1

CLASE 14/3 (P)

Business types
When you want to transact business you have to choose a legal structure. One such
structure is the sole proprietorship (US) or sole trader (UK).
An individual person, without partners, who does business not in company form but by
themselves.
Advantages:
1- Owner does not share decisions about the company, and he decides by himself
when to end the business.
2- No sharing of profits. Not allocating profits with other people. Owner reaps the
profits.
Disadvantages:
1- Absence of legal personality (no legal structure). If a person forms a company with
somebody else, said company is considered an artificial or legal person (persona
jurdica de existencia ideal). Theres no distinct personality between the structure and
the legal person (that is, the person doing business). All obligations, profits and losses
are assumed by the same person.
2- No limitation of responsibility. Debts can be incurred by an individual person or a
business:
Personal debts: personal or individual responsibility. These debts are backed by
personal assets (personal assets are answerable for those debts).
Business debts: backed by business assets. A person can have this type of
debts only by creating a legal structure. You limit responsibility by creating a
legal personality.
In sole propietorships, the owners personal assets are answerable for personal and
business debts because sole proprietorships have no legal personality. Personal and
business assets are the same. Personal creditors and business creditors fight over the
same assets: they compete over the same assets because there is no distinction of
category.
Limitation of responsibility to the extent of some activity. When there is limited liability, if
business assets are not enough to cover business debts, personal assets cannot be
used to repay those debts.

When you create an artificial person, you have fiscal advantages and disadvantages.
1. You will be taxed twice, both on a personal and on a corporate level. Sole
proprietorships, on the other hand, enjoy single taxation due to their absence of legal
entity.
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2. Your way of raising financing will be affected (you do not have a lot of money
because you are alone, whereas more people can raise more money together). Money
sums up to form corporate capital; creditors and people who want to fund the company
are interested in corporate capital. As a sole proprietor, your financial position is not
very strong.

The Argentine equivalent is the impresario o empresa individual.

CLASE 17/3 (P)

A sole proprietor may choose to conduct business using his own name (impresario
individual). All of his assets are capable of being executed, meaning that creditors may
go after these assets (absence of legal personality).
A sole proprietor decides when to stop a business (no sharing of managerial activities).
Management and control are two different things. Management refers to those in
charge of running of daily affairs, dealing with vendors, deciding corporate policing,
etc (RUNNING THE BUSINESS), while control of the business is related to those
who own the business. In the case of the sole proprietorship, the sole proprietor is both
the owner and the manager of the business.

Formation
Purpose: obtaining profit. Associating with a view of profit. Uniting efforts or using all
your efforts alone with a view of profit.
You may lose money (if the business is not prosperous), in which case you would be
working at a loss. If you work with a partner, you will share in the losses (contribute
towards the losses).
The association of two or more persons who contribute their assets sharing in the
profits and losses / sharing in the profits and contributing towards the losses.
SHARE: PARTICIPAR CONTRIBUTE: SOPORTAR
When you associate with somebody, you have to know their intentions and their
contributive capabilities so that you are sure they can contribute towards the losses.
Single-member companies (sociedad de un solo socio), is a company without
association. This company bares the exact features as other companies composed by
members. The fact that this company is comprised of only one member must be
disclosed to third parties in interest somebody who deals with a company must be
duly aware / put duly on notice of the companys name and type.
Company names are sometimes a source of fraud, so the name of a company is not a
minor matter. It should not be misleading or confusing. Sometimes names must be
 3

registered. Names that are confusing, misleading or similar to other registered names
can cause problems.

