PART II

PARTNERSHIP

66. In General. A party may trade and enter into contracts by himself, or he may associate with himself others. A person is not obliged by law to transact business solely by himself. He is permitted, for the purpose of having labor, capital and skill joined in one enterprise, to combine with others. Where a person joins with himself one or more persons for the purpose of transacting business as a unit, the firm composed of the two or more persons thus joined is called a partnership.

A partnership may be defined to be a contract between two or more persons, by which their labor, skill or property is joined in an enterprise for common profit, and in which each partner may act as principal. The principal features of a partnership are, the right of each partner to act as principal for the other partner, and the individual liability of each partner for the acts of the partnership. A and B agree to combine their efforts in operating a tea and coffee store. Each may bind the other by contract, made within the scope of the business, and each is liable individually to pay the debts incurred by the partnership.

67. How a Partnership is Created. A partnership is created by a contract. This contract may be oral, express or implied. Many partnerships are created by carefully drawn, written instruments, in which the rights and duties of each party are set forth in detail; while others are made by oral agreement. Any contract of importance should, for the purpose of having a record of the exact understanding of the parties, be made in writing. As between themselves, parties cannot be partners except such was their intention. Sometimes, parties are considered partners as to third persons, with whom they deal, and are liable as partners, where there is no intent to form a partnership, and when none exists as between themselves. This relationship, called partnership by estoppel, is based on equitable reasons and is discussed more at length under a separate section. As between the partners themselves, to constitute a partnership, there must be a contract to that effect. This requires an assent on the part of all the parties, based upon a valid consideration. Parties may enter into an agreement to enter into a partnership at a future time. In this event, the partnership does not exist as such until the time provided for in the contract arrives, and until the conditions of the executory agreement have been complied with.

A partnership may be created for any lawful purpose. If the partnership contract is procured through fraud or misrepresentation, it may be avoided by reason thereof.

68. Who May be Partners. Any person competent to contract on his own behalf may enter into a contract. (See "Competency of Parties," chapter on Contracts.) An infant, or person under legal age, may enter into a partnership contract the same as he may enter into any other contract. The law does not prohibit it. But contracts by infants are voidable. They may be renounced by the infant at his pleasure. For example, if A, of legal age, enters into a partnership contract with B, seventeen years of age, B may renounce his obligation to A at any time he pleases, before he has reached legal age. A, however, cannot renounce his partnership contract on account of the infancy of B. B may ratify his contract after becoming of legal age. If B, after becoming of legal age, refuses to continue the partnership, and refuses to carry out his partnership agreement, he is deemed in law to have renounced his partnership, and is not liable for the obligation of the partnership. If, however, after reaching legal age, B continues the partnership relationship for an appreciable length of time, he is deemed in law to have ratified the agreement, and is thereafter liable thereon. B may not only renounce the partnership agreement as to his partner, A but also as to third persons dealing with the partnership. A, however, is responsible individually upon the partnership contracts with third persons, and cannot take advantage of B's infancy. It is no defense for him.

Drunken persons, insane persons, and idiots cannot enter into partnership agreements. A married woman could not enter into contracts at common law, but by statute is now permitted to make contracts, with a few minor limitations, such as acting as surety for her husband, or making contracts with her husband.

69. Partnership Name. The members of a partnership may use any name they desire, so long as the name does not interfere with the fixed rights of others. The members of a partnership may use the name of one of the partners, or the combined names of all, or of a part of the partners, or a name separate and distinct from the names of any of the partners. For example, if A, B, and C form a partnership, they may use as a partnership name, "The A Co.," "The A, B, Co.," "The A, B, C Co.," "The X Co.," or any fictitious name they may determine upon. Some states provide by statute, that a partnership using a name not revealing the individual members of a partnership, must, in order to sue in the partnership name, file with a county official the names of the members composing the firm. Other states by statute prohibit the use of fictitious names.

A partnership cannot be bound by any other name than its own. Where a partnership has adopted a firm name, contracts made in the name of one of the individual members do not bind the partnership. A partnership may change its firm name. This may be done by agreement, express or implied. If the members of a partnership do not expressly agree to change the name, but a new name is used by one or more of the members, and the change is acquiesced in by the other members, they are deemed in law to have agreed to the new name. A partnership may use two firm names. This sometimes occurs when a firm has branches. One name is used for one branch and another for the second branch. In this event the partners are liable for contracts made in either name.

70. Names Applied to Different Kinds of Partners. Depending upon the nature of their relationship to the partnership, partners are said to be secret, silent, ostensible, nominal, or dormant.

A secret partner is one who keeps the fact of his membership in the partnership from the public. This does not enable him to escape liability as a partner. He is in the position of an undisclosed principal. (See "Undisclosed Principal," chapter on Agency.) So long as a secret partner keeps the fact of his membership from the public, of course he will not be sued as a member. But his liability exists in spite of this secret, and when discovered his liability may be enforced.

A silent partner is one who takes no active part in the operation of the partnership business. His name may be known as a partner, or not. He is not necessarily a secret partner. He may be well known as a member of the partnership, but if he takes no active part in the management, he is said to be a silent partner. A silent partner is individually liable for the obligations of the partnership, the same as any partner.

An ostensible partner is one who permits himself to be held out or represented as a partner, when in fact he is not a partner. He is responsible as a partner to third persons who deal with the firm, and to whom he has been held out as a partner. For example, A and B trade as the Rodway Co., A in company with C, tries to buy goods of D. D knows C but does not know A and B. A with C's consent, tells D that C is a member of the Rodway Co. C is liable as an ostensible partner. More commonly the ostensible partner permits his name to be used as a part of the partnership name when in fact he is not a member of the partnership. If A and B form a partnership and with C's consent use the name, "A B and C Co.," C is liable on the partnership obligations, in spite of the fact that as between himself and A and B, he is not a partner. If a partner is advertised to third parties as such, without his knowledge or consent, he is an ostensible partner, but is not liable as a partner.

A nominal partner is one who permits his name to be used as a member of the partnership without being a member of the partnership. Ordinarily he is paid something for the use of his name, but does not have a share in the profits. A nominal partner is liable to third persons as a partner, but as to the other partners, he does not have the rights or liabilities of a partner.

