Ch. 33 Nature, Formation, and Powers

Corporate attributes

(1) it is a legal entity; (2) it owes its existence to a State, which also regulates it; (3) it provides limited liability to its shareholders; (4) its shares of stock are freely transferable; (5) its existence may be perpetual; (6) its management is centralized; and it is considered, for some purposes, (7) a person and (8) a citizen.

Limited liability of corporations

- A corporation is a legal entity and therefore is liable out of its own assets for its debts. - Generally, the shareholders have limited liability for the corporation's debts—liability does not extend beyond the amount of their investment. - Under certain circumstances, a shareholder may be personally liable. - The limitation on liability will not affect the liability of a shareholder who committed the wrongful act. - A shareholder is also liable for any corporate obligations personally guaranteed by the individual member or manager.

A corporation as a legal entity

- A corporation is separate from its shareholders, with rights and liabilities entirely distinct from theirs. - It may sue or be sued by, and contract with, any other party, including any one of its shareholders. - A transfer of stock in the corporation from one individual to another has no effect upon the legal existence of the corporation. - Title to property belongs not to the shareholders, but to the corporation. - Even where a single individual owns all of the stock of a corporation, the existence of the shareholder is distinct from that of the corporation.

A corporation as a citizen

A corporation is NOT a citizen as the term is used in the Fourteenth Amendment, which provides, "No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States." A corporation is, however, regarded as a citizen of the State of its incorporation and of the State in which it has its principal office for the purpose of identifying diversity of citizenship between the parties to a lawsuit and thereby providing a basis for Federal court jurisdiction.

A corporation as a person

A corporation is considered a person within the provision in the Fifth and Fourteenth Amendments that no "person" shall be "deprived of life, liberty, or property without due process of law" and in the Fourteenth Amendment where no State shall "deny to any person within its jurisdiction the equal protection of the laws." A corporation also enjoys the right to be secure against unreasonable searches and seizures, as provided for in the Fourth Amendment. However, a corporation is not considered to be a person within the Fifth Amendment's clause that protects a "person" against self-incrimination.

liability for torts and crimes

A corporation is liable for the torts its agents commit in the course of their employment. The doctrine of ultra vires, even in those jurisdictions where it is permitted as a defense, does not apply to wrongdoing by the corporation. A corporation also may be found liable for fraud, false imprisonment, malicious prosecution, libel, and other torts, though some States hold the corporation liable for punitive damages only if it authorized or ratified the agent's act.

A corporation as a creature of the state

A corporation may be formed only by substantial compliance with a State incorporation statute. Every State has a general incorporation statute authorizing the Secretary of State to issue a certificate of incorporation or charter upon compliance with its provisions. A corporation's charter and the provisions of the statute under which it is formed constitute a contract between it and the State.

ultra vires acts

Any action or contract that is not within the scope and type of acts which the corporation is legally empowered to perform is ultra vires. Under the modern approach, courts allow the ultra vires defense in cases in which the contract is wholly executory on both sides. A corporation having received full performance from the other party to the contract is not permitted to escape liability by ultra vires. Conversely, the defense of ultra vires is unavailable to a corporation suing for breach of a contract that has been fully performed on its side.

statutory approach to corporations

Corporate existence begins either upon the filing of the articles of incorporation or their acceptance by the Secretary of State. The Revised Act and most States provide that the filing or acceptance of the articles of incorporation by the Secretary of State is conclusive proof that the incorporators have satisfied all conditions. This applies even if the articles of incorporation contain mistakes or omissions.

piercing the corporate veil

Going behind the corporate entity to confront those seeking to insulate themselves from personal accountability and the consequences of their wrongdoing. Courts will disregard the corporate entity when it is used to defeat public convenience, commit a wrongdoing, protect fraud, or circumvent the law. Courts have pierced the veil most frequently in regard to closely held corporations and parent/subsidiary relationships. In most cases, courts uphold the separateness of corporations.

articles of incorporation

Or charter, is generally a rather simple document that under the Revised Act must include the name of the corporation, the number of authorized shares, the street address of the registered office and the name of the registered agent, and the name and address of each incorporator. To form a corporation, the charter must be filed with the Secretary of State and then becomes the basic governing document of the corporation, so long as its provisions are consistent with State and Federal law.