A sole proprietorship is different from a single-member company (sociedad

unipersonal).
The sole proprietorship does not have a distinct legal personality from its owner, and it
is not a company type. On the other hand, a single-member company is a legal type
with a legal personality distinct from its single member. The single member also limits
liability to the amount of assets he contributes; only some assets can be executed. The
only similitude between both types of companies is that they are comprised of only one
member.
EMPRESA: ACTIVITY (ENTERPRISE), COMPANY: LEGAL FRAMEWORK
(SOCIEDAD, MARCO JURDICO DE LA EMPRESA)

In Argentina, a sole-member company is possible. Since the ACCC was passed,

people may form these types of companies.
The definition of a company or a business association before the ACCC prohibited the
existence of a SNC (there needed to be 2 or more persons). Now, there may be 1 or
more persons to form a company.
The SNC must be organized according to one specific type, the corporation type
(sociedad annima). It is governed by rules that govern corporations, which makes it a
single-member company limited by shares (UK) or a corporation (US).

Companies are formed to earn money out of an activity: a company may legally exists
where 1 or more persons act together and bind themselves to make capital
contributions for the purpose of exchanging/producing goods or rendering services,
with a view to sharing in the profits and contributing towards the losses.
CONTRIBUTE TOWARDS/SHARE IN/BEAR A LOSS
There must be a mutual intention of sharing profits and making business. There is a
difference between a lender (funds the company) and a shareholder (shares profits).

Classification of companies:
1. Personal-type structures. Business associations taking into account the
personal element of the partners. Legal forms whereby the personal element is
relevant and the individual partners are essential.
Management and control: managed by members who control (member-
managed structures sociedades personalistas). The death of a partner may
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partially dissolve or completely dissolve the company unless otherwise agreed

by the members. Partnerships are personal-type structures.
2. Capital-type structures. What really matters is what the partners contribute to
the company in terms of capital.
The personal element is irrelevant to how the structure of the company is
composed, capital must be carefully looked at, preserved and maintained.
Capital is crucial. Corporations are capital structures. LLCs are a hybrid
between both types, but they have more capital structure attributes.

CLASE 21/3 (P)

Personal-type structures vs. Capital-type structures
In partnerships, the personal element of the partners is essential. A company may be
dissolved if one of the members dies.
It is member-managed (although management activities may be delegated). It is joint-
managed and personally-involved. Corporations are management-managed by board
members of the firm (collegiate body). The Board of Directors is a collegiate body in
charge of managing. They receive instructions from members but they are not the
owners. The owners of the company, the shareholders, control the company.
Disposition of transfer of partnership interest: partnership interest. In other types: share
of interest.
A member has the right to dispose of or transfer partnership interest (participacin
social). To dispose of interest, you need the remaining members consent before the
transfer takes place. Partnership interest may not be transferred unless there is
unanimous agreement, which means you may not leave a company unless members
agree (your parting with your interest may be cause for dissolution).
On the other hand, shares (in corporate structures) are freely transferrable. The way in
which they may be disposed of is free, although there may be mechanisms of transfer
or limiting transferability (restrictions on transfer) but those are exceptional cases.
To sum up, in partnerships, in principle, interests cannot be transferred, but it does not
prevent a partner from leaving a firm. In corporations, the general principle is the free
transferability of shares.
Restrictions on transfer: used in all types of firms, but especially in capital structures.
Restrictions can limit transfer but they cannot prohibit it.
(EXERCISING THE) Right of first refusal. The remaining partners or shareholders are
entitled to being offered the participation or the shares of the selling member before an
outsider. Remaining partners or shareholders have the possibility to buy out the shares
or the participation first. It is a right of preference because members have priority over
non-members.
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Restrictions are written in companys articles (estatuto).

The way or formality of creation

Corporations must be incorporated (registered). Sometimes registration equals
incorporations. Other company forms do not need to be incorporated (they are
unincorporated), but it is a more domestic or informal way to do business.
Incorporation requires time, money and information about cost. Mostly companies of
capital structures or those with many members incorporate. When you want to prove
your corporation in a better way.
In Argentine law, according to the amended ACA, there are two sorts of companies.
1. Companies created in accordance with one of the legal types established by the
ACCC or sociedades tpicas. They follow one of the established types and the
requirements for the chosen types. You must comply with legal (substantial and formal)
requirements prescribed for each type. You cannot mix elements from different types
and still be considered a sociedad tpica.
However, you are not bound to use a prescribed type. You can choose the type that
best suits your needs.
2. Companies governed by Section IV. There are six types of companies governed by
Section IV (fotocopia).