The term, dormant partner, is sometimes used synonymously with secret partner. Technically, it means that the partner is both unknown and silent. It combines the elements of a secret and a silent partner.

The terms, general and special partner, are commonly used. By general partner, is meant the one who shares equally in the profits and losses of the partnership transactions. The term, special partner, means that the partner, as between the other partners, does not share equally in the profits, nor is he responsible to the other partners for an equal share of the losses. As to third persons, the terms general and special partners have no significance; for example, if A, B and C enter into a partnership, A and B each to furnish two fifths of the capital, and each to have two fifths of the profits, and C is to furnish one fifth of the capital, and receive one fifth of the profits, A and B are general partners and C is a special partner. As to third persons dealing with the partnership A, B and C, each are individually liable.

71. Partnership Agreements as between Partners. In considering the question as to whether a partnership exists, it must be regarded from two points. First, is there a partnership as between partners; second, is there a partnership as to third persons? A partnership may exist as between the partners themselves. When a partnership exists between the partners themselves, there can be no question about its existing as to third persons.

As between the partners themselves, a partnership cannot exist unless there is a contract express or implied, by which they mutually agree or consent to the partnership. If A and B agree, either orally or in writing, to engage in a partnership enterprise, and do so engage in a joint business, a partnership exists between them. If A trades alone as the "A Co." and, desiring to obtain credit from B, tells B that C is a member of the A Co., even though C ratifies the unauthorized act of A, by stating to B that he is a member of the A Co., this does not constitute him as a partner to A. As to B, however, he is a partner and is liable as such. As to A, he is not a partner, and is not entitled to a share in the profits. If the intent of the parties to form a partnership, is clear, from their express agreement, or from an agreement implied from their acts or conduct, a partnership, without question, exists between them. Many business arrangements are made by which property, skill, or labor is combined under peculiar arrangements, as to the division of profits and losses, making it difficult to tell whether a partnership exists. It is not essential that the word, "partnership," be used to have an agreement constitute a partnership. If it is the intent of the parties thereto to create a partnership, one exists regardless of the term used. An agreement to share losses, or to share profits in an enterprise, is some evidence of a partnership, but is not sufficient of itself to constitute a partnership. A and B may agree each to furnish his own tools in drilling an oil well, and if a profit is made, to divide the profits, and if a loss is sustained to bear the loss out of their individual funds. These facts, do not show an intent to form a partnership, and do not make A and B partners as to themselves. If, however, A and B contribute one hundred dollars ($100.00) each to a partnership fund, and combine the tools possessed by each toward a partnership fund, and agree to share equally the profits and losses, the intention is clear that a partnership is intended, and these facts constitute A and B partners.

72. Partnership as to Third Parties. Where a partnership exists as between the partners themselves there is no question about its existing as to third persons dealing with the partnership as such. A party cannot hold himself out to the world as a partner, and by means of a private arrangement with his apparent partners, evade liability as a partner. It is generally conceded that a secret arrangement made between partners that one shall not be liable as a partner, if made known to a third person dealing with the partnership, will relieve the apparent partner from liability to such third person. For example, if A and B are doing business as the "A B Co.," and A lends his name to the company for a fixed consideration, B receives all the profits and is liable for all the debts. If C deals with the "A B Co.," not knowing of the private contract between A and B, A is liable individually upon the contract. If, however, C at the time he deals with the "A B Co.," is informed of the actual connection of A with the company, he cannot hold A liable as a partner.

If a third person extends credit to one of the partners, knowing that the purchase is for the benefit of the partnership, he can hold liable, only the party to whom he extended credit. If, however, he sells to one of the partners, not knowing that he is a partner of a firm, and the firm gets the benefit of the purchase, the firm is liable for the debt.

A partnership, like a principal in agency, is liable for the torts or private wrongs of the individual partners, committed in the course of the partnership business. If A, a member of the A B Co. partnership, uses fraud in purchasing goods, the A B Co., is liable for the fraud. If A, a member of the A B Co., gas fitters, carelessly connect a gas burner, thereby causing an explosion, and injury to C, the A B Co., is liable for the injury.

73. Powers and Property of a Partnership. A partnership has the power to transact business in its firm name. Unless prohibited by statute, it may sue and be sued in its firm name, regardless of the names of the individual partners.

Each member of a partnership is regarded as an agent of all the other members of the partnership, with authority to bind the partnership by any contract made within the scope of the partnership business. A partner may deal individually in matters outside the scope of the partnership business. For example, A, B and C form a partnership for the purpose of buying, selling and leasing real estate. A, B and C are authorized to act for each other, in doing all the things reasonably connected with the transaction of real estate business. If A orders groceries in the firm name, his partners may deny and avoid the obligation, on the ground that is is not within the scope of the partnership affairs. The grocer selling A groceries in the firm name cannot claim that B and C authorized A to buy groceries. The purchase is clearly outside the real estate business. If, however, A purchases a house and lot in the firm name and uses it personally, the seller can hold the partnership for the purchase price. A partnership is empowered to sign notes, only when necessary to the transaction of the partnership business. Partnerships may hold the title to personal property in the name of the firm. This does not prevent the individual members from holding property individually at the same time. As between the partners themselves, only that personal property mutually agreed to belong to the partnership is partnership funds. Even as to third persons dealing with the partnership, the actual agreement of the individual members as to what is, and what is not partnership funds governs, except in the case of fraud. A partnership cannot represent that it owns certain property, or that certain purchases are made for the partnership for the purpose of obtaining credit, and then claim that it is owned by an individual member. Property purchased by partnership funds, or improved with partnership funds, belongs to the partnership. Real estate purchased with partnership funds is regarded as belonging to the firm, even though title is held in the name of one of the partners. The partner in whose name the property is held is said to be the legal owner, but the partnership is the equitable owner. Firm creditors may subject it to pay firm obligations.

