Chapter 46: Introduction to Corporation Law

1. Chapter 46: Introduction to Corporation Law

2. Formation of a Corporation • A corporation is an artificial person created by government action. • It exists as a separate and distinct entity possessing certain powers. • In most states, the corporation comes into existence when the secretary of state issues a certificate of incorporation.

3. Types of Corporations • The most common forms of corporations are: • Private business corporations whose stock is sold to the public (publicly held) and • Close corporations, which are business firms whose shares are not traded publicly. • Corporations may be formed for purposes other than conducting a business. • For example, there are nonprofit corporations, municipal corporations, and public authorities for governmental purposes.

4. Foreign Corporation Domestic Corporation “S” Corporation Special Service Corporation Public Authority Close Corporation Public Corporation Quasi-Public Corporation Private Corporation Nonprofit Corporation Professional Corporation Corporations Classifications of Corporations

5. Promoters • A promoter is a person who brings together the persons interested in the enterprise and sets in motion all that must be done to form a corporation. • The promoter is personally liable for contracts made for the corporation before its existence. The corporation is not liable on these contracts unless it adopts them. • A promoter stands in a fiduciary relation to the corporation and stockholders.

6. Liability During Formation

7. Procedures • The procedures for incorporation are set forth in the statutes of each state. • In most states, the corporation comes into existence upon compliance with requirements and the issuance of the certificate of incorporation. • When all requirements have been satisfied, the corporation becomes a corporation de jure, meaning corporation by virtue of law.

8. Defective Formation • When there is compliance with some but not all requirements for incorporation, but the corporation is functioning already, it may be declared to be a de facto corporation (existing in fact). • When sufficient compliance even for a de facto corporation does not exist, there is no corporation. • However, in some jurisdictions a third person may be estopped from denying the legal existence of such a “corporation” after they did business with it. It then becomes a corporation by estoppel.

9. Piercing the Corporate Veil • Ordinarily each corporation will be treated as a separate person, even if two corporations have the same shareholders. • However, when a corporation is formed to perpetrate a fraud, a court will ignore the corporate form, or “pierce the corporate veil.” • The corporate form will also be ignored to prevent injustice or because of the functional reality that the two corporations in question are one.

10. Duration and Rights • A corporation has the power to continue as an entity forever or for a stated period of time regardless of changes in the ownership of the stock or the death of a shareholder. • It may make contracts, issue stocks and bonds, borrow money, execute commercialpaper, transfer and acquire property, acquire its own stock if it is solvent and the purchase does not impair capital, and make charitablecontributions.

11. Corporate Rights • Subject to limitations, a corporation has the power to do business in other states. • A corporation also may participate in a business enterprise to the same extent as an individual. • That is, it may be a partner in a partnership, or it may enter a joint venture or other enterprise.

12. Particular Corporate Powers Perpetual Succession Corporate Name Corporate Seal Making Bylaws Executing Commercial Paper Borrowing Money Issuing Stock Making Contracts Acquiring Property (Investments & Holding companies) Issuing bonds Transferring Property Buying Back Stock Doing Business in Another State Paying Employee Benefits Making Charitable Contributions Participating in Enterprises

13. Limitations on Rights • Special service corporations, such as banks, insurance companies, and railroads, are subject to separate statutes with regard to their organization and powers. • An ultra vires act occurs when a corporation acts beyond the scope of the powers given it. • Because states now grant broad powers to corporations, it is unlikely that a modern corporation would act beyond the scope of its powers.

14. Combinations • Two or more corporations may be combined to form a new enterprise. • This combination may be a consolidation, with a new corporation coming into existence, or a merger, in which one corporation absorbs the other.

15. Corporation A Consolidation Transaction Corporation B Consolidation New Corporation C (A & B Disappear)

16. Corporation A Merger Transaction Corporation B Merger (Survivor) Corporation A (Corporation B Disappears)