CLASE 28/3 (P)

Company formation (corporations in the USA)
The benefit of creating a corporation is that the company enjoys separate or different
and distinct personality from that of the members.
Some other advantages are:
Corporations are not dissolved by the death of any of the members.
A legal person cannot be declared incapacitated.
A legal person can sue and be sued, it has legal representation of legal
standing (legitimidad pasiva).
Personnel can act on behalf of the corporation (the corporation must be
represented). The legal representative can appear in court.
A legal person can hold property in its own name, which is different from the
individual members property.
In the US, entity theory applies to partnerships. One of the consequences is that
partnerships can own property, and it can also have perpetual existence. The
corporation survives the members. It still may be dissolved or wound up or liquidated.
Liquidation extinguishes personality and sells assets.
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Taxation
Double taxation. A corporation is taxed on an entity level (corporate level on its own
profits), as well as at the member level (dividends).
Profits may be reinvested (capitalization of profits) in order to become more
profitable, in which case the company is not taxed at the member level because
members do not receive dividends. The company is not obligated to declare dividends
periodically, it does not violate the property rights of the members. The company
decides whether to declare dividends or capitalize profits at the meeting of corporate
members. However, if a company unreasonably retains dividends, it may turn out to be
perjudicial to shareholders because the company would be permanently preventing
shareholders from perceiving dividends.

Preincorporation or promotional activities

These are the activities that promoters carry out before the company is incorporated in
order to promote it. Promotional activities sometimes take the shape of contracts which
are entered into by promoters, who are not member of the corporation but will probably
be once it is incorporated, and future company shareholders. The may act to gain
profits in relation to the future company.
As for the legal nature of these contracts, they hold promoters personally liable for the
fulfillment of contractual obligations. If they fail to comply with the undertaken
obligations, they can be personally sued. In order to avoid this, promoters may include
clauses in the contract (secured contract) that hold the future company liable instead of
them. Personal liability may be backed by the company. Another way of being relieved
from / released of personal liability is novation of the contract, where an obligation is
turned into a new one. In this case, it is subjective novation, because the future
company assumes contractual obligations. (ASSUMPTION OF THE CONTRACTUAL
TERMS UPON FORMATION).
Steps that lead towards formation
1. Writing the articles of incorporation, which contain the most important elements of
the company. It contains: the object or purpose activity, the jurisdiction, the registered
office, the person in charge of receiving notices (registered agent), the original capital
(issued share capital = capital emitido), the number of classes of shares that represent
the capital, the number of shareholders, whether the company is closely-
related/closely-held company, they way and time in which the profits shall be
distributed (the proportion assumed by each member).
2. Once the document is executed, it is filed with the Secretary of State who will decide
whether to approve it or not. The final result is the approval of articles of incorporation.
The Secretary of State issues the certificate of incorporation, which serves as
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conclusive proof of incorporation. In order to be approved, the document needs to

comply with the states statutes.
The Secretary of State in the US and the Registrar of Companies in the UK, as well as
the IGJ in Argentina, act on behalf of governmental purposes to supervise and control
that legal requirements are complied with.
The Articles of Incorporation are different from the bylaws.

The company legally exists as such when the certificate of state is issued, and its legal
effect is that it confers legal personality. It is like a certificate of birth for the company,
and it is issued upon compliance with legal requirements on the part of subscribers
(incorporators).

Defective incorporation By error or omission (committed by incorporators).

