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:

1. Said parties agree to enter into a partnership for the purpose

of engaging in and carrying on a general hardware business in

the city of _Chicago_ under the name of _Cook County Hardware

Co._

2. The first party agrees to furnish his stock of goods, now

located at his present hardware store in _Chicago_, and said

second party agrees to contribute _$5,000.00_ in cash

immediately upon the signing of the agreement, said stock of

goods, and said _$5,000.00_, to constitute the joint capital

of the partnership.

3. Said parties agree to devote their entire time and attention

to the interests of the partnership business.

4. Said parties agree to share equally the losses and expenses of

said partnership, and at the expiration of each month, to

divide equally the net profits reserving a fund sufficient to

keep the original capital intact.

5. Said parties agree that the partnership shall continue as long

as the partners shall mutually so desire. In the event of

either party's desiring to withdraw, said parties agree that

each shall choose one arbitrator, the two thus chosen to

select a third, who shall appraise the assets of the firm,

and divide them into parts, which division shall be accepted

as final by the parties hereto. And each party agrees to

accept the portion allotted to him by said arbitrators. In

witness whereof, the parties hereto have set their hands the

day and year above written.

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.

[Illustration: UNITED STATES PATENT OFFICE, WASHINGTON. D. C.]

=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:

_First_--The power of perpetual succession.

_Second_--The right to sue and be sued, and to receive and grant in

their corporate name.

_Third_--The right to purchase and hold real estate and personal

property.

_Fourth_--The right to have a common seal.

_Fifth_--The right to make by-laws.

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:

The Consolidated Tack Co.

Cleveland, Ohio.

Incorporated under the laws of the state of Ohio.

No. 99 No. of shares -15-

Capital stock $1,000,000.00

This certifies that John Smith is the owner of fifteen shares of $100

each of the capital stock of The Consolidated Tack Co., transferable

only on the books of the company, in person or by attorney, upon

surrender of this certificate properly indorsed. In witness whereof

said corporation has caused this certificate to be signed by its duly

authorized officers, and to be sealed with the seal of the corporation.

At Cleveland, Ohio, this 1st day of October, A. D. 1909.

Jack Brown, Tom Jenkins,

Treasurer. President.

Corporate

Seal.

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.

=112. Certificates of Stock not Negotiable Instruments.= A certificate

of stock is merely evidence that the holder is a member of the

corporation. A person may be a member of a corporation, and be entitled

to the rights of a stockholder, without having a certificate of stock.

Certificates are convenient as evidence of membership. Transfers

of stock are usually made by filling in a blank on the back of the

certificate for that purpose, by which the owner declares the transfer

to the purchaser, and designates the purchaser, or someone, his

attorney to present the certificate to the corporation, to have the

transfer registered on the books of the company. It is the usual custom

to surrender certificates to the purchaser. A corporation has a right

to rely upon its books, and if a person wrongfully or fraudulently

attempts to transfer a certificate of stock which he does not own, or

has no right to transfer, the purchaser takes no better title than

the seller had. In this particular, certificates of stock are not

negotiable instruments. Negotiable instruments are good for value in

the hands of innocent purchasers, who purchase before the instrument is

due. As between the parties themselves, a transfer of a certificate of

stock is good, but as to the corporation or creditors of the seller,

the transfer is not effectual until recorded on the books of the

corporation.

[Illustration: A CORNER IN THE SALES DEPARTMENT OF THE MICHIGAN STOVE

COMPANY, DETROIT, MICH.]

=113. Individual Liability of Stockholders for Debts of a Corporation.=

A corporation is an artificial person having an existence in law,

separate and apart from that of its members. Its profits cannot be

divided until the managing agents of the corporation so decree. Its

property does not belong to the members, but to the corporation itself.

At one time some states provided by statute for double liability of

stockholders. In case a corporation was unable to pay its debts,

creditors could compel stockholders to pay to the corporation an amount

equal to the par value of their stock, after paying the full face or

par value of their stock. Statutes providing for double liability have

quite generally been abrogated. At the present time, except in the case

of national banks, corporations organized under United States law,

few states provide for double liability of stockholders. If _A_ has

subscribed for ten shares of stock, the par value of each share being

one hundred dollars ($100.00), and pays one-half the amount of his

subscription to the company, in case of insolvency of the corporation,

creditors can force _A_ to pay the balance of his stock subscription,

or five hundred dollars ($500.00). Even though not insolvent, the

corporation can collect the balance of five hundred dollars ($500.00)

from _A_ by call and assessment, and can enforce collection by suit.

