Chapter 15 Corporations
Formation • A corporation has the most formal filing and reporting requirements. • Document must state the corporation’s name, purpose, number of shares issued, and address of the corporation’s headquarters. • This document is known as the articles of Incorporation.
Liability • Shareholders, directors, and officers of a corporation are insulated from personal liability in case the corporation runs up large debts or suffers some liability. • This liability protection is often referred to as the corporate veil • “Piercing corporate veil”
Debt • Corporations often borrow money from commercial lenders (such as banks) to fund day-to-day operations. • For larger projects, corporations may also use more sophisticated forms of debt such as issuing bonds or debentures.
Equity • Corporations also sell equity to capitalize their operations. • For modest amounts of funding, corporations may turn to private investors or groups of investors. • Corporation will hire a registered broker-dealer to handle larger scale IPOs.
Public Offerings • A very complex and time-consuming process of converting the corporation from privately held to publicly held by engaging in an initial public offering (IPO). • At that point, the corporation may raise equity by selling its shares to the general public and to financial institutions.
Taxation • “C” corporations are considered a separate legal, taxable entity from the owners for income tax purposes. Therefore, corporations pay tax on their earnings and then tax is paid again if corporate earnings are distributed to shareholders in the form of dividends (known as double taxation).
Taxation • Subchapter S: • Avoids double taxation. • No more than 100 shareholders. • Single class of stock. • No non-resident alien shareholders.
Shareholders • Power to elect and remove directors. • Power to veto fundamental changes to corporation, e.g. sale of all assets, mergers, issuing more capital stock, and issuing bonds. • Shareholders also must approve any changes in the structure of the corporation through amending the articles of incorporation or bylaws.
Board of Directors • Sets strategy and policies of the corporation, including payment of dividends. • Also has important oversight functions. • Most planning initiatives that result in a change to the corporation, such as an acquisition of another corporation’s assets or stock, are overseen by the board prior to submitting the plan to shareholders for approval.
Officers • The corporation’s officers are appointed by, and may be removed by, the board of directors. The officers carry out the day-to-day operations of the corporation and execute the strategy and mandates set out by the board of directors.
Fiduciary Duties of Officers and Directors • Duty of care and the duty of loyalty • Breaching these duties may result in personal liability for the officer or director. • This may be referred to as the business judgment rule.
learning outcomes checklist • 15 - 1 Identify the sources and level of law governing formation and internal corporate matters. • 15 - 2 Articulate the concept of the corporation as a legally independent person. • 15 - 3 Recognize the liability associated with improper formation by a promoter.
learning outcomes checklist • 15 - 4 Understand the concept of a corporate veil and identify circumstances under which a court will pierce the veil and the impact on the principals. • 15 - 5 Explain the primary methods for capitalizing a corporation. • 15 - 6 Categorize corporate entities on the basis of how the income is taxed and understand the concept of flow-through taxation.
learning outcomes checklist • 15 - 7 Describe the fundamental structure and roles for officers, directors and shareholders. The corporate form of entity and understand the functions of each role and how it’s governed. • 15 - 8 Identify the major fiduciary duties owed by insiders of a corporation to its shareholders and give examples of each duty. • 15 - 9 Apply the business judgment rule to an alleged breach of fiduciary duty by an insider. • 15- 10 Distinguish between a shareholder derivative suit and a direct action suit.