Nature of Corporations

Chapter 41

Definition

A corporation is a legal entity created by

state law to accomplish a stated purpose.

Three Types:

1. Corporations for profit

2. Corporations not for profit

3. Government owned corporations

For Profit Corporation

Stockholders invest in corporation with expectation of

earning a profit on their investment in the form of

dividends or increased market value of their shares

Shareholders have limited liability.

Both Corporation and Shareholders pay

taxes.

Subchapter S Corp./ Avoids double tax

For Profit Corporations

Professional Corporations:

Physicians, dentists, lawyer, accountants(Usually cannot avoid liability for professional negligence)

Close Corporation:

Stock not publicly available. Small number of

shareholders who also manage corporation.

(Some states allow to operate like partnership)

Not-for-profit Corporation

None of the surplus revenue (profit) may be

distributed to shareholders (members).

Often have members rather than shareholders

Examples:

Charities, Churches, Fraternal Organizations

Government Corporations

Municipalities

School Districts

Federal Insurance Deposit Corporation

Other Classifications

Domestic Corporation:

Corporation is a domestic corporation in the state that has granted its charter.

Foreign Corporation:

Corporation is foreign in all states other than state of incorporation. (Must file for certificate of authority to do business in foreign state.)

Alien Corporations:

Corporation from another country

Foreign Corporation: Doing Business

Following activities do not constitute “doing

business”1. Maintaining, defending ,or settling any proceeding

2. Maintaining bank accounts

3. Holding meetings

4. Selling through Independent contractors

5. Soliciting orders from out of state. i.e. Catalog sales

6 Lending or borrowing money

Doing Business

7. Collecting debts

8. Owning property

9. Conducting an isolated transaction. (i.e. Tree grower bringing Christmas trees into a state in order to sell to one retailer)

10. Hiring employeesIf a foreign corporation transacts business without a certificate of authority, it is subject to fines and will not be permitted to file lawsuits in the foreign state.

Nature of A Corporation

1. Corporations are distinct legal entities

which exist separate from shareholders

(Shareholders have limited liability)

2. Corporations can sue and be sued

3. Corporations can own property

4. Corporations may and usually have a perpetual life.

Formation

Corporations are created by compliance with

state corporation statutes which usually require,

a. filing Articles of Incorporation with the secretary of

state, and

b. paying a fee

Corporate existence begins when the articles of

incorporation are filed, unless a delayed effective

date is specified in the articles. (2.03 (a))

Articles of Incorporation

Articles must include the following: (2.02)

1. Name of corporation

2. Number of shares authorized to issue

3. Address of corporate office and name of initial registered agent

4. Name and address of each incorporator

Articles of Incorporation

Articles of Incorporation may include: (2.02)

1. Names of initial directors

2. Corporate management

3. Definition and/or limitation of powers

4. Par value of corporate stock

5. Corporate purpose. (To conduct any lawful business)

Articles of Incorporation

6. Provisions defining, limiting and regulating powers of directors / shareholders

7. Par value of authorized shares

8. Imposition of personal liability on shareholders for the debts of corporation to a specified extent and upon specified conditions.

Articles of Incorporation

9. Release of Directors from liability to corporation or shareholders except for:

a. financial benefit received to which director is not entitled.

b. Intentional infliction of harm

c. Liability for unlawful distributions

d. Intentional violation of criminal law.

Formation

De Jure Corporation

All requirements for incorporation are met

De Facto Corporation Good faith effort to incorporate, however all

requirements not met and operate as a corporation Business will be treated as a corporation in all

respects, except state may bring an action challenging

the corporate status

Formation

Corporation by Estoppel

Occurs when

a. purported corporation holds it self out as being a corporation, and it is not.

b. Third party relies on representation.Purported corporation and third party will be estopped (prevented) from denying corporate existence. Applies only to specific situation.

Formation

Defective Incorporation

Attempts to incorporate fail to meet minimum requirements

No corporation is formed

Incorporators are treated as general partners

Formation

Model Business Corporation Act eliminates the

concepts of de facto corporation and

corporation by estoppel.

Revised Model Business Corporation Act section 2.03 (b)

“The secretary of state’s filing of the articles of incorporation is conclusive proof that the incorporators satisfied all conditions precedent to incorporation except a proceeding by the state to cancel or revoke the incorporation or inv9luntarily dissolve the corporation”

Promoters

Promoters: Person or persons who organize and start the corporation, negotiate and enter into contracts in advance of its formation, find the initial investors to finance the corporations, etc.

