Corporations Flashcards
Five Possible Fact Patterns
- Formation
- Issuance of Stock
- Directors and Officers
- Shareholders
- Fundamental Corporate Charges
Fact Pattern 1: Formation
For formation:
- Person - Incorporator, executes the articles and delivers them to the Secretary of State. Any person or entity may be an incorporator.
- Paper - Articles of Incorporation. Must include Corporate Name (Corp., Company, Inc., or Limited). Address of Incorporators. Name of registered agent, and address of registered office (must be in Georgia). Must give address of principal office (can be anywhere). Stock information.
- Act - Incorporator executes the articles and delivers them to the Secretary of State, along with a certificate of a request to publish the corporation’s formation, and pay fees. E-filing is okay.
If Ga. Secretary of State files the articles - De Jure Corporation.
Formation Terminology
A corporation formed in accordance with law is a de jure corporation. If all corporate laws have not been followed, a de facto corporation might result. Even if no attempt to incorporate is made, a business operating under a corporate name may be treated as a corporation for a particular transaction under the estoppel doctrine.
Articles of Incorporation
To form a corporation, we also need a particular paper—the articles of incorporation. This document must contain the information below:
Required Contents
- Corporate Name: A corporation’s name must include one of these “magic words,” or an abbreviation of them: corporation, company, incorporated, or limited.
- Name and Address of Each Incorporator: It is optional to name the initial directors in the articles. However, if they are named, their addresses must be given, too.
- Name of Registered Agent and Address of the Registered Office:The corporation’s registered office must be in Georgia. The registered agent is the corporation’s legal representative, meaning that they could, for example, receive service of process for the corporation.
- Address of the Principal Office
- Information About Stock:The articles must give certain details about the corporation’s stock. Note the following terminology:
- Authorized stock: The maximum number of shares the company can sell
- Issued stock: The number of shares the corporation actually does sell
- Outstanding stock: Shares that have been issued and not reacquired by the corporation
The articles must contain information about the corporation’s authorized stock. The articles may also create different classes of stock or allow the board of directors to do so.
Duration
If the articles say nothing about duration, then the corporation is presumed to have perpetual existence.
Purpose
If the articles say nothing about the corporation’s purpose, Georgia presumes that a corporation is formed to conduct any lawful business, and is allowed to do all things necessary and convenient to carry out its business purpose, unless the articles restrict its activity. Note that these provisions give authority for a corporation to do almost anything that is rationally related to a business purpose. Thus, unless the facts of an exam question provide a specific restriction on a corporation’s purposes, you should usually find corporate acts to be within the corporation’s powers.
Additional Provisions
The articles may also include any other provision regarding operation of the corporation that is not inconsistent with law.
Ultra Vires Activity
Formation - Articles of Incorporation
Narrow Business Purpose—Ultra Vires: Conceivably, the articles might contain a limited statement of purpose (though this is very rare). If a corporation does include a narrow business purpose in its articles, it is prohibited from undertaking action (such as entering a contract or buying property) unrelated to achieving the stated business purpose (“ultra vires” activities).
However, if it does, generally, the action isn’t void. The company’s action generally will be treated as valid, and the ultra vires nature of an action can be raised in only 3 circumstances:
- A shareholder may sue the corporation to enjoin a proposed ultra vires act
- The corporation may sue an officer or director for damages for authorizing an ultra vires act AND
- The state may bring an action to dissolve a corporation for committing an ultra vires act
Other Steps to Organize the Corporation
Formation
Organizational Meeting: If intitial directors were named in the Articles, they will hold the organizational meeting to select officers, adopt bylaws, transact other business.
If not named, then the incorporator will hold the organizational meeting, and she will elect the directors to proceed.
Bylaws: Internal document, don’t bind outsiders. Corporation’s operating manual. Bylaws may contain any provision for managing the corporation that is not inconsistent with the articles or law. Unlikely to ask about the content of a bylaw.
Bylaws are not filed with the State.
If Bylaws and Articles conflict, Articles will win.
- Bylaw Amendment/Repeal: Board or Shareholders can amend bylaws or adopt new ones.
Entity Status
Formation - Entity Status
A corporation is seen as a legal person, separate from its owners and managers. A corporation can sue and be sued, can be in a partnership, invest, and more. A for-profit corporation can make contributions to charity. If a business is to engage solely in charitable work, a “nonprofit corporation” can be formed under special provisions of Georgia law.
Non-Profit Corporations
Formation: Entity Status
In Georgia, charitable organizations (or nonprofit corporations) are governed by the Georgia Nonprofit Corporation Code and the Georgia Charitable Solicitations Act.
Unless exempted, charitable organizations must file a registration statement with the Secretary of State.
In addition, the articles of incorporation must state that the corporation is organized under the Georgia Nonprofit Corporation Code.
Within 1 year of filing, the charitable organization must file a financial statement. If it has received more than $1 million in contributions, the financial statement must be prepared by an independent certified public accountant.
To obtain tax exempt status, the charitable organization must file a section 501(c)(3) application with the IRS.
