Business Law Chap 41,42

Fiduciary duty

The promoter owes a fiduciary duty to the corporation and to its prospective investors. Meaning the promoter owes the parties a duty of full disclosure and honesty.

Two requirements for a court to pierce the corporate veil

1) Domination of a corporation by its shareholders 2) Use of that domination for an improper purpose.

Steps in incorporation

1) Preparation of articles of incorporation. 2) Signing and authenticating the articles by one or more incorporators. 3) Filing the articles with the secretary of state, accompanied by the payment of specified fees. 4) Receipt of a copy of the articles of incorporation stamped "Filed" by the secretary of state, accompanied by a fee receipt. 5) Holding an organization meeting for the purpose of adopting bylaws, electing officers, and transacting other business.

The state law does not unduly burden foreign interstate commerce if..

1) The law serves a legitimate state interest. 2) The state has chosen the least burdensome means of promoting that interest. 3) That legitimate state interest outweighs the statute's burden on interest commerce.

Doing business

A concept to determine whether a state may constitutionally impose its laws on a foreign corporation.

Incorporation

A fairly simple process usually requiring little more than paying a fee and filling a document with a designated government official such as the secretary of state.

Benefit theory

A foreign corporation should be required to pay for the benefits that it receives from the state.

Pseudo-foreign corporation

A foreign corporation that conducts most of its business in a state other than the one in which it is incorporated.

Novation

A promoter and their co-promoters are jointly severally liable on preincorporation contracts until novation occurs. That's when the corporation and the third party must agree to release the promoter from liability and substitute the corporation.

S corporation

A special type of close corporation. Treated nearly as a partnership for federal income tax purposes. Shareholders report earnings or losses of the business on their individual income tax returns.

Qualifying to do business

A state may require that foreign corporations qualify to conduct intrastate business in the state. There are exceptions such as, soliciting by mail or through employees, amazon selling online, owning real or personal property.

Taxation

A state may tax a foreign corporation if such taxation does not violate the Due Process Clause or the Commerce Clause.

A corporation is domicile in one country and its an....... in other country in which it does business with.

Alien corporation.

Issued shares

Are shares that have been sold to shareholders.

Debt securities

Creates a debtor-creditor relationship between the corporation and the security holder.

Prefered shareholders

Customarily given liquidation and dividend preferences over common shareholders.

There are three types of improper use of the corporation

Defrauding creditor, circumventing a statue or evading an existing obligation.

A corporation is a...... in the state that has granted its charter; it is a........ in all other states in which it does business.

Domestic corporation. Foreign corporation.

De Facto Corporation

Exists when incorporators fail in some material respect to comply with all of the mandatory provisions.

De Jure Corporation

Formed when the promoters substantially comply with each of the mandatory conditions precedent to the incorporation of the business. Those that the corporation statues states "Shall' or "Must" be done.

Thin capitalization

Forming a business with a high debt-to-equity ratio, in which a company is financed through a relatively high level of debt compared to equity.

Nearly all for-profit corporations are incorporated under the...

General incorporation law.

Common shareholders

Have the exclusive right to elect the directors, who manage the corporation.

Certificate of authority

If required to qualify. You have to apply with the secretary of state, pay an application fee, maintain a registered office and a registered agent in state, file an annual report and pay an annual fee.

To avoid liability promoters will...

Incorporate the business prior to making any contracts for the corporation. That is, they only makes contracts for existing corporations.

Adoption

Its when a corporation adopts the promoter's contract, the corporation must accept the contract with knowledge of all its material facts.

Bonds

Long-term, secured debts securities that usually have indentures

Dentures

Long-term, unsecured debts securities.

MBCA

Model Business Corporation Act. Created by the American Bar Association Committee on Corporate Laws to improve the rationality of corporation law.

MNCA

Model Nonprofit Corporation Act.

For-profit corporations

Most business corporations. They issue stock to their shareholders, who invest in the corporation to earn a profit in dividends and increased market value shares.

Corporation's Liability on preincorporation contracts

Nonexistent corporation has no liability on contracts made by a promoter prior to its incorporation. This is because the corporation does not exist.

Options

Permits their holder to purchase a specific amount of shares at a specific price during a specific time period.

All states requires professional such as accountants, dentist, lawyers to incorporate under...

Professional corporation acts.

Types of corporations

Profit corporations, Non-profit corporations and government-owned corporations.

Preincorporation share subscriptions

Promoters sometimes use this to ensure that the company will have adequate capital when it begin its business. Prospective shareholder offers to buy a specific number of shares for a stated price.

Publicly vs close corporations

Publicly held corporations shares are generally available to public investors and close are not.

Piercing the corporation veil

Refers to a situation in which courts put aside limited liability and hold a corporation's shareholders or directors personally liable for the corporation's actions or debts

Due Process Clause

Requires that a foreign corporation have sufficient contacts with a state before a state may exercise jurisdiction over the corporation.

State incorporation statues

Set out the basic rules regarding the relationship between the corporation, its shareholders, and its managers.

Discounted shares

Shares issued for less than par value.

Authorized shares

Shares that a corporation is permitted to issue.

Outstanding shares

Shares that are currently held by shareholders.

Notes

Shorter duration than debentures and bonds and they may or may not be secured.

Equity securities

Stocks or shares

Looting also occur when a parent corporation owns at least the majority of the share in a.....

Subsidiary corporation.

Shareholders

The holders of the shares or stockholders, who partially owners of the corporation.

Par value

The nominal value of a bond, share of stock, or a coupon as indicated in writing on the document or specified by charter.

Under the Commerce Clause

The power to regulate interstate commerce is given to the federal government. Nevertheless, a state may require a foreign corporation to comply with its laws if the application of these laws does not unduly burden interstate commerce.

Promoter

They create or discover a business or an idea to be developed, finds people who are willing to invest in the business, negotiates the contracts for initial operation, incorporates the business and helps management to that the operation. They may have liability.

Not-for-profit corporations

They do not issue stock and do not expect to make a profit. They have members instead of shareholders, but they don't receive any surplus revenue.

Foreign Corporations to Suit

They may be brought into a state's court in connection with its activities within the state, if the state doesn't violate the corporation's due process rights under the Commerce Clause.

Government-owned corporation

They perform governmental and business functions such as school corporations and water companies.

Automatic novation clause

This limits the promoter liability, which mean the promoter will have his liability cease automatically upon adoption.

4 purpose of determination

To determine whether.. 1) a corporation is subject to a lawsuit in a state's courts 2) the corporation's activities are a subject to taxation 3) the corporation must qualify to carry on its activities in the state 4) the state may regulate the internal affair of the corporation.

Looting

Transfer of corporate assets to shareholders for less than fair market value. Such as shareholder-managers loot a corporation by paying themselves excessively high salaries; leaving insufficient assets in the corporation to pay creditors claims.

Securities

Type of source to fund a corporation such as shares, debentures, bonds and long-term notes payable.

Defective attempts to incorporate

When business attempt to incorporate but fails to comply with all the conditions. The incorporators may not have filled articles of incorporation or they may not have held a organization meeting.

Corporation by estoppel

When people hold themselves out as representing a corporation or believe themselves to be dealing with a corporation, a court will estop those people from denying the existence of a corporation.