BLAW final

Among the numerous requirements for S corporation status, the following are the most important:

1. The corporation must be a domestic corporation. 2. The corporation must not be a member of an affiliated group of corporations. 3. The shareholders must be individuals, estates, or certain trusts and tax-exempt organizations. Partner-ships and nonqualifying trusts cannot be sharehold-ers. Corporations can be shareholders under certain circumstances. 4. The corporation must have no more than one hun-dred shareholders. 5. The corporation must have only one class of stock, although it is not necessary that all shareholders have the same voting rights. 6. No shareholder of the corporation may be a nonresi-dent alien.

Close Corporations

A close corporation is one whose shares are held by relatively few persons, often members of a family. Close corporations are also referred to as closely held, family, or privately held corporations. Most corporate enterprises in the United States fall into the category of close corporations. Usually, the members of the small group constitut-ing the shareholders of a close corporation are personally known to each other. Because the number of sharehold-ers is so small, there is no trading market for the shares. In practice, a close corporation is often operated like a partnership.

S Corporations

A close corporation that meets the qualifying requirements specified in Subchapter S of the Internal Revenue Code can choose to operate as an S corporation *A corporation will automatically be taxed under Subchapter C unless it elects S corporation status If a corporation has S corporation status, it can avoid the imposition of income taxes at the corporate level while retaining many of the advantages of a corporation, particularly limited liability An S corporation is treated differently than a regular corporation for tax purposes. An S corporation is taxed like a partnership, so the corporate income passes through to the shareholders, who pay personal income tax on it. This treatment enables the S corporation to avoid the double taxation imposed on regular corporations.

Rights of Directors

A corporate director must have cer-tain rights to function properly in that position, including the rights to participation, inspection, and indemnification

The Business Judgment Rule

A corporate director or officer will not be liable to the corporation or to its shareholders for honest mistakes of judgment and bad business decisions Courts give significant deference to the decisions of corporate directors and officers, and consider the reason-ableness of a decision at the time it was made, without the benefit of hindsight. Thus, corporate decision makers are not subjected to second-guessing by shareholders or others in the corporation The business judgment rule will apply as long as the director or officer: 1. Took reasonable steps to become informed about the matter 2. Had a rational basis for her or his decision 3. Did not have a conflict between her or his personal interest and the interest of the corporation.

Public corporation

A corporation formed by the government to meet some political or governmental purpose Cities and towns that incorporate are common examples In addition, many federal government organizations, such as the U.S. Postal Service, the Tennessee Valley Authority, and AMTRAK, are public corporations.

Alien Corporation

A corporation formed in another country (say, Mexico) but doing business in the United States

Foreign corporation

A corporation formed in one state but doing business in another

Outside director

A director who does not hold a management position

Inside director

A director who is also an officer of the corporation

A public corporation is NOT the same as a publicly held corporation

A publicly held corporation is any company whose shares are publicly traded in a securities market (like the New York stock exchange)

First Organizational Meeting to Adopt Bylaws

After incorporation, the first organizational meeting must be held. If the articles of incorporation named the initial board of directors, then the directors, by majority vote, call the meeting. If the articles did not name the directors (as is typical), then the incorporators hold the meeting to elect the directors and complete any other business necessary. Usually, the most important function of this meeting is the adoption of bylaws, which are the internal rules of management for the corporation. The bylaws typically describe such matters as voting requirements for shareholders, the election of the board of directors, and the methods of replacing directors. Bylaws also frequently outline the manner and time of holding shareholders' and board meetings.

Under modern criminal law, a corporation may be held liable for the criminal acts of its agents and employees

Although corporations cannot be imprisoned, they can be fined. (Of course, corporate directors and officers can be imprisoned, and many have been.) Corporations can face fines amounting to hundreds of millions of dollar (white-collar crimes)

shareholder agreement

An agreement between shareholders that restricts the transferability of shares, often entered into for the purpose of maintaining proportionate control of a close corporation.

