Ch.19

Corporation
legal entity created and recognized by state law.
One or more owners
operates under a name distinct from the names of its owners.
Owners
-may be individuals
-natural persons
-other businesses
Corporation’s authority
to act and the liability for its actions are separate and apart from the individuals who own it.
corporation recognition
-recognized as a person
-enjoys many privileges under state and federal law that US citizens enjoy.
-possess the same right of access to the courts as citizens and can sue or be sued.
board of directors
-the responsibility for the overall management of the firm is entrusted
-members are elected by the shareholders.
-makes the policy decisions and hires corporate officers and other employees to run the daily business operations.
shareholder
-When an individual purchases a share of stock in corporation
-an owner of the corporation
-The body of shareholders can change constantly without affecting the continued existence of the corporation.
Suing shareholder or corporation
-A shareholder can sue the corporation, and the corporation can do the same.
-Under certain circumstances, a shareholder can sue on behalf of a corporation.
Limited liability
-One of the key advantages
-shareholders not personally liable for the obligations of the corporation beyond their investments.
Pierce the corporate veil
-certain limited situations
-impose liability on shareholders for the corporation’s obligations.
-Creditors often will not extend credit to small companies unless the shareholders assume personal liability.
Retained earnings
-will yield higher corporate profits in the future
-cause the price of the company’s stock to rise.
-shareholders can reap the benefits of these retained earnings in the capital gains and that they receive when they sell their stock.
Corporate Taxation
-profits are subject to income tax by various levels of government.
Failure to pay taxes
-can lead to severe consequences
-State can suspend the entity’s corporate status
-Today, required to collect state sales taxes on goods sold via the Internet.
Double taxation
-The company pays tax on its profits.
-Then, if the profits are passed on to the shareholders as dividends, the shareholders must also pay income tax on them.
-Corporation normally does not receive a tax deduction for dividends it distributes.
-Major disadvantage
Holding Companies
-reduce or defer US income taxes.
-is a company whose business activity consists of holding shares in another company.
-established in a low-tax or no-tax offshore jurisdiction.
Low-tax offshore environment
-US corporation sets up a company.
-transfers its cash, bonds, stocks, and other investments to the holding company.
-Any profits received by the holding company on these investments are taxed at the rate of the offshore jurisdiction
-Holding company profits are not taxed at the rates applicable to the parent company or its shareholders in their country of residence.
Profits brought onshore
-taxed at the federal corporate income tax rate
-any payments received by the shareholders are also taxable at the full US rates
Tort Liability
-applies to a corporation exactly as it applies to the ordinary agency relationships.
Criminal Acts
-Under modern criminal law, a corporation may be liable for the criminal acts of its agents and employees
-Corporations cannot be imprisoned, they can be fined.
Sentencing guidelines for crimes
committed by corporate employees, corporate lawbreakers can face fines amount to hundreds of millions of dollars.
Domestic corporation
referred to as a domestic corporation by its home state
Foreign corporation
-A corporation formed in one state but doing business in another
Alien Corporation
-A corporation formed in another country but doing business in the US
certificate of authority
A corporation must obtain in any state it plans to do business
-Once issued, the corporation generally can exercise in that state all of the powers conferred.
-Without, the state can impose substantial fines and sanctions on that corporation.
Public corporation
-a corporation formed by the government to meet some political purpose.
-Many federal gov organizations are public corporations
Publicly held corporation
-not the same as public corporation
-is any corporation whose shares are publicly traded in a securities market.
Private corporations
-created either wholly or in part for private benefit.
-Most corporations are private.
-May serve a public purpose, owned by private persons rather than a government.
Nonprofit corporations
-formed for purposes other than making a profit.
-Ex: private hospitals, educations institutions, charities, and religious organizations
– a convenient form of organization that allows various groups to own property and to form contracts without exposing the individual members
Close corporations
-Most corporate enterprises in the US fall into close cor
-one whose shares are held by members of a family or by relatively few persons
-members are small group constituting the shareholders of a close corporation are personally known to each other.
-No trading market for the shares
-operated like a partnership
RMBCA
-gives a close corporation considerable flexibility in determining its rules of corporation.
-the corporation can operate without directors and bylaws.
