Domestic and Multinational
Corporations
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Corporation
A fictitious legal entity
that is created
according to statutory
requirements.
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Nature of the Corporation
• Corporations are a product of the
state law.
• Corporations Codes – State
statutes that regulate the
formation, operation, and
dissolution of corporations.
• Courts interpret state corporation
statutes to decide individual,
corporate and shareholder
disputes.
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The Corporation as a Legal
“Person”
• A corporation is a separate legal
entity (or legal person).
• Corporations can:
– Sue and be sued in their own
names.
– Enter into and enforce contracts.
– Hold title to and transfer property.
– Be found civilly and criminally
liable for violations of law.
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Characteristics of Corporations
Limited Liability
of Shareholders
Centralized
Management
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Free
Transferability of
Shares
Perpetual
Existence
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Limited Liability of Shareholders
• Shareholders are only liable to the
extent of their capital
contributions (stock purchases) for
the contracts and debts of the
corporation.
• Are NOT personally liable for the
contracts and debts of the
corporation.
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Free Transferability of Shares
• Corporate shares are freely
transferable by the
shareholder.
– May sell, assign, pledge, or gift.
– Unless issued pursuant to
certain exceptions from
securities registration.
• Shareholders may agree
among themselves on
restriction on the transfer of
shares.
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Perpetual Existence
• Corporations exist in
perpetuity
– Unless specific duration is
stated in articles of
incorporation.
• Can be voluntarily
terminated by the
shareholders.
• May be involuntarily
terminated by the
corporation’s creditors .
(BR does not dissolve.)
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Centralized Management
• Board of Directors makes policy
decisions concerning the
operation of the corporation.
• Members of the Board of Directors
are elected by the Shareholders.
• Directors appoint Corporate
Officers to run the corporation’s
day-to-day operations.
– Directors and the officers form the
corporate “management.”
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There is no general federal
corporations law governing the
formation and operation of
private corporations.
Many federal laws regulate the
operation of private
corporations.
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Public v. Private
• Public Corporation
– A corporation formed to meet
a specific governmental or
political purpose.
– i.e. Amtrack, State Fund Ins.
• Private Corporation
– A corporation formed to
conduct privately owned
business.
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Profit v. Nonprofit
• Profit Corporation
– A corporation created to
conduct a business for profit.
– Can distribute profits to
shareholders in the form of
dividends.
• Nonprofit Corporation
– A corporation that is formed to
operate charitable institutions,
colleges, universities, and other
not-for-profit entities.
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Publicly Held v. Closely Held
• Publicly Held Corporation
– A corporation that has many
shareholders.
– It’s securities are traded on
organized security markets.
• Closely Held Corporation
– A corporation owned by few
shareholders.
• Shareholders often involved in
management(Managers /
Officers)
• Shareholders may have buy-andsell agreements
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Professional Corporation
• A corporation formed by
lawyers, doctors, or
Accountants.
• Shareholders called
members.
• Members not usually liable for
torts committed by other
members or agents
• Liability usually imposed for
malpractice of members.
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Types of Corporations
Type of
Corporation
Description
Domestic
A corporation is a domestic
corporation in the state in which it is
incorporated
Foreign
A corporation is a foreign corporation
in states other than the one in which it
is incorporated
Alien
A corporation is an alien corporation
in the United States if it is
incorporated in another country.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Incorporation Procedures
• Corporations are creatures of
statute.
• The organizers of the corporation
must comply with the state’s
incorporation statute to form a
corporation.
• A corporation can be
incorporated in only one state.
• It can do business in all other
states in which it qualifies.
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Incorporators
• The person or persons,
partnerships, or corporations
that are responsible for
incorporation of a
corporation.
• Primary duty is to sign the
articles of incorporation.
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Promoter
• A person or persons who:
– Organize and start the
corporation
– Negotiate and enter into
contracts in advance of its
formation
– Find the initial investors to
finance the corporation
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Promoters’ Liability
• Promoters often enter into
contracts on behalf of the
corporation prior to its actual
incorporation.
• If the corporation never comes
into existence, the promoters
have joint personal liability on the
contract, unless the third party
specifically exempts them from
such liability.
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Promoters’ Liability (continued)
• If the corporation is formed, it
becomes liable on a promoter’s
contract only if it agrees to to
become bound to the contract.
• The promoter remains liable on
the contract unless the parties
enter into a novation.
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Articles of Incorporation
• The basic governing documents
of the corporation.
– Must be filed with the secretary of
state of the state of incorporation.
– Contains name of corporation,
number of shares authorized, name
and address for registered agent for
service and incorporators.
– May contain term, purpose,
limitations, regulations of affairs.
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Amending the Articles
– Can be amended to contain
any provision that could have
been lawfully included in the
original document.
– Must show that the Board
adopted resolution
recommending amendment
– Shareholders voted to approve
– Filed with secretary of state
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Corporate Status
• Calif. Corporations Code provides
that corporate existence begins
when the articles of incorporation
are filed.
– The filing of the articles of
incorporation is conclusive proof that
a corporation exists.
– After that, only the state can
challenge the status of the
corporation.
– Third parties cannot thereafter
challenge the existence of the
corporation.
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Purpose
• Can be formed for any legal
purpose.
• General-Purpose Clause is often
included in the articles of
incorporation that authorizes the
corporation “to engage in any
activity permitted corporations by
law.”