Private corporations

Are created either wholly or in part for private benefit—that is, for profit Most corporations are private. Although they may serve a public purpose, as a public electric or gas utility does, they are owned by private persons rather than by a government

A corporation is liable for the torts committed by its agents (including most employees who deal with third parties) or officers within the course and scope of their employment.

Because corporations can be liable for their employ-ees' fraud and other misconduct, companies need to be careful about whom they hire and how much they monitor or supervise their employees. Some companies are using special software designed to predict employee misconduct before it occurs

Transfer of Shares in Close Corporations

By definition, a close corporation has a small number of share-holders. Thus, the transfer of one shareholder's shares to someone else can cause serious management problems. The other shareholders may find themselves required to share control with someone they do not know or like. To avoid this situation, a close corporation can restrict the transferability of shares to outside persons. Sharehold-ers can be required to offer their shares to the corporation or to the other shareholders before selling them to an out-side purchaser

Corporate Officers and Executives

Corporate officers and other executive employees are hired by the board of directors. At a minimum, most corporations have a president, one or more vice presidents, a secretary, and a treasurer. In most states, an individual can hold more than one office, such as president and secretary, and can be both an officer and a director of the corporation

Nonprofit Corporations

Corporations formed for purposes other than making a profit are called nonprofit or not-for-profit corporations Private hospitals, educational institutions, charities, and religious organizations, for instance, are frequently organized as nonprofit corporations The nonprofit corporation is a convenient form of organization that allows various groups to own property and to form contracts without exposing the individual members to personal liability

Crowdfunding

Crowdfund-ing is a cooperative activity in which people network and pool funds and other resources via the Internet to assist a cause or invest in a venture. Sometimes, crowdfunding is used to raise funds for charitable purposes, such as disaster relief, but increasingly it is being used to finance budding entrepreneurs Starting in 2016, Securities and Exchange Commis-sion (SEC) rules allow companies to offer and sell secu-rities through crowdfunding

Bonds

Debt securities, which represent the borrowing of funds. Bonds are issued by business firms and by governments at all levels as evidence of funds they are borrowing from investors Bonds normally have a designated maturity date—the date when the principal, or face amount, of the bond is returned to the bondholder. Bondholders also receive fixed-dollar interest payments, usually semiannually, dur-ing the period of time prior to maturity

Liability of Directors and Officers

Directors and officers are exposed to liability on many fronts. They can be held liable for negligence in certain circumstances, as previously discussed. They may also be held liable for the crimes and torts committed by themselves or by employ-ees under their supervision. Additionally, if shareholders perceive that the corpo-rate directors are not acting in the best interests of the corporation, they may sue the directors on behalf of the corporation.

Dissenting Directors

Directors' votes at board of direc-tors' meetings should be entered into the minutes. Some-times, an individual director disagrees with the majority's vote (which becomes an act of the board of directors). Unless a dissent is entered in the minutes, the director is presumed to have assented. If the directors are later held liable for mismanagement as a result of a decision, dis-senting directors are rarely held individually liable to the corporation. For this reason, a director who is absent from a given meeting sometimes registers a dissent with the sec-retary of the board regarding actions taken at the meeting.

Illegal Dividends

Dividends are illegal if they are improperly paid from an unauthorized account or if their payment causes the corporation to become insolvent (unable to pay its debts as they come due) Generally, shareholders must return illegal dividends only if they knew that the dividends were illegal when the payment was received (or if the dividends were paid when the cor-poration was insolvent) Whenever dividends are illegal or improper, the board of directors can be held personally liable for the amount of the payment

What is a major disadvantage of the corporation model?

