ch. 22 - corporations: formation & organization

bus 207 - prof. wu

respondeat superior

Doctrine making corporations liable for torts/crimes committed by employees acting within scope of employment. Example: Company liable when delivery driver hits someone on the job.

corporate powers

Corporations have express and implied powers: sue/be sued, make contracts, borrow money, lend money, own property, donate, exist perpetually, create internal rules.

ultra vires act

Corporate act done beyond its legal powers. Example: A corporation enters a contract outside its stated purpose.

public corporation

Corporation created by government to perform governmental duties. Example: Amtrak.

private corporation

Corporation created by private individuals with no governmental role. Example: Apple.

for-profit corporation

Corporation organized to earn profits for shareholders. Example: Investors receive dividends.

nonprofit corporation

Corporation formed for charitable/social/educational purposes; does not issue stock. Example: Red Cross.

domestic corporation

Corporation operating in its state of incorporation. Example: A Delaware corporation in Delaware.

foreign corporation

Corporation doing business in a state other than where it was incorporated. Example: A Delaware corporation operating in California.

alien corporation

Corporation incorporated in another country. Example: A Japanese corporation selling products in the U.S.

publicly held corporation

Corporation whose stock is publicly traded and has many shareholders. Example: Microsoft.

closely held corporation

Corporation with few shareholders (often family), not publicly traded, stock transfer restricted. Example: Family-owned business.

S corporation

Closely held corporation taxed like a partnership. Example: Income passes through to shareholders’ personal taxes.

S corp requirements

Must have ≤100 shareholders, only individuals/trusts as shareholders, one class of stock, domestic, and no nonresident alien shareholders.

professional corporation

Corporation formed by licensed professionals (doctors, lawyers). Example: A dental practice incorporated as “Dental Group, P.C.”

promoters

People who start a corporation: arrange capital, financing, subscriptions. Example: Promoter signs contracts before corporation exists.

subscription agreement

Contract where subscribers agree to buy stock from the new corporation. Example: Investor signs agreement to purchase 100 shares.

promoter liability

Promoters are personally liable for preincorporation contracts unless corporation later adopts and releases them. Example: Promoter signs lease before corporation exists.

subscribers

Investors who offer to buy stock during incorporation. Example: Become shareholders after incorporation.

state of incorporation

Corporation chooses a state based on taxes, management flexibility, and shareholder rights. Example: Many incorporate in Delaware.

certificate of authority

Authorization allowing a corporation to do business in a state other than its incorporation state.

corporate name requirement

Must include “Corp,” “Inc,” “Company,” or similar and be unique within the state. Example: “Phoenix Tech, Inc.”

incorporators

Person(s) who sign and file articles of incorporation. Example: Only one incorporator required.

articles of incorporation

Document filed with state establishing corporation; includes name, address, registered agent, incorporators. Example: Filing creates legal existence.

first organizational meeting

Meeting after incorporation where bylaws are adopted and directors elected.

corporate bylaws

Internal rules for managing a corporation. Example: Rules for meetings and voting.

corporate financing

Corporations raise funds by issuing debt (bonds) or equity (stock). Example: Sell bonds to raise money.

debt securities (bonds)

Long-term loans to corporation with interest and a maturity date. Example: Corporation pays interest every 6 months.

maturity date

Date by which corporation must repay bond principal. Example: Bond matures in 2030.

equity securities (stock)

Ownership interests in corporation. Example: Stockholders vote in elections.

preferred stock

Stock with preference for dividends and assets. Example: Paid before common stockholders.

common stock

Basic ownership with voting rights but lowest dividend priority. Example: Most stockholders own common shares.

cumulative voting

Voting system helping minority shareholders elect directors. Example: Shareholder allocates all votes to one candidate.

three groups in corporation

Directors, officers, and shareholders.

directors’ election

Shareholders elect directors by majority vote; incorporators may appoint initial board.

director qualifications

Usually minimal; not required to own stock unless bylaws say so.

director removal

Directors can be removed for cause (e.g., failing duties).

director quorum

Minimum number of directors required to conduct business. Example: Majority present.

director voting

Each director gets one vote; major decisions may require 2/3 majority.

inside director

Director who is also an officer or employee. Example: CEO sitting on board.

outside director

Director who is not an employee. Example: Independent board member.

affiliated director

Outside director with business ties to corporation. Example: Supplier representative on board.

unaffiliated director

Outside director with no business ties. Example: Truly independent member.

executive committee

Group appointed by board to handle daily operations when board cannot meet.

corporate officers

Managers hired by directors (e.g., CEO, CFO) to run daily business. Example: CEO implements strategy.

shareholders

Owners of corporation who vote on major decisions and elect directors. Example: Want stock value to increase.