Class 8, Corporate Structure And Organization

Question 1

Forming a Corporation

Answer 1

To form a corporation, Articles of Incorporation must be filed with the Secretary of the State in the state that has been selected for corporation’s formation

Question 2

Minimum Requirements for Articles of Incorporation

Answer 2

1) The name of the corporation
2) The purpose of the corporation (may be as broad as “any lawful purpose”)
3)The number of shares that are authorized for each class of stock of the corporation; and
4) the name and the address of the agent for service of process

Question 3

Incorporator

Answer 3

• The person who signs and delivers the Articles of Incorporation
• names the initial board of directors, who then hold an organizational meeting to adopt Bylaws

Question 4

Bylaws

Answer 4

Bylaws are the rules that govern the basic internal operations of the corporation and its relations with its shareholders, officers and directors

Question 5

Incorporation checklist

Answer 5

1) state chosen
2) incorporator(s) meeting residency requirement, if any
3) qualifying name
4) articles of incorporation
5) filing fee

Question 6

Promoter

Answer 6

• Promoters are the people who organize the corporation before it is formed
• promoter might borrow money, enter into contracts, hire potential employees, rent office or factory space, etc., with the idea that all this will be of use to the business once it is incorporated.
• promoters have fiduciary duties (both of core and of loyalty) to the corporation and to those who will eventually prey stock in a corporation — promoter is an agent for the proposed corporation.

Question 7

Promoter Issues

Restatement (Third) Agency §6.04

Answer 7

If x acts for a corporation, and
If x knows corporation does not exist, and
If acts of x create liabilities,
Then x is a party to the contract

Exception: Third party agrees otherwise

Question 8

Liabilities on contracts into which the promoter entered into on behalf of the corporation

Answer 8

The promoter is personally bound by any contract entered into on behalf of a corporation that has not yet been formed, unless there is a clear intent that the promoter not de bound or the circumstances are such that the promotercould not perform the agreement.

• once the corporation is formed it may be bound by the contract, but only if the corporation agrees to be bound.

Question 9

Adoption, ratification, novation

Answer 9

Adoption: principal becomes party by statement or conduct

Ratification: principal confers retroactive actual authority

Novation: principal expressly replaces agent as party

Question 10

A corporation may agree to be bound by adopting a contract, and a corporation may adopt the contract by:

Answer 10

1) expressly ratifying the contract (often through novation); or

2) impliedly ratifying the contract through the corporation’s actions or by accepting or acknowledging the benefits of the contract.

Question 11

De facto corporation

Answer 11

• Doctrine under which courts may recognize the existence of a corporation and protect its shareholders with limited liability even though at the time they incurred liability, the corporation had not come into existence.

Question 12

Corporation by Estoppel

Answer 12

• If a third party treats an organization as though it were a corporation, that third party may be estopped from denying the organization’s corporate existence if the denial would result in unjust harm to the principals.

-If an organization holds itself out as a corporation even though it is not), that organization will be estopped from denying its own corporate existence to avoid an obligation or to obtain unfair benefit

Question 13

Doctrine of corporation by estoppel ONLY applies when:

Answer 13

① Third party sues corporation to recover debt that corporation owes to third party

② Third party believed that it was contracting with a corporation

• participants incorporation insulated from liability (doctrine applies)

Question 14

De facto corporation requirements

Answer 14

1) A valid law under which such a corporation can be lawfully organized

2) an attempt to organize thereunder;

3) Actual user of the corporate franchise

4) good faith in claiming to be and in doing business as a corporation (hard to have now that incorporates will almost always have notice that articles have been properly filed).

→ if these standards are met, the organization may be granted de facto corporation status, which means that the principals will have limited liability from the debts of the corporation as though the corporation has been property formed.

Question 15

Characteristics of a Corporation

Answer 15

① being treated as a separate person under the law

② providing limited liability for its owners and managers

③ creating a division between ownership and control (management)

④ allowing for flexible capital structure

⑤ allowing owners to freely transfer ownership (liquidity)

⑥ profits are taxed twice

Question 16

Obligations that a corporation must meet in order to have limited liability

Answer 16

① follow the rules/formalities

② provide notice to the world that it is a corporation

③treat the corporation as a separate entity from its owners and from sister corporations; and

④ be a real business, conducting business activities

Question 17

Internal affairs doctrine

Answer 17

The internal affairs doctrine is a conflicts of law rule that corporate governance matters ( e.g., shareholders’ right to vote,the procedures by which the board of directors act, the duties of directors to the corporation) are to be controlled by the laws of the state of incorporation.