Double taxation

Duties and Liabilities of Directors and Officers

Duty of Care 1. Act in good faith (honestly) 2. Exercise the care that an ordinarily prudent (careful) person would exercise in similar circumstances 3. Do what she or he believes is in the best interests of the corporation Duty to Make Informed Decisions Duty to Exercise Reasonable Supervision Duty of Loyalty - Loyalty can be defined as faithfulness to one's obligations and duties. In the corporate context, the duty of loyalty requires directors and officers to subordinate their personal interests to the welfare of the corporation Cases dealing with the duty of loyalty typically involve one or more of the following: 1. Competing with the corporation 2. Usurping (taking personal advantage of) a corporate opportunity 3. Pursuing an interest that conflicts with that of the corporation 4. Using information that is not available to the public to make a profit trading securities (insider trading) 5. Authorizing a corporate transaction that is detrimen-tal to minority shareholders 6. Selling control over the corporation

Right of Inspection

Each director can access the corporation's books and records, facilities, and premises. Inspection rights are essential for directors to make informed decisions and to exercise the necessary supervi-sion over corporate officers and employees. This right of inspection is almost absolute and cannot be restricted by the articles, bylaws, or any act of the board of directors

Quorum Requirements

For shareholders to act dur-ing a meeting, a quorum must be present. Generally, a quorum exists when shareholders holding more than 50 percent of the outstanding shares are present. State laws often permit the articles of incorporation to set higher or lower quorum requirements, however. In some states, obtaining the unanimous written consent of shareholders is a permissible alternative to holding a shareholders' meeting

De Jure Corporations

If a corporation has sub-stantially complied with all conditions precedent to incorporation, the corporation is said to have de jure (rightful and lawful) existence In most states and under RMBCA 2.03(b), the secretary of state's filing of the articles of incorporation is conclusive proof that all mandatory statutory provisions have been met

De Facto Corporations

If the defect in formation is substantial, such as a corporation's failure to hold an organizational meeting to adopt bylaws, the outcome will vary depending on the jurisdiction. Some states, including Mississippi, New York, Ohio, and Oklahoma, recognize the common law doctrine of de facto corporation In those states, the courts will treat a corporation as a legal corporation despite a defect in its formation if the following three requirements are met: 1. A state statute exists under which the corporation can be validly incorporated. 2. The parties have made a good faith attempt to com-ply with the statute. 3. The parties have already undertaken to do business as a corporation. In other states if there is a substantial defect in complying with the incorporation statute, the corporation does not legally exist, and the incorporators are personally liable.

A corporation does not have an automatic right to do business in a state other than its state of incorporation.

In some instances, it must obtain a certificate ofauthority in any state in which it plans to do business. Once the certificate has been issued, the corporation generally can exercise in that state all of the powers conferred on it by its home state. If a foreign corporation does business in a state without obtaining a certificate of authority, the state can impose substantial fines and sanctions on that corporation Note that most state statutes specify certain activities, such as soliciting orders via the Internet, that are not con-sidered "doing business" within the state. For instance, a foreign corporation normally does not need a certificate of authority to sell goods or services via the Internet or by mail.

Compensation of Directors

In the past, corporate directors were rarely compensated. Today, directors are often paid at least nominal sums. In large corporations, they may receive more substantial compensation because of the time, work, effort, and especially risk involved. Most states permit the corporate articles or bylaws to authorize compensation for directors. In fact, the Revised Model Business Corporation Act (RMBCA) states that unless the articles or bylaws provide otherwise, the board itself may set the directors' compensation Directors also receive indirect benefits, such as business con-tacts and prestige, and other rewards, such as stock options. In many corporations, directors are also chief corpo-rate officers (such as president or chief executive officer) and receive compensation in their managerial positions

Stocks

Issuing stocks is another way for corporations to obtain financing Stocks, or equity securities, represent the purchase of ownership in the business firm The true ownership of a corporation is represented by COMMON STOCK. Common stock provides an interest in the corporation with regard to (1) control, (2) earnings, and (3) net assets. A shareholder's interest is generally proportionate to the number of shares he or she owns out of the total number of shares issued. Any person who purchases common stock acquires voting rights—one vote per share held. PREFERRED STOCK is an equity security with preferences. Usually, this means that holders of preferred stock have priority over holders of common stock as to dividends and payment on dissolution of the corporation. The preferences must be stated in the articles of incorpora-tion. Holders of preferred stock may or may not have the right to vote.

