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Business Entities under the General

Corporation Law of Delaware

Civil Service BureauReform & Development Department

www.csb.gov.gewww.declaration.ge

www.hr.gov.ge

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General Corporation Law

Delaware General Corporation Law offers a liberal, flexible and non-restrictive statutory framework that allows investors,

entrepreneurs and managers to design their business organizations in the most efficient configuration.

(Law was first enacted in 1897)

 The underlying, guiding principle of Delaware’s approach

is:

FREEDOM OF

CONTRACT

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I. Corporations• STOCK Corporations• CLOSE Corporations• MEMBERSHIP Corporations

II. Partnerships• GENERAL Partnerships• LIMITED LIABILITY Partnerships• LIMITED Partnerships• LIMIRED LIABILITY LIMITED

Partnerships

III. LIMITED LIABILITY CompaniesIV. STATUTORY TrustsV. JOINT VenturesVI. Non-Profit Corporations and

CooperativesVII. SOLE Proprietorships

In this presentation:

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A Corporation is a separate legal entity formed by any person, partnership or association to conduct or promote a lawful business.S

TOCK

Corporation

MEMBERSHI

P

Corporation

CLOSE

Corporation

A corporation is formed by filing a certificate of incorporation with the Division of Corporations in the Department of State.

A corporation has three primary constituents: stockholders, directors and officers and, under certain circumstances, creditorsStockhold

ers• Owners

of the enterprise

Directors

• Set the policy for the management of the corporation

Officers

• Run the corporation on a day-to-day basis

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Certificate of Incorporation shall contain 1. Name of the corporation

2. Address of the corporation’s registered office and its registered agent in the state

3. Nature or purpose of the business should be stated clearly in the certificate of incorporation

4. Total number of shares of all classes of stock which the corporation shall have authority to issue and the number of shares of each class

5. Name and mailing address of the incorporator or incorporators In cases where the incorporators are to lose their power upon the filing of the certificate of incorporation, the names and mailing address of the directors proposed to serve until the first annual meeting of stockholders is conducted should be provided in the certificate of incorporation.

6. All provisions for the management of business under the corporation

7. The certificate of incorporation may include any other terms desired in the certificate so long as these are not contrary to the General Corporation Law (broad flexibility is possible)

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STOCK Corporations: have the authority under its certificate of incorporation to issue shares of stock representing the equity interests in the enterprise

FORMATION

The corporation is formed upon the filing of the certificate of incorporation with the Delaware Secretary of State. The appointment of an initial board of directors and initial officers, adoption of bylaws and issuance of shares complete the organization of the corporation.

LIMITED LIABILITY

The stockholders of a corporation are not personally liable for payment of the corporation’s debts (unless otherwise provided in the certificate of incorporation)

CAPITAL STRUCTURE

Delaware does not impose any minimum capital requirements. A corporation is free to establish the capital structure that best suits its needs:

Corporations may issue a single class of stock or multiple classes of stock Stock may be voting or non-voting, and shares of one class may be given a

greater or lesser number of votes per share than shares of another class Stock may be common stock or preferred stock Stock may be made convertible into shares or may be made redeemable by

the corporation

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STOCK CorporationsMANAGEMENT

The business and affairs of Delaware corporations are managed by or under the direction of a board of directors !!!

Directors

•The board of directors may consist of as many or as few persons as the certificate of incorporation or bylaws provide. The entire board is elected annually, unless the certificate of incorporation provides for the board to be divided into classes. The board may not be divided into more than three classes, and directors may not be elected for more than three years.

Officers

•The corporation’s officers are selected by the board of directors, which also is empowered to remove the officers. The authority of the officers is generally fixed in the bylaws or in resolutions adopted by the directors. The officers exercise operational management over the corporation.

Stock -holders

•Stockholders elect directors annually and have the power to approve or disapprove significant corporate events, such as:

•Sales of all or substantially all of the corporation’s assets, mergers, and dissolution

•Amendments to the certificate of incorporation

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CLOSE Corporation - is a corporation organized under the General Corporation Law, but its certificate of incorporation also contains provisions requiring following conditions:

All of the corporation’s shares be represented by certificates and held record by a specified number of persons, not exceeding thirty persons

All issued shares are subject to one or more of certain specified restrictions on transfer:

such as: restrictions granting existing stockholders or the corporation first right to purchase shares proposed to be sold by another stockholder

No public offering of the corporation’s shares within the meaning of the Securities Act of 1933. The certificate of incorporation of a close corporation may set forth the qualifications of stockholders:

by specifying classes of persons who shall be entitled to be holders of record of stock of any class

by specifying classes of person who shall not be entitled to be holders of stock of any class or both

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CLOSE Corporation MANAGEMENT

