Formation and Organization

Question 1

Key Players in a Corporation

Answer 1

Shareholders - Owners
Board of Directors - Management
Officers - Agents

Question 2

Key Characteristics of a Coro

Answer 2

Limited Liability for Owners, Directors, and Officers

Centralized Management

Free Transferability of Ownership - I.e., shareholders are free to sell their shares to others unless provided otherwise.

Continuity of Life - a corp may exist perpetually and generally is not affected by changes in ownership.

Taxation
1. C Corp - corp is taxed as an entity distinct from its owners
2. S Corp - allowed to be taxed like a partnership and yet retain advantages of corporation.

Question 3

Forming a Corporation (De Jure Corp)

Answer 3

1. Person (incorporator - can be a person or entity)
2. Paper (articles of Incorporation)
3. Act (Incorporator has notarized papers delivered to secretary of state for filing

Question 4

Articles of Incorporation must include:

Answer 4

1. Name of Corp (must include one of the following words or an abbreviation: corporation, company, incorporated, or limited)
2. Name/Address (each incorporator, name of registered agent and address of registered office)
3. Corporation’s stock (how many authorized, classes of stock)

Question 5

Organizational Meeting

Answer 5

The organizational meeting may be held by the BOD if they are named in the articles OR by the incorporators if BOD has not been named.

When the BOD runs the meeting, they adopt the initial bylaws and appoint the officers.

When the Incorporators run the meeting they first select/elect a BOD then adopt the bylaws and appoint officers.

Question 6

The Bylaws

Answer 6

Bylaws are an internal document

Essentially the corp’s operating agreement/manual

If conflict with AOI, then AOI wins
Not filed with state (because internal document)

BOD or SHHs can adopt, amend, and repeal the bylaws.

Question 7

Internal Affairs Doctrine

Answer 7

Internal Affairs are governed by the law of the state of incorporation

Question 8

Entity Status

Answer 8

Once formed, corp is a legal person.

Question 9

B Corp

Answer 9

B Corp - formed for profit but also to pursue some benefit –> broader social policy cause.

Articles must say B Corp

Question 10

Double Taxation

Answer 10

Corp pays income tax

To avoid legally having to pay income taxes at corp level, we form S Corp.

Question 11

S Corp

Answer 11

No income tax at entity level. To qualify as S corp under Fed Tax Law:

no more than 100 SHHs
All SHHs human, not entities
US Citizens/Residents
One class of stock, not publicly traded

Question 12

Limited Liability

Answer 12

SHHs generally only liable to pay for their stock and not corps debts

BOD/Officers not liable for Corp debts

Who is liable? the corporation itself.

Question 13

Defective Incorporation and Solutions

Answer 13

We wrongly though there was a corporation, so either de facto corp or corp by estoppel.

De Facto is just as good De Jure, but don’t want to be in this situation if not needed.

Question 14

Defective Incorporation: De Facto Corp

Answer 14

For a de facto corp to exist, we must meet the following requirements:

1. There must be a relevant incorporation statute (this is always met because there is a statute in every state).
2. The parties made a good faith, colorable attempt to comply with the statute - i.e., the parties tried and came close to forming the corp.

AND

3. There has been some exercise of corporate privileges, meaning the parties were acting as though they thought there was a corporation.

If the de facto corp doctrine applies, the business is treated as a corp for all purposes except in an action by the state.

LIMITATION: this defense can only be raised by someone who is unaware that there was no valid incorporation.

Question 15

Corporation by Estoppel

Answer 15

Not a de jure corp, but treated that way for people who treated the business like a corp.

NOTE: ONLY APPLIES TO CONTRACT CASES!! DOES NOT APPLY TO TORT

There is a very narrow application of this doctrine

Parties act as if there is a corporation; no requirement of following statutory provisions - insulates against personal liability in contract, but in tort.

Question 16

Status of Corp by Estoppel and De Facto Corp

Answer 16

“Doctrines are abolished in many state, but if they applied. . .”

Question 17

Pre-Incorporation Contracts (We knew there was not a corporation when entering the contract)

Answer 17

A promoter is a person acting on behalf of a corporation not yet formed. Before a corp is formed, promoters procure commitments for capital and other instrumentalities that will be used by the corp after its formation.

Question 18

Promoter Fiduciary Duties

Answer 18

Promoter owes the corporation fair disclosure and good faith

Question 19

Promoter Relationship to 3P - Preincorp Agreements

Answer 19

A promoter may enter into contracts on behalf of a corp not yet formed.

Question 20

Corp’s Liability regarding promoter

Answer 20

Corp is only liable on Promoter’s k, if the corp adopts the contract (expressly, impliedly)

Implied adoption - corp does something to accept a benefit from the k.

Question 21

Promoter’s Liability

Answer 21

Promoter is liable until there is a novation –> i.e., corp replaces promoter.

EXCEPTION: Agreement Expressly Relieves Promoter of Liability, there is no contract; such an arrangement may be construed as a revocable offer to the proposed corporation, and the promoter has no rights or liabilities under the agreement.

Question 22

Promoter’s Right to Reimbursement

Answer 22

A promoter who is held personally liable on a preincorp contract may have a right to reimbursement from the corp to the extent of any benefits received by the corporation.

Question 23

Foreign Corps

Answer 23

If transacting business in state, must qualify and pay prescribed frees.

Transacting Business - regular business in the state.

Question 24

Registering as a Foreign Corp

Answer 24

Foreign corp must appoint registered agent and have/maintain office in the state even though not incorporated in state.