BASICS OF CORPORATIONS


Corporation: A legal entity formed in compliance with the
statutory requirements of its state of incorporation, owned by
shareholders whose liability is limited to their investment in
the corporation, and managed by (i) a board of directors
elected by the shareholders and (ii) officers employed by the
board of directors.

Directors: Persons elected by shareholders and
responsible for overall management of the corporation.

Officers: Persons hired by the board of directors and
responsible for operations of the corporation.

Shareholders: Owners of the corporation in proportion
to their ownership of corporate stock outstanding.
Corporate Taxation: Corporate profits are taxable to the
corporation when they are distributed in the form of
dividends, but not when they are “reinvested” in the
corporation as retained earnings.

Dividends: Corporate profits distributed to shareholders
in proportion to their shares held.

Retained Earnings: Corporate profits not distributed to
shareholders.
Ch. 37: Corporations – Formation and Financing - No. 1
West’s Business Law (9th ed.)
CORPORATE RIGHTS AND LIABILITY

Constitutional Rights: A corporation is a “person” for
purposes of most rights guaranteed by the U.S. Constitution
(e.g., due process, double jeopardy, freedom of speech).
However, corporations do not enjoy

Fifth Amendment protection against self-incrimination
or

the protection of the Privileges and Immunities Clause.

Tort Liability: A corporation is liable, under the doctrine of
respondeat superior, for the torts committed by its agents or
employees within the course and scope of their duties.

Criminal Liability: A corporation may be liable for the
criminal acts of its agents or employees, as long as the
criminal sanctions can be applied to the corporation (e.g.,
fines).
Ch. 37: Corporations – Formation and Financing - No. 2
West’s Business Law (9th ed.)
CORPORATE POWERS

The express powers of a corporation are found in the
following sources, and any conflict between sources is to be
resolved according to the following priorities:
(1) United States Constitution takes priority over
(2) State Constitution(s), which take priority over
(3) State Statutes, which take priority over
(4) Articles of Incorporation filed by the corporation in the
state of incorporation, containing information about the
corporation’s organization and functions, which take
priority over
(5) Corporate By-Laws adopted by the corporation’s
shareholders, which take priority over
(6) Resolutions of the Corporation’s Board of Directors
– policy statements adopted periodically by the board.

Implied Powers: Barring express constitutional, statutory, or
charter prohibitions, a corporation has the implied power to
perform all acts reasonably appropriate and necessary to
accomplish its corporate purpose.
Ch. 37: Corporations – Formation and Financing - No. 3
West’s Business Law (9th ed.)
ULTRA VIRES DOCTRINE

Ultra Vires Acts: Acts of a corporation – through one or
more officer or director – that exceed its express and implied
powers, triggering the following remedies:

Derivative Action: The corporation’s shareholders may
sue the officers or directors on behalf of the corporation
to enjoin the ultra vires act before they commit it or to
recover damages caused by a completed ultra vires act.

Direct Action: The corporation may, itself, sue the
officers or directors to recover damages caused by a
completed ultra vires act.

State Action: The state attorney general may seek an
injunction or may dissolve the corporation.
Ch. 37: Corporations – Formation and Financing - No. 4
West’s Business Law (9th ed.)
DOMESTIC, FOREIGN, AND ALIEN
CORPORATIONS

Domestic Corporation: A corporation incorporated in a
given state and doing business in that same state.

Foreign Corporation: A corporation doing business in a
given state, but incorporated in another state.

Alien Corporation: A corporation doing business in a given
state, but incorporated in a foreign country (or otherwise
formed, as provided for by the laws thereof).

Foreign and alien corporations do not automatically have the
right to do business in a state other than the one in which they
are incorporated. They may be required to obtain a certificate
of authority from any other state in which they want to do
business.

Any particular corporation doing business in several
jurisdictions can be a domestic corporation in one
jurisdiction, and a foreign corporation in another. The
distinction depends on in which jurisdiction the corporation’s
activity is being assessed.
Ch. 37: Corporations – Formation and Financing - No. 5
West’s Business Law (9th ed.)
PRIVATE, PUBLIC, AND NON-PROFIT
CORPORATIONS

Private Corporation: A corporation formed by and owned
by individuals and other private interests.

Publicly-Held Corporation: A corporation whose
shares are sold to and held by, or on behalf of, the
general public, and are traded on a public exchange.

Privately-Held Corporation: A corporation whose
shares are not publicly-traded, and may generally only
be bought from or sold to the corporation.

Public Corporation: A corporation formed by a government
to serve some public purpose.

Non-Profit Corporation: A corporation formed, in many
cases, for charitable, educational, religious, or similar
purposes, and organized and operated without the goal of
making a profit.
Ch. 37: Corporations – Formation and Financing - No. 6
West’s Business Law (9th ed.)
CLOSE CORPORATIONS

Close Corporation (a.k.a. “closely-held corporation”): A
privately-held corporation with a small number of
shareholders, often members of the same family.

Management of a close corporation resembles that of a
sole proprietorship or partnership, with one or a few of
the firm’s owners also holding positions as officers
and directors.


