Corporations

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Corporation

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is a separate legal entity. Its authority to act and the liability for its actions are separate and apart from its owners

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Shareholders are not liable for:

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the debts, contracts, or torts of the corporation; limited liability means that all they can lose is their investment in the stock

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Shareholders are liable for any corporation debts that they

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personally guarantee

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Shareholders may be:

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individuals, trusts, partnerships, corporations, or any other entity

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Stock may be purchased:

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directly from the company or from other shareholders

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Shareholders elect a ____________________ to manage the corporation.

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board of directors

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The board of directors hires _______ to run the corporation on a day to day basis.

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officers

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Corporate profits can either:

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be kept by the corporation for use in the business (as retained earnings) or distributed to the shareholders (as dividends)

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Growth companies often _______ their earnings to expand the business instead of paying dividends

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reinvest

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Corporations are taxed:

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on their profits by federal and state governments

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Shareholders are taxed on:

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dividends they receive from corporations

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"Double taxation" refers to

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the fact that corporations pay income tax on their earnings, and when those earnings are distributed as form of dividends, shareholders pay income tax on dividends

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Dividends are normally cash but may also be in the form of:

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company stock, cash, property, or corporate assets

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Dividends are paid only if they are

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declared by the board of directors

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Domestic Corporation

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is one that was incorporated in that state. The state in which it is incorporated is the company's home state

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A _______________ is a company doing business in a state other than its home.

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foreign corporation

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Many companies incorporate in _______________ because of its favorable corporation laws.

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Delaware

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Most corporations are

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private, for- profit corporations

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Public Corporations

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are organized by governments to meet governmental purposes ex: TVA

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Nonprofit corporations are

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typically formed operated for educational, health, or charitable purposes (ex: colleges, hospitals, charities)

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Closely held coorporation

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Most U.S. corporations are this kind; this means that their stock is not publicly traded. Typically, shares are held by a small number of shareholders

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An S Corporation

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is a regular for profit corporation that makes a special IRS election to be taxed like a partnership. This election lets the corporation avoid "double taxation" at the federal level

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Shareholders of S-Corps report their share of corporate income on their _______________________.

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Individual tax returns

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IRS Restrictions for making the election include:

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limit on maximum number of shareholders- no more than 100, and one type of stock that may be issued

cannot be part of an affiliated group

shareholders must be individuals, estates, trusts, or certain tax exempt organizations

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Professional Corporations

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All shareholders are required to be members of the same profession. This legal form does not limit a shareholder's liabilities for his/ her own malpractice

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Corporate Formation

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1. Choose one state in which to incorporate

2. Choose and reserve a corporate name. The name must have the proper suffix: "Corporation", "Corp", "Incorporated", "Inc"

3. File "Articles of Incorporation" with the Secretary of State in the state of incorporation

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Persons who execute the articles of the incorporation are the _________________.

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incorporators (usually, the owners or their attorneys)

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Registered Agent/ Office

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Specific person in the state authorized to receive any legal notice and documents from state and/or 3rd parties

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ByLaws

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Each corporation also adopts (usually at the first organizational meeting) the bylaws, a written set of rules that govern the internal operations of the corporation. Do not have to be filed with the state

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Benefit Corporations

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Are for profit corporations organized under specific state statutes that permit them to intentionally operate in a way that benefits society and the environment and not just the share holders

Key diff- purpose, accountability, and transparency

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Piercing the corporate veil occurs when

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a court, in the interest of justice or fairness, ignores the corporate structure and holds shareholders personally liable for the corporation's debts

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Corporate veil may be pierced when the corporation is the "alter ego" of the majority of shareholders and

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personal and corporate interests are commingled such that corporation has no separate identity

(Mainly happens with closely held corporations)

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Some factors that would lead a court to pierce the veil:

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1. 3rd party misled into dealing with a corporation rather than an individual

2. Corporation was never meant to make a profit or be solvent, or is under-capitalized

3. Statutory formalities are not followed (ex: shareholder meetings)

4. Personal and corporate interests are commingled to such a degree that there is no corporate identity

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The number of directors is set forth in a corporation's

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bylaws

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The first set of directors is generally elected by the

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incorporators, after that shareholders

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Term of office of a director

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one year

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Rights of Directors

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1. Participate in corporate decisions and inspect corporate books and records

2. Compensation

3. Indemnification

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Indemnification

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If a director is sued for acts as director, the corporation should guarantee reimbursement and or purchase liability insurance to protect the board from personal liability

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Directors have general responsibility for:

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1. Corporate policies

2. Appointment and removal of all corporate officers and setting officers compensation

3. Financial decisions

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Officers

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are employees of the corporation hired by the board of directors

ex: president, CEO, CFO

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Officers act as _________ for the corporation.

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agents

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A person can be both an officer and director. T/F?

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True

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Directors and officers are _______ of the corporation. They owe ethical and legal duties to the corporation and shareholders.

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fiduciaries

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Duty of Care

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Directors/ Ofiicers are expected to act in good faith, using prudent business judgement, and in the best interests of the corporation. Failure to exercise due care may subject individual directors or officers to personal liability for negligence

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Duty of Care includes the following obligations:

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1. Make informed and reasonable decisions

2. Rely on competent consultants and experts

3. Exercise reasonable supervision for work delegated to officers and employees

3. Attend meetings

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Business Judgement Rule

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is a common law legal doctrine that protests a director or officer from liability for consequences of a good-faith business decision that may turn out to be harmful or unprofitable for the corporation

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Business Judgment Rule will protect the director as long as :

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1. Took reasonable steps to become informed about the matter

2. Had a rational basis for decision

3. Did not have a conflict of interest

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Duty of Loyalty

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requires putting the welfare of the corp before personal interests, and includes the following obligations:

1. No competition with corp

2. No taking of corp opportunity

3. No conflict of interests

4.No insider trading

5. No transaction that is detrimental to minority shareholders

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No conflicts of interest

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one must fully disclose any potential conflicts of interest and abstain from voting on any transaction that may benefit the director/ officer personally

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case 18.3

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