Acc241 Chapter 20

Ultra Vires

"beyond the powers" he articles of incorporation of a proposed corporation may include (and some states require it) a statement describing the proposed business activities of the corporation. The doctrine applies to those instances where a corporation engages in activities not permitted in the description of their approved business activities.

Close Corporations

A "close" corporation or a "closely held" corporation is a domestic corporation where the stock is owned only by members of a family or by a small group of unrelated people.

A Legal Person

A corporation is a legal person, and it has many of the legal rights possessed by a natural person including to sue and be sued

Articles of Incorporation

A corporation is formed by filing articles of incorporation.

Assume for the moment that New Jersey recognizes the existence of de facto corporations. What must be proved to establish the existence of a de facto corporation?

A court would ask the following three questions: (a) Is there a statute that allows incorporation? (b) Did the incorporators (acting in good faith) attempt to follow the (c) Has the enterprise in question been acting as if it was a corporation? If the answer is "yes" to the three questions above, then the approach in many states is to label the corporation a label the corporation a de facto corporation.

Publicly Held Corporations

A domestic corporation with shares traded on public exchanges is a "publicly held" corporation.

Domestic and Foreign Corporations

A routine corporation created in Kansas is called a domestic corporation in Kansas, but that same corporation is a foreign corporation in the other forty-nine states. (In this and the following chapters we will refer to all of these corporations simply as "domestic" corporations.)

Which of the following would disqualify a corporation from being an "S Corporation"? being a foreign corporation having 110 shareholders having two classes of common stock All of these would disqualify a corporation from being an "S Corporation."

All of these would disqualify a corporation from being an "S Corporation." To qualify as an S corporation the applicant must be a domestic corporation, have no more than one hundred shareholders and have only one class of stock.

"S" Corporation

An "S" corporation is a corporation that is permitted to pay a so-called "single" tax because it is qualified under sublesson S of the Internal Revenue Code.

Corporation formation

Article or incorporation: Corporate Name. The articles state a proposed name that is not being used by (or is deceptively similar to) the name of another corporation. (A corporation name must include words such as corporation, company, incorporated, or an abbreviation such as Corp., Co., or Inc.) Number of Shares. This is the place where the authorized number of corporation shares is stated. If "par value" is required in a particular state, it is meant to be a statement of the minimum price (for example "five cents per share") at which common stock of the corporation may be sold by the corporation. Registered Agent. The street address of the original corporation office is stated. A very important item is the name and address of the registered agent of the corporation. (If legal papers must be delivered to a corporation, they may be delivered to this person.) Incorporators. The name and address of each incorporator is stated.

Which of the following is correct concerning the taxation of a corporation? The corporation is taxed on its profits. Shareholders are taxed on the profits that are distributed to them as dividends. Both of these are correct. Neither of these is correct.

Both of these are correct. Corporation profits are taxed and then distributed to shareholders. The money distributed to holders (called dividends) is taxable to the shareholders. This is the double tax.

Revised Act on Corporation Formation (not required)

Business Activities. Corporation Duration. Some states require a specific statement of how many years the corporation will stay in existence—fifty years, for example, or seventy-five years. Where states allow a statement of perpetual existence, which is nearly always selected by a new corporation. Paid-in Capital. Some states require a statement of the minimum amount of money (for example, $1,000) that must be paid into the corporation before it commences business. Initial Directors. Some states require a statement of the names and addresses of the initial directors of the corporation.

A. W. Chesterton Co., Inc. v. Chesterton

Chesterton Co. is a S Corp. One of its member, Chesterton, want to sell stocks but other cannot afford this. Then he wanted to sell the stocks to a corp which revokes the S Corp status. Court ruled that Chesterton was threatening the firm so prohibited him from selling stock.

Corporation Promoters

Corporation promoters sometimes expose themselves to personal liabilities by engaging in business before the corporation is actually formed.

What does the "pierce the corporate veil" mean? The corporation is insolvent. The corporation is not a de jure corporation. Corporation status will be disregarded.

Corporation status will be disregarded If a court decides that corporation status has been abused by disregarding corporation procedures, the court may "pierce the corporate veil" and hold officers or directors personally liable for claims by creditors.

