Chapter 15: Corporations

ultra vires

A Latin term meaning "beyond the powers" that in corporate law, describes acts of management that are beyond the corporation's express and implied powers to undertake.

stock certificate

A certificate issued by a corporation evidencing the ownership of a specified number of shares in the corporation.

Stock warrants

A certificate that grants the owner the option to buy a given number of shares of stock, usually within a set time period. are rights to buy stock at a stated price by a specified date that are created by the company

close corporation

A corporation whose shareholders are limited to a small group of persons, often only family members. In a close corporation, the shareholders' rights to transfer shares to others are usually restricted.

Stocks (equity securities)

An ownership (equity) interest in a corporation, measured in units of shares.

Professional corporations

Professionals such as physicians, lawyers, dentists, and accountants can incorporate. are identified by the letters S.C. (service corporation), P.C. (professional corporation), or P.A. (professional association).

preemptive rights

Rights that entitle shareholders to purchase newly issued shares of a corporation's stock, equal in percentage to shares already held, before the stock is offered to outside buyers.

common stock

Shares of ownership in a corporation that give the owner of the stock a proportionate interest in the corporation with regard to control, earnings, and net assets. interest in regard to: - control (voting rights) - earnings - net assets

retained earnings

The portion of a corporation's profits that has not been paid out as dividends to shareholders. if invested properly, will yield higher corporate profits in the future and thus cause the price of the company's stock to rise

dividend

a distribution of corporate profits or income ordered by the directors and paid to the shareholders in proportion to their respective shares in the corporation. Dividends can be paid in cash, property, stock of the corporation that is paying the dividends, or stock of other corporations. dividends may be paid from the following sources: 1. Retained earnings. 2. Net profits. 3. Surplus.

public corporation

formed by the government to meet some political or governmental purpose such as the U.S. Postal Service, the Tennessee Valley Authority, and AMTRAK, are public corporations.

Select the State of Incorporation

individuals may look for the states that offer the most advantageous tax or other provisions. Another consideration is the fee that a particular state charges to incorporate, as well as the annual fees and the fees for specific transactions (such as stock transfers). Delaware has historically had the least restrictive laws and provisions that favor corporate management.

alien corporation

A designation in the United States for a corporation formed in another country but doing business in the United States. A corporation formed in another country (say, Mexico) but doing business in the United States is referred to in the United States

dividends

A distribution to corporate shareholders of corporate profits or income, disbursed in proportion to the number of shares held.

shareholder's derivative suit

A suit brought by a shareholder to enforce a corporate cause of action against a third party. The directors then have ninety days in which to act. Only if they refuse to do so can the derivative suit go forward.

nonprofit or not-for-profit corporations

Corporations formed for purposes other than making a profit Private hospitals, educational institutions, charities, and religious organizations 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.

foreign corporation

In a given state, a corporation that does business in the state without being incorporated there in. A corporation formed in one state but doing business in another is referred to in the second state

domestic corporation

In a given state, a corporation that does business in, and is organized under the law of, that state. by its home state (the state in which it incorporates)

proxy

In corporate law, a written or electronically transmitted form in which a stockholder authorizes another party to vote the stockholder's shares in a certain manner. Latin procurare, meaning "to manage, take care of").

S corporation

A close business corporation that has most corporate attributes, including limited liability, but qualifies under the Internal Revenue Code to be taxed as a partnership. 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 of the corporation must be individuals, estates, or certain trusts. Partnerships and nonqualifying trusts cannot be shareholders. Corporations can be shareholders under certain circumstances. 4. The corporation must have no more than one hundred shareholders. 5. The corporation must have only one class of stock, although all shareholders do not have to have the same voting rights. 6. No shareholder of the corporation may be a nonresident alien.

benefit corporation

A for-profit corporation that seeks to have a material positive impact on society and the environment. This new business form is available by statute in a growing number of states. 1. Purpose. Although the corporation is designed to make a profit, its purpose is to benefit the public as a whole (rather than just to provide long-term shareholder value, as in ordinary corporations). The directors of a benefit corporation must, during the decision-making process, consider the impact of their decisions on society and the environment. 2. Accountability. Shareholders of a benefit corporation determine whether the company has achieved a material positive impact. Shareholders also have a right of private action, called a benefit enforcement proceeding, enabling them to sue the corporation if it fails to pursue or create public benefit. 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. The report must be delivered to the shareholders and posted on a public Web site.

outside director

A member of the board of directors who does not hold a management position at the corporation.

inside director

A member of the board of directors who is also an officer of the corporation.

business judgment rule

A rule that immunizes corporate management from liability for decisions that result in corporate losses or damages if the decision-makers took reasonable steps to become informed, had a rational basis for their decisions, and did not have a contract of interest with the corporation.

Bonds (debentures)

A security that evidences a corporate (or government) debt. some debt is in the form of accounts payable and notes payable, which typically are short-term debts. Bonds are simply a way for the corporation to split up its long-term debt so that it can be more easily marketed.

Venture capital

Financing provided by professional, outside investors (venture capitalists) to new business ventures.

private equity capital

Funds invested by a private equity firm in an existing corporation, usually to purchase and reorganize it.

securities

Generally, stocks, bonds, and other items that represent an ownership interest in a corporation or a promise of repayment of debt by a corporation.

quorum

The number of members of a decision-making body that must be present before business may be transacted.

Preferred stock

Stock that has priority over common stock as to payment of dividends and distribution of assets on the corporation's dissolution.

piercing the corporate veil

The action of a court to disregard the corporate entity and hold the shareholders personally liable for corporate debts and obligations. 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 the controlling shareholder. 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, or it is too "thinly" capitalized—that is, it has insufficient capital at the time of formation to meet its prospective debts or other 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 commingled (mixed together) to such an extent that the corporation has no separate identity.

articles of incorporation

The document containing basic information about the corporation that is filed with the appropriate governmental agency, usually the secretary of state, when a business is incorporated. 1. The name of the corporation. 2. The number of shares the corporation is authorized to issue. (For instance, a company might state that the aggregate number of shares that the corporation has the authority to issue is five thousand.) 3. The name and address of the corporation's initial registered agent (the person designated to receive legal documents on behalf of the corporation). 4. The name and address of each incorporator.

bylaws

The internal rules of management adopted by a corporation or other association.

corporation

a legal entity created and recognized by state law It can consist of one or more natural persons (as opposed to the artificial legal person of the corporation) identified under a common name. A corporation can be owned by a single person, or it can have hundreds, thousands, or even millions of owners (shareholders) A corporation is recognized as a "person," and it enjoys many of the same rights and privileges under state and federal law that natural persons enjoy. the responsibility for the overall management of the firm is entrusted to a board of directors, whose members are elected by the shareholders. The board of directors hires corporate officers and other employees to run the daily business operations. One of the key advantages of the corporate form is the limited liability of its owners (shareholders). Whether a corporation retains its profits or passes them on to the shareholders as dividends, those profits are subject to income tax by various levels of government. corporate profits can be subject to double taxation. The company pays tax on its profits. Then, if the profits are passed on to the shareholders as dividends, the shareholders must also pay income tax on them.