BUS 116 Chap026 corporations


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  • The statutory template that most states follow in developing their corporate law statutes is the Model Business Corporation Act,
    often referred to as the Model Corporation Act and sometimes simply as the MBCA. The
    MBCA is a relatively young statute, in existence for only about 40 years, and is therefore not
    quite as settled as older, more traditional statutes, such as the Uniform Commercial Code and
    the original Uniform Partnership Act.
  • Today one of the most attractive features of the corporate way of doing business is its limited
    liability. Limited liability means that the corporate investors cannot be held personally
    liable for the debts of the corporation. Thus, the most that an investor can lose is the
    amount of money used to purchase his or her shares of the corporation.
  • Background Information
    In the Roman Empire, corporations were recognized as entities with legal identities separate
    from those of their individual members. As business organizations grew more powerful, the Roman government
    created mandates to control and tax these early corporations.
  • Dividends are the net profits, or surplus, set
    aside for the shareholders. Shareholders (or stockholders, as they are also known) are the
    persons who own units of interest (shares of stock) in a corporation.
  • Large private corporations generally sell their stock to the public at large and are therefore
    often referred to as public corporations. When the owners of a private corporation decide
    to sell stock to the public at large, financial experts report that the corporation is about
    to “go public.”
  • In most instances, they are public utilities, which provide the public with such essentials as
    water, gas, and electricity.
    (Note: Unless specified otherwise, the discussion in this chapter and those that follow will focus on
    private corporations.)
  • Getting Students Involved
    Have students look through issues of The Wall Street Journal, Fortune, BusinessWeek, and other
    business-related publications and check the Internet for stories about the efforts of
    states to attract corporations.
    American Airlines, Sears, Saturn, and BMW are examples of corporations that have negotiated favorable arrangements
    with various states. Ask students to report on their findings in class.
  • Teaching Tips Certification of authority is obtained by filling out an application, along with other required
    documents, and submitting them to the secretary of state. It is important for the applying corporation to
    consult the secretary of state to ensure that all statutes are being followed.
  • State business corporation statutes generally accommodate closely held
    corporations by allowing them to have a few directors
    or a sole director and president, with no voting shares in the hands of the public.
  • In this way, they avoid double taxation. There are, however, several restrictions on S corporations.
    These restrictions include limits on the number and types of owners that can be involved in
    such an entity. Consequently, many individuals now look to limited liability companies to
    escape double taxation.
  • In addition, LLCs are statutory, which means that they may come into existence
    only if the owners follow the precise steps laid out in the state code by the state
    legislature. The owners of an LLC are called members. The people who run the LLC are
    called managers. Later in this chapter, we discuss the formation details of an LLC. Chapter
    39 also includes a discussion of the duties and responsibilities of the members and the
    managers of an LLC.
  • Background Information
    Any transactions by the promoter on behalf of the corporation before incorporation are considered to
    be pre-incorporation transactions.
    These transactions must be ratified by the corporation after it is formed if they are to be valid and
    binding on the corporation.
  • The promoter may also include an automatic release
    clause in all contracts negotiated for the unborn corporation. However, the release clause
    must do more than simply include the corporation as a party to the contract. It must also
    specifically release the promoters from liability.
  • Some state incorporation statutes are very strict, requiring detailed information in the articles of incorporation.
    Typically this information includes the following:
    • The corporation’s name
    • The duration of the corporation
    • The purpose(s) of the corporation
    • The number and classes of shares
    • The shareholders’ rights in relation to shares, classes of shares, and special shares
    • The shareholders’ right to buy new shares
    • The addresses of its original registered (statutory) office and its original registered
    (statutory) agent
    • The number of directors plus the names and addresses of the initial directors
    • Each incorporator’s name and address
  • Background Information
    A corporation’s certificate of incorporation may be changed; however, it costs time and money to
    do so. With variations from state to state, parts of the certificate that can be changed include the corporate
    name, corporate purpose, and office address.
    Also, the duration of the corporation can be extended or renewed, and the number of shares can be
    increased or decreased
  • Nevertheless, the first order of business at an incorporator-run meeting is to elect
    the directors. In addition to the appointment of the first directors, the adoption of bylaws,
    or regulations, also occurs at the organizational meeting.
