Chapter 11 Business Organizations November 10th 2014 11 3 Corporations Learning Objectives Learn about the advantages and disadvantages of corporations Study roles and duties of shareholders directors and officers in corporations Explore issues surrounding corporate governance Understand how corporations are taxed Corporations Corporations Form of business organizations that provides limited liability to owners and is also flexible and easy to manage Possess continuity regardless of its owners Can be created for a limited duration or it can have perpetual existence Stock Capital raised by a corporation through issuance of shares entitling owners to an ownership interest o Allows for different classes of stock both common and preferred Securities Any negotiable instruments representing financial value such as a bond or stock Formed in compliance with corporate law o Corporate law is state law and corporations are incorporated by the states Initial Public Offering IPO First time a corporation sells its shares to members of the public Formation of a Corporation Articles of Incorporations are filed by the founders of the corporation with the state agency charged with managing business entities o Articles of Incorporation Legal document that creates a corporation when filed and approved by the relevant state authority Founders must state o Name of the company which is to be unique and distinctive Words like incorporated company corporation or limited are included Formation of a Corporation Whether it is for profit or nonprofit Their identity Duration of the company s existence Number of shares that will be issued initially and their par value Purpose of formation any lawful purpose o Par Value Face vale of a security as determined by the corporation o May be no Par Value shares Types of Corporations Domestic corporation Operated in the state in which it was incorporated Foreign corporation Incorporated in a state other than where it is seeking to operate Reasons for Existence of Corporation Reward owners of shareholders According to Chicago school economists corporations act legally to maximize shareholder value o Chicago School Neoclassical theory of economics most closely associated with influential economics faculty from the University of Chicago o Corporate Social Responsibility CSR Deliberate inclusion of the public interest into decision making o Closely Held Corporation Stock is held by only a small number of Value of a share is determined by the laws of supply and demand Own share or stock in the company but have no legal right to the company s Shareholders Owners of a corporation shareholders assets o Have limited liability Parent Company Owns all the stock of another corporation Affiliate Commercial enterprise with some sort of contractual or equity relationship with another commercial enterprise Subsidiary Company wholly owned or controlled by another company o Formed to hold real property so that premises liability is limited to that real estate subsidiary only Shields parent company and its assets from lawsuits Premises Liability Liability of landowners and leaseholders for torts that occur on their real property Legal Implications Sophisticated liability and tax planning make corporate from attractive for larger business in the United States Many sole proprietors incorporate their businesses to gain limited liability Failure to respect legal corporation by sole proprietors with an arm s length transaction leads creditors to ask a court to pierce the corporate veil o Arm s Length transaction Made by parties as if they were unrelated in a free market system each acting in its own best interest o Pierce the corporate veil Equitable doctrine allowing creditors to petition a court to not permit limited liability to a corporate shareholder If a court agrees then o Limited liability disappears o Creditors can reach shareholder s personal assets Creditors argue that corporate form is a sham to create limited liability Shareholders and corporation are indistinguishable from each other Shareholders U S corporate law allows for creation of different types of shareholders Shareholders of different classes may be given preferential treatment when it comes to corporate actions o Example Paying dividends or voting at shareholder meetings Dilution Result when a corporation issues additional shares resulting in a reduction of percentage of the corporation owned by shareholders Right of Shareholders Preemptive Right Rights given to existing stockholders to purchase new issues of the company stock before it is offered to the public so that existing stockholders can maintain proportionate ownership of the company if desired Outlined in a company s articles of incorporation or bylaws or required by state laws Right to obtain a dividend o Incase some shareholders are not available proxy is used Shareholder Derivative Lawsuit Brought by a shareholder on behalf of a corporation against a third party where board fails to take legal action o Typically involves suit against the board or top managers Board of Directors Group of persons elected by shareholders of company to set policy and high level strategy for the company Elected by shareholders Drawn from slate of candidates proposed by management and may include top level managers of the company o Chief executive officer CEO of the company does not necessarily serve as chair of the board of directors o Some corporations seat a representative for shareholders and large force of labor Duties of the Members of Board Declare and pay corporate dividends to shareholders Authorize entry into a new foreign market Appoint and remove corporate officers Determine employee compensation Issue new shares and corporate bonds o Corporate Bonds Debt obligation issued by corporations to raise money without selling stock Duties of the Members of Board Fiduciary duty to the corporation and its shareholders o Business Judgment Rule Legal assumption that prevents courts or juries from second guessing decisions made by directors unless they are proven to act with bad faith or corrupt motive Appoint Corporate Officers o Officers Senior management often C Level or Chief Level appointed by the board of directors of a corporation to execute strategy day to day matters for the corporation CEO CFO COO Types of Fiduciary Duties Double Taxation Imposition of two or more separate taxes on the same pool of money o Employer Identification Number EIN Unique nine digit number