Business Law: Chapter 32

Scenarios that involve piercing 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, thinly capitalized. 3. The corporation is formed to evade a legal obligation. 4. Statutory corporate formalities (holding meetings) are not followed. 5. Personal and corporate interests are mixed together, or commingled, that the corporation has no separate identity.

What are the requirements for a de facto corporation to be legal?

1. A state statute exists under which the corporation can be validly incorporated. 2. The parties have made a good faith attempt to comply with the statute. 3. The parties have already undertaken to do business as a corporation.

7 types of corporations

1. Domestic 2. Foreign 3. Alien 4. Public 5. Publicly Held 6. Nonprofit 7. Close Corporation

Two types of powers for a corporation.

1. Implied 2. Express

4 requirements for the articles of incorporation

1. Name of the corporation. 2. Number of shares 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.

3 ways a benefit corporation differentiates themselves from traditional corporations.

1. Purpose - it's purpose is to benefit the public as a whole 2. Accountability - Shareholders determine whether the company has achieved a material positive impact. Under benefit enforcement proceeding, shareholders can sue the corporation if it fails to benefit the public. 3. Transparency - A benefit corporation must issue an annual benefit report on its overall social and environmental performance.

4 steps for incorporation (making a corporation)

1. Select a state of incorporation (Find the most advantageous area when it comes to tax) 2. Secure the corporate name 3. Prepare the articles of incorporation 4. File the articles of incorporation with the secretary of state.

If a conflict arises among various documents involved in a corporation, what is the order of priorities?

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.

3 problems that can arise from a close corporation.

1. The commingling of funds (corporate and personal). 2. The failure to hold board of directors meetings and record the minutes. 3. The shareholders' continuous personal use of corporate property.

6 Requirements for an S corporation

1. The corporation must be domestic (not foreign) 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 4. The corporation must have no more than one hundred shareholders 5. The corporation must have only one class of stock 6. No shareholder may be a non-resident alien (from another country)

Remedy for ultra vires act.

1. The corporation or its shareholders can seek damages

When a corporation earns profits, what are the two things that a corporation can do with it?

1. pass them on to shareholders in the form of dividends 2. retain them as profits (retained earnings will yield higher corporate profits and cause the company's stock price to rise.)

E 32.1

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E 32.6

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E32.2

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E 32.4

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Tort liability of a corporation

A corp is liable for the torts committed by its agents or officers within the course and scope of their employment. (follows the doctrine of respondeat superior)

Alien Corporation

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

S corporation

A corporation that can avoid the imposition of income taxes at the corporate level while retaining many of the advantages of a corporation (C corporations are the default corporations, and they're taxed more heavily than S corps)

Foreign Corporation

A corporation that operates outside of its home state

Domestic Corporation

A corporation that's formed and operated in its home state

Close Corporations

A corporation whose shares are held by members of a family or by relatively few persons. closely held, family, or privately held (no trading market for their shares, since it's too small) (operated like a partnership)

Does corporations have limited liability?

Absolutely shareholders are not personally liable for the obligations of the corporation beyond the extent of their investments (corporate veil)

Where are express powers found in a corporation?

Articles of incorporation

How are profits from the holding company taxed?

At the rate of the offshore jurisdiction where the company is registered. Holding company profits are not taxed at the rates applicable to the parent company or its shareholders (deposits of cash may earn interest that's taxed only at a minimal rate)

Nonprofit Corporations

Corporations formed for purposes other than making a profit. hospitals, charity, religious organizations

De Jure corps

De jure = rightful and lawful If a corporation has substantially complied with all conditions precedent to incorporation, then De Jure takes place.

Which state has been the most popular for incorporating.

Delaware least restrictive laws and a special court for corporations.

True or False? Under modern criminal law, a corporation is not held liable for criminal acts of the agents and employees.

False Corporations are held liable, but they can't be imprisoned (only fined)

True or False? Most corporations are public

False Most of them are private.

True or False? As soon as the original owner dies in a corporation, the corporation ends.

False, the body of shareholders can change overtime without it affecting the longevity of the corporation.

After the articles of incorporation are filed (and the incorporation starts), what's the first step?

First organizational meeting must be held.

De Facto corps

If there's a defect in the formation of the corporation that's substantial.

Important function of an organizational meeting.

Make/form bylaws (internal rules of management for the corporation)

Can a new corporation's name be the same as an existing corporation that's currently doing business?

No The firm may be liable for trade name infringment

Do the details about the firm's operations get covered in the articles of incorporation.

Not typically It's covered in the company's bylaws (internal rules of management adopted by the corp at it's first meeting)

Participating Preferred Stock

Preferred shares entitling the owner to receive 1. the preferred-stock dividend and 2. additional dividends after the corporation has paid dividends on common stock.

Redeemable, or Callable, Preferred Stock

Preferred shares issued with the express condition that the issuing corporation has the right to repurchase the shares as specified.