Proxies

It usually is not practical for owners of only a few shares of stock of publicly traded corporations to attend a shareholders' meeting. Therefore, the law allows stockhold-ers to appoint another person as their agent to vote their shares at the meeting

Management of Close Corporations

Management of a close corporation resembles that of a sole proprietorship or a partnership, in that control is held by a single shareholder or a tightly knit group of shareholders. As a corporation, however, the firm must meet all specific legal requirements set forth in state statutes To prevent a majority shareholder from dominat-ing the company, a close corporation may require that more than a simple majority of the directors approve any action taken by the board.

Cumulative Voting

Most states permit, and many require, shareholders to elect directors by cumulative vot-ing, a voting method designed to allow minority share-holders to be represented on the board of directors. When cumulative voting is not required, the entire board can be elected by a majority of shares

Can only individuals be shareholders?

No, businesses can be as well

Piercing the Corporate Veil

Occasionally, the owners use a corporate entity to perpe-trate a fraud, circumvent the law, or in some other way accomplish an illegitimate objective. In these situations, the courts will ignore the corporate structure by piercing the corporate veil and exposing the shareholders to per-sonal liability Generally, courts 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 When the facts show that great injustice would result from a shareholder's use of a corporation to avoid indi-vidual responsibility, a court will look behind the corpo-rate structure to the individual shareholders

Limited Liability of Shareholders

One of the key advantages of the corporate form is the limited liability of its owners. Normally, corporate share-holders are not personally liable for the obligations of the corporation beyond the extent of their investments. In certain limited situations, however, a court can pierce the corporate veil and impose liability on share-holders for the corporation's obligations.

Corporate Financing

Part of the process of corporate formation involves financ-ing. Corporations normally are financed by the issuance and sale of corporate securities. Some corporations may also seek alternative financing through venture capital, private equity capital, and crowdfunding.

Private Equity Capital

Private equity firms pool funds from wealthy investors and use this private equity capital to invest in existing corporations. Usually, a pri-vate equity firm buys an entire corporation and then reorganizes it. Sometimes, divisions of the purchased company are sold off to pay down debt. Ultimately, the private equity firm may sell shares in the reorganized (and perhaps more profitable) company to the public in an initial public offering (IPO). Then the private equity firm can make profits by selling its shares in the company to the public.

Professional Corporations

Professionals such as physicians, lawyers, dentists, and accountants can incorporate. A professional corporation typically is identified by the letters P.C. (professional corporation), S.C. (service corporation), or P.A. (professional association). In general, the laws governing the formation and operation of professional corporations are similar to those governing ordinary business corporations. There are some differences in terms of liability, however, because the shareholder-owners are professionals who are held to a higher standard of conduct. For liability purposes, some courts treat professional corporations somewhat like partnerships and hold each professional liable for malpractice committed within the scope of the business by others in the firm.

Corporate Formation and Powers

Select the State of Incorporation - Because state corporate laws differ, individuals seeking to incorporate a business may look for the states that offer the most advantageous tax or other provisions. For reasons of convenience and cost, though, businesses often choose to incorporate in the state in which the corporation's business will primarily be conducted. Secure an Appropriate Corporate Name - The choice of a corporate name is subject to state approval to ensure against duplication or deception. Most state statutes require a search to confirm that the chosen corporate name is available. A new corporation's name cannot be the same as, or deceptively similar to, the name of an existing corporation doing business within the state. Prepare the Articles of Incorporation - The articles include basic information about the corporation and serve as a primary source of authority for its future organization and business functions. The person or persons who execute (sign) the articles are the incorporators. Generally, the articles must include the following information: 1. The name of the corporation 2. The number of shares of stock the corporation is authorized to issue 3. The name and street address of the corporation's initial registered agent and registered office. 4. The name and address of each incorporator. *Similarly, the articles do not provide much detail about the firm's operations, which are spelled out in the com-pany's bylaws File the Articles with the State - Once the articles of incorporation have been prepared and signed, they are sent to the appropriate state official, usually the secretary of state, along with the required filing fee. In most states, the secretary of state then stamps the articles "Filed" and returns a copy of the articles to the incorporators. Once this occurs, the corporation officially exists.