_A's_ subscription is a contract between himself, and the corporation.

Unlike partners, stockholders are not personally responsible for

the debts of the corporation of which they are members. In dealing

with partnerships, a person may rely upon the personal financial

worth of the individual members of the partnership. The property

of the individual members may be subjected to pay the debts of the

partnership. But in case of a party dealing with a corporation, he

cannot rely upon the personal worth or responsibility of the members

of the corporation, since the members individually are not liable for

the corporation's debts. The corporation is separate and distinct from

its members, and when the assets of the corporation are exhausted, the

property of the individual members is not liable.

=114. Officers and Agents of a Corporation.= A corporation is an

artificial person which must necessarily conduct its affairs through

agents. The managing board of a corporation having a capital stock

is usually called the board of directors. The managing board of a

corporation having no capital stock is usually called the board of

trustees. These managing boards are elected by the members of the

corporation. In case the corporation is one organized for profit, the

members are called stockholders or shareholders. The directors or

managing board, of a corporation may delegate the performance of what

are called ministerial duties. They may appoint officers and agents to

assist them in the performance of their duties of a certain character.

The officers of a corporation elected by the directors usually consist

of a _president_, _vice-president_, _secretary_ and _treasurer_. If a

corporation's business transactions are limited, practically the only

duty of the president is to preside at the meeting of the board of

directors. If the affairs of the corporation are many and complicated,

the president is usually intrusted with many duties. The board of

directors meets at stated times, authorizes and passes on certain

important matters, but the duty of carrying them into execution, and of

performing the routine work, falls on the president. In a corporation

of large affairs, the president may pay current bills, make purchases,

give notes, if necessary, make sales and give and take mortgages on

property. He is often given authority to act as general manager for the

corporation. In this event, he may perform all the duties connected

with the general operation of the business. The vice-president has

authority to perform the duties of the president during his absence or

disability. It is the duty of the secretary to keep the records of the

corporation. It is the duty of the treasurer to take care of the funds

of the corporation. The officers of a corporation are liable to the

corporation for breach of trust. They are personally liable to third

persons when they exceed their authority. A corporation, through its

properly appointed officers, as well as through its board of directors,

may appoint subordinate agents to perform work for the corporation. The

corporation is responsible for the acts of its agent, performed within

the real or apparent scope of the agent's authority.

=115. Execution of Contracts and Negotiable Instruments by a

Corporation.= A corporation can act only through its agents. The

agents authorized to act for a corporation are the board of directors,

the officers appointed by the board, or the officers. A corporation,

as one of its powers, has _the right to use_ a common seal. While a

corporation _commonly uses_ its seal in signing written instruments

of importance, for the purpose of showing authority of its agents to

enter into such contracts, a corporation need not use its seal except

in those cases when it is necessary that a natural person use a seal.

A corporation usually authorizes its officers to make contracts. A

president and secretary, acting together, have the right to make

contracts for their corporation, by reason of the general authority

conferred upon them by the board of directors. The proper signature of

a corporation to a written document is the name of the corporation,

followed by the signature of the president as its president, and by the

signature of the secretary as its secretary. For example, if the India

Rubber Company is to sign a contract, the proper signature is:

The India Rubber Co.,

By John Smith, its President.

By John Jones, its Secretary.

When the signature must be acknowledged before an officer authorized to

administer oaths, before it will be received for record, as in the case

of a deed, the officer authorized to sign the name of the corporation

to the deed may make the acknowledgment.

Negotiable instruments, such as promissory notes, drafts and checks,

should be signed with the corporate name by the proper officer, as its

officer. It is held, however, that by custom, a cashier of a bank may

make and indorse negotiable paper in his own name, merely adding the

designation _cashier_ to his signature, and by this means make the

paper that of the corporation, and not incur any personal liability

therefor. This is an exception to the general rule. Where a person

signs as agent, he should sign the name of his principal, by himself,

as agent. If he signs his own name, followed by the word, _agent_,

or _president_, or whatever his office may be, he binds himself

personally, and not his principal.