Centralized management of a corporation

Shareholders of a corporation elect a board of directors to manage the business of the corporation. The board appoints officers to run the day-to-day operations. Neither the directors nor the officers (collectively referred to as management) need be shareholders, therefore it is possible, and in large corporations typical, for ownership and management to be separate.

subchapter s corporation

Subchapter S of the Internal Revenue Code permits a corporation to elect to be taxed essentially as though it were a partnership. A corporation's income is taxed only once at the individual shareholder level. Requirements: (1) it must be a domestic corporation; (2) it must have no more than one hundred shareholders; (3) each shareholder must be an individual, or an estate, or certain types of trusts; (4) no shareholder may be a nonresident alien; and (5) it may have only one class of stock, although classes of common stock differing only in voting rights are permitted.

bylaws

The rules and regulations that govern its internal management. Because bylaws are necessary to the organization of the corporation, their adoption is one of the first items of business at the organizational meeting held promptly after incorporation. Under the Revised Act, either the incorporators or the board of directors may adopt the bylaws. Bylaws do not have to be publicly filed. Under the Revised Act, the shareholders and board of directors may amend or repeal the bylaws

selection of state of incorporation

Usually incorporated in the State in which a corporation intends to be located and to transact all or the principal part of its business. Nevertheless, a corporation may be formed in one State and have its principal place of business and conduct all or most of its operations in another State or States by obtaining a certificate of authority to transact business in those States. The principal criteria in selecting a State for incorporation include: flexibility accorded management, the rights granted to shareholders, the protection provided against takeovers, the limitations imposed upon the issuance of shares, the restrictions placed upon the payment of dividends, and organizational costs such as fees and taxes.

Perpetual existence of a corporation

a general presumption in corporation law that a corporation will exist forever; i.e., most organizations do not have a specific date fixed for termination.

domestic v. foreign corporations

domestic: considered domestic in the State in which it is incorporated. foreign: considered foreign in every other State or jurisdiction. - A corporation may not do business, except for acts in interstate commerce, in a State other than the State of its incorporation without the permission and authorization of the other State. - Every State, however, provides for the issuance of certificates of authority that allow foreign corporations to do business within its borders and for the taxation of such foreign businesses. Obtaining a certificate involves filing with the Secretary of State, paying fees, and designating a resident agent. Doing business within a particular State makes the corporation subject to local litigation, regulation, and taxation.

free transferability of corporate shares

in the absence of contractual restrictions, shares in a corporation may be freely transferred by way of sale, gift, or pledge

profit v. nonprofit corporations

profit: founded for the purpose of operating a business for profit from which payments are made to the corporation's shareholders in the form of dividends. nonprofit: although it may make a profit, the profit may not be distributed to members, directors, or officers but must be used exclusively for the charitable, educational, or scientific purpose for which the corporation was organized (private schools, library clubs, athletic clubs, fraternities, sororities, and hospitals).

public v. private corporations

public: created to administer a unit of local civil government, such as a county, city, town, village, school district, or park district, or one created by the United States to conduct public business (Tennessee Valley Authority or the Federal Deposit Insurance Corporation). Usually is created by specific legislation, which determines the corporation's purpose and powers. private: founded by and composed of private persons for private purposes and has no government duties. A private corporation may be for profit or nonprofit.

publicly held v. closely held corporations

publicly held: Shares are owned by a large number of people and are widely traded. No accepted minimum number of shareholders, but any corporation required to register under the Federal Securities and Exchange Act of 1934 is considered to be publicly held. Corporations that have issued securities subject to a registered public distribution under the Federal Securities Act of 1933 usually are also considered publicly held. closely held: outstanding shares of stock are held by a small number of persons who often are family, relatives, or friends. Shareholders are active in the management and control of the business. Accordingly, they are concerned about the identities of their fellow shareholders, a concern that frequently leads shareholders to restrict the transfer of shares to prevent "outsiders" from obtaining stock in a closely held corporation.