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Registered Agent
• A person or corporation that
is empowered to accept
service of process on behalf
of the corporation.
• Must be identified in the
articles
• Must have office in state.
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Corporate Bylaws
• A detailed set of rules adopted by
the board of directors after the
corporation is incorporated.
– Contains provisions for
managing the business and the
affairs of the corporation.
– Govern internal management
structure.
– Board of directors may amend.
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Corporate Seal
• A design containing the
name of the corporation and
the date of incorporation.
– It is imprinted by the
corporate secretary using
a metal stamp on certain
legal documents.
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Organizational Meeting
• A meeting held by the initial
directors of the corporation
after the articles of
incorporation are filed.
• Directors adopt bylaws, elect
officers, transact business.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheesemn
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S Corporations
• Corporations are separate legal
entities.
• They generally must pay
corporate income taxes to federal
and state governments.
• If a corporation distributes its
profits to shareholders in the form
of dividends, shareholders must
pay personal income tax on the
dividends.
• This double taxation of
corporations is a disadvantage of
doing business.
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S Corporations (continued)
• Some corporations and their
shareholders can avoid double
taxation by electing to be an S
Corporation.
• If a corporation elects to be taxed
as an S Corporation, it pays no
federal income tax at the
corporate level.
• The corporation’s income or loss
flows to the shareholders’
individual income tax returns.
• Election is made by filing IRS Form
2553.
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Financing the Corporation
• A corporation needs to finance
the operation of its business.
– Equity securities (or stocks) –
represent ownership rights in
the corporation.
– Debt securities – establish a
debtor-creditor relationship in
which the corporation borrows
money from the investor to
whom the debt security is
issued.
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Equity Securities
• Common Stock – A type of equity
security that represents the
residual value of the corporation.
– Common stock has no
preferences.
– Common stock does not have
a fixed maturity date.
– Corporations may issue
different classes of common
stock.
– Common shareholders have
limited liability.
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Equity Securities (continued)
• Preferred Stock – A type of equity
security that is given certain
preferences and rights over
common stock.
– Preferred stock can be issued in
classes or series.
– One class of preferred stock
can be given preferences over
another class of preferred
stock.
– Preferred shareholders have
limited liability.
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Types of Shares
Type of
Share
Description
Authorized
Shares authorized in the corporation’s
articles of incorporation.
Issued
Shares sold by the corporation.
Treasury
Shares repurchased by the corporation.
They do not have the right to vote.
Outstanding
Shares of stock that are in shareholder
hands. These shares have the right to
vote.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Debt Securities
• Debenture – A long-term
unsecured debt instrument that is
based on the corporation’s
general credit standing.
• Bond – A long-term debt security
that is secured by some form of
collateral.
• Note – A debt security with a
maturity of five years or less.
• Indenture Agreement- A contract
between the corporation and the
holder that contains the terms of
debt security.
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Express Powers of a
Corporation
• A corporation has the same basic
rights to perform acts and enter
into contracts as a physical
person.
• A corporation’s express powers
are found in:
(1) the U.S. Constitution, (2)
state constitutions, (3) federal
statutes, (4) state statutes, (5)
articles of incorporation, (6)
bylaws, and (7) resolutions of
the board of directors.
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Express Powers of a Corporation
(continued)
• Generally, a corporation has the
power to:
– Purchase, own, lease, sell,
mortgage, or otherwise deal in
real and personal property
– Make contracts
– Lend and borrow money
– Incur liabilities
– Issue notes, bonds, and other
obligations
– Invest and reinvest funds
– Sue and be sued in its
corporate name
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Implied Powers of a
Corporation
• Powers beyond express powers
that allow a corporation to
accomplish its corporate purpose.
– e.g., a corporation has the
implied power to open a bank
account
– e.g., a corporation has the
implied power to to reimburse
its employees for expenses
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Ultra Vires Act
•
•
An act by a corporation that is
beyond its express or implied
powers.
Remedies available if an ultra
vires act is committed:
1. Shareholders can sue for an
injunction.
2. The corporation can sue the officers
or directors who caused the act for
damages.
3. The attorney general of the state of
incorporation can bring an action to
enjoin the act or to dissolve the
corporation.
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Dissolution of Corporations
Voluntary Dissolution
Administrative
Dissolution
Judicial Dissolution
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Voluntary Dissolution
• If corporation has not
commenced business or
issued shares
– Dissolved by majority vote of
incorporators or board
• If it has started business
– Board of directors must
recommend and majority of
shares must be voted to
dissolve
• Articles of dissolution must be
filed with secretary of state
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Administrative Dissolution
• Secretary of state will
administratively dissolve
corporation if:
– Failed to file annual report
– Failed to maintain registered agent
for 60 days
– Failed to file change of registered
agent
– Did not pay franchise fee
– Period of duration stated in articles
has expired
• Secretary issues a certificate of
dissolution
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Judicial Dissolution
• Instituted by attorney general
of state of incorporation
– Procured articles through fraud
– Exceeded or abused authority
• Decree of dissolution issued
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Winding-up and Liquidation
• The process by which a dissolved
corporation’s assets are collected,
liquidated, and distributed to:
– Creditors
– Shareholders
– Other claimants
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Termination
• The ending of a corporation that
occurs only after the:
– Winding-up of the corporation’s
affairs
– Liquidation of its assets
– Distribution of the proceeds to
the claimants
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