Business Law and the Business Law and the Regulation of BusinessRegulation of Business

Chapter 34: Nature and Formation Chapter 34: Nature and Formation

of Corporationsof Corporations

Business Law and the Business Law and the Regulation of BusinessRegulation of Business

Chapter 34: Nature and Formation Chapter 34: Nature and Formation

of Corporationsof Corporations

ByBy

Richard A. MannRichard A. Mann

&&

Barry S. RobertsBarry S. Roberts

Topics Covered in this ChapterTopics Covered in this Chapter

I. Nature of CorporationsI. Nature of CorporationsA. Corporate AttributesA. Corporate AttributesB. Classification of CorporationsB. Classification of Corporations

II. Formation of a CorporationII. Formation of a CorporationA. Organizing the CorporationA. Organizing the CorporationB. Formalities of IncorporationB. Formalities of Incorporation

III. Recognition or Disregard of CorporatenessIII. Recognition or Disregard of CorporatenessA. Defective IncorporationA. Defective IncorporationB. Piercing the Corporate VeilB. Piercing the Corporate Veil

IV. Corporate PowersIV. Corporate PowersA. Sources of Corporate PowersA. Sources of Corporate PowersB. B. Ultra ViresUltra Vires Acts ActsC. Liability for Torts and Crimes C. Liability for Torts and Crimes

Corporate Attributes Corporate Attributes Legal EntityLegal Entity – – a corporation is an entity a corporation is an entity

apart from its shareholders, with entirely apart from its shareholders, with entirely distinct rights and liabilities.distinct rights and liabilities.

Creature of the StateCreature of the State – – a corporation a corporation may be formed only by substantial may be formed only by substantial compliance with a State incorporation compliance with a State incorporation statute.statute.

Limited LiabilityLimited Liability – – a shareholder's a shareholder's liability is limited to the amount invested liability is limited to the amount invested in the business enterprise.in the business enterprise.

Corporate Attributes Corporate Attributes

Free Transferability of Corporate Shares Free Transferability of Corporate Shares – – unless otherwise specified in the charter.unless otherwise specified in the charter.

Perpetual Existence Perpetual Existence – – unless the charter unless the charter provides otherwise.provides otherwise.

Centralized Management Centralized Management – – shareholders of shareholders of a corporation elect the board of directors to a corporation elect the board of directors to manage its business affairs; the board manage its business affairs; the board appoints officers to run the day-to-day appoints officers to run the day-to-day operations of the business.operations of the business.

Nature of CorporationsNature of Corporations

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

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

Classification of Corporations Classification of Corporations

Public Corporation Public Corporation – – one created to one created to administer a unit of local civil administer a unit of local civil government or one created by the government or one created by the United States to conduct public United States to conduct public business.business.

Private Corporation Private Corporation – – one founded by one founded by and composed of private persons for and composed of private persons for private purposes; has no governmental private purposes; has no governmental dutiesduties..

Classification of Corporations Classification of Corporations

Profit Corporation Profit Corporation – – one founded to one founded to operate a business for profit.operate a business for profit.

Nonprofit Corporation Nonprofit Corporation – – one whose one whose profits must be used exclusively for profits must be used exclusively for charitable, educational, or scientific charitable, educational, or scientific purposes.purposes.

Classification of Corporations Classification of Corporations

Domestic Corporation Domestic Corporation – – one created one created under the laws of a given State.under the laws of a given State.

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

Classification of Corporations Classification of Corporations

Publicly Held Corporation Publicly Held Corporation – – one one whose shares are owned by a large whose shares are owned by a large number of people and are widely number of people and are widely traded.traded.

Closely Held Corporation Closely Held Corporation – – one that is one that is owned by few shareholders and whose owned by few shareholders and whose shares are not actively traded.shares are not actively traded.

Types of CorporationsTypes of Corporations

Subchapter S Corporation Subchapter S Corporation – – eligible eligible corporation electing to be taxed as a corporation electing to be taxed as a partnership under the Internal Revenue partnership under the Internal Revenue Code.Code.

Professional Corporations Professional Corporations – – corporate form under which duly corporate form under which duly licensed individuals may practice their licensed individuals may practice their professions.professions.

