Incorporation Flashcards
Texas Business Organizations Code
TBOC
organization that governs Texas corporations
To form a corporation
Need: person, paper and an act
Person
An organizer who executes the certificate and delivers to secretary of state
Can be a person or another entity
Does not have to be a TX resident
Paper
The Certificate of Formation
- need name and address of company
- need name and address of organizer
- number of initial directors
- name and addresses of directors
- name of the corporate agent and post office address
- statement of purpose
Name of the Corporation requirement
all corporation names must include either:
- corporation
- company
- Incorporated
abbreviation of these are OK
Reserving a company name
before forming company you can reserve a company name with the Secretary of State for 120 days
Duration of a company
not required to be specified in the certificate of formation
if not, will last forever
statement of purpose
in the certificate of formation
Does not need to be specific, but if it is then the corporation’s actions must stay within the stated purpose’s scope
Outside scope: ultra vires activity
*Ultra Vires Activity
When corporation is acting outside the scope of its stated purpose
- *ultra vires acts are not voidable by the corp.
- SH can sue for an injunction
- the responsible managers are liable to the corporation for ultra vires losses
*Stock requirements for the Certificate of Formation
Must include:
- authorized stock
- number of shares per class
- Information on par value, voting rights and preferences fo each class
Authorized Stock
The maximum number of shares of stock that the corporate can sell
Outstanding stock
shares the corporation has issued and not reacquired
The Act
The organizer signs the certificate of formation, delivers it to the Texas Secretary of state and pays the required fee.
Electronic submissions are OK
Secretary of state then will file it and send an acknowledgment of filing to the corporation
Effect of the Secretary fo state filing the certificate of formation?
Corporation existence begins!!!
Organizational meeting
Held by the initial directors of a corporation after the articles of formation are filed
Board:
- selects officers
- adopts the initial bylaws
- may transact other company business
3 day notice required before the meeting
Does not need to be held in TX
Bylaws
Operating manual for the corporation
Required for all TX corporation unless a closed corporation
Not filed with the state, an internal document
Can be repeal by the Board or SH
Bylaws and Certificate of Formation conflict?
the certificate will take precedence
Except for number of directors which can be set out in the bylaws
Internal Affairs Rule
TX law will govern the internal affairs of a corporation formed in TX even if the corporation does no business in TX
Entity Status
Corporation is a separate legal entity that can be sued, sue, hold property and serve as a partner in a partnership
B-corp
is formed for profit and also to pursue some benefit to a broader social-policy cause
must be stated in the certificate that this type of corporation is being formed
Income Taxation
C corps will pay taxes on profits and SH pay taxes on dividends- double taxation
Can avoid by creating an S-corp
S-corp
has 100 or fewer SH all of whom are humans (no corporation SHs)
only one class of stock that is not publicly traded
Limited Liability
SH are only liable to pay for their stock and not for any of the business’s obligations
Directors will also not be liable for the corporation’s obligations
Reason why we form a corporation
Defective Incorporation
When we wrongly thought there was a corporation
Two doctrines that can be relied on to stop SH.organizer from being liable for what the business did when a business was no in fact formed:
Person asserting either must be unaware that a corporation was not actually formed when joined
- De facto Corporation
- Corporation by Estoppel
De Facto Corporation
Requirements:
- there is a relevant incorporation statute (always TBOC)
- parties made a good faith, colorable attempt to comply with it; and
- some exercise of corporate privileges (acting like a corporation)
Doctrine may be abolished in TX- “Unsure”
Corporation by Estoppel
One who treats a business as a corporation may be estopped from denying that it is a corporation
If you have no reason to know that it is not a corporation and you treat and do business with it like it is a corporation you may be stopped from trying to sue the proprietors individually once you find out that not an actual true corporation
Applies in contract cases, not tort
Doctrine may be abolished in TX- “Unsure”
Pre-Incorpoation Contracts
We knew there was not a corporation
Liability of the corporation will depend on whether the corporation adopts the contract
A promoter
a person acting on behalf of a corporation not yet formed
Can contract with 3P on behalf of the not yet formed corporation
Liability of a promoter
Unless the contract clearly says otherwise, the promoter is liable on pre-incorporation contracts until there is a Novation.
