BLAW chapter 39

legal entity created and recognized by state laws; can have one or more owners (called shareholders); operates under a name distinct from names of the companies owners, the owners may be natural persons; authority to act and the the liability for its actions are separate and apart from the individuals who own it
corporate personnel
the responsibility for the overall management of the firm is entrust to a board of directions, who members are elected by the shareholders. The board of directors hires corporate officers and other employees to run the daily business operations of the corporation

-unlike the partners in a partnership, the body of shareholders can change constantly without affecting the continued existence of the corporation

-a shareholder can sue the corporation, and the corporation can sue the shareholder and under circumstances a shareholder can sue on behalf of a corporation

Limited liability of shareholders
-normally corporate shareholders are not personally liable for the obligations of the corporation beyond the extent of their investments

-creditors often will not extend credit to small companies unless the shareholders assume personal liability as guarantors for corporate obligations

corporate taxation
-whether a corporation retains its profits or passes them on to the shareholders as divineness, these profits are subject to income tax by various levels of government

-corporation profits are subject to double taxation
the corporation pays taxes on profits, and then if the profits are passed on the to shareholders as dividends, the shareholders must also pay income tax on them

franchise tax
state levied tax for the privilege of doing business in the state
holding company
(sometimes referred to as a parent company) is a company whose business activity consists of holding shares in another company. Typically, the holding company is established in a low-tax or no-tax offshore jurisdiction

-transfers cash, bond, stocks, and other investments to the holding company, and profits are taxed at the rate of an offshore jurisdiction where the company is registered

torts and criminal acts
a corporation is liable for the torts committed by its agents or officers within the course and scope of their employment
-follows doctrine of respondeat superior
-under modern criminal law a corporation may also be held liable for the criminal acts of its agents and employees, provided the punishments is one that can be applied to the corporation
-corps cannot be imprisoned but can be fined , but the corporate directions and officers can be fined
respondant superior
as employer you are responsible for the acts of your employees; employer held responsible for negligence in hiring, fails to provide duty of care to its patrons
public corporation
a corporation formed by the government to meet some political or governmental purpose (NOT THE SAME AS A PUBLICLY HELD CORP)
publicly held corp
any corporation whose shares are publicly traded in a securities market
private companies
(such as public held companies) are created either wholly or in part for private benefit (for profit)
-most corps are private
-not owned by the government
nonprofit corporations
corps formed for purposed other than marking a profit
-convenient form of organization that allows various groups to own property and to form contracts without exposing the individual members to personal liability
closely head corporations
-most corps in US fall under this category
-shares are not publicly traded, in fact there is no trading market for the shares
-shares are often held by family members or by relatively small group os persons (usually persons personally know each other)
-often operated like a partnership
-given considerable flexibility in determine its rules of operations
-if all of shareholders agree in writing, the corp can operate without directors, bylaws, annual or special shareholders’ or directory meetings, stock certificate, or formal records of shareholders’ or directors’ decisions
management of closely held corporation
-has a single shareholder or a tight knit group of shareholders, who usually hold the positions of directors and officers
-managements resembles management of a sole proprietorship or partnership
-the firm must meet all specific legal requirements set forth in state statutes

-to prevent a majority shareholder from dominating a closely held corporation, the company may require that more than a simple majority of the directors approve any action taken by the board (applies only to extraordinary actions)

transfer of shares in closely held corps
-small number of shareholders, so transfer of one shareholder’s shares to someone else can cause serious management problems
-to avoid these bad situations, the corp can restrict the transferability of shares to outside persons
-shareholders could be required to offer their shares to the closely held corp or other shareholders before selling them to an outside purchaser


shareholder agreement to restrict stock transfers in closely held corps
-control can be stabilized through a shareholder agreement which can provide that when one of the original shareholders dies, his or her shares of stocks in the corp will be divided in such a way that the proportionate holdings of the survivors, and his their proportionate control, will be maintained
-agreements can also restrict the transfer of closely held corp’s stock in other ways
misappropriation of closely held corp. funds
-sometimes, a majority shareholder in a closely held corp takes advantage of his or her position and misappropriates company funds

