Chapter 39 corporate formation and financing

How do benefit corporations differ?

1. Purpose. Makes profit but also benefits society. 2 accountability- shareholders can sue corp if they haven't attained societal goals called benefit enforcement proceedings 3. Transparency- third party audits them to see what they accomplished. Report made public.

What are bonds?

Bonzer debt securities which represent the borrowing of funds. Bonds issued by business firms and governments as evidence of funds that are borrowing from investors. They have a maturity date which the principal must be paid. Also fixed interest rate collected usually semi annually until maturity.

What is the liability of shareholders?

Corporate shareholders are not personally liable for obligations of corporation be on the extent of their investment. In limited situations of court compares the corporate veil and impose liability on shareholders for the corporations obligations. Sometimes creditors will not extend credit to small companies unless the shareholders assume personal liability

Foreign corporation

Corporation has business in home state and operating in another state is referred to as

Alien corporation

Corporation in another country is operating in the US is referred to as

Non profit or not for profit copprations

Corporation is not run for profit

What is the alter ego theory?

Courts pierce the corporate veil under the tree that the corporation was not operated as a separate entity rather it was just another side of the individual or group that actually control the corporation.

Private corporation

created in whole or in part for private benefit

What is venture capital?

For high-risk start up businesses seek venture-capital which is capital provided to new businesses by professionals, outside investors, usually wealthy groups of investors. Venture capital investments are high risk, the investor must be willing to lose all of their invested funds, but offer the potential for well above average returns in the future. Entrepreneur typically gives up a share of its ownership to the venture capitalist. Venture capitalist may provide managerial or technical expertise And are giving some control over our company decisions.

Benefit corporation

For profit to benefit society

The articles of corporation must include

1. Name of corp 2. Number of shares of stock the corp is authorized to issue. 3. Name and street address of corp initial registered agent and registered office. 4 name and address of each incorporated.

S corporation

Avoids corporate taxes but still enjoys limited liability

S corp requirements

1. Must be domestic corp 2. Corp must not be an affiliated member of another corp 3. Must be an individual, estate, truest, or tax exempt organization. Sometimes can be shareholders too. 4. No more than 100 shareholders 5. Have only 1 class of stock 6. No shareholder can be a non resident alien

Model Business Corporation Act (MBCA)

A clarification of modern corporation law that has been influential in shaping state corporation statute.

What happens at the first organizational meeting to adopt bylaws?

After incorporation, the first organizational meeting must be held. Elect directors of not already elected. Adopt bylaws- internal rules of management for the corporation. Both directors and shareholders can amend or repeal by laws unless stated otherwise in articles.

Publicly held corporation

Any corp whose stock is publicly traded on the stock market

What types of improper incorporation exist?

De jure corps- if a corp has substantially complied with all conditions precedent to incorporation. Filing articles is conclusive proof that all provisions have been met. If it is a small defect courts find de jure corp exists. De facto corps- substantial defect. In some states treated as legal corp despite defect if these requirements are met: 1) a state statute exists under which the corp can be validly incorporated, 2) parties have made good faith attempt to comply with statute, 3) parties have already undertaken to do business as a corp. in other states de facto corp means corp does not legally exist and incorporated are personally liable. Corporation by estoppel: estoppel from denying corporate status in lawsuit if they represented themselves as corp when they actually weren't.

How is a corporation taxed?

Double taxation. They are taxed on profits and any dividends to shareholders are taxed on their income statements

What does a corp need to do business elsewhere?

If a corporation wants to do business in a foreign country or state it will need a certificate of authority or it will be fined. Internet transactions don't count.

Domestic corporation

In home state

How in what ways can a corporation finance its business?

Issuance or sale of corporate security which are stocks and bonds or evidence of an ownership interest in the corporation or a promise of repayment of debt by corporation.

What is crowdfunding?

It is a cooperative activity in which people network and pool funds and other resources by the Internet to assist a cause or invest in a venture. Companies are required to make specific disclosures and are limited to raising $1 million a year through crowdfunding.

Professional corporations

Like lawyers or doctors. Have differences in liability because they are professionals. Individuals held liable for malpractice. Normally other members not held liable for others conduct unless it is malpractice or breach of duty.

What is ultra vires doctrine?

Means beyond the power. Acts of a corporation that are beyond its express or implied powers are considered this. In the past mostly involved cases where contracts were made for unauthorized purposes. Today usually involve nonprofit organizations or municipal corporations.

