Corporations Definition

 A corporation is a creature of
statute, an artificial “person.”
 Corporations can have one or
more shareholders, comprised
of natural persons or other
businesses. 
2
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

 A corporation is a legal
“person”, enjoys the same
rights and privileges as a
natural person:
Access to court systems.
Constitutional guarantees of free
speech, due process, etc. 
3

 Corporate Personnel.
• Responsibility for management of
company rests with board of directors
(elected by shareholders).
• Board of directors makes policy
decisions and hires officers to run
corporation on a daily basis. 
4

 Limited Liability of
Shareholders.
• Generally, shareholders are not
personally liable for corporate acts.

5

 Corporate Earnings and
Taxation.
• Profits can either be kept as retained
earnings or passed on to the
shareholders as dividends.
• Corporate Taxation: can be taxed
twice, first to corporation, then to
shareholders via dividends. 
6

 Classification of Corporations.
• Public and Private Corporations.
• Nonprofit Corporations.
• Close Corporations
Shares held by few shareholders.
More informal management, similar to a
partnership. 
7

• Close Corporations.
Management of Closely Held
Corporations.
Transfer of Shares.
Shareholder Agreement to Restrict Stock
Transfers. 
8

• “S” Corporations:
Avoids federal “double taxation” of
regular corporations at the corporate
level.
Only dividends are taxed to the
shareholders as personal income. 
9

• “S” Corporations:
IRS requirements: Corporation is
domestic, fewer than 75 shareholders,
only one class of stock, no shareholder
can be a non-resident alien.
10

 The process of incorporation
generally involves two steps:
• Preliminary and Promotional
Activities; and 
• The Legal Process of
Incorporation.
11

 Incorporation Procedures.
• Select State of Incorporation.
• Secure the Corporate Name.
Be sure to include a Domain Name,
research Trade Name disputes.
12

 Incorporation Procedures.
• Prepare the Articles of
Incorporation: which deals with shares,
the registered agent and office,
incorporators, duration and purpose, and
internal organization.
• File the Articles with State.
13

 A corporation is governed by a
board of directors elected by
shareholders.
 Individual directors are not
corporate agents, only the board
can act as an agent and bind the
corporation. 
14

 A director can also be a
shareholder, especially in
closely-held corporations.
 Few qualifications are required
for directors. 
15

 Election of Directors.
• Removal of Directors: directors can
be removed for cause.
• Vacancies on Board: if director dies
or resigns or new position created
by the articles or bylaws. 
16

 Compensation of Directors.
• Inside director (officer), vs. outside
director. Often the same person is
both an officer and director, and
receives compensation as an
officer.
17

 Board of Directors’ Meetings.
• Quorum must be present to
conduct official business. 
18

 Rights of Directors.
• Participate in corporate decisions
and inspect corporate books and
records.
• Compensation (usually a nominal
sum). 
19

 Rights of Directors.
• Indemnification. Corporation should
guarantee reimbursement
(indemnification) or purchase
liability insurance to protect the
board from personal liability. 
20

 Corporate Officers and
Executives.
• Officers serve at the pleasure of the
board but have fiduciary duties to
company as well.
• Employment relationships are
generally governed by contract law
and employment law. 
21

 Corporate Officers and
Executives.
• Officers may be terminated for cause.
22

 Duties and Liabilities.
• Directors and officers are fiduciaries
and owe the company ethical and
legal duties. 
23

 Duty of Care.
• Duty to Make Informed Decisions.
Fully informed on corporate matters.
• Duty to Exercise Reasonable
Supervision. Supervise officers when
work is delegated. 
24

 Business Judgment Rule.
• Immunizes a director or officer from
liability from bad decisions.
• Court will not require directors or
officers to manage “in hindsight.” 
25

 Business Judgment Rule.
• As long as decision was
reasonable, informed, made in good
faith and in the best interests of the
corporation, BJR will apply.
26

 Duty of Loyalty.
• Subordination of personal interests to
the welfare of the corporation.
• No competition with Corporation.
• No “corporate opportunity.”
• No conflict of interests.
27

 Conflicts of Interest.
• Full disclosure of any potential
conflicts of interest and abstain from
voting on any transaction that may
benefit the director/officer
personally. 
28

 Conflicts of Interest.
• However, if transaction was fair and
reasonable, it can be approved by
majority of disinterested directors.
29

 Liability of Directors and
Officers.
• Shareholder derivative suits where
shareholder(s) sue directors on
behalf of corporation.
30

 Acquisition of shares grants an
equitable ownership interest in a
corporation.
 Shareholders generally have no
right to manage the daily affairs of
the corporation, but do so indirectly
by electing directors. 
31

 Shareholders’ Powers:
• Approving all fundamental changes
to the corporation.
• Amending articles of incorporation
or bylaws.
• Approval of mergers or acquisition.

32

 Shareholders’ Powers:
• Sale of all corporate assets or
dissolution.
• Shareholders also elect and remove
the board of directors.
33

 Shareholders’ Meetings.
• Must occur at least annually.
• Voting requirements and
procedures are:
Notice of Meetings.
Proxies.
Shareholder Proposals.
34

 Shareholder Voting.
• Quorum Requirements:
shareholders representing more
than 50% of shares must be
present to conduct business.
35

 Rights (depending on the
articles and bylaws):
• Preemptive Rights: allows each
shareholder to maintain his
proportional control. 
36

 Rights:
• Dividends.
Distribution of corporate profits or
income ordered by the board. 
37

 Rights:
• Dividends.
Illegal Dividends.
Directors’ Failure to Declare a
Dividend.
• Inspection Rights. 
38

 Rights:
• Transfer of Shares.
• Rights on Dissolution.
• Shareholder’s Derivative Suit.
Shareholders sue a third party on
behalf of the corporation. 
39

 Rights:
• Shareholder’s Derivative Suit.
When shareholders bring a derivative
suit, they are doing so in the name of
the company, not individually.
40

• Shareholders are generally not liable
for the contracts or torts of the
corporation.
• If the corporation fails, shareholders
generally cannot lose more than their
investment. 
41

• Majority shareholders owe a fiduciary
duty to corporation and the minority
shareholders and creditors when they
sell their shares because of the
possibility of transfer of control.
42

Corporations Definition

Recommended

Recommended

More Related Content

Similar to Corporations Definition

Similar to Corporations Definition (13)

Recently uploaded

Recently uploaded (20)

Corporations Definition