  • If neither the articles nor the operating agreement,
    as discussed below, include a duration statement, then some state statutes set an automatic
    duration period, generally of 30 years. In contrast, in the absence of a duration
    statement, other state statutes set an unlimited duration. The name of the LLC must include
    the term “Limited Liability Company” or those words abbreviated, followed by the word
    “Limited” or the abbreviation “Ltd.” In addition, the name of the LLC must not be the same
    as the name of another LLC or corporation.
  • Typically includes formation provisions, operating provisions, the nature of the business to be conducted by the LLC, distribution of profits and losses, the powers of the managers, voting rights of the members, admission and withdrawal procedures, provisions regarding the transfer of a member’s interest in the LLC, and provisions involving the termination of the LLC, among others
  • A corporation whose existence is the result of the incorporators having fully or substantially
    complied with the relevant corporation statutes is a de jure corporation. Its status as
    a corporation cannot be challenged by private citizens or the state.
  • Usually, if only some minor requirement has been left unsatisfied, the court will hold that
    there has been a good faith attempt to incorporate. Only the state can directly challenge the
    existence of a de facto corporation. Thus, a de facto corporation has the same rights, privileges,
    and duties as a de jure corporation as far as anyone other than the state is concerned.
  • Corporation by estoppel does not create a real corporation. Instead,
    it is a legal fiction used by the courts on a case-by-case basis to prevent injustice.
    Generally, but not always, it is applied in contract cases rather than in tort cases.
  • The shareholders of close corporations are more likely to fall victim to piercing the corporate
    veil than are the shareholders of large corporations, because the shareholders of a close
    corporation are often also the original incorporators, as well as the directors and officers of
    the corporation, and thus may neglect to follow the corporate formalities required by statute
    and/or fail to keep corporate property and business separate from their personal property
    and business. Thus, the court will sometimes find that the corporation is nothing more
    than the alter ego (other self) of the original incorporators.
  • Getting Students Involved
    Have students obtain the annual reports of three or four corporations. Annual reports are available at
    most public libraries, on the Internet, or directly from local corporations. Ask students
    to analyze the reports and select companies for investment. Have students explain the rationale for
    their choices.
  • A corporation’s board of directors has the sole authority to determine the amount, time, place, and manner of dividend
    payment. Typically, the directors’ declaration of a dividend sets a cutoff date—the
    date by which a shareholder must hold corporate stock of record to receive payment.
  • The correct answer is “C” – stock certificate. See next slide.
  • The correct answer is “B” – novation. See next slide.
  • The correct answer is “D” – bylaws. See next slide.
  • The correct answer is “A” – Certificate of authority . See next slide.
  • The correct answer is “B” – public. See next slide.
  • The correct answer is “C” – corporation. See next slide.
  • BUS 116 Chap026 corporations

    1. 1. The Corporate Entity Chapter 26
    2. 2. Learning Objectives 1. Describe the evolution of associative corporativism. 2. Explain the nature of a corporation. 3. List the constitutional rights of a corporation. 4. Describe the differences among a private, a public, and a quasi-public corporation. 5. Distinguish between a close and an S corporation. 2
    3. 3. Learning Objectives (cont.) 6. List the typical elements within the articles of incorporation. 7. Distinguish between the articles of organization and the operating agreement of a limited liability company. 8. Distinguish between a de jure and a de facto corporation. 9. Identify the objective of piercing the corporate veil. 10. Distinguish between common and preferred stock. 3
    4. 4. The Theory of Corporativism • Corporation – a legal entity created under the authority of a state or federal statute that gives certain individuals the capacity to operate an enterprise. • Corporativism – The process of doing business as a selfgoverning business association, or corporation 4
    5. 5. Corporate Limited Liability • Limited liability – the corporate investors cannot be held personally liable for the debts of the corporation. 5
    6. 6. Corporate Entity Status • A corporation exists apart from its owners and is taxed directly on the income it earns. • As a legal entity, a corporation can own property and sue or be sued, 6
    7. 7. Types of Corporate Entities • Private corporation – a corporation formed by private persons to accomplish a task best undertaken by an entity that can raise large amounts of capital quickly or that can grant the protection of limited liability. 7
    8. 8. Types of Corporate Entities • Public corporation – a corporation created by the federal, state, or local government for governmental purposes. 8
    9. 9. Types of Corporate Entities • Quasi-public corporations – Corporations that are privately organized for profit but also provide a service on which the public depends 9
