Organization of a Corporation

Question 1

How to form a corporation

Answer 1

(1) People (must have one or more incorporators who execute articles and deliver to secretary of state)
(2) Paper (Articles of Incorporation)
(3) Act (notorized articles delivered to secretary of state and pay required fees)
- De Jure Corporation at this point
(4) Board of Directors holds organizational meeting, where it selects officers and adopts bylaws and conducts other appropriate business

Question 2

Incorporator

Answer 2

Can be person or entity who executes articles and delivers to secretary of state

Question 3

Articles of Incorporation

Answer 3

• K between corp and shareholders
• K between corporation and state

(1) Corporate Name: needs corporation, company, incorporated, or limited
(2) name and address of each incorporator
(3) name and address of each initial director
(4) name of registered agent and address of registered office (aka legal representative, receive service)
(5) OK if no duration (perpetual existance)
(6) Statement of purpose
(7) Authorized stock
(8) number of shares per class
(9) information on voting rights and references of each class

Question 4

Ultra Vires activities (beyond scope of articles)

Answer 4

(1) Ultra vires contracts are valid
(2) Shareholders can seek an injunction
(3) Responsible managers are liable to corporation for ultra vires losses

Question 5

De Jure Corporation

Answer 5

Accepted notorized articles delivered to secretary of state is conclusive proof of valid formation so have legal corp in eyes of law

Question 6

Authorized Stock

Answer 6

max number of shares corporation can sell

Question 7

Issued stock

Answer 7

number of shares the corporation actually sells

Question 8

Outstanding stock

Answer 8

shares that have been issued and not reacquired

Question 9

“Internal Affairs” rule

Answer 9

Internal affairs governed by law of state of incorporation

Question 10

“Double taxation”

Answer 10

B/c corporation is separate legal entity, it can sue or be sued,, make charitable contributions, pay income tax and profits. But shareholders also taxed on distributions.

Question 11

How does a corporation legally avoid paying income tax at corporate level?

Answer 11

Form an S corporation instead of a C corporation

Question 12

S Corporation

Answer 12

Has no more than 100 shareholders (human and US citizens or residents). One class of stock and is not publicly traded.

No income tax at corporate level

Question 13

Corporate liability

Answer 13

• Corporation itself generally liable for itself (even if only one shareholder)
• Directors/officers/shareholders (owners) not liable for what corporate entity does
• “Limited Liability” -shareholdres generally liable only for price of their stock

Question 14

De Facto Corporation (DFC)

Answer 14

(1) relevant incorporation statute (automatically met)
(2) parties made a good faith, colorable attempt to comply
(3) some exercise fo corporate privilege (acting like have corporation)
(4) Person asserting doctrine unaware of failure to form de jure corporation

Question 15

Corporate Liability if fail to establish de jure corporation

Answer 15

-Proprieters personaly liable for what business does (b/c just partnership)

Exception (abolished in many states):

(1) De Facto Corporation
(2) Corporation by Estoppel

Question 16

Incorporators put together proper documents and mail them to the secretary of state. Unbeknowst to them, teh documents are lost in the mail. Meanwhile, the business is being operated as a corporation, and enters a contract. Are the shareholders personally liable on the contract?

Answer 16

Yes, unless the court applies DFC (de facto corporation)

Question 17

Corporation by Estoppel

Answer 17

One who treats business as a corporation may be estopped in contract cases from denying that it is a corporation. Can prevent improperly formed corp from avoiding liability by saying not properly formed.

Question 18

Bylaws

Answer 18

Internal governance of corporation i.e. responsibilities of officers, times and places for regular meetings, methods of giving noice, etc.

Board adopts at organizational meeting. Shareholders can amend or repeal but in many states board can as well. Articles controls if there’s a conflict b/c K with state.

Question 19

Promoter

Answer 19

Person acting on behalf of corporation not yet formed. Might enter into K on behalf of corporation not yet formed

Question 20

Pre-Incorporation Contracts

Answer 20

• Promoter can enter into
• Corp not liable on pre-incorporation K unless adopts K
• Can adopt K by express (board takes action) or implied action (accepts a benefit under K)
• Unless K clearly says otherwise, promoter is liable on pre-incorp K unless novation

Question 21

Will promoter be liable on the lease if company is formed and adopts the lease?

Answer 21

Yes, promoter is liable until novation (both company and promoter are liable)

Question 22

Foreign Corporations

Answer 22

• Foreign corp transacting business in state must qualify and pay prescribed fees
• If does business without qualifying: (1) civil fines; (2) cannto sue in this state (but can be sued and defend)
• If corp qualifies and pays back fees and fines, can sue

Question 23

Transacting busines (Foreign Corp)

Answer 23

regular course of intrastate business activity (does not include sporadic or occasional activity in state or simply owning property)

Question 24

Qualify (Foreign Corp)

Answer 24

Qualifies by getting certificate of authority from secretary of state (gives info from articles and provides good standing in home state, has registered agent in this state and pay state fees)