=116. Ultra Vires Acts.= A corporation by its charter is granted

certain privileges. It has a right to act within the terms of its

charter, but no right to go beyond the terms of its charter. If it

performs acts beyond the terms of its charter these acts are said to

be _ultra vires_. This does not mean that all the acts which may be

performed by a corporation must expressly be enumerated in its charter.

Corporations are created for certain purposes. They are permitted to

perform all the acts necessary, and incidental to the purpose of their

organization. The general laws under which a corporation is created

are a part of its charter. A corporation organized to do a general

banking business has no authority to sign bonds as surety for persons

or corporations. Attempts to perform such acts of suretyship are beyond

their power, and are _ultra vires_. _Ultra vires_ acts are unlawful,

and a single stockholder may prevent, by legal action, the officers

of a corporation from completing an _ultra vires_ contract. Third

persons are deemed to have notice of the limitation of the powers of

a corporation. They are not permitted to act in such a manner as to

benefit by _ultra vires_ acts, and then escape liability on the ground

that the obligation is _ultra vires_. If an _ultra vires_ contract is

wholly executory on both sides, neither party can enforce it, if the

other party complains by reason thereof. But one cannot accept benefits

thereunder, and refuse to carry out the contract on his part. He is

said to be estopped from so doing. The doctrine laid down by the last

statement is disputed in some jurisdictions.

=117. Rights and Liabilities of a Foreign Corporation.= Corporations

have no rights, as such, outside of the jurisdiction of the power

creating them. A corporation organized under the laws of one state

may be excluded from performing any of its corporate functions in

another state. States may permit foreign corporations to exercise their

function within their borders, if they so desire. But states cannot be

compelled to recognize the corporate rights of foreign corporations.

While the United States constitution provides that citizens of each

state shall be entitled to all the privileges and immunities of

citizens of the several states, a corporation is not a citizen within

the meaning of this provision. The United States Government may employ

or organize corporations to carry out its purposes. Such corporations

cannot be denied the right to exercise their functions by any state.

For example, the United States Constitution gives Congress the right to

regulate commerce with foreign nations, among the several states, and

with the Indian tribes. A corporation engaged in interstate commerce

cannot be excluded by any state, in the exercise of this function.

Outside these governmental agencies, each state has the right to

exclude a foreign corporation from exercising any of its corporate

functions within their jurisdictions. The states generally provide by

statute that foreign corporations may transact business within their

territory by filing with the Secretary of State a statement of their

capitalization, the amount actually paid in, the nature of their

business, and the names of their officers. Then, by paying a certain

tax, they are permitted to maintain an office and transact business

within the state thus granting them the privilege. The statutes of

the various states regulating foreign corporations commonly use the

term, "doing business." They prohibit foreign corporations from doing

business within their borders unless they comply with their statutes.

The term, "doing business," has been held to mean the maintaining an

office or place of business, or manufacturing plant within a state, and

does not prohibit a foreign corporation from selling goods by traveling

salesmen, or from making or suing on contracts.

=118. Liability of a Corporation for its Torts and Crimes.= A

corporation, as well as an individual, may commit torts and crimes. If

an agent, acting within the scope of his employment, defrauds another,

the corporation is liable in damages for his act. If, however, an

officer or agent goes outside his employment, and commits a wrong, it

is his own act, and he, personally, and not the corporation, is liable.

A corporation, as well as an individual, may commit a crime for which

it may be punished. It must, of course, commit the crime through its

officers and agents. If a corporation is guilty of criminal negligence

in failing to keep its works in repair, and persons are injured

thereby, it is subject to indictment and punishment. If a corporation

obstructs navigation or breaks the Sabbath, it is subject to criminal

action. The usual punishment for the crime of a corporation is the

payment of a fine, but the officers of a corporation may be imprisoned

as well.

=119. Dissolution of Corporations.= A corporation continues to exist

indefinitely, unless the period of its existence is limited by its

charter, unless its charter is revoked by the power that granted it,

or unless it voluntarily or by a decree of court ceases business. A

corporation may forfeit its right to continue as a corporation, if it

abuses its privileges, if it assumes to have powers and rights which

it does not have, or if it fails to exercise its corporate functions.

