Chapter 38 Corporations: Formation and Financing
defective corporation; shareholders
A corporation in which there was an error or omission during the incorporation process; Who may be liable for this corporation's actions?
articles of incorporation; name of the corporation, address of the registered office, name of the registered agent (who receives legal documents on behalf of the corporation), names and addresses of incorporators
The third legal activity in the corporation formation process: the creation of this document, providing basic information about the corporation; What 4 things must it include, according to the RMBCA?
preferred stock
Type of equity security: securities in which the owners enjoy preferences in the distribution of assets and dividends, they usually receive a percentage of dividends associated with the face value of their stock, and they will receive dividends before other stock owners do
common stock
Type of equity security: securities in which the owners own a portion of the corporation but do not enjoy any preferences, and is entitled to corporate dividends in proportion to the number of stocks they own and has the right to vote in corporate elections
unsecured bonds (debentures); secured bonds (mortgage bonds); income bonds; convertible bonds; callable bonds
Types of bonds issued by corporations: no assets support the corporations' obligation to repay the face value of the unsecured bonds; Specific property supports the corporations' obligation to repay secured bonds; A corporation pays interest on these in proportion to its earnings; Shareholders may exchange their these for shares of company stock; Corporations may call in and repay these bonds at specific times
shareholders only report their income from the corporation once as personal income, shareholders may deduct corporate losses from their personal income (which reduces their taxes in case of loss), when a shareholder is part of a lower tax bracket than non-S corporations, the entire corporation is taxed at this lower rate even if dividends are retained
What are the 3 tax advantages of S corporations?
cannot have more than 100 shareholders, only individuals/trusts/corporations can be shareholders (not partnerships), can only issue one class of shares (but need not have identical voting rights), must be domestic corporations, no shareholder can be a nonresident alien
What are the 5 requirements that an S corporation must meet?
perpetual existence, to sue and be sued, to acquire property/make contracts, to lend and borrow money, to make charitable donations, to establish rules for managing the corporation; to execute express powers, to execute powers given in the statement of corporate purpose in the articles of incorporation
What are the 6 express powers of a corporation? What are the 2 implied powers?
articles of incorporation, state incorporation statutes
What are the only 2 sources from where the authority possessed by corporations is derived?
issuing and selling corporate securities
What is the most common way by which corporations obtain funding?
certificate of incorporation
A document issued by the secretary of state certifying that the corporation is incorporated in the state and authorized to conduct business
debt securities (bonds); corporations usually pay holders fixed-dollar interest payments before the maturity date
A form of corporate financing: loans to a corporation from another party; Why are they often called fixed-income securities?
equity securities
A form of corporate financing: shares of stock through which stock owners own part of the corporation, thus giving them a voice in the firm's control
de jure corporation; no one
A response to defective incorporation: deemed by the courts to be this, a corporation that has met the substantial elements of the incorporation process but made minor errors; Who has the power to challenge this status in court?
de facto corporation; the state through an action of quo warranto
A response to defective incorporation: deemed by the courts to be this, a corporation that has not substantially met the requirements of the state incorporation statute, but is recognized as a corporation for most purposes to avoid unfairness to third parties who believed it was properly incorporated; Who has the power to challenge this status in court?
corporation by estoppel
A response to defective incorporation: deemed by the courts to be this, in which the corporation cannot deny its corporate status during a lawsuit for breach of contract
piercing the corporate veil
A response to defective incorporation: the act of the courts to impose personal liability on shareholders if they have used their corporation to engage in illegal or wrongful acts
novation
An agreement between the corporation, the promoter, and a third party to substitute the third party for one of the two original parties in a contract and terminating the rights under it
certificate of authority
Because a corporation can incorporate in only one state, this must be obtained in each of the other states in which a corporation does business if they want to operate there
liability for officers and employees; respondeat superior
Characteristic of a corporation: because the relationship between corporations and their directors/officers/employees is an agency relationship, corporations are liable for torts and crimes committed by their agents during the scope of their employment; What is this doctrine called?
corporate taxation; dividends
Characteristic of a corporation: because they are separate legal entities, government taxes their income directly through federal and state taxes; A way in which corporations can distribute income to shareholders, though shareholders must pay taxes on them too
limited liability
Characteristic of a corporation: corporations, not their shareholders, assume liability for corporate actions, and thus shareholders' liability is limited to their investment in the corporation
free transferability of corporate shares
Characteristic of a corporation: shareholders can sell their shares or give them to charity at will
creature of the state
Characteristic of a corporation: state incorporation statutes establish the requirements for corporate formation, and each individual corporation's charter creates a contract between that corporation and the state
perpetual existence; articles of incorporation
Characteristic of a corporation: the corporation continues to exist if shareholders, corporate directors, or officers withdraw or die; The document a corporation files with the state explaining its organization that may include a restriction on the duration of the corporation, or otherwise it will exist indefinitely
centralized management
Characteristic of a corporation: unless the articles of incorporation specify otherwise, shareholders do not participate in corporate management but instead elect a board of directors that select officers to manage the day-to-day business of the corporation
they exist separately from their shareholders and thus can sue and be sued
Characteristic of a corporation: what does it mean to declare corporations to be legal entities under U.S. Law?
due process, search and seizure, free speech (greater protections for corporate political speech than corporate commercial speech)
Characteristic of a corporation: what rights do corporations have that are the same as those of legal persons (3)?
