Corporations Generally & Fact pattern 1: setting up a biz as a corp

Question 1

Corporations fact patterns

Answer 1

Six fact patterns:

1. Organization of a corp
2. Issuance of stock
3. directors and officers
4. shareholders
5. Fundamental corporate changes

Question 2

General corporations info

Answer 2

A corporation is owned by its shareholders

Group in charge of management is board of directors

Members of the board of directors are elected by shareholders

The board of directors appoints people to carry out its policy—the directors

Question 3

What’s needed to forma corp

Answer 3

I. To form a corporation, we need a person, paper and an act

a. Person: Incorporator. Must have one or more. An incorporator executes the articles and delivers them to the secretary of state.
i. A person OR an entity may serve as an incorporator.

b. Paper: Articles of incorporation
i. Required contents
1. Name of the corporation : Must include one of the magic words (or an abbreviation): corporation, company, incorporated, or limited
2. Name and address of each incorporator
3. Registered agent and street address of the registered office. – Registered agent is the company’s legal representative, so she can receive service of process for the corporation.
4. Info regarding stock
a. Authorized stock: maximum number of shares the corporation may sell.
b. If the company will have different classes of stock, mny sttes require that articles state number of shares per class and the voting rights and preferences for each class of stock
c. Other things MAY be put in articles, but not required.
i. Like initial directors

c. Act
i. Incorporators have notarized articles delivered to the secretary of state and pay the required fees. If secretary of state accepts the articles for filing→ corporation is filed
1. At this point we have de jure corporation

Question 4

Other steps to organize the corporation

Answer 4

organizational meeting where you adopt the bylaws

a. Organizational meeting
i. If the initial directors were named in the articles, the directors hold organizational meeting. If not, incorporators hold the meeting, where they elect initial directors.
ii. At the meeting, board of directors or incorporators must complete organization
1. Must eslect officers and adopt initial bylaws.

b. Bylaws
i. Internal document. Operating manual with things like setting record dates and methods of giving notice.
1. Not filed with the state
2. Articles govern if there’s a conflict
3. board of directors or shareholders can amend or adopt new bylaws

Question 5

Consequences of forming a corporation

Answer 5

a. Internal affairs rule
i. If company formed in State X and only does business in state Y
1. Internal affairs are governed by the law of the state of incorporation.

b. Entity status
i. A corporation is a legal person. It can sue and be sued, hold property, be a partner in a partnership, invest in other companies or commodities
1. It can make contributions to charity
2. But if doing nothing other than charitable work, you should for a nonprofit corporation.
3. Benefit corporation is one formed for profit but also to purue some benefit to a broader socialpolicy cause
ii. A corporation pays income tax on profits shareholders also taxed on distributions so there’s double tax

1. Can we form a corporation and avoid having to pay income tax at corporation level
   a. S corporation lets us do that
   b. S corporation has no more than 100 shareholders, all of whom are human and US citizens and residents. Only 1 clas of stock and not publicly traded
2. C corporation DOES pay tax at entity level.

c. Limited liability of shareholders
i. If corporation incurs debt or commits tort or breaches k, shareholders aren’t personally liable
ii. This si limited liability: shareholders are liable only for the price of their stock, not for corporate debts
1. Neither are directors and officers
iii. Corporation is liable for its debts

Question 6

Defective incorporations

Answer 6

(we wrongly thought there was a corporation)
a. Proprieters thought they formed a corporation, but failed to do so. This means they and the SHs ARE personally liable for business debts because they really just formed a partnership

b. Two doctrines allow proprietors to escape liability. Anyone asserting either doctrine must be unaware of failure to form de jure corporation.
i. De Facto Corporation “DFC” Requirements.
1) relevant incorporation statute, 2) good faith attempt to comply and 3) there has been an excersise of corporate privileges (Acted like they thought they were a corp
4. If applies, business is treated as a corporation for ALL purposes except in an action by the state (aka quo warranto, state coming after us for failing to do a proper corporation).

ii. Corporation by estoppel:Both sides to bargain think a corporation was formed. Turns out it wasn’t properly formed. Cannot sue the proprieters/ SHs individually if the opposing party treated it like a corporation
2. Can also be used from stopping the improperly formed corporation from liability

3. Corporation by estoppel ONLY applies in Ks not Tort actions– in torts you MAY sue the proprieters individually
   c. Status of these two doctrines – abolished in many states, MUST TAKE CARE TO FORM THE CORPORATION PROPERLY

Question 7

Pre-incorporation ks

Answer 7

a. A promoter is a person acting on behalf of a corporation not yet formed. She might enter a k on behalf f a corporation not-yet formed
b. Is the corporation liable on these ks? Corporation liable ONLY if it expressly or impliedly adopts the k

a. Express—board takes an action adopting the k
b. Implied adoption arises when: the corporation accepts a benefit under the k

c. Is the promoter liable on these ks? Unless the k says otherwise, the promoter IS PERSONALLY LIABLE on pre-incorporation ks until there is a novation
i. Novation is an agreement of the promoter, the corporation, and the other contracting party that the corporation replaces the promoter under the k.

1. Promoter will also be liable if the corp is never formed

Question 8

Promoters

Answer 8

the people who procure commitments for capital and other insturmentalities.

-promoters have fiduciary duty amongst themselves

• Duty to the corporation is one of fair disclosure and good faith.
  1. If disclosed and approved by independent board—promoter has met duty. No breach
  2. If disclosed to non-independent board—transaction must either be known by SHs at time they subscribed OR unanimously approved by shareholders/ subscribers.
  ii. If promoters purchase all the stock themselves with no intent to resell the stock, but then DO sell their shares to outsiders, they are not liable for breach of a fiduciary duty with regard to their txs, since at the time of purchase of stock there was no one they were keeping their profit a secret from

c. If fraud—liable if π can show the fraud caused harm.

Question 9

Foreign corporations

Answer 9

Foreign corps transacting business in this state must qualify and pay prescribed fees

i. Foreign = anything outside state a
b. Transacting business means the regular course of intrastate business activity (not interstate). So it doesn’t include occasional or sporadic activity in this state, and not just owning property
c. The foreign corporation qualifies by getting a certificate of authority from the secretary of state. It gives info from its articles and proves good standing in its home state. Foreign corporation must also appoint a registered agent and maintain a registered office in the state

d. IF it transacts business without qualifying
i. Civil fine
ii. Corporation cannot assert a claim in the state
iii. But it can be sued and defined
e. Once it qualifies and pays back fees and fines, it then can sue in the state