Section 28.1
Corporations
Section 28.1 Corporations
What You’ll Learn
How to define corporation (p. 606)
How to distinguish among various types of
corporations (p. 607)
How to create a corporation (p. 608)
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
What You’ll Learn
How to finance a corporation (p. 614)
How to distinguish between a corporation
and a limited liability company (p. 616)
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Why It’s Important
Understanding the nature of a corporation
will help you decide when to form one rather
than the other associations that are
available.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Legal Terms
corporation (p. 606)
shareholder (p. 606)
share (p. 606)
promoter (p. 608)
articles of incorporation (p. 610)
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Legal Terms
certificate of incorporation (p. 612)
common stock (p. 614)
dividends (p. 614)
preferred stock (p. 614)
limited liability company (p. 616)
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Section Outline
The Nature of a Corporation
Advantages of a Corporation
Disadvantages of a Corporation
Types of Corporations
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Section Outline
Forming a Corporation
The Incorporation Process
Corporate Financing
Forming a Limited Liability
Company
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Section Outline
Incorporation Problems
De Facto Corporation
Corporation by Estoppel
Piercing the Corporate Veil
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Pre-Learning Question
What is a corporation?
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
The Nature of a Corporation
A corporation is a body formed and
authorized by law to act as a single
person, distinct from its members or
owners.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
The Nature of a Corporation
About 90 percent of all business in
the United States is done by
corporations.
Not all corporations are large
businesses. Approximately 40
percent of all corporations employ
fewer than five employees.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
The Nature of a Corporation
An individual who owns shares of a
corporation is called a shareholder
or a stockholder.
A share is a single unit of
ownership of a corporation.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
The Nature of a Corporation
Each shareholder has one vote for
each share of stock that he or she
owns.
Shareholders cast their votes to
elect a board of directors whose
duty is to direct the corporation’s
business.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Advantages of a Corporation
Selling shares enables a
corporation to tap into a large
source of capital.
Shareholder’s liability is limited to
the amount of money he or she paid
for shares in the corporation.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Advantages of a Corporation
It is a legal entity and has the power
to make contracts, buy and sell
goods, and sue and be sued.
It has continuity of existence,
regardless of the lifespans of
founders, shareholders, and
directors.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Disadvantages of a Corporation
A corporation’s income may be
taxed more than once. First as the
company profits; then shareholders’
dividends become part of their
taxable income.
Large corporations face extensive
government regulation.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Disadvantages of a Corporation
Original founders can lose not only
control but also actual ownership.
Because of the prominence of some
corporations, business decisions
may be subject to close scrutiny.
Understanding Business and Personal Law
Forming and Financing a Corporation
28.1 28.1 Corporations
Section
Types of Corporations
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Pre-Learning Question
How is a corporation formed?
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Forming a Corporation
Each state has its own version of
corporate law. States may use:
The Model Business Corporation
Act (MBCA)
The Revised Model Business
Corporation Act (RMBCA)
Their own statutes
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
The Incorporation Process
1. A promoter carries out the
incorporation process by taking the
initial steps to organize and finance
a business.
2. Promoters choose a corporate
name.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
The Incorporation Process
3. Promoters are responsible for
drawing up and filing the articles of
incorporation, an application for
incorporation of a business that
describes a corporation’s
organization, powers, and authority.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
The Incorporation Process
4. A filing fee completes the
application.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
The Incorporation Process
5. After the application is approved by
the secretary of state, the
corporation receives a certificate of
incorporation, its official
authorization to do business in the
state (also called a charter).
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
The Incorporation Process
6. Initial shareholders elect a board of
directors who replace the original
incorporators.
7. Directors elect a chairman and top
corporate officers to manage the
company.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Articles of Incorporation
The articles of incorporation usually
include the following information:
Name of the corporation, including
the words company, incorporated,
or corporation or appropriate
abbreviations.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Articles of Incorporation
Proposed duration of the
corporation.
Purpose(s) of the corporation.
Number, classes, and value of
corporate shares.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Articles of Incorporation
Shareholders’ rights in relation to
shares, classes of shares, and
special shares.
Address of the original registered or
statutory agent.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Articles of Incorporation
Names and signature of the initial
directors.
Names and signatures of the
incorporators.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Corporate Financing
A corporation may choose to issue
several different kinds of stock. Along
with each share of stock come certain
rights.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Types of Stock
Common stock is the basic form of
corporation ownership.
Owners have voting rights.
It pays dividends, or profits, to the
shareholders based on the
corporation’s performance.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Types of Stock
Preferred stock is the second type of
stock issued by a corporation.
Owners have no voting rights.
But do receive a fixed dividend.
Preferred stock dividends are paid
before common stock dividends.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Draw a flow chart that describes the
relationship between the following
people.