Who elects the board of directors in a corporation?

Shareholders

Shareholder Voting

Shareholders exercise ownership control through the power of their votes. Corporate business matters are pre-sented in the form of resolutions, which shareholders vote to approve or disapprove. Each common shareholder normally is entitled to one vote per share

Shareholders' Powers

Shareholders must approve fundamental changes affecting the corporation before the changes can be implemented. Hence, shareholder approval normally is required to amend the articles of incorporation or bylaws, to conduct a merger or dissolve the corporation, and to sell all or substantially all of the corporation's assets

Shareholders' Meetings

Shareholders' meetings must occur at least annually. In addition, special meetings can be called to deal with urgent matters. A corporation must notify its sharehold-ers of the date, time, and place of an annual or special shareholders' meeting at least ten days, but not more than sixty days, before the meeting date Notice of a special meeting must include a statement of the purpose of the meeting, and business transacted at the meeting is limited to that purpose

Holding Companies

Some U.S. corporations use holding companies to reduce or defer their U.S. income taxes. A holding company (sometimes referred to as a parent company) is a company whose business activity consists of holding shares in another company Typically, the holding company is established in a low-tax or no-tax offshore jurisdiction, such as the Cayman Islands, Dubai, Hong Kong, Luxembourg, Monaco, or Panama Sometimes, a U.S. corporation sets up a holding com-pany in a low-tax offshore environment and then trans-fers its cash, bonds, stocks, and other investments to the holding company. In general, any profits received by the holding company on these investments are taxed at the rate of the offshore jurisdiction where the company is registered. Once the profits are brought "onshore," though, they are taxed at the federal corporate income tax rate. Any payments received by the shareholders are also taxable at the full U.S. rates.

Corporation by Estoppel

Sometimes, a business association holds itself out to others as being a corporation when it has made no attempt to incorporate. In those situations, the firm normally will be estopped (prevented) from denying corporate status in a lawsuit by a third party. The estoppel doctrine most commonly applies when a third party contracts with an entity that claims to be a corpora-tion but has not filed articles of incorporation. It may also apply when a third party contracts with a person claiming to be an agent of a corporation that does not in fact exist. When justice requires, courts in some states will treat an alleged corporation as if it were an actual corporation for the purpose of determining rights and liabilities in particu-lar circumstances

Misappropriation of Close Corporation Funds

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

The Alter-Ego Theory

Sometimes, courts pierce the corporate veil under the theory that the corporation was not operated as a sepa-rate entity. Rather, it was just another side (the alter ego) of the individual or group that actually controlled the corporation. This is called the alter-ego theory The alter-ego theory is applied when a corporation is so dominated and controlled by an individual (or group) that the separate identities of the person (or group) and the corporation are no longer distinct. Courts use the alter-ego theory to avoid injustice or fraud that would result if wrongdoers were allowed to hide behind the protection of limited liability.

Venture Capital

Start-up businesses and high-risk enterprises often obtain venture capital financing. Venture capital is capital provided to new businesses by professional, outside investors (venture capitalists, typically groups of wealthy investors and securities firms). Venture capital investments are high risk—the investors must be willing to lose all of their invested funds—but offer the potential for well-above-average returns in the future. To obtain venture capital financing, the start-up busi-ness typically gives up a share of its ownership to the venture capitalists. In addition to funding, venture capitalists may provide managerial and technical expertise, and they nearly always are given some control over the new company's deci-sions. Shark Tank