Cumulative Preferred Stock

Preferred shares on which required dividends not paid in a given year must be paid in a subsequent year before any common-stock dividends can be paid.

Convertible Preferred Stock

Preferred shares that, under certain conditions, can be converted into a specified number of common shares either in the issuing corporation or, sometimes, in another corporation.

Preferred stock

Shares of stock that have priority over common-stock shares as to payment of dividends and distribution of assets on dissolution. Dividend payments are usually a fixed percentage of the face value of the share. Preferred shares may or may not be voting shares.

What is double taxation?

The company pays tax on its profits, then when the profits are passed to the shareholders, the shareholders must also pay tax. (profits and dividends get taxed) major disadvantage of a corporation

If the articles did not name the directors (typical), then who holds the meeting?

The incorporators hold the meeting to elect the directors and adopt bylaws.

Articles of incorporation

The primary document needed to incorporate a business

What happens after the articles of incorporation are prepared and signed?

They are sent to the appropriate state official (usually the secretary of state) and the filing fee must be paid. (the secretary of state stamps the articles "Filed" and returns a copy of the articles to the incorporation.

If the articles of incorporation named the initial board of directors, what do the directors do?

They call the meeting to adopt the bylaws and complete the company's organization.

True or False? State statutes require that the secretary of state needs to run a check on the name for a corporation.

True

True or False? A corporation is recognized as a "person", and enjoys many of the same rights and privileges under state and federal law.

True Freedom of speech, no unreasonable search and seizures, due process, etc.

True or False? The corporation has the implied power to perform all acts reasonably necessary to accomplish its corporate purposes.

True It's an implied power a corporation has. (A corporation has the implied power to borrow funds, lend funds, and extend credit)

Common stock

Voting shares that represent ownership interest in a corporation. Common has the lowest priority with respect to payment of dividends and distribution of assets on the corporation's dissolution.

Corporation by Estoppel

When a business association holds itself out to others as being a corporation, but didn't make any effort to incorporate.

Professional Corporation

When professionals (such as physicians, lawyers, dentists, and accounts) incorporate. P.C.

When is piercing the corporate veil used?

When the corporate privilege is abused for personal benefit or when the corporate business is treated so carelessly that it's indistinguishable from that of a controlling shareholder. (1. privilege is abused, 2. corporation is treated carelessly)

Alter-Ego Theory

When the corporation was not operated as a separate entity, but was just another side (alter ego) of the individual or group that actually controlled the corporation.

When does a person have voting rights?

When they purchase common stock

E 32.7

Yay!

Can a corporation be formed with a de facto label?

Yes

When a corporation retains its profits or passes them on to the shareholders, are those earnings subjected to income tax?

Yes (failure to pay taxes can lead to suspension of the corporation, or could even dissolve a corporation)

Does the court hold each professional liable?

Yes, for any malpractice committed within the scope of business.

Can a shareholder sue the corporation?

Yes, they can also sue on behalf of the corporation. (Phillips and Nintendo)

Holding Company

a company whose business activity consists of holding share in another company (parent company)

Typical management of a close corporation

a single shareholder or a tightly knit group of shareholders usually hold the positions of directors and officers. operates more like a sole-proprietor or a partnership.

Typically, the holding company is established in a ____-tax or _____-tax offshore jurisdiction a. low, no b. high, low c. high, high d. low, low

a. low, no

Publicly Held Corporation

any corporation whose shares are publicly traded in a securities market (NYSE or NASDAQ)

ultra vires

beyond the power

IN a corporation, the responsibility for the overall management of the firm is entrusted to a _________

board of directors (the members are elected by shareholders)

Who does the board of directors hire to run business operations of a corporation?

corporate officers (and other employees)

Public corporation

corporation formed by the government to meet some political or governmental purpose. (U.S. postal service)

Private Corporations

created either wholly or in part for private benefit (profit).

Pierce the corporate veil

exposing the shareholders to personal liability (personal assets)

benefit corporation

for-profit corporation that seeks to have a material positive impact on society and the environment.

Types of owners that can be found in a corporation

individuals (natural persons) legalperson (artificial corporation)

Bonds

issued by business firms and by governments at all levels as evidence of the funds they are borrowing from investors (evidence of the funds that are borrowed from investors)

bond indenture

ledning agreement

Corporation

legal entity created and recognized by state law. can have one or more owners (shareholders) operates under a name distinct from the names of its owners

Are firms obligated to return a principal amount per share to each holder of a common stock?

no

In order to compete effectively today, Corps need an _____ presence

online

An S corporation is taxed like a ______

partnership (this corporation can avoid double-taxation)

shareholder agreement

provides proportional control when one of the original owners dies. Useful for closely-held corporations

Corporations are financed by the issuance and sale of corporate ______

securities (includes stocks [equity securities] and bonds [debt securities]).

maturity date

the date when the principal (face-value) is returned to the investor