    10. 10. Domestic, Foreign, and Alien • A corporation is a domestic corporation in the state that grants its charter. • It is a foreign corporation in all other states. • Alien corporation – one that, though incorporated in a foreign country, is doing business in the United States. 26-10
    11. 11. Domestic, Foreign, and Alien • Certificate of authority – a document that grants a foreign corporation permission to do business in another state 11
    12. 12. Close and S Corporations • Close corporation – the outstanding shares of stock and managerial control are closely held by fewer than 50 shareholders (often members of the same family) or by one person. 12
    13. 13. Close and S Corporations • S corporation – a corporation in which shareholders have agreed to have the profits (or losses) of the corporation taxed directly to them rather than to the corporation 13
    14. 14. Limited Liability Companies • Limited liability company (LLC), – cross between a partnership and a corporation. – offers the protection of limited liability to its owners. – tax liability flows through the LLC and to the owners. – escapes the double taxation penalty that falls on corporate entities 14
    15. 15. Steps in the Incorporation Process Figure 26-1 26-15
    16. 16. Promoters • Promoters – The people who want to begin a new corporation or incorporate an existing business • Incorporators – the people who actually sign the articles of incorporation and submit them to the appropriate state officials. 16
    17. 17. Novation • Novation – The agreement releasing a promoter from potential liability 17
    18. 18. Articles of Incorporation • Articles of incorporation – the written applications to the state for permission to incorporate – prepared by the corporation’s incorporators – represent the legal boundaries within which a corporation must conduct its business 18
    19. 19. Approval of Articles • Statutory agent – an individual who is designated to receive service of process when a lawsuit is filed against the corporation • Certificate of incorporation – the corporation’s official authorization to do business in the state 19
    20. 20. Commencement of the Business • Bylaws – the rules that guide the corporation’s day-to-day internal affairs. – usually stipulate the time and place of shareholders’ and directors’ meetings, quorum requirements, qualifications and duties of directors and officers, and procedures for filling board vacancies. 20
    21. 21. The Articles of Organization • Articles of organization – the written application to the state for permission to form a limited liability company 21
    22. 22. The Operating Agreement • The operating agreement – Typically includes formation provisions, operating provisions, the nature of the business to be conducted by the LLC, distribution of profits and losses, the powers of the managers, voting rights of the members, etc. 22
    23. 23. Corporate Identity • De jure corporation – one that has been formed properly by incorporators who followed all of the steps outlined by the state incorporation statute. 23
    24. 24. Corporate Identity • A de facto corporation exist when: – A valid state incorporation statute must be in effect. – The parties must have made a bona fide (good faith) attempt to follow the statute’s requirements for incorporation. – The business must have acted as if it were a corporation. 24
    25. 25. Corporation by Estoppel • Corporation by estoppel. – if a group of people act as if they are a corporation when they are not, any parties who have accepted that counterfeit corporation’s existence will not be allowed to deny that acceptance. – individuals who acted as if they were a corporation will not be able to deny that the corporation exists. 25
    26. 26. Piercing the Corporate Veil • Piercing the corporate veil – a court holds wrongdoers (usually the controlling shareholders) personally liable for activities committed in the corporation’s name 26
    27. 27. Corporate Financing • Stock certificate – written evidence of ownership of a unit of interest in the corporation 27
    28. 28. Dividends • Cash dividend – declared and paid out of current corporate earnings or accumulated surplus at regular intervals. • Stock dividend. – a distribution of earnings is made in shares of capital stock 28
    29. 29. Question? A __________ is written evidence of ownership of a unit of interest in the corporation. A. Dividend B. Surplus C. Stock certificate D. Share credential 29
    30. 30. Question? What agreement releases a promoter from potential liability? A. Certificate of authenticity B. Novation C. Flammation D. Disclaimer notification 30
    31. 31. Question? What are the rules that guide the corporation’s day-to-day internal affairs? A. Company handbook B. Operating agreement C. Commission agreement D. Bylaws 31
    32. 32. Question? What document grants a foreign corporation permission to do business in another state? A. Certificate of authority B. Certificate of influence C. Certificate of authenticity D. Certificate of power 32
    33. 33. Question? A ________ corporation is created by the federal, state, or local government for governmental purposes. A. Private B. Public C. Classified D. Clandestine 33
    34. 34. Question? What legal entity gives certain individuals the capacity to operate an enterprise? A. Venture B. Project C. Corporation D. Conglomerate 34