What steps are involved in bringing a corporation into existence? What steps are involved in bringing a corporation into existence? What is the difference

• What steps are involved in bringing a What steps are involved in bringing a corporation into existence?corporation into existence?

• What is the difference between a What is the difference between a de jure de jure corporation and a de facto corporation?corporation and a de facto corporation?

• In what circumstances might a court In what circumstances might a court disregard the corporate entity (pierce the disregard the corporate entity (pierce the corporate veil) and hold the shareholders corporate veil) and hold the shareholders personally liable? personally liable?

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2

• How are corporations financed?How are corporations financed?• What is the difference between stocks What is the difference between stocks

and bonds?and bonds?


• A corporation is a creature of statute, A corporation is a creature of statute, an artificial “person.”an artificial “person.”–Corporations can have one or more

shareholders.–Owners can be natural persons or

other businesses.–Corporation substitutes itself for

shareholders.© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4

• Corporate PersonnelCorporate Personnel. . –Responsibility for overall management

of company rests with board of directors (elected by shareholders).–Board of directors makes policy

decisions and hires officers to run corporation on a daily basis.


• Corporate Personnel Corporate Personnel (cont’d). (cont’d). –Shareholders can sue corporation and

be sued by corporation and bring suit for corporation in some instances.


• Constitutional Rights of CorporationsConstitutional Rights of Corporations..–Corporation is recognized as a legal

“person” and enjoys virtually same rights and privileges under our Constitution as a natural person:• Access to court systems.• Constitutional guarantees of free speech,

due process, and freedom from unreasonable search and seizures.


• Limited Liability of ShareholdersLimited Liability of Shareholders..–One of the key advantages of

corporations is the limited liability of owners (shareholders). –In certain situations, the corporate

“veil” of limited liability can be pierced, holding the shareholders personally liable.


• Corporate Earnings and TaxationCorporate Earnings and Taxation..–Corporate profits can either be kept as

retained earnings or passed on to the shareholders as dividends.–Corporate Taxation: corporate taxes

can be taxes twice, first to the corporation, then to the shareholders via dividends.


• Corporate Earnings and TaxationCorporate Earnings and Taxation (cont’d).(cont’d).–Holding Companies (parent company):

company whose business activity consists of holding shares in another company.• Typically holding company is established

off-shore (Cayman Islands, Hong Kong, etc).


• Torts and Criminal ActsTorts and Criminal Acts..–Corporation is liable for the torts

committed by its agents or officers within the course and scope of their employment under the doctrine of respondeat superior.–Corporation can be liable for criminal

acts, but only fined. Responsible officers may go to prison.


• Classification of CorporationsClassification of Corporations..–Domestic corporation does business in

its state of incorporation.–Foreign corporation from X state doing

business in Z state. –Alien Corporation: formed in another

country doing business in United States.


• Classification of Corporations Classification of Corporations (cont’d).(cont’d).–Public and Private Corporations.–Nonprofit Corporations.–Close Corporations: Shares held by few

shareholders.•More informal management, similar to a

partnership. • Restriction on transfer of sale and transfer

of shares. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13

• Classification of CorporationsClassification of Corporations (cont’d). (cont’d).–Close Corporations (cont’d).•Management of Closely Held Corporations.• Transfer of Shares • Shareholder Agreement to Restrict Stock.•Misappropriation of Closely Held

Corporation Funds.


• Classification of CorporationsClassification of Corporations (cont’d). (cont’d).–Close Corporations (cont’d).•Misappropriation of Close Corporation

Funds. CASE 34.1 Williams v. Stanford Williams v. Stanford (2008). Was it acceptable for the Williams brothers to demand $125,000 each for their shares?


• Classification of CorporationsClassification of Corporations (cont’d). (cont’d).–“S” Corporations.• Avoids federal tax under IRS Code

“Subchapter S.” • Avoids federal “double taxation” of regular

corporations at the corporate level. Only dividends are taxed to the shareholders as personal income. • See requirements (p. 742).


• Classification of CorporationsClassification of Corporations (cont’d). (cont’d).–“S” Corporations: avoids federal tax

under IRS Code “Subchapter S.” • IRS requirements: Corporation is domestic,

fewer than 75 shareholders, only one class of stock, no shareholder can be a non-resident alien.

–Professional Corporations.


• The process of incorporation The process of incorporation generally involves two steps:generally involves two steps:–Preliminary and Promotional Activities;

and –The Legal Process of Incorporation.


• Promotional ActivitiesPromotional Activities. . –Before corporation is formed,

promoters are the persons who take the preliminary steps of organizing the venture and attracting investors via subscription agreements.


