Corporations



Corporations

A separate legal entity (a “person”)

owned by investors (shareholders)

and managed by a board of directors

□ Corporate Characteristics (Advantages)

➢ Continuity of Life—“Perpetual Life”

Corporation does not automatically terminate on change of shareholder.

➢ Centralization of Management

Board of directors elected by shareholders manages business.

Directors appoint officers (president, vice president, secretary) to manage daily operations.

➢ Limited Liability

Shareholders have limited personal liability.

➢ Free Transferability of Interests

Ownership of corporations may be transferred.

Exception: closely held corporations

□ Disadvantages of Corporate Form

➢ Corporate Formalities

Must be complied with to maintain corporate status (liability protections)

For example, articles of incorporation, bylaws, annual shareholders’ meetings, regular board of directors’ meetings, and so on

➢ Taxation Considerations

Double Taxation

First, corporate person is taxed.

Second, shareholders are taxed when corporate profits (dividends) are paid.

Exception: close corporations

Corporate Forms

Basic Forms

Business Corporations

Statutory Close Corporations

Specific Categories of Businesses

Nonprofit Corporations

Professional Corporations

IRS Designation

S Corporation

Receives pass-through taxation

□ Business Corporations

Basic form for all corporate forms

owners = shareholders (investors without liability)

managers = board of directors or officers

Advantages

1. perpetual life

2. centralization of management

3. limited liability

4. free transferability of ownership

Disadvantages

1. corporate formalities

2. double taxation

□ Statutory Close Corporation

Small corporation (e.g., family owned)

50 or fewer shareholders (Nevada: 30 or fewer)

Shareholders also manage; therefore, stock ownership is restricted. Restriction is on stock certificate.

➢ Formation

Statutory close corporation election in articles of incorporation

➢ Organization

Managed by shareholders

Organized pursuant to shareholders’ agreement

➢ Minimal Corporate Formalities

Board of directors not required

Bylaws not required

Annual shareholders’ meetings not required

main advantage = stock transfer restrictions

□ Professional Corporation

Traditionally sole proprietors or partnerships

Theory: hold professionals accountable for services

➢ Special Considerations

• Name must specify

P.C. (professional corporation)

P.A. (professional association)

S.C. (service corporation)

• Liability Protections

More restrictive than other corporations

Limited personal liability for negligence or malfeasance of associates

• Ownership Restrictions

Only by professionals

Theory: eliminates profit motives of investors

□ Nonprofit Corporation

(charitable, educational, cultural, religious, etc.)

1. limits liability of benefactors

2. offers taxation exemptions

□ S Corporation

IRS designation but not a separate corporate form

Small corporations (less than 75 shareholders) Shareholders—individuals or extensions of individuals (trusts, estates, etc.)

Advantages Disadvantages

Perpetual Centralization Limited Free Transferability Formalities Double

Life of Management Liability of Interests Taxation

Business x x x x x x*

Close x x x x*

Nonprofit x x x x x Exempt

Professional x x** x x*

* Unless S election is made

** All professionals remain personally liable for their own negligence or malfeasance and that which they supervise or have knowledge of.

Formation of a Corporation

Creating the corporation

□ Preincorporation Considerations

➢ Organization

• Corporate Organizers

Promoters

organize corporation

lease business property

buy business equipment

hire employees

solicit investors

Incorporators

sign and file

articles of incorporation

Generally, promoters have a role only in large corporations. Also, promoters and incorporators often are the same people and become shareholders in the corporation.

Selection of Jurisdiction

MBCA and RMBCA—uniform laws

Reduce forum shopping

Corporate Financing

Potential investors agree to purchase corporate shares once corporation is formed.

= preincorporation share subscriptions

Corporate Name

Designate one of the following:

“Corporation”

“Incorporated”

“Company”

Name may not be deceptively similar to another corporate name (to prevent consumer confusion and unfair competition).

Large corporations intending to expand markets reserve their corporate names.

