Organization

Question 1

What is a corporation?

Answer 1

A corporation is a legal entity distinct from its owners and may be created only by filing certain documents with the state.

Question 2

Who are the key players in a corporation?

Answer 2

1. Shareholders - owners of the corporation
2. The Board of Directors - the group in charge of management of the corporation
3. Officers - agents of the corporation appointed to carry out the corporation’s policy

Question 3

Key Characteristics of a Corporation

Answer 3

a. Limited Liability for Owners, Directors & Officers
b. Centralized Management
c. Free Transferability of Ownership
d. Continuity of Life
e. Taxation (C-Corps = double taxed; S-Corps = taxed like partnership)

Question 4

Corporation Distinguished from Sole Proprietorship

Answer 4

Sole proprietorship
- one person owns all assets;
- business + owner not distinct;
- owner personally liable;
- entity cannot continue beyond owner’s life

Question 5

Corporation Distinguished From Partnership

Answer 5

Partnership
- similar to sole proprietorship but has at least two owners
- little formality required
- not treated as legal entities apart from owners
- partners personally liable
- management rights spread out among partners
- ownership interest non-transferable w/o consent
- doesn’t continue past lives of partners
- profits/losses go directly to partners (unless they opt to be taxed like a corp.)

Question 6

Corporation Distinguished LP

Answer 6

LP
- partnership that provides limited liability of some investors (i.e., limited partners)
- otherwise similar to partnerships
- formed only by compliance with limited partnership statute
- must be one GP, who has full liability + management rights

Question 7

Corporation Distinguished from LLC

Answer 7

LLC
- offers limited liability of corporation and the flow through tax advantages of a partnership (unless elected otherwise)
- may be formed only by filing appropriate documents with the state (like an inc.)
- flexible business form: owners may choose between centralized management vs. owner management, free vs. restricted transferability, etc…

Question 8

Corporations vs. Benefit Corporations

Answer 8

B Corporations
- intend to benefit the public and environment + shareholders
- treated like C-Corps for tax purposes
- Articles of inc. state that they’re a B corp.
- D+O = limited liability and same fiduciary duties as C-Corps but in addition must consider the impact of their decisions on employees, customers, communities, etc…
- must prepare annual benefit report which is delivered to all shareholders and posted online/filed with SoS

Question 9

Corporation Creation by Statute

Answer 9

Corporations are created by complying with state corporate law, which in a majority of states is based on the Revised Model Business Corporation Act (MBCA)

Question 10

Formation Terminology

Answer 10

A corporation formed in accordance with the law is a de jure corporation. If all corporate laws have not been followed, a de facto corporation might result or a corporation might be recognized via estoppel.

Question 11

How do you create a de jure corporation?

Answer 11

You need: a person, a paper, and an act.

Person - the “incorporator” must comply with applicable statutory requirements; can be a person or entity.

Paper - a.k.a The Articles of Incorporation

Act - Corporate Existence Begins on Filing
* to complete formation, the incorporators will have notarized articles delivered to the SoS and pay proper fees
* the filling is conclusive proof of corporate existence

Incorporator does not have to be a citizen of the state of incorporation.

Question 12

What must the Articles of Incorporation include?

Answer 12

Must include:
1. Name of corporation (followed by “corporation” “company “incorporated” or “limited”)
2. Name and address of incorporators
3. A registered agent (must be legal rep) and the street address of a registered office (must be in-state)
4. Information regarding corp.’s stock
* details about the authorized stock (max # of shares corp. can sell)
* types of stock classes and shares per class
* describe voting rights, preferences, and limitations of each stock class

May include:
1. names and addresses of intial directors
2. provisions stating that internal corporate claims should be brought exclusively in a court in which the corporaton’s state of incorporation sits

Traditionally, corporations have included a statement of business purposes in their articles. Absent such a statement, the MBCA presumes that a corporation is formed to conduct any lawful business and is allowed to undertake any act that is necessary or conveninet for carrying on their business purpose.

Question 13

Ultra Vires Acts

Pertaining to Articles of Incorporation

Answer 13

if a corporation includes a narrow business purpose in its articles, it may not undertake activities unrelated to the achievemnt of the stated purpose. Activities outside the scope are deemed ultra vires.

At CL: Ultra vires acts = void + unenforceable
MCBA: ultra vires atcs = enforceable
- ultra vires nature can only be raised in three situations under the MCBA
1. shareholder may sue corp. to enjoin a proposed ultra vires act
2. the corporation may sue an officer/director for damages for approving an ultra vires act
3. the state may bring an action to dissolve a corporation for committing an ultra vires act

Under modern statutes, the ultra vires defense is very limited. Do not let a corporation get out of a contract simply because the contract is outside the stated purpose.

Question 14

Other steps to organize the corporation

Answer 14

1. organizational meeting: if the intial directors were named in the articles, the board will hold meeting; if not, incorporators hold meeting. meeting’s purpose is to “complete hte organization of the corporation” which means (1) adopt bylaws; and (2) appoint officers
2. bylaws: internal documents; corporation’s operating manual

Question 15

Internal Affairs Doctrine

Answer 15

Under this doctrine, the internal affairs of a corporation are governed by the law of the state of incorporation

Question 16

Entity Status

Answer 16

Upon formation, a corporation has “entity status” meaning it’s a legal person

It can sue and be sued, hold property, be a partner in a partnership, invest in other companies, etc.

Question 17

Defective Incorporation

We wrongly thought we were a corporation

Answer 17

If no corporation is formed, default: partnership + personal liability applies.

To prevent this, the court may apply one of two doctrines: (1) de facto corporation; and (2) corporation by estoppel.

Question 18

Characteristic Needed to Assert Doctrine Under Defective Incorporation

Answer 18

ANYONE asserting either doctrine must be UNAWARE of the failure to form a de jure corporation.

Question 19

De Facto Corporation

Answer 19

Following requirements must be met:
1. Relevant incorporation statute (there’s 1 in every state)
2. Parties made a good-faith, colorable attempt to comply w statute
3. There has been some exercise of corporate privileges (i.e., parties act as though they thought they were a corporation)

Applies equally to Contracts + Torts

If the doctrine applies, business = treated as corporation EXCEPT in an action by the state (e.g., if state wants to dissolve corporation) (called a “quo warranto” action).

Question 20

Corporation by Estoppel

Answer 20

CL Doctrine in which persons who have dealt with the entity as if it were a corporation will be estopped from denying the corporation’s existence.

Helpful in two scenarios:
1. Prevents corporate entity from backing out of contracts
2. Prevents corporation from avoiding liability by saying it was not properly formed

ONLY INSULATES LIABILTY IN CONTRACTS*** (never tort)

Applies on case-by-case basis.

Question 21

If there is no corporation and none of the doctrines apply… what happens?

Answer 21

Court will hold only the active members personally liable (liability = joint and several)

Question 22

Which states follow the defective incorporation doctrines?

Answer 22

Most states have abolished (lol.) However, if one or both of the doctrines is relevant in an essay - RAISE THEM in answer. Show off your stuff, man.

Question 23

Pre-Incorporation Contracts

(We knew there was not a corporation)

Answer 23

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 and its formation.

Under the MBCA, a promoter is jointly and severally liable for the obligations incurred. Liability CONTINUES after the corporation is formed (even if inc. accepted the K) until there is an express or implied novation.

novation = agreement among all three parties - the promoter, the corporation, and the contracting party - to release the promoter from liability and substitute the corporation for the promoter in the K

Question 24

Promoter’s Relationships

Answer 24

Promoter v. Promoter = joint venturers (unless stated otherwise) who owe the other a fiduciary duty. Duty will be breached if they secretly pursue personal gain at the expense of each other

Promoter v. Corp = fiduciary duty of fair disclosure and good faith
* duty may be breached if promoter profits from a sale to the corporation. Liability is avoided if promoter makes known all material facts of the transaction to all who are contemplated as being part of the OG financing scheme
* a promoter who is held personally liable on a pre-inc K may be reimbursed to the extent of benefits receieved by inc.

Promoter v. Third Party = can enter into contracts

Question 25

What if an agreement between a third party and a promoter relieves the promoter of all liability?

Answer 25

NUH-UH. If the agreement expressly relieves the promoter of liability, there is no K, dummy; such an arrangement is basically a revocable offer to the proposed corporation and the promoter has no rights or liabilites under the agreement.

Remember: for there to be a valid K, someone has to be bound with the third party. At this stage, it can’t be the corporation because it doesn’t even exist yet (it’s in utero!!) - thus, the promoter is liable (even if she was acting behalf of the baby-corp.). If the agreement relieves promoter of liability = it’s an offer.

Question 26

Foreign Corporations

Answer 26

Must register + pay fees if transacting in the state. Should provide info about its articles + prove they have good standing in home state.

Transacting = regular course of intRAstate business activity (occasional or sporadic activity doesn’t apply)