Differences in management of STOCK and CLOSE Corporations

STOCK Corporation

CLOSE Corporation

Management of the corporation is conducted by or under the direction of the board of directors

except specific management functions are expressly conferred on someone else by the certificate of incorporation

In a close corporation, the certificate of incorporation may provide that the stockholders will manage the business of the corporation directly

In this case no elections of directors are required

NOTICE: A close corporation is formed in the same manner as any stock corporation, except its certificate of incorporation must contain a heading stating that it is a close corporation

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MEMBERSHIP Corporation

NOTICE: A close corporation is formed and managed in the same manner as any stock corporation

Certificate of Incorporation must state (or the certificate may state that such conditions are to be stated in the

bylaws)

Authorized number, classes and par value of shares of the corporation

Conditions of membership in the

corporation (if any)

Corporation has no authority to issue shares of capital stock

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PARTNERSHIPS: A partnership is an association of two or more persons to carry

on any lawful business, purpose or activity. There are two types of partnerships GENERAL PARTNESHIP and LIMITED PARTNERSHIP

FORMATIONGENERAL PARTNERSHIP can be formed orally (it is not necessary to make filings with any governmental agency) OR a statement of partnership existence can be filed with the Secretary of State of the State of Delaware. Statement must include: the name of the general partnership, the address of the general partnership’s registered office in Delaware name and address of the general partnership’s registered agent for service of process in Delaware.

 

Limited Liability

Partnership

Limited PartnerShip

Limited Liability Limited

Partnership

PARTNERSHIP

S

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LIMITED Partnership (LP) Limited partnership is formed by two or more persons or entities, with at least one general partner and one or more limited partners.

FORMATIONA Delaware limited partnership is formed under authority of the Partnership Act. The Partnership Act permits a limited partnership to conduct any lawful business, purpose or activity with the exception of the business of granting policies of insurance, assuming insurance risks or banking (no judicial or regulatory approval is required to create a limited partnership).

CERTIFICATE of LP

Required contents of a certificate of limited partnership: name of the limited partnership, address of the registered office of the limited partnership, name and address of the registered agent of the limited partnership in Delaware for service of process and the name and address of each general partner of the limited partnership (certificate must be signed by all of the general partners, the limited partners need not be listed and need not sign the certificate)

LP AGREEMENT

To organize a limited partnership there must be a partnership agreement. Partnership agreement can set forth amanagement structure and impose any structure they deem fit. While it is generally recommended that a partnership agreement be a written instrument, the Partnership Act does permit oral partnership agreements.

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LIMITED Partnership (LP)Limited Liability

Management

In a limited partnership, the general partners are generally liable for the debts and obligations of the limited partnership, but limited partners who do not participate in the control of the business of the partnership are not generally liable for the debts and obligations of the limited partnership and have virtually no risk beyond their investment in the limited partnership.

General partners of a limited partnership conduct the day-to-day business and affairs of the limited partnership and are involved in the management of the limited partnership’s business. A limited partner is generally a partner of the limited partnership who does not participate in the management of the business but who invests in the limited partnership in exchange for certain economic rights (including the right to participate in the profits of the business venture)

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LIMITED Partnerships (LP)

LIMITIED LIABILITY

Partnership

LIMITIED LIABILITY LIMITED

Partnership LLP is a type of partnership in which a partner’s general liability is permitted to be restricted.

Unless otherwise agreed, a partner of a LLP, is not personally liable for debts of the LLP incurred while the partnership, whether such debts arise in contract, tort or otherwise.

The LLP itself, of course, remains liable for its own obligations.

LLLP is a Limited partnership in which a general partner’s general liability is permitted to be restricted.

In a LLLP, a general partner is not personally liable for the debts of the limited partnership, and no limited partner would have any liability for the debts of the limited partnership even if participated in the control of the business. LLLP itself, of course, remains liable for its own liabilities.

In order to form a LLLP, a statement of qualification must be filed with the Delaware Secretary of State. An annual report must also be filed in order to maintain a LLLP’s status.

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STATUTORY TRUST is: an unincorporated

association that is created by a governing instrument under which property is administered or business or professional activities are carried on by one or more trustees for the benefit of the owners of beneficial interests in the trust property. FORMATION

OWNERSHIP

A statutory trust is formed pursuant to a governing instrument and the filing of a certificate of trust with the Delaware Secretary of State (The governing instrument may be a trust agreement, a declaration of trust or otherwise. There is no requirement that the governing instrument be filed or recorded in Delaware).

The certificate of trust must set forth: the name of the statutory trust and the name and the business, address of at least one trustee who is a resident of or has a principal place of business in Delaware. The statutory trust is formed at the time of filing of the certificate of trust.