Formation of a CorporationFormation of a Corporation

Promoter Promoter – – person who takes the person who takes the preliminary steps to organize a corporationpreliminary steps to organize a corporation– Promoters' Contracts Promoters' Contracts – – promoters remain promoters remain

liable on preincorporation contracts made in the liable on preincorporation contracts made in the name of the corporation unless the contract name of the corporation unless the contract provides otherwise or unless a novation is provides otherwise or unless a novation is effected.effected.

– Promoters' Fiduciary Duty Promoters' Fiduciary Duty – – promoters owe promoters owe a fiduciary duty among themselves and to the a fiduciary duty among themselves and to the corporation, its subscribers, and its initial corporation, its subscribers, and its initial shareholders.shareholders.

Promoter’s Preincorporation Promoter’s Preincorporation ContractsContracts

CorporationThirdParty

Promoter

Corporation, Promoter, and Third Party Enter into a Novation

PromoterThirdParty

bound

PromoterThirdParty

bound

Corporation Does Adopt Preincorporation Contract

liable

bound

Corporation Does NOT Adopt Preincorporation Contract

Corporation

Corporation

Organizing the Corporation Organizing the Corporation

SubscribersSubscribers – persons who agree to – persons who agree to purchase the initial stock in a corporation.purchase the initial stock in a corporation.– Preincorporation SubscriptionPreincorporation Subscription – – an offer to an offer to

purchase capital stock in a corporation yet to be purchase capital stock in a corporation yet to be formed which under many incorporation statutes is formed which under many incorporation statutes is irrevocable for a specified time period.irrevocable for a specified time period.

– Postincorporation SubscriptionPostincorporation Subscription – – a subscription a subscription agreement entered into after incorporation; an agreement entered into after incorporation; an offer to enter into such a subscription is revocable offer to enter into such a subscription is revocable any time before the corporation accepts it.any time before the corporation accepts it.

Formalities of Incorporation Formalities of Incorporation Selection of Name Selection of Name – – the name must clearly the name must clearly

designate the entity as a corporation.designate the entity as a corporation. Incorporators Incorporators – – the persons who sign the the persons who sign the

articles of incorporation.articles of incorporation. Articles of Incorporation Articles of Incorporation – – the charter or the charter or

basic organizational document of a corporation.basic organizational document of a corporation. Organizational Meeting Organizational Meeting – – the first meeting, the first meeting,

held to adopt the bylaws and appoint officers.held to adopt the bylaws and appoint officers. Bylaws Bylaws – – rules governing a corporation's rules governing a corporation's

internal management.internal management.

Sample Articles of IncorporationSample Articles of IncorporationArticles 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 Address_________________________________________ _________________________________________________Ninth: The name and address of each incorporator is:

Name Address_________________________________________ _________________________________________________

Dated __________, 19___. _________________________________________________

Incorprator(s)Source: Reprinted with permission from Henn & Alexander, Corporations, 3rd ed. Copyright 1983 by West Publishing Company.

Defective Incorporation Defective Incorporation Common Law ApproachCommon Law Approach

Corporation de Jure Corporation de Jure – – one formed in one formed in substantial compliance with the incorporation substantial compliance with the incorporation statute and having all corporate attributes.statute and having all corporate attributes.

Corporation de Facto Corporation de Facto – – one not formed one not formed in compliance with the statute but recognized in compliance with the statute but recognized for most purposes as a corporation.for most purposes as a corporation.

Corporation by Estoppel Corporation by Estoppel – – prevents a prevents a person from raising the question of a person from raising the question of a corporation's existence.corporation's existence.

Statutory ApproachStatutory Approach

The filing or acceptance of the articles of The filing or acceptance of the articles of incorporation is generally conclusive proof of incorporation is generally conclusive proof of proper incorporation.proper incorporation.

RMBCA RMBCA – – liability is imposed only on liability is imposed only on persons who act on behalf of a defectively persons who act on behalf of a defectively formed corporation knowing that there was no formed corporation knowing that there was no incorporation.incorporation.

MBCA MBCA – – unlimited personal liability is unlimited personal liability is imposed on all persons who act on behalf of a imposed on all persons who act on behalf of a defectively formed corporation.defectively formed corporation.

