Business Law Chapter 38 - Corporate Formation And Financing

Front 1

Define corporation

Back 1

Artificial entity created in compliance with a states general corporate business statute

Front 2

List three major characteristics of a corporation

Back 2

1. Artificial entity with separate existence which can do business in its own name and be taxed - created by compliance with state incorporation statute.

2. Owned by shareholders with limited liability

3. Centrally managed by Board Of Directors elected by share holders.

Front 3

Public and private corporations

Back 3

a.) Public - formed by Govt. for governmental purpose - postal service, ambulance district

b.) Private - Formed by private parties for non govt. purpose

Front 4

Domestic, foreign and alien corporations

Back 4

a.) Domestic - Doing business in state of incorporation

b.) Foreign - Doing business outside state of incorporation

c.) Alien - Formed abroad, doing business in U.S.

Front 5

Non profit corporations

Back 5

a.) Formed for a charitable purpose under a non-profit corporation.

b.) Tax free treatment - sales tax, real estate and income donations tax free

c.)Restrictions - regulated distributions. Distributions on dissolutions can only go to another non-profit.

Front 6

Closely held and publicly held corporations

Back 6

a.) Closely held: Doesn't sell stock on a public exchange

b.) Public - sells stock on public exchange

Front 7

How do you sell your stock in a closely held corporation?

Back 7

1. 1st offer to the corporation
2. Offer to other shareholders
3. Right of refusal to corporation.
4. Right of refusal to shareholders

Front 8

C corporation tax

Back 8

Double taxed under corporation tax code

Front 9

S corporation tax

Back 9

Flow through taxation under code if they filed election

Front 10

Advantages of being an S corporation

Back 10

Flow through taxation
- avoid the double tax
- Immediate recognition of losses on tax return

Front 11

Requirements to become an S corporation

Back 11

1. 100 shareholders or fewer
2. One class of shares - voting distinctions ok
3. Must be incorporated in U.S.
4. No business corporations, partnerships, non resident aliens or non qualifying trusts can be shareholders

LLC's can elect for S taxation

Front 12

Professional corporations

Back 12

Formed under professional corporation statute. All shareholders are members of a particular profession.

Front 13

Typical promoter's activities

Back 13

To promote or organize a corporation prior to its existence.

Front 14

Four aspects of liability for pre-incorporation transactions

Back 14

1. The corporation is not liable for pre-incorporation contracts unless it assumes the liabilities.

2. A promoter is typically personally liable for pre-incorporation contracts

3. Promoter liability may be avoided with options and agreed releases

4. Parties to pre-incorporation subscription agreements are typically liable

Front 15

Four types of formalities required of corporations

Back 15

1. Articles of incorporation

2. Bylaws - operating agreement of company, board elections, meetings, and authority and roles. Need president and secretary.

3. Shareholders' and directors' organizational meetings - sell stock and vote directors

4. Ongoing formalities: annual meeting of shareholders and annual meeting of directors - required

Front 16

Express corporate powers

Back 16

constitutions, statutes, bylaws, board resolutions and articles of incorporation

Front 17

Implied corporate powers

Back 17

Generally corporations have power to all that is legally necessary to carry out corporate goals.

Front 18

Ultra vires doctrine

Back 18

"Beyond the powers" - Company goes beyond what they had the right to do.

Front 19

Torts and crimes

Back 19

a.) corporations are liable for the torts of employees under respondent superior

b.) Corporations are liable for crimes if: they involve high managerial agent or if a statute provides for corporation criminal liability

Front 20

Results of defective incorporation

Back 20

Owners liable as partners

Front 21

Defenses to defective incorporation - De Jure "By Law" corporation

Back 21

a.) Certificate of incorporation issued by state

b.) Corporation was substantially in compliance with incorporation law

Front 22

Defenses to defective incorporation - De Facto corporation

Back 22

a.) Parties made good faith attempt to comply with incorporation law

b.) Corporation dealt with 3rd parties only as if a corporation

Front 23

Corporation by estoppel

Back 23

1. Owners held themselves out as corporation

2. Creditors relied on corporation status in dealing with business

Front 24

Four factors supporting piercing the corporate veil

Back 24

1. Failure to follow formalities
2. Inadequate capitalization
3. Commingling of personal and corporate assets
4. Shareholder domination of corporate actions - alter-ego theory

Front 25

Results of piercing the veil

Back 25

Personal liability of affected shareholders

Front 26

Two types of securities

Back 26

1. Debt securities - Sells units of debt as security

2. Equity securities - Sells ownership interest in company in form of stock

Front 27

Four types of bonds

Back 27

1. Bonds (mortgage bonds): Debt securities of a corporation secured by corporate property

2. Debenture bonds (junk bonds): Debt securities that are not secured by corporate property

3. Convertible bonds - May be exchanged for a certain number of common shares according to a formula

4. Callable bonds: May be repurchased by corporation

Front 28

Common stock

Back 28

Typically the basic ownership interest in company, controlling interest, but a corporation may also have non voting common shares

Front 29

Preferred stock

Back 29

Fixed dividend percentage, priority on payment

Front 30

Five options as to preferred stock

Back 30

1. Cumulative preferred stock
2. Participating preferred stock
3. Convertible preferred stock
4. Callable preferred stock
5. Voting or non voting preferred stock

Front 31

Cumulative preferred stock

Back 31

Dividends for all years paid before any common dividends

Front 32

Participating preferred stock

Back 32

Extra dividend paid along with any common dividend

Front 33

Convertible preferred stock

Back 33

May be exchanged for a certain number of common shares per formula

Front 34

Callable preferred stock

Back 34

May be repurchased by the corporation

Front 35

Venture capitalists typical demands

Back 35

1. Voting preferred
2. Convertible
3. Place board member
4. Control