Management of close corporations
-resembles that of a sole proprietorship or a partnership
-a single shareholder or a tightly knit group of shareholders usually hold the positions of directors and officers.
-the firm must meet all specific legal requirements set forth in state statues.
-may require that more than a simple majority of the directors approve any action taken by the board.
Transfer of shares in close corporations
-transfer of one shareholder’s shares to someone else can cause serious management problems.
-The other shareholders may find themselves required to share control with someone they do not know or like.
Shareholder agreement to restrict stock transfers
-can provide for proportional control when one of the original shareholders dies.
-decedent’s shares of stock in the corporation would be divided in such a way that the proportionate holdings of the survivors, and thus their proportionate control, would be maintained.
-Shareholders might agree that existing shareholders will have an option to purchase stock before it is sold or transferred to an outside party.
Misappropriation of close corporation funds
-majority shareholder in a close corporation takes advantage of his or her position and misappropriates company funds.
-The normal remedy for the injured minority shareholders is to have their shares appraised and to be paid the fair market value for them.
S corporation
-A close corporation that meets the qualifying requirements specified in Sub-chapter S of the Internal Revenue Code can choose.
-it can avoid the imposition of income taxes at the corporate level while retaining many of the advantages of a corporation.
Important requirements for S corporation
1. The corporation must be a domestic corp.
2. The corporation must be a member of an affiliated group of corps.
3. The shareholders of the corp must be individuals, estates, or certain trusts and tax-exempt organizations.
4. The corp must have no more than 100 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 the corp may be a nonresident alien.
Effect of S Election
-treated differently than a regular corporation for tax purposes.
-taxed like a partnership, so the corporate income passes through to the shareholders
-this treatment is to avoid the double taxation imposed on regular corporations
-Shareholders’ tax brackets may be lower than the corporation.
-If the corporation has losses, the S election allows the shareholders to use the losses to offset other income.
Professional Corporations
-such as physicians, lawyers, dentists, and accountants can incorporate.
-typically identified by the letters P.C., S.C, P.A.
-laws governing the formation and operation are similar to those governing ordinary business corporations.
-some difference in terms of liability because the shareholder-owners are professionals who are held to a higher standard of conduct.
Liability purposes- professional corporations
-some courts treat a professional corporation somewhat like a partnership and hold each professional liable for any malpractice committed within the scope of the business by the others in the firm.
-a shareholder in a professional corporation generally cannot be held liable for the torts committed by other professionals at the firm
Benefit corporations
-have a for-profit corporation that seeks to have a material positive impact on society and the environment.
how benefit corp differs from other corps
1. Purpose
2. Accountability
3. Transparency
Promotional activities
-persons incorporating their business rarely engage in preliminary promotional activities.
-Important for businesspersons to understand that they are personally liable for all preincorporation contracts made with investors, accountants, or others on behalf of the future corporation.
-Personal liability continues until formed corporation assumes liability for the preincorporation contacts through a novation.
Incorporation Procedures
-Exact procedure for incorporation differ among states
-Basic steps:
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
-State laws differ, individuals may look for the states that offer the most advantageous tax or provisions.
-the fee that a particular state charges to incorporate, as well as the annual fees and the fees for specific transactions
Delaware
-has historically had the least restrictive laws and provisions that favor corporate management.
-Many corporations have incorporated there
-statutes permit firms to incorporate in that state and conduct business and locate their operating headquarters elsewhere.
Close corporations in selection of state
-particularly those of a professional nature, generally incorporate in the state where their principal shareholders live and work.
-Businesses often choose to incorporate in the state in which most of the corp’s business will be conducted.
Secure the corporate name
-the choice of a corporate name is subject to state approval to ensure against duplication or deception.
-State statues usually require that the secretary of state run a check on the proposed name in the state of incorporation.
Some states
-require that the persons incorporating a firm run a check on the proposed name at their own expense.
-check can often be made via the internet.
-if a firm is likely to do business in other states, for a fee, pending the completion of the articles of incorporation.
-All states require the corporation’s name to include the word corporation, incorporated, company, or limited
First check available domain names
-All corporations need to have an online presence to compete effectively.
