Business Law Ch. 33

Factors That Lead to Piercing the Corporate Veil

1. A party is tricked or mislead into dealing with the corporation rather than the individual 2 The corporation is set up never to make profit or always to be insolvent, has insufficient capital at time of formation to meet its prospective debts or potential liabilities 3. Statutory corporate formalities, such as holding required meetings, are not followed 4. Personal and corporate interests are commingled (funds or goods together in one mass so they are mixed to a degree that they no longer have separate identities

Incorporation Procedures

1. Select the State of Incorporation 2. Secure the Corporate Name: subject to state approval to ensure against duplication. Can't be the same as a corporation within that state. Must include "corporation, incorporated, company, or limited" 3. Prepare an Articles of Incorporation: Document that is filed with the appropriate state official, usually S.O.S. 4. File the Articles of Incorporation

S Corporations

A close corporation that meets the qualifying requirements specified in Sub-chapter S of the Internal Revenue Code can operate as an S corporation Has most corporate attributes, but qualifies to be taxed as a partnership Must have: 1. Must be a domestic corporation 2. Must not be a member of an affiliated group of corporations 3. Shareholders must be individuals, estates, or certain trusts. Can't be partnership 4. Corporation must have < 100 shareholders 5. Must have only one class of stock, but not all shareholders have the same voting rights 6. No shareholder of the corporation may be a nonresident alien

Alien Corporation

A corporation formed in another country but doing business in the United States

Dividends

A distribution of corporate profits to the corporation's shareholders in proportion to the number of share held

Stocks

An ownership (equity) interest in a corporation measured in units of shares

Publicly Held Corporation

Any corporation whose shares are publicly traded in securities markets, such as the NYSE or NASDAQ

Case Ex: Court ruled that MB was liable because the acts were committed within scope

Bloom was an officer and director at MB. He formed NH investment fund. Bloom and other MB employees used MB equipment for NH fund. It was a Ponzi scheme NH filed suit against MB

Corporation by Estoppel

Business association holds itself out to others as being a corporation when it has made no attempt to incorporate. The firm will be estopped from denying corporate status in a lawsuit by a third party

Venture Capital

Capital provided to new business ventures by professional, outside investors High risk Usually has to give a share of ownership interest in order for someone to invest in the company

Crowdfunding

Cooperative activity in which people network and pool funds and other resources via the Internet to assist a cause or invest

Certificate of Authority

Corporation does not have automatic right to do business in a state other than its state of incorporation, must obtain certificate of authority in any state it plans to do business

Private Corporations

Created wholly or in part for private benefit. Most are private.

Corporation

Creature of statute, a legal entity created and recognized by state law, statutory requirements distinct from its shareholder-owners Recognized by law as a person

Bonds

Debentures or debt securities, represent the borrowing of funds. Issued by business firms and by governments at all levels as evidence of the funds they are borrowing from investors

Case Ex: Court ruled in Drake's favor, Drake was required to obtain a certificate of authority

Drake Manufacturing Co in Delaware entered into a contract to sell certain products to Polyflow Inc in Pennsylvania Drake promised to ship the goods from Drake's plant in Pennsylvania... Polyflow withheld payment of goods, and Drake filed breach of contract in Penn.

Corporate Powers

Express Powers: Found in its articles of incorporation, in the law of the state, and in state and federal constitutions. Bylaws also Implied Powers: To perform all acts reasonably appropriate and necessary to accomplish its corporate purposes. Power to borrow funds within certain limits, to lend funds, etc. Ultra Vires Doctrine

Benefit Corporations

For-profit corporation that seeks to have a material positive impact on society and the environment Must have: 1. Purpose: Purpose is to benefit the public as a whole, must consider impact of their decisions on society and environment 2. Accountability: Shareholders determine whether the company has achieved a material positive impact. Also have right of private action, "benefit enforcement proceeding" which enables them to sue the corporation if it fails to pursue or create benefit 3. Transparency: Must issue annual benefit report on its overall social and environmental performance that uses a recognized third-party standard to assess its performance

