Corporations Essay

CHAPTER 19 CORPORATIONS1. THE NATURE AND CLASSIFICATION OF CORPORATIONSA potbelly is a legal entity created and recognized by state police force. It post consist of iodine or two somebodys identified down the stairs a common send for.CORPORATE PERSONNELWhen an individual purchases a sh argon of tune in a throne, that person becomes a sh atomic subprogram 18holder and owner of the batch. pullulateholder and messs ar liable.THE LIMITED LIABILITY OF SHAREHOLDEROne of the key advantages of the somatic skeletal frames is the limited obligation of its owners. embodied sh atomic hail 18holders norm tot all toldyy are not privately liable for the obligations of the green goddess beyond the extent of their investment fundss.CORPORATE TAXATION bodied profits are taxed, and do not receives tax deduction for dividends distri besidesed to stockholders. loot that are not distri exclusivelyed are retained by the mountain. These retained salary if invested properly, will yield higher(prenominal) unified profits in the future.TORTS AND abominable ACTSA sens is liable for the torts committed by its agents or officers inwardly the course and scope of their employment. partnership whitethorn be held liable for savage good turns of its agents and employees, provided the punishment is one that give notice be applied to the conjunction, dope th chthonian mug be fined.CORPORATION SENTENCING GUIDELINESPenalties depend on factors and executives involvement. Corporate constabularybreakers brush off typeface fines smaller amounting or to hundreds of millions of dollars. When a company has taken substantial move to observe, investigate, and punish wrongdoing, much(prenominal) as by establishing and enforcing crime preventionstandards, a court may impose slight serious penalties. Corporate sentencing guidelines guide breadbaskets to train employees on how to comply with relevant laws.CLASSIFICATION OF CORPORATIONS municipal, foreign, and alien hatfuls* Domestic muckle by its home state (the state in which it in unifieds). * conflicting corporation corporation form in one state but doing rail line in an early(a) state. * Alien corporation corporation formed in an early(a) country but doing business on the E.E.U.U.In any(prenominal) instances, the corporation essential(prenominal)iness obtain a enfranchisement of say-so in any state which plans to do business. But the foreign corporation does not bespeak this certificate to sell full(a)s everywhere the internet.Public and snug corporations* Public corporation, is one formed by the goernment to outfit well-nigh political usage, such a U.S. Postal service, AMTRAK. A public corporation is not the same(p) as a in public held corporation. A publicly held corporation is any corporation whose shares are publicly traded in a securities market, such as the New York Stock Exchange or over the counter market. * Private corporation, are created for one-on-one welfa re. about corporations are private although they may serve a public purpose.Nonprofit corporationCorporation formed for purposes other making a profit are called not-for-profit or not-for-profit corporations. Private hospitals, educational institutions, charities, and religious organizations for example, are organized as nonprofit organization.Close corporationsA stringent corporations is one whose shares are held by members of a family or by relatively a few(prenominal) persons. Referred also as closely held, family, or privately held corporations. Usually the members of the small groupconstituting a close corporation are in person know to individually other. A close corporation is a great deal operated like a partnership.*Management of close corporationsTo prevent a bulk shareholder from dominating a close corporation, the corporation may require that more than a simple volume of the coachs approve any action taken by the notice.*Transfer of shares in close corporationsThe transfer of one shareholders shares to someone else rotter cause serious way problems. Control of a close corporation set up also be established through the use of shareholder accord.S corporationsA close corporation that meets the qualifying requirements specify in subchapter S of the inwrought Revenue Code can operate as an S corporation. If a corporation has a S corporation status, it can avoid the imposition of income taxes at the corporate level while retaining legion(predicate) of the advantages of a corporation, particularly limited liability.*Qualification requirement for S corporations1) The corporation moldiness be a domestic corporation.2) The corporation must not be a member of an affiliated group of corporations. 3) The shareholders of the corporation must be individuals, estates, or certain trusts. 4) The corporation must bedevil no more than one hundred shareholders. 5) The corporation must take a crap save one class of stock, although all shareholders do n ot need to restrain the same pick out declines. 6) No shareholder of the corporation may be a nonresident alien.*Benefits of a S corporations1) When a corporation has losses, the S election allows the shareholders to use the losses to offset other taxable income. 