Recognition of Corporate Recognition of Corporate Attributes: Statutory ApproachAttributes: Statutory Approach

Non-recognition of Corporateness Recognition of Corporateness

RMBCA

Approach

No Filing of Articles of IncorporationNo corporate attributesJoint and several liability for those who act

knowing that there was noincorporation

Filing of Articles of IncorporationCorporate attributesLimited liabilityInsulation from collateral suits

MBCA Approach

No Certificate IssuedNo corporate attributesJoint and several liability for all who

assume to act as a corporation

Certificate IssuedCorporate attributesLimited liabilityInsulation from collateral suits

Piercing the Corporate Veil Piercing the Corporate Veil

General Rule General Rule – – the courts may the courts may disregard the corporate entity when it is disregard the corporate entity when it is used to defeat public convenience, used to defeat public convenience, commit a wrongdoing, protect fraud, or commit a wrongdoing, protect fraud, or circumvent the law.circumvent the law.

Application Application – – most frequently applied most frequently applied toto– Closely Held CorporationsClosely Held Corporations– Parent-Subsidiary CorporationsParent-Subsidiary Corporations

Sources of Corporate Powers Sources of Corporate Powers

Statutory Powers Statutory Powers – – typically include typically include perpetual existence, right to hold perpetual existence, right to hold property in the corporate name, and all property in the corporate name, and all powers necessary or convenient to powers necessary or convenient to effect the corporation's purposes.effect the corporation's purposes.

Purposes Purposes –– a corporation a corporation may bemay be formed for any lawful purposes unless formed for any lawful purposes unless its articles of incorporation state a more its articles of incorporation state a more limited purpose.limited purpose.

Ultra Vires Acts Ultra Vires Acts Definition of Ultra Vires Acts Definition of Ultra Vires Acts – – any any

action or contract that goes beyond a action or contract that goes beyond a corporation's express and implied corporation's express and implied powers.powers.

Effect of Ultra Vires Acts Effect of Ultra Vires Acts – – under under RMBCA, RMBCA, ultra viresultra vires acts and acts and conveyances are not invalid.conveyances are not invalid.

Remedies for Ultra Vires Acts Remedies for Ultra Vires Acts – – the the RMBCA provides three possible RMBCA provides three possible remedies.remedies.

Liability for Torts and Crimes Liability for Torts and Crimes

Torts Torts – – under the doctrine of under the doctrine of respondeat superior, a corporation is respondeat superior, a corporation is liable for torts committed by its liable for torts committed by its employees within the course of their employees within the course of their employment.employment.

Crimes Crimes – – a corporation may be a corporation may be criminally liable for violations of statutes criminally liable for violations of statutes imposing liability without fault or for an imposing liability without fault or for an offense perpetrated by a high corporate offense perpetrated by a high corporate officer or its board of directors.officer or its board of directors.

General Partnership, Limited Partnership, General Partnership, Limited Partnership, Corporation, and Limited Liability CompanyCorporation, and Limited Liability Company

GeneralPartnership

LimitedPartnership

PublicCorporation

CloseCorporation

Limited LiabilityCompany

Transferability Financial interestmay be assigned;membershiprequires consentof all partners

Financial interestmay be assigned,and assignee maybecome limitedpartner if allpartners consent

Freely transferable Freely transferableunless shareholdersagree otherwise

Financial interestmay be assigned;membershiprequires consent ofall members

Liability Partners haveunlimited liability

General partnershave unlimitedliability; limitedpartners havelimited liability

Shareholders havelimited liability

Shareholders havelimited liability

All members havelimited liability

Control By all partners By generalpartners, notlimited partners

By board ofdirectors electedby shareholders

By board ofdirectors electedby shareholders

By all members

Continuity Dissolved bydeath, bankruptcy,or withdrawal ofpartner

Dissolved bydeath, bankruptcy,or withdrawal ofgeneral partner

Unaffected bydeath, bankruptcy,or withdrawal ofshareholder

Unaffected bydeath, bankruptcy,or withdrawal ofshareholder

Dissolved bydeath, bankruptcy,or withdrawal ofmember

Taxation Only partnerstaxed

Only partnerstaxed

Corporation andshareholders taxed

Corporation taxedunless SubchapterS applies;shareholders taxed

Only memberstaxed

Comparison of Charter & BylawsComparison of Charter & Bylaws

Charter Bylaws

Filing Publicly Not publicly

Amendment Requires board andshareholder approval

Requires only boardapproval

Availability Must include certainmandatory andoptional provisions. Some optionalprovisions may beelected only in thecharter

Must include certainprovisions unless they areincluded in the charter

Validity May include anyprovision notinconsistent with law

May include any provisionnot inconsistent with lawand the charter