Unformatted text preview: Business Law and the Regulation of Business Regulation
Chapter 34: Nature and Formation of Corporations of By Richard A. Mann & Barry S. Roberts Topics Covered in this Chapter Topics
I. Nature of Corporations
A. B. Corporate Attributes Classification of Corporations II. Formation of a Corporation A. Organizing the Corporation B. Formalities of Incorporation A. B. Defective Incorporation Piercing the Corporate Veil III. Recognition or Disregard of Corporateness IV. Corporate Powers A. Sources of Corporate Powers B. Ultra Vires Acts B. Ultra C. Liability for Torts and Crimes C. Corporate Attributes
Legal Entity – a corporation is an entity apart from its shareholders, with entirely distinct rights and liabilities. distinct s Creature of the State – a corporation may be formed only by substantial compliance with a State incorporation statute. statute. s Limited Liability – a shareholder's liability is limited to the amount invested in the business enterprise. in
s Corporate Attributes
s s s Free Transferability of Corporate Shares – Free unless otherwise specified in the charter. unless Perpetual Existence – unless the charter Perpetual provides otherwise. provides Centralized Management – shareholders of Centralized a corporation elect the board of directors to manage its business affairs; the board appoints officers to run the day-to-day operations of the business. operations Nature of Corporations Nature
As a Person – a corporation is As considered a person for some but not all purposes. all s As a Citizen – a corporation is As considered a citizen for some but not all purposes. purposes.
s Classification of Corporations
Public Corporation – one created to Public administer a unit of local civil government or one created by the United States to conduct public business. business. s Private Corporation – one founded by Private and composed of private persons for private purposes; has no governmental duties. duties
s Classification of Corporations
Profit Corporation – one founded to Profit operate a business for profit. operate s Nonprofit Corporation – one whose Nonprofit profits must be used exclusively for charitable, educational, or scientific purposes. purposes.
s Classification of Corporations
Domestic Corporation – one created Domestic under the laws of a given State. under s Foreign Corporation – one created Foreign under the laws of any other State or jurisdiction; it must obtain a certificate of authority from each State in which it does intrastate business. does
s Classification of Corporations
Publicly Held Corporation – one Publicly whose shares are owned by a large number of people and are widely traded. traded. s Closely Held Corporation – one that is Closely owned by few shareholders and whose shares are not actively traded. shares
s Types of Corporations Types
Subchapter S Corporation – eligible Subchapter corporation electing to be taxed as a partnership under the Internal Revenue Code. Code. s Professional Corporations – Professional corporate form under which duly licensed individuals may practice their professions. professions.
s Formation of a Corporation Formation
s Promoter – person who takes the Promoter
preliminary steps to organize a corporation preliminary – Promoters' Contracts – promoters remain Promoters'
liable on preincorporation contracts made in the name of the corporation unless the contract provides otherwise or unless a novation is effected. effected. – Promoters' Fiduciary Duty – promoters owe Promoters'
a fiduciary duty among themselves and to the corporation, its subscribers, and its initial shareholders. shareholders. Promoter’s Preincorporation Contracts Contracts
Corporation Does NOT Adopt Preincorporation Contract Corporation
bound Third Party Corporation Does Adopt Preincorporation Contract boun d Corporation Promoter liable Third Party Corporation, Promoter, and Third Party Enter into a Novation Promoter Corporation boun d Third Party Organizing the Corporation
s Subscribers persons who agree to purchase the initial stock in a corporation. purchase
– Preincorporation Subscription – an offer to purchase capital stock in a corporation yet to be formed which under many incorporation statutes is irrevocable for a specified time period. irrevocable – Postincorporation Subscription – a subscription agreement entered into after incorporation; an offer to enter into such a subscription is revocable any time before the corporation accepts it. any Formalities of Incorporation
s s s s s Selection of Name – the name must clearly Selection designate the entity as a corporation. designate Incorporators – the persons who sign the Incorporators articles of incorporation. articles Articles of Incorporation – the charter or Articles basic organizational document of a corporation. basic Organizational Meeting – the first meeting, Organizational held to adopt the bylaws and appoint officers. held Bylaws – rules governing a corporation's Bylaws internal management. internal Sample Articles of Incorporation Sample
Articles of Incorporation of [Corporate Name]
The undersigned, acting as incorporator(s) of a corporation under the _____________ Business Corporation Act, adopt(s) the following Articles of Incorporation for such corporation: First: The name of the Corporation is _________________________________________________________________________ Second: The period of its duration is __________________________________________________________________________ Third: The purpose or purposes for which the corporation is organized are:____________________________________________ Fourth: The aggregate number of shares which the corporation shall have authority to issue is _________________________________________ Fifth: Provisions granting preemptive rights are:_________________________________________________________________ Sixth: Provisions for the regulation of the internal affairs of the corporation are:________________________________________ Seventh: The address of