Business Entities in Virginia: Article 3 of 4
W. Brandon Cowan, Esquire
This is the third in a series of four articles directed at highlighting the characteristics of and differences between business organizations in Virginia. The first article served as both an introduction to business entities and frequently used terms (capitalized terms herein shall have the meaning delineated in the Definition Sections of Article 1 and Article 2, or as further defined herein). The second article focused on Partnerships. This article centers on Corporations, and the final article will examine Limited Liability Companies.
As was the case with the previous articles, I begin with a definition section, focused on commonly used Corporate terms. A synopsis of features, benefits and disadvantages of Corporation follows.
Article of Amendment: A Corporation amending its Articles must file the amendment with the SCC (e.g. to change the Registered Agent or Registered Office).
Articles of Incorporation (Articles): A document, or documents, filed with the SCC, commencing the Corporation's legal existence, and setting forth the basic terms of a Corporation's existence.
Authorized Shares: The total number of Shares of Stock that a Corporation may issue under its Charter or Articles, including both Common Stock and Preferred Stock. A Corporation may increase the amount of Authorized Shares if the owners of a majority of the outstanding Shares consent.
Board: The Board of Directors.
Bylaws: A document, enacted apart from the Articles, setting out the rules and administration for the Corporation's internal governance.
Common Stock: A form of equity ownership in a Corporation that provides its owner with certain voting rights and a Share of Corporate profits, though Common Stock provides the holder an inferior priority to Preferred Stock.
Derivative Suit or Shareholder Derivative Suit: A suit asserted by a Shareholder, on the company's behalf against a third party (usually against a Corporate Officer), because of the company's failure to take some action against the third party.
Director: A person appointed or elected to a Board by the Shareholders that manages the overall operations and affairs of a Corporation, including electing and exercising control over its Officers.
Dividends: A portion of a company's earnings or profits distributed pro rata to its Shareholders, usually in the form of cash or additional Shares. Preferred Shares often receive preference over Common Shares. With respect to Dividends
Emergency Powers: Special rules that can provide the Board the power to act, in catastrophic situations, when a Quorum of Board Members cannot be assembled.
Incorporators: An individual who assists in the Formation of a Corporation, usually by filing the Articles. The incorporator's duties end after Incorporation. The incorporator must be competent to enter into legally binding contracts.
Officer: A person elected or appointed by the Board of Directors to manage the daily operations of a company (e.g. CEO, president, vice-president, secretary, and treasurer).
Par Value: The value of a security as shown on its face, representing the arbitrary dollar amount assigned to a Share of Stock by the Corporate Charter.
Preemptive Rights: A Shareholder's right and option to purchase newly issued Shares, usually in an amount proportionate to the Shareholder's current holdings, prior to the Shares being offered to the public. The purpose is to prevent dilution of the Shareholder's ownership interest. The Shareholder must exercise the privilege within a period fixed by the Articles, Bylaws, or other agreement conveying those rights.
Preferred Stock: Carries priority over Common Stock in providing benefits to the owner; including but not limited to, Dividend preference, asset preference on liquidation, voting rights, etc.
Promoters: A founder or organizer of a Corporation who acts on behalf of a Corporation not yet formed. Promoters are fiduciaries of each other and the Corporation, and cannot make a secret profit on their dealings with the Corporation.
Proxy: A person who is authorized to vote another's Shares (a Proxy Vote).
Public Corporation (Publicly Held Corporation): A Corporation who trades Shares to and among the general public.
Quorum: The minimum number of interested parties, usually a majority, who must be present at a meeting (e.g. Annual Meeting, "special meeting" and Directors' Meeting) for the company to transact business or take a vote.
S-Corporation (Subchapter-S Corporation or S-Corp.): A Corporation whose income passes through the Shareholders. The Shareholders pay the tax on their income, as opposed to C-Corps, where the Corporation pays taxes on its income and the Shareholders are taxed on the Dividends they receive. Only Corporations with a limited number of Shareholders can elect S-Corp. tax status under Subchapter S of the Internal Revenue Code.
Shareholder: The name in which Shares are registered in the records of the Corporation; and the beneficial owner of Shares to the extent of the rights granted by a nominee certificate on file with a Corporation.
Shares: The units into which the equity interests in a Corporation are divided, representing an equity or proportion of ownership interest in the Corporation.
Stock: The capital or principal fund raised by a Corporation through Subscribers' contributions or the sale of Shares.
Subscriber: One who subscribes for Shares in a Corporation, either before or after Incorporation.
