Business Law & Litigation Faqs
Q: What factors should be considered in choosing the type of business form?
In determining business formation, there are many important factors to consider such as tax treatment and consequence, the liability of the business owners, how you intend to capitalize the business, whether you plan to issue stock and trade it publicly, how you intend to structure the management of your business and etc. Therefore, the Client should consult with an experienced attorney and accountant discuss the Client’s objectives, and then to decide which business formation is best suited to meet such objectives.
Q: What is the difference between a subchapter C and S corporation?
The two most common ways to incorporate are C corporations and S corporations since the Internal Revenue Code allows for two different levels of corporate tax treatment.
S corporations: A corporation that meets the S Corporation requirements can apply for the designation, from the IRS, in order to avoid the double taxing. S Corporations are geared toward smaller businesses, and protect the owners from personal liability while also permitting the income to ‘pass through’ to shareholders.
C corporations: are usually larger corporations which give up ‘pass-through’ status in exchange for the ability to have an unlimited number of shareholders (i.e. publicly-held businesses). C corporations usually face double taxation; the C corporations will pay taxes on profits, then pay dividends to the shareholders, who will eventually pay taxes on the dividends they receive.
Keep in mind that both types require additional paperwork and you must meet all the relevant regulations.
Q: What is the difference between litigation, arbitration and mediation?
Litigation is a lawsuit that is heard in court by a judge (and/or jury). Litigation can be in a state court or federal court. Litigation is often time-consuming and expensive. Arbitration and mediation are both means through which disputes can be settled outside of a traditional court setting.
Mediation is a process that enables parties in a dispute to resolve their differences with the aid of a mediator instead of resorting to a lawsuit. The mediator is neutral third party that has been trained to assist people with the discussion of their differences. Mediators are not like judges and do not decide which party “wins”. The mediator instead helps the parties come to a solution on their own using communication between the parties and helping them focus on the real issues. Mediation permits the parties to have some control over the outcome, even though it doesn’t guarantee a final resolution.
Arbitration: is a common dispute resolution mechanism in lieu of litigation because arbitration is usually faster, more efficient and less expensive than litigating a dispute in Court. Sometimes it is referred to as “ADR,” which means “alternative dispute resolution.” Arbitrators are usually trained professionals that may be former judges or lawyers. An Arbitrator is a neutral party tasked to hear the evidence from the parties and the Arbitrator will render a decision that is binding.
Q: What does it mean to “pierce the corporate veil?”
The Corporate Veil: for the most part, a corporate veil is creature of state law. Each state has its own rules regarding the various corporate forms and their resulting limitations of liability that protect corporate owners as well as officers and directors of the corporation. However, all states follow the general principle that certain qualified parties will not be held liable for debts of a corporation unless the facts conform to a veil-piercing exception to the rule.
Although one of the primary legitimate purposes of incorporating a corporate entity is to limit or eliminate the personal liability of corporate principals, in certain instances, “equity” will nevertheless intervene and allow for a “piercing of the corporate veil.”
Piercing the Corporate Veil: occurs when the Court allows a plaintiff to receive compensation for damages directly from the corporate owners, officers, directors, or shareholders for damages, instead of limiting recovery to corporate assets, in order to avoid fraud or injustice.
Courts may impose liability on the individuals where the underlying business is indistinguishable from its owners controlling the business, or if a business fails to follow certain corporate formalities.
In most instances, “piercing the corporate veil” requires a showing that the individual defendants exercised complete dominion and control over the corporation and used such dominion and control to commit a fraud or wrong against the plaintiff which resulted in injury.
The specific criteria for piercing the corporate veil vary somewhat from state to state and may include the following:
- Courts may not allow owners to benefit from a corporation’s limited liability if the underlying business is indistinguishable from its owners.
- If a corporation is formed for fraudulent purposes.
- In areas such as record-keeping.