the initial registered office of the corporation is ________________________and the name of its initial registered agent at such address is_____________________________________________________________________________ Eighth: The number of directors constituting the initial board of directors of the corporation is __________, and the names and addresses of the persons who are to serve as directors until the first annual meeting of share holders or until their successors are elected and shall qualify are: Name _________________________________________ Ninth: The name and address of each incorporator is: Name _________________________________________ Address _________________________________________________ Address _________________________________________________ Dated __________, 19___. _________________________________________________ Incorprator(s) Source: Reprinted with permission from Henn & Alexander, Corporations, 3rd ed. Copyright © 1983 by West Publishing Company. Defective Incorporation Common Law Approach Common
s Corporation de Jure – one formed in Corporation
substantial compliance with the incorporation statute and having all corporate attributes. statute s Corporation de Facto – one not formed Corporation
in compliance with the statute but recognized for most purposes as a corporation. for s Corporation by Estoppel – prevents a Corporation
person from raising the question of a corporation's existence. corporation's Statutory Approach Statutory
s The filing or acceptance of the articles of The incorporation is generally conclusive proof of proper incorporation. proper s RMBCA – liability is imposed only on RMBCA
persons who act on behalf of a defectively formed corporation knowing that there was no incorporation. incorporation. s MBCA – unlimited personal liability is MBCA
imposed on all persons who act on behalf of a defectively formed corporation. defectively Recognition of Corporate Attributes: Statutory Approach Attributes:
Non-recognition of Corporateness RMBCA Approach No Filing of Articles of Incorporation No corporate attributes Joint and several liability for those who act knowing that there was no incorporation No Certificate Issued No corporate attributes Joint and several liability for all who assume to act as a corporation Recognition of Corporateness Filing of Articles of Incorporation Corporate attributes Limited liability Insulation from collateral suits Certificate Issued Corporate attributes Limited liability Insulation from collateral suits MBCA Approach Piercing the Corporate Veil
General Rule – the courts may General disregard the corporate entity when it is used to defeat public convenience, commit a wrongdoing, protect fraud, or circumvent the law. circumvent s Application – most frequently applied Application to to
s – Closely Held Corporations – Parent-Subsidiary Corporations Sources of Corporate Powers
Statutory Powers – typically include Statutory perpetual existence, right to hold property in the corporate name, and all powers necessary or convenient to effect the corporation's purposes. effect s Purposes – a corporation may be Purposes may formed for any lawful purposes unless its articles of incorporation state a more limited purpose. limited
s Ultra Vires Acts
Definition of Ultra Vires Acts – any Definition action or contract that goes beyond a corporation's express and implied powers. powers. s Effect of Ultra Vires Acts – under Effect RMBCA, ultra vires acts and ultra conveyances are not invalid. conveyances s Remedies for Ultra Vires Acts – the Remedies RMBCA provides three possible remedies. remedies.
s Liability for Torts and Crimes
Torts – under the doctrine of Torts respondeat superior, a corporation is liable for torts committed by its employees within the course of their employment. employment. s Crimes – a corporation may be Crimes criminally liable for violations of statutes imposing liability without fault or for an offense perpetrated by a high corporate officer or its board of directors. officer
s General Partnership, Limited Partnership, Corporation, and Limited Liability Company Corporation,
General Partnership Transferability Financ ial interest may be assigned; membership requires consent of all partners Partners have unlimited liability Limited Partnership Financ ial interest may be assigned, and ass ignee may become limited partner if all partners consent General partners have unlimited liability; limited partners have limited liability By general partners, not limited partners Public Corporation Freely transferable Close Corporation Limited Liability Company Freely transferable Financ ial interest unless shareholders may be assigned; agree otherwise membership requires consent of all members Shareholders have limited liability All members have limited liability Liability Shareholders have limited liability Control By all partners By board of directors elected by shareholders Unaffected by death, bankruptcy, or withdrawal of shareholder Corporation and shareholders taxed By board of directors elected by shareholders Unaffected by death, bankruptcy, or withdrawal of s hareholder Corporation taxed unless Subchapter S applies; s hareholders taxed By all members Continuity Dissolved by Dissolved by death, bankruptcy, death, bankruptcy, or withdrawal of or withdrawal of partner general partner Only partners taxed Only partners taxed Dissolved by death, bankruptcy, or withdrawal of member Only members taxed Taxation Comparison of Charter & Bylaws Comparison
Charter Filing Amendment Availability Publicly Requires board and shareholder approval Must include certain mandatory and optional provisions. Some optional provisions may be elected only in the charter May include any provision not inconsistent with law Bylaws Not publicly Requires only board approval Must include certain provisions unless they are included in the charter Validity May include any provision not inconsistent with law and the charter ...
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