Subsidiary: A Corporation that has a parent Corporation with a controlling, or majority, Share of its Stock.
Treasury Stock: Stock issued by a Corporation and then reacquired by the Corporation and either canceled or held. By the Corporation
Virginia Stock Corporation Act: Sections 13.1-601 thru 13.1-782 of the Code of Virginia that set forth the Virginia statutory rules for Corporations.
Voting Agreement: A contractual arrangement in which Shareholders agree their Shares will be voted as a unit.
Voting Group or Class Voting: A method of Shareholder voting by which all Shares a class (e.g. class of Common Shares) is entitled to vote and be counted collectively on a matter, usually involving a Fundamental Corporate Change.
Voting Trusts: A Shareholder created voting block that is created through the transfer of Shares to a trustee. Typically the trustee votes the Shares, while the Shareholders still receive the Dividends.
For most new businesses or small companies, a Corporation should not be the Entity of choice. The Code of Virginia imposes rigid requirements upon Corporate formation, initial and annual filings, organizational structure (i.e. Shareholders, Board of Directors and Officers), management, required notices and termination. The fulfillment of these requirements demands significant resources, including time and expense. For a small company, the burden can be overwhelming, and is often unnecessary. Additionally, the centralized management of a Corporation often diminishes the influence of the Shareholders. Finally, as discussed further herein, many Corporations are "double taxed", an unnecessary and undeserved fate for most small companies.
Predominately, a Corporation should be the Entity of choice if the initial principals need or desire (i) a greater flexibility to raise capital; (ii) a less restrictive transfer of assets; or (iii) to allow for the perpetual existence of the company. As discussed throughout this series of Articles, other Entities, such as Partnerships and LLCs, are limited in this regard. It is important for the initial principals to understand that, in return for the aforementioned flexibility, their investment will be diluted by an increase in Shareholders, and their control over Corporate decisions is often diminished.
Promoters act on behalf of a Corporation prior to its Incorporation. Usually the Promoter has a pre-incorporation contract. The Corporation becomes liable for the contract through express Board resolution or implied acceptance through knowledge and receipt of benefits. The Promoter remains liable for the pre-incorporation contract until a Novation releases the Promoter. Similar to Partners, Members, Managers, Directors and Officers, Promoters are Fiduciaries and owe Fiduciary Duties to each other and the Corporation. Therefore, Promoters cannot make any undisclosed profit from his dealings with the Corporation.
Subscribers are persons or Entities that make written offers to buy Stock from a not yet formed Corporation. In Virginia, a pre-incorporation subscription is irrevocable for 6 months.
Virginia has strict formation requirements, which if not followed results in the failure of any Entity to Incorporate. The Incorporator signs and files the Articles of Incorporation with the SCC. The Articles must include (i) the name of the Incorporator; (ii) the Name of the Corporation, which must include some indication of Incorporation (e.g. inc.); (iii) the number of Authorized Shares; (iv) the Articles must describe and authorize rights assigned to each class of Stock; and (v) the Articles must assign a Registered Agent and address of the Registered Office. The SCC publishes this information to provide the public the means of serving Corporations with notices, a lawsuit or summons. Additionally, the Corporation must adopt Bylaws, though they need not be included with the Articles. The Board and/or the Shareholders have the power to adopt and amend the Bylaws, unless the Articles provide otherwise.
Unless properly formed, it is illegal to do Business as a Corporation, and the Shareholders would not be shielded from liability. A foreign Corporation is Incorporated outside Virginia, but doing business in the Commonwealth. It is recommended that a foreign Corporation, which regularly transacts business in Virginia, apply for a certificate of authority from the SCC. The certificate requires the same information as the Articles. Foreign Corporations that transact business in Virginia without certification are subject to a modest fine. More importantly, the foreign Corporation may not initiate a lawsuit in a Virginia State Court; even though the foreign Corporation can be sued in Virginia.
Generally, Shareholders of properly formed Corporations are not personally liable for debts or obligations of the Corporation, and are only liable for the price of their Stock. Though, as discussed further herein, the Corporate veil can be pierced (i) for fraud by the Shareholder; (ii) if the Corporate formalities are not strictly followed (e.g. the Shareholder treats the Corporation as his alter ego); and (iii) for undercapitalization (i.e. failure to maintain capital sufficient to satisfy foreseeable liabilities of the Corporation).
