The document discusses the history and nature of corporations, including how corporations evolved from special charters granted by states to modern enabling statutes, and covers key topics such as classes of corporations, state and federal regulation of corporations, what constitutes "doing business" in a state, and piercing the corporate veil. It also provides examples, definitions, and a short quiz.

1. C H A P T
History and
E R
41
Nature of Corporations
In every era, society must strike the right balance between
the freedom businesses need to compete for a market
share and to make profits and the preservation of family
and community values.
Hillary Clinton, in It Takes a Village (1996)
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2. Learning Objectives
• Discuss the history of corporations
• Recognize the types of corporations
• Understand state regulation of
foreign and alien corporations
• Describe how to pierce the
corporate veil
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3. History
• By the time of the Roman Empire, the
corporate form of business had evolved
• Governments allowed the corporate form
special privileges and powers believing that
the benefit to society outweighed any harm
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4. The American Corporation
• England granted corporations monopolies
in trade and broad powers of governance
• In 1776, American colonists quickly limited
corporations by special charters issued by
a state’s legislature:
– Limited time, limited purpose, revocable
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5. The American Corporation
• By the end of the Civil
War, corporate charter
laws were being
amended to expand,
rather than limit,
corporate powers
• Abraham Lincoln
wrote: “…corporations
have been
enthroned…”
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6. Modern Statutes
• Modern statutes are enabling statutes,
giving substantial powers and flexibility

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7. Principle Characteristics
• Corporations share unique characteristics
in the way they are created, a legal
status as a fictitious “person,” specific
authority for operation and
management, limited liability for owners,
easy transferability of an owner’s interest,
and the obligation to pay taxes that
results in double taxation of profit
– See Fig. 1
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8. Classes of U.S. Corporations
• By purpose:
– For-profit corporations
– Not-for-profit corporations
• By ownership:
– Publicly held (shareholders)
– Close (a few shareholders)
• Subchapter S
– Government-owned corporations
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9. Classes of U.S. Corporations
• By origin – a company is:
– Domestic in the state in which the
company incorporates
– Foreign in all other states in which a
company operates
– Alien in all countries other than the
country in which it incorporated
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10. Federal Regulation of Firms
• A state law that regulates business
activities is constitutional (i.e., does not
unduly burden interstate commerce)
if:
1. It serves a legitimate state interest
2. It is the least burdensome means of
promoting that interest,
3. That legitimate state interest outweighs
the burden on interstate commerce
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11. Federal Regulation of Firms
• Under the Commerce Clause of the
U.S. Constitution, the federal
government has power to regulate
interstate commerce
– Article 1, Section 8, Clause 3: “The
Congress shall have Power …To
regulate Commerce with foreign
Nations, and among the several
States, and with the Indian Tribes”
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12. State Regulation of Firms
• In the U.S., states regulate how a
corporation is created and operated
– Generally follows Model Business
Corporation Act (MBCA) or Model
Nonprofit Corporation Act (MNCA)
• A state may require a foreign corporation
to qualify to do business within the state
– By obtaining a certificate of authority
– But what does “doing business” mean?
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13. The Meaning of Doing Business
• MBCA lists several activities that are
not doing business within a state
– Soliciting orders (by mail or employees)
– Selling through independent contractors
– Owning property for investment purposes
– Conducting an isolated transaction
completed within 30 days
– Maintaining a bank account for
collection purposes
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14. Examples of Doing Business
• Contracts related to local
business or sales
• Owning/using real property
for business
• Maintaining stock for order
fulfillment
• Performing service activities
• Maintaining an office for
intrastate business
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15. The Due Process Clause
• In landmark case of International Shoe,
the Supreme Court held that under the
Due Process Clause of the Fourteenth
Amendment, a state may exercise
jurisdiction over a foreign corporation only
if the corporation has sufficient minimum
contacts with a state
– Minimum contacts may be less than
“doing business,” including an isolated
event that harms a citizen or state interest
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16. Long-Arm Statutes
• Most states have enacted a long-arm statute
that allows the state to exercise jurisdiction
over an entity that harms a state interest, but
due process is still required
• Goodyear Dunlop Tires Operations, S.A. v. Brown:
Turkish, French, and Luxembourgian subsidiaries
of an American corporation could not be sued in
North Carolina since connections to the State
were far short of “the continuous and systematic
general business contacts” necessary for such
jurisdiction
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17. Ryan v. Cerullo
• Facts:
– Ryan, a Connecticut resident, hired New
York accounting firm Cerullo & Co. to
handle taxes
– New York State claimed Ryan was a NY
resident and attached tax penalties
– Ryan sued Cerullo and his firm for
malpractice arguing that Connecticut had
jurisdiction since Cerullo had not obtained
a Connecticut certificate of authority
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18. Ryan v. Cerullo
• Connecticut Supreme Court Ruling:
– Ryan worked and had an apartment in
New York City and the taxes were for New
York
– Neither Cerullo individually nor Cerullo &
Co. were required to qualify to do
business in Connecticut despite providing
tax services to a Connecticut resident,
thus not properly subject to a law suit in a
Connecticut court
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19. Piercing the Corporate Veil
• Corporation law provides an imaginary
wall – the corporate veil – between a
corporation and its shareholders to
protect shareholders from personal
liability for a corporation’s actions
• However, sometimes a court will pierce
the corporate veil to reach individual
shareholders
– See Fig. 2
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20. Piercing the Corporate Veil
• Two requirements must exist:
– Domination of a corporation by its
shareholders
• Corporation is an alter ego of shareholders
• Corporation is instrumentality of
shareholders
– Domination used for an improper purpose
• Defrauding creditors, circumventing a
statute, or evading an existing obligation
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21. Piercing the Corporate Veil
• Signs that corporation is an instrumentality
or alter ego of shareholders:
– Inadequate capitalization (defrauds creditors)
– Transfers of corporate assets for less than fair
market value (looting; defrauds creditors)
– Commingling assets between corporate entities
or between shareholders and corporation
(defrauds creditors)
– Establishing subsidiary to circumvent or evade
statutory or contractual obligation
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22. Test Your Knowledge
• True=A, False = B
– Prior to the mid-1800s, U.S. corporations were
limited by law in terms of time and scope of
operations.
– A corporation is a fictitious, but legal, person.
– Corporations may be classified only in terms
of ownership.
– Under the Commerce Clause, states have
the power to regulate commerce within their
state.
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23. Test Your Knowledge
• True=A, False = B
– A company organized under Kansas corporate
law is a domestic company when it operates
within the state of Kansas and a foreign
company in any state other than Kansas.
– Cole Inc. is owned by two people. Each owner
built a home with money obtained by a loan
from State Bank to Cole Inc. The corporate
shield provides absolute protection to both
owners from personal liability for repayment of
the loans.
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24. Test Your Knowledge
• Multiple Choice
– A state law that regulates business activities of
a foreign corporation is constitutional if :
a) It serves a legitimate state interest
b) The legitimate state interest outweighs the
burden on interstate commerce
c) It is the most burdensome means of
promoting that interest
d) All of the above
e) A and B, but not C
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25. Test Your Knowledge
• Multiple Choice
– Which of the following activities meet the
requirements for doing business in a state?
a) Owning personal property as investment
b) Maintaining a bank account for collection
purposes
c) Maintaining a storefront for product sales
d) Soliciting product orders through a catalog
e) All of the above
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26. Thought Questions
• Does an online stock transaction meet the
sufficient minimum contacts criteria of the
International Shoe ruling? In other words, if a
consumer is injured by an online stock trade,
could the consumer sue the firm in his or her
state court system?
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