public corporation; private corporation
Classification of corporations: a corporation created by the government to help administer law, typically for the purpose of fulfilling specific government duties; a corporation created by private persons for private purposes, and do not have government duties
domestic corporation; foreign corporation; alien corporation
Classification of corporations: a corporation in the particular state in which it is incorporated; a corporation in states in which it conducts business but is not incorporated; a business incorporated in another country
for-profit corporations; nonprofit corporations
Classification of corporations: a corporation whose objective is to operate for profit, and shareholders seeking to make a profit purchase the stock these corporations issue; a corporation that may earn profits, but do not distribute them to shareholders, and instead provide services to their members and reinvest most of their profits in the business
publicly held corporation; closely held corporation (aka close, family, privately held)
Classification of corporations: a corporation whose stock is available to the public; a corporation that generally does not offer stock to the general public
professional corporation; doctors for medical malpractice
Classification of corporations: a group of professionals practicing; In what circumstance may courts impose personal liability on members?
S corporation
Classification of corporations: a particular type of closely held corporation that enjoys the tax status of partnerships
publicly held; closely held
Do publicly held or closely held corporations account for the vast majority of corporate assets and revenues? Are most corporations in the U.S. publicly held or closely held?
each share is worth one vote; cumulative voting
How are common stockholders usually permitted to vote in corporate elections?; An alternate method
when there is a clause stating that the corporation's adoption of the contract terminates the promoters' liability, when the corporation/promoter/third party enter into a novation
In what 2 cases are promoters not personally liable if a corporation does accept a preincorporation contract?
as continuing offers from the subscribers to buy stock in the corporation that may be revoked anytime, as contracts among subscribers that cannot be revoked unless all subscribers consent; subscribers cannot revoke subscription agreements for 6 months unless the agreements provide otherwise or all subscribers consent
In what 2 ways to courts interpret subscription agreements? What does the RMBCA say?
bonds; stock
Not all corporations issue (bonds/stock), but they all issue (bonds/stock)
Revised Model Business Corporation Act
Provides the basis of most state regulatory statutes for corporations, adopted at least in part by 25 states
bylaws; articles of incorporation
Rules and regulations that govern the corporation's internal management, adopted by shareholders at the first organizational meeting; What determines who has the power to amend these after the meeting (shareholders/directors/both)
selection of corporate name; corporation, company, limited, incorporated; name must be distinguished from all domestic or foreign corporations licensed to do business within the state
The first legal activity in the corporation formation process: the corporation must choose a name that is subject to the approval of the state; What 4 terms do states require corporations pick from to attach to the end of the business name to indicate the firm is incorporated? What requirement protects third parties from confusion over similar names?
organizing and promoting the corporation; promoters; subscribers; subscription agreements
The first organizational activity in the corporation formation process; One of the groups of people responsible for the organization of the corporation, they begin the process by arranging for necessary capital, financing, and licenses; The other group of people responsible for the organization of the corporation, they offer to purchase stock during the incorporation process and become shareholders once the corporation incorporates or accepts the purchase offer; Agreements made between these two groups of people
first organizational meeting
The fourth legal activity in the corporate formation process: the meeting of shareholders to elect the corporate board of directors, pass corporate bylaws, and carry out other corporate business
incorporator; no (to all); to sign the articles of incorporation
The second legal activity in the corporation formation process: the selection of this individual, who applies to the state for incorporation on behalf of a corporation; Is there a limit/minimum requirement for the number of these individuals in a corporation? Do they have to be promoters or subscribers? Do they have to have an interest in the company? What is their only duty, generally speaking?
selecting a state for incorporation; Delaware (courts are experienced in corporate law, gives extensive rights to management in the event of a takeover; the state in which most of their shareholders live
The second organizational activity in the corporation formation process; In what state are over half of all publicly held corporations and Fortune 500 companies incorporated? In what state are most closely held and professional corporations incorporated?
cumulative; convertible; redeemable (callable); participating
Types of preferred stock: requires that if a corporation cannot pay the required dividends in a given year, it must pay them in the next year before it pays any common stock; Allows the stock's owner to convert shares into common stock at any time; Permits the issuing corporation to buy shares back from shareholders in certain circumstances; Entitles the stock's owner to both preferred stock dividends and additional dividends after the corporation has paid out common stock
promoters, subscribers, and incorporator made a good-faith attempt to comply with the incorporation statute, the organization has already conducted business as a corporation
What 2 requirements must a de facto corporation meet?
corporation lacked adequate capital when formed, corporation did not follow statutory mandates regarding corporate business, shareholders personal interests and corporate interests are commingled to the point where the corporation has no separate identity, shareholders use the corporation to commit fraud
What 4 circumstances may lead courts to pierce the corporate veil?
many shareholders, managers do not own large percentages of the stock, sellers of the stock do not face many transfer restrictions
What are 3 common characteristics of a publicly held corporations?
dividends, increased selling price of the stock
What are the 2 forms that shareholders' profit may take if the firm prospers?
general organizational activities, legal activities
What are the 2 steps in the corporation formation process?
prepare the incorporation papers, enter into contracts for the corporation, are held liable when problems with preincorporation contracts arise; no because there is no principal that exists yet
What are the 3 responsibilities/characteristics of promoters? Are they agents of the infant corporation?
