Transcript Chapter 035 - Formation & Operation of Corporations

Corporations
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Corporation
A fictitious legal entity
that is created
according to statutory
requirements.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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The Corporation as a Legal
“Person”
• A corporation is a separate legal
entity (or legal person).
• Corporations can:
– Sue or 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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Characteristics of Corporations
Limited Liability
of Shareholders
Centralized
Management
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Free
Transferability of
Shares
Perpetual
Existence
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Limited Liability of Shareholders
• Shareholders are only liable to the
extent of their capital
contributions for the contracts
and debts of their corporation.
• Are not personally liable for the
contracts and debts of the
corporation.
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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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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 .
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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.”
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Public v. Private
• Public Corporation
– A corporation formed to meet
a specific governmental or
political purpose.
• Private Corporation
– A corporation formed to
conduct privately owned
business.
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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.
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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-andsell agreements
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Professional Corporation
• A corporation formed by
lawyers, doctors, or other
professionals.
• Shareholders called
members.
• Members not usually liable for
torts committed by members
or agents
• Liability usually imposed for
malpractice of members.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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.
Common shareholders have
limited liability.
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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.
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Preferred Stock
Dividend
Preference
Conversion
Right
Right to
Participate in
Profits
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Liquidation
Preference
Cumulative
Dividend Right
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