- Substantial: for example, the number of shareholders, the jurisdiction of the company,
the capital structure. These are necessary requirements for the company or else it is
declared null or void. Nonetheless, some states in the US allow companies to still do
business at de facto company (common law doctrine). This means that the company
exists in fact but not in law. The application of this doctrine, however, is not automatic -
certain elements must exist. If this theory is applied, the company does business as if it
were a de jure corporation. The requirements that a corporation which has been
defectively incorporated must meet in order to be considered a de fact corporation are
as follows:
A state statute or law under which the corporation would be considered to be
effectively incorporated.
Incorporators must have made a good faith attempt to incorporate properly.
They must not have willingly skipped a requirement.
The company must have stated doing business under the corporations name.
This means that third parties have already relied on the company.
This doctrine only comes into play when a company could have been declared null due
to a substantial error. If a state does not apply this doctrine, the corporation will be
declared null and i will be removed from the Register.
If the error is minor, courts often overlook it, especially if it can be corrected later on,
because these errors do not affect the continuance of the company or third parties
interests.

A rejected certificate of incorporation can be revised, because all decisions made by

administrative jurisdictions are subjected to judiciary revision or review to protect the
rights of incorporators.
 8

CLASE 31/3
Corporation single-member company (sociedad annima unipersonal)
Formar / constituir: constitute or form
Pluralidad de socios: plurality of members
Amendment to
Entered into force as from
Aplicado: introduced
Separate legal entity: personera jurdica
Members to a partnership

Partnership
More than one member. Members are co-owners.
Decisions are made jointly.
Formal document as proof of existence.
Members share in profits and losses. Members may agree on different ways to
do this.
Joint liability
A partnership is a separate legal entity distinct from its members. Claims must be
brought against the company. It is a personal-type structure, which means that if
someone wants to transfer or assign his shares to other members, it must be
unanimously decided.
Partnerships have assets assign to them. Creditors will have claim against those
assets.
A term of duration may be specified or not. If a term is decided, once the agreed term
has passed, the company can cease its existence or it can continue its activities. In the
event that it decides to continue past its fixed duration, the company becomes a
partnership at will.
The partnerships profits are the only income the members have.
Members have to inform everything related to the company in the proper record.
right of information.
Duty of loyalty (deber de lealtad): members cannot start a business that competes with
the partnerships business. Everything must be disclosed.
Secondary, joint and several liability
When the companys assets are not enough to cover the companys debts (the money
owed to creditors), the members personal assets will be used.

CLASE 4/4 (P)

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Corporate financing
Using broad clauses such as any lawful activity or act reasonably necessary and
appropriate for its purpose stating the companys object, the company avoids the need
to amend the articles of incorporation and it is also able to transact business without
being subject to the ultra vires doctrine (strange acts or activities that go beyond the
powers granted to the company - acts beyond the scope of the companys object).
The consequences of the application of the ultra vires doctrine are:
1- The attorney general of the state of incorporation can liquidate the company.
2- A court injunction may be issued in order to ban the company to continue doing
business as such.
Amendments are time-consuming (a special meeting with a majority quorum needs to
be held, and a special document must be written).

(Clusula de objeto social amplio evita que se incurra en la doctrina de ultra vires y
hace que la sociedad no deba reformar el estatuto y cambiar el objeto de la sociedad)

Ultra vires: the company is not bound by actions or acts not within the ordinary course
of business.
Intra vires: the companys directors bind the company to any acts that are part of the
ordinary course of business without the need of express powers (meaning that this is
an implied power).

Express powers are granted through special resolutions -> special resolutions are
issued when there is a change of company structure or purpose, or when the company
needs to buy property or sell a substantial part of its assets or the totality of its assets.

The Board of Directors acts through the companys legal representatives (the Board
President or CEO) in all actions or acts included within the corporation. The board is
elected in the corporations first organizational meeting (the first company act), held by
incorporators. In this meeting, the board is elected and the bylaws are adopted.