Rights of Shareholders

Stock Certificates - evidenced owner-ship of a specified number of shares in the corporation Preemptive Rights - a shareholder receives a preference over all other purchasers to subscribe to or purchase a prorated share of a new issue of stock. Generally, preemptive rights must be exercised within a specific time period (usually thirty days) Stock Warrants - rights given by a company to buy stock at a stated price by a specified date Dividends - a distribution of corporate profits or income ordered by the directors and paid to the shareholders in proportion to their shares in the corporation Inspection Rights - shareholders in a corporation enjoy both common law and statutory inspection rights. The RMBCA provides that every shareholder is entitled to examine specified corporate records, including voting lists Transfer of shares - corporate stock represents an ownership right in intangible personal property. The law generally recognizes the owner's right to transfer stock to another person unless there are valid restrictions on its transferability, such as frequently occur with close corporation stock The Shareholder's Derivative Suit - when the corporation is harmed by the actions of a third party, the directors can bring a lawsuit in the name of the corporation against that party. If the corporate directors fail to bring a lawsuit, shareholders can do so "derivatively"

Election of Directors

Subject to statutory limita-tions, the number of directors is set forth in the corpo-ration's articles or bylaws. Historically, the minimum number of directors has been three, but today many states permit fewer. Normally, the incorporators may appoint the first board of directors in the articles of incorporation. If not, then the incorporators hold a meeting after incorporation to elect the directors and complete any other business necessary (such as adopting bylaws). The initial board serves until the first annual shareholders' meeting. Subsequent directors are elected by a majority vote of the shareholders A director usually serves for a term of one year—from annual meeting to annual meeting. Most state statutes per-mit longer and staggered terms. A common practice is to elect one-third of the board members each year for a three-year term. In this way, there is greater management continuity A director can be removed for cause—that is, for fail-ing to perform a required duty—either as specified in the articles or bylaws or by shareholder action. The board of directors may also have the power to remove a director for cause, subject to shareholder review. In most states, a director cannot be removed without cause unless the shareholders reserved the right to do so at the time of election When a vacancy on the board occurs, such as if a director dies or resigns, either the shareholders or the board itself can fill the vacant position, depending on state law or on the provisions of the bylaws. Often, for instance, an election is held, and shareholders vote to fill the vacancy

What happens when an individual purchases a share of stock in a corporation?

That person becomes a shareholder and an owner of the corporation the body of shareholders can change constantly without affecting the continued existence of the corporation (unlike partnerships)

Rules for Proxies and Shareholder Proposals

The Securities and Exchange Commission (SEC) regu-lates the purchase and sale of securities. The SEC has special provisions relating to proxies and shareholder proposals. SEC Rule 14a-8 provides that all sharehold-ers who own stock worth at least $1,000 are eligible to submit proposals for inclusion in corporate proxy materi-als. The corporation is required to include information on whatever proposals will be considered at the shareholders' meeting along with proxy materials. Only those proposals that relate to significant policy considerations, not ordi-nary business operations, must be included

Shareholders

The acquisition of a share of stock makes a person an owner and a shareholder in a corporation. Shareholders thus own the corporation. Although they have no legal title to corporate property, such as buildings and equipment, they do have an equitable (ownership) interest in the firm.

Board of Directors' Meetings

The board of direc-tors conducts business by holding formal meetings with recorded minutes. The dates of regular meetings are usually established in the articles or bylaws or by board resolution, and ordinarily no further notice is required Most states allow directors to participate in board of directors' meetings from remote locations. Directors can participate via telephone, Web conferencing, or Skype, provided that all the directors can simultaneously hear each other during the meeting

In a corporation, who is responsible for the overall management of the firm?

The board of directors these board of directors hire corporate officers and other employees to run the daily business operations

Role of Directors and Officers

The board of directors is the ultimate authority in every corporation. Directors have responsibility for all policy-making decisions necessary to the management of all corporate affairs. Additionally, the directors must act as a body in carrying out routine corporate business. The board selects and removes the corporate officers, determines the capital structure of the corporation, and declares dividends. Each director has one vote, and customarily the majority rules Directors are sometimes inappropriately characterized as agents because they act on behalf of the corporation. No individual director, however, can act as an agent to bind the corporation. As a group, directors collectively control the corporation in a way that no agent is able to control a principal. In addition, although directors occupy positions of trust and control over the corporation, they are not trustees, because they do not hold title to property for the use and benefit of others Few qualifications are required for directors. Only a handful of states impose minimum age and residency requirements. A director may be a shareholder, but that is not necessary (unless the articles of incorporation or bylaws require ownership interest)

