Delaware. Business Entities under the General Corporation Law of

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1 Business Entities under the General Corporation Law of Delaware Civil Service Bureau Reform & Development Department 1

2 The underlying, guiding principle of Delaware s approach is: 2

3 In this presentation: I. Corporations STOCK Corporations CLOSE Corporations MEMBERSHIP Corporations II. Partnerships GENERAL Partnerships LIMITED LIABILITY Partnerships LIMITED Partnerships LIMIRED LIABILITY LIMITED Partnerships III. LIMITED LIABILITY Companies IV. STATUTORY Trusts V. JOINT Ventures VI. Non-Profit Corporations and Cooperatives VII. SOLE Proprietorships 3

4 A Corporation is a separate legal entity formed by any person, partnership or association to conduct or promote a lawful business. A corporation is formed by filing a certificate of incorporation with the Division of Corporations in the Department of State. A corporation has three primary constituents: stockholders, directors and officers and, under certain circumstances, creditors 4

5 Certificate of Incorporation shall contain 1. Name of the corporation 2. Address of the corporation s registered office and its registered agent in the state 3. Nature or purpose of the business should be stated clearly in the certificate of incorporation 4. Total number of shares of all classes of stock which the corporation shall have authority to issue and the number of shares of each class 5. Name and mailing address of the incorporator or incorporators In cases where the incorporators are to lose their power upon the filing of the certificate of incorporation, the names and mailing address of the directors proposed to serve until the first annual meeting of stockholders is conducted should be provided in the certificate of incorporation. 6. All provisions for the management of business under the corporation 7. The certificate of incorporation may include any other terms desired in the certificate so long as these are not contrary to the General Corporation Law (broad flexibility is possible) 5

6 STOCK Corporations: have the authority under its certificate of incorporation to issue shares of stock representing the equity interests in the enterprise FORMATION The corporation is formed upon the filing of the certificate of incorporation with the Delaware Secretary of State. The appointment of an initial board of directors and initial officers, adoption of bylaws and issuance of shares complete the organization of the corporation. LIMITED LIABILITY The stockholders of a corporation are not personally liable for payment of the corporation s debts (unless otherwise provided in the certificate of incorporation) CAPITAL STRUCTURE Delaware does not impose any minimum capital requirements. A corporation is free to establish the capital structure that best suits its needs: Corporations may issue a single class of stock or multiple classes of stock Stock may be voting or non-voting, and shares of one class may be given a greater or lesser number of votes per share than shares of another class Stock may be common stock or preferred stock Stock may be made convertible into shares or may be made redeemable by the corporation 6

7 STOCK Corporations MANAGEMENT The business and affairs of Delaware corporations are managed by or under the direction of a board of directors!!! 7

8 CLOSE Corporation - is a corporation organized under the General Corporation Law, but its certificate of incorporation also contains provisions requiring following conditions: All of the corporation s shares be represented by certificates and held record by a specified number of persons, not exceeding thirty persons All issued shares are subject to one or more of certain specified restrictions on transfer: such as: restrictions granting existing stockholders or the corporation first right to purchase shares proposed to be sold by another stockholder No public offering of the corporation s shares within the meaning of the Securities Act of The certificate of incorporation of a close corporation may set forth the qualifications of stockholders: by specifying classes of persons who shall be entitled to record of stock of any class be holders of by specifying classes of person who shall not be entitled to be holders of stock of any class or both 8

9 CLOSE Corporation MANAGEMENT Differences in management of STOCK and CLOSE Corporations STOCK Corporation CLOSE Corporation Management of the corporation is conducted by or under the direction of the board of directors except specific management functions are expressly conferred on someone else by the certificate of incorporation In a close corporation, the certificate of incorporation may provide that the stockholders will manage the business of the corporation directly In this case no elections of directors are required NOTICE: A close corporation is formed in the same manner as any stock corporation, except its certificate of incorporation must contain a heading stating that it is a close corporation 9

