CORPORATIONS -FACT PATTERN 1: SETTING UP A BUSINESS AS A CORPORATION

- Corporation by estoppel applies only in what kinds of cases? = CONTRACT, NOT TORT

-- It can also prevent the improperly-formed "corporation" from avoiding liability by saying it was not properly formed. -

Bylaws are an internal document. They comprise an operating manual, with things like setting record dates and methods of giving notice, etc. 1. Are bylaws filed with the state? = No, just the articles are 2. If bylaws and articles conflict, which governs? articles 3. Who can amend or repeal the bylaws or adopt new ones? board or shareholders

B). BY laws

--this means that someone who treats a business as a corporation may be estopped from denying that it is a corporation. -- You do business with people who hold their business out as a corporation. They think it's a corporation. You think it's a corporation. You write checks to the "corporation" and deal with it as a corporation. Turns out it's not a corporation. You sue the proprietors individually. Under this doctrine, you cannot win. You are estopped to deny that the business was a corporation.

B). Corporation By Estoppel

A corporation is a legal person. It can sue and be sued, hold property, be a partner in a partnership, invest in other companies or commodities. a. Can a for-profit corporation make contributions to charity? =YES b. To do nothing but charitable work, you should form a not-for-profit business. A "benefit corporation" is one formed for profit but also to pursue some benefit to a broader social-policy cause.

B). Entity Status

The corporation is liable on a preincorporation contract ONLY if it adopts the contract. --ExampleOn January 10, P, acting as a promoter for a corporation not yet formed, leases a building from Don Draper and signs the lease "Oscar de la Rental Cars, Inc." On February 20, Oscar de la Rental Cars, Inc. is formed. -- Is the corporation liable on the contract? Yes, if it adopted the contract.

B). Is the corp liable on these ks?

a. Name of the corporation. Can I form a corporation with the name Bubba's Burritos? No. It must include one of these "magic words" (or an abbreviation):corp, company, inc. or limited b. Name and address of each incorporator. c. Registered agent and street address of the registered office. (Registered agent is the company's legal representative, so she can receiveservice of process for the corporation

B). Paper- Articles of Incorporation 1). Required Contenets

means the regular course of intrastate (not interstate) business activity. -So it doesn't include occasional or sporadic activity in this state, and not simply owning property here

B). Transacting business

The incorporators have notarized articles delivered to the Secretary of State and pay the required fees. What happens if the Secretary of State's office accepts the articles for filing?= THE CORP IS FORMED -- At that point, we have a de jure corporation.

C). ACT.

If the corporation incurs a debt, commits a tort, or breaches a contract, are theshareholders personally liable for that debt? = NO (unless you PCV) This is "limited liability": shareholders generally are liable only for the price of their stock, not for corporate debts. (We'll see an exception in Fact Pattern 4.) BTW, are directors or officers vicariously liable for corporate debts? NO So who is liable for corporate debts?= the corp itself

C). Limited Liability of shareholders

- ABOLSIHED in many states (flag this)

C). What is the status of these two doctrines?

It gives information from its articles and proves good standing in its home state. The foreign corporation must also appoint a registered agent and maintain a registered office in this state

C. The foreign corporation qualifies by getting a certificate of authority from the Secretary of State

Yes, Promoter is liable until Novation; here there is no Novation; both will be ---- Remember: Adoption makes the corporation liable too, but does not relieve P. So on this fact pattern, both the corporation and P are liable.

Classic example- -- Will P be liable on the lease if Oscar de la Rental Cars, Inc. is formed and adopts the lease?

1). Civil fine 2). Corp cannot assert a claim ni the sate -But it can be SUED and DEFEND -Once, the corporation qualifies and pays back fees, it can then sue here

D). What happens if the foreign corp transacts business without qualifuing

Incorporators put together the proper documents and mail them to the Secretary of State. Unbeknownst to them, the documents are lost in the mail. In the meantime, the business is being operated as a corporation, and enters a contract. Are the shareholders personally liable on the contract?= YES, unless the court applies DFC

Example

1. Express -- board takes an action adopting the contract. 2. Implied adoption arises when corporation accepts a benefi under K; e.g. they moved into a premises where they signed alease

HOW CAN THE CORPORATION "ADOPT" THE K

A. Person: Incorporator. Must have one or more. What does an incorporator do? executes the articles and delivers them to the secretary of state__ -A person or an entity may serve as an incrporator

I. TO FORM A CORPORATION, WE NEED A PERSON, PAPER, AND AN ACT A). A person

If the initial directors were named in the articles, the directors hold the "organizational meeting." If they were not, incorporators hold the organizational meeting, where they elect the initial directors. - At the meeting, the board of directors (or the incorporators if no directors were named in the articles) must "complete the organization of the corporation." =this means that select officers and adopt intial bylaws

II. OTHER STEPS TO ORGANIZE THE CORP A). Organizational meetings

- the law of the state where incorporated governs Suppose we form a corporation in State X but the company only does business in State -Y. What law governs the internal affairs of the corporation (e.g., roles and duties of directors, officers, and shareholders)? = the law of the stte of incorporation

III. CONSEQUENCES OF FORMING A CORP. A). Internal Affairs Rule

The proprietors thought they formed a corporation, but they failed to do so. That means they are personally liable for business debts (because they have formed a partnership and partners are liable for business debts).

IV. DEFECTIVE INCORPORTATION (we wrongly thought there was a Corporation)

Unless the contract clearly says otherwise, the promoter IS LIABLE on pre-incorporation contracts until there is a NOVATION. -- A novation is an agreement of the promoter, the corporation, and the other contracting party that the corporation replaces the promoter under the contract. -- Will P be liable on the lease if Oscar de la Rental Cars, Inc. is never formed? = YES

Is the promoter liable on these contracts??

A corporation is owned by its shaeholders The group in charge of management is the board of directors Members of the board of directors are elected by the the shareholders The board appoints people to carry out its policy. Who are they? = officers

Prelimi Issues

a. Can we form a corporation and avoid (legally) having it pay income tax at the corporate level? = YES, Form an S Corp_ b. An S Corporation has no more than 100 shareholders, all of whom are human and U.S. citizens or residents. There is one class of stock and it is not publicly traded.

Taxation Issues- A corporation pays income tax on its profits. In addition, shareholders are taxed on distributions to them, so there's "double taxation." That is a disadvantage

1. There is a relevant incorporation statute (there is!). 2. The parties made a good faith, colorable attempt to comply with it. And 3. There has been some exercise of corporate privileges (they are acting as thought they thought it was a corporation). -- If this doctrine applies, the business is treated as a corporation for all purposes except y the state. (Such an action would be quo warranto).

Two doctrines allow the proprietors to escape liability. Anyone asserting either doctrine must be unaware of failure to form de jure corporation. A). DEFACTO CORPORATION

She might enter a contract on behalf of a corporation-not-yet-formed

V). PRE-INCORPRATION CONTRACTS (we knew there was no corp here) A. A promoter is a person acting on behalf of a corporation not yet formed.

A. Let's say we are in State A. Is a corporation formed in State B considered "foreign?"= YES, foreign means anything outside of state A

VI.FOREIGN CORPORATIONS -foreign corps transacting biz in the state MUST qualify and PAY prescribed fees a). What is foreign?

d). Information regarding stock. Authorized stock is the maximum # of share the corporation may sell - If the company will have different classes of stock, many states require that the articles state the number of shares per class and the voting rights and preferences of each class of stock.

cont

Other things may be put in the articles, but are not required. For example,the initial directors may be named in the articles (with their addresses).

things that may be put in the article