The latter is called _nonruser_. Most states provide by statute that

corporations shall not commence business until a certain portion of its

capital has been raised. If the corporation violates this provision

or any provision of the statutes regulating the completion of its

organization, its franchise may be revoked by the state. Most states

provide by statute, a means by which a corporation may wind up its

affairs. After paying its liabilities the balance of its assets may be

divided ratably among its stockholders.

NEGOTIABLE INSTRUMENTS

=120. In General.= By negotiable instruments are meant those written

instruments intended to circulate as money, which by their form and

nature are transferred by delivery or by indorsement and delivery. The

most common negotiable instruments are promissory notes, drafts and

checks. Negotiable instruments are much more commonly and extensively

used than money in the transaction of business. Their function is

to take the place of money. Their use arose out of the scarcity of

currency and facilitates the transaction of business. Their form and

nature make them more desirable and practical in many respects than

money itself. Negotiable instruments may readily be traced. They

may be drawn in any denomination to meet any emergency. They may be

indorsed in such a manner that only the person intended by the maker

to receive payment can receive payment thereon. Money, on the other

hand, has no particular identity. After payment it cannot be traced,

nor can mistakes in amount be corrected. If lost, payment thereon

cannot be stopped. If found or stolen, its possessor may receive the

benefit of it without question. Negotiable instruments were devised

to meet a broad and pressing demand. Usage and custom have given them

characteristics to meet this demand.

=121. Negotiability.= Negotiability is the power of a written

instrument to circulate as money. To be negotiable, an instrument must

contain language of negotiability. The common phrases of negotiability

are _Pay to the order of_, or _Pay to bearer_. Any draft, promissory

note, check, or bill of exchange containing the words, _pay to the

order of_, or _pay to bearer_ are known as negotiable instruments. If

a negotiable instrument is made payable to bearer, it is transferable

by delivery. The holder of it may pass it like money and the taker

is entitled to receive payment of it when it is due. A negotiable

instrument payable to the order of a designated person is payable upon

the indorsement and delivery of the person to whose order it is made

payable. For example, if a check is made payable to the order of John

Smith, and John Smith desires to transfer it to John Jones, he writes

his name, John Smith, on the back of the check, and delivers the check

to John Jones. By this act, John Jones becomes the owner of the check,

and may in turn transfer it, or cash it by presenting it to the bank on

which it is drawn. If a check is made payable to John Smith or bearer,

and if John Smith desires to transfer it to John Jones, he merely hands

John Jones the check. No indorsement is necessary.

=122. Negotiability Distinguished from Assignability.= An ordinary

contract or obligation not requiring personal services or discretion

may be transferred by oral or written contract of assignment. For

example, if _B_ purchases a barrel of flour from _A_, his grocer, to

be paid for in thirty days, _A_ may assign his claim against _B_ to

_C_. This may be accomplished by a verbal agreement to that effect

between _A_ and _C_, or _A_ may give _C_ a written statement to the

effect that he has transferred his claim against _B_ to _C_. When _B_

is notified of this assignment, he is obliged to pay _C_ the money.

If for any reason the flour was not accepted by _B_, or if _B_ has a

claim against _A_, _C_ can recover from _B_ only the amount _B_ owes

_A_. If _B_ owes _A_ nothing, on account of the flour being of poor

quality, and not accepted for that reason, or if _B_ has a claim for

an equal amount against _A_, _B_ can set up this defense against _C's_

claim, and _C_ can recover from _B_ only the amount that _A_ could

have recovered against _B_. In other words, in case of an assignment,

all defenses that were good against the assignor are good against the

assignee. In case of negotiable instruments, however, the transferee

who takes the instrument before maturity for value, and without notice

of any defenses, has the right to recover the full face value from the

maker, regardless of defenses the maker may have against the original

payee. In case of assignment, notice must be given the debtor to make

the title good in the purchaser. In case of negotiability, no notice to

the debtor is necessary.

A negotiable instrument may be assigned. A common example is the

delivery for value, of an instrument payable to order without

indorsement. The purchaser takes only the rights of a seller.