PROMOTERS ARE NOT AGENTS OF THE CORPORATION BUT DO OWE A FIDUCIARY DUTY TO THE CORPORATION AND TO ITS PROSPECTIVE INVESTORS.

CORPORATION IS NOT OBLIGATED TO COMPENSATE A PROMOTER FOR PROMOTIONAL SERVICES BUT MAY CHOSE TO DO SO.

MBCA PERMITS ISSUANCE OF SHARES FRO PROMOTER’S WORK

Promoters

Promoters: Person or persons who organize and start the corporation, negotiate and enter into contracts in advance of its formation, find the initial investors to finance the corporations, etc.

PROMOTERS ARE NOT AGENTS OF THE CORPORATION BUT DO OWE A FIDUCIARY DUTY TO THE CORPORATION AND TO ITS PROSPECTIVE INVESTORS.

CORPORATION IS NOT OBLIGATED TO COMPENSATE A PROMOTER FOR PROMOTIONAL SERVICES BUT MAY CHOSE TO DO SO.

MBCA PERMITS ISSUANCE OF SHARES FRO PROMOTER’S WORK

Promoter Liability

Pre -incorporation contracts:

a. Leases

b. Sales contracts

c. Purchase of property

d. Employment

PROMOTERS ARE PERSONALLY LIABLE ON

PRE-INCORPORATION CONTRACTS.

Promoter Liability

Corporation never formed

All promoter(s) have joint personal liability

Corporation formed

Promoter(s) remains liable on contracts even after incorporation even thought corporation adopts contracts.

Novation: A three-party agreement whereby the corporation agrees to assume the contract liability of the promoter(s) with the consent of the third party who agrees to release the promoter(s) from the contract.

Incorporators

One or more persons, partnerships,

corporations or other associations which

file the documents (articles of incorporation)

necessary to create the corporation.

Corporate Objective ?

Traditional View:

Objective of business corporation is to enhance corporate profits and shareholder gain.

Modern View:

Corporation is a collection of interests working together for the purpose of producing goods and services at a profit considering not only shareholders, but other constituencies, such as: employees, customers, community, suppliers and the like.

Corporate Powers

Sources of power:

State Corporation Statute

Articles of Incorporation

Bylaws and Board resolutions

Implied powers: Barring express prohibition a corporation has certain implied power to perform acts reasonably appropriate and necessary to accomplish its corporate purposes. For example: Borrow and lend money and/ or extend credit.

Ultra Vires Doctrine

Ultra Vires = “beyond the powers”Corporate actions beyond its express or implied

powers are ultra vires.

Remedies for Ultra Vires acts:

1. Shareholders suit to obtain injunction or recover

damages.

2. Suit by corporation

3. State action for injunction or dissolution

Shareholders (Own the Corporations)

Powers:

1. Elect Board of Directors.

2. Approve fundamental corporate changes:

a. Amend articles of Incorporation

b. Amend bylaws

c. Approve merger or dissolution

d. Approve sale of substantially all of

corporate assets

Rights of Shareholders

1 Vote

2. Receive payment of dividends

3. Inspect corporate books and records

4. Receive distribution upon termination

5. Purchase proportionate share of a new issuance or corporate stock to maintain current ownership percentage.

(Preemptive Right)

Rights of Shareholders

6. Right of first refusal to purchase stock offered for resale by fellow shareholders.

(If permitted by corporate bylaws)

7. File derivative suit to redress wrong suffered by the corporation. (Damages recovered belong to corporation)

Shareholder Voting

Shareholder’s Meeting

Shareholder’s meetings must occur a least

annually.

Special meetings may be called to deal with

urgent matters according to bylaws after

appropriate notice.

Piercing the Corporate Veil

Disregarding the corporate entity which shields

shareholders from liability and piercing through the

corporation to hold shareholders personally liable for

corporate obligations. Requires:

1. Domination of a corporation by its shareholders

a. Corporation is alter ego of shareholders

b. Corporation is an instrumentality of

shareholders

2. Use of domination for improper purpose.

Reasons for Piercing Corporate Veil

1. Commingling Personal Funds with Corporate

Funds or otherwise ignore corporate

formalities

2. Inadequate Capitalization: Must start corporation with sufficient capital

to reasonably meet prospective liabilities

3. Committing Fraud on Existing Creditors