74. Liability of Persons Held Out as Partners. If a person permits himself to be held out as a partner, he will be bound as a partner, as to third persons dealing with the partnership with this in view. It matters not that the party held out as a partner is not a partner in fact. The real relation will protect the apparent partner, as against the other partners, but not as against third parties who deal with the firm, relying upon his being a partner. What amounts to being held out as a partner is a question of fact, which must be determined by the circumstances surrounding each particular case. If A, without authority of B, tells C that B is his partner in the shoe business and that they are trading as the "A B Co.," and C sells them an order of shoes, without investigating whether B actually is a partner, B is not liable as a partner for the obligation. The authority to hold a person out as a partner must come from the partner so held out. It may come from his assent or his neglect in denying the relationship when he learns that he is being advertised as a partner. For example, suppose A borrows five hundred dollars ($500.00) of B and promises to give B a one-half interest in his grocery business, if B so desires, on condition that B spend his afternoons working in the store, and B, not considering himself a partner, permits C to tell third persons that he is a partner. As a result, B cannot deny partnership liability as against third persons who consider him a partner in dealing with the partnership.

75. Duties and Liabilities of Partners as to Each Other. The relation of partners to each other is a contract relation. Each partner must carry out the terms of the contract. Ordinarily, partnerships require the devotion of the entire time and attention of each partner to the partnership business. Partners are not permitted to engage in any business for themselves which will interfere with the partnership business, or take their time and attention away from the partnership business. Each partner owes that duty of fidelity to the other members of the partnership. A partner as an individual may deal with the firm, and may act as agent for others in dealing with the firm, if it is with the consent and knowledge of the other partners. A partner cannot sell his interest in the firm to another, and have the new partner take his place as a member of the partnership, without the consent of the other partners. In any event, the withdrawal of one partner and the substitution of another dissolves the old partnership and establishes a new partnership. One partner may assign or transfer his interest in a partnership but this dissolves the partnership, and gives the purchaser the right to his seller's interest in the funds of the partnership. It gives the purchaser no right to participate in the management of the business.

If by the terms of a partnership agreement, the partnership is to subsist for a specified length of time, and one partner withdraws or refuses to continue, he is liable in damages to the other partners, for breach of contract. If the partnership is organized without regard to any specified duration, a partner may withdraw at will, and thus dissolve the partnership. Partners must devote their entire time and attention to the business, unless the partnership agreement provides otherwise. Each partner is entitled to an equal share of the profits. If one partner deals unfairly with another, the latter cannot bring an ordinary suit at law for recovery of the amount due him, or for his damages, but he must bring a suit in equity, setting up the facts, and must demand an accounting. The court will then determine the rights of the partners. If a partnership is dissolved, and the partners expressly agree that a certain sum is owing by one partner to another, the latter may sue the former for this amount, in an ordinary action at law.

76. Liability of Partnership to Third Persons. A partnership is liable as such, upon its contracts to third persons. This means that the obligation is in the nature of a joint one against all the partners, and not a several one against the individual partners. There is an individual liability of each partner, called a liability of each partner in solido. This liability is discussed in this section under the title, "Liability of Individual Members of a Partnership." A third person, in commencing a suit against a partnership, must sue all the partners, or be subject to the risk of having the case dismissed at the objection of the one sued. All the property of a partnership may be subjected to the payment of partnership obligations.

77. Liability of Individual Members of a Partnership for Partnership Obligations. While a suit brought against one partner for a partnership debt may be dismissed if objected to by the partner sued, if not objected to, and judgment is taken, it may be enforced against the individual assets of the partner sued. In this event, in most jurisdictions, the other partners are discharged from liability. If the partnership is sued either in the partnership name, or in the name of all the individual partners, the individual members are still liable in solido for the debt. By in solido is meant, liable for the whole. If one partner is compelled to pay all or more than his proportion of a partnership debt, he may recover the excess of his share, ratably from the other partners.

A member of a partnership may have partnership assets and individual assets. A creditor of the partnership may satisfy his claim out of the firm assets, or out of a partner's individual assets, except where there are individual creditors. In the latter event, the partnership creditors cannot subject individual partners assets to the disadvantage of the individual creditors. On the other hand, individual creditors cannot subject a partner's share in the partnership assets to the disadvantage of partnership creditors. This means that in case of insolvency of either a partner or of the partnership, firm creditors must first exhaust firm assets, and take the balance of individual assets after individual creditors have been satisfied. It means, further, that individual creditors must satisfy their debts out of individual partner's assets, and can only subject the balance of firm assets after firm creditors have been satisfied. If there are no partnership assets at all, and no solvent partners, firm creditors are treated on the same basis as individual creditors, and the individual assets of the partners are divided pro rata among partnership and individual creditors alike.

78. Change of Membership. A partnership depends for its existence upon the continuation of the same membership. If one partner withdraws, the partnership is, by that act, dissolved. If a new member is admitted, the partnership is dissolved and a new one created. A partner cannot escape his liability as a partner by withdrawing from the partnership. By this act, he terminates the partnership, and no further liabilities can be created against him except as to those persons having no notice of his withdrawal; but he is still liable for the old partnership debts. A substituted partner is not liable for the debts incurred before he enters the firm, unless he expressly assumes such debts. If he expressly assumes them, this does not relieve the outgoing partner from liability, unless this is assented to by partnership creditors. If it is borne in mind that a change in membership dissolves a partnership, and any partnership that exists thereafter is separate and distinct from the old one, and dates from the withdrawal of the retiring partner, or admission of the new partner, the individual liability of the partners is easily determined. For example, if A, B and C are partners in a dry goods business, and B withdraws, B is still personally liable for the debts of the A B C Co. The partnership ceases at the time of his withdrawal. If A sells his interest to D, who becomes a member with the consent of B and C, A is still liable to creditors who became creditors before A's withdrawal. D is not liable for the debts incurred before his admission as a partner, unless he expressly so agrees.

79. Death of a Partner. The death of a partner terminates the partnership. The remaining partners may agree to continue the partnership, which amounts to the formation of a new partnership. In case of death of one partner, title to the partnership property is in the surviving partners. They must collect the assets and may sue on firm obligations. They cannot, as survivors, continue the business further than is necessary to wind up the affairs of the partnership. They must first pay all firm obligations, and distribute the proceeds among themselves and the representatives of the deceased partner.

