Business Law Chapter 4
Benefit corporations differ from traditional corporations in the following three ways
-Purpose: benefit the public -Accountability: achieve material positive impact (benefit enforcement proceeding) -Transparency: Annual report on overall social and environmental performance
Corporate Personnel
-Responsibility for overall management of company rests with board of directors (elected by shareholders). -Board of directors makes policy decisions and hires officers to run corporation on a daily basis.
Criminal Acts
-Under modern criminal law, a corporation may also be held liable for the criminal acts of its agents and employees, provided the punishment is one that can be applied to the corporation. -Corporations cannot be imprisoned, they can be fined.
Transfer of Shares in Close Corporations
-cause serious management problems -the other shareholders may find themselves required to share control with someone they do not know or like. EX: Three brother Terry, Damon, and Henry
Incorporation Procedures
1. Select a state of incorporation 2. Secure the corporate name 3. Prepare the articles of incorporation 4. File the articles of incorporation with the secretary of state
publicly held corporation
A corporation that may have thousands of stockholders and whose stock is traded on a national securities market.
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.
Promotional activities
Before corporation is formed, promoters are the persons who take the preliminary steps of organizing the venture and attracting investors via subscription agreements. EX: Jade Sorrel
Dividends
Company's share profits to the shareholders based on the corporation's performance.
De Facto Corporation
Corporation that has not met the requirements of state incorporation statute, but courts recognize it as a corporation for most purposes to avoid unfairness to third parties who reasonably believed it was properly incorporated
de jure
by law
Corporate Taxation
can be taxed twice, first to corporation, then to shareholders via dividends
Nonprofit Organizations
corporations that focus on providing a service rather than earning a profit but are not owned by a government entity -private hospitals -educational institutions -charities -religious organizations
Bonds
debt securities, represent the borrowing of funds by firms (and governments). -Bonds are issued by business firms and by governments at all levels as evidence of the funds they are borrowing from investors.
De Jure Corporation
if a corporation has substantially complied with all conditions precedent to incorporation
preferred stock
is an equity security with preferences. Usually, this means that holders of preferred stock have priority over holders of common stock as to dividends and payment on dissolution of the corporation.
S corporation
it can avoid the imposition of income taxes at the corporate level while retaining many of the advantages of a corporation like limited liability
Effect of S Election
less tax
Select the state of incorporation
look for -advantageous tax -incorporation provisions -annual fees -Delaware has historically had the least restrictive laws and provisions that favor corporate management.
venture capital
money invested to finance a new firm
close corporation
one whose shares are held by members of a family or by relatively few persons
Shareholders
owners of a corporation
Earnings
Firms are not obligated to return a principal amount per share to each holder of common stock because no firm can ensure that the market price per share of its common stock will not decline over time.
private equity capital
Funds invested by a private equity firm in an existing corporation, usually to purchase and reorganize it.
The Limited Liability of Shareholders
General rule of corporate law that provides that shareholders are generally liable only to the extent of their capital contributions and are not personally liable for the debts and obligations of the corporation.
Corporate Financing
through Bonds, Stocks, loans, and investments
Corporate Earnings and Taxation
when a corporation earns profits, it can either distribute them to its shareholders in the form of dividends or retain the profits.
Ultra Vires Doctrine
"beyond the powers" which mean that certain acts done by the corporation are beyond its express or implied powers
Common stocks
- The true ownership of a corporation - Common stock provides a proportionate interest in the corporation with regard to 1.) control, 2.) earnings, 3.) net assets.
When a corporation's actions exceed its stated purpose
- made for unauthorized purposes -most private corps. are organized for "any legal business" and do not state a specific purpose, so the ultra vires doctrine has declined in importance. -Cases that allege ultra vires acts usually involve nonprofit corporations or municipal (public corporations). Ex: The Armenian Genocide Museum and Memorial (AGM&M).
First Organizational Meeting to Adopt Bylaws
-After the corporation is "chartered" (created) it can do business. -At meeting, shareholders should approve the bylaws, elect directors, hire officers and ratify pre-incorporation contracts and activities.
retained earnings
-An amount earned by a corporation and not yet distributed to stockholders. -if invested properly, will yield higher corporate profits in the future and thus cause the price of the company's stock to rise.
Registered Agent
Person who can receive legal documents on behalf of the corporation
Factors that lead 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 be insolvent, or it is too "thinly" capitalized. That is, it has insufficient capital at the time it is formed to meet its prospective debts or potential liabilities. 3.) The corporation if 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 mixed together, or commingled, to such an extent that the corporation has no separate identity.
In some states like Mississippi, New York, Ohio, and Oklahoma the courts will treat a corporation as a legal corporation despite the defect in its formation if the following three requirements are met
1.) A state statute exists under which the corporation can be validly incorporated . 2.) The parties may have made a good faith attempt to comply with statute. 3.) The parties have already undertaken to do business as a corporation
The following order of priority is used if a conflict arises among the various documents involving a corporation
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
A Potential Problem for Close Corporations
1.) the commingling of corporate and personal funds 2.) The failure to hold board of directors' meetings and record the minutes 3.) The shareholders' continuous personal use of corporate property (for instance, company owned vehicles).
articles of incorporation
1.) the name of the corporation 2.) The 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.
