: 

  1. The purchaser (corporation or its shareholders) will have important tax implications. Typically, with a C corporation, the purchaser will be the corporation to reduce corporate earnings and profits. With an S corporation, the shareholders will be the purchasers to increase their bases in their stock in the corporation.
  2. Even in those situation when it is desirable for the corporation to purchase the stock, the corporation may be prevented under corporate law from purchasing the stock, in which case the shareholders need to be granted a secondary right to purchase. This also allow greater tax planning flexibility.

 


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Q: Should the Buy-Sell Agreement be funded by life insurance?

Any effective Buy-Sell Agreement must be funded by life insurance.  Without funding by life insurance:

  • The family of the deceased will not have any assurance that his or her interest in the business will be purchased at its value in a timely manner and that the purchase price will be received when it is needed most.
  • The purchasers of the interest of the deceased may be faced with satisfying an obligation that is beyond their means.


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N. Dean Hawkins & Associates, Inc. assists clients throughout the Dallas metropolitan area, including Dallas, Collin, Denton, Kaufman and Rockwall counties.



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12801 N. Central Expressway, Suite 540, Dallas, TX 75243
| Phone: 972.934.2830

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