In the US, incorporators may or may not be shareholders, while in Argentina,

subscribers to the articles of incorporation are necessarily incorporators. There is no
distinction between shareholders and incorporators in Argentina.
In Argentina, there are two types of incorporation methods:
1. Suscripcin nica: approval of articles of incorporation.
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2. Suscripcin pblica: public issuance of shares. A company that publically issues

its shares to finance the future corporation when they do not have the money
necessary to do so.
When it comes to suscripcin nica, the subscribers of the articles are shareholders
(suscriptor o fundador) (subscribers are incorporators as well). They are subscribers to
the document (arts of incorporation)and the subscribers of shares.
At the moment an incorporator subscribes, he undertakes/binds himself to take up
shares in a share-subscription agreement.
The company is the issuer of shares and the shareholder is the holder of shares. Once
a person has acquired shares, he or she becomes an owner.

Private company: sociedad cerrada.

Go public: sociedad abierta.
Whether a corporation is closed or not will depend on whether their shares are offered
to the public or not.

The articles of incorporation need to state the amount of capital with which the
company intends to do business and the division of said capital (the representation of
capital in shares). The companys capital is divided into shares.
A share is represented by a certificate of shares, it is the legal representation and
division of capital. It is an item of property.
Share certificate
In Argentina, the capital may be materialized in a share capital - it is represented in a
legal document that a shareholder may have (accin cartular)- or it may be
dematerialized - acciones escriturales, also known as book-entry shares; they are not
represented by a legal document and to prove their existence, you need a copy of the
book entry where the shares are entered (constancia de accin escritural en el libro de
registro de acciones).

Shares issued in accordance with capital held

Issued-share capital: capital and share in accordance with capital. The number of
shares issued according to capital. If you are a company and you hold capital, you
need to issue shares representing it, it is compulsory. Otherwise, it is not considered
capital, it may be reserved money but not corporate capital.
Issued-share capital: capital suscripto. Capital that has been subscribed by third
persons who bought it.

Ways of contribution (when you are a contributor, you are a subscriber).

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Capital contribution: company property received from shareholders. A person gives

something to the company and they receive shares in exchange for it.
When you make a contribution to capital, you are issued a share in return.

Shareholders are issued shares because they have made contributions to capital
instead of otherwise (different from creditors), so they are an economic resource.
Shares are different from bonds. Bonds are not contributions to capital. When
somebody lends money to the company, he or she is a creditor. A creditor does not
share in on the companys profits and losses. Creditors are issued bonds. With bonds,
creditors receive profits with maturity date, as well as interest on the loan. They get
profit regardless of whether the company is prosperous or not. Unlike shareholders,
bondholders are creditors. They do not run the risk of companys vicissitudes. They are
not concerned with the management of the firm or the firms profits. Bondholders do not
depend on dividends.
Bonds are considerad company liabilities (deudas que forman parte del pasivo de la
sociedad). It is a debt incurred by the company.
A shareholder, on the other hand, shares in profits and losses and may get dividends
according to the companys profits (should the company declare dividends).
Bondholders do not participate in the declaration of dividends, because they receive a
fixed and periodical rate. It is periodical because bondholders always receive their rate,
and it is fixed because the creditor will get payments and if he does not he can bring an
action against the company without having to wait until the companys dissolution.
Shareholders have an interest on remaining assets on dissolution (CUOTA
LIQUIDACIONAL), a claim on dividends and the entitlement to vote. Shareholders
have financial rights (collection of dividends and return on dissolution) and political
rights (entitlement to vote). Creditors have no intervention in the companys political
decisions. Thy do not have the right of say and the right to vote.
Shareholders have an interest upon the company being liquidated, but to a residual
position - they are at the end of the line when it comes to collecting money upon
liquidation. Shareholders have to wait for preferred creditors to get payment first after
the company has liquidate its assets, and then they get the remaining assets, which
often means they get nothing.
There are secured and unsecured creditors (privilegiados y quirografarios).
It is an eventual (in expectancy) and residual right.
The residual character of the shareholder in expectancy
+ Common shares:
Single-vote shares: one vote per share (acciones ordinaries).
 12

Privileged common shares: common shares may be issued with privileges regarding
political power, such as plurality of votes) (acciones privilegiadas o acciones ordinarias
de voto plural). In Argentina, these types of shares cannot confer more than 5 votes per
share. They are also known as plurality-voting shares.
Preferred shares: preferred shares have priority over other common shares (acciones
preferidas). Shareholders who hold them have priority in collecting dividends and
priority in collecting assets upon liquidation. These shares put shareholders in a
position similar to that of bondholders. They can also offer cumulative dividends which
accumulate dividends (dividends fijos o acumulativos), which give shareholders the
right to collect undeclared dividends.
In Argentina, shares cannot entitle shareholders to voting privileges and patrimonial
preference at the same time.

