Customized by Professor Ludlum October 31, 2016 Unit N Customized by Professor Ludlum October 31, 2016 Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning.

Eifel Tower, Paris, 2006

The sole proprietor is the simplest form of business; used by anyone who does business without creating an organization. The owner is the business. John Grisham, person John Grisham, writer

The corporation is a legal entity distinct from its owner(s). The corporation can own property, have bank accounts, and pay taxes in its own name. Stephen King Stephen King, Inc.

Nature and Classification of Corporations Corporation: formed in compliance with STATE statutory requirements, is a legal entity separate and distinct from its owners, and can have perpetual existence. Personnel: The shareholder-owners elect directors, who set policy and hire officers to run the day-to-day business of the corporation.

Constitutional Rights of Corporations Corporation is a legal “person” under state and federal law. Corporation has right to: Due process, Equal protection, Speech, Access to Courts, Freedom from unreasonable search and seizure. Does not have

Constitutional Rights of Corporations Corporation is a person, and can commit a crime! Q: Spending limits on Campaigns? Q: Corp right to bear arms? Q: Corp running for public office?

Corporations Limited Liability of Shareholders: normally are not personally liable for the debts of the corporation. Corporate Taxation: The corporation pays income tax on net profits; shareholders pay income tax on disbursed dividends.

Torts and Criminal Acts The corporation is liable for the torts committed by its agents or officers within the course and scope of their employment (under the doctrine of _ _).

Classification of Corporations A corporation is referred to as a _Domestic_ corporation within its home state (the state in which it incorporates). A corporation is referred to as a _______________________ corporation by any state that is not its home state. A corporation is referred to as an _______________________ corporation if it originates in another country but does business in the United States.

Classification of Corporations Public and Private corporations. Nonprofit Corporations.

Classification of Corporations Close Corporations. Typically a small corporation whose shares are held by family or relatively few persons. No trading market for shares. Shareholders are generally officers and board members.

S Corporations Corporations can further be divided based on their tax status. S Corporations C Corporations Shareholders of a corporation may elect to treat the corporation as a flow-through entity known as an S corporation. An S corporation is not itself subject to income tax; rather, shareholders of the S corporation are subject to tax on their pro rata shares of income based on their shareholdings. To qualify to make the S corporation election, the corporation's shares must be held by resident or citizen individuals..

Corporate Formation The corporation is a legal entity distinct from its owners. Formal statutory requirements, which vary somewhat from state to state, must be followed in forming a corporation. The corporation can have perpetual existence or be chartered for a specific period of time.

Incorporation Procedures Internal Organization: usually included in the bylaws. Registered Office and Agent: specific person that will receive any legal notice and documents from state and/or 3rd parties. Incorporators (usually the promoter): at least one with name and address.

First Organizational Meeting After the corporation is “chartered” (created) it can do business. Shareholders should have the first organizational meeting to: approve the bylaws, elect directors, hire officers and adopt pre-incorporation contracts and activities.

Defects in Formation and Corporate Status What if Smith, Jones, Watson, and Noble combine to form a corporation, but forget to send the $50 to the State….

Improper Incorporation __De Jure___: substantial statutory requirements are met. __De Facto___: statutory requirements not met, but promoters made good faith effort to comply with corporate law; corporate status can only be attacked by state. _By Estoppel__: if it acts like a corporation, cannot avoid liability by claiming that no corporation exists.

Corporate acts are beyond the express or implied powers of the corporation as stated in state statute or the corporation’s own articles of incorporations and are considered to be “___________” (beyond the powers).

Piercing the Corporate Veil “Piercing the Corporate Veil” occurs when a court, in the interest of justice or fairness,” holds shareholders personally liable for corporate acts.

Board of Directors’ Meetings Directors hold meetings pursuant to bylaws with recorded minutes. Meetings require ____________________ (minimum number of directors to conduct official corporate business, usually majority).

Stockholders have limited liability Directors have liability for their actions What if a person is a director and a stockholder? Limited or unlimited liability?

Shareholders’ Powers Shareholder powers include approving all fundamental changes to the corporation. Shareholders also elect and remove the board of directors.

Rights on Dissolution Shareholders have right to pro-rata share of assets upon liquidation.