Business Law and the
Regulation of Business
Chapter 34: Nature and Formation of Corporations
By
Richard A. Mann
&
Barry S. Roberts

I. Nature of Corporations
A. Corporate Attributes
B. Classification of Corporations
II. Formation of a Corporation
A. Organizing the Corporation
B. Formalities of Incorporation
III. Recognition or Disregard of Corporateness
A. Defective Incorporation
B. Piercing the Corporate Veil
IV. Corporate Powers
A. Sources of Corporate Powers
B. Ultra Vires Acts
C. Liability for Torts and Crimes

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Legal Entity – a corporation is an entity apart from its shareholders, with entirely distinct rights and liabilities.
Creature of the State – a corporation may be formed only by substantial compliance with a State incorporation statute.
Limited Liability – a shareholder's liability is limited to the amount invested in the business enterprise.

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Free Transferability of Corporate Shares – unless otherwise specified in the charter.
Perpetual Existence – unless the charter provides otherwise.
Centralized Management – shareholders of a corporation elect the board of directors to manage its business affairs; the board appoints officers to run the day-to-day operations of the business.

 As a Person – a corporation is considered a person for some but not all purposes.
 As a Citizen – a corporation is considered a citizen for some but not all purposes.

 Public Corporation – one created to administer a unit of local civil government or one created by the
United States to conduct public business.
 Private Corporation – one founded by and composed of private persons for private purposes; has no governmental duties.

 Profit Corporation – one founded to operate a business for profit.
 Nonprofit Corporation – one whose profits must be used exclusively for charitable, educational, or scientific purposes.

 Domestic Corporation – one created under the laws of a given State.
 Foreign Corporation – one created under the laws of any other State or jurisdiction; it must obtain a certificate of authority from each State in which it does intrastate business.

 Publicly Held Corporation – one whose shares are owned by a large number of people and are widely traded.
 Closely Held Corporation – one that is owned by few shareholders and whose shares are not actively traded.

 Subchapter S Corporation – eligible corporation electing to be taxed as a partnership under the Internal Revenue
Code.
 Professional Corporations – corporate form under which duly licensed individuals may practice their professions.

 Promoter – person who takes the preliminary steps to organize a corporation
– Promoters' Contracts – promoters remain liable on preincorporation contracts made in the name of the corporation unless the contract provides otherwise or unless a novation is effected.
– Promoters' Fiduciary Duty – promoters owe a fiduciary duty among themselves and to the corporation, its subscribers, and its initial shareholders.

Corporation Does NOT Adopt Preincorporation Contract
Promoter
Corporation bound
Third
Party
Corporation Does Adopt Preincorporation Contract
Corporation
Promoter liable
Third
Party
Corporation, Promoter, and Third Party Enter into a Novation
Corporation
Promoter
Third
Party

 Subscribers – persons who agree to purchase the initial stock in a corporation.
– Preincorporation Subscription – an offer to purchase capital stock in a corporation yet to be formed which under many incorporation statutes is irrevocable for a specified time period.
– Postincorporation Subscription – a subscription agreement entered into after incorporation; an offer to enter into such a subscription is revocable any time before the corporation accepts it.

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Selection of Name – the name must clearly designate the entity as a corporation.
Incorporators – the persons who sign the articles of incorporation.
Articles of Incorporation – the charter or basic organizational document of a corporation.
Organizational Meeting – the first meeting, held to adopt the bylaws and appoint officers.
Bylaws – rules governing a corporation's internal management.

Articles of Incorporation of [Corporate Name]
The undersigned, acting as incorporator(s) of a corporation under the _____________ Business Corporation Act, adopt(s) the following
Articles of Incorporation for such corporation:
First : The name of the Corporation is _________________________________________________________________________
Second: The period of its duration is __________________________________________________________________________
Third: The purpose or purposes for which the corporation is organized are:____________________________________________
Fourth: The aggregate number of shares which the corporation shall have authority to issue is
_________________________________________
Fifth: Provisions granting preemptive rights are:_________________________________________________________________
Sixth: Provisions for the regulation of the internal affairs of the corporation are:________________________________________
Seventh: The address of the initial registered office of the corporation is ________________________and the name of its initial registered agent at such address is_____________________________________________________________________________
Eighth : The number of directors constituting the initial board of directors of the corporation is __________, and the names and addresses of the persons who are to serve as directors until the first annual meeting of share holders or until their successors are elected and shall qualify are:
Name
_________________________________________
Ninth: The name and address of each incorporator is:
Name
_________________________________________
Address
_________________________________________________
Address
_________________________________________________
Dated __________, 19___.
_________________________________________________
Incorprator(s)
Source: Reprinted with permission from Henn & Alexander, Corporations , 3rd ed. Copyright
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1983 by West Publishing Company.

