Business Law Chapter 39
The nature and classification of corporations
A corporation is recognizes as a “legal person” and has the same rights as a natural person- access to the courts, due process, freedom from unreasonable searches and seizures, free speech.
Shareholders elect a board of directors, which is responsible for overall management and hires corporate officers to run daily operations
The limited Liability of Shareholders
(an entity) the key feature of a corporation is the limit of its owners’ liability, corporate obligations, to the amounts of their investments is the firm. Of course, a lender may require otherwise a court may “pierce the corporate veil”
Corporate Earnings and taxation
Corporations can retain corporate profits or pass them on to shareholders in the form of dividends. Profits that are not distributed are retained earnings and can be invested for higher profits, which may cause the price of the stock to rise, benefiting shareholders.
Torts and Criminal acts
A corporation is liable for the torts commited by its agents within the course and scope of employment. A corporation may be held liable for the crimes of its employees and agents if the punishment for the crimes can be applied to a corporation. (with scope of authority)
Domestic, Foreign, and Alien -Classification of corporations
A corporation is a domestic corporation in the state in which it is incorporated, a foreign corporation in other states, and an alien corporation in other countries. a foreign corporation normally must obtain a certificate of authority to do business in any state except its home state
Public and private corporation-Classification of corporations
a public corporation is formed by the government to meet a political or government purpose. A private corporation is created for private benefit and is owned by private persons
nonprofit corporations- Classification of corporations
these are corporations formed without a profit-making purpose (private hospitals, educational institutions, charities, and religious organizations)
Closely held corporations (C corp)
a close corporation is exempt from most of the nonessential formalities of corporate operations (bylaws, annual meetings, etc.) To qualify, a firm must have a limited number of shareholders, and restrict its issue and transfer of stock
Management of a closely held corporation (C corp)
Resembles that of a sole proprietorship or a partnership- one or few shareholders usually hold the positions of directors and officers
transfer of shares in closely held corporations (C corp)
Shareholders may be required to offer their shares to the closely held corporations or the other shareholders before selling them to outside buyers
shareholder agreement to restrict stock transfer
under a shareholder agreement, there is often a restriction on transfer of the shares which may also limit their market.
requirements of S corporations
must be a domestic corporation; must not be a member of an affiliated group of corporations; shareholders must be individuals, estates or certain trusts; must have 100 or fewer shareholders; can have only one class of stock; no shareholder can be a nonresident alien
Benefits of S corporations
shareholders can use corporate losses to offset other income; only a single tax on corporate income is imposed at individual income tax rates at the shareholder level (even if not distributed)
Promotional Activities-Corporate formation
Promotors take the first steps in organizing a corporation-issue a prospectus and secure the corporate charter. promoters are personally liable on preincorporation contacts until the corporation assumes the contract by novation
1. select the state of incorporation- incorporation procedures
some states offer more advantages tax or incorporation provisions.
2. Secure the corporate name-incorporation procedures
Must include words that disclose the corporate status like Corporation, Incorporated, Limited, Company. Cannot infringe on another’s trademark rights ( can’t be close to/ like another corporate name)
3. Prepare the articles of incorporation-incorporation procedures
the articles include basic information about the corporation and serve as a primary source of authority for its organization and functions. Shares of the corporation (amount of stock authorized for issuance), Registered office and agent (the principal office of the corporation; the agent is a person designated to receive legal documents on behalf of the corporation), Incorporators (some states require only one, must sign articles when they’re submitted to state), Duration and purpose (can have perpetual existence), Internal Organization (management structure can be described in bylaws later
First organizational meeting to adopt bylaws-Corporate formation
The incorporators or the board; the business conducted depends on state law, the nature of the corporation’s business, the provisions of the articles, and the wishes of the promoters. Adoption of the bylaws is the most important function of the first organizational meeting.
Improper Incorporation- Corporate formation
On the basis of improper incorporation, a person attempting to enforce a contract or bring a tort suit against the corporation could seek to make the shareholder personally liable. If a corporation seeks to enforce a contract, the defaulting party who learns of a defect in incorporation may be able to avoid liability.
De Jure Corporations- improper corporation
Occurs if there is a substantial compliance with all requirements for incorporation. In most states, the certificate of incorporation is evidence that all requirements have been met, and neither the state nor a third party can attack the corporation’s existence.
De Facto Corporation- improper corporation
the existence of a corporation cannot be challenged by third persons (except the state) if (1) there is a statute under which the firm can be incorporated, (2) the parties made a good faith attempt to comply with it, and (3) the firm has attempted to do business as a corporation. Some states do not apply this doctrine.
Corporation by Estoppel- Corporate Formation
If an association that is neither an actual corporation nor a de facto or de jure corporation holds itself out as being a corporation, it will be estopped from denying corporate status in a suit by a third party.
Express Powers- Corporate powers
Are in the U.S Constitution, state constitution, state statutes, articles of incorporation, bylaws, and board resolutions.
Implied Powers- Corporate Powers
A corporation has the implied Power to perform all acts reasonably appropriate and necessary to accomplish its purposes.
Ultra Vires Doctrine- Corporate Powers
acts beyond the purpose stated in the articles. Earlier cases involved contracts. Now, courts usually allow any legal action a firm takes to profit shareholders, and declining number of cases are brought mostly against nonprofit or municipal corporations