80. Survivorship. Survivorship is the term applied to the relation to the partnership of the remaining partners, after a dissolution. The partners remaining after a dissolution are known as survivors. The title to the partnership property vests in the survivors, and they must collect the assets, pay the liabilities and distribute the proceeds among themselves and the representatives of the other partners. By statute, in some states, surviving partners are permitted to purchase firm assets at a fair appraised valuation. Surviving partners have the right to retain possession of the partnership property, and to do those things necessary to wind up the affairs of the partnership. They are not permitted to divide any firm assets among themselves, until all firm debts are paid. If A, B and C are partners in the grocery business, and C dies, the title to the property rests in A and B, who have the authority to sue for the debts owing, and may be sued for the debts owed by the firm. They have the right to draw checks on the firm checking account, but no right to incur further obligations. In the absence of special statute, they have no right to purchase the business for themselves, and if they choose to continue it, they do so at their own individual risk, and must account for all profits made.

81. Dissolution of Partnerships. A partnership may be dissolved by lapse of time. If a partnership is entered into under an express agreement that it is to subsist for a certain length of time, lapse of the stipulated period works a dissolution. A partnership may be dissolved by mutual agreement of the partners. A partnership may also be dissolved by any change of membership, whether it be the withdrawal of a member, admission of a new member, or death of a member. Bankruptcy of a member, or bankruptcy of the partnership itself, works a dissolution. If one party violates his duties as a partner, or if for any reason, the partnership ceases as a result of a decree of court, there is a dissolution.

82. Notice of Dissolution. Persons who deal with a partnership through one of the partners, or through an authorized agent, have the right to assume that the partnership will continue to exist. If a partnership is dissolved by lapse of time, by mutual agreement, or by withdrawal or entrance of another partner, notice must be given of such change, to protect the members of the former partnership against contracts of third persons, made subsequently to the dissolution. Business people, who have had former dealings with the partnership, must receive actual notice. These notices may be sent by mail, or delivered orally, or in writing. A public announcement in a newspaper is sufficient to protect former partners against contracts subsequently made by persons who have not previously dealt with the firm. In case of dissolution of a partnership by operation of law, such as by death of a member, bankruptcy, or decree of court, no notice is necessary. The act which causes the dissolution is deemed to be notice to everyone.

83. Distribution of Firm and Individual Assets after Dissolution. As a general rule, firm creditors are entitled to firm assets. The balance goes to individual partners. Individual creditors are entitled to individual assets. The balance goes to firm creditors. If, however, the partnership is insolvent as a firm, and there is no living solvent partner, in the distribution of firm assets, firm creditors are treated the same as individual creditors. Firm real estate may be subjected by firm creditors to the payment of their claims. After firm creditors are satisfied, firm real estate is treated as the real estate of the individual members, and descends to the heirs of the partners, and does not pass as personal property to their personal representatives.

84. Limited Partnership. Most states by statute permit limited partnerships to be formed. In general, a limited partnership differs from an ordinary partnership in that some of the members, called special partners, are not individually liable for the obligations of the partnership. The statutes of the different states differ somewhat as to the purposes for which a limited partnership may be formed. In general, however, a limited partnership may be formed to carry on any business except banking and insurance. A limited partnership must have at least one general partner who is individually liable for the obligations of the partnership. The special partners contribute certain fixed sums, which must be paid before the partnership starts business, and beyond which the special partners are not liable. Generally, special partners are not permitted to manage the business. A limited partnership is generally required to file with a public officer a certificate showing its membership, the purpose for which it is organized, the number of shares held by special partners, the assets, the total capital, and the names of the general partners. The purpose of a limited partnership is to enable persons to invest a certain amount of capital in an enterprise without being individually responsible beyond the amount actually invested. Limited partnerships are now largely supplanted by corporations.

85. Form of Partnership Agreement.

Articles of agreement entered into at Chicago, Ill., this ... day of ... 1909, by and between A, hereinafter designated as the first party, and B, hereinafter designated as the second party, both of Chicago, Ill. Witnesseth that:

Signed

A.......................
B.......................

Signed in the presence of
C.......................
D.......................

CORPORATIONS

86. Nature of a Corporation. A corporation has been defined to be "a collection of many individuals into one body, under a specific denomination having perpetual succession, under an artificial form and vested by the policy of the law, with the capacity of acting in several respects as an individual." In other words corporation is the name applied to an association of persons authorized by law to create, by mutual contribution, a common fund for the purpose of transacting business without rendering the individual members personally liable for the debts of the association, beyond a certain amount. The object is to permit persons to obtain the advantage of large combinations of capital without involving, beyond certain limits, the private property of the individuals composing it. A corporation is an artificial person having an existence in many respects separate and apart from the members composing it. While it can only transact business by means of agents, the obligations created are the obligations of the artificial person, the corporation. The common fund or capital of the corporation, is the only property that can be subjected in payment of the debts. The individual property of the members is not the property of the corporation.

87. Corporations Distinguished from Partnerships. A partnership may be created by mutual consent of the parties desiring to engage in that joint enterprise. The only limitation is that the enterprise must be for a lawful purpose. A person may form a partnership for the transaction of any kind of business which he may transact as an individual. A corporation, on the other hand, must have permission from the government to transact business. This permission is called its franchise. Corporations cannot be formed for every purpose. That is, individuals are permitted to engage in lines of business denied to corporations. A corporation is an artificial person, regarded in law as distinct from the individuals composing it. A partnership is not distinct from the individuals composing it, and the individual members are personally liable for the debts of the partnership. A corporation has a continuous existence; it continues to live regardless of death of some of its members, or regardless of a change of membership. A partnership ceases to exist upon the death of a member, or by a change of membership. A corporation's members do not have the right, as such, to act as agents of the corporation for the purpose of transacting business. The agents of the corporation are appointed in a manner prescribed by law, and by the rules of the corporation. In a partnership, each member is the recognized and authorized agent of the partnership. Each member may bind the partnership by any contract made within the scope of the partnership business. For example, if A and B form a partnership for the purpose of selling real estate, either A or B by reason of the partnership agreement, is authorized to sell real estate in the name of the firm. If A, B, C, D, and E are stockholders in the X Co. neither A, B, C, D or E is entitled, by reason of his being a stockholder, to make contracts for the corporation. A board of directors must be elected by the stockholders, who in turn elect officers, and appoint agents authorized to transact the business of the corporation.