To protect against domination by a majority
shareholder, a close corporation’s articles may
require more than simple majority approval of
any board action.
Transfer Restrictions: Because transfer of a
shareholder’s shares to a non-shareholder can
fundamentally alter the nature of a close corporation,
close corporations often require a shareholder who
wishes to exit the corporation to sell their shares to the
other existing shareholders, or at least offer them or the
corporation a right of first refusal.
Ch. 37: Corporations – Formation and Financing - No. 7
West’s Business Law (9th ed.)
S CORPORATIONS AND PCs

S Corporation: A closely-held corporation that is taxed like
a partnership, while affording its owners the limited liability
of a corporation. In order to qualify as a S Corporation, the
corporation:
(1) must be incorporated in the U.S.,
(2) must not be a member of an affiliated group of
corporations,
(3) must be owned by individuals, estates, or certain
trusts (S Corporation shares cannot be owned by other
corporations, partnerships, or nonqualifying trusts),
(4) must have 75 or fewer shareholders,
(5) must have only one class of stock (although not all
shares must have the same voting rights), and
(6) must not have any nonresident alien shareholders.

Professional Corporation (“PC”): A corporation formed by
professionals, such as lawyers, doctors, dentists, accountants,
or architects in an effort to reduce the members’ exposure to
liability compared to what they would face in a partnership.
Ch. 37: Corporations – Formation and Financing - No. 8
West’s Business Law (9th ed.)
CORPORATE FORMATION: PROMOTION

Promoter: A person who takes the preliminary steps in
organizing a corporation, including:
(1) issuing a prospectus – a document required by federal or
state securities laws that describes the financial
operations of the proposed corporation sufficiently to
enable prospective investors (subscribers) to make an
informed decision;
(2) procuring stock subscriptions;
(3) making contracts (e.g., to purchase or lease property for
corporate facilities, to secure the services of attorneys,
accountants, and other professionals); and
(4) securing a corporate charter.

Promoter Liability: A promoter is personally liable on
contracts made prior to incorporation, unless the other party
to the contract agrees to hold the corporation, rather than the
promoter, liable. Once the corporation is formed, it may
release the promoter and assume liability on the contract
through novation.
Ch. 37: Corporations – Formation and Financing - No. 9
West’s Business Law (9th ed.)
INCORPORATION

Chartering: The first step in incorporation is to select the
state of incorporation. Delaware is very popular because of
its corporation laws. Increasingly, though, corporations are
incorporating in the state where they plan to base their
operations.

Articles of Incorporation: The primary document needed to
incorporate, the articles of incorporation (see Exhibit 37-1)
include basic information about the corporation and will serve
as a reference for future business organization and operations.


Incorporator: A person who executes the articles of
incorporation.
Certificate of Incorporation: Once the articles have been
executed by the incorporators, they are sent to the appropriate
state official, along with a filing fee, in return for which a
certificate of incorporation will be issued by the state of
incorporation evidencing the corporation’s legal existence.
Ch. 37: Corporations – Formation and Financing - No. 10
West’s Business Law (9th ed.)
IMPROPER INCORPORATION

De Jure Corporation: A corporation whose articles, while
containing some technical defect, substantially comply with
the laws of the state of incorporation.

De Facto Corporation: A corporation which, despite some
substantive defect in its incorporation or continuing status, is
recognized to exist, even if its existence is improper or illegal.
De facto status requires:
(1) a state statute under which the corporation can be
validly incorporated;
(2) a good faith effort by the corporation to comply with
that statute; and
(3) the corporation has actually undertaken to do business.

Corporation by Estoppel: A business entity that holds itself
out as a corporation will normally be estopped from denying
corporate status against claims by a third party.
Ch. 37: Corporations – Formation and Financing - No. 11
West’s Business Law (9th ed.)
PIERCING THE CORPORATE VEIL

At times, owners or officers or directors of a corporation will
use a corporate entity to commit fraud or other illegality. In
such a case, a plaintiff may be able to “pierce the corporate
veil” – i.e., disregard the corporate entity and its attendant
limitations on personal liability – and sue the wrongdoers
individually for actions they took as owners, officers, or
directors of the corporation.

The following factors may persuade a court to pierce the
corporate veil:
(1) the plaintiff was tricked or misled into dealing with the
corporation rather than the individual;
(2) the corporation was created never to make a profit or
had insufficient capital at the time of its formation to
meet its prospective debts or potential liabilities;
(3) the corporation does not observe statutorily-required
corporate formalities; and
(4) personal and corporate interests are commingled to the
extent that the corporation ceases to have a separate
identity from its owners.
Ch. 37: Corporations – Formation and Financing - No. 12
West’s Business Law (9th ed.)
CORPORATE FINANCING

Bond: A debt security that represents borrowing by the
corporation, in accordance with a bond indenture – a contract
between the issuing corporation and the bondholder.

Stock: An equity security that represents the purchase of a
share of ownership in a corporation by a shareholder.

Common Stock: Shares of stock in a corporation that
give the shareholder a proportionate interest in the
corporation with regard to voting, earnings, and net
assets. Common stock shares are the last to receive
dividends (distributed income) and to receive asset
distribution upon the corporation’s dissolution.

Preferred Stock: Shares of stock that have priority over
common stock both with respect to payment of
dividends and distribution of assets upon the
corporation’s dissolution, but generally afford holders
less input in corporate decisionmaking.
Ch. 37: Corporations – Formation and Financing - No. 13
West’s Business Law (9th ed.)