Transcript Business Law and the Regulation of Business Chapter 34

Business Law and the
Regulation of Business
Chapter 34: Nature and Formation
of Corporations
By
Richard A. Mann
&
Barry S. Roberts
Topics Covered in this Chapter
I. Nature of Corporations
A. Corporate Attributes
B. Classification of Corporations
II. Formation of a Corporation
A. Organizing the Corporation
B. Formalities of Incorporation
III. Recognition or Disregard of Corporateness
A. Defective Incorporation
B. Piercing the Corporate Veil
IV. Corporate Powers
A. Sources of Corporate Powers
B. Ultra Vires Acts
C. Liability for Torts and Crimes
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.

Corporate Attributes



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.
Nature of Corporations
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 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.

Classification of Corporations
Profit Corporation – one founded to
operate a business for profit.
 Nonprofit Corporation – one whose
profits must be used exclusively for
charitable, educational, or scientific
purposes.

Classification of Corporations
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.

Classification of Corporations
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.

Types of Corporations
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.

Formation of a 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.
Promoter’s Preincorporation
Contracts
Corporation Does NOT Adopt Preincorporation Contract
Corporation
Promoter
bound
Third
Party
Corporation Does Adopt Preincorporation Contract
Corporation
Promoter
liable
Third
Party
Corporation, Promoter, and Third Party Enter into a Novation
Promoter
Corporation
Third
Party
Organizing the Corporation

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
any time 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.
Sample Articles of Incorporation
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
_________________________________________
Dated __________, 19___.
Address
_________________________________________________
Address
_________________________________________________
_________________________________________________
Incorprator(s)
Source: Reprinted with permission from Henn & Alexander, Corporations, 3rd ed. Copyright  1983 by West Publishing Company.
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.
Statutory Approach

The filing or acceptance of the articles of
incorporation is generally conclusive proof of
proper incorporation.

RMBCA – liability is imposed only on
persons who act on behalf of a defectively
formed corporation knowing that there was no
incorporation.

MBCA – unlimited personal liability is
imposed on all persons who act on behalf of
a defectively formed corporation.
Recognition of Corporate
Attributes: Statutory Approach
Non-recognition of Corporateness
RMBCA
Approach
MBCA
Approach
Recognition of Corporateness
No Filing of Articles of Incorporation
No corporate attributes
Joint and several liability for those who act
knowing that there was no
incorporation
Filing of Articles of Incorporation
Corporate attributes
Limited liability
Insulation from collateral suits
No Certificate Issued
No corporate attributes
Joint and several liability for all who
assume to act as a corporation
Certificate Issued
Corporate attributes
Limited liability
Insulation from collateral suits
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
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.

General Partnership, Limited Partnership,
Corporation, and Limited Liability Company
General
Partnership
Limited
Partnership
Public
Corporation
Close
Corporation
Transferability
Financial interest
may be assigned;
membership
requires consent
of all partners
Financial interest
may be assigned,
and assignee may
become limited
partner if all
partners consent
Freely transferable
Freely transferable Financial interest
unless shareholders may be assigned;
agree otherwise
membership
requires consent of
all members
Liability
Partners have
unlimited liability
General partners
have unlimited
liability; limited
partners have
limited liability
Shareholders have
limited liability
Shareholders have
limited liability
All members have
limited liability
Control
By all partners
By general
partners, not
limited partners
By board of
directors elected
by shareholders
By board of
directors elected
by shareholders
By all members
Continuity
Dissolved by
Dissolved by
death, bankruptcy, death, bankruptcy,
or withdrawal of
or withdrawal of
partner
general partner
Unaffected by
death, bankruptcy,
or withdrawal of
shareholder
Unaffected by
death, bankruptcy,
or withdrawal of
shareholder
Dissolved by
death, bankruptcy,
or withdrawal of
member
Taxation
Only partners
taxed
Corporation and
shareholders taxed
Corporation taxed
unless Subchapter
S applies;
shareholders taxed
Only members
taxed
Only partners
taxed
Limited Liability
Company
Comparison of Charter & Bylaws
Charter
Bylaws
Filing
Publicly
Not publicly
Amendment
Requires board and
shareholder approval
Requires only board
approval
Availability
Must include certain
mandatory and
optional provisions.
Some optional
provisions may be
elected only in the
charter
Must include certain
provisions unless they are
included in the charter
Validity
May include any
provision not
inconsistent with law
May include any provision
not inconsistent with law
and the charter