Twomey  Jennings
Anderson’s Business Law and the Legal Environment, Comprehensive 20e
Anderson’s Business Law and the Legal Environment, Standard 20e
Business Law: Principles for Today’s Commercial Environment 2e
Chapter 44
Corporation Formation
Copyright © 2008 by West Legal Studies in Business
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Corporation as a Person
• A corporation is an artificial person
created by government action.
• It exists as a separate and distinct entity
possessing certain powers. Shareholders
are not personally liable for corporate
obligations.
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Classifications of Corporations
• The most common forms of
corporations are:
– Private business corporations whose
stock is sold to the public (publicly held)
and
– Close corporations, which are business
firms whose shares are not traded
publicly.
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Classifications of Corporations
• Corporations may be formed for
purposes other than conducting a
business.
– For example, there are nonprofit
corporations, municipal corporations,
and public authorities for governmental
purposes.
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Corporations
Close
Corporation
Domestic
Corporation
Private
Corporation
Public
Corporation
“S”
Corporation
Classifications
of
Corporations
Special Service
Corporation
Public
Authority
Quasi-Public
Corporation
Foreign
Corporation
Nonprofit
Corporation
Professional
Corporation
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Corporations and Goverments
• Power to Create: corporation is created
by state or federal statute.
• Power to Regulate:
– Protection of the corporation as a person.
– Protection of the corporation as a citizen.
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Corporate Powers
• A corporation has the power to
continue as an entity forever or for a
stated period of time regardless of
changes in the ownership of the stock
or the death of a shareholder.
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Corporate Powers
• It may make contracts, issue stocks
and bonds, borrow money, execute
commercial paper, transfer and
acquire property, acquire its own
stock if it is solvent and the purchase
does not impair capital, and make
charitable contributions.
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Corporate Powers
• Subject to limitations, a corporation has
the power to do business in other states.
• A corporation also may participate in a
business enterprise to the same extent as
an individual.
• That is, it may be a partner in a
partnership, or it may enter a joint
venture or other enterprise.
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Particular Corporate Powers
Perpetual
Succession
Issuing
Stock
Corporate
Name
Corporate
Seal
Making
Bylaws
Making
Contracts
Borrowing
Money
Executing
Commercial
Paper
Issuing
bonds
Transferring
Property
Doing
Business
in Another
State
Participating
in
Enterprises
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Acquiring
Property
(Investments
& Holding
companies)
Paying
Employee
Benefits
Buying
Back
Stock
Making
Charitable
Contributions
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Corporate Powers
• Special service corporations, such as
banks, insurance companies, and
railroads, are subject to separate
statutes with regard to their
organization and powers.
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Corporate Powers
• An ultra vires act occurs when a
corporation acts beyond the scope of
the powers given it.
– Because states now grant broad powers
to corporations, it is unlikely that a
modern corporation would act beyond
the scope of its powers.
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Promoters
• A promoter is a fiduciary who brings
together the persons interested in the
enterprise and sets in motion all that
must be done to form a corporation.
• The promoter is personally liable for
contracts made for the corporation
before its existence. The corporation is
not liable on these contracts unless it
adopts them.
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Liability during Formation
Promoter: one or more persons who
bring together other persons to form
the corporation itself
Corporation: an artificial being,
existing as a person, separate and
distinct from the persons who own it
Liable for all contracts made on behalf
of the corporation before its existence,
unless exempted by agreement or
circumstances. Liable on contractions
if the corporation is never formed,
unless exempted by agreement
Not liable on a contract made by its
promoter for its benefit unless it adopts
such contract
Liable for all torts committed in
connection with promoter’s activities
Not ordinarily liable for torts of the
promoter, but may become liable by its
own conduct after incorporation
Cannot make secret profits at the
expense of the corporation or its
subscribers
Not liable for expenses and services of
promoter, unless it subsequently
promises to pay, or charter or statute
imposes such liability
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Incorporation Process
• The procedures for incorporation are
set forth in the statutes of each state.
• In most states, the corporation comes
into existence upon compliance with
requirements and the issuance of the
certificate of incorporation.
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Incorporation Process
• When all requirements have been
satisfied, the corporation becomes a
corporation de jure, meaning
corporation by virtue of law.
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Proper and Defective Formation
• De Facto Corporation. Compliance with
some but not all requirements for
incorporation and the corporation is
functioning already (existing in fact).
• But when sufficient compliance even for
a de facto corporation does not exist,
there is no corporation.
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Proper and Defective Formation
• Corporation by Estoppel. A third person
may be estopped from denying the legal
existence of a “corporation” that did not
exist, after they did business with it.
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Consolidations & Mergers
• Two or more corporations may be
combined to form a new enterprise.
• This combination may be a consolidation,
with a new corporation coming into
existence, or a merger, in which one
corporation absorbs the other.
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Liability of Successor
Corporations
• Mergers and Consolidations:
– Generally, surviving corporation that
continues to do business succeeds to all the
rights and property of the predecessor, or
‘disappearing’ corporation.
– Liabilities can be imposed upon
‘disappearing’ corporations by law or by
agreement.
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Liability of Successor
Corporations
• Asset Sales:
– A corporation may merely purchase the
assets of another corporation.
– In that case, the purchaser is not liable for
the obligations of the selling corporation.
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Consolidation
Corporation
A
Corporation
B
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New
Corporation
Consolidation
C
Transaction (A & B Disappear)
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Merger
Corporation
A
Corporation
B
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Merger
Transaction
(Survivor)
Corporation
A
(Corporation B
Disappears)
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