-The corp name should be one that can be used as the business’s interent domain name.
-It is advisable to check what domain names are available before securing a corporate name with the state.
Ways to find domain
-going to one of the many companies that issue domain names
-the corporation can select an alternative name that can be used as the business’s URL.
Trade Name disputes
-A new corp’s name cannot be the same as or similar to the name of an existing corp doing business within the same state.
-If a firm does business under a name that is the same or similar to an existing company’s name, it may be liable for trade name infringement.
articles of corporation
-the primary document needed to incorporate a business
-The articles include basic info about the corporation and serve as a primary source of authority for its future organization and business functions.
-The persons who execute the articles are the incorporators.
Articles of incorporation include
1. The name of the corporation
2. The number of shares the corp is authorized to issue
3. The name and street address of the corp’s initial registered agent and registered office
4. The name and address of each incorporator.
-articles may set forth other info
How it differs
-vary widely depending on the jurisdiction, and the size and type of the corp.
-Do not provide much detail about the firm’s operations, which are spelled out in the company’s bylaws
Share of the corporation
-Article must specify the number of shares of stock.
Registered office and agent
-corp must indicate the location and street address of its registered office within the state.
-The registered office is also the principal office of the corp.
-Must give the name and address of a specific person who has been designated as an agent.
-Registered agent is the person who can receive legal documents
Incorporators
-Each incorporator must be listed by name and address
-need not have any interest at all in the corp.
-Many states do not have residency or age requirements for incorporators.
-can be as few as one or as many as three.
-Incorporators frequently participate in the first organizational meeting of the corporation.
Duration and purpose
-A corp has perpetual existence unless the articles state otherwise.
-The RMBCA does not require a specific statement of purpose to be included in the articles.
-A corporation can be formed for any lawful purpose
-The articles may indicate that the corp is organized for any legal business
Internal management
-The articles can describe the corp’s internal management structure, although this usually is included in the bylaws adopted after the corp is formed.
-The bylaws typically describe such matters as voting requirements for shareholders, the election of the board of directors, and the methods of replacing directors.
-Bylaws cannot conflict with the incorporation statute or the articles of incorporation.
RMBCA
shareholders may amend or repeal the bylaws
-The board of directors may also amend or repeal the bylaws unless the articles of incorporation or state statutory provisions reserve this power to the shareholders exclusively
File the articles with the state
-Once the articles of incorporation have been prepared and signed, they are sent to the appropriate state official usually the secretary of state, along with the fee
-In most states, the secretary of state stamps the articles “filed”, and return the copy to the incorporators
First organizations meetings to adopt bylaws
-After incorporation, the first meeting must be held.
-In the meeting, adoption of bylaw, internal rules of management, happens.
-If the articles name the initial board of directors, then the directors call the meeting to adopt bylaws and complete the company’s organization.
-If the articles did not name the directors, the incorporators hold the meeting to elect the directors and adopt bylaws.
Improper incorporation
-if not followed precisely, others may be able to challenge the existence of the corp.
-Errors in incorp 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.
De Jure corporations
-If a corp has substantially complied with all conditions precedent to incorp, the corp is said to have de jure (rightful and lawful) existence.
-In most states and under RMBCA, the secretary of state’s filing of the articles of incorporation is conclusive proof that all mandatory statutory provisions have been met.
De Facto corporations
-If the defect in formation is substantial, however, such as a corporation’s failure to hold an organizational meeting to adopt bylaws, the outcome will vary depending on the jurisdiction.
-Some states still recognizae the common law doctrine of de facto corporation.
-In those states, the courts will treat a corporation as a legal corporation despite the defect in its formation.
Courts treat a corporation as a legal corp if
1. A state statue exists under which the corp can be validly incorporated
2. The parties have made a good faith attempt to comply with the statue.
3. The parties have already undertaken to do business as a corporation
States with RMBCA
-Many states courts have interpreted their states’ version of the RMBCA as abolishing the common law.
-Alaska, Arizona, Minnesota, New Mexico, Oregon, South Dakota, Tennessee, Utah, and Washington, as well as DC,
– In those jurisdictions, if there is a substantial defect in complying with the incorporation statute, the corp does not legally exist, and the incorporators are personally reliable.
