BLAW Final Exam - Corporations

The following are some of the factors that frequently cause the courts to pierce the corporate veil:

1. A party is tricked or misled into dealing with the corporation rather than the individual. 2. The corporation is set up never to make a profit or always to be insolvent. Alternatively, it is too thinly capitalized—that is, it has insufficient capital at the time it is formed to meet its prospective debts or potential liabilities. 3. The corporation is formed to evade an existing legal obligation. 4. Statutory corporate formalities, such as holding required corporation meetings, are not followed. 5. Personal and corporate interests are mixed together, or commingled, to such an extent that the corporation has no separate identity.

Benefit corporations differ from traditional corporations in the following ways:

1. Purpose. Although a benefit corporation is designed to make a profit, its purpose is to benefit the public as a whole. (In contrast, the purpose of an ordinary business corporation is to provide long-term shareholder value.) 2. Accountability. Shareholders of a benefit corporation determine whether the company has achieved a material positive impact. Shareholders also have a right of private action, called a benefit enforcement proceeding, enabling them to sue the corporation if it fails to pursue or create public benefit. 3. Transparency. A benefit corporation must issue an annual benefit report on its overall social and environmental performance that uses a recognized third-party standard to assess its performance. The report must be delivered to the shareholders and posted on a public website.

Requirements of S corporation

1. The corporation must be a domestic corporation. 2. The corporation must not be a member of an affiliated group of corporations. 3. The shareholders must be individuals, estates, or certain trusts and tax-exempt organizations.Partnerships and nonqualifying trusts cannot be shareholders. Corporations can be shareholders under certain circumstances. 4. The corporation must have no more than one hundred shareholders. 6. The corporation must have only one class of stock, although it is not necessary that all shareholders have the same voting rights. 6. No shareholder of the corporation may be a nonresident alien.

Generally, the articles of incorporation must include the following information:

1. The name of the corporation. 2. The number of shares of stock the corporation is authorized to issue (Large corporations often also state a par value for each share, such as $0.20 per share, and specify the various types or classes of stock authorized for issuance.) 3. The name and street address of the corporation's initial registered agent and registered office. The registered agent is the person who can receive legal documents (such as orders to appear in court) on behalf of the corporation. 4. The name and address of each incorporator.

ultra vires

"beyond the powers" Cafesjian suit example

Close Corporations

(Most US corps fall in this category) Corporations with a small number of shareholders, often family members.

Secure an Appropriate Corporate Name

A new corporation's name cannot be the same as, or deceptively similar to, the name of an existing corporation doing business within the state. All states require the corporation's name to include the word Corporation (Corp.), Incorporated (Inc.), Company (Co.), or Limited (Ltd.).

To sue (shareholders & corps)

A shareholder can sue the corporation, and the corporation can sue a shareholder. Additionally, under certain circumstances, a shareholder can sue on behalf of a corporation.

preferred stock

A special type of stock whose owners, though not generally having a say in running the company, have a claim to profits before other stockholders do.

Mississippi, New York, Ohio, and Oklahoma, recognize the common law doctrine of de facto corporation.

Can be legal if 3 requirements are met

Piercing the Corporate Veil

exposing the shareholders to personal liability for debts and obligations. Used when shareholders participate in fraud, illegal purposes or break law.

Although corps cannot be imprisoned, they can be...

fined!! (Of course, corporate directors and officers can be imprisoned)

Articles sent to...

generally the secretary of state where they will be stamped "Filed" and returns a copy of the articles to the incorporators. Once this occurs, the corporation officially exists.

Venture capital investments

high risk!!!

Sometimes, a U.S. corporation sets up a holding company in a low-tax offshore environment...

ny profits received by the holding company on these investments are taxed at the rate of the offshore jurisdiction. Once "onshore," they are taxed at the federal corporate income tax rate. Any payments received by shareholders are also taxable at the full U.S. rates.

