Chapter 19CORPORATIONSI. The Nature of Corporationsa. Corporation: legal entity created and recognized by state lawb. Shareholders = owners (via purchase of shares of stock)i. May be natural personsii. May be other businessesc. Corporate authority to act and any potential accompanying liability is separate and apart from shareholdersd. Considered a person and guaranteed the same rights and privileges as that of other US citizense. Board of Directors: i. Responsible for overall firm managementii. Makes policy decisionsiii. Hires officers and other employeesiv. Elected by shareholdersf. No personal liability for shareholders beyond the extent of their investmentg. Corporate profits can be distributed to shareholders as dividends or retained and reinvestedh. Corporate profits can be subject to double taxation: both corporate profits and dividends are taxed, unless the dividends represent distributions of capitali. Holding company (a.k.a parent company): a company whose business activity consists of holding shares in another companyi. Used to reduce or defer income taxesii. 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 onshorej. Corporation is liable for the torts committed by its agents or officers within the course and scope of their employmenti. Respondeat superiorii. Belmont v. MB Investment Partnersk. Corporation may be liable for criminal acts of agents and employeesi. Corporate officers and directors can be imprisonedii. Often, corporations are fined for any criminal infractionII. Corporation Classificationa. Classification typically depends on the corporation’s location, purpose andownership characteristicsb. Classification according to location:i. Domestic: a corporation is so named by its home stateii. Foreign: formed in one state but doing business in another1. Corporation must obtain a Certificate of Authority in the state in which it is doing business2. Failure to obtain the Certificate of Authority could subject the corporation to heavy fines or other sanctionsiii. Alien Corporationc. 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 citizensd. Publicly Held Corporation (a.k.a. Public Company): any corporation whose shares are publicly traded in a securities markete. NonProfit Corporations: corporations formed for purposes other than making a profitf. Close Corporations: shares are held by members of a family or by a small number of peoplei. No trading market for shares of a close corporationii. Has more flexibility in operation than traditional corporationiii. Management resembles that of partnership or sole proprietorshipg. 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 corporationii. Must not be a member of an affiliated group of corporationsiii. Shareholders must be individuals, estates, trust or tax exempt organizationsiv. Must have no more than 100 shareholdersv. Must only have one class of stockvi. No shareholder may be a non-resident alienh. Professional Corporations: an incorporated professional services firm; members are liable for malpractice of other membersi. Benefit Corporation: a for-profit corporation whose aim is to benefit society and/or the environmentIII. Corporate Formationa. Incorporation Procedure:i. Select a State in which to incorporate1. Corporation is a citizen of the state in which it is incorporated, so state laws must be considered2. Delaware is generally considered most corporate friendly stateii. Secure the corporate name1. Must ensure that proposed name is available to avoid duplication or deception2. Corporation doing business under a name that is identical to or deceptively similar to an existing corporation may be liable for trade name infringementiii. Prepare the Articles of Incorporation1. Primary document needed to incorporate; those who sign the articles are called incorporators2. Include basic information about the corporation and serves as primary source of authority for future organization and business functions3. Must include:a. Name of corporationb. Number of shares the corporation is authorized to issuec. Name and address of corporation’s initial registered agent and registered officed. Name and address of each incorporatoriv. File the Articles with the secretary of stateb. First organizational meeting after incorporation:i. Adopt bylaws (internal rules of management)ii. Elect board of directors if not already named in articles of incorporationc. 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 statuteiii. The parties have already undertaken to do business as a corporationIV. Corporate Powersa. 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 formedb. Express powers: found in state and federal law and articles of incorporation; includesi. Issue stocks and bondsii. Execute contractsiii. Buy and sell propertyiv. Pay employee benefitsv. Make charitable contributionsc. Implied powers: unless otherwise prohibited, the corporation has the implied power to perform all acts reasonably appropriate and necessary to accomplish the corporate purposed. 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 damagesV. Piercing the Corporate Veila. 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