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COPYRIGHT © 2010 South-Western/Cengage Learning.
Promoter’s Liability Before the
Corporation is Formed
• The promoter is personally liable on any contract
signed before formation.
• The corporation is not liable unless it adopts the
contract after incorporation.
• Even if the corporation adopts the contract, the
promoter is still liable until the third party agrees
to a novation (new contract), unless the contract
clearly indicates that the other party is relying only
on the corporation, which he knows does not yet
exist.
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Defective Incorporation
• De Jure Corporation
– The promoter has substantially complied with
the requirements for incorporation, but has
made some minor error.
• De Facto Corporation
– The promoter has made a good faith effort to
incorporate and has actually used the
corporation to conduct business.
• Corporation by Estoppel
– If a party enters a contract believing in good
faith the corporation exists, he cannot later
take advantage of the fact that it does not.
COPYRIGHT © 2010 South-Western/Cengage Learning.
Incorporation Process
• Where to Incorporate
– In a state –either the home state of the business or a state
which has favorable laws for corporations (often Delaware)
• Charter’s Required Provisions
– Name of corporation
– Address and Registered Agent
– Incorporator –person who signs the charter and delivers it to
the Secretary of State for filing (perhaps the lawyer or the
promoter)
– Purpose – this can be a broad statement, such as “to conduct
lawful business”
– Stock – number, par value and types offered
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Stock
• Stock can be:
– Authorized and unissued
– Authorized and issued or outstanding
– Treasury stock (been issued, then bought back by
company)
• Par value - minimum issue price
• Classes and series
– Owners of preferred stock have preference on dividends
and liquidation.
– Common stock is last in line for any corporate payouts,
including dividends and liquidation.
COPYRIGHT © 2010 South-Western/Cengage Learning.
Charter’s Optional Provisions
• Indemnification of Directors
– Under most state statutes, a corporation may
include in its charter a provision to pay any
liability they incur from doing their job.
– Directors are usually liable for their own
misconduct.
• Cumulative Voting
– Under a cumulative voting system, a shareholder
is allowed to pool his shares and vote them all for
the same person.
COPYRIGHT © 2010 South-Western/Cengage Learning.
After Incorporation
• Directors and officers are elected,
unless all shareholders agree to not
have a board of directors.
• Minute book holds records of all
meetings.
• Bylaws set the rules for the
corporation.
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After Incorporation (cont'd)
• Shareholder Agreements – set
procedures for voting stock.
• Issuing Debt – corporations often need
to borrow funds for start-up.
– Bonds – long term debt secured by
company assets.
– Debentures – long term, unsecured debt.
– Notes – short term, either secured or
unsecured.
COPYRIGHT © 2010 South-Western/Cengage Learning.
Foreign Corporations
• A foreign corporation is one that does business
in any other state besides the state of
incorporation.
• Qualifying to Do Business
– To qualify, a corporation must register in any states
where it is “doing business.”
– Opening an office or establishing any other ongoing
presence is doing business.
– An unqualified company that is doing business
cannot file a lawsuit until it has registered. It can,
however, defend itself against a suit and it can file a
lawsuit if it is NOT doing business in that state.
COPYRIGHT © 2010 South-Western/Cengage Learning.
Death of a Corporation
• May be voluntary (shareholders vote) or forced
(by court order).
• Piercing the Corporate Veil -- a court may hold
shareholders liable for debt in four
circumstances:
– Failure to observe formalities (such as holding
meetings, keeping records)
– Commingling of assets (using corporate funds to pay
personal debts, etc.)
– Inadequate capitalization (the corporation should
obtain insurance against liability for torts)
– Fraud (injured party may recover from the guilty
party, even if the action was the corporation’s)
COPYRIGHT © 2010 South-Western/Cengage Learning.
Termination
• Terminating a corporation is a threestep process:
– Vote by a majority of the shareholders.
– Filing Articles of Dissolution with the
Secretary of State.
– Winding up – paying debts and
distributing assets.
COPYRIGHT © 2010 South-Western/Cengage Learning.
“Entrepreneurs often become
impatient with the legal
technicalities required to form
and maintain a corporation.
However, these legalities can
have a profound impact on the
success of the business.”
COPYRIGHT © 2010 South-Western/Cengage Learning.