Louis E."Lee" Madere, Jr.
Attorney & Counselor at Law
546 Octavia Street
New Orleans, Louisiana 70115
(504) 897-3102 or lee@madere.com
1. Protecting the Corporate
Veil
2. Duties and Liabilities
of Officers and Directors
(a) Dealings with the
Company
(b) Liability for Corporate
Acts and Debts
(c) Competition with the
Corporation and Usurpation of Corporate Opportunities
(d) Mistakes and the Business
Judgment Rule
3. Compliance with Securities
Laws
4. Louisiana Corporation
Franchise Tax
5. Louisiana Corporation
Income Tax
6. Selected Federal Taxation
Issues
7. "S Corporation"
Election
8. Federal Employer Identification
Number
9. Louisiana Sales Tax Certificate
and Withholding Income Tax
10. Louisiana Employment
Security Law
11. Occupational License
Taxes
12. Filing in Parish Mortgage
Records
1. Protecting the Corporate Veil
As a matter of Louisiana law, shareholders of a duly-formed corporation
are not liable to creditors of the corporation. In other words, there is
a shield between shareholders and the debts of the corporation, known as
the "corporate veil." However, in some instances courts can be
persuaded by corporation creditors to ignore the corporate entity and impose
liability for corporate debts directly upon the shareholders. This is known
as "piercing" the corporate veil.
Some of the reason courts may disregard the corporate entity are where
there has been a (I) commingling of corporation and shareholder funds,
(ii) under-capitalization, (iii) failure to keep separate bank accounts
and bookkeeping records for the corporation and the shareholder, (iv) failure
to hold regular shareholder or directors' meetings, or (v) generally a
failure to conduct business as a corporation. It is important that the
legal amenities attending corporate existence be properly observed.
(a) All acts of the Company which are not routine (ex: entering into
an important agreement) should be approved in advance at a shareholder
or directors' meeting;
(b) Shareholder meetings should be held annually; special meetings
should be held when necessary, (keep accurate minutes of all actions taken);
(c)Directors' meetings should be held at least annually and otherwise
as necessary to authorize acts of the Company, (keep accurate minutes of
all actions taken);
(d) Do not allow the funds of the Company to be commingled with funds
of any other person or entity;
(e) The bank accounts, ledgers, journals and other financial records
of the Company (whether written or in the form of a computer program) should
be kept segregated from those of any shareholder, officer or director;
(f) Do not mix personal business affairs with those of the Company;
that is, do not disregard the corporate entity and transact what is actually
Company business as if it were indistinguishable from your own. Draw a
clear distinction between corporate and personal dealings;
(g) Keep written minutes of all meetings of shareholders and directors;
(h) All meeting minutes, shareholder consents, directors' resolutions
and similar papers should be prepared in documents fashion and maintained
in the Company's minute book;
(i) All transfers and redemptions of the Company's shares should be
promptly and accurately reflected in the stock transfer ledger;
(j) All franchise and income taxes due should be timely paid to the
Collector of Revenue, and all annual reports should be timely filed with
the Secretary of State of Louisiana; and
(k) The Company should be adequately capitalized in consideration of
its intended business operations.
The foregoing precautions, though neither exclusive nor exhaustive,
will help ensure that the Company's creditors are unable to impose upon
you, as shareholder, liability for the Company's debts.
Top | Lee's
Home Page | lee@madere.com | Comments
2. Duties and Liabilities of Officers and Directors
The directors and officers of a corporation owe a high duty of
care to the corporation and its shareholders. Consequently, they must at
all times act in good faith, with the same diligence, care, judgment and
skill which an ordinarily prudent person would exercise under similar circumstances
and like positions.
Top | Lee's Home Page | lee@madere.com | Comments
(a) Dealings with the Company
While it is permissible for a director or officer to deal with
the Company, such dealings should be (i) had in good faith, (ii) fair to
the Company, and (iii) authorized by the shareholders or by the directors,
excluding the vote of the interested director. Of course, the officer or
director's interest must be fully disclosed to the other directors.
Top | Lee's Home Page | lee@madere.com | Comments
(b) Liability for Corporate Acts and Debts
. As a general rule, officers and directors will not incur personal
liability for debts of the Company, absent fraud, malfeasance, criminal
wrongdoing or negligence. However, it is vital that officers and directors,
when acting for the Company, clearly and unequivocally act for and in the
name of the Company as its agents and do not purport (or appear) to bind
themselves personally for Company obligations. Further, an officer or director
may be cast with personal liability in the event he or she knowingly or
without reasonable care and inquiry:
(i) allows the issuance of shares in contravention of federal securities
laws and Louisiana corporation and securities laws;
(ii) allows the issuance of shares for over-valued consideration;
(iii) allows the payment of a dividend or redemption of stock in contravention
of the Louisiana Business Corporation Law; or
(iv) refuses to permit a shareholder upon proper demand, to inspect
the corporate books and records.