Alien Corporation
A corporation formed in another country but doing business in the United States.
Duration and purpose
A corporation has perpetual existence unless the articles state otherwise.
Tort Liability
A corporation is liable, under the doctrine of respondeat superior, for the torts committed by its agents or employees within the course and scope of their duties.
Misappropriation of Close corporation Funds
A majority shareholder in a close corporation takes advantage of his or her position and misappropriates company funds. The normal remedy for the injured minority shareholders is to have their shares appraised and to be paid the fair market value for them.
Trade Name Disputes
A new corporation's name cannot be the same as (or deceptively similar to) the name of an existing corporation doing business within the same state. - if caught liable for trade name infringement
Shareholder Agreement to Restrict Stock Transfers
A shareholder agreement can provide that when one of the original shareholders dies, his or her shares of stock in the corporation will be divided in such a way that the proportionate holdings of the survivors will be maintained. Agreements between shareholders can also restrict stock transfers in other ways.
Voting Rights
Any person who purchases common stock acquires voting rights - one vote per share held.
Bylaws
The internal rules of management adopted by a corporation at its first organizational meeting.
domestic corporation
In a given state, a corporation that does business in, and is organized under the law of, that state.
Stocks
Issuing stocks is another way for corporations to obtain financing.
Corporate Formation
Many fortune 500 companies started as sole proprietorships or partnerships and then converted to corporate entities as the business grew and needed to obtain additional capital by issuing shares of stock.
Pierce the corporate veil
Occasionally, the owners use a corporate entity to perpetrate a fraud, circumvent the law, or in some other way accomplish an illegitimate objective. In these situations, the courts will ignore the corporate structure and pierce the corporate veil
Management of Close Corporations
Resembles that of a sole proprietorship or a partnership, in that a single shareholder or a tightly knit group of shareholders usually hold the positions of directors and officers.
Stocks
Securities that represent part ownership or equity in a corporation
remedies for ultra vires acts
Shareholders can seek an injunction from a court to stop the corporation from engaging in ultra vires acts. The corporation or its shareholders can also seek damages from the officers and directors who were responsible for the ultra vires acts.
Prepare the Articles of Incorporation
The primary document needed to incorporate a business is the articles of incorporation
The Alter-Ego Theory
Sometimes, courts pierce the corporate veil under the theory that the corporation was not operated as a separate entity, but was just another side (or alter ego) of the individual or group that actually controlled the corporation. EX: Harvey and Barbara Jacobson
Improper Incorporation
The procedures for incorporation are very specific. If they are not followed precisely, others may be able to challenge the existence of the corporation.
Pierce the corporate veil
The action of a court to disregard the corporate entity and hold the shareholders personally liable for corporate debts and obligations.
Internal Organization
The articles can describe the corporation's internal management structure, although this usually is included in the bylaws adopted after the corporation is formed.
Shares of the corporation
The articles must specify the number of shares of stock the corporation is authorized to issue.
Classification of Corporations
The classification of a corporation normally depends on its location, purpose, and ownership characteristics.
First check available domain names
The corporate name should be one that can be used as the business's domain name. Advisable to check before secure. Use the site www.whois.com/whois and see if preferred name is available
S corporation requirements
The corporation must be a domestic corporation. The corporation must not be a member of a group of corporations that are legally tied together. The shareholders must be individuals (and some trusts or estates). The corporation may have no more than 100 shareholders. The corporation may have only one class of stock. No shareholder may not be a non-resident alien.
Registered Office and Agent
The corporation must indicate the location and street address of its registered office within the state. The corporation must also give the name and address of a specific person who has been designated as an agent.
Express powers
The express powers of a corporation are found in the articles of incorporation, in the law of the state incorporation, and in the state and federal constitutions.
pierce the corporate veil
To disregard the corporate entity, which limits the liability of shareholders, and hold the shareholders personally liable for a corporate obligation.
venture capital and private equity capital
To obtain sufficient financing, many entrepreneurs seek alternative financing.
implied powers
When a corporation is created, certain implied powers arise. In the absence of express constitutional, statutory, or other prohibitions, the corporation has the implied powers to perform all acts reasonably necessary to accomplish its corporate purposes.
Corporate Powers
When a corporation is created, the express and implied powers necessary to achieve its purpose also comes into existence.
File the articles with the state
When articles of incorporation have been prepared and signed, they are sent to the appropriate state official, along with the required filing fee.
bond indenture
a legal document that details all the conditions relating to a bond issue
Incorporator
a party who signs the articles of incorporation of a corporation
Corporation
a company or group of people authorized to act as a single entity (legally a person) and recognized as such in law.
Holding Companies
a company whose business activity consists of holding shares in another company
Professional Corporation
a corporation formed by lawyers, doctors, or other professionals
public corporation
a corporation formed by the government to meet some political or governmental purpose
foreign corporation
a corporation formed in one state but doing business in another -need certificate of authority
Corporation by Estoppel
a defective corporation that has conducted business with a third party and therefore cannot deny its status as a corporation to escape liability. EX: W.P. Media,Inc
Securities
stocks and bonds