-in most situations the moral remedy for the injured minority shareholders is to have their shares appraised and to be paid the FMV for them

S corporation
-closely held corp that meets the qualifying requirements can choose to operate as an S-corp
-a corp will automatically be taxed as a C corp unless it elects S corp status)

-if a corp has S corp status, it can avoid the imposition of double taxation

-shareholders tax brackets may be low
-resulting tax saving is particularly attractive when the corp wants to accumulate earnings for some future business purpose

some S corp requirements
1. must be a domestic corp
2. corp cannot be a member if an affiliated group of corps
3. shareholders must be individuals, estates, or certain tax-exempt organizations
4. corp can have NO MORE than one hundred shareholders
5. the corp must have only one class of stock, although all shareholders do not need to have the same voting rights
6. no shareholder of corp may be a non resident alien
professional corps
identified by the letters P.C. or S.C. or P.A.
-in general the laws governing the formation and operation of professional corps are similar to those governing ordinary business corps

1 some courts treat a professional corp somewhat like a partnership and hold each professional liable for any malpractice committed within the scope of the business by others in the firm
2. with the exception of malpractice or a breach of duty to clients or patients, a shareholder in a professional corporation generally cannot be held liable for the torts committed by other professionals at the firm

Corporate Formation
1. promotional activities
2. select the state of incorporation
3. secure the corporate name
4. prepare the articles of incorporation
4. file the articles of incorporation with the secretary of state
5. 1st organizational meeting
promotional activities
-today, due to the relative ease of forming a corporation in most states, persons incorporating their business rarely, if ever, engage in preliminary promotional activities

-a businessperson needs to understand that they are personally liable for all pre incorporation contracts made on behalf of the FUTURE corp
-a promoter can limit liability in an initial promotional contract with a third party by including a provision that makes the corp, once formed, assume liability under the contract
-if no provision exists, promoters personal liability continues until the corp assumes liability through a novation
-a newly formed corp is not liable for any pre-incorporation contracts unless it has has expressly agreed to its terms

a contract to substitute a third party in the place of one of the original contract parties
incorporation procedures
basic procedures
1. select a state of incorporation
2. secure the corporate name
3. prepare the articles of incorporation
4. file the articles of incorporation with the secretary of state
select the state of incorporation
-individuals may look for the states the offer the most advantageous tax or incorporation provisions
-another consideration is the fee that a particular state charges as well as the annual fees and the fees for specific transactions (deleware is very popular place of incorporation)
-generally closely held corps, incorporate in the state where their principal shareholders live and work
-for reasons of convenience and costs of business, often choose states where corps business will be conducted
secure the corporate name
-corp name must include the word corporation, incorporated company, or limited (or the abbreviations) **if failure to comply, the individual who signed a contract for the corp can be help personally liable

-a new corps name cannot be the same as (or deceptively similar to) the name of an existing corporation doing business within the state, this could lead to infringing another corps trademark rights
**if corp contemplates doing business in other states-or over the internet- they will also need to check existing corp names in the other states in which they will do business to avoid liability for trademark infringement

prepare the articles of incorporation
(primary document needed to incorporate a business)

-articles include basic information about the corporation and serves as a primary source of authority for its future organization and business functions
1. name of the corp
2. number of shares the corp is authorized to issue
3. the name and street address of the corporations initial registered agent and registered office
4. names and addresses of each incorporator

**things that may be included
1. names and addresses of the initial members of the board of directors, the duration and purpose of the corporation, a par value of shares of the corporation, and other information pertinent to the rights and duties of the corporation’s shareholders and directors

the person(s) who sign the articles of incorporation
-each name and address of incorporator must be listed
-incorporators need not have any interest at all in the corp, and sometimes signing the articles is their only duty

**incorporators frequently participate in the first organizational meeting of the corporation

internal rules of management adopted by the corporation at its first organizational meeting
-shareholders may amend or repeal the bylaws, as can the board of directors unless the articles reserve this right to shareholders exclusively