A novation is an agreement of the promoter, the corporation, and the other contracting party that the corporation replaces the promoter under the contract.
Adoption by corporation only makes the corporation liable too, but does not relieve P because there has to be a novation.
Adoption of a pre-incorporation contract
When adopted by the corporation, they will become liable for the contract
Express: board takes an action adopting the contract
Implied: will arise if the corporation accepts a benefit of the contract
Foreign Corporations
A foreign corporation transacting business in TX must register and pay prescribed fees
Regular business, not sporadic activity
What happens if a foreign corporation transacts business in TX without registering?
- there is a civil penalty
- the corporation cannot sue in TX on a claim arising from business in TX
It CAN be sued just cannot not sue
Can get ability to sue back if it pays back fees and registers
*Assumed Name Certificate
An entity formed by filing, which is any anything besides a general partnership and a sole proprietorship, has a requirement for its name that it designate its
entitle type in the name.
This means a limited partnership would have to include “limited partnership” in its name or an abbreviation of that.
But any entity may operate under a name by filing an assumed name certificate in the county of the principal office is located.
The assumed name certificate sets forth the owner, it states the legal name of the entity if it is an entity that filed a certificate of formation with the secretary of state and the assumed name under which the business will be operating.
*Remedies for ultra vires activity
- injunction
- derivative suit (if SH meets test)
- direct suit
- AG can also sue to enjoin
- Restrictions on Certificate of Formation
Not allowed:
- illegal purpose for the corporation
- limiting liability for breach of duties of care and loyalty (but can require corp. to indemnify)
Allowed
- loans to officers as long as they provide a benefit to the corporation (e.g. compensation plans, etc.)
- profit-sharing: as long as the profit-sharing is not like a partnership but like a corporation (where profits go to corporation, and then to extent allowable, distributions)
- donate funds to charity: as long as the BJR is followed
- limiting liability for money damages to the corporation or shareholders for actions taken or omissions.
*When Must and When May a Corporation Indemnify
May: if director found liable, settles, or pleads nolo contendre, she may be completely indemnified if she acted in good faith. All amounts owed (including attorney’s fees, costs of defense, costs of judgment, and reimbursement for advance payments of fees; except, in derivative action, if director or officer is found to have improperly received benefit or if liability was imposed, she can only receive reasonable expenses and not judgment cost)
Must: reasonable expenses if she is “wholly successful” in proceeding against her in her corporate capacity.
*Forming Document: What must be filed and with whom must it be filed
Organizers must sign and deliver Certificate of Formation to the Secretary of State who sends back an acknowledgment
- Forming Document: What is required?
- name of corporation
- name and address of initial directors
- purposes for which the corporation is to be formed (can be as broad as “any lawful purpose”)
- duration of corporation if it not perpetual
- capitol structure and shareholders’ rights
- named and address of registered agent
- Forming Document: Legal Effect of Properly filing Document
corporation becomes a de jure corporation and has all the rights of corporation (e.g. its own legal entity, sue and be sued, enter into contracts, be a partner of a partnership)
- Requirements to form a close corporation
The same steps as forming a regular corporation + the certificate of formation must state: “This corporation is a close corporation.”
- What are the benefits of a close corporation?
- taxes: can elect to be a pass-through tax entity. In typical corporations, taxed are paid twice (once when corporation paid and once when distributions are received)
- same limited liability as regular corporations
- limits on stock that would ordinarily be restraints on transferability
- practical flexibility on notice to SH, quorum, voting requirements bc can suit them to company
more flexible bc don’t answer to public shareholders
