NATURE OF CORPORATIONS. Profit or Nonprofit

Transcription

1 CHAPTER 34 CHAPTER SUMMARY NATURE OF CORPORATIONS CORPORATE ATTRIBUTES Legal Entity a corporation is an entity apart from its shareholders, with entirely distinct rights and liabilities Creature of the State a corporation may be formed only by substantial compliance with a State incorporation statute Limited Liability a shareholder s liability is limited to the amount invested in the business enterprise Free Transferability of Corporate Shares unless otherwise specified in the charter Perpetual Existence unless the charter provides otherwise Centralized Management shareholders of 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 As a Person a corporation is considered a person for some but not all purposes As a Citizen a corporation is considered a citizen for some but not all purposes CLASSIFICATION OF CORPORATIONS Public or Private Public Corporation one created to administer a unit of local civil government or one created by the United States to conduct public business Private Corporation one founded by and composed of private persons for private purposes; has no governmental duties Profit or Nonprofit Profit Corporation one founded to operate a business for profit Nonprofit Corporation one whose profits must be used exclusively for charitable,

2 educational, or scientific purposes Domestic or Foreign Domestic Corporation one created under the laws of a given State Foreign Corporation one created 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 Publicly Held or Closely Held Publicly Held Corporation one whose shares are owned by a large number of people and are widely traded Closely Held Corporation one that is owned by few shareholders and whose shares are not actively traded Subchapter S Corporation eligible corporation electing to be taxed as a partnership under the Internal Revenue Code Professional Corporations corporate form under which duly licensed individuals may practice their professions

3 FORMATION OF A CORPORATION ORGANIZING THE CORPORATION Promoter person who takes the preliminary steps to organize a corporation Promoters Contracts promoters remain liable on preincorporation contracts made in the name of the corporation unless the contract provides otherwise or unless a novation is effected Promoters Fiduciary Duty promoters owe a fiduciary duty among themselves and to the corporation, its subscribers, and its initial shareholders Subscribers persons who agree to purchase the initial stock in a corporation 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 Postincorporation Subscription a subscription agreement entered into after incorporation; an offer to enter into such a subscription is revocable anytime before the corporation accepts it FORMALITIES OF INCORPORATION Selection of Name the name must clearly designate the entity as a corporation Incorporators the persons who sign the articles of incorporation Articles of Incorporation the charter or basic organizational document of a corporation Organizational Meeting the first meeting, held to adopt the bylaws and appoint Officers Bylaws rules governing a corporation s internal management

4 RECOGNITION OR DISREGARD OF CORPORATENESS DEFECTIVE INCORPORATION Common Law Approach Corporation de Jure one formed in substantial compliance with the incorporation statute and having all corporate attributes Corporation de Facto one not formed in compliance with the statute but recognized for most purposes as a corporation Corporation by Estoppel prevents a person from raising the question of a corporation s existence Defective Corporation the associates are denied the benefits of incorporation Statutory Approach the filing or acceptance of the articles of incorporation is generally conclusive proof of proper incorporation Revised Model Business Corporation Act (RMBCA) liability is imposed only on persons who act on behalf of a defectively formed corporation knowing that there was no incorporation Model Business Corporation Act (MBCA) unlimited personal liability is imposed on all persons who act on behalf of a defectively formed corporation PIERCING THE CORPORATE VEIL General Rule the courts may disregard the corporate entity when it is used to defeat public convenience, commit a wrongdoing, protect fraud, or circumvent the law Application most frequently applied to Closely Held Corporations Parent-Subsidiary Corporations

5 CORPORATE POWERS SOURCES OF CORPORATE POWERS Statutory Powers typically include perpetual existence, right to hold property in the corporate name, and all powers necessary or convenient to effect the corporation s purposes Purposes a corporation may be formed for any lawful purposes unless its articles of incorporation state a more limited purpose ULTRA VIRES ACTS Definition of Ultra Vires Acts any action or contract that goes beyond a corporation s express and implied powers Effect of Ultra Vires Acts under RMBCA, ultra vires acts and conveyances are not Invalid Remedies for Ultra Vires Acts the RMBCA provides three possible remedies LIABILITY FOR TORTS AND CRIMES Torts under the doctrine of respondeat superior, a corporation is liable for torts committed by its employees within the course of their employment Crimes a corporation may be 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