2) When the shareholders tax bracket is lower than the tax bracket for continual corporations. The S election causes the corporations entire income to be taxed in the shareholders bracket, whether it is distributed.Professional corporationProfessional corporation such as physician, lawyers, dentists, and accountants can incorporate. There is generally no limitation on liability for acts of malpractice or obligations incurred because of a breach of duty to a thickening of a PC. In many states, professional persons are liable not only for their own negligent acts, but also for the misconduct of persons under their unmediated supervision who render professional services. A shareholder in a professional corporation is ge nerally protected from contractual liability and cannot be held liable for the torts that are committed by other professional at the firm.2. CORPORATE FORMATIONOne of the most common reasons for creating a corporation is the need for additional capital to finance expansion. Incorporation may be the outdo choice for an expanding business organization because a corporation can obtain more capital by issuing shares to stock.promotional ACTIVITIESPersons rarely engage in preliminary promotional activities. It is important for businesspersons to hear that they are personally liable for all preinternalization contracts illuminate investor, accountants, or others on behalf of the future corporation.INCORPORATION PROCEDURESExact procedures for incorporation differ among states, but the prefatory steps are as follows 1) Select a state of incorporation.2) underwrite the corporate name.3) Prepare the articles of incorporation.4) File the articles of incorporation with the secretary of st ate.Selecting the state of incorporationBecause laws differ from state to state. States fees are considered too.Securing the corporate nameThe choice of a corporate name is subject to state approval to ensure against extra or deception. All the states require the corporation name to imply the formulate corporation (Corp.), Incorporated (Inc.), company (Co.), or limited (Ltd.).Preparing the articles of incorporationThe autochthonic document needed to incorporate a business is the articles of incorporation, must include the following information 1) The name of the corporation.2) The number of shares the corporation is trustworthy to issue. 3) The name and address of the corporations initial registered agent. 4) The name and address of each incorporator.*Shares of the corporationThe articles must specify the number of shares of stock the corporation is authoritative to issue. A company might state that the aggregate number of shares that the corporation has the authority to issue is 5k.*Registered office and agentThe corporation must read the location and address where of it registered office within the state.*IncorporatorsEach incorporator must be listed by name and address.*Duration and purposeA corporation has a perpetual existence unless(prenominal) the articles state otherwise. The owners may want to prescribe a maximum duration, however, after which the corporation must formally renew its existence. A corporation can be formed for any lawful purpose.*Internal organizationArticles can describe the corporations internal management structure, although this is usually included in the bylaws adopted after thecorporation is formed. register the articles with the StateOnce the articles of incorporation cave in been prepared and signed by the incorporators, they are sent to the appropriate state official, usually the secretary of State. origin ORGANIZATIONAL MEETING TO ADOPT BYLAWSUsually, the most important function of this confluence is the adoption of by laws. If the articles of incorporation named the initial be on of directors, then the directors, by majority vote, call the meeting to adopt the bylaws and complete the companys organization.DEFECTS IN FORMATION AND CORPORATE STATUSThe procedures for incorporation are very specific. If they are not allowed precisely, others may be able to challenge the existence of the corporation. When the corporation seeks to enforce a contract against a defaulting company that party may be able to avoid liability on the ground of a crack in the incorporation procedure.De Jure and De Facto corporationsIf a corporation has substantially complied with all conditions precedent to incorporation, a corporation is said to bring de jure existence. Because a de jure corporation is one that is properly formed, nevery the state nor third party can attack its existence. Sometimes, there is a defect in complying with statutory mandates, under these circumstances the corporation may have de facto status, me aning that it will be treated as a legal corporation despite the defect in its formation. The following elements are required for de facto status1) There must be a state statute under which the corporation can be incorporated. 2) The parties must have make a good organized religion attempt to comply with the statute. 3) The enterprise must already have undertaken to do business as a corporation.Corporation by EstoppelIf a business holds itself out to others as being a corporation but has made no attempt to incorporate, the firm normally will be stop from denying corporate status lawsuit by a third party. When referee requires, the courts treat an alleged corporation as if it were an actual corporation for the purpose of determining the rights and liabilities in particular circumstances. A corporation by estoppels is therefore determined by the situation. CORPORATE POWERSWhen a corporation is created, the express and implied military groups requirement to achieve its purpose also come into existence. The following order of precedence is used if a conflict arises among the various documents involving a corporation 1) U. S. establishment.2) Constitution of the state of incorporation.3) State statutes.4) Articles of incorporation.5) Bylaws.6) Resolutions of the maturate of directors.To borrow funds, the corporation acts through its board of directors to authorize the loan.ULTRA VIRES DOCTRINEThe term ultra vires way of life beyond the power. Most cases dealing with ultra vires acts have involved contracts made for unauthorized purposes. In some states, when a contract is entirely executor, either party can use a defense of ultra vires to prevent contract enforcement.3. PIERCING CORPORATE VEILOccasionally, the owners use a corporate entity to perpetrate a fraud, circumvent the law, or in some other way accomplish an illegitimate objective. In these situations, the court will issue the corporate structure and pierce the corporate veil. The following are som e of thefactors that frequently cause of the courts to pierce the corporate veil 1) A party is tricked into a dealing.2) The corporation is set up never to make a profit or always to be insolvent. Not enough cash when it formed. 