• What steps are involved in bringing a
corporation into existence?
• What is the difference between a de jure
corporation and a de facto corporation?
• In what circumstances might a court
disregard the corporate entity (pierce
the corporate veil) and hold the
shareholders personally liable? 
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• How are corporations financed?
• What is the difference between stocks
and bonds?
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• A corporation is a creature of statute,
an artificial “person.”
–Corporations can have one or more
shareholders.
–Owners can be natural persons or
other businesses.
–Corporation substitutes itself for
shareholders.
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• Corporate Personnel.
–Responsibility for overall management
of company rests with board of
directors (elected by shareholders).
–Board of directors makes policy
decisions and hires officers to run
corporation on a daily basis.
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• Corporate Personnel (cont’d).
–Shareholders can sue corporation and
be sued by corporation and bring suit
for corporation in some instances.
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• Constitutional Rights of Corporations.
–Corporation is recognized as a legal
“person” and enjoys virtually same
rights and privileges under our
Constitution as a natural person:
• Access to court systems.
• Constitutional guarantees of free speech,
due process, and freedom from
unreasonable search and seizures.
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• Limited Liability of Shareholders.
–One of the key advantages of
corporations is the limited liability of
owners (shareholders).
–In certain situations, the corporate
“veil” of limited liability can be pierced,
holding the shareholders personally
liable.
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• Corporate Earnings and Taxation.
–Corporate profits can either be kept as
retained earnings or passed on to the
shareholders as dividends.
–Corporate Taxation: corporate taxes
can be taxes twice, first to the
corporation, then to the shareholders
via dividends. 
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• Corporate Earnings and Taxation
(cont’d).
–Holding Companies (parent company):
company whose business activity
consists of holding shares in another
company.
• Typically holding company is established
off-shore (Cayman Islands, Hong Kong,
etc).
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• Torts and Criminal Acts.
–Corporation is liable for the torts
committed by its agents or officers
within the course and scope of their
employment under the doctrine of
respondeat superior.
–Corporation can be liable for criminal
acts, but only fined. Responsible
officers may go to prison.
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• Classification of Corporations.
–Domestic corporation does business in
its state of incorporation.
–Foreign corporation from X state doing
business in Z state.
–Alien Corporation: formed in another
country doing business in United
States.
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• Classification of Corporations (cont’d).
–Public and Private Corporations.
–Nonprofit Corporations.
–Close Corporations: Shares held by few
shareholders.
• More informal management, similar to a
partnership.
• Restriction on transfer of sale and transfer
of shares. 
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• Classification of Corporations (cont’d).
–Close Corporations (cont’d).
• Management of Closely Held Corporations.
• Transfer of Shares
• Shareholder Agreement to Restrict Stock.
• Misappropriation of Closely Held
Corporation Funds. 
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• Classification of Corporations (cont’d).
–Close Corporations (cont’d).
• Misappropriation of Close Corporation
Funds. CASE 34.1 Williams v. Stanford
(2008). Was it acceptable for the Williams
brothers to demand $125,000 each for
their shares?
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• Classification of Corporations (cont’d).
–“S” Corporations.
• Avoids federal tax under IRS Code
“Subchapter S.”
• Avoids federal “double taxation” of regular
corporations at the corporate level. Only
dividends are taxed to the shareholders as
personal income.
• See requirements (p. 742). 
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• Classification of Corporations (cont’d).
–“S” Corporations: avoids federal tax
under IRS Code “Subchapter S.”
• IRS requirements: Corporation is domestic,
fewer than 75 shareholders, only one class
of stock, no shareholder can be a nonresident alien.
–Professional Corporations.
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• The process of incorporation
generally involves two steps:
–Preliminary and Promotional Activities;
and 
–The Legal Process of Incorporation.
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• Promotional Activities.
–Before corporation is formed,
promoters are the persons who take
the preliminary steps of organizing the
venture and attracting investors via
subscription agreements. 