Issuance of Stock
Corporate ownership rights are created by the issuance of Shares of Stock. To raise capital, Corporations sell Shares of Stock to Shareholders. In return, Shareholders receive a pro rata equity interest in the Corporation. The return or realization of appreciation of the Shareholder's investment depends on the success of the Corporation. In its basic form, Corporations are designed to allow for the free transferability of ownership, meaning the Corporation does not control who can, and cannot, hold Stock. This is a distinguishing characteristic from other Entities, like Partnerships and LLCs, which guard ownership rights. Though, as is the case with many Corporate characteristics, the Articles, Bylaws, and agreements among Shareholders can limit this free transference.
The Corporation must receive fair and reasonable Consideration in exchange for Stock. Consideration may be received in currency, property or services; so long as the Board agrees the offered Consideration meets the requisite Par Value (the minimum issuance price for a Share of Stock). The Board and purchasing Shareholder may be liable for Shares issued below Par Value. The Corporation may receive greater than Par Value. Shares issued as Treasury Stock (Stock previously issued and reacquired by the Corporation) do not carry a Par Value requirement. Additionally, a Shareholder may be able to exercise Preemptive Rights by buying Stock whenever there is a new issuance, if such a right is provided for in the Articles, Bylaws, or by Shareholder agreement. This enables the Shareholder to maintain his percentage of ownership in the Corporation.
The rights of Shareholders differ between companies, primarily dependent upon the Articles, Bylaws and class of Shares. Generally, the Shareholders elect the Board of Directors. The Board establishes the policies, direction and structure of the Corporation, and makes big-picture business decisions for the Corporation. The Board also hires and oversees the Officers (e.g. president or chief executive officer, vice-president, secretary and treasurer). The Officers carry out the day-to-day operations, consistent with the direction and policy decisions of the Board. The Officers hire, instruct and assign duties to the employees. Accordingly, the employees are accountable to the Officers, the Officers are accountable to the Board and the Board is accountable to the Shareholders.
Shareholders often, but not always, have voting rights. If available, voting rights provide Shareholders some ability to influence the general direction of the Corporation, but do not enable Shareholders to directly influence policy or day-to-day operations of the business. This is analogous to the United State's electoral structure. A citizen's vote influences the general direction of government; but once the government is in place, the citizens cannot control specific government operations, policies and legislative decisions. For the most part, citizens relinquish their influence until the next election.
The general rule is that only the Shareholders of record, as of record date, have the right to vote. The Shareholders of record are those persons who own the Stock as reflected in the Corporation's records. The record date establishes the specific day required to own Stock in order to vote, which is set by the Board no more than 70 days before the meeting.
Shareholders vote at an annual meeting. Corporations are required to have an annual meeting whenever there is at least one Director's seat open. Additionally, Shareholders vote at "special meetings" when, as discussed further herein, a proposal or Fundamental Corporate Change needs to be addressed. Prior to every annual or "special meeting", the Corporation is required to give written notice to every Shareholder entitled to vote; including the time, place and purpose for the meeting. Unless waived, notice must be given between 10 – 60 days prior to an annual meeting, and 25 – 60 days prior to a "special meeting". If proper notice is not provided, any action taken at the meeting is void; unless those Shareholders, who did not receive proper notice, provide a waiver. Additionally, a Quorum must be present at the meeting. Shares may be represented in person, by Proxy or by electronic transmission, if allowed by the Bylaws. Once a Share is represented for any purpose, it is deemed represented for the remainder of a meeting. As such, leaving a meeting cannot break a Quorum. Unless otherwise provided for in the Articles or Bylaws, action is approved if a Quorum is present and if a majority of Shares present at the meeting vote to approve the action.
A Shareholder can utilize a few alternative voting options to provide flexibility and strategic advantage on how the Shareholder's Shares are voted (i.e. Proxies, Voting Trusts, Voting Agreement and Cumulative Voting). A Proxy is a written or electronic transmission, authorized by the record Shareholder and directed to the secretary of the Corporation that authorizes another to vote his Shares. Voting Trusts create a formal delegation of voting power in a written agreement that is filed with the Corporation. Shareholders transfer legal title of their Shares to a voting trustee, who votes their Shares in accordance with the Voting Trust agreement. A Voting Agreement is similar to a Voting Trust in that Shareholders execute a written agreement. The Shareholders agree that all Shares, committed by the agreement, will be voted as the majority determines. Finally, Cumulative Voting concerns the election of Directors, and must be specifically authorized by the Articles. In Cumulative Voting each Shareholder can vote the total Shares he owns – multiplied by the number of Directors to be elected. Then, the Shareholder has the option to concentrate his votes on specific Directors (e.g. If the Shareholder owns 1,000 Shares and there are three Directors to be elected. The Shareholder has 3,000 votes. The Shareholder can choose to allocate all 3,000 votes to one Director's seat, or can allot 1,500 votes to two Directors seats, or can allot 1,000 votes to each Director's seat).