Once it receives a letter of determination as a tax exempt entity, it must file the letter within 30 days of receipt with the secretary of state in order to apply for state tax exemption.
Benefit Corporations
Formation: Entity Status
Georgia law also allows for the creation of benefit corporations, or “B Corps,” which are formed for profit and also to pursue some benefit to a broader social policy cause.
Things work as with a regular corporation, but the articles must say it’s a “benefit corporation” formed to pursue some sort of public benefit or benefits (such as having a positive effect, or reduction of negative effects, of an artistic, charitable, cultural, economic, environmental, scientific, or technological nature).
The board of directors of a B Corp must consider the public benefit(s) specified in the articles when managing or directing the B Corp’s business, in addition to impact on shareholders.
They must also adopt standards by which to measure the corporation’s performance in pursuing such benefit(s). The corporation must provide written reports (on at least an annual basis) to shareholders addressing the B Corp’s performance with respect to its pursuit of the benefit(s) stated in its articles.
Internal Affairs Doctrine
Formation
Under the internal affairs doctrine, the internal affairs of a corporation are governed by the law of the state of incorporation.
So, the internal affairs of a Georgia corporation (for instance, the roles and duties of directors, officers, and shareholders) are governed by Georgia law.
Limited Liability
Formation
One of the most important consequences of forming a corporation is limited liability.
Shareholders are not personally liable for debts. Shareholders are generally only liable to pay for their stocks, they are no liable for business debts.
Directors/officers are not liable for what the entity does.
The corporation itself is liable for what the corporation does.
Federal Income Taxation
Formation
In terms of corporate taxation at the federal level, 2 names (based on subchapters of the Internal Revenue Code (“IRC”)) are important to know:
C Corporation - Presume C corporation unless exam says otherwise
- Generally, a corporation is taxed as an entity distinct from its owners. (Under the tax laws, it is a “C corporation.”)
- Unless a bar exam question says otherwise, we have a C corporation under the IRC.
- The corporate tax rate generally is lower than the personal tax rate, so this arrangement can be advantageous to persons who want to delay the realization of income.
- However, this advantage comes at a price—double taxation—because when the corporation does make distributions to shareholders, the distributions are treated as taxable income to the shareholders, even though the corporation has already paid taxes on its profits.
S Corporation
- So, is it possible to form a corporation and legally avoid having it pay income tax at the corporate level?
- Yes, because the tax laws permit certain corporations to elect to be taxed like partnerships and yet retain the other advantages of the corporate form.
- Such corporations are called “S corporations” under the tax laws. Partnerships and S corporations are not subject to double taxation—profits and losses flow through the entity to the owners.
- There are a number of restrictions on S corporations (for example, stock can be held by no more than 100 persons, generally shareholders must be individuals and U.S. citizens or residents, there can be only one class of stock, and the stock must not be publicly traded).
Doctrine of Defective Incorporation
Formation
Where proprietors failed to form a de jure corporation, they will be personally liable for what the business does. But under two doctrines, the business gets treated as a corporation. To use either doctrine, the person must be unaware of the failure to form the de jure corporation.
- De Facto Corporation
- Corporation by Estoppel
One of the main reasons to incorporate is to avoid personal liability for obligations that the corporation incurs. If the incorporators thought they formed a corporation, but they failed to do so, they’d be personally liable for business debts. (Basically, the would-be incorporators have formed a partnership instead, and partners are liable for business debts.) But 2 doctrines may still allow the incorporators to escape liability: (1) de facto corporation and (2) corporation by estoppel. Under these doctrines, the business is treated as a corporation, so shareholders are not liable for what the business did. One important characteristic of both of these doctrines is that anyone asserting either doctrine must be unaware of the failure to form a de jure corporation.
De Factor Corporation Doctrine
Formation - Defective Incorporation
For a de facto corporation to exist, we must meet the following requirements:
- There must be a relevant incorporation statute. (On the exam, you can address this requirement quickly—it will always be met, because there’s an incorporation statute in every state.)
- The parties made a good faith, colorable attempt to comply with the statute, meaning the parties tried and came close to forming a corporation.
- There has been some exercise of corporate privileges, meaning the parties were acting as though they thought there was a corporation.
If the de facto corporation doctrine applies, the business is treated as a corporation for all purposes except in an action by the state(called a “quo warranto” action).
Status of De Factor Corpation Georgia
- Probably abolished, but not 100% clear.
- Georgia has abolished the de facto corporation doctrine—at least with respect to persons who know that articles have not been filed.
- Georgia law imposes joint and several liability on all persons who purport to act on behalf of a corporation knowing that there has been no incorporation.
- Thus, a person who signs a contract on behalf of a corporation knowing that the articles of incorporation have not been filed will be personally liable on the contract.
- On the other hand, a person who reasonably believes that articles of incorporation have been filed (for example, because they were sent to the state or because a business associate said he would do so) when, in fact, they have not been filed is not personally liable.