3) Statutory corporate formalities, such a holding required corporation meeting, are not allowed. 4) Personal and corporate interests are mixed together.THE COMINGLING OF in-person AND CORPORATE ASSETSThe potential for corporate assets to be used for personal benefit its especially great in a close corporation, in which the shares are held by a single person or by few individuals. In such a situation, the separate status of the corporate entity and the shareholder must be carefully preserved. Certain practices invite trouble family possess corporation, the comingling of corporate and personal funds, the bereavement to remit taxes, including payroll, and the shareholders continuous personal use of corporate property.LOANS TO THE CORPORATIONCorporation law s usually do not specifically prohibit a shareholder from leading funds to her or his corporation. Any transaction has to be made in a good faith and for fair value.4. DIRECTORS, OFFICERS, AND SHAREHOLDERSROLE OF DIRECTORSThe board of directors is the ultimate authority in every corporation. handlers have responsibility for all policymaking decisions necessary to the management of all corporate affairs. Just as shareholders cannot act individually to bind the corporation, the directors must act as a body in carrying out human action corporate business. The board selects and removes the corporate officers.Election of directorsCan be less than three, directors are elected by a majority vote of theshareholders.*remotion of directorsA director can be removed for cause (failing to perform).*Vacancies on the board of directorsCan occur because of death or resignation or when a new position is created through mitigatement of the articles or bylaws. pay of directorsDirector usually are compensated for time, effort, etc. In many corporations directors are also chief corporate officers and receive compensation in their managerial positions.Board of directors meetingsThe board of directors conducts business by holding formal meetings with save minutes. The date of regular meetings are usually established in the articles or by board resolution.Rights of directorsA corporate director must have rights to function properly in that position.COMMITTEES OF THE BOARD OF DIRECTORS1) Executive committee. The board members often elect an executive committee of directors to handle the interium management decisions between board of directors meetings. 2) Audit committee. Is responsible for the selection, compensation, and oversight of the independent public accountants who audit the corporations pecuniary records. 3) Nominating committee. This one chooses the candidates for the board of directors that management wishes to submit to the shareholders in the next election. 4) Comp ensation committee. Reviews and decides the salaries, bonuses, stock options and other benefits. 5) Litigation committee. Decides whether the corporation should pursue requests by shareholders to accuse a lawsuit against some party that has allegedly harmed the corporation.CORPORATE OFFICERS AND EXECUTIVESOfficers and other executives are hired by the board of directors.DUTIES AND LIABILITIES OF DIRECTORS AND OFFICERSAre deemed to be fiduciaries of the corporation because their relationship with the corporation and its shareholders is one of trust and confidence.Duty of careDirectors and officers must exercise due care in performing their duties, they need to act in a good faith. If directors and officers failed to exercise due care results in harm to the corporation can be held liable for negligence.*Duty to make informed and reasonable decisionsDirectors and officers are judge to be informed on corporate matters and to conduct a reasonable investigations of this situations forr ader making a decision.*Duty to exercise reasonable supervisionDirectors are also expected to exercise a reasonable amount of supervision when they delegate massage to corporate officers and employees.*dissent directorsDirectors are also expected to attend board of directors meetings, and their votes should be entered into the minutes. Unless a dissent is entered in the minutes, the director is presumed to have assented. Dissenting directors are rarely held individually liable to the corporation.*The business judgment regainDirectors and officers are expected to exercise due care and to use their best judgment in guiding corporate management, but they are not insurers of business success. Under the business judgment rule, a corporate director or officer will not be liable to the corporation or to its shareholders mistakes of judgment and bad business decisions.Duty of loyalty defined as faithfulness to ones obligations and duties. Typically involve 1) Competing with the corporatio n.2) Usurping a corporate opportunity3) Having an interest that conflicts with the interest of the corporation. 4) Engaging in insider trading.5) Authorizing a corporate transaction that is detrimental to minority shareholders. 