Board of directors
Initial shareholders
Chairperson
Top corporate officers
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
ANSWER
Initial shareholders hire board of
directors who elect the chairperson
and top corporate officers.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Pre-Learning Question
What is a limited liability company?
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Forming a Limited
Liability Company
A limited liability company (LLC) is
a new type of business enterprise that
has been adopted by all states. It is a
combination of a partnership and a
corporation.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Forming a Limited
Liability Company
LLCs offer limited liability to its
owners.
Like the partners in a partnership,
the owners of an LLC escape
double taxation.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Forming a Limited
Liability Company
LLCs are statutory entities—they can
be formed only if owners follow the
legal steps required—and must also
have a statutory agent for service of
process.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Pre-Learning Question
How does the law deal with
incorporation problems?
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Incorporation Problems
The courts have developed two
doctrines—de facto corporations and
corporation by estoppel—to deal with
incorporation problems.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
De Facto Corporation
Even when making a good faith
attempt to incorporate, promoters
sometimes inadvertently make an
error in filing, or fail to complete the
incorporation.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
De Facto Corporation
The laws says that, although the
corporation does not exist in law (de
jure), it does exist in fact (de facto).
This type of corporation is called a de
facto corporation.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Corporation by Estoppel
Like other estoppel doctrines,
corporation by estoppel stops people
from denying the consequences of
their own actions.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Corporation by Estoppel
Corporation by estoppel usually
occurs when some party has been
willing to treat a person or a group of
people as a corporation, generally
reaping some benefit from the
relationship.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Corporation by Estoppel
When this happens, the court will not
allow that party to then deny the
existence of the corporation because
doing so would be unfair.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Piercing the Corporate Veil
Sometimes there are extreme
circumstances in which the courts will
deny shareholders the benefits of
limited liability and hold them
personally liable. This is known as
piercing the corporate veil.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Section 28.1 Assessment
Reviewing What You Learned
1. What is a corporation? Who are its
owners?
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Section 28.1 Assessment
Reviewing What You Learned
Answer
An artificial person created by law owned
by shareholders or stockholders.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Section 28.1 Assessment
Reviewing What You Learned
2. What are the two main types of
corporations?
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Section 28.1 Assessment
Reviewing What You Learned
Answer
Public and private.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Section 28.1 Assessment
Reviewing What You Learned
3. What are the steps necessary to
form a corporation?
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Section 28.1 Assessment
Reviewing What You Learned
Answer
Promoters choose a corporate name, draw
up and file articles of incorporation with the
office of the secretary of state, pay the
filing fee, and receive the certificate of
incorporation;
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Section 28.1 Assessment
Reviewing What You Learned
Answer
initial shareholders elect a board of
directors; and directors elect a chairman
and top officers to manage the corporation.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Section 28.1 Assessment
Reviewing What You Learned
4. How are corporations financed?
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Section 28.1 Assessment
Reviewing What You Learned
Answer
By selling shares of stock in the
corporation.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Section 28.1 Assessment
Reviewing What You Learned
5. What is the difference between a
corporation and a limited liability
company?
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Section 28.1 Assessment
Reviewing What You Learned
Answer
A limited liability company is a combination
of a partnership and a corporation. Like a
corporation, it offers limited liability to its
owners. Like a partnership, the owners
escape double taxation.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Section 28.1 Assessment
Critical Thinking Activity
Advantages and Disadvantages of
a Corporation
If you had a chain of very successful
restaurants in a large city, why might you
decide to incorporate the business? Why
might you decide not to incorporate?
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Section 28.1 Assessment
Critical Thinking Activity Answer
Advantages and Disadvantages of
a Corporation
Answers will vary, but could include raising
capital for further expansion as an
advantage and additional government
regulation as a disadvantage.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Section 28.1 Assessment
Legal Skills in Action
Forming a Corporation
Your brother, Dirk, wants to start a
business manufacturing playground
equipment using recyclable materials, such
as plastics and old tires.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Section 28.1 Assessment
Legal Skills in Action
Forming a Corporation
He wants to organize his company as a
corporation in order to raise capital to build
his manufacturing plant, but he isn’t sure
how to go about it.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Section 28.1 Assessment
Legal Skills in Action
Forming a Corporation
Write a letter to Dirk outlining the steps he
should take to incorporate his business.
Understanding Business and Personal Law
Forming and Financing a Corporation
Section 28.1 Corporations
Section 28.1 Assessment
Legal Skills in Action Answer
Forming a Corporation
Letters will vary, but should include
contacting the secretary of state’s office in
Dirk’s state.
Understanding Business and Personal Law
Forming and Financing a Corporation
End of Section 28.1
Corporations