Corporation A fictitious legal entity that is created according to statutory requirements.
Nature of the Corporation • Corporations are a product of the state law. • Corporations Codes – State statutes that regulate the formation, operation, and dissolution of corporations. • Courts interpret state corporation statutes to decide individual, corporate and shareholder disputes.
The Corporation as a Legal “Person” • A corporation is a separate legal entity (or legal person). • Corporations can: • Sue and be sued in their own names. • Enter into and enforce contracts. • Hold title to and transfer property. • Be found civilly and criminally liable for violations of law.
Characteristics of Corporations Limited Liability of Shareholders Free Transferability of Shares Perpetual Existence Centralized Management © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Limited Liability of Shareholders • Shareholders are only liable to the extent of their capital contributions (stock purchases) for the contracts and debts of their corporation. • Are NOT personally liable for the contracts and debts of the corporation.
Free Transferability of Shares • Corporate shares are freely transferable by the shareholder. • May sell, assign, pledge, or gift. • Unless issued pursuant to certain exceptions from securities registration. • Shareholders may agree among themselves on restriction on the transfer of shares.
Perpetual Existence • Corporations exist in perpetuity • Unless specific duration is stated in articles of incorporation. • Can be voluntarily terminated by the shareholders. • May be involuntarily terminated by the corporation’s creditors .
Centralized Management • Board of Directors makes policy decisions concerning the operation of the corporation. • Members of the Board of Directors are elected by the Shareholders. • Directors appoint Corporate Officers to run the corporation’s day-to-day operations. • Directors and the officers form the corporate “management.”
There is no general federal corporations law governing the formation and operation of private corporations. Many federal laws regulate the operation of private corporations.
Public v. Private • Public Corporation • A corporation formed to meet a specific governmental or political purpose. • i.e. Amtrack, State Fund Ins. • Private Corporation • A corporation formed to conduct privately owned business.
Profit v. Nonprofit • Profit Corporation • A corporation created to conduct a business for profit. • Can distribute profits to shareholders in the form of dividends. • Nonprofit Corporation • A corporation that is formed to operate charitable institutions, colleges, universities, and other not-for-profit entities.
Publicly Held v. Closely Held • Publicly Held Corporation • A corporation that has many shareholders. • It’s securities are traded on organized security markets. • Closely Held Corporation • A corporation owned by few shareholders. • Shareholders often involved in management. • Shareholders may have buy-and-sell agreements
Professional Corporation • A corporation formed by lawyers, doctors, or Accountants. • Shareholders called members. • Members not usually liable for torts committed by other members or agents • Liability usually imposed for malpractice of members.
Types of Corporations © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Incorporation Procedures • Corporations are creatures of statute. • The organizers of the corporation must comply with the state’s incorporation statute to form a corporation. • A corporation can be incorporated in only one state. • It can do business in all other states in which it qualifies.
Incorporators • The person or persons, partnerships, or corporations that are responsible for incorporation of a corporation. • Primary duty is to sign the articles of incorporation.
Promoter • A person or persons who: • Organize and start the corporation • Negotiate and enter into contracts in advance of its formation • Find the initial investors to finance the corporation
Promoters’ Liability • Promoters often enter into contracts on behalf of the corporation prior to its actual incorporation. • If the corporation never comes into existence, the promoters have jointpersonal liability on the contract, unless the third party specifically exempts them from such liability.
Promoters’ Liability (continued) • If the corporation is formed, it becomes liable on a promoter’s contract only if it agrees to to become bound to the contract. • The promoter remains liable on the contract unless the parties enter into a novation.
Articles of Incorporation • The basic governing documents of the corporation. • Must be filed with the secretary of state of the state of incorporation. • Contains name of corporation, number of shares authorized, name and address for registered agent for service and incorporators. • May contain term, purpose, limitations, regulations of affairs.
Amending the Articles • Can be amended to contain any provision that could have been lawfully included in the original document. • Must show that the Board adopted resolution recommending amendment • Shareholders voted to approve • Filed with secretary of state
Corporate Status • Calif. Corporations Code provides that corporate existence begins when the articles of incorporation are filed. • The filing of the articles of incorporation is conclusive proof that a corporation exists. • After that, only the state can challenge the status of the corporation. • Third parties cannot thereafter challenge the existence of the corporation.
Purpose • Can be formed for any legal purpose. • General-Purpose Clause is often included in the articles of incorporation that authorizes the corporation “to engage in any activity permitted corporations by law.”
Registered Agent • A person or corporation that is empowered to accept service of process on behalf of the corporation. • Must be identified in the articles • Must have office in state.