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• Promotional Activities (cont’d).
–Promoter’s Liability: Promoter is
personally liable for pre-incorporation
contracts on behalf of the corporation,
unless 3rd party agrees to hold future
corporation liable.
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• Incorporation Procedures.
–Select State of Incorporation.
–Secure the Corporate Name.
–Prepare the Articles of Incorporation:
which deals with shares, the registered
agent and office, incorporators, duration
and purpose, and internal organization.
–File the Articles with State.
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• First Organizational Meeting to
Adopt Bylaws.
–After the corporation is “chartered”
(created) it can do business.
–At meeting, shareholders should
approve the bylaws, elect directors,
hire officers and ratify preincorporation contracts and activities.
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• Corporate Powers.
–Express Powers.
• Found in the corporation’s articles of
incorporation, the laws of the state of
incorporation, and in the state and
federal corporations.
• Corporate by-laws may also grant or limit
a corporation’s express powers.
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• Corporate Powers (cont’d).
–Implied Powers.
• To perform all acts reasonably necessary
to accomplish its corporate purposes.
• A corporate officer can bind corporation
in contract in matters connected with the
ordinary business affairs of the
enterprise.
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• Corporate Powers (cont’d).
–Ultra Vires Doctrine.
• Corporate acts beyond the express or
implied powers of the corporation (by
statute of articles of incorporation).
• Corporate articles of incorporations now
adopt very broad purposes to prevent
lawsuits against the corporation.
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• De Jure and De Facto Corporations.
–De Jure: substantial statutory
requirements are met; cannot be
attacked by state or 3rd parties.
–De Facto: statutory requirements not
met, but promoters made good faith
effort to comply with corporate law;
can only be attacked by state.
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• Corporation by Estoppel: if it acts like a
corporation, cannot avoid liability by
claiming that no corporation exists.
– CASE 34.2 Brown v. W.P. Media, Inc. (2009).
Why couldn’t W.P. Media deny Alabama
MBA’s existence?
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• Piercing the Corporate Veil.
–In certain situations, courts will “pierce
the corporate veil” and hold
shareholders personally liable in the
interests of justice and fairness.
–Factors a court considers:
• 3rd party tricked into dealing with a
corporation rather than the individual.

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• Piercing the Corporate Veil (cont’d).
–Factors (cont’d):
• Corporation is set up never to make a
profit or remain insolvent or is
undercapitalized.
• Corporation is formed to evade an
existing legal obligation.
• Statutory formalities are not followed. 
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• Piercing the Corporate Veil (cont’d).
–Factors (cont’d):
• Commingling of personal and corporate
interests or assets.
–A Potential Problem for Closely Held
Corporations.
• CASE 34.3 Schultz v. General Electric
Healthcare Financial Services (2010).
Why was Schultz personally liable?
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Bonds
vs.
Stocks
Debt
Ownership/equity
Fixed ROI
Dividends (variable)
No votes
Vote for Management
Optional
Required
Priority over stock
Paid last
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• Bonds.
–Issued by business firms and
government at all levels.
• Normally have a maturity date – when
principal is returned to investor.
• Sometimes referred to as fixed-income
securities, because bondholders receive
fixed-dollar interest payments.
• Bond indenture: lending agreement.
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• Stocks.
–Common Stock: represents true
ownership of a corporation.
• Provides pro-rata (proportional)
ownership interest reflected in voting,
control, earnings and assets.
• Investors who assume a residual financing
position (whatever is left may go to
dividends to shareholders). 
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• Stocks (cont’d).
–Preferred Stock: has preferences over
common stock.
• Cumulative Preferred.
• Participating Preferred.
• Convertible Preferred.
• Redeemable or Callable Preferred.
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• Venture Capital: start-up businesses
and high-risk enterprises need start-up
and expansion capital. The start-up
typically gives a share of its stock.
• Private Equity Capital: obtain capital
from wealthy investors. Ultimately, the
company may sell shares in an IPO.
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