Section 28.1 Corporations
BELL QUIZ ON CHAPTER 27
1. What is the most common type of business?
2. Name one advantage of a sole proprietorship.
3. Name one disadvantage of a sole
proprietorship.
4. Name one advantage of a partnership.
5. Name one disadvantage of a partnership.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
ANSWERS TO BELL QUIZ
1. Sole proprietorship
2. – 5.
(See handout for answers)
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1
Corporations
Section 28.1 Corporations
Why It’s Important
Understanding the nature of a corporation
will help you decide when to form one rather
than the other associations that are
available.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
The Nature of a Corporation
A corporation is a body formed and
authorized by law to act as a single
person, distinct from its members or
owners.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
The Nature of a Corporation
NOTES:
About 90 percent of all business in the
United States is done by corporations.
Not all corporations are large
businesses. Approximately 40 percent
of all corporations employ fewer than
five employees.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
The Nature of a Corporation
An individual who owns shares of a
corporation is called a shareholder
or a stockholder.
A share is a single unit of
ownership of a corporation.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
The Nature of a Corporation
NOTES:
Each shareholder has one vote for
each share of stock that he or she
owns.
Shareholders cast their votes to elect
a board of directors whose duty is to
direct the corporation’s business.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Advantages of a Corporation
NOTES:
Selling shares enables a
corporation to tap into a large
source of capital.
Shareholder’s liability is limited to
the amount of money he or she paid
for shares in the corporation.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Advantages of a Corporation
NOTES:
It is a legal entity and has the power
to make contracts, buy and sell
goods, and sue and be sued.
It has continuity of existence,
regardless of the lifespans of
founders, shareholders, and directors.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Disadvantages of a Corporation
NOTES:
A corporation’s income may be taxed
more than once. First as company
profits; then shareholders’ dividends
become part of their taxable income.
Large corporations face extensive
government regulation.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Disadvantages of a Corporation
NOTES:
Original founders can lose not only
control but also actual ownership.
Because of the prominence of some
corporations, business decisions
may be subject to close scrutiny.
Understanding Business and Personal Law
Forming and Financing a Corporation
28.1 28.1 Corporations
Section
Types of Corporations
NOTES:
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Forming a Corporation
NOTES: Each state has its own version of
corporate law. States may use:
the Model Business Corporation Act
(MBCA)
the Revised Model Business
Corporation Act (RMBCA)
their own statutes
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
The Incorporation Process
1. A promoter carries out the
incorporation process by taking the
initial steps to organize and finance
a business.
2. NOTES: Promoters choose a
corporate name.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
The Incorporation Process
3. Promoters are responsible for
drawing up and filing the articles of
incorporation, an application for
incorporation of a business that
describes a corporation’s
organization, powers, and authority.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
The Incorporation Process
4. NOTES: A filing fee completes the
application.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
The Incorporation Process
5. After the application is approved by
the secretary of state, the
corporation receives a certificate of
incorporation, its official
authorization to do business in the
state (also called a charter).
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
The Incorporation Process
NOTES:
6. Initial shareholders elect a board of
directors who replace the original
incorporators.
7. Directors elect a chairman and top
corporate officers to manage the
company.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Articles of Incorporation
NOTES: The articles of incorporation
usually include the following
information.
name of the corporation, including
the words company, incorporated,
or corporation or appropriate
abbreviations.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Articles of Incorporation
NOTES:
proposed duration of the
corporation
purpose(s) of the corporation
number, classes, and value of
corporate shares
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Articles of Incorporation
NOTES:
shareholders’ rights in relation to
shares, classes of shares, and
special shares
address of the original registered or
statutory agent
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Articles of Incorporation
NOTES:
names and signature of the initial
directors
names and signatures of the
incorporators
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Corporate Financing
NOTES: A corporation may choose to
issue several different kinds of stock.
Along with each share of stock come
certain rights.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Types of Stock
Common stock is the basic form of
corporation ownership.
NOTES:
Owners have voting rights.
It pays dividends, or profits, to the
shareholders based on the
corporation’s performance.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Types of Stock
Preferred stock is the second type of
stock issued by a corporation.
Owners have no voting rights.
But do receive a fixed dividend.
Preferred stock dividends are paid
before common stock dividends.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Forming a Limited
Liability Company
A limited liability company (LLC) is
a new type of business enterprise that
has been adopted by all states. It is a
combination of a partnership and a
corporation.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Forming a Limited
Liability Company
NOTES:
LLCs offer limited liability to its
owners.
Like the partners in a partnership,
the owners of an LLC escape
double taxation.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Forming a Limited
Liability Company
LLCs are statutory entities—they can
be formed only if owners follow the
legal steps required—and must also
have a statutory agent for service of
process.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Incorporation Problems
The courts have developed two
doctrines: de facto corporations and
corporation by estoppel to deal with
incorporation problems.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
De Facto Corporation
NOTES: Even when making a good
faith attempt to incorporate, promoters
sometimes inadvertently make an
error in filing, or fail to complete the
incorporation.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
De Facto Corporation
NOTES: The laws says that, although
the corporation does not exist in law
(de jure), it does exist in fact (de
facto). This type of corporation is
called a de facto corporation.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Corporation by Estoppel
NOTES: Like other estoppel
doctrines, corporation by estoppel
stops people from denying the
consequences of their own actions.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Corporation by Estoppel
NOTES: Corporation by estoppel
usually occurs when some party has
been willing to treat a person or a
group of people as a corporation,
generally reaping some benefit from
the relationship.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Corporation by Estoppel
NOTES: When this happens, the court
will not allow that party to then deny
the existence of the corporation
because doing so would be unfair.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Piercing the Corporate Veil
NOTES: Sometimes there are
extreme circumstances in which the
courts will deny shareholders the
benefits of limited liability and hold
them personally liable. This is known
as piercing the corporate veil.
End of Chapter 28
Understanding Business and Personal Law
Forming and Financing a Corporation