CLASE 7/4
Sole proprietorship
One person is primarily responsible for the companys activities.
It is more difficult to finance the company at the beginning.
There is no sharing of profits and losses.
Pass-through taxation.
No separate legal entity.
In Argentina, with the amendment of the ACA, a new type of single-member corporation
was created: the SAU. SAUs are legal entities. It is a company divided by shares. They
only thing SAUs have in common with SPs is that they are comprised of only one
member. When it comes to liability, creditors are not able to attack the members
personal assets, instead, they can only go after those assets which he has contributed
to the corporation.

General partnership
More than one person involved. Members of a partnership are subject to
secondary, joint and several liability.
It is easier for partners to raise money.
Sharing of profits and losses.
Pass-through entity, single taxation (different from Argentinas Sociedades
Colectivas).
Separate legal entity. Standing to sue and be sued.
Partners may choose to enter a partners agreement. If they do not enter an
agreement, the UPA will settle anything that is not covered by the law.
 13

Fiduciary duties in general partnership. The duty of care and the duty of loyalty are
essential to creating a sense of trust among the members. Partners cannot waive these
duties. The key element in partnerships is disclosure, partners cannot do anything that
affects the other partners interests without consulting with them first.
Authority of partners (legal powers). Although a partner may be legally entitled to do
something, this does not mean that he or she is not falling into a breach of partners
agreement, which holds the partner liable against other partners and against third
parties.
Limiting liability. A partner may limit liability by filing a statement of partnership authority
with the secretary of state. This statement protects the partnership and all the partners
have to sign it. Third parties may not be aware of the partners statement, but the
partnership is still liable against them. These agreements protect the partnership
because partners know what they can and cannot do.
Authorized actions are implied or express actions that bind the company, while
unauthorized actions are those which exceed the partners authority.
Liability of the partners (according to the UPA).
A creditor has to go after the partnerships assets first in order to satisfy his or her
credit. If the partnerships assets have already been exhausted and the debt has not
been fully covered, the creditor can then go after the partners personal assets. This is
called the EXCUSIO BENEFIT, and it means that the partnerships assets must be
exhausted before attacking the partners assets jointly.
Some states have not adopted these changes.
Liability does not apply to incoming partners on debts that were incurred in before said
partner joined the company.
Dissociation (desvincular si es voluntario, remover si es involuntario) means that the
partner no longer belongs to the partnership, he or she ceases to be partner. If it is
voluntary, the partner needs to serve notice to withdraw from the partnership
(depending on the partnership agreement) and the remaining partners have to decide
whether to continue doing business as a partnership. Dissociation can also happen
when an event that was contemplated in the partnership agreement takes places, when
the partners unanimously vote for a partner to dissociate, when there is a court order to
remove a partner, when the partner suffers from mental or physical disability that
prevents him or her from continuing being a partner, when the partner declares
bankruptcy or when a partner dies.
The effects of dissociation are:
When it comes to management, the leaving partner cannot vote or make
decisions regarding the company.
 14

One or more of the remaining members of the partnership have to buy out the
leaving partners interest in the partnership.
The partnership will be liable to third parties for two years after the partner
leaves, unless they file a statement of dissociation, in which case it will only be
held liable for 90 days.
Termination of a partnership
The company no longer exists. The events that may lead to dissolution are:
dissociation, when the rest of the partners decide not to continue, operation of law or a
court order.
After dissolution, the winding up process commences. Creditors will collect assets and
the company will be liquidated. During liquidation, the assets have to be preserved,
collected and liquidated. Moreover, employers need to be paid.
Distibution of assets:
1. Creditors and employees.
2. Partners in proportion to their contribution.