88. Powers of a Corporation. Corporations are not permitted, as such, to transact business of every kind. A corporation is an artificial being created by law. It can exist only for those purposes enumerated by law. Corporations, as such, have well recognized, or distinguished, powers or characteristics. The ordinary powers of a corporation are as follows:

It was long ago decided that a franchise given by the government to a corporation, cannot be revoked or changed by the government, unless such a reservation is made by the government at the time the franchise is granted. At present, such reservations are made in granting most franchises, either by express reservation in the franchise itself, by general statutory provision, or by constitutional limitations.

89. Creation of Corporations. A corporation cannot be organized merely by agreement of the members. It must obtain permission of the government, state or national, to operate as a corporation, before it can lawfully exercise any corporate rights.

Originally, the right to become a corporation was granted by express permission of the king. The franchise, or right granted, was called the corporate charter. In this country, charters originally were granted by special legislative grants. While the United States Constitution does not expressly provide for the formation of national corporations, Congress is deemed to have the right to create them for the purpose of carrying out the express functions of the government, expressly granted by the United States Constitution. For example, the Constitution expressly grants the United States Congress the power to coin money and regulate the value thereof, and to levy and collect taxes. It is given no express power to organize national banks, but under the provisions giving it power to make laws to carry into execution all of the powers expressly granted, it is held to have the power to provide for the organization of national banks.

Most corporations are organized under state laws. Originally, charters were granted by special acts of the state legislatures. These charters were decided to be contracts between the state and the corporation, which could not be changed or revoked at the desire of the legislature. At the present time, most states have general permissive statutes, under which corporations may be organized. These statutes generally reserve the right to the state, to revoke or change the charter at the will of the legislature. Many states have constitutional provisions limiting the power of the legislature to grant irrevocable charters. The statutes of the different states vary somewhat as to the things required of persons desiring to organize a corporation, but the primary requirements are similar. In general, the following are the statutory requirements of the states for the organization of a corporation. The persons desiring to organize a corporation, not less than three (some states require more), a majority of whom are citizens of the state, must sign a paper, called the articles of corporation, which contains the name of the proposed corporation, the place where it is to be located, the purpose for which it is to be formed, and the place where its principal business is to be transacted, the amount of its capital stock, and the number of shares into which it is to be divided. The articles of incorporation are sent to a designated state officer, usually the Secretary of State. Upon the filing of the articles of incorporation with the proper state officers, the incorporators may open the books of the company, for stock subscriptions. The time and place of opening the books is announced, usually by thirty days advertising in a newspaper. A portion of the stock, usually ten percent, must be paid at the time the subscription is made. When the required portion of the authorized capital stock is subscribed, by advertising notice, the stockholders may meet and elect a board of directors. The board usually consists of from five to fifteen directors. The directors are required to take an oath of office. Some of the governing rules of the corporation, usually called by-laws or regulations, are enacted by the stockholders. Some regulations may be enacted by the board of directors. The board of directors may elect the officers provided for by the regulations, and then proceed to transact the business of the corporation. Corporations not for profit may be organized. Such corporations are organized in the same manner as corporations for profit, except that there is no capital stock, and the directors are usually called trustees. Church and fraternal organizations are common examples of corporations not for profit.

90. Names of Corporations. A corporation must of necessity have a name by which it may be designated, and under which it can transact business. The statutes of the different states generally provide that the incorporators must designate the name which the corporation is to use. One corporation is not permitted to use a name already appropriated by another corporation. A corporation has no right to use a name other than the one given it by its charter. A corporation may prevent by injunction another organization from using a name which interferes with its corporate name. This is subject to the limitations that a corporation is not permitted to appropriate a name descriptive of an article or place. For example, a storage company was incorporated under the name of the "Fireproof Storage Co." An individual with a fireproof building adopted the trade name "The Allen Fireproof Storage Co." The former company was not permitted to enjoin the latter from using the word Fireproof, in the name of his company, since the word, fireproof, is descriptive of the kind of building used in the business, and cannot be appropriated by any one company or person. The states generally, by statute, provide a means by which a corporation may change its name.

91. Kinds of Corporations. Corporations are usually classified as public and private. Public corporations include those corporations organized for the purpose of exercising public functions, and for carrying out government purposes. An incorporated city or village is a common example.

A private corporation is one organized for the private benefit of its members. Private corporations are either corporations for profit or corporations not for profit. Corporations for profit have a capital stock, and are organized for the financial benefit of the members. Ordinary trading or manufacturing corporations are examples. Corporations not for profit have no capital stock, and are organized for charitable or social purposes. Clubs, educational institutions, and churches are common examples.

Corporations organized for private gain, and which serve some public purpose, are sometimes classified as quasi-public corporations. Express companies and telegraph and railway companies are common examples of the class. These companies are strictly private corporations.

92. When Corporate Existence Commences. The states generally provide by statute, for the organization of corporations. At present, corporations seldom are created by special grant of the legislatures. Most states, by constitutional provisions, limit the power of the legislatures to create corporations by special act. Persons desiring to organize a corporation, must comply with the general laws regulating their formation. As was pointed out in the section on creation of corporations, several steps must be taken to complete the organization of a corporation. The question often arises as to when the legal existence of a corporation commences. It is quite generally held that a corporation's legal existence dates from the filing of the articles of incorporation with the designated state office. After that time the corporation cannot deny its legal existence. Neither can third persons dealing with the corporation deny the legal existence of the corporation. If the corporation fails to fulfil the remaining statutory provisions relating to the completion of the corporation, the state, through its officers, may revoke the corporation's right to continue as a corporation. A corporation does not have the right to transact business, until its organization is completed. It may have a legal existence before that time.

93. Estoppel from Denying Corporate Existence. An association of persons pretending, innocently or otherwise, to be a corporation, not having complied with the legal requirements for creating a corporation, is not permitted to deny its corporate existence, for the purpose of avoiding its obligations. Such an association is liable as a corporation for its obligations, and if there is no corporate property, the members of the association are liable personally.

On the other hand, persons who deal with an association of persons which claims either by name, or by express statement, to be a corporation, cannot evade their liability to the association on the ground that the corporation has not been legally organized.