6) Selling halt over the corporation.Conflicts of interestCorporate directors often have many business affiliations, and a director may sit on the board of more than one corporation. Sometimes engage personal interest too.Liability of directors and officersCorporate directors and officers are personally liable for their own torts and crimes. Additionally they may be held personally liable for the torts and crimes committed by corporate personnel under their direct supervision.THE ROLE OF SHAREHOLDERSThe acquisition of a share of stock makes a person an owner of and shareholder in a corporation, shareholders own the corporation but have no right to manage it. Basically the shareholders ownership view is limited to voting to elect or remove members of the boa rd of directors and deciding whether to approve fundamental changes in the corporation. Shareholders are not agents of the corporation, nor do they have legal title to the corporations property, such as its building and equipment, they simply have an equitable (ownership) in the firm.Shareholders powersShareholders must approve fundamental changes affecting the corporations before the changes can be implemented. Shareholder approval normally is required to amend the articles of incorporation or bylaws, to conduct a merger or disrupt the corporation, and to sell all or substantially all of the corporations assets. Shareholders have the power to vote to elect orremove members of the board of directors.Shareholders meetingsAt to the lowest degree annually and proper notice need to be send it.*ProxiesThe law allows stockholders to either vote in person or appoint some other person as their agent to vote their shares at the meetings. The signed designation form authorizing an agent t o vote the shares is called proxy.Shareholder votingShareholders exercises ownership control through the power of their votes. Corporate business matters are presented in the form of resolutions, which shareholders vote to approve or disapprove.*Quorum requirementsAt least 50% need to be present. Extraordinary corporate matters, such as a merger, consolidation, or the dissolution of the corporation require approval by a higher percentage of representatives of all corporate shares entitled to vote.*Voting listThe RMBCA requires a corporation to maintain an alphabetical voting list of shareholders.*Cummulative votingMost states permit and some require, shareholders to elect directors by cumulative voting, a voting method designed to allow minority shareholders to be represented on the board of directors.*Other voting techniquesA voting trust is an agreement under which shareholder transfers the shares to a trustee, usually for a specified distributor point of time. The trustee is res ponsible for voting the shares on behalf of the beneficiary-shareholder.RIGHTS OF SHAREHOLDERSStock certificatesIs a certificate issued by a corporation that evidences ownership of a specified number of shares in the corporation. In jurisdiction that require the issuance of stock certificates, shareholders have the right to demand that the corporation issue certificates and record their names and addresses in the corporate stock record books.Preemptive rightsWith preemptive rights a shareholder receives a preference over all other purchasers to subscribe to or purchase a prorated share of a new issue of stock. Which means a shareholder who is given preemptive rights can purchase the same percentage of the new shares being issued as she or he already holds in the company. This rule does not apply to treasury shares, shares that are authorized but have not been issued.Stock warrantsAre rights to buy stock at a stated price by a specified date that are given by the company.DividendsIs a distribution of corporate profits or income orders by the directors and paying(a) to the shareholders in proportion to their single shares in the corporation.*Sources of funds for dividendsDepending on the state law, dividends may be paid from the following sources 1) Retained earnings2) Net profits3) Surplus*Directors failure to declare a dividendShareholders can ask the court to compel the directors to meet and declare a dividend. To succeed the shareholders must show that the directors haveacted so unreasonably in withholding the dividend that their conduct is an abuse of their discretion.Inspection rightsShareholders in a corporations enjoy both law and statutory inspection right (but limited). This include inspect voting lists, specified corporate records.Transfer of sharesCorporate stock represents an ownership right in intangible personal property. The law generally recognizes the right of an owner to transfer property to another person unless there are valid restrictions on its transferability.Rights on dissolutionWhen a corporation is dissolved and its outstanding debts and the claims of its creditors have been satisfied, the remaining assets are distributed on a pro rata basis among the shareholders.The shareholders derivative suitWhen the corporation is harmed by the actions of a third party, the directors can bring a lawsuit in the name of the corporation against that party.LIABILITY OF SHAREHOLDERSOne of the hallmarks of the corporate organization is that shareholders are nor personally liable for the debts of the corporation. If the corporation fails the shareholder can lose their investment but that is the limit of their liability.Watered stockWhen a corporation issued shares for less than their fair market value, the shares are referred as watered stock. Usually the shareholder who receives the watered stock must to pay the difference to the corporation.Duties of majority shareholdersA majority shareholder is regarded as having a fiduciary duty to the corporation and to the minority shareholders. This occurs when a single shareholder owns a sufficient number of shares to exercise de facto control over the corporation. In these cases the majority shareholders owe a fiduciary duty to the minority shareholders. A breach of fiduciary duties by those who control a closely held corporation normally constitutes what is known as oppressive conduct.5. MAJOR BUSINESS FORMS COMPARED