Final Exam Chapter 22 (Corporations: Formation & Organization)

subscription agreement

an agreement between promoters (persons raising capital for a new corporation) and subscribers (investors). the subscribers agree to purchase stock in the new corporation

incorporator

an individual who applies for incorporation on behalf of a corporation

states give powers to corporations through

state statutes and through each corporation's articles of incorporation

implied powers

the statement of corporate purpose in each corporation's articles of incorporation gives each corporation these powers

corporations are separate legal entities,

they can be sued by others, they are distinct from their shareholders, they are liable for corporate actions

foreign corporation

a corporation in a state in which it conducts business but is not incorporated

certificate of incorporation

a document certifying that a corporation is incorporated in the state and is authorized to conduct business

fixed income securities

bonds are sometimes called this

shareholders

can freely transfer their corporate shares

common stock

corporate stock that does not convey any preferences to its holders (also called common shares)

because corporations are separate legal entities, government taxes their income directly.

corporations have control over their income. corporations can distribute their income to shareholders in the form of dividends

the life of a corporation

does not end when the lives of its owners end

selection of corporate name

every corporation must attach corporation, company, limited, or incorporated, or an abbreviation of one of these to the end of the business name

ultra vires act

if corporations act beyond their express and implied powers, this act comes into play. historically, courts have ruled that ultra vires acts are null and void. recently, courts have permitted corporations to use the ultra vires defense if neither party to the contract has performed the terms of the contract. yet courts uphold ultra vires contracts if one of the parties has executed her or his part of the contract.

relationship between corporations and their directors, officers, and employees

is an agency relationship - corporations are liable for torts and crimes committed by their agents during the scope of their employment - courts refer to this liability as the doctrine of ------respondeat superior------

bylaws

rules and regulations that govern a corporation's internal management

equity securities

securities that represent ownership in a corporation (stocks)

pierce the corporate veil

shareholders attempt to hide behind the corporate veil to protect themselves from personal liability

shareholders do not participate in corporation management,

shareholders elect a board of directors

de facto corporation

latin for "corporation in fact"; a corporation that has not substantially met the requirements of the state incorporation statutes (courts recognize it as a corporation for most purposes to avoid unfairness to third parties who believed it was properly incorporated)

de jure corporation

latin for "lawful corporation"; a corporation that has met the mandatory statutory provisions and thus received its certificate of incorporation (courts will not revoke the corporation's limited liability)

debt securities

securities that represent loans to a corporation (bonds)

state statutes

state statutes govern corporate laws

preferred stock

stock that conveys preferences to its holders with respect to assets and dividends (also called preferred shares)

express powers

the power to have perpetual existence, the power to sue and be sued in the corporation's name, the power to acquire property, the power to make contracts and borrow money, and power to lend money, the power to make charitable donations, and the power to establish rules for managing the corporations. corporations may take whatever actions are necessary to execute these powers.

courts are likely to pierce the corporate veil when:

1. a corporation lacked adequate capital when it initially formed 2. a corporation did not follow statutory mandates regarding corporate business 3. shareholders' personal interests and corporate interests are commingled such that the corporation has no separate identity 4. shareholders attempt to commit fraud through a corporation

S corporation must meet certain requirements:

1. cannot have over 100 shareholders 2. only individuals, trusts, and corporations can be shareholders 3. can issue only one class of share, although not all shares must have identical voting rights 4. must be domestic corporations 5. no shareholder can be a nonresident alien

factors corporations consider when selecting a state for incorporation:

1. how much flexibility does the state grant to corporate management? 2. what rights do state statutes give to shareholders? 3. what restrictions does the state place on the distribution of dividends? 4. does the state offer any kind of protection against takeovers?

if a corporation commits an ultra vires act, RMBCA provides several remedies:

1. shareholders may sue to prohibit the corporation from fulfilling the ultra vires contract 2. the corporation or shareholders may sue corporate directors or officers for the damages caused by the ultra vires act 3. the state attorney general can have the corporation dissolved or prevent the corporation from fulfilling the ultra vires act

de facto corporations must meet the following requirements:

1. the promoters, subscribers, and incorporator made a good faith attempt to comply with the incorporation statute 2. the organization has already conducted business as a corporation

alien corporation

a business that is incorporated in a foreign country

retained earnings

profits that a corporation keeps

domestic corporation

a corporation in the state in which it is incorporated

defective corporation

a corporation in which an error or omission was made during its incorporation process (shareholders may be personally liable for a defective corporation)

closely held corporation

a corporation that does not sell stock to the general public - also called close, family, or privately held corporations (they have restrictions on the transfer of shares to prevent outsiders from gaining control of the business)

private corporation

a corporation that is created by private persons and does not have government duties (Coke)

public corporation

a corporation that is created by the government to help administer law (FDIC)

nonprofit corporation

a corporation that operates for educational, charitable, social, religious, civic, or humanitarian purposes rather than to earn a profit (churches)

publicly held corporation

a corporation whose stock is available to the public (shareholders wishing to sell their shares do not face many transfer restrictions)

dividend

a distribution of corporate profits or income ordered by the directors and paid to the shareholders

articles of incorporation

a document that contains basic information about a corporation and is filed with the state