In rare situations a court can...

pierce the corporate veil and impose liability on shareholders for the corporation's obligations. (Judges hate this)

Private equity firms

pool funds from wealthy investors and use this private equity capital to invest in existing corporations. Usually, a private equity firm buys an entire corporation and then reorganizes it.

businesspersons should understand that they are personally liable for any...

preincorporation contracts made with investors, accountants, or others on behalf of the future corporation.

Most corporations are...

private

Benefit Corporations example

renting houses for more than 30 days only to help trash, pollution. Lost bcs they had no right to put a barrier on the beach.

Stocks (equity securities)

represent the purchase of ownership in the business firm

To prevent a majority shareholder from dominating the company, a close corporation may...

require that more than a simple majority of the directors approve any action taken by the board.

Who owns a corporation?

shareholders/stockholders

Incorporating a business

simple..many states allow businesses to incorporate via the Internet

certificate of authority

sometimes needed for right to do business in a state other than its state of incorporation

A corporation has perpetual existence unless

the articles state otherwise

An S corporation is taxed like a partnership...

the corporate income passes through to the shareholders, who pay personal income tax on it. This treatment enables the S corporation to avoid the double taxation imposed on regular corporations. In addition, the shareholders' tax brackets may be lower than the tax bracket that the corporation would have been in if the tax had been imposed at the corporate level.

maturity date

the date when the principal, or face amount, of the bond is returned to the bondholder.

Nonprofits allow...

various groups to own property and to form contracts without exposing the individual members to personal liability.

Alien Corporation

A corporation formed in another country (say, Mexico) but doing business in the United States is referred to in the United States.

First Organizational Meeting to Adopt Bylaws

After incorportaion. Lead by directors. If no directors yet, chose them. Create bylaws that dont conflict with the state (internal rules)

Cloud Act

An act to provide trans-border access to communications data in criminal law enforcement investigations.

shareholder agreement

An agreement between shareholders that restricts the transferability of shares, often entered into for the purpose of maintaining proportionate control of a close corporation. (A shareholder agreement can also provide for proportional control when one of the original shareholders dies.)

retained earnings

An amount earned by a corporation and not yet distributed to stockholders. (if invested properly, will yield higher corporate profits in the future.)

foreign corporation

a corporation in any state in which it does business except the one in which it is incorporated. Foreign in NJ when doing business if incorp in FL.

Select the State of Incorporation

Because state corporate laws differ, individuals seeking to incorporate a business may look for the states that offer the most advantageous tax or other provisions. (Most of the time choose where they will do most business) **Delaware=best

closed corporation continued...

Because the number of shareholders is so small, there is no trading market for the shares. In practice, a close corporation is often operated like a partnership.

Who can be shareholders?

Both individuals and other businesses

Nonprofit Corporations

Corporations formed for purposes other than making a profit. (Private hospitals, educational institutions, charities, religious organizations)

Corporate Financing

Corporations normally are financed by the issuance and sale of corporate securities.

corporate profits can be subject to

DOUBLE Taxation.

Incorporation Procedures

Each state varies. Can check on secretary of state website. Simple steps are same across the board.

Improper Incorporation

Errors in incorporation procedures can become important when, for instance, a third party who is attempting to enforce a contract or bring a suit for a tort injury learns of them.

private equity capital

Funds invested by a private equity firm in an existing corporation, usually to purchase and reorganize it.

Corporation by Estoppel case study

Gene's wife argued that Dale's estate should not be able to avoid paying a note that Dale had knowingly signed as president of a corporation whose legal status had been revoked. Ultimately, a state appellate court ruled that the mortgage note was valid. BLF was estopped from denying its corporate status for the purpose of invalidating the loan contract.

De Jure Corporations

If a corporation has substantially complied with all conditions precedent to incorporation, the corporation is said to have de jure (rightful and lawful) existence.

Under the RMBCA, close corporations have considerable flexibility in determining their operating rules...

