Chpater 33 Nature and Formations of Corporations

legal entity

a corporation is an entity apart from its shareholders, with entirely distinct rights and liabilities

limited liability

a shareholder’s liability is limited to the amount invested in the business enterprise

Free transferability of corporate shares

unless otherwise specified in the charter, corporate shares are freely transferable

perpetual existence

unless the charter provides otherwise, a corporation has perpetual existence

Centralized Management

shareholders of a corporation elect the board of directors to manage its business affairs; the board appoints officers to run the day-to-day operations of the business

As a Person

a corporation is considered a person for some but not all purposes

As a citizen

a corporation is considered a citizen for some but not all purposes

public corporation

one created to administer a unit of local civil government or one created by the United States to conduct public business

private corporation

one founded by and composed of private persons for private purposes and having no government duties

profit corporation

one founded for the purpose of operating a business for profit

nonprofit (or not-for-profit) corporation

one whose profits must be used exclusively for the charitable, educational, or scientific purpose for which it was formed

domestic corporation

corporation created under the laws of a given state

foreign corporation

corporation created under the laws of any other state, government, or country; it must obtain a certificate of authority from each state in which it does intrastate business

publicly held corporation

corporation whose shares are owned by a large number of people and are widely traded

closely held corporation

corporation that is owned by few shareholders and whose shares are not actively traded

Subchapter S

eligible corporation electing to be taxed as a partnership under the Internal Revenue Code

corporation

eligible corporation electing to be taxed as a partnership under the Internal Revenue Code

professional corporation

corporate form under which duly licensed individuals may practice their professions

promoter

person who takes the preliminary steps to organize a corporation

Promoters’ contracts

promoters remain liable on preincorporation contracts made in the name of the corporation unless the contract provides otherwise or unless a novation is effected

Promoters’ fiduciary duty

promoters owe a fiduciary duty among themselves and to the corporation, its subscribers, and its initial shareholders

subscriber

a person who agrees to purchase stock in a corporation

preincorporation subscription

offer to purchase capital stock in a corporation yet to be formed

postincorporation subscription

a subscription agreement entered into after incorporation

Selection of Name

the name must clearly designate the entity as a corporation

incorporators

the persons who sign the articles of incorporation

articles of incorporation

the charter or basic organizational document of a corporation

organizational meeting

the first meeting, held to adopt the bylaws and appoint officers

bylaws

rules governing a corporation’s internal management

Corporation de jure

one formed in substantial compliance with the incorporation statute and having all corporate attributes

corporation de facto

one not formed in compliance with the statute but recognized for most purposes as a corporation

corporation by estoppel

prevents a person from raising the question of a corporation’s existence

Defective Corporation

the associates are denied the benefits of incorporation

RMBCA

liability is imposed only on persons who act on behalf of a defectively formed corporation knowing that there was no incorporation

MBCA

unlimited personal liability is imposed on all persons who act on behalf of a defectively formed corporation

piercing the corporate veil

the courts will disregard the corporate entity when it is used to defeat public convenience, commit a wrongdoing, protect fraud, or circumvent the law

subsidiary corporation

corporation controlled by another corporation

parent corporation

corporation that controls another corporation

Statutory Powers

typically include perpetual existence, right to hold property in the corporate name, and all powers necessary or convenient to effect the corporation’s purposes

ultra vires

any action or contract that goes beyond a corporation’s express and implied powers

Effect of Ultra Vires Acts

under RMBCA, ultra vires acts and conveyances are not invalid

Remedies for Ultra Vires Acts

the RMBCA provides three possible remedies

Torts

under the doctrine of respondeat superior, a corporation is liable for torts committed by its employees within the course of their employment

Crimes

a corporation may be criminally liable for violations of statutes imposing liability without fault or for an offense perpetrated by a high corporate officer or its board of directors