10 MEMBERSHIP Corporation Certificate of Incorporation must state (or the certificate may state that such conditions are to be stated in the bylaws) Authorized number, classes and par value of shares of the corporation Corporation has no authority to issue shares of capital stock Conditions of membership in the corporation (if any) NOTICE: A close corporation is formed and managed in the same manner as any stock corporation 10

11 PARTNERSHIPS: A partnership is an association of two or more persons to carry on any lawful business, purpose or activity. There are two types of partnerships GENERAL PARTNESHIP and LIMITED PARTNERSHIP FORMATION GENERAL PARTNERSHIP can be formed orally (it is not necessary to make filings with any governmental agency) OR a statement of partnership existence can be filed with the Secretary of State of the State of Delaware. Statement must include: the name of the general partnership, the address of the general partnership s registered office in Delaware name and address of the general partnership s registered agent for service of process in Delaware. 11

12 LIMITED Partnership (LP) Limited partnership is formed by two or more persons or entities, with at least one general partner and one or more limited partners. FORMATION A Delaware limited partnership is formed under authority of the Partnership Act. The Partnership Act permits a limited partnership to conduct any lawful business, purpose or activity with the exception of the business of granting policies of insurance, assuming insurance risks or banking (no judicial or regulatory approval is required to create a limited partnership). Required contents of a certificate of limited partnership: name of the limited partnership, address of the registered office of the limited partnership, name and address of the registered agent of the limited partnership in Delaware for service of process and the name and address of each general partner of the limited partnership (certificate must be signed by all of the general partners, the limited partners need not be listed and need not sign the certificate) To organize a limited partnership there must be a partnership agreement. Partnership agreement can set forth a management structure and impose any structure they deem fit. While it is generally recommended that a partnership agreement be a written instrument, the Partnership Act does permit oral partnership agreements. 12

13 LIMITEDPartnership(LP) 13

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16 The governing instrument of a Delaware statutory trust may also include provisions for officers, employees or other managers of the statutory trust. The governing instrument may also contain provisions defining the rights, duties and obligations of the trustees, the beneficial owners and other persons The governing instrument also may provide rights to any other person, including a person who is not a party thereto NOTICE:. Neither the trustees nor the beneficial owners of a statutory trust will have any personal liability for the obligations of the statutory trust unless otherwise provided in the governing instrument 16

17 The Delaware Limited Liability Company Act s basic approach: broadest possible discretion in drafting their limited liability company L I M I T E D L I A B I L I T Y COMPANIES agreement members of an LLC are free to contract among themselves concerning the management of and standards governing the internal affairs of the LLC maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements RESULT over 250,000 Delaware LLCs have been formed in the eleven years since adoption of the Delaware Limited Liability Company Act 17

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19 LLC Capital Structure & Management The cornerstone of the formation and organization of LLC is - LLC Agreement. The LLC Agreement will govern the internal affairs of the LLC and the conduct of its business. (The LLC Agreement is not required to be publicly filed) Different classes or groups of members having differing rights, powers and duties, including differing voting rights. The LLC Agreement may provide for the manner in which profits and losses of the LLC are to be allocated. LLC Agreement may specify the responsibilities of the managers having differing managerial rights, powers and duties. 19

20 Equal division of profits and losses Equal control over the business venture Equal ownership in the business venture Agreement to engage in the business for mutual benefit NOTICE: Depending on the choice of structure, joint ventures may be able to limit or modify their fiduciary duties by contract. Delaware law provides an unparalleled degree of freedom to do this, whichever organizational form is chosen. 20

21 A Delaware corporation may be structured as a non-profit entity by including in its certificate of incorporation that the corporation is not organized for profit. distributions of corporate assets to members of the corporation whether on dissolution or otherwise is limited. Normally such corporations are formed as membership corporations and are conducted for religious, scientific, charitable or educational purposes. A sole proprietorship (simplest form of business enterprise) consisting of a single proprietor conducting business as an individual. (A sole proprietorship has no legal existence apart from its owner) Business conducted in this form subjects the owner to unlimited personal liability. Profits and losses of the enterprise are borne directly by the proprietor. Management of the business is entirely within the control of the proprietor, who by definition is the only person with an equity interest in the enterprise. 21

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