As between the corporation and the state, which alone can give it power to exist as a corporation, no valid corporation exists until all the legal requirements are complied with. The state, through its proper officers, may deny corporate right to any association of persons who have not fully complied with the statutes regulating the creation of corporations. To create a corporation by estoppel, there must be an organization assuming to act as a corporation. If A trades in his own name, a person dealing with him cannot claim that A is a corporation by estoppel. But if A trades as "The Cook County Lumber Co.," and enters into a contract with B in the name of The Cook County Lumber Co., and signs his name as president of the company, he cannot deny its corporate existence. If B purchases material of The Cook County Lumber Co., he cannot refuse to pay for it on the ground that The Cook County Lumber Co., is not a legally incorporated company.

94. Corporate Charter a Contract. Originally in this country, the right to exist as a corporation was granted by special act of the legislature. It was early decided that this grant by a legislature could not be revoked or changed by subsequent act of the legislature. It was regarded as a contract. By reason of the fact that corporate charters are contracts, giving corporations the right to a continuous existence under the terms of the original grant, many states now have constitutional provisions, limiting the right of legislatures to grant irrevocable charters. Those states having no such constitutional limitations, have a provision in their statutes authorizing the creation of corporations, and providing that all corporate charters or franchises be revocable or changeable at the will of the legislature. At the present time in most, if not all of the states, a corporation cannot obtain an irrevocable charter. Their charters are granted with the reservation, or upon the condition, that the terms may be changed or revoked at any time.

95. De Facto Corporations. In connection with corporations, the terms de facto and de jure are often used. By de jure corporation is meant a corporation that has a perfectly legal existence; one that has complied with all the laws relating to its creation; one that cannot have its right to exist as a corporation denied by the state under whose laws it was created, on the ground that it has not complied with all the laws relating to its creation. By de facto corporation is meant a corporation that has performed some of the functions of a corporation without having complied with all the legal requirements relating to its incorporation. To constitute a corporation de facto, it is usually conceded that there must have been laws under which the pretended corporation might lawfully have been organized, followed by some kind of an attempt to organize under these laws, and by a use of corporate functions. As between the corporation and the state, the state may stop the corporation from exercising corporate functions. As between the corporation and third persons dealing with it as such, in the absence of fraud, corporate existence of a de facto corporation cannot be denied.

96. Promoters. Persons who undertake the organization of corporations are called promoters. The promoter of a corporation need not be one of the incorporators, but he is the active man who engineers the enterprise. He is the one who interests capital, who induces persons to take the required amount of stock, who assembles the parties desiring or induced to organize the corporation. In short, he is the one who manages the organizing and starting of the corporation. Oftimes much work must be done, many contracts made, and liabilities incurred before a corporation has any legal existence. Just what connection the promoter has with the corporation, whether he may bind the future corporation, or make it liable for his acts of necessity, or by adoption, is often a close question. It must be borne in mind that before a corporation has a legal existence, it can incur no obligations as a corporation. Before a corporation's legal existence commences it can have no authorized agents. If A, knowing where valuable undeveloped stone quarries are located, obtains options on the lands, interests men of means to promise to take stock in a future organization, performs all the preliminary work to the creation of a corporation, organized for the purpose of purchasing and operating said lands, and incurs debts in connection therewith in the name of the proposed company, the corporation, when completed, cannot be compelled to pay such obligations. It did not incur them. It had no power to incur them since its legal existence did not commence until a subsequent time. The obligation belongs to the promoter, or to those persons, if any, who authorized him to incur the debts. If, however, recurring to the former example, "The Cuyahoga Stone Co.," is organized by A to develop and operate such stone lands, and after the organization is completed with full knowledge of the obligations of A, it, as a corporation, agrees to pay said obligations, and to purchase A's options on the lands for a specified amount, the obligations now become the obligations of the corporation. The corporation may be sued thereon, and its property subjected. This is called the adoption of a promoter's obligation by a corporation.

A corporation is liable on its express, as well as on its implied contracts, and if it accepts valuable services of a promoter after it becomes a corporation, it is liable on an implied contract to pay for the same. Services rendered by a promoter for a future corporation do not render a corporation liable therefor, unless adopted by the corporation after its legal existence commences. The states generally provide by statute, the time when a corporation's existence commences. These statutes vary somewhat, but in general provide that the corporation's existence commences when the proper articles of incorporation are filed with the Secretary of State.

97. Reorganization of Corporations. The right to exist as a corporation is a special privilege which cannot be sold or transferred to another. Any property acquired by a corporation may be mortgaged, sold or transferred at the will of the corporation. The right to exist as a corporation, however, is a special privilege granted by the state, and cannot be transferred. Any association of persons desiring to exercise the rights and privileges of a corporation must obtain such rights from the state. They cannot purchase such a right from an existing corporation. Many of the states provide by statute for the organization of a corporation by those persons purchasing the property of public service corporations at a foreclosure sale. A common example is in case of a foreclosure of a mortgage on a railway. Statutes of some states provide that the purchasers of such property at foreclosure sale may, and shall organize a corporation which shall carry out the purposes of the original corporation.

Where a corporation is organized and purchases the assets of the former corporation, the new corporation is not liable for the obligations of the old. Sometimes the new corporation takes over the assets of the old corporation, and expressly assumes the obligations of the old. In this event, the new corporation is liable for its predecessor's debts. If the new corporation, in purchasing the assets of the old, uses unfair or fraudulent methods, the transfer will be set aside at the instance of creditors of the old corporation, or the new corporation will be deemed liable for the debts of the old corporation. In carrying out reorganization schemes, a transfer of assets must be fair and bon fide, or the sale will either be set aside as fraudulent, or the new organization will be deemed a continuation of the old, and liable for its debts.

98. Consolidation of Corporations. The right to exist as a corporation does not carry with it the right to combine or consolidate with other corporations. Where two or more corporations combine or consolidate, the resulting corporation is distinct from the combining corporations. The right to consolidate, like the right to exist as a corporation, is a special privilege granted by the state. Consent must be obtained from the state before a valid consolidation can be made. Most states provide by statute for the consolidation of certain corporations under certain prescribed conditions. Before a valid consolidation can be effected, the provisions of these statutes must be complied with. Some states require the payment of a consolidation tax. Others require that parallel and competing railroads cannot consolidate.