Nature and classification of corporations

One more owner is called shareholders and it operates under her name distinct from the names of its owners. Corporation is recognized under US law as an artificial legal person as opposed to a natural person.

What factors lead chords to pierce the corporate veil?

One. A party is trick to miss lead in the dealing with the corporation rather than the individual. Two. The corporation set up never to make a profit or always to be insulted. Or it is to thinly capitalized. Three. The corporation is formed to invade an existing legal obligation. Four. Statutory corporate formalities are not followed. Five. Personal and corporate interests are mixed together to such an extent that the corporation has no separate entity.

What personnel does a corporation need?

Overall management of firm is entrusted to Board of Directors, whose members are elected by the shareholders. Board of Directors makes the policy decisions and hires corporate officers and other employees to run the daily business operations

What is a potential problem for close corporations?

Potential for corporate assets to be used for personal benefit. There is no requirement for small close corporations to operate with the formality usually expected of larger corporations.

Process by which corporation comes into existence

Promotional activities- personally liable for preincorporated contracts Incorporation activities- select state, secure corporate name (can't be duplicated) Prepare articles of corporation- basic info and primary source of authority. File articles with state

What is private equity capital?

Pull funds from wealthy investors and use it to invest in existing corporations. Usually private equity firm buys an entire corporation and then re-organize it.

Close corporations

Shares held by a few shareholders usually family. Not traded publicly. Under RMBCA, they operate more like a partnership and don't have to do all the things real corporations have to do. Management is like a partnership, but to prevent one shareholder from making all decisions, majority of board has to agree with actions. To prevent a shareholder from giving shares to a third party some close corporations make them sell their shares first to the shareholders. When a shareholder dies the shareholder agreement can specify that shares are distributed proportionally. If one shareholder mismanages funds the remedy is for the other shareholders to be given the fair value of their shares.

What does it mean to pierce the corporate veil

Sometimes owners use a corporate energy to perpetrate a fraud circumvent the law or some other way accomplish an illegitimate objective. In the situations the court will ignore the corporate structure and expose the shareholders to personal liability. Only Pierce the Veil when the corporate privilege is abused for personal benefit or when the corporate business is treated so carelessly that it is indistinguishable from that of a controlling shareholder.

What are stocks?

Stocks or equity securities represent the purchase or ownership in the business firm two major types are common stock and preferred stock. Common stock provides an interest of the corporation with regard to one) control, two) earnings, three) not assets. Shareholders interest generally proportionate to number if she was here she can owns out of total number of shares issued. Have voting rights. Fishing firm not obligated to return principal amount nor do they have a guarantee dividend. Preferred stock is an equity security with preferences. Holders of preferred stock has priority over holders of common stock as to dividends and payment on the solution of the corporation. Holders of preferred stock may or may not have the right to vote. Preferred stockholders to receive fix dividends periodically.

What is the effect of an s corp election?

Taxed like a partnership. Tax savings because taxed at lower bracket and not corporate level. Losses can be used to offset shareholders income. Less flexibility. LLC is more enticing

How do shareholders benefit from corporation?

They can get dividends, or the company can reinvest in itself using retained earnings making their stock more valuable.

What is a corporations implied powers?

The corporation has implied power to perform all acts reasonably necessary to accomplish its corporate purposes. Implied power to borrow and lend funds within certain limits and to extend credit to parties with whom it has contracts. Corporate officers have power to bind corporation matters directly connected with ordinary business affairs of the enterprise.

How are corporations held accountable for employees criminal acts?

They are fined.

What are some alternative ways entrepreneurs seek financing?

Through venture capital in private equity capital.

What are the remedies for ultra vires acts?

Under ourMBCA shareholders can seek an injunction from a court to prevent the corporation from engaging in ultra vires act. Attorney general in state of incorporation can also bring action to obtain injunction against ultra liars transactions or to seek dissolution of the corporation. Corporation or shareholders can seek damages from the officers and directors who were responsible

What is a holding company?

Usually offshore at a place with low tax rates. Company offshores all stocks and shares to holding company for a lower tax rate.

What is a corps express powers?

Various things give express power. Here is the order of precedence if there ever is conflict: 1. US constitution 2. State constitutions 3. State statutes 4. Articles of corporation 5. Bylaws 6. Resolutions of board of directors

Is a corporation responsible for torts of employees?

Yes, responsdeat superior applies to corporations as well as agencies

public corp

a corp formed by the government to meet some political or governmental purpose. Like the post office