B. Law Ch. 19

Corporations whose stock is not publicly traded. Typically, shares are held by a small number of shareholders who know each other.

"close corporations" "privately held corporations"

Management responsibilities of directors

- Corporate policies - Appointment and removal of all corporate officers and setting officers' compensation - Final decisions; including whether to distribute dividends, and if so, in what amount

Prohibited actions in order to fulfill duty of loyalty

- Directors cannot use corporate funds or confidential information for personal gain - Competing with the corporation - Taking of a "corporate opportunity" - Having conflicts of interests with the corporation - Engaging in insider trading - Approving transactions that re detrimental to minority shareholders.

Privately held corporation characteristics

- Informal management; shareholders are often directors and officers - Shareholder agreements that restrict transfers of shares - Generally subject to state corporation laws, but some statutory formalities, such as annual shareholder meeting, may be relaxed

Duty of Care includes what obligations?

- Make informed and reasonable decisions - Rely on competent consultants and experts - Exercise reasonable supervision for work delegated to officers and employees - Attend meetings - Directors who disagree with the majority should enter their dissent in the minutes

IRS restricts fro making an S Corp election include

- No more than 100 shareholders - Only one class of stock may be issued - Cannot be part of an affiliated group -Shareholders must be individuals, estates, or trusts and certain tax-exempt organizations

Rights of directors

- Participate in corporate decisions - Inspect corporate books and records - Indemnification --> If a director is sued for acts as director, the corporation should guarantee reimbursement (indemnification) and/or purchase liability to protect the board from personal liability

Corporation

A separate legal entity created under state law.

What is the first thing a corporation does after incorporation

Adopts its bylaws

What must be filed for corporation formation?

Articles of Incorporation (called a Charter in TN) with the Secretary of State in the state of the incorporation

How can stock be purchased?

Directly from the company (as in an IPO) or from other shareholders

How is ownership of a corporation represented?

By shares of stock (shareholders), they can change constantly without affecting the continued existence of the corporation (continuity)

A written set of rules that govern the internal operations of the corporation

Bylaws

Holding companies

Companies used to move tax location (Burger King)

What are public corporations?

Corporations organized by governments to meet governmental purposes (e.g. TVA, AMTRAK)

Corporate profits ("net income") distributed to shareholders

Dividends

Directors/officers are expected to act in good faith, using prudent business judgment, and in the best interests of the corporation. Failure to exercise due care may subject individual officers to personal liability for negligence.

Duty of Care

Putting the welfare of the corporation before personal interests.

Duty of Loyalty

What type of corporations are most corporations?

For-Profit

Can a corporation incorporate in more than one state?

NO

Who runs the corporation on a day to day basis?

Officers (hired by board of directors)

How do shareholders of S-corps report their share of corporate income?

On their individual tax returns

When can dividends be distributed?

Only if they are "declared" by the board of directors

When a court, in the interest of justice or fairness, ignores the corporate structure and holds shareholders personally liable for the corporation's debts

Piercing the corporate veil

What are shareholders liable and not liable for?

Shareholders are not liable for the debts, contracts, or torts of the corporation. The limited liability means all they can lose is their investment in the stock.

A corporation whose shares are traded in a securities market

Publicly held corporation

What can a corporation do to do business in other states besides the one where it has incorporated?

Register as a foreign corporation by apply for a certificate of authority

A regular for-profit corporation that makes a special IRS elections to be taxed like a partnership. This election lets the corporation avoid "double taxation" at the federal level

S Corporation

Who elects the board of directors?

Shareholders

Who elects the board of directors?

Shareholders, voting is generally based on the number of voting shares owned

How are corporations taxed?

Taxed by federal and state governments on their income (regardless of whether they distribute it to shareholders)

What does it meant for directors and officers to be fiduciaries of a corporation?

They owe ethical and legal duties to the corporation and shareholders

Can officers/executives be terminated without cause?

Yes, but may be entitled to compensation (severance pay) if terminated without cause pursuant to an employment agreement

Can shareholder dividends be taxed?

Yes, counts as part of their income

Can a directors also be a shareholder and/pr an officer?

Yes, officers who serve as directors are "inside directors"

Corporation Key Advantages

ability to raise capital via sale of stock, continuity of life, and limited liability of owners

Who manages a corporation?

board of directors

A common law legal doctrine that protects a director or officer from liability for consequences of a good-faith business decision that may turn out to be harmful or unprofitable for the corporation

business judgment rule

A corporation that incorporated in that state

domestic corporation

Disadvantages of Corporations

double taxation of business income, cost and complexity of formation and compliance, management of constraints

Person(s) who execute the articles of incorporation

incorporators (typically the owners or their attorney)

Official record of the corporation, minutes of meetings and written consents are kept in here

minute book

Double Taxation

refers to the fact that corporations pay income tax on their earnings, and when those earning are distributed in the form of dividends, shareholders pay income tax on the dividends they actually receive

Specific person in the state authorized to receive any legal notice and documents from state and/or 3rd parties

registered agent/office

Corporate profits ("net income") kept by the corporation for use in the business

retained earnings

Corporate actions that are beyond its express or implied powers

ultra vires acts