Unless the charter of the corporation permits of consolidation without the consent of all the shareholders, and unless the shareholders have by valid resolution given the directors the right to consolidate, a consolidation cannot be made over the objection of any shareholder. An attempted consolidation under these circumstances may be enjoined by a dissenting stockholder, or if the consolidation is made over his objection the resulting consolidated company is liable in damages to him.

When a consolidation has been legally made, the consolidated company is liable for the debts, and is entitled to the assets of the component corporations.

99. Meetings and Elections of Corporations. A corporation transacts its business through a board of managers. The shareholders or members of the corporation do not transact the business of the corporation directly, but through the governing board. In case of a corporation having a capital stock, this governing board is called the board of directors. In case the corporation has no capital stock, such as a church or charitable organization, the governing board is called the board of trustees. The charter, or statute under which corporations are formed, usually provides for annual meetings for the election of officers. If the corporation has no fixed place of meeting, notice must be given each stockholder of the place of such meeting. A corporation has no power to hold its meetings outside the state of its organization. It may employ agents to represent the corporation outside the state of its creation, but it should hold its corporate meetings within the state. If the time of holding the election of officers is fixed by statute, or by a regulation or by-laws of the corporation, the meeting should be held at that time. If for any reason a corporate election cannot, or is not held at the time designated, the old directors hold over until the new board is regularly elected.

100. Voting at Corporate Meetings, Quorum and Proxy. Each shareholder or stockholder of a corporation is entitled to vote at the corporate meeting for the election of officers. Usually the vote is by shares. Each shareholder is entitled to one vote for each share he holds. Some states, by statute, limit the right of a single shareholder to a certain number of votes. When this limitation is fixed, it usually limits the shareholders to one vote regardless of the number of shares held. Such a limitation, where found, is for the protection of small shareholders. Corporations keep books in which are kept the names of the shareholders. Only the persons whose names appear upon the corporation's book as shareholders are entitled to vote.

Some states provide by statute for what is known as cumulative voting. Instead of voting the number of shares he owns for each director, by cumulative voting a stockholder is entitled to vote for one director the number of shares he owns, multiplied by the number of directors to be elected. This is sometimes called ticket voting. For example, three directors are to be elected, and a shareholder holds ten shares. He may have ten votes for each director, or thirty votes for one director. This is for the protection of the small shareholder.

By quorum is meant the number of votes required to constitute an election. Sometimes a quorum is based upon a majority of the number of shareholders present. In the absence of statute or corporate regulations to the contrary, this rule applies. Statutes of some states provide that a two thirds majority of the shares of the corporation shall constitute a quorum.

Most states provide by statute for voting by proxy. This entitles one shareholder to give another written authority to vote his shares at a corporate meeting. This right does not exist in the absence of statute. A proxy may be revoked at the will of the shareholder giving it.

101. Stockholders of a Corporation. The membership of a corporation is made up of the stockholders or shareholders. A corporation for profit is authorized by its charter to have a certain capitalization, or the capitalization is the total amount of the shares authorized to be issued. The charter usually requires that a certain percentage of shares subscribed be paid in before the corporation is authorized to elect directors. The charter usually provides that at least ten per cent of the capitalization be subscribed, and at least ten per cent of the amount subscribed be paid in, before directors can be elected. A stockholder is liable to the corporation on his subscription and, in the absence of any additional liability fixed by the charter, is not liable for the debts of the corporation for any amount in addition. Formerly some of the states provided by statute for double liability of stockholders. In case of insolvency of the corporation, stockholders could be required to contribute an amount equal to their subscription in addition to paying their subscription in full. Stockholders' double liability has been abolished by most states. At present a stockholder can be compelled to pay the full amount of his stock subscription, and no more.

Stockholders of national banks, corporations organized under United States laws, are liable for double the amount of their stock. Those persons are regarded as stockholders who appear as such on the books of the company. A person may become a stockholder by purchasing stock from the corporation, or by purchasing it from another stockholder. Any person legally competent to contract may become a stockholder.

102. Certificate of Stock. Written certificates are usually furnished shareholders, by corporations, as evidence of membership. These certificates are made transferable, in order that they may be indorsed by a shareholder, and made payable to a purchaser. When so indorsed, the purchaser is entitled to have the shares transferred on the books of the company, showing that he is a shareholder in the company. A certificate of stock does not of itself constitute ownership. It is merely evidence of ownership. A person may be a stockholder in a corporation by making a valid subscription, and by paying for the same, regardless of having received a certificate of stock. The following is a common form of stock certificate:

Blank for transfer, on back of certificate.

For value received................ hereby sell, assign and transfer unto.............,............ shares of the capital stock represented by the within certificate, and do hereby irrevocably constitute and appoint.............. to transfer the said stock on the books of the within named corporation.
Dated................190..

_______________________

In the presence of
___________________

103. Directors of a Corporation. The managing officers of a corporation are called directors. They are the representatives elected by the stockholders, or members of the corporation, to transact the business of the corporation. While in the absence of statutory regulations a director need not be a stockholder, practically all states require directors to be stockholders.

Directors are authorized to act as agents for the corporation in the management of the corporation's business. Their authority is limited not only by the charter of the corporation, but by the regulations, and by-laws of the corporation as well. The directors of a corporation are not authorized by virtue of their office to dispose of the entire assets of the corporation, neither can they transfer their right to act as directors to others. They have the right to purchase property, to sell and mortgage assets of the corporation within the limits prescribed by the charter, regulations and by-laws of the corporation.

The directors of a corporation must act as a board. They are not permitted to act by proxy. The majority of the entire number of directors constitutes a quorum for the purpose of doing business. They may employ agents to make and carry out contracts, and perform ministerial acts of the corporation, but cannot delegate their discretionary powers as directors. Unless provided otherwise by statute, directors must hold their meetings within the state under whose laws the corporation is created. Notice of the meeting giving the place, time and purpose must be given to all the directors before a valid meeting can be held. Directors, like agents, cannot act for their own private interests if opposed to those of their corporation. Directors who privately profit to the disadvantage of the corporation are liable in damages for such acts to the corporation. It is generally conceded that a director may contract with his corporation, if no fraud is used, and if a quorum of directors without him consents. Directors are liable to the corporation for their dishonesty or negligence.