As well as voting, there are other rights vested in the Shareholders. A Shareholder can examine the Corporation's books and records; so long as he has been a record Shareholder for 6 months, or owns at least 5% of the outstanding Shares, or through court approval. In addition, the Shareholder must make written demand upon the Corporation, stating his requisite "good faith" purpose for the review.
Shareholders may also be entitled to receive Dividends (a pro rata portion of the Corporation's earnings or profits). The declaration of Dividends is within the Board's discretion. The Board cannot award Dividends if the Corporation is Insolvent. Directors are personally liable for unlawful Dividends, but "good faith" reliance on a financial officer's representations are acceptable. Dividends are paid by the priority of Shares. In simplest terms, Preferred Stock is the first to be paid a Dividend; then, if there are additional funds, Common Stock is paid. Participating Preferred Stock gets the preferred Dividend in addition to the second Dividend with the Common Stock. There is also cumulative Preferred Stock, meaning, if a Dividend is not paid, it will accumulate until the next time a Dividend is paid. Then, the accumulated Preferred Dividends are paid first.
Shareholders can also bring a Derivative Suit, on behalf of the Corporation, against an Officer, Director or the Corporation as a whole. Often, the third party is a Fiduciary of the Corporation. Once a derivative suit is filed a committee of two or more independent Directors can, after an investigation, move for dismissal if the committee concludes the suit is not in the best interest of the Corporation. The proceeds from a successful Derivative Suit are the property of the Corporation. The Shareholder is reimbursed for attorney's fees.
Directors and Officers
As with Incorporation, Virginia has statutory requirements pertaining to Directors: (i) Virginia Corporations must have a Board with at least one member; (ii) the Shareholders elect the Directors; (iii) the Shareholders can remove a Director prior to expiration of the Director's term, with or without cause; and (iv) unless the Directors consent to act without a meeting, Board meetings are required. Proxies and Voting Agreements are not allowed. Additionally, a Quorum of Directors must be present for the Board to conduct business. For a Board to pass a resolution, unless the Bylaws provide otherwise, a majority vote of the Directors present at the meeting is required (e.g. if there are 13 directors, at least 7 Directors must attend the meeting for a Quorum; and if 7 attend, at least 4 Directors must vote for a resolution in order for it to pass).
As previously stated, the Board establishes the vision and day-to-day direction of the Corporation; and, in so doing, answers to the Corporation and its Shareholder. Management and execution of the Board's vision, is vested in the Officers.
Directors and Officers are Fiduciaries, owing the Duties of Care and Loyalty. The Duty of Care requires Fiduciaries to act with the care that a prudent person would employ to his own business, and not act with Nonfeasance, Misfeasance or Malfeasance. The Duty of Loyalty precludes a Fiduciary from receiving an unfair benefit to the detriment of the Corporation or its Shareholders, unless there is material disclosure and ratification by a majority of independent Directors or Shares. In executing their duties, Directors and Officers are protected from liability by the "business judgment rule", which presumes that Directors manage in good faith and in the best interests of the Corporation and its Shareholders. As such, directors are not liable for innocent mistakes of business judgment.
Frequently, the Corporation indemnifies the Fiduciary. The Fiduciary is reimbursed for costs, attorney's fees, fines, and the amount of the judgment or settlement. Indemnification is mandatory if the Fiduciary is victorious. On the other hand, indemnification is prohibited when the Fiduciary was found liable and the Corporation was the adverse party. Conversely, the Corporation is permitted to indemnify the Fiduciary when there is liability to third parties or a settlement with the Corporation. Still, the Fiduciary must show he acted in good faith and with the reasonable belief that his conduct was in the Corporation's best interest. Permissive indemnification is allowed if approved by a majority of independent Directors, if approved by a committee of at least two independent Directors, if approved by a majority of independent Shares, or if recommended by counsel.