If all of a corporation's shareholders agree in writing, the corporation can operate without directors and bylaws. In addition, the corporation can operate without annual or special shareholders' or directors' meetings, stock certificates, or formal records of shareholders' or directors' decisions.

De Facto Corporations

If the defect in formation is substantial, such as a corporation's failure to hold an organizational meeting to adopt bylaws, the outcome will vary depending on the jurisdiction.

domestic corporation

a corporation that operates in the state in which it is incorporated

Misappropriation of Close Corporation Funds EXAMPLE

John Murray, Stephen Hopkins, and Paul Ryan were officers, directors, employees, and majority shareholders of Olympic Adhesives, Inc. Merek Rubin was a minority shareholder. Twice a year, they paid themselves additional compensation—between 75 and 98 percent of Olympic's net profits. Rubin filed a suit against the majority shareholders bcs it was EXCESSIVE AND NON REASONABLE. They owed the company 6 million back.

pierce the corporate veil case 2:

Later, when Brennan's, Inc., sued Colbert for malpractice, Colbert argued that the court should pierce the corporate veil because the Brennan brothers did not observe corporate formalities. The court refused to do so, however, because there was no evidence of fraud, malfeasance, or other wrongdoing by the Brennan brothers.

implied powers

Powers not specifically mentioned in the constitution

Misappropriation of Close Corporation Funds

Sometimes, a majority shareholder in a close corporation takes advantage of his or her position and misappropriates company funds, in such situations, the normal remedy for the injured minority shareholders is to have their shares appraised and to be paid the fair market value for them

express powers order of priority

The U.S. Constitution. State constitutions. State statutes. The articles of incorporation. Bylaws. Resolutions of the board of directors. (On occasion, the U.S. government steps in to challenge what a corporation may consider one of its express powers.)

The Alter-Ego Theory

The alter-ego theory is applied when a corporation is so dominated and controlled by an individual (or group)

Role of Directors

The board of directors is the ultimate authority in every corporation. The board selects and removes the corporate officers, determines the capital structure of the corporation, and declares dividends.

Double Taxation (corp disatvantage)

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.

Remedies for Ultra Vires Acts

The corporation or its shareholders (on behalf of the corporation) can seek damages from the officers and directors who were responsible for the ultra vires acts.

pierce the corporate veil case:

The court pierced the corporate veil and held Jerry personally liable for the repair costs. An appellate court affirmed. Teal Properties owned no property and had no assets. It received rent but paid it immediately to Jerry. The court concluded that the company was not operated as an entity separate from its sole shareholder.

Corporation by Estoppel

The estoppel doctrine most commonly applies when a third party contracts with an entity that claims to be a corporation but has not filed articles of incorporation. It may also apply when a third party contracts with a person claiming to be an agent of a corporation that does not in fact exist.

A Potential Problem for Close Corporations

The potential for corporate assets to be used for personal benefit is especially great in a close corporation.

Articles of Incorporation

The primary document needed to incorporate a business.

failure to pay income taxes...

The state can suspend the organization's corporate status until the taxes are paid and can even dissolve the corporation for failing to pay taxes.

Transfer of Shares in Close Corporations Example

Three siblings, Sherry, Karen, and Henry Johnson, are the only shareholders of Johnson's Car Wash, Inc. Henry wants to sell his shares, but Sherry and Karen do not want him to sell the shares to a third person unknown to them.

Transfer of Shares in Close Corporations solution

To avoid this situation, a close corporation can restrict the transferability of shares to outside persons. Shareholders can be required to offer their shares to the corporation or to the other shareholders before selling them to an outside purchaser. In fact, in a few states close corporations must transfer shares in this manner under state statutes.

Criminal Acts

Under modern criminal law, a corporation may be held liable for the criminal acts of its agents and employees.

Bylaws continued...