□ Preincorporation Document Preparation

➢ Formation

File articles of incorporation with secretary of state.

Acceptance of articles of incorporation =

beginning of corporate life

Articles of incorporation are an informational filing with the secretary of state. Look to state statute.

name of corporation

purpose of corporation

capital structure of corporation

registered agent

initial board of directors

Note: Provide minimal information because articles of incorporation are available for public inspection and difficult to amend.

□ Postincorporation Procedures

Organizing = bylaws and meetings of incorporators and directors

➢ Bylaws (operating procedures)

= written guidelines and procedures for operation and management

dates and places of shareholders’ and board of directors’ meetings

voting of board of directors

duties of board of directors or officers

stock issuance and ownership

corporate finances (e.g., bank accounts)

➢ Organizational Meeting

By incorporators or initial directors

Purpose

elect directors (if none in articles of incorporation)

appoint corporate officers

approve articles of incorporation

adopt bylaws

ratify preincorporation transactions

□ Defective Incorporation Doctrines

de jure corporation = valid corporation

Corporation complies with all state statutory requirements, so corporation cannot be set aside and shareholders cannot be held liable for corporate debts.

But if a corporation does not comply with statutory requirements, then corporate structure may be set aside and shareholders may be personally liable for obligations of corporation.

A defective corporation, however, may be saved according to one of the following theories:

De Facto Corporation

Business owner has in good faith

1. attempted to comply with state statutory requirements and

2. operated as corporation (e.g., uses corporate name)

Creditor cannot set aside corporate structure.

But state can always challenge corporate status.

Corporation by Estoppel

If party to a contract represents self as corporation,

other party cannot set aside corporate existence.

Applicable only to contract disputes

Reflects contract expectations

□ Taxation Considerations

Federal Income Taxation

Corporation is taxed as “person.”

Shareholders are taxed on dividends.

Exception: S corporations are offered pass-through taxation.

State Income Taxation

Prorated state taxing

Each state in which corporation transacts business may tax corporation.

Corporate residence versus sales profits

Corporate Organizational Structure

Shareholders ……….……………………Corporate Owners

Elect directors

Vote on extraordinary corporate matters

Directors ………..………………………………Policy Makers

Make corporate policy

Determine management of corporation

Officers ……………………..………………Daily Managers

Implement corporate policies

Manage daily operations of corporation

Shareholders

Corporate owners

Contribute investment capital for shares

Ownership = right to receive corporate profits, elect and remove directors, vote on extraordinary corporate matters, receive corpororate assets in dissolution.

No management rights, therefore, no personal liability

□ Shareholders’ rights

➢ Inspection rights

Inspect corporate books to oversee management

➢ Voting Rights

• Elect and Remove Directors

• Extraordinary Corporate Matters

Amendment of articles of incorporation

Mergers

Sale of corporate assets not ordinary

Dissolution

• Voting Mechanisms

quorum = minimum number of shares for valid vote

1. per articles of incorporation or bylaws

or

2. RMBCA = majority of votes

majority of quorum = binding vote

adjourn and reschedule if no quorum

• Proxies

Another person votes shareholder’s vote.

➢ Preemptive Rights

Shareholders’ right to maintain proportionate ownership interest (i.e., control of corporation)

Prevents outsiders from taking over corporation

➢ Meeting Rights

• Meeting Prerequisites

Shareholders eligible to vote

Shareholders owning stock on date of notice of meeting (record date)

Notice of meetings (date, place, time)

Shareholders must have reasonable notice.

May waive notice

• Shareholders’ Meetings

1. Annual meetings

Purpose: elect new directors

Other matters: amend articles,

consider mergers

2. Special meetings

Held between annual meetings

3. Meetings by written consent

Votes must be unanimous (all shareholders).

Minutes of corporate meetings must be maintained.



