Organization of a Corporation

Question 1

What does it take to form a corporation?

Answer 1

1) Incorporators
2) Articles of Incorporation
3) Act

Question 2

Incorporators

Answer 2

An incorporators executes articles and deliver them to the Secretary of State
A corp. must have one or more incorporators in order to incorporate - can be a person or entity

Question 3

Articles of Incorporation

Answer 3

A contract between the corporation and SHs AND a contract between the corporation and the state

Question 4

Information Needed in Articles

Answer 4

1) Name and addresses
a) Corp. name must include the magic words of corporation, company, incorporated, limited
b) Also need name and address of each incorporator, each initial director, and the registered agent (legal representative)
2) Statement of Purpose
3) Capital Structure

Question 5

Ultra Vires Rule

Answer 5

An activity that is beyond the scope of the articles. How are ultra vires contracts handled today:

1) ultra vires Ks are valid
2) SHs can seek an injunction
3) The responsible managers are liable to corp. for ultra vires losses

Question 6

Capital Structure

Answer 6

Stock:

1) Authorized stock - maximum number of shares the corporation can sell
2) Issued Stock - number of shares the corporation actually sell
3) Outstanding stock - shares that have been issued and not reacquired

Articles must include: authorized stock, number of shares per class, and information on voting rights and preferences of each class

Question 7

Act

Answer 7

Incorporators have notarized articles delivered to the Secretary of State and pay the required fees. If Secretary of State accepts the articles for filing, this is conclusive proof of valid formation –> de jure corporation

Then, the board of directors holds the organizational meeting, where it selects its officers and adopts any bylaws and conducts other appropriate business.

Question 8

Internal Affairs Rule

Answer 8

Internal affairs are governed by the law of the state of incorporation.

Question 9

A corporation is a separate legal person

Answer 9

It can sue and be sued, hold property, be a partner in a partnership, make charitable contributions. It pays income tax on its profits and SHs are taxed on distributions (double tax)

Question 10

S Corporation

Answer 10

Has no more than 100 SHs, all of whom are human and U.S. citizens or residents. There is one class of stock and it is not publicly traded. S Corps can avoid having to pay income tax at the corporate level

Question 11

Who is liable for what the corporation does?

Answer 11

The corporation itself (even if there is only one SH)

Question 12

De Facto Corporation

Answer 12

Doctrine that can be applied when the proprietors failed to form a de jure corp. If requirements are met, business is treated as a corporation and SHs are not liable for what the business did.

1) There is a relevant incorporation statute (there always is)
2) the parties made a good faith, colorable attempt to comply with it, and
3) some exercise of corporate privileges (acting like we have a corp)

Question 13

Corporation by Estoppel

Answer 13

One who treats a business as a corporation may be estopped from denying that it is a corporation.

Applies only in contract, not tort cases.

Both corporation by estoppel and de facto corporation is abolished in many states

Question 14

Bylaws

Answer 14

1) Not a condition precedent to forming a corp.
2) Internal documents not filed with the state
3) SHs (Board can too in many states) can amend or repeal bylaws
4) If bylaws conflict with the articles, the articles always control because they are the contract with the state

Question 15

Promoter

Answer 15

A person acting on behalf of a corporation not yet formed. Promoter might enter a contract on behalf of a corporation not yet formed.

Question 16

Pre-Incorporation Contracts: Liability

Answer 16

1) Corporation: not liable on pre-incorporation Ks until it adopts the K (can be express or implied adoption)
2) Liability of promoter: Unless the K clearly says otherwise, the promoter is liable on pre-incorporation contracts until there is a novation

Question 17

Novation

Answer 17

Agreement of the promoter, corporation, and other contracting party that the corp. replaces the promoter under the contract.

Question 18

Foreign Corporations

Answer 18

Foreign corps transacting business in a state must qualify and pay prescribed fees.

1) Foreign corp is anything outside the state
2) Transacting business means the regular course of intrastate business activity. Does not include occasional or sporadic activity in the state or simply owning property there.
3) Corp. qualifies by getting a certificate of authority from Secretary of State.

Question 19

What happens if a foreign corp. transacts business without qualifying?

Answer 19

1) civil fine
2) cannot sue in that state (but can be sued and defend)

Once the corp. qualifies and pays back fees and fines, it can sue in the state.