Business Law: Chapter 19 (Corporations)

Corporate Earnings and Taxation

-Profits can either be kept as retained earnings or passed on to the shareholders as dividends. Double Layer of Taxation: -First layer: earnings generated by the Corporation subject to income tax. -Second layer: shareholders pay tax on dividends (profits passed on to them by the corporation).

S Corporation Requirements and Limitations

-Must be domestic. -Must have no more than 100 shareholders (none of whom can be a non-resident alien/foreign nationals). -Only one class of stock can be authorized (or issued). Another corporation cannot be a shareholder in this type of corporation unless it is "tax exempt".

Shareholders

-Acquisition of shares grants an equitable ownership interest in a corporation. -Shareholders generally have no right to manage the daily affairs of the corporation, but do so indirectly by electing directors. -Controlling shareholders owe a fiduciary duty to minority shareholders. -Must observe annual meeting formalities.

Fiduciary Duty of Care

-Act in Good Faith: exercise the care that an ordinarily prudent person would exercise in similar circumstances. -Duty to Make Informed Decisions. Become fully informed on corporate matters; investigate. -Duty to Exercise Reasonable Supervision (applicable to Directors). Supervise officers when work is delegated.

Shareholder Powers

-Approve all fundamental changes to the corporation. -Amending articles of incorporation or bylaws. -Approval of mergers or acquisition.

Classification of Corporations

-Domestic: does business within its state of incorporation. Foreign: formed in X state, doing business in Z state. -Foreign corporation must be authorized ("qualified") to do business in states outside its state of incorporation. -Alien: Entity formed in another country. -Public Corporations. (Such as United Postal Service and AMTRAK) -Non-profit (aka not-for-profit) Corporations. (Private hospitals, universities, charities, religious organizations) -Publicly-Held Corporation (aka Public Company) - Shares are publicly traded in a securities market. -Close (aka Closely Held) Corporations (frequently formed as "S" Corps) - Shares held by few shareholders (family members, for example, Hobby Lobby). More informal management (but must still comply with corporate formalities).

Limited Liability of Shareholders

-Generally, shareholders are not personally liable for corporate acts. -Exception: "Piercing the Corporate Veil": in certain situations, the limited liability protection can be pierced, holding the shareholders personally liable.

Fiduciary Duty of Loyalty

-Subordination of personal interests to the interests of the corporation. -No competition with Corporation. -No taking personal advantage of a "corporate opportunity." -Avoidance of conflicts of interest. -No insider trading. -No authorization of transactions detrimental to minority shareholders.

Incorporation Procedures

1. Prepare and File Articles of Incorporation: include number of shares to be authorized, identification of registered agent for service of legal process, name of incorporator, duration and purpose. 2. First Organizational Meetings After the corporation is "chartered" (created) it can do business. -Initial Meeting of the Shareholders: approve the bylaws (internal rules of management) and elect directors to serve on the Board of Directors. -Shareholder Meeting followed by Initial Meeting of the Board of Directors: hire officers and set compensation; ratify pre-incorporation contracts; authorize bank account creation; other foundational activities.

Business Judgment Rule

A corporate director or officer will not be liable to the corporation or to its shareholders for honest mistakes of judgement and bad decisions. -Corporate decision makers are not subjected to "second guessing" by shareholders or others; not expected to manage "in hindsight."

Liability for Criminal Acts

A corporation can be held liable for criminal acts of its agents/employees; it cannot be imprisoned, only fined. However, under the 'responsible officer' doctrine, corporate officers may go to prison.

Directors

A corporation is governed by a board of directors elected by the shareholders. Individual directors are not corporate agents, only the Board can act as an agent and bind the corporation. A director can also be a shareholder, especially in closely-held corporations. Few qualifications are required for directors

Corporation

Is a creature of state statute, an artificial "person." Can have one or more shareholders (comprised of natural persons or other businesses)

Rights/Privileges of a Corporation

Enjoys the same rights and privileges as a natural person: -Access to court systems. -Constitutional guarantees of free speech, due process, etc. -Hobby Lobby case: Supreme Court ruled that closely-held corporation (Green family) could exercise religious beliefs.

Committees of the Board of Directors

Executive Committee. Audit Committee. Nominating Committee. Compensation Committee. Litigation Committee.

Corporate Personnel

Responsibility for management of company rests with board of directors (elected by shareholders). Board of directors makes policy decisions and appoints officers to operate corporation on a day-to-day basis.

Corporate Officers/Executives

Responsible for managing the day-to-day operations of the corporation. Officers/executives 'serve at the pleasure' of the Board but owe fiduciary duties to company as well. Employment relationships of officers/executives are generally governed by contract law and employment law.

Piercing the Corporate Veil

When courts can hold shareholders personally liable in the interests of justice and fairness: -3rd party tricked into dealing with a corporation rather than the individual; corporation is formed to evade an existing legal obligation -Corporation is set up never to make a profit or remain insolvent or is under-capitalized. Statutory formalities are not followed. -Commingling of personal and corporate interests or assets.

Doctrine of Respondeat Superior (Tort Liability)

a corporation is liable for the torts committed by its agents (employees included) and officers within the course and scope of their employment. -A corporation can speak and act only through its agents and so must be accountable for any acts committed by one of its agents within his or her actual or apparent scope of authority.

"Subchapter S" Corporations (Similar to LLCs)

after meeting certain specifications to become one, this corporation can avoid the imposition of income tax at the corporate level (and avoid the "double taxation" challenge faced by regular "C" corporations). -Distributed "dividends" taxed to the shareholders as personal income