Chapter 19 CORPORATIONS I The Nature of Corporations a Corporation legal entity created and recognized by state law b Shareholders owners via purchase of shares of stock i May be natural persons ii May be other businesses c Corporate authority to act and any potential accompanying liability is separate and apart from shareholders d Considered a person and guaranteed the same rights and privileges as that of other US citizens e Board of Directors i Responsible for overall firm management ii Makes policy decisions iii Hires officers and other employees iv Elected by shareholders f No personal liability for shareholders beyond the extent of their investment g Corporate profits can be distributed to shareholders as dividends or retained and reinvested h Corporate profits can be subject to double taxation both corporate profits and dividends are taxed unless the dividends represent distributions of capital i Holding company a k a parent company a company whose business activity consists of holding shares in another company i Used to reduce or defer income taxes ii Typically established in a low tax no tax offshore jurisdiction ex Cayman Islands Dubai Monaco iii Holding company profits are NOT taxed at the rate applicable to the parent company unless the profits are brought back onshore j Corporation is liable for the torts committed by its agents or officers within the course and scope of their employment i Respondeat superior ii Belmont v MB Investment Partners k Corporation may be liable for criminal acts of agents and employees i Corporate officers and directors can be imprisoned ii Often corporations are fined for any criminal infraction II Corporation Classification a Classification typically depends on the corporation s location purpose and ownership characteristics b Classification according to location i Domestic a corporation is so named by its home state ii Foreign formed in one state but doing business in another 1 Corporation must obtain a Certificate of Authority in the state in which it is doing business 2 Failure to obtain the Certificate of Authority could subject the corporation to heavy fines or other sanctions iii Alien Corporation c Public and Private Corporations i Public a corporation formed by the government to meet some political or governmental purpose ex TVA USPS ii Private created for profit and owned by private citizens d Publicly Held Corporation a k a Public Company any corporation whose shares are publicly traded in a securities market e NonProfit Corporations corporations formed for purposes other than making a profit f Close Corporations shares are held by members of a family or by a small number of people i No trading market for shares of a close corporation ii Has more flexibility in operation than traditional corporation iii Management resembles that of partnership or sole proprietorship g S Corporation a close corporation falling under Subchapter S of Internal Revenue Code and taxed like a partnership must meet many requirements among them i Corporation must be a domestic corporation ii Must not be a member of an affiliated group of corporations iii Shareholders must be individuals estates trust or tax exempt organizations iv Must have no more than 100 shareholders v Must only have one class of stock vi No shareholder may be a non resident alien h Professional Corporations an incorporated professional services firm members are liable for malpractice of other members i Benefit Corporation a for profit corporation whose aim is to benefit society and or the environment III Corporate Formation a Incorporation Procedure i Select a State in which to incorporate 1 Corporation is a citizen of the state in which it is incorporated so state laws must be considered 2 Delaware is generally considered most corporate friendly state ii Secure the corporate name 1 Must ensure that proposed name is available to avoid duplication or deception 2 Corporation doing business under a name that is identical to or deceptively similar to an existing corporation may be liable for trade name infringement iii Prepare the Articles of Incorporation 1 Primary document needed to incorporate those who sign the articles are called incorporators 2 Include basic information about the corporation and serves as primary source of authority for future organization and business functions 3 Must include a Name of corporation b Number of shares the corporation is authorized to issue c Name and address of corporation s initial registered agent and registered office d Name and address of each incorporator iv File the Articles with the secretary of state b First organizational meeting after incorporation i Adopt bylaws internal rules of management ii Elect board of directors if not already named in articles of incorporation c De Jure Corporation one that has substantially complied with all conditions precedent to incorporation minor defects can be overlooked d De Facto Corporation not all states recognize De Facto Corporations If there is a major defect in the incorporation procedure courts will steal treat the entity as a corporation if i A statute exists under which the corporation can be validly incorporated ii The parties have made a good faith attempt to comply with the statute iii The parties have already undertaken to do business as a corporation IV Corporate Powers a Corporation can engage in any act and enter into any contract available to a natural person in order to accomplish the purposes for which it was formed b Express powers found in state and federal law and articles of incorporation includes i Issue stocks and bonds ii Execute contracts iii Buy and sell property iv Pay employee benefits v Make charitable contributions c Implied powers unless otherwise prohibited the corporation has the implied power to perform all acts reasonably appropriate and necessary to accomplish the corporate purpose d Ultra Vires Doctrine acts of a corporation that are beyond the express and implied powers shareholders can seek an injunction to prevent the corporation from engaging in such acts or can seek damages V Piercing the Corporate Veil a A legal decision to treat the rights and duties of the corporation as the rights or liabilities of the shareholders courts ignore the corporate structure and expose shareholders to personal liability b Courts will pierce the veil when the corporate privilege is abused for personal benefit or when the corporate business is indistinguishable from that of a