 Corporation de Jure – one formed in substantial compliance with the incorporation statute and having all corporate attributes.
 Corporation de Facto – one not formed in compliance with the statute but recognized for most purposes as a corporation.
 Corporation by Estoppel – prevents a person from raising the question of a corporation's existence.

 The filing or acceptance of the articles of incorporation is generally conclusive proof of proper incorporation.
 RMBCA – liability is imposed only on persons who act on behalf of a defectively formed corporation knowing that there was no incorporation.
 MBCA – unlimited personal liability is imposed on all persons who act on behalf of a defectively formed corporation.

RMBCA
Approach
MBCA
Approach
Non-recognition of Corporateness Recognition of Corporateness
No Filing of Articles of Incorporation
No corporate attributes
Joint and several liability for those who act knowing that there was no incorporation
No Certificate Issued
No corporate attributes
Joint and several liability for all who assume to act as a corporation
Filing of Articles of Incorporation
Corporate attributes
Limited liability
Insulation from collateral suits
Certificate Issued
Corporate attributes
Limited liability
Insulation from collateral suits

 General Rule – the courts may disregard the corporate entity when it is used to defeat public convenience, commit a wrongdoing, protect fraud, or circumvent the law.
 Application – most frequently applied to
– Closely Held Corporations
– Parent-Subsidiary Corporations

 Statutory Powers – typically include perpetual existence, right to hold property in the corporate name, and all powers necessary or convenient to effect the corporation's purposes.
 Purposes – a corporation may be formed for any lawful purposes unless its articles of incorporation state a more limited purpose.

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Definition of Ultra Vires Acts – any action or contract that goes beyond a corporation's express and implied powers.
Effect of Ultra Vires Acts – under
RMBCA, ultra vires acts and conveyances are not invalid.
Remedies for Ultra Vires Acts – the
RMBCA provides three possible remedies.

 Torts – under the doctrine of respondeat superior, a corporation is liable for torts committed by its employees within the course of their employment.
 Crimes – a corporation may be criminally liable for violations of statutes imposing liability without fault or for an offense perpetrated by a high corporate officer or its board of directors.

General Partnership, Limited Partnership,
Corporation, and Limited Liability Company
Liability
Control
Continuity
Taxation
General
Partnership
Transferability F inanc ial interest may be ass igned; membership requires consent of all partners
Partners have unlimited liab ility
By all partners
Disso lved by death, bankruptcy, or withdrawal of partner
Only partners taxed
Limited
Partnership
F inanc ial interest may be ass igned, and ass ignee may become limited partner if all partners consent
General partners have unlimited liab ility; limited partners have limited liab ility
By general partners, not limited partners
Dissolved by death, bankruptcy, or withdrawal of general partner
Only partners taxed
Public
Corporation
Close
Corporation
Freely transferab le Freely transferab le unless shareholders agree otherwise
Limited Liability
Company
F inanc ial interest may be ass igned; membership req uires consent of all members
Shareholders have limited liab ility
By board of d irectors elected b y shareholders
Unaffected by death, bankruptcy, or withdrawal of s hareholder
Corporation and s hareholders taxed
Shareholders have limited liab ility
By board of d irectors elected b y shareholders
Unaffected by death, bankruptcy, or withdrawal of s hareholder
Corporation taxed unless Subchapter
S app lies; s hareholders taxed
All members have limited liab ility
By all members
Dissolved by death, bankruptcy, or withdrawal of member
Only members taxed

Filing
Charter
Publicly
Amendment Requires board and shareholder approval
Availability
Validity
Must include certain mandatory and optional provisions.
Some optional provisions may be elected only in the charter
May include any provision not inconsistent with law
Bylaws
Not publicly
Requires only board approval
Must include certain provisions unless they are included in the charter
May include any provision not inconsistent with law and the charter