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Business Law and the Legal Environment for a New Century
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Quote of the Day
“CORPORATION, n. An ingenious
device for obtaining individual profit
without individual responsibility.”
Ambrose Bierce, American writer,
“The Devil’s Dictionary”
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Promoter’s Liability Before the
Corporation is Formed



The promoter is personally liable on any contract
signed before formation.
The corporation is not liable unless it adopts the
contract after incorporation.
Even if the corporation adopts the contract, the
promoter is still liable until the third party agrees
to a novation (new contract), unless the contract
clearly indicates that the other party is relying
only on the corporation, which he knows does
not yet exist.
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Defective Incorporation
 De Jure Corporation
• The promoter has substantially complied
with the requirements for incorporation, but
has made some minor error.
 De Facto Corporation
• The promoter has made a good faith effort
to incorporate and has actually used the
corporation to conduct business.
 Corporation by Estoppel
• If a party enters into a contract believing
the corporation exists, he cannot later take
advantage of the fact that it does not.
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Incorporation Process
 Where to Incorporate
• In a state –either the home state of the
business or a state which has favorable laws
for corporations (often Delaware)
 Charter’s Required Provisions
• Name of corporation
• Address and Registered Agent
• Incorporator –person who signs the charter
and delivers it to the Secretary of State for
filing (perhaps the lawyer or the promoter)
• Purpose – this can be a broad statement,
such as “to conduct lawful business”
• Stock – number and types to be offered
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Stock
 Stock can be:
• Authorized and unissued
• Authorized and issued or outstanding
• Treasury stock (been issued, then bought
back by company)
 Par value - minimum issue price
 Classes and series
• Owners of preferred stock have preference
on dividends and liquidation.
• Common stock is last in line for any corporate
payouts, including dividends and liquidation.
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Charter’s Optional
Provisions
 Indemnification of Officers and
Directors
 Cumulative Voting
• Under a cumulative voting system, a
shareholder is allowed to pool his shares
and vote them all for the same person.
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After Incorporation
 Directors and officers are elected,
unless all shareholders agree to not
have a board of directors.
 Minute book holds records of all
meetings.
 Bylaws set the rules for the corporation.
A sample of bylaws can be seen on the Web by clicking here.
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After Incorporation (cont'd)
 Shareholder Agreements – set
procedures for voting stock.
 Issuing Debt – corporations often need
to borrow funds for start-up.
• Bonds – long term debt secured by
company assets.
• Debentures – long term, unsecured debt.
• Notes – short term, either secured or
unsecured.
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Foreign Corporations
 Foreign means any other state (not
country) besides the state of
incorporation.
 Qualifying to Do Business
• Opening an office or establishing any other
ongoing presence counts as doing
business.
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Foreign Corporations (cont’d)
 Defending a Lawsuit
• A corporation can be sued in a state only if
the firm has sufficient contact so that a suit
would not violate “traditional notions of fair
play and substantial justice.”
• Circumstances under which a foreign
company may sue and be sued:
May file suit
Must defend suit
Qualifies to do business
Yes
Yes
Should qualify to do business, but fails to
No
Yes
Has “sufficient minimum contacts,” but is
not required to qualify
Yes
Yes
Has less than “sufficient minimum contacts”
Yes
No
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Death of a Corporation
 May be voluntary (shareholders vote) or
forced (by court order).
 Piercing the Corporate Veil -- a court
may hold shareholders liable for debt.
• This happens in four circumstances:
– Failure to observe formalities (such as holding
meetings, keeping records)
– Commingling of assets (using corporate funds to
pay personal debts, etc.)
– Inadequate capitalization (the corporation should
obtain insurance against liability for torts)
– Fraud (injured party may recover from the guilty
party, even if the action was the corporation’s)
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Termination
 Terminating a corporation is a three
step process:
• Vote by a majority of the shareholders.
• Filing Articles of Dissolution with the
Secretary of State.
• Winding up – paying debts and distributing
assets.
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“Entrepreneurs often become
impatient with the legal
technicalities required to form
and maintain a corporation.
However, these legalities can
have a profound impact on
the success of the business.”
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