© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. M ILLER

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  A corporation is a creature of statute, an artificial “person.”  Corporations can have one or more shareholders, comprised of natural persons or other businesses.  2

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3  A corporation is a legal “person” and enjoys the same rights and privileges as a natural person: Access to court systems. Constitutional guarantees of free speech, due process, and freedom from unreasonable search and seizures.

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4  Corporate Personnel.  Responsibility for management of company rests with board of directors (elected by shareholders).  Board of directors makes policy decisions and hires officers to run corporation on a daily basis. 

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5  Corporate Personnel.  Shareholders can sue corporation and be sued by corporation and bring a derivative suit on behalf of the corporation in some instances (more in Chapter 40).

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6  Limited Liability of Shareholders.  Generally, shareholders are not personally liable for corporate acts.  But in certain situations, the corporate “veil” of limited liability can be pierced, holding the shareholders personally liable. 

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7  Corporate Earnings and Taxation.  Profits can either be kept as retained earnings or passed on to the shareholders as dividends.  Corporate Taxation: can be taxed twice, first to corporation, then to shareholders via dividends. 

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8  Corporate Earnings and Taxation.  Holding Companies (parent company): company whose business activity consists of holding shares in another company.  Typically, a holding company is established off-shore.

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9  Torts.  Under respondeat superior, liability for torts committed by agents within the course and scope of their employment  CASE 32.1 B ELMONT V. MB I NVESTMENT P ARTNERS, I NC. (2013).

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10  Criminal Acts.  A corporation can be liable for criminal acts, but cannot be imprisoned, only fined.  However, under the ‘responsible officer’ doctrine (Chapter 10), corporate officers may go to prison.

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11  Classification of Corporations.  Domestic corporation does business within its state of incorporation.  Foreign corporation from in X state, doing business in Z state.  Alien Corporation: formed in another country.

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12  Classification of Corporations.  Public and Private Corporations.  Nonprofit Corporations.  Closely Held Corporations Shares held by few shareholders. More informal management, similar to a partnership. 

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13  Classification of Corporations.  Closely Held Corporations Management of Closely Held Corporations. Transfer of Shares. Shareholder Agreement to Restrict Stock Transfers. 

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14  Classification of Corporations.  Closely Held Corporations Misappropriation of Closely Held Corporation Funds. CASE 32.2 R UBIN V. M URRAY (2011). 

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15  Classification of Corporations.  “S” Corporations: Avoids federal “double taxation” of regular corporations at the corporate level. Only dividends are taxed to the shareholders as personal income. 

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16  Classification of Corporations.  “S” Corporations: IRS requirements: Corporation is domestic, fewer than 75 shareholders, only one class of stock, no shareholder can be a non-resident alien.

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17  Classification of Corporations.  Benefit Corporations. For-profit corporation that seeks to have a material positive impact on society, but must comply with certain statutory requirements.

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The process of incorporation generally involves two steps:  Preliminary and Promotional Activities; and   The Legal Process of Incorporation.  18

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Promotional Activities.  Before corporation is formed, promoters are the persons who take the preliminary steps of organizing the venture and attracting investors via subscription agreements.  19

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Promotional Activities.  Promoter’s Liability: Promoter is personally liable for pre- incorporation contracts on behalf of the corporation, unless 3 rd party agrees to hold future corporation liable. 20

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Promotion Name Search File Articles of Incorporation Subscribers 1st Organiza- tional Meeting State Charter Incorporation Procedures.  21

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Incorporation Procedures.  Select State of Incorporation.  Secure the Corporate Name. Domain Name, Trade Name disputes.  22

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 23  Incorporation Procedures.  Prepare the Articles of Incorporation: which deals with shares, the registered agent and office, incorporators, duration and purpose, and internal organization.  File the Articles with State.

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 24  First Organizational Meeting.  After the corporation is “chartered” (created) it can do business.  Shareholders should approve the bylaws, elect directors, hire officers and ratify pre-incorporation contracts and activities.

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Improper Incorporation.  De Jure: substantial statutory requirements are met; cannot be attacked by state or 3 rd parties.  25

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 26  Improper Incorporation.  De Facto: statutory requirements not met, but promoters made good faith effort to comply with corporate law; can only be attacked by state. 

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 27  Corporation by Estoppel.  If it acts like a corporation, it cannot avoid liability by claiming that no corporation exists.  Applies when a third party contracts with corporation but not filed articles of incorporation.

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Express Powers.  Found in the corporation’s articles of incorporation, the laws of the state of incorporation, and in the state and federal corporations.  Corporate by-laws may also grant or limit a corporation’s express powers. 28

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Implied Powers.  All acts reasonably necessary to accomplish corporate purposes.  A corporate officer can bind corporation in contract in matters connected with the ordinary business affairs of the enterprise. 

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 30  Ultra Vires.  Corporate acts beyond the express or implied powers of the corporation  Articles of incorporation now adopt very broad purposes to prevent lawsuits against the corporation.

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 31  In certain situations, courts will “pierce the corporate veil” and hold shareholders personally liable in the interests of justice and fairness. 

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 32  Factors a court considers:  3 rd party tricked into dealing with a corporation rather than the individual.  Corporation is set up never to make a profit or remain insolvent or is under-capitalized. 

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 33  Factors a court considers:  Corporation is formed to evade an existing legal obligation.  Statutory formalities are not followed.  Commingling of personal and corporate interests or assets. 

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 34  A Potential Problem for Closely Held Corporations.  Separate status must be preserved.  Commingling of funds.  No director meetings.  Shareholder use of corporate property. 

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 35  A Potential Problem for Closely Held Corporations.  CASE 32.3 B RENNAN ' S, I NC. V. C OLBERT (2012).

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 36  The Alter-Ego Theory.  Corporation is “alter ego” of majority shareholder and personal and corporate interest are commingled such that the corporation has no separate identity.

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bonds vs. Stocks DebtOwnership/equity Fixed ROIDividends (variable) No votesVote for Management OptionalRequired Priority over stockPaid last 37

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Bonds.  Issued by business firms and government at all levels.  Normally have a maturity date – when principal is returned to investor.  38

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Bonds.  Sometimes referred to as fixed- income securities, because bondholders receive fixed-dollar interest payments.  Bond indenture: lending agreement. 39

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Stocks.  Common Stock: represents true ownership of a corporation. Provides pro-rata (proportional) ownership interest reflected in voting, control, earnings and assets.  40

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Stocks.  Common Stock: Investors who assume a residual financing position (whatever is left may go to dividends to shareholders).  41

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Stocks.  Preferred Stock: has preferences over common stock. Cumulative Preferred. Participating Preferred. Convertible Preferred. Redeemable or Callable Preferred. 42

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Venture Capital.  Start-up businesses and high-risk enterprises need start-up and expansion capital. The start-up typically gives a share of its stock.  43

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Private Equity Capital.  Obtain capital from wealthy investors. Ultimately, the company may sell shares in an IPO.  44

© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Private Equity Capital.  Preferred Stock: has preferences over common stock. Cumulative Preferred. Participating Preferred. Convertible Preferred. Redeemable or Callable Preferred. 45