Corporation Advangates

Corporations have advantages over partnerships, limited liability partnerships, and limited liability companies (in the sense that they are well-suited for sophisticated financial transactions)

Why corporation?

Easier to get investment through bond and stocks.

Coopers & Lybrand v. Fox

Fox asked Coopers to do somethings on behalf of a coming corporation. Bill wasn't paid, sue. Coopers didn't know the corporation did not existed => Fox was liable.

If, indeed, corporations have many of the rights that a natural person possesses, would you suppose that a corporation has the right of "free speech" described in Amendment I ("Congress shall make no law . . . abridging the freedom of speech") of the U.S. Constitution?

Heretofore the answer has been no. However, on Jan. 21, 2010, the U.S. Supreme Court ruled in Citizens United v. Federal Election Commission that corporations enjoy the same First Amendment free speech as individuals.

Hutchinson Baseball Enterprises, Inc. v. C.I.R.

Hutchinson claimed it was non profit while IRS denied that status. Court agreed Hutchinson is nonprofit. Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition

What is the meaning of "par" stock?

If "par value" is required in a particular state, it is meant to be a statement of the minimum price (for example, "5 cents per share") at which common stock of the corporation may be sold by the corporation. (The par value concept applies to the sale of stock by a corporation and not to subsequent sales by stockholders.)

Describe the advantage to corporation stockholders if the corporation qualifies under Subchapter S of the Internal Revenue Code.

If a corporation qualifies as an "S Corporation," the corporation pays no income tax. Instead, corporation profit and loss flows through to the shareholders like it does in a general partnership.

Pharmaceutical Sales and Con. v. J.W.S. Delavau

Pharmaceutical Sales and Con lost because no bona fide attempt was filed.

Piercing the Corporate Veil

Piercing the corporate veil refers to court action that disregards corporation status because it is being abused by a corporation.

Suppose that Rowena was a promoter (but not a shareholder, officer or director) who helped organize the ABC Specialities Corp. Prior to formal approval of the articles of incorporation, Rowena purchased Blackacre from Bart using the following language: "Rowena, agent for ABC Specialities." Which of the following is true? Rowena (only) is liable to Bart on the contract. ABC Specialities (only) is liable to Bart on the contract. Rowena and ABC Specialities (both) are liable to Bart on the contract.

Rowena (only) is liable to Bart on the contract. A corporation is not liable on a contract that was formed before it existed unless it afterward ratifies the contract, and in this case there is no indication of ratification. Thus Rowena (only) is liable on the contract.

Which of the following uses the name "corporation" but really refers to an Internal Revenue Service (IRS) qualification? foreign corporation public corporation domestic corporation S corporation

S corporation An S corporation is a corporation that has qualified under Subchapter S of the IRS Code.

Marsili v. Pacific Gas and Electric Company

Shareholders challenged the firm because it donated money to oppose a Proposition . The judge ruled that: No restriction appears in the articles of PG&E which would limit the authority of its board of directors to act upon initiative or referendum proposals affecting the affairs of the company.

The Coopers & Lybrand v. Fox case was decided in Colorado. If history could be rewritten, what should Mr. Fox have inserted into his agreement with Coopers so that he could avoid personal liability if the bill was not paid?

Something like this would suffice: "The parties understand that Fox is acting in behalf of a corporation yet to be formed and Fox shall have no personal liability if fees from Coopers are not paid.")

If the subject matter of this chapter was being discussed in a classroom, the professor might ask if it is possible that the same corporation can be properly labeled a "domestic corporation ," "closely held corporation," and "S corporation." Can it?

The answer is "yes." A routine, domestic corporation where all of the stock is owned only by members of a family or by a small group of unrelated people is "closely held." Moreover, if the same corporation met other "small" corporation requirements described later in the chapter, it would also be an S corporation.

In Pharmaceutical Sales and Con. v. J. W. S. Delavau, what did the court decide? The corporation in question was a corporation de jure. The corporation in question was a corporation de facto. The corporation in question was not a corporation at all.