CLASE 11/4 (P)

Legal theory of capital - funding
Capital is the element whereby the company is funded. It is a resource composed of
the capital contributions made by shareholders. Capital contributions must be fairly
valued by an independent valuer or appraiser (somebody who fixes a value).
Capital must represent the true amount of capital contribution. If capital is overvalued, it
may be undercapitalized because you are given more shares than you should have
had. This leads to watered stock, which is what occurs when shares are worth more
than their real value.
Shares are a guarantee fund for creditors, so a company cannot inform an untrue
value. Watered stock is detrimental to the company, to shareholders and to creditors
and third parties because the company is showing false information.
Corporate capital is like a snapshot of the company. The nominal amount is an
accounting figure that shows a snapshot of the initial capital of a company and the
issued shared capital is its legal and economic correspondence.
The corporations capital is composed of the shareholders contributions. Contributions
can be tangible or intangible.
Contributions can be divided into cash contributions (contribuciones dinerarias) and
non-cash contributions (contribuciones en especie) or in kind. Contributions in kind
have to be capable of being economically valued, and they must be capable of being
turned into money and easily realizable. This type of contribution is also known as non-
 15

cash consideration. Non-cash contributions are capable of being foreclosed (ejecucin

forzada), where they are the subject matter of an auction sale.
Non-cash contributions can be tanglible (corporeal real property such as a car, land, or
flats) or intangible (cannot be seen or touched, it is related to real and personal
property rights, interests and claims). The legal representation of an intangible asset
takes the form of a document. Secured claims have a higher value and a higher
probability of collection.
The nominal figure (liability figure) can change as the company carries out business, it
can fluctuate. If the company is profitable, the nominal figure will be higher but if it is
not, it will be lower.
The net worth or shareholders equity (patrimonio neto) of the company helps
understand the true value of the company. The net worth is the difference between net
profits and net losses, or gains minus indebtness at any given time. Net worth reflects a
period.
Net assets (what you really have) are the difference between net gains (what you have
actually gained) and net losses (what you have really lost).
Legal functions of corporate capital
1- Capital is inviolable (inviolability of corporate capital). Capital cannot be diminished
or increased in detriment of third parties or shareholders. To increase or decrease
capital, a corporation must follow complex procedures established by statutes.
Corporations cannot change their capital for their own benefit. Capital is exercised by
and for a company to fulfill the corporations purpose.
Capital must reflect the correspondence between the value of shares and the value of
the corporations assets.
It guarantees outsiders that resources are there.
2- Guarantee. Corporate capital guarantees that nobody will be deceived by untrue
information about the corporations real capital. The truthfulness of fanatical statements
protects outside parties from being deceived and it helps shareholders maintain their
control over the company (their financial and voting rights in the company).
Capital also benefits corporation members because it helps them maintain their control
in the company (it guarantees voting rights) and it preserves the shareholders financial
rights (rights of collection).
They can maintain control in the company using other mechanisms, or equity holding
rights. Equity holders are entitled to voting and financial rights. They have propriety
over external investors to subscribe to newly issued shares.

CLASE 18/4 (P)

Corporate funding - ways whereby a company may increase capital
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Internal funding: the company does not require outside investments, it is funded
resorting to its own resources. The company rationalizes their resources.
The company must issue the corresponding shares according to the amount of capital
it has. Internal funding does not require third parties or outsiders - there is no need for
outside contributions. The company funds itself by means of its own resources or
funds.
1- Dividend capitalization. (capitalzizacin de dividendos). Payment of dividends to its
members.
2- Capitalization of free reserves (capiitalizacin de resrvas libres). Reserve refers to
undistributed profit (not distributed to shareholders). Reserves are capitalized and
placed in the capital account, and the corporation must issue shares that represent this
capital amount. The company may increase its capital by means of internal funding by
capitalizing reserve or other balance sheet funds capable of being distributed among
members.
3- Revaluation of assets (readjustment): assigning a new value to assets.

