Formation of a Corporation Flashcards
A corporation has four key characteristics:
- perpetual or continuous existence; it survives the death or replacement of its owners (shareholders);
- centralized management of its assets and business;
- limited liability for its owners (shareholders), who are generally shielded from personal liability for the corporation’s debts and obligations; and
- free transferability of ownership interest (shares).
Double taxation of a corporation
- Corporation’s profits are taxed; and,
2. profits distributed to shareholders as dividends are taxed as income
Corporation Required Formalities
Annual shareholder and director meetings,
maintain separate bank account,
strict book-keeping,
LLC Required Formalities
- maintain separate bank account;
- and books and records,
- file annual reports
- and follow any procedures added by the Operating Agreement.
Who manages the day to day business of corporations?
Corporate officers
Who manages the day to day business of close corporations?
The Board of Directors can or the Shareholders can
Who manages day to day of LLCs?
Can be manager managed or member managed
Who manages day to day B of LLCs?
All general partners have co-equal right to manage business
3 main groups of players in a corporation?
Directors, officers, shareholders
Corporate directors do what
sit on the board and are responsible for governing the corporation
Corporate officers do what?
delegated the responsibility for managing the corporate business and serve as agents of the corporation.
Shareholders are?
owners of the corporation but generally will not exercise control over the management of the corporate business.
Who are promoters?
Promoters take the necessary preliminary steps for creating a corporation; these steps often involve contracts that the promoters enter into for the benefit of the not-yet-formed corporation.
What are promoter’s liability?
In general, promoters are personally liable on the contracts they enter into for the benefit of a not yet existant corporation
Promoters are not liable on pre-incorporation contracts if:
the preincorporation contract specifically disclaims the personal liability of the promoter; or,
Circumstances demonstrate that the other party agreed to look only to the corporation for performance
What is a Corporation’s Liability on a Preincorporation Contract
A corporation is not liable on any pre-incorporation agreements its promoters entered into on its behalf unless, after it comes into existence, the corporation assumes liability by its own act through
adoption or
novation.
If a corporation adopts the contract of a promoter, the promoters will
remain liable on the contract to the third party
but are no entitled to indemnification from the newly created corporation
If a novation occurs, the promoters are:
Are released from all personal liability on the preincorporation contract
A novation occurs when
3 Parties
the promoter,
the other party to the original contract,
and the corporation
—agree to substitution of the corporation as a party to the contract in place of the promoter.
Adoption of preincorporation acts can be either
express or implied
Express adoption occurs
when the board passes a resolution
Implied adoption occurs
when the corporation accepts or acknowledges the benefits of the contract in some manner.
How can a corporation ratify pre-incorporation transactions?
A corporation is unable to ratify a pre-incorporation transaction because ratification requires that the principal would have been lawfully able to authorize the unauthorized act when it was done.
What is the best protection for promoters?
Novation when corporation comes into existance