Moreover, an officer or director may be fined and/or imprisoned if
he or she:
(i) fails to make the required tax filings with the state of Louisiana;
(ii) neglects or refuses to deliver an annual report to a shareholder;
(iii) fails to keep adequate corporate records; or
(iv) attempts to exercise a corporate power, privilege or franchise
after annulment, vacation or forfeiture of the corporation's charter.
However, a director generally cannot be subjected to criminal liability
for corporate acts authorized by action of the board of directors if he
or she was not present at the meeting which authorized such action or,
if present, dissented from such vote. Such dissent must be noted in the
minutes of the meeting or be reduced to writing and filed at the corporation's
registered office.
Top | Lee's Home Page | lee@madere.com | Comments
(c) Competition with the Corporation and Usurpation
of Corporate Opportunities
Competition between a corporation and an officer or director is
not per se unlawful, but courts will scrutinize such transactions for unfair
advantage or profit at the corporation's expense. By example, unfairness
has been found when an officer or director uses inside information to obtain
personal profit, when he or she lures away corporate customers or employees
to a new firm or when he or she uses corporate funds to establish a competing
enterprise.
Similarly, a corporation may void or avoid a transaction when a director
or officer has taken advantage of an opportunity belonging to the corporation.
Whether an opportunity belongs to the corporation depends upon all the
circumstances, including to whom it was presented, who developed and financed
the opportunity and the relation between the opportunity and the corporation's
business. However, an officer or director may take advantage of an opportunity
if after full disclosure to the corporation it cannot or will not do so.
Top | Lee's Home Page | lee@madere.com | Comments
(d) Mistakes and the Business Judgment Rule
Officers and directors must act for the corporation in good faith
and with the same diligence, care, judgment and skill which an ordinarily
prudent person would exercise under similar circumstances and like positions.
In determining whether a specific act or failure to act amounts to a breach
of duty under Louisiana law, the courts have considered such factors as:
(I) the duties imposed by the corporation's charter;
(ii) the good or bad faith accompanying the conduct;
(iii) the type of authorization for the conduct;
(iv) the actual or imputed knowledge of corporation affairs to the
officer or director;
(v) the time of the alleged breach of duty;
(vi) the personal gain or lack of gain to the officer or director in
question;
(vii) whether the officer or director is paid or unpaid; and
(viii) his or her special skill, knowledge, experience or background.
Courts generally do not impose personal liability upon an officer or
director for mere error of business judgment, absent negligence or bad
faith. However, an officer or director is expected to know something of
the corporation he or she directs.
Top | Lee's Home Page | lee@madere.com | Comments
3. Compliance with Securities Laws
Shares of stock in the Company are defined as securities under
both the Securities Act of 1933, as amended (the "Act") and the
Louisiana Blue Sky Law. These laws provide that no shares of the Company's
stock may be sold unless a registration statement covering such shares
has been filed with the Securities and Exchange Commission ("SEC")
and the Commissioner of Securities of Louisiana (the "Commissioner")
and is in effect, unless there is available an exemption from the registration
requirement.
Therefore, any shares of the Company's stock which are sold must be:
(I) covered by an effective registration statement,
(ii) sold in an exempt transaction or
(iii) sold illegally.
A number of exemptions from the registration requirements probably
will be available for any proposed sale of shares of the Company. Nevertheless,
you should consult with counsel in advance of
(i) offering any shares for sale or soliciting offers to buy shares,
(ii) transferring such shares for anything of value, or
(iii) entering into any agreement or understanding to transfer such
shares for value.
Remedies under the Act and the Blue Sky Law ignore the corporate veil.
We advise you that both the Company and all persons who "control"
it (by virtue of stock ownership, agency, position or otherwise) could,
under certain circumstances, become liable under state or federal securities
laws for substantial criminal or civil penalties.
Moreover, a purchaser of the Company's shares could recover from the
Company and/or its control persons the price paid for the shares, plus
interest, less income received thereon if he can simply prove either that
(i) no exemption from registration was available for the sale of the
shares, or
(ii) in the course of selling the shares, a material fact (one that
might have influenced a reasonable person's buying decision) was omitted
or misrepresented.
You should also be aware that many other common business dealings may
also involve transactions in securities or be deemed to be "security
transactions" under the Act and the Blue Sky Law. The transfer for
value of any stock, bond, debenture, note or other evidence of indebtedness,
fractional, undivided interest in oil, gas or other mineral rights, investment
contract or any certificate of interest or participation in, temporary
or interim certificate for, receipt for, guarantee of, or warrant or right
to subscribe to or purchase any of the foregoing, may constitute the sale
of a security. However, this list is by no means exhaustive.
The subsequent resale or transfer of the Company's shares by any shareholder
(or heir, legatee, successor or assign of a shareholder) also must be registered
or permitted by exemption. The Company has an obligation under law to prevent
any subsequent resale or other transfer of its shares, and it should refuse
to recognize any such transfer not lawfully done and refuse to issue a
new stock certificate in such a case. You will note that the Company's
stock certificates contain a declaration restricting the transfer of its
shares unless the transfer complies with state and federal securities laws.
