Organization Flashcards
(26 cards)
What is a corporation?
A corporation is a legal entity distinct from its owners and may be created only by filing certain documents with the state.
Who are the key players in a corporation?
- Shareholders - owners of the corporation
- The Board of Directors - the group in charge of management of the corporation
- Officers - agents of the corporation appointed to carry out the corporation’s policy
Key Characteristics of a Corporation
a. Limited Liability for Owners, Directors & Officers
b. Centralized Management
c. Free Transferability of Ownership
d. Continuity of Life
e. Taxation (C-Corps = double taxed; S-Corps = taxed like partnership)
Corporation Distinguished from Sole Proprietorship
Sole proprietorship
- one person owns all assets;
- business + owner not distinct;
- owner personally liable;
- entity cannot continue beyond owner’s life
Corporation Distinguished From Partnership
Partnership
- similar to sole proprietorship but has at least two owners
- little formality required
- not treated as legal entities apart from owners
- partners personally liable
- management rights spread out among partners
- ownership interest non-transferable w/o consent
- doesn’t continue past lives of partners
- profits/losses go directly to partners (unless they opt to be taxed like a corp.)
Corporation Distinguished LP
LP
- partnership that provides limited liability of some investors (i.e., limited partners)
- otherwise similar to partnerships
- formed only by compliance with limited partnership statute
- must be one GP, who has full liability + management rights
Corporation Distinguished from LLC
LLC
- offers limited liability of corporation and the flow through tax advantages of a partnership (unless elected otherwise)
- may be formed only by filing appropriate documents with the state (like an inc.)
- flexible business form: owners may choose between centralized management vs. owner management, free vs. restricted transferability, etc…
Corporations vs. Benefit Corporations
B Corporations
- intend to benefit the public and environment + shareholders
- treated like C-Corps for tax purposes
- Articles of inc. state that they’re a B corp.
- D+O = limited liability and same fiduciary duties as C-Corps but in addition must consider the impact of their decisions on employees, customers, communities, etc…
- must prepare annual benefit report which is delivered to all shareholders and posted online/filed with SoS
Corporation Creation by Statute
Corporations are created by complying with state corporate law, which in a majority of states is based on the Revised Model Business Corporation Act (MBCA)
Formation Terminology
A corporation formed in accordance with the law is a de jure corporation. If all corporate laws have not been followed, a de facto corporation might result or a corporation might be recognized via estoppel.
How do you create a de jure corporation?
You need: a person, a paper, and an act.
Person - the “incorporator” must comply with applicable statutory requirements; can be a person or entity.
Paper - a.k.a The Articles of Incorporation
Act - Corporate Existence Begins on Filing
* to complete formation, the incorporators will have notarized articles delivered to the SoS and pay proper fees
* the filling is conclusive proof of corporate existence
Incorporator does not have to be a citizen of the state of incorporation.
What must the Articles of Incorporation include?
Must include:
1. Name of corporation (followed by “corporation” “company “incorporated” or “limited”)
2. Name and address of incorporators
3. A registered agent (must be legal rep) and the street address of a registered office (must be in-state)
4. Information regarding corp.’s stock
* details about the authorized stock (max # of shares corp. can sell)
* types of stock classes and shares per class
* describe voting rights, preferences, and limitations of each stock class
May include:
1. names and addresses of intial directors
2. provisions stating that internal corporate claims should be brought exclusively in a court in which the corporaton’s state of incorporation sits
Traditionally, corporations have included a statement of business purposes in their articles. Absent such a statement, the MBCA presumes that a corporation is formed to conduct any lawful business and is allowed to undertake any act that is necessary or conveninet for carrying on their business purpose.
Ultra Vires Acts
Pertaining to Articles of Incorporation
if a corporation includes a narrow business purpose in its articles, it may not undertake activities unrelated to the achievemnt of the stated purpose. Activities outside the scope are deemed ultra vires.
At CL: Ultra vires acts = void + unenforceable
MCBA: ultra vires atcs = enforceable
- ultra vires nature can only be raised in three situations under the MCBA
1. shareholder may sue corp. to enjoin a proposed ultra vires act
2. the corporation may sue an officer/director for damages for approving an ultra vires act
3. the state may bring an action to dissolve a corporation for committing an ultra vires act
Under modern statutes, the ultra vires defense is very limited. Do not let a corporation get out of a contract simply because the contract is outside the stated purpose.
Other steps to organize the corporation
- organizational meeting: if the intial directors were named in the articles, the board will hold meeting; if not, incorporators hold meeting. meeting’s purpose is to “complete hte organization of the corporation” which means (1) adopt bylaws; and (2) appoint officers
- bylaws: internal documents; corporation’s operating manual
Internal Affairs Doctrine
Under this doctrine, the internal affairs of a corporation are governed by the law of the state of incorporation
Entity Status
Upon formation, a corporation has “entity status” meaning it’s a legal person
It can sue and be sued, hold property, be a partner in a partnership, invest in other companies, etc.
Defective Incorporation
We wrongly thought we were a corporation
If no corporation is formed, default: partnership + personal liability applies.
To prevent this, the court may apply one of two doctrines: (1) de facto corporation; and (2) corporation by estoppel.
Characteristic Needed to Assert Doctrine Under Defective Incorporation
ANYONE asserting either doctrine must be UNAWARE of the failure to form a de jure corporation.
De Facto Corporation
Following requirements must be met:
1. Relevant incorporation statute (there’s 1 in every state)
2. Parties made a good-faith, colorable attempt to comply w statute
3. There has been some exercise of corporate privileges (i.e., parties act as though they thought they were a corporation)
Applies equally to Contracts + Torts
If the doctrine applies, business = treated as corporation EXCEPT in an action by the state (e.g., if state wants to dissolve corporation) (called a “quo warranto” action).
Corporation by Estoppel
CL Doctrine in which persons who have dealt with the entity as if it were a corporation will be estopped from denying the corporation’s existence.
Helpful in two scenarios:
1. Prevents corporate entity from backing out of contracts
2. Prevents corporation from avoiding liability by saying it was not properly formed
ONLY INSULATES LIABILTY IN CONTRACTS*** (never tort)
Applies on case-by-case basis.
If there is no corporation and none of the doctrines apply… what happens?
Court will hold only the active members personally liable (liability = joint and several)
Which states follow the defective incorporation doctrines?
Most states have abolished (lol.) However, if one or both of the doctrines is relevant in an essay - RAISE THEM in answer. Show off your stuff, man.
Pre-Incorporation Contracts
(We knew there was not a corporation)
A promoter is a person acting on behalf of a corporation not yet formed. Before a corporation is formed, promoters procure commitments for capital and other instrumentalities that will be used by the corporation and its formation.
Under the MBCA, a promoter is jointly and severally liable for the obligations incurred. Liability CONTINUES after the corporation is formed (even if inc. accepted the K) until there is an express or implied novation.
novation = agreement among all three parties - the promoter, the corporation, and the contracting party - to release the promoter from liability and substitute the corporation for the promoter in the K
Promoter’s Relationships
Promoter v. Promoter = joint venturers (unless stated otherwise) who owe the other a fiduciary duty. Duty will be breached if they secretly pursue personal gain at the expense of each other
Promoter v. Corp = fiduciary duty of fair disclosure and good faith
* duty may be breached if promoter profits from a sale to the corporation. Liability is avoided if promoter makes known all material facts of the transaction to all who are contemplated as being part of the OG financing scheme
* a promoter who is held personally liable on a pre-inc K may be reimbursed to the extent of benefits receieved by inc.
Promoter v. Third Party = can enter into contracts