**typically describe such matters as voting requirements for shareholders, the election of the board of directors, and the methods of replacing directors, they also usually outline the manner and time of holding shareholders’ and board meetings

shares of the corporation
-must specify the number of shares the corp is authorized to issue
-to allow for the raising of additional capital in the future, the articles often authorize many more shares of stock than will initially be issued (this avoids the cumbersome and sometimes complicated task of amending the articles at a later date)
registered office and agent
-usually registered office is also the principal office of the corporation
-corp must also give the name and address of a specific person who has been designated as an AGENT and who can receive legal documents (such as orders to appear in court) on behalf of the corp
duration and purpose
-a corp has perpetual existence unless the articles state otherwise (their is no specific requirement to be stated)
-a corp can be formed for any lawful purpose
-trend towards allowing corporate articles to state that the corp is organized for “any legal business” with no mention of specifics, to avoid the need for future amendments to the articles
internal organization
-articles can describe corps internal management structure, but this is usually included in the bylaws adopted after the corp is formed
-bylaws are formed after commencement by the board of directors, they cannot conflict with the incorporated statute or the articles of incorporation
file articles with the state
-once articles have been prepared and signed off on by the incorporators, they are sent to the appropriate state official
-once secretary of state stamps the articles “filed” and returns a copy of the articles to the incorporators, the corporation officially exists
first organizational meeting to adopt bylaws
bylaws- internal rules of management
0if articles named the initial board of directors, then the directors, by majority vote, call the meeting to adopt bylaws and complete the company’s organization

-typically articles do not name directors, so incorporators hold the meeting to elect the directors, adopt bylaws, and complete the routine business of incorporation (authorizing the issuance of shares- and hiring employees)

improper incorporation
-procedures are very specific, and if they are not followed precisely, others may be able to challenge the existence of the corporation

-errors in incorporation procedures can become important when a third party who is attempting to enforce a contract or bring a suit for a tort injury learns of them

general defects- de jury and de facto

de jure
-corp is said to be rightful and lawful in existence if the corp has substantially complied with all conditions precedent to incorporation

-in most states the secretary of state’s filing of the articles is conclusive proof that all mandatory statutory provisions have been met
** if the defect is minor most courts will overlook the defect and find that a corporation (de jure) exists

de facto
if the defect is substantial, courts will treat a corporation as a legal corp despite the defect if the following three requirements are met
1. a state statute exists under which the corporation can be validly incorporated
2. the parties have made a good faith attempt to comply with the statute
3. the parties have already undertaken to do business as a corporation

**however some states have abolished the common law doctrine of de facto corporations, if there is a substantial defect in complying with the incorporation statute, the corporation does not legally exist, and the incorporators are personally liable

corporation by estoppel
-if a business holds itself out to others as being a corporation but has made no attempt to incorporate, the firm may be estopped (prevented) from denying corporate status in a lawsuit by a third party
-some states will treat an alleged corp as if it were an actual corporation for the purpose of determining the rights and liabilities in particular circumstances HOWEVER RECOGNITION DOES NOT EXTEND BEYOND THE RESOLUTION OF THR PROBLEM AT HAND
corporate powers
expressed and implied
express powers
-found in the articles of incorporation, in the law of the state of incorporation, and in the state and federal constitutions

if conflict arises among the various documents, the following order of priority is used
1. U.S. constitution
2. state constitutions
3.state statutes
4. articles of incorporation
5. bylaws
6. resolutions of the board of directors

implied powers
unless expressly prohibited by a constitution, a statute, or the articles, the corp has the implied power to perform all acts reasonably appropriate and necessary to accomplish its corporate purpose
-corporation has the implied power to borrow funds within certain limits, lend funds, and extend credit to those with whom it has a legal or contractual relationship
-to borrow funds, corp acts through its board of directors
-corporate officers have the implied power to bind the corporation in matters directly connected with the ORDINARY business affairs of the enterprise