□ Shareholders’ Liability

Shareholders generally have no personal liability

= veil between corporation and shareholders

➢ Piercing the Corporate Veil

But veil may be pierced

1. 1. to prevent fraud or injustice

2. 2. if a shareholder personally guarantees loans

Three reasons

1. lack of corporate formalities

2. commingling of assets

3. inadequate capitalization

➢ Personal Guarantee by Shareholder

Voluntary agreement by shareholder to be personally liable for specific debts of corporation (maintains liability protections for other debts)

Purpose: financing for corporation

Directors

Corporate policy makers

□ Election of Directors

Directors are elected by shareholders at annual meetings.

➢ Voting Mechanisms

Plurality of outstanding shares

Cumulative voting versus straight voting

➢ Removal of Directors

10 percent vote to remove director

□ Directors’ Duties

➢ Management Responsibilities

make corporate policy

declare corporate dividends

elect and remove officers of the corporation

initiate extraordinary corporate matters

➢ Directors’ Meetings (look to bylaws)

Voting requirements and restrictions

Majority of directors must be at meeting for valid vote.

➢ Fiduciary Duties

• Duty of Care

Reasonably prudent director standard

Business judgment rule

• Duty of Loyalty

Conflict of interest

1. Personal interest in corporate transaction

full disclosure

a. disclose interest

b. transaction fair to corporation

2. Usurpation of corporate opportunity

3. Insider trading

Trading on corporation’s stock with inside information (information not available to general public)

• Directors’ Liability

Director and liability insurance

Provides director’s protection from suit

Ultra Vires Acts

Director exceeds authority granted

Breach of Fiduciary Duties

Duty of Care

Duty of Loyalty

Conflict of interest

Usurpation of corporate opportunity

Insider trading

Officers

Corporate (daily) managers

□ Appointment and Removal of Officers

□ Officers’ Duties

President oversees general management

Vice President has variable duties

Secretary keeps records of corporation

Treasurer is responsible for financial affairs

□ Agency

Officers are agents of corporation.

➢ Express Authority

Granted by

articles of incorporation

bylaws

board of directors

➢ Implied Authority

Authority that public assumes of officer

➢ Apparent Authority

Corporation gives impression officer has authority.

Purpose: to protect public from unauthorized acts of officers

□ Fiduciary Duties

➢ Duty of Care

➢ Duty of Loyalty

Breach of fiduciary duties

Creates personal liability

Business judgment rule

Fundamental Changes in

Corporate Structure

□ Fundamental Changes

merger

consolidation

sale, lease, exchange of corporate assets not in the

ordinary course of business

amendment to articles of incorporation

dissolution

□ Standard Approval Procedure

Board of directors and shareholders must approve change.

(File articles of amendment.)

➢ Board of Directors’ Approval

Is change in best interests of shareholders?

If approved, then submit to shareholders.

➢ Shareholders’ Approval

Approved by majority (or two-thirds)

Dissenters’ rights

Fundamental Changes

1. Amendment to Articles of Incorporation

Articles create and organize; therefore,

amendment = fundamental change

File articles of amendment with secretary of state.

2. Merger

One or more corporations (merged corporations) absorbed into

another corporation (surviving corporation)

File articles of merger with secretary of state.

3. Consolidation

One or more corporations merge and form a new corporation

File articles of consolidation with secretary of state.

4. Sale of Corporate Assets

Corporation buys all or substantially all of the assets of another corporation (not in ordinary course of business).

Purpose: escape liabilities of selling corporation

(5. Hostile Takeovers)

Take over management, ownership, or both of corporation without approval of board of directors or shareholders.

6. Dissolution of Corporation

Two-step process: a. dissolve corporate form

b. liquidate corporate assets

□ Dissolution

1. Voluntary

By board of directors or shareholders

2. Involuntary

Because of poor or ineffective management

Dissolved by state, shareholders, or corporate creditors

➢ Liquidation of Corporate Assets

Turning assets into cash

1. creditors’ claims

Paid before distribution to shareholders

2. distributions to shareholders

➢ File Articles of Dissolution

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download