Corporations Flashcards
A corporation is _____
a legal entity distinct from its owners and may be created only by filing certain documents with the state.
There are several key players we need to remember in the context of corporations:
- Shareholders, or stockholders, are the owners of the corporation;
- The board of directors is the group in charge of management of the corporation; and
- Officers are agents of the corporation appointed to carry out the corporation’s policy
Key Characteristics of a Corporation
- Limited Liability for Owners, Directors, and Officers
- Centralized Management
- Free Transferability of Ownership
- Continuity of Life
- Taxation (lower corporate tax rate but double tax, but see also S Corp)
On the exam, Corporations questions fall into five main fact patterns or topic areas:
- Organization of a corporation
- Issuance of stock
- Directors and officers
- Shareholders
- Fundamental corporate changes
Comparison of Corporation with Sole Proprietorship
- In a sole proprietorship, one person owns all of the assets of the business.
- There is no business entity distinct from the owner.
- The owner is personally liable for the business’s obligations, and the business “entity” cannot continue beyond the life of the owner.
- Ownership is freely transferable, and all profits and losses from the business flow through directly to the owner.
Comparison of Corporation with Partnership
- A partnership is similar to a sole proprietorship except that there are at least two owners of a partnership.
- Little formality is required to form a partnership (just an intention to carry on as co-owners a business for profit).
- Partnerships generally are not treated as legal entities apart from their owners.
- Partners are personally liable for obligations of the partnership, and management rights generally are spread among the partners.
- Ownership interests of partners cannot be transferred without the consent of the other partners.
- A partnership generally does not continue beyond the lives of its owners.
- Finally, profits and losses of a partnership flow through directly to the
partners unless the partners have elected to be taxed as a corporation.
Comparison of Corporation with Limited Partnership
- A limited partnership is a partnership that provides for limited liability of some investors (called “limited partners”), but otherwise is similar to other partnerships.
- A limited partnership can be formed only by compliance with the limited partnership statute.
- There must be at least one general partner, who has full personal liability for partnership debts and has most management rights.
Comparison of Corporation with Limited Liability Company
- The limited liability company (“LLC”) is designed to offer the limited liability of a corporation and the flow through tax advantages of a partnership (unless the parties elect to be taxed as a corporation).
- Like a corporation, it may be formed only by filing appropriate documents with the state, but otherwise it is a very flexible business form: owners may choose between centralized management and owner management, free transferability of ownership or restricted transferability, etc
Comparison of Corporation with Benefit Corporation
- A benefit corporation (“B corporation”) intends to benefit the public and the environment, in addition to its shareholders.
- B corporations are treated the same as C corporations for tax purposes.
- A benefit corporation’s articles of incorporation must state that it is a benefit corporation.
- Directors and officers of benefit corporations operate with the same limited liability and fiduciary duties as their traditional counterparts in C corporations, but they are also required to consider the impact of their decisions on the B corporation’s employees, customers, communities, and the environment, not just its share-
holders. - B corporations must also prepare an annual benefit report, which is delivered to all the shareholders and posted online and/or filed with the secretary of state.
Corporations are created by ____
complying with state corporate law, which in a majority of states is based on the Revised Model Business Corporation Act (“MBCA”).
A corporation formed in accordance with law is a ____ corporation. If all corporate laws have not been followed, a ____ corporation might result or a corporation might be recognized through _____.
de jure; de facto; estoppel
To create a de jure corporation, we need _______
a person, a paper, and an act
To form a corporation, we need one or more persons who undertake to form it, who are known as ____
the incorporators.
The incorporators must comply with _____ to form the corporation.
all applicable statutory requirements
Incorporators may be a ____. They do not need to be a citizen of _____
person or an entity; the state of incorporation.
To form a corporation, we also need a particular paper—the ____
articles of incorporation.
The articles of incorporation must include:
- The name of the corporation: must include one of the following words or an abbreviation: “corporation,” “company,” “incorporated,” or “limited.”
- The name and address of each incorporator
- A registered agent and the street address of the registered office. The registered office must be in the state. The registered agent is the company’s legal representative, meaning
they could, for example, receive service of process for the corporation. - Information regarding the corporation’s stock.
–> The articles must give details about the corporation’s authorized stock,
which is the maximum number of shares the corporation can sell.
–> If the company has different classes of stock or series within a class of stock, many states require that the articles
state the number of shares per class; provide a distinguishing designation for each class (for example, “Class A preferred,” “Class B preferred,” and so on); and describe the voting rights,
preferences, and limitations of each class of stock.
Optional Contents of Articles of Incorporation
The articles may also include any other provision regarding operation of the corporation that’s not inconsistent with law.
-> For example, the articles might include the names and addresses of the initial directors.
-> The articles may also require that any internal corporate claims be brought exclusively at a court within the corporation’s state of incorporation.
Traditionally, corporations have included a statement of business purposes in their articles. Absent such a statement, the MBCA presumes that _____
a corporation is formed to conduct any lawful business and is allowed to undertake any act that is necessary or convenient for carrying on their business purpose, including making charitable donations and lending money to employees, officers, and directors.
Ultra Vires Acts
If a corporation includes a narrow business purpose in its articles, it may not undertake activities unrelated to achieving the stated business purpose
-> Activities beyond the scope of the stated business purposes are said to be “ultra vires.
Under common law, ultra vires acts were _____.
Under the MBCA, ultra vires acts generally are enforceable, and the ultra vires nature of an act can be raised in only three situations:
void and unenforceable
a) A shareholder may sue the corporation to enjoin a proposed ultra vires act;
b) The corporation may sue an officer or director for damages for approving an ultra vires act; and
c) The state may bring an action to dissolve a corporation for committing an ultra vires act
To complete formation of the corporation, the incorporators will have notarized articles delivered to ____
the secretary of state and pay any required fees.
Corporate existence begins upon ____.
this filing by the state (the filing is conclusive proof of corporate existence)
If the initial directors were named in the articles, the _____ hold the organizational meeting. If they were not named in the articles, the ____ hold the organizational meeting.
board of directors; incorporators