Chapter 39 Flashcards
Corporation
an artificial being, recognized under US law as a person – an artificial legal person; it has access to courts and the concepts of due process and other constitutional guarantees apply to corporations.
Who can be shareholders of a corporation?
Individuals and other businesses
Shareholders
have limited liability (not personal liability) risk is investment only – however, it is possible for the court to “pierce the veil”, then shareholders would be liable
What does “shareholders have limited personal liability mean?”
- Shareholders are not personally liable for the debts of the corporation?
- Corporations are never sued?
- Shareholders risk their investment if the company goes bankrupt?
Board of Directors
Members are elected by shareholders. The board of directors makes the policy decisions and hires corporate officers.
Officers
Run the daily business operations
Limited Liability of Shareholders
normally corporate shareholders are NOT personally liable for the debts/liabilities of the corporation. Financially all they risk is their initial investment.
Earnings
Corporate profits
Dividends
Corporate profits paid out to shareholders in proportion to their shares
Retained Earnings
Keep profits to invest and grow more profits
What is a disadvantage to a corporation?
Double taxation
Double Taxation
Taxes are paid twice. The corporation does not pay taxes twice. Corporation pays tax, then dividends are distributed and they are taxed at the personal level.
Criminal Acts - Corporation
The corporation may be held liable for the criminal acts of its agents and employees – pays fines and directors and officers can go to jail. SOX holds CEO and CFO accountable for fraudulent activity.
Tort Liability
Respondeat Superior applies. The corporation is responsible (officers act as “agents” of the corporation)
Domestic Corp
refers to the corp. home state (state of incorporation). So, a corp. formed in Texas and doing business in Texas is a domestic corp.
Foreign Corp
what the corp. is called in a second state. So, a Texas corp. doing business in Oklahoma is referred to as a foreign corp. in the state of Oklahoma.
Alien Corp
what we call a corp. formed in another country but doing business in the US
Public Corp
formed by the government to meet political or governmental purpose (EG: USPS, AMTRAK)
Private Corp
created in whole or in part for profit; most corporations are private, even if they serve a public purpose – like Suddenlink or Atmos Gas
Are publicly held or publicly traded corporations private or public?
They are private.
“Publicly traded”: shares are offered to the public to be purchased
Nonprofit Corp
corporations formed for purposes other than making a profit – private hospitals, educational institutions, charities, religious organizations; allows these groups to own property and form contracts without individual members having personal liability (5013c status)
Close Corp.
shares of stock are held by relatively few people; could be family members; could be employees; “closely held”; “family”; “privately held” all refer to a close corp.; no trading market for the shares and a close corp. is often operated like a partnership, even though it usually has a board of directors (usually c corps become s corps)
S Corp.
a close corp. that meets requirements of Subchapter S of the IRC – can operate as an S Corp.; files an S Corp. election with the IRS and it is taxed like a partnership; must meet 6 requirements
6 Requirements of an S Corp
- The corporation must be a domestic corporation
- The corporation must not be a member of an affiliated group of corporations
- The shareholders must be individuals, estates, or certain trusts and tax-exempt organizations (partnerships and non qualifying trusts cannot be shareholders) Corporations can be shareholders under certain circumstances
- The corporation must have no more than 100 shareholders
- The corporation must have only 1 class of stock
- No shareholder of the corporation may be a nonresident alien.
Why would companies that could be a close corp or s corp elect to form an LLC?
Same tax advantages, greater flexibility
Professional Corp.
used by professionals like attorneys/accountants/doctors in business together; have lost their appeal after LLPs became possible. A PC or PA is still possible, but in many states each partner is held liable for the malpractice of each other partner; still used if a professional is a solo practitioner.
Corporate Formation and Powers
Relatively simple and fast, forms are now uploaded online
Promotional Activities
Business people are personally liable for any preincorpoartion contracts made with investors, accountants, or others on behalf of the future corporation. Personal liability continues until the newly formed corporation assumes liability through novation.
Incorporation Procedures
Select a state, select a name, websites, include “corporation” or an abbreviation of corporation in the name, file Articles of Incorporation, pay a fee
Bylaws
Bylaws are the internal rules for management of the corporation. Bylaws are synonymous to operating agreement in a partnership.
Rules related to voting, how to elect the board, how to replace the board, how to run a meeting.
Corporate Resolutions
documents that show actions corporations take (recordkeeping).
Improper incorporation
if rules for creating a corporation are not followed it can lead to third parties challenging the existence of the corporation.
De Jure Corporation
describes a corporation which has substantially complied with all requirements.
*minor defects may be overlooked by most courts
Still treated as a corporation, corporate shield stays in place.
Corporate Powers: order of priority
- The US Constitution
- State Constitutions
- State statutes
- The articles of incorporation
- Bylaws
- Resolutions of the board of directors
Piercing the Corporate Veil
exposing shareholders to personal liability; done by the courts when the owners use a corporate entity to perpetrate a fraud or other illegitimate objective. Corporate Veil is supposed to be protecting shareholders from personal liability. The court usually doesn’t do this unless it is something SUPER major.
5 Factors Used by Courts to Determine Whether or not to Pierce the Corporate Veil:
- A party is tricked or misled into dealing with the corporation rather than the individual. (Looks like fraud)
- It is set up to never make a profit…is always insolvent… or too thinly capitalized.
- It is formed to evade an existing legal obligation
- Statutory corporate formalities, such as holding required meetins, are not followed. (NOT ENOUGH on it’s own to peirce the veil.)
- Personal and corporate interest are commingled to such an extent that the corporate identity doesn’t appear separate.
What factors are super relevant to closely held corporations?
4 and 5 (Don’t have meetings, don’t keep good records)
Close corporation and an LLC. Tennessee. Landlord tenant breach of lease. Jerry Teal, the sole owner of Teal Properties, Inc. which is the landlord, is held personally liable for the breach of lease. Flood in the space. The property if flooded and not usable, the landlord is supposed to be repairing the property. Dog House hired repair people and paid out of pocket, Jerry won’t pay them back. What was the verdict?
Teal properties, Inc. owned no other property, had no assets and had no cash except the rents it took in and immediately dispersed to Jerry Teal personally. So Teal Properties, Inc. was the alter ego of Jerry Teal and the courts pierced the corporate veil and held Jerry Teal personally liable to the tenant Dob House Investments, LLC.
The Alter Ego Theory
Theory that the corporation does not operate as a separate entity - rather it was just another side of the individual or group that actually controlled the corporation
Bonds
debt securities; borrowing of funds from investors
Stocks
equity securities; represent purchase of ownership in the company
Common Stock
true ownership of the corporation, the shareholder has control, they have voting rights, shareholders are the last in line
Preferred Stock
priority over dividends and payment on dissolution, do not always have the right to vote
Venture Capital
(alternative funding): outside wealthy investors that are willing to provide money
Private Equity Capital
(alternative funding): funds pulled from wealthy investors (like a private equity firm)