• Promotional ActivitiesPromotional Activities (cont’d). (cont’d).–Promoter’s Liability: Promoter is

personally liable for pre-incorporation contracts on behalf of the corporation, unless 3rd party agrees to hold future corporation liable.


• Incorporation ProceduresIncorporation Procedures..–Select State of Incorporation.–Secure the Corporate Name. –Prepare the Articles of Incorporation:

which deals with shares, the registered agent and office, incorporators, duration and purpose, and internal organization.–File the Articles with State.


• First Organizational Meeting First Organizational Meeting to to Adopt Bylaws. Adopt Bylaws. –After the corporation is “chartered”

(created) it can do business.–At meeting, shareholders should

approve the bylaws, elect directors, hire officers and ratify pre-incorporation contracts and activities.


• Corporate Powers.Corporate Powers.–Express Powers.• Found in the corporation’s articles of

incorporation, the laws of the state of incorporation, and in the state and federal corporations.• Corporate by-laws may also grant or limit

a corporation’s express powers.


• Corporate Powers Corporate Powers (cont’d). (cont’d).–Implied Powers.• To perform all acts reasonably necessary

to accomplish its corporate purposes.• A corporate officer can bind corporation

in contract in matters connected with the ordinary business affairs of the enterprise.


• Corporate Powers Corporate Powers (cont’d). (cont’d).–Ultra Vires Doctrine.• Corporate acts beyond the express or

implied powers of the corporation (by statute of articles of incorporation).• Corporate articles of incorporations now

adopt very broad purposes to prevent lawsuits against the corporation.


• De Jure De Jure and and De Facto De Facto Corporations. Corporations. –De Jure: substantial statutory

requirements are met; cannot be attacked by state or 3rd parties. –De Facto: statutory requirements not

met, but promoters made good faith effort to comply with corporate law; can only be attacked by state.


• Corporation by Estoppel: Corporation by Estoppel: if it acts like a if it acts like a corporation, cannot avoid liability by corporation, cannot avoid liability by claiming that no corporation exists.claiming that no corporation exists.–CASE 34.2 Brown v. W.P. Media, Inc. Brown v. W.P. Media, Inc. (2009).

Why couldn’t W.P. Media deny Alabama MBA’s existence?


• Piercing the Corporate Veil.Piercing the Corporate Veil.–In certain situations, courts will

“pierce the corporate veil” and hold shareholders personally liable in the interests of justice and fairness.–Factors a court considers: • 3rd party tricked into dealing with a

corporation rather than the individual.


• Piercing the Corporate Veil Piercing the Corporate Veil (cont’d).(cont’d).–Factors (cont’d): • Corporation is set up never to make a

profit or remain insolvent or is undercapitalized.• Corporation is formed to evade an

existing legal obligation.• Statutory formalities are not followed.


• Piercing the Corporate Veil Piercing the Corporate Veil (cont’d).(cont’d).–Factors (cont’d): • Commingling of personal and corporate

interests or assets.–A Potential Problem for Closely Held

Corporations.• CASE 34.3 Schultz v. General Electric Schultz v. General Electric

Healthcare Financial Services Healthcare Financial Services (2010). Why was Schultz personally liable?



• Bonds.Bonds.–Issued by business firms and

government at all levels.• Normally have a maturity date – when

principal is returned to investor.• Sometimes referred to as fixed-income

securities, because bondholders receive fixed-dollar interest payments.• Bond indenture: lending agreement.


• Stocks.Stocks.–Common Stock: represents true

ownership of a corporation. • Provides pro-rata (proportional)

ownership interest reflected in voting, control, earnings and assets.• Investors who assume a residual financing

position (whatever is left may go to dividends to shareholders).


• StocksStocks (cont’d). (cont’d).–Preferred Stock: has preferences over

common stock.• Cumulative Preferred.• Participating Preferred.• Convertible Preferred.• Redeemable or Callable Preferred.


• Venture CapitalVenture Capital: : start-up businesses start-up businesses and high-risk enterprises need start-up and high-risk enterprises need start-up and expansion capital. The start-up and expansion capital. The start-up typically gives a share of its stock.typically gives a share of its stock.• Private Equity CapitalPrivate Equity Capital: : obtain capital obtain capital

from wealthy investors. Ultimately, the from wealthy investors. Ultimately, the company may sell shares in an IPO.company may sell shares in an IPO.


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What steps are involved in bringing a corporation into existence? What steps are involved in bringing a corporation into existence? What is the difference