Forming a Corporation & Issuance of Stock

Question 1

three elements of formation - person, paper & act

Answer 1

(1) person (or entity)

(2) paper (articles of incorporation)
»> needs proper suffix
»> name/address of incorporator and registered agent
»> info regarding stock (max # of stock, division of shares)

(3) act
»> deliver to SOS and pay fees - FORMS THE DE JURE CORP

Question 2

2 steps to organize the corp

Answer 2

(1) appoint officers

(2) adopt bylaws (operating manual for corp)
»> not filed with the state
»> AOI governs if there is a conflict!
»> both BOD AND shareholders can adopt, amend, repeal the bylaws

Question 3

consequences of forming a corp:

internal affairs doctrine (what law governs)

entity status

benefit corp

taxation (C corps vs S corps)

limited liability

Answer 3

internal affairs are governed by the state of incorporation

entity status - corp is a legal person (can sue, be sued, invest, contribute to charity)

benefit corps: have a second priority besides the bottom line - a community purpose

taxation:
»> C corps BOTH the corp (on income) and the shareholders (on dividends) pay taxes
»> S corps DO NOT pay income tax at the corporate level (can only have human shareholders and one class of non-publicly-traded stock)

limited liability: shareholders, directors, and officers NOT personally liable for corporate debts

Question 4

defective incorporation: result; de facto corp; corp by estoppel

Answer 4

if you fail the formalities, you will be a partnership (and personally liable for company debts), unless:

(1) de facto corp:

• elements
  »> must be a relevant incorp statute
  »> parties made a GOOD FAITH COLORABLE ATTEMPT to comply with formalities
  »> acting as though you are a corporation
• result: you are de jure except for suits against you by the state
• most common: documents with SOS get lost in mail
  (2) corporation by estoppel: a person who deals with an entity as a corporation will be estopped from denying the corporation’s existence

(BOTH OF THESE ABOLISHED IN MOST STATES)

Question 5

promoters & pre-incorporation contracts

Answer 5

promoter: someone who procures commitments for a corp to be formed int he future

pre-incorp contract: this is when the promoter is contracting on behalf of a corp not yet formed

corp is liable on the contract ONLY IF it later adopts the contract
»> can be express or implied (like accepting a benefit of the contract)
»> kind of like a ratification

promoter is liable on the contract unless contract has contrary language, or there is a complete novation (NOT simply an adoption)
»> if limiting liability language IS included, the “contract” will be considered to be an OFFER proposed to the corporation

Question 6

where does the original capital come from (2 avenues)

Answer 6

money to start the corp (capital) comes from borrowing, or raising by selling stock:

debt securities (bonds): corp borrows money and the lender becomes a CREDITOR

equity securities (stocks): corp sells ownership interest and becomes an OWNER
>>> stock sold BY THE COMPANY is called an "issuance" (whether the initial sale or a subsequent sale of reacquired stocks)

Question 7

consideration required to get an issuance of stock

Answer 7

can be ANY tangible or intangible property or benefit to the corp
»> i.e. can include promissory notes & future services

“par” refers to the MINIMUM ISSUANCE price
»> if person paid too little, directors who authorized and purchaser are liable
»> remember, only applies to ISSUANCES

Question 8

preemptive rights

Answer 8

rights of existing shareholders to maintain percentage of ownership by buying stock if there is a new ISSUANCE FOR MONEY (not services/property/etc.)

this is a RIGHT, not an obligation

AOI must EXPRESSLY provide for these rights, or they won’t apply