Slide 1Sec. 1: Nature and Classification of CorporationsNature of the CorporationCorporate ManagementCorporate TaxationCorporate TaxationDividendsTort Liability and Criminal ActsClassification of CorporationsClassification of CorporationsClassification of CorporationsClassification of CorporationsProfessional Corps.& Benefit Corps.Sec. 2: Corporate FormationCorporate FormationCorporate BylawsSec. 3: Corporate PowersSec. 4: Piercing the Corporate VeilPiercing the Corporate VeilSec. 5: Directors and OfficersManagement Responsibilities of DirectorsRole of DirectorsDirectors’ MeetingsRights of DirectorsRole of Corporate Officers/Executive EmployeesFiduciary Duties of Directors and OfficersFiduciary Duties of Directors and OfficersThe Business Judgment RuleFiduciary Duties of Directors and OfficersFiduciary Duties of Directors and OfficersSec. 7: Major Business Forms Compared1CorporationsChapter 192Sec. 1: Nature and Classification of CorporationsA corporation is a separate legal entity created under state law. Each state has corporation statutes that govern the formation and operation of corporations in that state. Key advantages: ability to raise capital via sale of stock; continuity of life; and limited liability of owners. A corporation’s authority to act, and its liability for those actions, are separate and apart from its owners. Ownership of a corporation is represented by shares of stock, and the owners (“shareholders”) can change constantly without affecting the continued existence of the corporation (“continuity of life”). Stock may be purchased directly from the company (as in an IPO) or from other shareholders.3Nature of the CorporationShareholders are not liable for the debts, contracts, or torts of the corporation. This limited liability means that all they can lose is their investment in the stock.However if a court “pierces the corporate veil” of limited liability, shareholders can be held personally liable for certain corporation debts. (covered in Sec. 4)Shareholders are liable for any corporation debts that they have personally guaranteed.Key disadvantages: double taxation of business income; cost and complexity of formation and compliance; management constraints.4Corporate ManagementA corporation may have thousands of shareholders--or as few as one. Shareholders can be individuals, trusts, partnerships, corporations, or any other entity.Some shareholders may be subject to provisions of a “Shareholders Agreement” that restrict when (and to whom) shares can be sold. Shareholders do not directly manage the corporation; they elect the members of the board of directors who manage the corporation. Voting is generally based on the number of voting shares owned.The board of directors hires officers to run the corporation on a day to day basis.5Corporate TaxationCorporate profits (“net income”) can either be kept by the corporation for use in the business (as retained earnings) or distributed to the shareholders (as dividends). Growth companies often reinvest their earnings to expand the business instead of paying dividends.Corporations are taxed by federal and state governments on their income (regardless of whether they distribute it to shareholders).Holding companies in low-tax countries may be used by to reduce or defer federal income taxes.6Corporate Taxation“Double taxation” refers to the fact that corporations pay income tax on their earnings, and when those earnings are distributed in the form of dividends, shareholders pay income tax on the dividends they actually receive. Example: Modern Corp. has federal taxable income of $1,000,000 in 2013 and pays FIT of $340,000 on this income. Out of its 2013 income, Modern pays cash dividends of $250,000 to its shareholders, who then have to pay taxes on this dividend income (for individuals in 2013, typically 15%).7DividendsCorporate profits or income may be distributed to shareholders as dividends. Though typically paid in cash, dividends may also be in the form of company stock, cash, property, or corporate assets.Dividends are paid only if they are “declared” by the board of directors. Growth companies often do not pay dividends to shareholders because those funds are used to expand the business.State laws control the sources of funds available for the payment of dividends, which typically must be paid from retained earnings, net profits, and surplus.Tort Liability and Criminal ActsA corporation is liable for torts committed by its agents and officers in the course of their employment. Skip Case 19.1.Tort liability will be discussed in Chapter 20 in the context of employers’ vicarious liability for employees’ actions.A corporation may be liable for the criminal acts committed by officers/agents/employees while engaged in corporate business.89Classification of CorporationsFrom a state’s perspective, a “domestic corporation” is one that was incorporated in that state. The state in which it incorporated is the company’s “home state” and it is authorized to do business there.While a corporation only incorporates in one state, it can do business in other states by registering to do business as a “foreign corporation” in those states. A corporation registers to do business in a state as a foreign corporation by applying for a “certificate of authority.”Many companies incorporate in Delaware because of its favorable corporation laws—even if the companies do not plan to operate in DE.10Classification of CorporationsMost corporations are for-profit corporations. Publicly held corporations are those whose shares are traded in a securities market.Public corporations are organized by governments to meet governmental purposes (e.g., TVA, AMTRAK).Nonprofit corporations are typically formed and operated for educational, health, or charitable purposes (e.g., colleges, hospitals, charities).11Classification of CorporationsMost U.S. corporations are “close corporations” (a/k/a “privately held corporations” or “closely held corporations”), meaning their stock is not publicly traded. Typically, shares are held by a small number of shareholders who know each other. Other characteristics:Informal management; shareholders are often directors and officers.Shareholder agreements that restrict transfers of shares.Generally subject to state corporation