Under the RMBCA, the shareholders may amend or repeal the bylaws. The board of directors may also amend or repeal the bylaws, unless the articles of incorporation or provisions of the state corporation statute reserve this power to the shareholders

public corporation

a corporation formed by the government to meet some political or governmental purpose. (U.S. Postal Service, the Tennessee Valley Authority, and AMTRAK)

A corporation is recognized under U.S. law as

a LEGAL person (not a natural one)

Transfer of Shares in Close Corporations

a close corporation has a small number of shareholders. Thus, the 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.

holding company (parent company)

a company whose business activity consists of holding shares in another company. Typically, the holding company is established in a low-tax or no-tax offshore jurisdiction, such as the Cayman Islands, Dubai, Hong Kong, Luxembourg, Monaco, or Panama.

Crowdfunding

a cooperative activity in which people network and pool funds and other resources via the Internet to assist a cause or invest in a venture. (start-ups can use this)

Benefit Corporations

a for-profit corporation that seeks to have a material positive impact on society and the environment.

Internet Selling

a foreign corporation normally does not need a certificate of authority to sell goods or services via the Internet or by mail.

Professional Corporations can be identified...

by the letters P.C. (professional corporation), S.C. (service corporation), or P.A. (professional association).

Tort liability can be attributed to a corporation for the acts of its..

agent that were committed within the scope of the agent's employment. (Ponzi scandal ex)

Professional Corporations

are owned by those who offer professional services (physicians, lawyers, dentists, accountants). The shareholder-owners are professionals who are held to a higher standard of conduct.

a corps authority to act and the liability for its actions...

are separate from its shareholders.

In a corporation, the responsibility for the overall management of the firm is entrusted to..

board of directors (whose members are elected by the shareholders.)

Common stock provides an interest in the corporation with regard to

control, earnings, and net assets.

The true ownership of a corporation is represented by

common stock

the body of shareholders can change...

constantly as people purchase shares of stock

How a corp is like a person?

corporations possess the same right of access to the courts as citizens and can sue or be sued. The constitutional guarantees of due process, free speech, and freedom from unreasonable searches and seizures also apply to corporations.

Bonds

debt securities, which represent the borrowing of funds paid back with interest. (usually long term)

Alaska, Arizona, Minnesota, New Mexico, Oregon, South Dakota, Tennessee, Utah, and Washington, as well as the District of Columbia

if there is a substantial defect in complying with the incorporation statute, the corporation does not legally exist, and the incorporators are personally liable.

Whether a corporation retains its profits or passes them on to the shareholders as dividends, those profits are subject to...

income taxation by various levels of government.

The person or persons who execute (sign) the articles of incorporation are the

incorporators

publicly held corporation (public company)

is any corporation whose shares are publicly traded in a securities market, such as the New York Stock Exchange or the NASDAQ.

If a corporation has S corporation status...

it can avoid the imposition of income taxes at the corporate level while retaining many of the advantages of a corporation, particularly limited liability.

corporation

legal entity created and recognized by state law.

ADVT - corporate shareholders are not personally...

liable for the obligations of the corporation beyond the extent of their investments.

board of directors

makes the policy decisions and hires corporate officers and other employees to run the daily business operations.

De Jure Corporations cont...

minor mistakes like a tiny error in address will still count as De Jure Corporations

Any person who purchases common stock acquires voting rights

one vote per share held

When a corporation earns profits, it can either...

pass them on to shareholders in the form of dividends or retain them as profits.

S Corporations

specified in Subchapter S of the Internal Revenue Code

venture capital financing

start-up business typically gives up a share of its ownership to the venture capitalists. Many Internet-based companies, such as Google and Amazon, were initially financed by venture capital.

Securities

stocks and bonds

In theory, higher profits will cause...

the price of the companys stock to rise. (Individuals can then gain when/if they sell their stock)

If a foreign corporation does business in a state without obtaining a certificate of authority...

the state can impose substantial fines and sanctions on that corporation.