Fundamental Corporate Changes
The Board has the power to make ministerial decisions pertaining to the Corporation. Conversely, Fundamental Corporate Changes require, at a minimum, approval by at least a majority of the Shareholders. Fundamental Corporate Changes include amendment of the Articles; merger, consolidation with another company or conversion to another for of Entity; sale of substantially all Corporate assets; reduction of Authorized Shares; purchase or exchange of Shares with another company; and Dissolution of the Corporation. Due to the potential for significant impact to the Corporation and Shareholders, Fundamental Corporate Changes are governed by special rules. The following illustrates the standard procedure, which may be modified by the Articles or Bylaws. First, the Board must pass a resolution to bring the Fundamental Change to a vote of the Shareholders at an annual or "special meeting". Then, notice of a "special meeting" must be sent to the record Shareholders (between 25 - 60 days prior to the meeting, unless waived). Finally, at the "special meeting", approval by more than 2/3 of all Shares entitled to vote are required for approval of the Fundamental Change, absent les or more restrictive provisions in the Articles, Bylaws or Shareholder agreement.
Certain Fundamental Corporate Changes permit a Dissenting Shareholder's Right of Appraisal, meaning the right to force the Corporation to buy his Shares at fair market value ("FMV"). To perfect this right, prior to the "special meeting", the Shareholder must file a written notice both objecting to the Board's resolution and stating the Shareholder's intent to demand payment. Subsequently, the Shareholder must either abstain from voting or vote against the proposed change; and then must make a timely written demand to the Corporation for his Shares to be bought.
Taxes – S-Corp
For tax purposes, Corporations are often referred to as C-Corps and S-Corps, based upon the governing subchapter (C or S) of the Internal Revenue Code, pursuant to which they are taxed. Most often, Corporations are thought to be C-Corps. A negative characteristic of the C-Corp is the imposition of "double taxation"; however, other considerations may make a C-Corp a more desirable option. "Double taxation" refers to the fact that with C-Corps income tax is imposed first on the Corporation's net profits; and subsequently upon the distributions of Dividends to the Shareholders. This differs from other entities, like Partnerships and LLCs, where the company is not taxed; and, instead, taxes Flow Through the company to the individual's tax return. Virginia taxes C-Corps in a similar manner to the Federal government by taxing income minus deductions. Property and payroll taxes are among other taxes to which a Corporation is subjected.
S-Corps are entitled the same Flow Through Tax privilege as Partnerships and LLCs, in that the Shareholders report their proportionate share of the S-Corp's income on their individual tax returns. The S-Corp does not pay Federal or State income tax. The S-Corp sheds the dubious "double taxation", while also maintaining a shield from liability of individual Shareholders, a protection not extended to Partners of a Partnership. To be granted the S-Corp designation the Corporation (i) must be an eligible Entity, (ii) must have fewer than 100 Shareholders; (iii) must have only one class of Stock; (iv) must allocate profits and losses proportionately to Shareholders; and (v) the Shareholders must be natural persons (e.g. not Entities) that are U.S. citizens or residents.
The foregoing not withstanding, attorneys and tax advisors should assist in making the final decision concerning the appropriate tax designation for an Entity.
Dissolution and Termination
As a review, Dissolution is the process by which a Corporation Terminates its legal existence. Generally, Corporations voluntarily dissolve by Board resolution and approval by the Shareholders; provided, however, that the formalities for a Fundamental Corporate Change, as previously discussed herein, must be followed. Once ratified, Articles of Dissolution are filed with the SCC, and "Form 996" must be filed with the IRS. The SCC issues a Certificate of Dissolution once it determines that the Articles comply with the requirements of law and that the Corporation has paid all fees and taxes and delinquencies thereof. The Corporation is deemed dissolved upon the effective date of the Certificate.
Upon Dissolution, the Corporation must cease all business that is not related to the Winding Up of Corporate affairs (e.g. paying obligations, selling assets and collecting accounts receivable). The Corporation must provide written notice to all creditors of its intent to dissolve; and, in the notice, state that the creditor has 120 days to deliver a claim to the Corporation. Upon the conclusion of Winding Up, after all obligations have been settled, the remaining assets of the Corporation are distributed to the Shareholders, in accordance with the priority of their Stock and in proportion with the amount of Shares they own.
The final Corporate act is to file Articles of Termination with the SCC. The Articles certify that the Corporation has paid all obligations and distributed all assets. If the SCC finds that the Articles comply with the requirements of law and that all required fees have been paid, the SCC shall, by order, issue a Certificate of Termination of Corporate existence. Upon the issuance of such certificate, the existence of the Corporation ceases, except for the purpose of suits, other proceedings and appropriate Corporate action by Shareholders, the Board and Officers. Termination does eliminate or impair any remedy available to, or against, the Corporation, its Directors, Officers or Shareholders that existed prior to Termination.