Voting Lists

The corporation prepares a voting list before each shareholders' meeting. Ordinarily, only per-sons whose names appear on the corporation's stockholder records as owners are entitled to vote

Express Powers

The express powers of a corporation are found in its articles of incorporation, in the law of the state of incorporation, and in the state and federal consti-tutions. Corporate bylaws and the resolutions of the cor-poration's board of directors also establish express powers. The following order of priority is used if a conflict arises among the various documents involving a corporation: 1. The U.S. Constitution 2. State constitutions 3. State statutes 4. The articles of incorporation 5. Bylaws 6. Resolutions of the board of directors

Factors That Lead Courts to Pierce the Corporate Veil

The following are some of the factors that frequently cause the courts to pierce the corporate veil: 1. A party is tricked or misled into dealing with the corporation rather than the individual. 2. The corporation is set up never to make a profit or always to be insolvent. Alternatively, it is too thinly capitalized—that is, it has insufficient capital at the time it is formed to meet its prospective debts or potential liabilities. 3. The corporation is formed to evade an existing legal obligation 4. Statutory corporate formalities, such as holding required corporation meetings, are not followed. 5. Personal and corporate interests are mixed together, or commingled, to such an extent that the corporation has no separate identity.

In spite of its tax benefits, the S corporation has lost much of its appeal

The newer limited liability business forms (such as LLCs, LPs, and LLPs) offer similar tax advantages and greater flexibility

Piercing the Corporate Veil - Can be a problem for close corporations

The potential for corporate assets to be used for personal benefit is especially great in a close corporation. In such a corporation, the separate status of the corporate entity and the shareholders (often family members) must be carefully preserved. Practices that invite trouble for a close corporation include the commingling of corporate and personal funds and the shareholders' continuous personal use of corporate property (for instance, vehicles) Typically, courts are reluctant to hold shareholders in close corporations personally liable for corporate obliga-tions unless there is some evidence of fraud or wrongdo-ing.

Ultra Vires Doctrine

The term ultra vires means "beyond the power" In corporate law, acts of a corporation that are beyond its express or implied powers are ultra vires acts Cases involving ultra vires acts are some-times brought against nonprofit corporations or municipal (public) corporations

Although holders of preferred stock have a stronger position than common shareholders with respect to dividends and claims on assets, they will not share in the full prosperity of the firm if it grows success-fully over time.

True

Is a corporation a person?

Under u.s. law, a corporation is recognized under u.s. law as a person - an artificial legal person (vs natural person) enjoys many of the same rights and privileges as u.s. citizens - possess same right to court (can be sued or sue) - due process - free speech - freedom from unreasonable search and seizures

Duties and Liabilities of Shareholders

Watered Stock - When a corporation issues shares for less than their fair market value, the shares are referred to as watered stock. Usually, the shareholder who receives watered stock must pay the difference to the corporation (the shareholder is personally liable) Duties of Majority Shareholders - In some instances, a majority shareholder is regarded as having a fiduciary duty to the corporation and to the minority shareholders. This duty arises when a single shareholder (or a few shareholders acting in concert) owns a sufficient number of shares to exercise de facto control over the cor-poration. In these situations, the majority shareholder owes a fiduciary duty to the minority shareholders

Committees of the Board of Directors

When a board of directors has a large number of members and must deal with myriad complex business issues, meet-ings can become unwieldy Therefore, the boards of large, publicly held corporations typically create committees of directors and delegate certain tasks to these committees. By focusing on specific subjects, committees can increase the efficiency of the board Executive committee - handles interim management decisions between board meetings. It is limited to dealing with ordinary business matters and does not have the power to declare dividends, amend the bylaws, or authorize the issuance of stock Audit committee - is responsible for the selection, compensation, and oversight of the independent public accountants that audit the firm's financial records