Corporation by Estoppel Doctrine
Formation - Defective Incorporation
- Under the estoppel doctrine, the “corporate” entity, and parties who have dealt with the entity as if it were a corporation, will be estopped from denying the corporation’s existence.
- In other words, say that you do business with people who hold their business out as a corporation. They think it’s a corporation and so do you. You write checks to the “corporation” and deal with it as a corporation. But there is no corporation.
- If you sue the proprietors individually, under the estoppel doctrine, you can’t win because you’ll be estopped to deny that the business was a corporation.
- Note that this doctrine can also prevent the corporation from avoiding liability by saying it was not a properly formed corporation.
- The estoppel doctrine applies on a case-by-case basis, but is generally applied only in contract cases and not in tort cases (on the rationale that a tort victim doesn’t allow himself to be injured in reliance on the business’s status as a corporation).
- This doctrine remains alive in Georgia.
Pre-Incorporation Contracts
Formation
A promoter is a person acting on behalf of a corporation not yet formed. Before a corporation is formed, promoters procure commitments for capital and other instrumentalities that will be used by the corporation after its formation.
Promoters’ Relationship with Each Other
Formation - Pre-Incorporation Contracts
Absent an agreement to the contrary, promoters are joint venturers who occupy a fiduciary relationship with each other.
They’ll breach their fiduciary duty if they secretly pursue personal gain at the expense of their fellow promoters.
Promoters’ Relationship with Corporation
Formation - Pre-Incorporation Contracts
A promoter’s fiduciary duty to the corporation is one of fair disclosure and good faith.
Breach of Fiduciary Duty Arising from Sales to the Corporation
A promoter who profits by selling property to the corporation may be liable for his profit unless all material facts of the transaction were disclosed. If the transaction is disclosed to an independent board of directors and approved, the promoter has met his duty and will not be liable for his profits. If the board is not completely independent, the promoter still will not be liable for his profits if the subscribers knew of the transaction at the time they subscribed or unanimously ratified the transaction after full disclosure. Disclosure must be to all who are contemplated to be part of the initial financing scheme. If the promoters purchase all the stock and subsequently sell their individual shares to outsiders, the promoters can’t be held liable for the profits from the sale of property to the corporation.
Fraud
Promoters may always be held liable if plaintiffs can show that they were damaged by the promoters’ fraudulent misrepresentations or fraudulent failure to disclose all material facts.
Promoters’ Relationship with Third Parties - Preincorporation Agreements
Formation - Pre-Incorporation Contracts
A promoter may enter into contracts on behalf of a corporation not yet formed. Our key question is who bears liability on these preincorporation contracts?
Corporation’s Liability
Since the corporate entity doesn’t exist prior to incorporation, it’s not bound on contracts entered into by the promoter in the corporate name prior to incorporation. The corporation may become liable only if it expressly or impliedly adopts the promoter’s contract.
How can adoption happen?
- Express adoption: The board takes an action adopting the contract.
- Implied adoption: The corporation accepts a benefit of the contract.
Promoter’s Liability
If a promoter enters into an agreement with a third party on behalf of a planned but unformed corporation, the promoter is personally liable on the contract.
The promoter’s liability continues after the corporation is formed, even if the corporation adopts the contract and benefits from it.
The promoter will be released from liability only if there is an express or implied novation (meaning, an agreement among all 3 parties—the promoter, the corporation, and the other contracting party—to release the promoter from liability and substitute the corporation for the promoter in the contract).
- Exception—Agreement Expressly Relieves Promoter of Liability: If the agreement expressly relieves the promoter of liability, there’s no contract; such an arrangement may be construed as a revocable offer to the proposed corporation, and the promoter has no rights or liabilities under the agreement.
Promoter’s Right to Reimbursement
Formation - Pre-Incorporation Contracts
A promoter who is held personally liable on a preincorporation contract may have a right to reimbursement from the corporation to the extent of any benefits received by the corporation.
Foreign Corporations
Formation
A foreign corporation may not transact business within Georgia until it has qualified (by obtaining a certificate of authority) and paid the prescribed fees.
Any jurisdiction outside of Georgia is considered foreign.
Trasnacting Business
Formation - Foreign Corporations
Transacting business means the regular course of intrastate (not interstate) business activity. This does not include owning property or sporadic business in Georgia.
Qualification
Formation - Foreign Corporations
To qualify, the foreign corporation gets a certificate of authority from the Georgia Secretary of State.
It applies by giving information from its articles and a certificate of good standing from its home state.
The corporation also must appoint a registered agent in Georgia.
A foreign corporation may not be denied a certificate of authority merely because the laws of its state of incorporation governing its organization and internal affairs differ from Georgia’s.
Failure to Qualify
Formation - Foreign Corporations
If a foreign corporation fails to qualify within 30 days of transacting business in Georgia, it will incur a civil penalty and cannot bring suit in Georgia courts (but can be sued and defend suits there).
The corporation can sue in Georgia once it qualifies and pays the fees and civil penalty. Failure to obtain a certificate does not usually impair the validity of any contract or corporate act.