Corporate Bylaws • A detailed set of rules adopted by the board of directors after the corporation is incorporated. • Contains provisions for managing the business and the affairs of the corporation. • Govern internal management structure. • Board of directors may amend.
Corporate Seal • A design containing the name of the corporation and the date of incorporation. • It is imprinted by the corporate secretary using a metal stamp on certain legal documents.
Organizational Meeting • A meeting held by the initial directors of the corporation after the articles of incorporation are filed. • Directors adopt bylaws, elect officers, transact business. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheesemn
S Corporations • Corporations are separate legal entities. • They generally must pay corporate income taxes to federal and state governments. • If a corporation distributes its profits to shareholders in the form of dividends, shareholders must pay personal income tax on the dividends. • This double taxation of corporations is a disadvantage of doing business.
S Corporations (continued) • Some corporations and their shareholders can avoid double taxation by electing to be an S Corporation. • If a corporation elects to be taxed as an S Corporation, it pays no federal income tax at the corporate level. • The corporation’s income or loss flows to the shareholders’ individual income tax returns. • Election is made by filing IRS Form 2553.
Financing the Corporation • A corporation needs to finance the operation of its business. • Equity securities (or stocks) – represent ownership rights in the corporation. • Debt securities – establish a debtor-creditor relationship in which the corporation borrows money from the investor to whom the debt security is issued.
Equity Securities • Common Stock – A type of equity security that represents the residual value of the corporation. • Common stock has no preferences. • Common stock does not have a fixed maturity date. • Corporations may issue different classes of common stock. • Common shareholders have limited liability.
Equity Securities (continued) • Preferred Stock – A type of equity security that is given certain preferences and rights over common stock. • Preferred stock can be issued in classes or series. • One class of preferred stock can be given preferences over another class of preferred stock. • Preferred shareholders have limited liability.
Types of Shares © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Debt Securities • Debenture – A long-term unsecured debt instrument that is based on the corporation’s general credit standing. • Bond – A long-term debt security that is secured by some form of collateral. • Note – A debt security with a maturity of five years or less. • Indenture Agreement- A contract between the corporation and the holder that contains the terms of debt security.
Express Powers of a Corporation • A corporation has the same basic rights to perform acts and enter into contracts as a physical person. • A corporation’s express powers are found in: (1) the U.S. Constitution, (2) state constitutions, (3) federal statutes, (4) state statutes, (5) articles of incorporation, (6) bylaws, and (7) resolutions of the board of directors.
Express Powers of a Corporation(continued) • Generally, a corporation has the power to: • Purchase, own, lease, sell, mortgage, or otherwise deal in real and personal property • Make contracts • Lend and borrow money • Incur liabilities • Issue notes, bonds, and other obligations • Invest and reinvest funds • Sue and be sued in its corporate name
Implied Powers of a Corporation • Powers beyond express powers that allow a corporation to accomplish its corporate purpose. • e.g., a corporation has the implied power to open a bank account • e.g., a corporation has the implied power to to reimburse its employees for expenses
Ultra Vires Act • An act by a corporation that is beyond its express or implied powers. • Remedies available if an ultra vires act is committed: • Shareholders can sue for an injunction. • The corporation can sue the officers or directors who caused the act for damages. • The attorney general of the state of incorporation can bring an action to enjoin the act or to dissolve the corporation.
Dissolution of Corporations Voluntary Dissolution Administrative Dissolution Judicial Dissolution © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Voluntary Dissolution • If corporation has not commenced business or issued shares • Dissolved by majority vote of incorporators or board • If it has started business • Board of directors must recommend and majority of shares must be voted to dissolve • Articles of dissolution must be filed with secretary of state
Administrative Dissolution • Secretary of state will administratively dissolve corporation if: • Failed to file annual report • Failed to maintain registered agent for 60 days • Failed to file change of registered agent • Did not pay franchise fee • Period of duration stated in articles has expired • Secretary issues a certificate of dissolution
Judicial Dissolution • Instituted by attorney general of state of incorporation • Procured articles through fraud • Exceeded or abused authority • Decree of dissolution issued
Winding-up and Liquidation • The process by which a dissolved corporation’s assets are collected, liquidated, and distributed to: • Creditors • Shareholders • Other claimants
Termination • The ending of a corporation that occurs only after the: • Winding-up of the corporation’s affairs • Liquidation of its assets • Distribution of the proceeds to the claimants
Next Week • Organizational Forms of Small Businesses (Chapt. 28) © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman