Organization of a Corporation

Question 1

What are the key characteristics of a corporation?

Answer 1

1. Limited liability of Owners (shareholders), directors, and officers.
2. Centralized Management (board manages and delegates to officers)
3. Free Transferability of Ownership (shareholders can freely sell/transfer)
4. Continuity of life (can exist perpetually).

Question 2

What are the two methods of taxation for a corporation and how do they work?

Answer 2

C-Corp: Subject to double taxation because the corporation pays taxes on profits, and then when they make a distribution, shareholders pay an income tax.

S-Corp: Pass through taxation, allowing all profits and losses pass through to shareholders.

Question 3

What are the limitations to having an S-Corp?

Answer 3

1. Max 100 shareholders
2. Shareholders MUST be persons, cannot be entities, and
   3: Only one class of stock.

Question 4

Three steps to creating a corporation?

Answer 4

1. Person: 2 or more persons, which can be entities or individuals, complying with a states incorporation statute
2. Papers: Articles of incorporation
3. Act: Deliver notarized AOI to Secretary of State.

Question 5

Mandatory contents of Articles of Incorp.?

Answer 5

1. Name of incorporation, which must include company, corp., corporation, or limited.
2. Name and Addresses of incorporators
3. Name and Address of a registered agent.
4. Stock information, including authorized stock, and any classifications of stock.

Question 6

Optional contents of AOI?

Answer 6

1. Business Purpose
2. Names and Address of initial incorporators
3. Limitations of certain fiduciary duties

Question 7

What is a proper business purpose?

Answer 7

Generally, modern statutes find that any lawful business purpose is proper.

Question 8

When is corporate action proper under a business purpose?

Answer 8

When their business purpose is necessary or convenient to effect a purpose and is rationally related to that business purpose.

Question 9

What are Ultra Vires Acts, and how does common law and modern law treat them?

Answer 9

When a corporation has a limited purpose, any act taken outside of that purpose is an Ultra Vires Act.

Under common law, ultra vires acts are void and unenforceable.

Under modern law, ultra vires acts are generally enforceable and a cause of action only arises in three situations

1. Shareholders sue corporation to enjoin a propose UVA
2. Corp. sues officers or directors for damages resulting from UVA approval.
3. State brings action to dissolve a corporation for committing a UVA.

Question 10

When does a corporation come into existence?

Answer 10

Upon the filing of notarized articles delivered to the Secretary of State.

Question 11

What is an Organizational Meeting?

Answer 11

Final step in creating a corporation, in which the incorporators (or if the initial directors were named, the board will do this) meeting to “complete the organization of the corporation” which includes

1. Adopting initial bylaws, and
2. appointing officers.

Question 12

What are bylaws?

Answer 12

Internal documents setting forth internal procedures for the operation of the corporation.

• Not filed with state
• Articles will trump bylaws if the conflict.
• Board of directors can amend.

Question 13

What law governs the internal affairs of a corporation?

Answer 13

The laws of the state where the corporation is incorporated.

Question 14

What is entity status and how does it effect a corporation?

Answer 14

Entity status means the corporation is considered a legal person. As a result, they can sue, be sued, hold property, be a partner in a partnership, invest in other companies and commodities, and so on.

Question 15

What protection does limited liability offer?

Answer 15

Corporations are afforded limited liability; therefore, shareholders, directors, and officers will generally not be personally liable for corporate debts.

Shareholders’ liability is specifically limited to the amount of their investment. See exceptions later.

Question 16

What happens if the incorporation is defective?

Answer 16

The incorporators have essentially created a partnership and therefore have lost their limited liability status and can now be held personally liable.

Question 17

What are the two ways to provide protection to a defective corporation?

Answer 17

1. De Facto Corporation, and
2. Corporation by Estoppel

Question 18

When does a De Facto Corporation exception apply and what protection does it offer?

Answer 18

A De Facto Corporation will exist when:

1. there is a relevant incorporation statute (every state has one),
2. the parties or incorporators made a good faith, colorable attempt to comply with the statute (tried and came close to forming a corporation), and
3. The parties have exercised some form of corporate privileges (such as acting as though they were a corporation)

A DFC treats the business as a corporation for all purposes (including limited liability) except in an action brought by the state.

Question 19

Limitations to De Facto Corps

Answer 19

Can only be raised as a defense to personal liability by a person who did not know that the incorporation was defective. A person aware of the defective status or mistake in incorporating will be personally liable.

Question 20

When does incorporation by estoppel apply and what protection does it offer?

Answer 20

Incorporation by Estoppel applies only in contract cases (not torts), and it prevents either the corporation or parties dealing with the corporation, from claiming that they were improperly formed as a means of escaping liability.

Ex: A is a defective incorporation and contracts with B. Both believe that A is properly incorporated. B cannot attempt to back out of the contract by claiming that A is not a corporation, and A cannot do the same.

Question 21

True or False: De Facto Incorporation and Incorporation by Estoppel have been abolished by MOST states?

Answer 21

True: Most states have abolished it, however, if the concept applies in an essay, still bring it up and mention however that the exception are mostly abolished and may not apply.

Question 22

What is a promoter?

Answer 22

A promoter is an agent of the corporation not yet formed, seeking to procure commitment for capital and other instrumentalities that will be used by the corporation after its formation (initial funding).

Question 23

Promoters relationships to each other?

Answer 23

Without an agreement, they have formed a partnership and have fiduciary relationships, which will be breached if they secretly pursue personal gain at the expense of fellow promoters.

Question 24

Promoters relationship with the corporation

Answer 24

They owe fiduciary duties of fair disclosure and good faith.

A promoter will generally breach their FD’s when they sell property to the corporation for a profit without disclosing all material facts of the transaction to an independent board of directors and it is approved.

If the board is not independent, a promoter will still not be liable if the subscribers knew of the transaction at the time they subscribed or unanimously ratified the transaction.

Note: Purchasing all of the corporate stock and selling it to outsiders for a profit will not result in liability.

Question 25

What is a promoter’s liability to a third party?

Answer 25

1. A promoter represents an entity that does not yet exist, so they cannot be liable until they come into existence and have expressly or impliedly adopted the promoter’s contract.
2. The only way for a promoter to escape liability is through novation (corp, third party, and promoters all agreeing to relieve the promoter of liability). A corporation merely adopting a contract will not relieve him of liability.

Question 26

What is a foreign corporation, and what are its requirements?

Answer 26

A foreign corporation is any corporation not registered in that state. (State A corp doing business in State B is foreign).

A foreign corporation must register its corporation (including a registered agent) and pay fees with the Secretary of State when it wishes to transact business. Transacting business is a regular course of intrastate business activity. Occasional dealings or owning land is not enough to require registration. (example: McDonalds opening a branch in Texas).