Beneficial owners of the Statutory Trust are not required to make any contribution to in order to receive a beneficial interest. Beneficial interests in a Delaware statutory trust may be evidenced by the issuance of trust certificates or by any other method, such as book-entry registration.

Except as otherwise provided in the governing instrument, a beneficial owner is entitled to an undivided beneficial interest in the property of the statutory trust and may share in the profits and losses of the statutory trust in the manner set forth in its governing instrument.

A beneficial owner’s interest in a Delaware statutory trust is deemed to be personal property notwithstanding the nature of the trust property.

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MANAGEMENT of the STATUTORY

TRUST FLEXIBILITY

The Delaware Statutory Trust Act permits the GOVERNING INSTRUMENT of a statutory trust to establish whatever rights and obligations of the trustees, the beneficial owners and other persons as are desired.

The business and affairs of a Delaware statutory trust are managed by its trustees.

The governing instrument of a Delaware statutory trust may also include provisions for officers, employees or other managers of the statutory trust.

The governing instrument may also contain provisions defining the rights, duties and obligations of the trustees, the beneficial owners and other persons

The governing instrument also may provide rights to any other person, including a person who is not a party thereto

NOTICE: . Neither the trustees nor the beneficial owners of a statutory trust will have any personal liability for the obligations of the statutory trust unless otherwise provided in the governing instrument

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The Delaware Limited Liability Company Act’s basic approach:

broadest possible discretion in drafting their limited liability company L I M I T E D L I A B I L I T Y COMPANIES agreement

members of an LLC are free to contract among themselves concerning the management of and standards governing the internal affairs of the LLC

maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements

Limited Liability Companies LLC

Flexible Approach

over 250,000 Delaware LLCs have been formed in the eleven years since adoption of the Delaware Limited Liability Company

Act

RESULT

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Membership

Certificate of

Formation LLC Agreement

Restrictions

LLC is a membership entity formed by any:

• natural person•Entity •Association

LLC is deemed to have been formed when certificate of formation is filed with the Secretary of State of Delaware.

It is filed by one or more authorized persons and sets forth:

•Name of the LLC•Address of the registered office•Name and address of the registered agent for service of process on the LLC in Delaware

LLC Agreement may provide for:

•Rights, powers and duties,including differing voting rights of members.

•The manner in which profits and losses of the LLC are to be allocated.

LLC conducts any lawful business, with theexception of:•Granting policies of insurance•Assuming insurance risks• Banking

NOTICE: Information such as the identity of the members, their addresses, the amounts of their investments, the nature of the business of the LLC and the LLC’s capital structure need not be set forth in a certificate of formation.

LLC FORMATION

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LLC Capital Structure & Management

The cornerstone of the formation and organization of LLC is - “LLC Agreement”. The LLC Agreement will govern the internal affairs of the LLC and the conduct of its business. (The LLC Agreement is not required to be publicly filed)

Different classes or groups of members having differing rights, powers and duties, including differing voting rights.

The LLC Agreement may provide for the manner in which profits and losses of the LLC are to be allocated.

LLC Agreement may specify the responsibilities of the managers having differing managerial rights, powers and duties.

LLC Agreement Provides for:

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A joint venture may be structured as a corporation, a general or limited partnership, a statutory trust or a limited liability company, depending on the degree of integration, management

structure and tax treatment desired.

JOINT VENTURES

A joint venture is a description generally used to denote two or more persons or entities joining together to conduct a specific business

The Court finds join venture created following elements are in place:

Equal division of profits and

losses

Equal control

over the business venture

Equal ownership

in the business venture

Agreement to engage

in the business

for mutual benefit

NOTICE: Depending on the choice of structure, joint ventures may be able to limit or modify their

fiduciary duties by contract. Delaware law provides an unparalleled degree of freedom to do this, whichever organizational form is chosen.

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ALTERNATIVE MODELSNon profit

Corporations and cooperatives

Sole Proprietorships

A Delaware corporation may be structured as a non-profit entity by including in its certificate of incorporation that the corporation is not organized for profit.

distributions of corporate assets to members of the corporation whether on dissolution or otherwise is limited.

Normally such corporations are formed as membership corporations and are conducted for religious, scientific, charitable or educational purposes.

A sole proprietorship (simplest form of

business enterprise) consisting of a single proprietor conducting business as an individual. (A sole proprietorship has no legal existence apart from its owner)

Business conducted in this form subjects the owner to unlimited personal liability. Profits and losses of the enterprise are borne directly by the proprietor.

Management of the business is entirely within the control of the proprietor, who by definition is the only person with an equity interest in the enterprise.

THANK YOU

www.csb.gov.ge

www.declaration.ge

www.hr.gov.ge

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