Foreign Corporation

Formed in one state but doing business in another

Nonprofit Corporations

Formed without a profit-making purpose

Private Equity Capital

Funds invested by a private equity firm in an existing corporation, usually to purchase and reorganize it May sell shares in the reorganized company to the public in an Initial Public Offering (IPO). Private equity firm can make profits by selling its ownership rights in the company to the public

De Jure Corporations

If a corporation has substantially complied with all conditions precedent to incorporation, said to "de jure" exist. (rightful and lawful)

De Facto Corporations

If a defect in formation is substantial, the outcome will vary depending on the court. Some statutes recognize the common law doctrine of "de facto": The courts treat a corporation as a legal corporation despite defect if all 3: 1. A state statute exists under which the corporation can be validly incorporated 2. The parties have made good faith attempt to comply with the statute 3. The parties have already undertaken to do business as a corporation

Domestic Corporation

In a given state, a corporation that is organized under the law of that state (in state of incorporation)

Articles of Incorporation

Includes Corp name, number of shares it's authorized to issue, name and address of initial registered agent. Also, names of incorporators Corporation has perpetual existence Does not require a specific statement of purpose to be included, can be formed for any lawful purpose

Limited Liability of Shareholders

Major advantage, limited only up to the amount of their investments

Close Corporations

Most corporate enterprises in the US fall into this category Shares are held by relatively few persons, often members of a family No trading market for shares, usually operate somewhat like a partnership Considerable flexibility in determining operating rules

Public Corporation

One formed by the government to meet some political or governmental purpose Ex: Cities and towns, or federal government organizations

Promotional Activities

Persons incorporating a business rarely engage in promotional activities Must understand they are liable for any preincorporation contracts made with investors, accountants, and others

Professional Corporations

Physicians, lawyers, dentists, and accountants can incorporate. Typically identified by the letters S.C (Service Corporation) or P.C (Professional Corporation) or P.A (Professional Association) Laws of formation and operation of professional corporations are similar to those governing ordinary business corporations For liability purposes some courts treat a professional corporation somewhat like a partnership and hold each professional liable for malpractice committed by others in the firm within the scope of the firm's business Shareholder generally cannot be held liable for torts committed by other professionals at the firm

Management of Close Corporations

Resembles that of a sole proprietorship To prevent majority shareholder from dominating a close corporation, they may require that more than a simple majority of the directors approve any actions taken by the board

Corporate Personnel

Responsibility for overall management of the firm is entrusted to a board of directors, members are elected by shareholders. Board of Directors hires corporate officers and other employees to run the daily business operations

Tax Effects of S Election

S corp is treated differently than a regular corp for tax purposes, they are taxed like a partnership They can avoid double taxation

Misappropriation of Close Corporation Funds

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

Securities

Stocks and bonds, evidence the right to participate in earnings and the distribution of corporate property or the obligation to pay funds

Piercing the Corporate Veil

The action of a court to disregard the corporate entity and hold the shareholders personally liable for corporate debts and obligations Exposes shareholders who have committed fraud, etc. to personal liability Also when corporate privilege is abused for personal business

Retained Earnings

The portion of a corporation's profits that has not been paid out to shareholders

Transfer of Shares in Close Corporation

Transfer of shares can cause serious management problems The corporation could restrict the transfer-ability of shares to outside persons Shareholders could be required to offer their shares to the corporation or the other shareholders before selling to outside person

Ultra Vires Doctrine

Ultra Vires means "beyond the powers." Acts of corporations that are beyond its express and implied powers. Remedies: Shareholders can seek injunction from a court to prevent the corporation from engaging in Ultra Vires acts. Attorney General of the state can also bring action against Ultra Vire or institute dissolution

Torts and Criminal Acts

Under modern criminal law, a corporation may be held liable for the criminal acts of its agents and employees Liable for the torts committed by its agents or officers within the course and scope of their employment (Respondeat Superior)