Normally, an exemption for subsequent transfers of stock will be available,
but it is best to consult counsel before making or permitting any such
transfers.
Top | Lee's Home Page | lee@madere.com | Comments
4. Louisiana Corporation Franchise Tax
The Company will be required to pay an annual franchise tax and
file with it a Louisiana Corporation Franchise Tax Return with the Louisiana
Department of Revenue and Taxation, Corporate Tax Division, Corporate Franchise
Tax Section.
Top | Lee's Home Page | lee@madere.com | Comments
5. Louisiana Corporation Income Tax
In addition to the franchise tax, the Company will be required
to pay tax on income derived from Louisiana sources. You should consult
the Company's accountant in respect of Louisiana income tax liabilities
which the Company incurs.
Top | Lee's Home Page | lee@madere.com | Comments
6. Selected Federal Taxation Issues
Following are brief discussions of federal taxation issues which
may arise in the course of the Company's business. The matter of a subchapter
S election is discussed in item number 7 of this letter. Corporations which
are organized for profit, such as the Company, are referred to in the Internal
Revenue Code and in this letter as "C Corporations." We do not
purport to address all federal taxation issues which may arise, but only
those chiefly of concern to a newly-organized corporation.
(a) Corporate Income Tax. The Company will owe federal income tax on
its net income, pursuant to the Internal Revenue Code (the "IRC"):
(b) Fringe Benefits. Eventually the Company may wish to implement certain
fringe benefits for its officers, directors or employees. Such benefits
may include accident and health plans, medical reimbursement plans, group
term life insurance, and qualified pension, stock bonus or profit-sharing
plans. However, relevant IRC provisions are extremely complex, hence any
such plans should be implemented only after careful planning and design
by a qualified tax advisor.
(c) Miscellaneous matters. The Company will have recurring obligations,
including the payment of the federal unemployment tax, and the collection
and payment of F.I.C.A. and withholding taxes, to the Internal Revenue
Service. These matters are too complex to address in this letter, and the
Company should rely upon its accountant to oversee and handle such matters.
Top | Lee's Home Page | lee@madere.com | Comments
7. "S Corporation" Election
Certain qualifying corporations may elect under Subchapter S of
the IRC to be treated as an "S Corporation." An S Corporation
is taxed under rules that are practically identical to those that apply
to partnerships. The advantage of an S Corporation is that it allows net
operating losses to be passed through and utilized by its shareholders,
and the shareholders still possess limited liability and other non-tax
advantages of the corporate form of organization. Moreover, S Corporation
income is only taxable once, when it is distributed to the shareholders,
whereas C Corporation income is taxed twice, once at the corporate level,
then again when paid as dividends to shareholders.
There are advantages and disadvantages which attend S Corporation election.
For example, the Company in event of such election could not issue preferred
stock. Moreover, a highly profitable corporation may not benefit from S
Corporation treatment, although a company which expects significant start-up
losses may benefit greatly. Since S Corporation earnings are taxed only
at the shareholder level, income taxes are paid by each shareholder just
as they would on other ordinary income. On the other hand, C Corporations
pay tax at the corporate level at the corporate rate. You should consult
with the Company's accountant on this matter.
Top | Lee's Home Page | lee@madere.com | Comments
8. Federal Employer Identification Number
The Company will be required to file Form SS-4 with the Internal
Revenue Service and obtain a federal employer identification number.
Top | Lee's Home Page | lee@madere.com | Comments
9. Louisiana Sales Tax Certificate and Withholding Income
Tax
If the Company will employ persons in Louisiana, it must register
for withholding tax and withhold and pay income taxes on employee salaries
to the State of Louisiana. Further, the Company may be required to obtain
a sales tax or use tax certificate.
Top | Lee's Home Page | lee@madere.com | Comments
10. Louisiana Employment Security Law
The Company will be required to file a Status Report with the Louisiana
Department of Labor, Office of Employment Security. Upon receiving the
Status Report, the Department will assign a Louisiana employer identification
number to the Company. The Company's accountant should oversee and handle
such matters as payments regarding withholding taxes.
Top | Lee's Home Page | lee@madere.com | Comments
11. Occupational License Taxes
The governing authority of each local governmental subdivision
is authorized to levy an annual license tax upon each person doing business
within the territorial jurisdiction of such local governmental subdivision.
Each governmental subdivision which has elected to impose such a tax has
its own licensing procedure and should be consulted directly for compliance
therewith.
Top | Lee's Home Page | lee@madere.com | Comments
12. Filing in Parish Mortgage Records
Louisiana law requires that a certified copy or multiple original
of the corporation's articles of incorporation and initial report, together
with a copy of the certificate of incorporation, be filed for recordation
in the mortgage records of the parish where the corporation maintains its
registered office. Was such filing was made by your attorney on your behalf?
Top | Lee's Home Page | lee@madere.com | Comments