Connections

Issue 2 • Volume 3 • April 10

CORPORATE UPDATES

What’s a Corporation, and Who Cares?
By Shiriki Cavitt, Oldcastle Law Group

Shariki Cavitt

Understanding legal entities is important, both in connection with running our business and in doing business with others. The Oldcastle Law Group often receives questions regarding the structure of OMG, and the legal significance and requirements of a company doing business as a corporation, as opposed to a division, company, sole proprietorship, limited liability company (LLC) or partnership. Questions also arise as to the meaning of being a corporate officer or director, and the significance of powers of attorney and corporate seals. The following discussion provides an overview of these matters.

Business Entities
There are many types of business entities, and the major factors affecting how a business is organized include (1) the size and scope of the business, (2) the desire to limit individual liability, (3) tax advantages, and (4) disclosure and compliance requirements. A business operated by an individual is a "sole proprietorship." The owner is individually liable for all of the obligations and risks of the business. In other words, the owner's individual assets are at stake for any of the business' liabilities. A "partnership" is a business owned by two or more people, each of whom is individually liable for the obligations of the business. The partners have to share both liability and business risk. Additionally, each partner is personally liable for the actions of the other partner(s). A "limited partnership" is a partnership in which the liabilities of some partners are limited by the partnership agreement.

The law allows the formation of a separate legal entity, called a "corporation," to engage in business. An LLC is a type of legal entity that provides the liability protection of a corporation but is taxed like a partnership. The members (owners) have a liability limited to their investment in the entity. OMG legal entities are typically traditional corporations.

A corporation or LLC can be owned by an individual or individuals, or by another corporation or LLC, through the ownership of shares of the company's stock. A corporation or LLC owned by another corporation or LLC is a "subsidiary." The owner or owners of a corporation or LLC that is properly formed and maintained are not individually liable for the corporation’s obligations. A corporation has almost all of the same legal rights and responsibilities as a person: it can enter into contracts, sue and be sued, and be convicted of crimes.

A corporation can operate through divisions, branches or companies. These are not legal entities, but typically utilize trade or "doing business as" names. This arrangement reflects an internal method of organizing and managing a corporation’s operations. For example, Trotti & Thomson and Texas Bitulithic are trade names used by APAC-Texas, Inc. They are separately managed at the operations level, but they are not separate corporations from a legal perspective. Also, it is important to register trade names and any associated logos with the U.S. Patent & Trademark office.

With Whom Are We Doing Business?
Before doing business with anyone, including entering into any kind of contract or granting credit, we need to verify the legal entity. This will assure that we can enforce our legal rights, if necessary. Is "Joe Jones Trucking" a sole proprietorship, a corporation or an LLC? If it is a corporation or LLC, is the entity in good standing and authorized to do business? Are bank accounts and insurance policies in its name? Are the names on contracts and other important documents, such as insurance certificates and credit applications, the same? If you can't answer these questions, then you don't really know who you’re doing business with, or whether you can enforce your rights, such as payment.

Who Can Sign?
Just as important as verifying who we're doing business with is assuring that representatives of those companies signing contracts and other documents are authorized to do so. A contract signed by someone who is not authorized may not be binding and prevent us from enforcing our rights.

Here’s how corporate authority works. A corporation's Board of Directors (or similar group for an LLC) has overall responsibility for supervising a company’s business. It elects officers to perform functions necessary to the day-to-day operation of the business. An officer has specified powers to act on the company's behalf. The powers of each officer are specified by corporate "bylaws" or by acts of the board. Typically, the president and vice presidents of a corporation have the authority and duty to manage the company's operations in the ordinary course of business, including executing contracts and other documents. The treasurer and assistant treasurers are responsible for the corporation’s financial and accounting affairs and records, and may have authority to sign documents in connection with those functions, but typically do not have general authority to sign. Similarly, the secretary and assistant secretaries are responsible for keeping current certain records necessary to maintain the corporation’s legal existence. They also "attest," or officially certify as witnesses, the signatures of corporate officers on documents, but typically do not have general authority to sign. A company can also issue Powers of Attorney to designate employees or agents who may or may not also be officers, to execute certain types of documents and to attest signatures. Powers of Attorney also may authorize the use of certain trade names. In order to verify a person's authority to sign, you will need to get a copy of the board resolution, Power of Attorney or certificate of the corporate secretary verifying the authority. This can be a critical issue for documents signed on a construction project, such as change orders.

Also, it is important not to assume that an individual has authority from a title on a business card like "sales representative" or "area manager," unless there is a long history of doing business with the company based on documents signed by the individual, which would make it difficult for the company to deny the person’s authority.

If you have any questions about legal entities or signing authority, please don't hesitate to call the Oldcastle Law Group at (800) 241-7074 or visit the OMG Legal Resource site: http://omgintranet/legal/Pages/default.aspx.

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