Ultra Vires Doctrine
ultra vires- beyond the power
-in corporate law, acts of a corporation that are beyond its express or implied powers are ultra vires acts
-the shareholders can seek an injunction from a court to prevent these acts from happening and the attorney general in the state of incorporation can also bring an action to obtain an injection against the ultra vires transactions or to institute dissolution
-the corporation or its shareholders (on behalf of the corporation) can seek damages from the officers and directors who were responsible for the ultra vires acts
piercing the corporate veil
-occasionally the owners use a corporate entity to perpetrate fraud, circumvent the law, or in some other way accomplish an illegitimate objective
-if this happens the courts will ignore the corporate structure and pierce the corporate veil, exposing the shareholders to personal liability
factors that lead courts to pierce the corporate veil
1. a party is tricked or misled into dealing with the corporation rather than the individual
2. the corporation is set up never to make profit or always to be insolvent, or it is too “thinly” capitalized- that is, it has insufficient capital at the time it is formed to meet its prospective debts or potential liabilities
3. the corporation is formed to evade an existing legal obligation
4. statutory corporate formalities, such as holding required corporation meetings, are not followed
5. personal and corporate interests are mixed together or commingled to the extent that the corporation has no separate identity
6. alter-ego theory, the theory that the corporation was not operated as a separate entity, but was just another side of the individual or group who actually controlled by the corporation; theory is applied when a corporation is so dominated and controlled by an individual or group that the separate identities of the person/ group and the corporation are no longer distinct; courts use the alter ego theory to avoid injustice or fraud that would result if wrongdoers were allowed to hide behind the protection of limited liability

**loans from a person who controls the corporation must be made in good faith and for fair value

**closely held corporations must be very careful so that court does not pierce the corporate veil

corporate financing
-financed by the issuance and sale of corporate securities which include stocks and bonds
(equity securities) represent the purchase of ownership in the business

2 major types of stock
1. common- provides a proportionate interest in the corporation with regard to (1) control, (2) earnings, and (3) net assets; a shareholder’s interest is generally in proportion to the number of shares he or she owns out of the total number of shares issued; any person who purchases common stock acquires voting rights-one vote per share held; voting rights in a corporation apply to the election of the firm’s board of directors and to any proposed changes in the ownership structure of the firm; holders of common stock assume a residual position (last in line to receive a return on investments)

2. preferred stock- an equity security with preferences; usually have priority over holder of common stock as to dividends and payments on dissolution of the corporation; preferences must be stated in the articles; holders may or may not have the right to vote; not included among the liabilities of a business because it is equity; more similar to bonds than common stock and as a result it is often categorized with corporate bonds as a fixed-income security, even though the legal status is not the same

issued by business firms and by governments at all levels as evidence of the funds they are borrowing from investors; normally have a designated maturity date; because debt financing represents a legal obligation on the part of the corporation, various features and terms of a particular bond issue are specified in the bond indenture (lending agreement)

4 types of bonds
1. debentures- no specific corporate assets are pledged as collateral, backed by a corporation’s general credit rating; unsecured debt
2. mortgages- pledge specific real estate; if corporation defaults, bondholders can foreclose
3. convertible- conditions trigger bonds to convert to corporate stock
4. callable- can be “called in” by principal and repaid according to the bond conditions

different types of preferred stock
1. cumulative preferred-if dividends have been skipped or omitted in the past, the holder will receive accumulated dividends in arrears.
2. participating preferred-provide holders with the opportunity to receive additional dividend payouts if the company or the issuer beats predetermined financial objectives, such as sales, earnings or profitability goals. Investors of participating preferred stocks will receive regular dividends, regardless of how well the company performs, as long it has enough assets to make the dividend payments
3. convertible preferred- can be converted to common stock
4. redeemable or callable preferred- comes with a provision that gives the issuing company the right to call or redeem the share at a certain price, which will usually be higher than market value
venture capital
capital provided to new business ventures by professionals, outside investors
-venture capital investments are high risk-the investor must be willing to lose their invested funds-but offer the potential for well-above-average returns at some point in the future; gets shares or portion of control in return

-Start-up businesses and high-risk enterprises may obtain venture capital financing (capital from professional investors), as well as managerial or technical expertise, in exchange for a share of ownership in the firm or control over its decisions.


Private capital equity
private equity firms obtain their capital from wealthy investors in private markets; these firms use their private equity capital to invest in existing corporations, firm may sell shares to the public in an IPO

-Private equity investors pool their funds to buy an existing corporation to reorganize or sell