104. By-Laws, Rules and Regulations of a Corporation. The by-laws of a corporation are the rules and regulations by which the corporation is governed. Sometimes a distinction is drawn between the term by-law, and the term regulation. For example, the statutes of some states provide that the stockholders may pass regulations for the government of the corporation relating to the time, place and manner of holding corporate meetings, the number of stockholders that shall constitute a quorum, the time and manner of electing directors, the duties and compensation of officers, and the qualification of officers; while the directors have the power to pass by-laws relating to the government of the corporation, not inconsistent with the charter of the corporation and the regulations. This distinction between regulations and by-laws does not seem to be generally recognized. The entire government of the corporation is generally included in the term by-laws. If the charter does not provide otherwise, the by-laws shall be passed by the stockholders rather than by the board of directors.

A resolution is not a by-law. By resolution is meant the recorded and legally passed determination of a corporation to perform some particular thing or item of business. A vote of a board of directors to make certain bids on certain contracts is an example of a resolution. By-laws must not be contrary to the corporation's charter, or to general law. They are not presumed to be known by third persons, but if third persons dealing with a corporation have actual knowledge of them, they are bound by notice of their provisions.

105. Capital Stock of Corporations. The capitalization of a corporation is the aggregate amount of stock it is authorized by its charter to issue. If a corporation is authorized to issue one hundred thousand dollars ($100,000.00) of stock, it is said to be capitalized at one hundred thousand dollars ($100,000.00). This does not mean that the corporation has property worth one hundred thousand dollars ($100,000.00). A corporation is usually authorized to elect directors after one tenth of its stock has been subscribed, and after one tenth of the amount subscribed is paid in. Thus, a corporation capitalized at one hundred thousand dollars ($100,000.00), may elect directors and start business with only one thousand dollars ($1,000.00) actually paid in. The term, capital stock of a corporation, is used in many different ways. It is commonly used to designate the capitalization. Sometimes it is used to designate the amount actually subscribed. Strictly, it probably means the money actually paid in on subscriptions. A corporation's assets may be far in excess of its capitalization, or far below its capitalization. It may have property worth five hundred thousand dollars ($500,000.00) and be capitalized at one hundred thousand dollars ($100,000.00) more or less, or it may be capitalized at one hundred thousand dollars ($100,000.00) and have no assets.

106. Payment of Shares of Stock. It may be stated as a general rule that a corporation has no authority to dispose of its stock for less than par value. If a corporation is solvent, ordinarily no objection is raised, but if the corporation becomes insolvent, creditors may complain, and force, by proper legal action, the shareholders to pay the difference between the face value of their stock and the amount actually paid.

In the absence of a statute requiring stock subscriptions to be paid in cash, there is nothing to prevent a corporation from accepting property at a fair valuation in payment of stock. The rule is usually stated to be, that shares of stock must be paid for in money or in money's worth. Shares of stock may be paid for in bon fide services. The rule by which purchasers of stock are compelled to pay the full par value either in money or money's worth applies only to those who purchase direct from the company, or who purchase from stockholders with notice that the shares have not been fully paid for. If the certificates of stock state that they are fully paid for and the purchaser has no notice otherwise, or if the purchaser does not know that the stock has not been paid for in full, he cannot be made to suffer for the act of the corporation in unlawfully issuing the stock.

107. Calls and Assessments. An assessment may be defined to be a levy by a corporation upon a shareholder for an unpaid portion of his stock subscription; a call is a notice to a shareholder of an assessment. Ordinarily, assessments may be made by call, at the direction of the directors, until the entire par value of subscriptions are paid in full. Stock cannot be assessed beyond its par value, unless so provided for by the corporate charter, or unless the subscriber so contracts.

108. Watered Stock. In case property or services are accepted in payment for stock at an inflated valuation, or if stock is issued as fully paid up when it is not, the stock is said to be watered. For example, if A, a promoter of a corporation, turns over options to the company, actually worth one thousand dollars ($1,000.00), and receives stock in payment, the par value of which is five thousand dollars ($5,000.00), the stock is said to be watered, and the four thousand dollars ($4,000.00) excess valuation is said to represent the amount of water in the stock.

109. Increasing or Decreasing Capitalization. A corporation has no power, by reason of being a corporation, to increase or decrease its capitalization. The states generally provide by statute for the increasing or decreasing of the capitalization. The corporation must comply with these statutes, before its capitalization can be changed. In case the capitalization is increased, the purchasers of such stock are subjected to pay the full face value at the instance of creditors, the same as purchasers of an original issue. That is, if a corporation is unable to pay its debts, one who has purchased direct from the company, shares of stock upon an increased capitalization, at a price below par, may be compelled by creditors to pay the difference between what he has actually paid and the par value. In case of an increase of capitalization, the present stockholders, in the absence of express statutory regulations to the contrary, are entitled to receive the increased shares in proportion to their holdings. This is usually called a stock dividend.

110. Common and Preferred Stock. Stock of a corporation may be of two kinds, common and preferred. When stock is issued by a corporation without any agreement to pay certain dividends out of the profits, or to repay the original stock investments if the corporation ceases doing business, in preference to other stock, it is called common stock. Corporations are sometimes authorized by their charters to issue what is called preferred stock. That is, the corporation pledges to pay a certain percent of its profits, as dividends to the preferred stockholders, before paying anything to common stockholders. If the corporation ceases doing business, preferred stockholders are first paid the amount of their subscriptions, and if any balance remains, it is paid to common stockholders. In the absence of statutory authority, probably an existing corporation has the right to issue preferred stock by the unanimous consent of all the common stockholders. This is commonly done for the purpose of raising additional funds.

111. Dividends. Dividends is the term applied to the money distributed to shareholders, out of the profits of a corporation. The directors are usually empowered to declare dividends. A stockholder cannot compel the corporation to pay him a percentage of the profits until a dividend has been declared. After a dividend has been declared, it is regarded as a debt of the corporation in favor of the shareholder. When a dividend has been declared at the discretion of the board of directors, the preferred stockholders must first be paid the amount of their preference, and the balance must be distributed equally between the common stockholders. No partiality can be shown stockholders. They must be treated alike. Dividends can be declared only out of the profits, except when a corporation ceases doing business, in which event the property of the corporation, after paying liabilities, is distributed as dividends.