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 employees
If 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