External funding: issuance of new shares. The company resorts to outside parties
assets (tangible or intangible) rather than to its own resources. It may occur when the
company obtains disbursements in cash by existing shareholders or new investors.
The company raises its capital amount by a new issuance of shares. It can also be
externally funded when funds are brought into it as the business entity exercises its
borrowing powers and issues debentures convertible into shares. If the company
exercises its borrowing powers, it does not raise its capital because it has to return the
capital later.

Debenture holders are firm creditors. They are entitled to be paid back the amount of
money lent to the company with interest, irrespective of the financial position of the
company. They are not afforded voting rights and they do not exercise influential
control over the companys business.
Shareholders are investors. They run the risk of commercial trade in respect of
collecting dividends. They are vested with management and control powers through
voting rights.

Corporate powers
- Express powers allow a corporation to issue bonds and stocks, to execute contracts
and negotiable instruments, to buy and sell property, to pay employee benefits and to
make charitable contributions.
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- Implied powers allow a corporation to perform all acts reasonably appropriate to

accomplish its corporate purposes and to borrow funds within certain limits, to lend
funds and to extend credit to those with whom the company has a legal or contractual
obligation.
Ultra vires doctrine: beyond the power (express or implied). Ultra vires acts are those
attempted by a corporation that are beyond the scope of its express or implied powers,
granted by the corporations articles of incorporation or the company bylaws.

Internal equity funding

Internal equity funding occurs when the companys nominal capital is increased in
order to reflect the real value of depreciated assets as a result of fluctuations in the
purchase power of money due to inflation. In a case of internal equity funding by a
dividend or reserve capitalization, shareholders are not entitled to exercise pre-emption
rights (equity holding) and they are not afforded rights of accretion, either.

- Preemptive rights: shareholders are entitled to purchasing newly issued corporate

stock of the same class as those they hold before outsiders. This right prevents
management from depriving shareholders of their proportion of control of the
corporation by increasing the number of shares in the company.
- Appraisal rights: rights of shareholders granted by state statutes to receive a fair value
for their shares when a merger or consolidation takes place. It is an exceptional way of
being returned your contribution.
- Dividend capitalization: a form of cancelling a debt (different from debt capitalization).
Nominal capital increase would take place. The members right to collect dividends is
transformed into fully paid-up shares allotted to them, as if they were creditors of the
company. It is an internal funding method.

Internal funding you want to be more powerful from a financial and commercial
point of view. A corporation can increase capital without disbursement of money on the
part of the shareholders. .
Reserve capitalization and other reserves capitalization of reserves.
The issuance of shares has to be made in the proportion that each shareholder holds.
Otherwise, you change the shareholders participation in the company. The corporation
has to respect the proportion that each shareholder holds to keep the same degree of
control and political sand financial decisions.
There is no issuance of new shares because they have already been paid-up (bonus
shares). It is a way of rationalizing your resources.
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External funding shareholders subscription agreement made between the

corporation and either outsiders or other shareholders with preemptive rights (priority to
obtain newly issued share capital).
Preemptive rights are different from rights of first refusal. Rights of first refusal are not
related to raising the corporations capital. The corporation member is capable of
acquiring shares by transference - another shareholder transfers his or her equity
holding to the remaining shareholders of the company first, and then to outsiders.
Preemptive rights are a priority right. Shareholders have the priority when it comes to
obtaining newly issued share capital. In Argentina, you may only subscribe to newly
issued shares of the same class and in proportion to the shares that you already hold.
In Argentina, rights of first refusal are related to increasing holding over
undersubscribed shares of other shareholders.
Accretion rights entitle shareholders to increase their proportion of shares by
subscribing to other shares not subscribed by any other person.