Dividends and retained earnings

When a corporation earns profits, it can either pass them on to shareholders in the form of dividends or retain them as profits (retained earnings) The retained earnings, if invested properly, will yield higher corporate profits in the future Higher profits will cause the price of the company's stock to rise. Individual shareholders can then reap the benefits in the capital gains they receive when they sell their stock

Implied Powers

When a corporation is created, it acquires certain implied powers. Barring express constitutional, statutory, or other prohibitions, the corporation has the implied power to perform all acts reasonably necessary to accomplish its corporate purposes. For this reason, a corporation has the implied power to borrow and lend funds within certain limits and to extend credit to parties with whom it has contracts

Right to Indemnification

When a director becomes involved in litigation by virtue of her or his position, the director may have a right to indemnification (reimbursement) for the legal costs, fees, and damages incurred

The Directors' Failure to Declare a Dividend

When directors fail to declare a dividend, shareholders can ask a court to compel the directors to do so. To succeed, the shareholders must show that the directors have acted so unreasonably in withholding the dividend that their con-duct is an abuse of their discretion

Shareholder Proposals

When shareholders want to change a company policy, they can put their ideas up for a shareholder vote They do this by submitting a share-holder proposal to the board of directors and asking the board to include the proposal in the proxy materials that are sent to all shareholders before meetings.

Corporate taxation

Whether a corporation retains its profits or passes them on to the shareholders as divi-dends, those profits are subject to income taxation by various levels of government Failure to pay taxes can lead to severe consequences. The state can suspend the organi-zation's corporate status until the taxes are paid and can even dissolve the corporation for failing to pay taxes Another important aspect of corporate taxation is that corporate profits can be subject to double taxation. The company pays tax on its profits. Then, if the prof-its are passed on to the shareholders as dividends, the shareholders must also pay income tax on them The corporation normally does not receive a tax deduction for dividends it distributes. This double-taxation feature is one of the major disadvantages of the corporate form.

Can a shareholder sue a corporation and vice versa?

Yes A shareholder can sue the corporation and the corporation can sue the shareholder In certain circumstances, a shareholder can sue on behalf of the corporation as well

Domestic corporation

a corporation in the state in which it is incorporated

Benefit Corporations

a for-profit corporation that seeks to have a material positive impact on society and the environment Benefit corporations differ from traditional corporations in the following ways: 1. Purpose. Although a benefit corporation is designed to make a profit, its purpose is to benefit the public as a whole. 2. Accountability. Shareholders of a benefit corporation determine whether the company has achieved a material positive impact. 3. Transparency. A benefit corporation must issue an annual benefit report on its overall social and environmental performance that uses a recognized third-party standard to assess its performance.

Corporation

a legal entity, created and recognized by state law - can have more than one owner (shareholders) - operates under a name distinct from the name of its owners - liability is separate from shareholders

voting trust

an agreement (a trust contract) under which a shareholder assigns the right to vote his or her shares to a trustee, usually for a specified period of time.

Right to Participation

directors are entitled to participate in all board of directors' meetings and have a right to be notified of these meetings

quorum

minimum number of members of a body of officials or other group who must be present for business to be validly transacted Once a quorum is present, the directors transact business and vote on issues affecting the corporation Each director present at the meeting has one vote.15 Ordinary matters gen-erally require a simple majority vote, but certain extraordi-nary issues may require a greater-than-majority vote

Remedies for Ultra Vires Acts

shareholders can seek an injunction from a court to prevent (or stop) the corporation from engaging in ultra vires acts. The attorney general in the state of incorporation can also bring an action to obtain an injunction against the ultra vires transactions or to seek dissolution of the corporation. The corporation or its shareholders (on behalf of the corporation) can seek damages from the officers and directors who were responsible for the ultra vires acts

Securities

stocks and bonds—evidence an ownership interest in a corporation or a promise of repayment of debt by a corporation