Corporation by Estoppel
-A business association holds itself out to others as being a corporation when it has made no attempt to incorporate.
-The firm normally will be estopped(prevented) from denying corporate status in a lawsuit by a third party.
-The estoppel doctrine most commonly applies when a third party contracts with an entity that claims to be a corp but has not filed articles of incorporation.
-Also apply when a third party contracts with a person claiming to be an agent of a corp that does not in fact exist.
-When justice requires, courts in some states will treat an alleged corp as if it were an actual corp for the purpose of determining the rights and liabilities in particular circumstances.
-Recognition of corporate status does not extend beyond the resolution of the problem at hand.
Corporate powers
-the express and implied powers necessary to achieve its purpose come into existence.
-The express powers of a corporation are found in its articles of incorporation, in the law of the state of incorporation, and in the state and federal constitutions.
Corporate bylaws and resolutions
-establish the express powers of the corp.
-State corp statues frequently provide default rules that apply if the company’s bylaws are silent on an issue, it is important that the bylaws set forth the specific operating rules of the corporation.
-After the bylaws are adopted, the corporation’s board of directors will pass resolutions that also grant or restrict corp powers
prority used if a conflict arises
1. The US constitution
2 State constitution
3. State statutes
4. The articles of incorp
5. Bylaws
6. Resolutions of the board of directors.
Implied powers
– In the absence of express constitutional, stautory, or other prohibitions, the corp has the implied power to perform all acts reasonably necessary to accomplish its corp purposes.
-A crop has the implied power to borrow funds within certain limits, lend funds, and extend credit to hose with whom it has a legal or contractual relationship
To borrow funds
-the corp acts through its board of directors to authorize the loan.
-The president or chief executive officer of the corp will execute the necessary documents on behalf of the corp.
-Officers have the implied power to bind the crop in matters directly connected with the ordinary business affairs of the enterprise.
Limit of a corp officer
-does not have the authority to ind the corp to an action that will greatly affect the crop purpose or undertaking, such as the sale of substantial crop assets.
Ultra Vires Doctorine
-ultra vires means “beyond the power”
-acts of a crop that are beyond its express or implied powers are ultra vires acts
When a corp’s actions exceed its stated purpose
-most private corp are organized for “any legal business” and do not state a specific purpose, so the ultra vires doctrine has declined in importance.
Remedies for ultra vires acts
-the shareholders can seek an injunction from a court to prevent the corp from engaging in ultra vires acts.
-The attorney general in the sate of incorp can also bring an action to obtain an injunction against the ultra vires transactions or to seek dissolution of the crop.
-The corp or its shareholders can seek damages from the officers and directors who were responsible for the ultra vires acts.
Piercing the corp veil
-Owners use a corp entity to perpetrate a fund, circumvent the law, or in some other way accomplish and illegitimate objective.
-Courts will ignore the corp structure and pierce the corp veil, exposing the shareholders to personal liability.
-Courts pierce the veil when the crop privilege is abused for personal benefit or when the corp business is treated so carelessly that it is indistinguishable from that of a controlling shareholder.
-A court will look behind the crop structure to the individual shareholders.
Factors that Lead corts to perice the corp veil
1. A party is tricked ir misled into dealing with the crop rather than the individual
2. The crop is set up never to make a profit or always to be insolvent, or it is too “thinly” capitalized.
3. The corp is formed to evade an existing legal obligation
4. Statutory corp formalities, such as holding required crop meetings, are not followed.
5. Personal and crop interests are mixed together, or commingled, to such an extend that the crop has no separate identity.
Potential problem for close crop
-assets to be used for personal benefit is great in a close corp.
-the separate status of the crop entity and the sole shareholder must carefully preserved
Practices invite trouble for one-person or family owned corp
1. The commingling of crop and personal funds
2. The failure to hold board of directors’ meetings and record the minutes
3. The shareholders’ continuous personal use of corporate property
Alter-Ego Theory
1. applied when a corp is so dominated and controlled by an individual or group that the separate identities of the person and the corp are no longer distinct.
-Courts use alter-ego theory to avoid injustice or fraud that would result if wrongdoers were allowed to hide behind the protection of limited liability.