The corporation in question was not a corporation at all. It was admitted that the corporation in question was not a de jure corporation. It was claimed, however, that the corporation in question was a corporation de facto. Because there had not been a bona fide attempt to form the corporation, there was no basis for recognizing a corporation de facto.

S Corporation requirements

The corporation must be a domestic corporation. The corporation must not be a member of a group of corporations that are legally tied together. The shareholders must be individuals (and some trusts or estates). The corporation may have no more than 100 shareholders. The corporation may have only one class of stock. No shareholder may not be a non-resident alien.

What is a practical way for incorporators to avoid the possibility of future claims that their corporation has engaged in an ultra vires act?

The simplest way to avoid ultra vires claims is to use broad and permissive language in the articles of incorporation. An example is language that allows the corporation to engage in activities that have "any lawful purpose."

Types of Corporation

There are many different "types" of corporations: domestic and foreign corporations, publicly held corporations, close corporations, public corporations, nonprofit corporations, professional corporations, and so-called "S" corporations.

S Corporations.

These are closely held domestic corporations that have qualified for "single" tax status.

Public Corporations.

These are corporations created by governments. Cities and towns, for example, are municipal corporations. The U.S. Postal Service is a public corporation. Their internal organization is sometimes different than a domestic corporation.

Nonprofit Corporations.

These are organizations that do not issue stocks and are not designed to generate profit. Nonprofit hospitals and orphanages are examples of nonprofit corporations. Their internal organization is sometimes different than the organization of a domestic corporation.

Professional Corporations.

These corporations are formed by professionals, such as lawyers or doctors. The objective is to avoid some personal liability and to receive tax benefits.

Which of the following is best suited to having hundreds or thousands of investors? a limited liability partnership (LLP) a limited liability company (LLC) a general partnership a corporation

a corporation A corporation can have hundreds or thousands of shareholders and the shareholders may be divided into classes and have different shareholder rights. No other business organization comes close to the number, size and rights of hundreds, thousands or millions of investors.

pierce the corporate veil

a judgment call, but litigants are sometimes allowed to get to the associated business operators when the operators are engaged in fraudulent activity or when the operators mix corporation and personal interests to the point that no separate corporation identity exists.

If Jed wishes to sue the XYZ Corporation, he would usually deliver (or have delivered) the legal papers to which of the following? corporation treasurer corporation shareholders corporation president corporation registered agent

corporation registered agent By statute, the "registered agent" is the person to whom documents may be delivered and delivery to the registered agent is considered delivery to the corporation.

De Jure corporation

corporations that are correctly formed, or formed with only minor errors.

What does it mean to "pierce the corporate veil"?

disregard the existence of a corporation and hold the principal operators liable for the debts of the corporation.

What is a corporation formed in California but doing business in Utah called? domestic corporation public corporation foreign corporation S corporation

foreign corporation A corporation formed in state A but doing business in state B is referred to as a "foreign" corporation. As commonly used, the term "foreign" does not refer to a corporation organized outside of the United States.

In Re Flutie New York Corp

he trustee (the manager of the case) attempted to cut through an insolvent corporation and hold the creator of the corporation, Albert Flutie, personally liable for the unpaid debts of the corporation. no corporate formalities were followed, the business was undercapitalized. Michael Flutie looted Flutie N.Y. and used the corporate veil as a sham through which to engage in conduct intended to deprive the Debtor's legitimate creditors of assets of the Debtor.

Suppose that a state statute requires that the signatures of people on articles of incorporation be notarized. The signatures on the articles of incorporation for ABC Specialities, Corp. are indeed notarized by Jed and the corporation is approved. Later, however, it is discovered that the notary public commission of Jed had expired and, thus, the articles of incorporation are technically not "notarized." Who is allowed to challenge the existence of the incorporation? corporation shareholders corporation directors corporation creditors none of these is correct.

none of these is correct Section 203(b) of the Revised Model business Corporation Act provides that only the state that approved the incorporation may thereafter challenge it.

De Facto corporation

not correctly formed but is still recognized as a corporation in order to protect the innocent officers, directors, or shareholders involved.

promoters

takes the steps that are necessary to form a corporation