When considering the type of Entity, always seek legal counsel and tax advice for guidance prior to establishing a Corporation or any Entity. While this Article highlights the advantages and disadvantages of a Corporation, as opposed to other Entities, the ultimate decision should be made on a case-by-case basis following the consideration of all relevant facts.
 This Article is intended to provide an overview of business Entities in Virginia, specifically focused on Corporations. This Article does not constitute and should not be treated as legal advice regarding any issue pertaining to legal business issues, generally; and should not be treated as legal advice regarding business organizations in Virginia, and the establishment thereof. Each recipient and reader of this Article should consult with an attorney and other advisors (e.g. tax advisors) regarding issues pertaining to businesses, issues specifically pertaining to the business organization, the establishment of a business organization, and both the tax and non-tax implications and consequences relevant to business organizations.
 Feel free to contact me, Brandon Cowan at CowanGates, for assistance in understanding the significant differences between Entities and assistance in choosing the appropriate Entity.
 Article 4 will be posted on, or about, April 1, 2012.
 Similar to other Entities that are Incorporated in Virginia and registered with the SCC, like Partnerships and LLCs, the Corporate veil limits the liability of Shareholders, Directors and Officers.
 Novation is the replacement of an old contract with a new one.
 Authorized Shares re the maximum number of Shares the Corporation is certified to issue. The Corporation can always issue fewer Shares than an authorized. For the Corporation to issue more it must amend the Articles.
 See Definitions for Common Stock and Preferred Stock
 The Code of Virginia creates certain requirements Corporations must follow. If not specifically mandated by the Code, the Articles and Bylaws control Corporate governance. The Code does provide many provisions that control only if the Articles or Bylaws are silent on the issue.
 Consideration is defined as something of value. meaning it cannot be a gift. The Consideration does not have to be in the form of currency (e.g. it could be the performances of services). Regardless, of the form, the Consideration must represent fair market value.
 Preemptive Rights are presumed for Corporations formed prior to 2006. Conversely, for Corporations formed after 2006, Preemptive Rights do not exist unless expressly granted by the Articles.
 A majority of Shares, not Shareholders, constitutes a Quorum, unless otherwise provided for in the Articles or Bylaws.
 Unless otherwise expressed in the Articles or Bylaws, a Proxy Agreement is valid for eleven months. Proxies are revocable unless the Proxy explicitly states it is irrevocable, and unless there is an interest created by the Proxy.
 The original Shareholders receive trust certificates; and, with the exception of voting, retain all Shareholder rights. A Voting Trust is limited to ten years.
 A Corporation is Insolvent if it is unable to pay its debts or the Corporation's assets are less than its liabilities.
 To bring a Derivative action the Shareholder: (i) must have contemporaneous Stock ownership (at least one Share when the claim arose and throughout the litigation); (ii) must first make a written demand on the Directors to file suit; and (iii) the Shareholder's demand must have either been rejected by the Board or 90 days must have passed since the Shareholder made the demand.
 Recovery against a Fiduciary is limited to either $100,000 or is limited by that Director's cash compensation for the previous year.
 Notice requirements for the meetings may be set in the Bylaws.
 See Articles 1 and 2 for a more extensive discussion of Fiduciary Duties.
 Merger is when one company merges into another. Consolidation is when two companies are consolidated into a new company. Conversion is when a Corporation is converted into a limited liability company.
 The Articles may provide for different percentages, but not less than a majority.
 E.g. merger or consolidation; sale or exchange of assets; exchange of Shares; or as expressed in the Articles or Bylaws.
 Invariably, the Corporation and Shareholder may not agree on the FMV of the Shares. When this occurs the court holds the power to appoint an expert appraiser to determine the FMV.
 Generally, net profits are determined by calculating Corporate sales, and then subtracting costs as well as taxable deductions and exemptions.
 See Articles 1 and 2 for further explanation of Flow Through taxation.
 Dissolution, Winding Up and Termination were previously discussed in Article II, pertaining to Partnerships. Therefore, the following shall only serve as a review. See Article II for a more thorough discussion.
 Dissolution can also be voluntarily initiated by: (i) resolution of the initial Board if Shares have not been the Corporation has not begun doing business or issues Stock; (ii) unanimous consent of the Shareholders without resolution for the Board. Involuntary Dissolution can occur: (i) automatically if the Corporation fails to record required filings with the SCC (e.g. annual reports) or fails to pay its annual fees; (ii) by order of the SCC if the Corporation exceeds its legal authority, fails to maintain a registered office or agent, or fails to file required documents; (iii) or by court order.
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