Chapter 15: Corporations - The Legal Environment of Business

Flashcards covering key corporate law concepts, entity types, formation procedures, financing, governance structures, fiduciary duties, landmark court cases, and liability exceptions.

Corporation

A fictitious legal entity that exists as an independent "person" separate from its principals, capable of suing, being sued, entering contracts, and holding obligations separate from its owners.

Business Corporation Law

A specific state statute covering corporate structure, oversight of manager activity, rights of principals regarding sales of assets or ownership interests, annual reporting requirements, and internal rules.

Revised Model Business Corporation Act (RMBCA)

A standardized model set of corporate laws adopted in whole or substantial part by over half of U.S. states to govern corporate formation and internal operations.

Privately Held Corporation

A corporation owned exclusively by private individuals that does not sell ownership interests through brokers to the general public or financial investors.

Publicly Held Corporation

A corporation that sells its ownership interests to the general public via public stock exchanges and is subject to extensive federal and state regulation.

Unanimous Consent Resolution

A single document signed by each principal in a privately held corporation to dispose of necessary tasks, such as electing directors or issuing stock, in lieu of holding an actual meeting.

Initial Public Offering (IPO)

The process by which a privately held corporation sells ownership interests to the general public and commercial investors to convert into a publicly held corporation.

Domestic Corporation

A legal classification describing a corporation within the specific state in which it was incorporated.

Foreign Corporation

A legal classification describing a corporation transacting business in a state other than its state of incorporation.

Alien Corporation

A corporation formed outside the United States that transacts business inside the United States.

Nonprofit Corporation

A corporation formed to perform a service to the public at large rather than to generate profits for owners.

Benefit Corporation

A profit-seeking corporate entity owned by principals that exists with the dual purpose of providing a social benefit while seeking profits.

Public Corporation

A corporation created by a government body to serve the public at large, possessing no owners.

Professional Corporation

A corporation in which ownership is legally restricted to members in good standing of a specific licensed profession.

Articles of Incorporation

The official document filed with a state filing official (typically the secretary of state) to initiate the legal creation of a corporation.

Promoter

An individual who carries out pre-incorporation activities for a prospective business entity, such as arranging loans, leasing property, and recruiting personnel.

Branch v. Mullineaux

A New York court case holding that pre-incorporation promoters who execute contracts on behalf of an unformed corporation are personally liable unless the contracting parties agreed otherwise.

Bonds

Debt instruments issued by a corporation to the general public promising to pay bondholders a specified interest rate and repay the principal upon reaching a maturity date.

Venture Capital

Funding supplied by professional investment firms to developing businesses, typically in exchange for significant control over board decisions and an agreed exit strategy.

Corporate Bylaws

Internal corporate operational rules that govern annual meeting details, officer and director counts, voting procedures, and specific officer responsibilities.

Corporate Veil

The legal barrier that insulates the personal assets of shareholders, directors, and officers from liability for corporate debts and judgments.

Piercing the Corporate Veil

An action by a court discarding limited liability protection to allow creditors access to the personal assets of corporate shareholders.

Personal Guarantee

A legal commitment required by creditors forcing individual shareholders to back corporate debts with their personal assets in the event of default.

C Corporation

A taxable business entity that pays tax on its corporate earnings independently of its shareholders, resulting in double taxation when dividends are distributed.

Double Taxation

A tax system where corporate earnings are taxed twice: first at the corporate level when earned, and second at the individual shareholder level when distributed as dividends.

S Corporation

A corporate structure qualifying under Subchapter S of the Internal Revenue Code that receives pass-through tax treatment, avoiding taxation at the entity level.

Flow-through Taxation

A tax model (also called pass-through taxation) where income bypasses taxation at the corporate entity level and passes directly to shareholders' individual tax returns.

Figure 15.1: Taxation of C Corporations and S Corporations

A comparison diagram illustrating the Double-Taxation Model (C Corp) where income is taxed at the corporate level and shareholder level versus the Pass-through Taxation Model (S Corp) where income is taxed only upon distribution to shareholders.

Shareholders

The owners of a corporation who act primarily by electing and removing directors, approving structural changes, and voting on fundamental corporate decisions.

Board of Directors

An independent corporate governing body elected by shareholders that establishes overall strategy, policies, and management oversight.

Quorum Requirement

The minimum number of directors or shareholders specified in corporate bylaws who must be present to officially conduct business and hold a binding vote.

Express Authority

Authority granted explicitly to a corporate officer via bylaws or a formal board of directors resolution.

Implied Authority

Inherent power vested in a corporate officer by virtue of their position and routine industry practices to bind the corporation in ordinary transactions.

Duty of Care

A fiduciary duty obligating corporate insiders to act in good faith, with the diligence of a reasonably prudent person, and in the best interests of the corporation.

Business Judgment Rule

A legal standard insulating officers and directors from liability for unwise decisions made in good faith, without personal interest, and based on reasonable diligence.

Smith v. Van Gorkom

A Delaware Supreme Court case establishing that directors breach their duty of care and lose business judgment rule protection if they fail to adequately inform themselves and investigate transaction values.

Duty of Loyalty

A fiduciary duty requiring corporate officers, directors, and controlling shareholders to put the corporation's welfare above personal interest and refrain from unapproved self-dealing.

Self-Dealing

An improper situation where a corporate insider has a personal financial interest in a transaction involving the corporation and uses their influence to advance it.

Corporate Opportunity Doctrine

A legal rule forbidding corporate insiders from personally usurping a business opportunity closely related to the corporate business without prior full disclosure and board rejection.

Usurp

To seize or appropriate a lucrative business opportunity for oneself when the opportunity rightfully belongs to the corporation.

Advantage Marketing Group, Inc. v. Keane

An Illinois case ruling that an employee holding extensive managerial authority and minority stock can be subject to the corporate opportunity doctrine and fiduciary duties.

Shareholder Derivative Suit

A lawsuit brought by shareholders in the name of the corporation against an insider alleging a breach of fiduciary duty, initiated after formal demand on the board is refused.

Shareholder Direct Action

A lawsuit filed by a shareholder in their own capacity to address direct injuries, such as infringement of voting rights, inspection rights, or minority oppression.

Florence Cement Co. v. Vittraino

A court ruling upholding piercing of the corporate veil due to intentional undercapitalization, mixing of personal and business liabilities, and fraudulent draw statements.

Merger

A transaction in which two or more corporate entities combine to form a single new business entity, causing the prior existing entities to cease to exist.

Acquisition

The purchase of a target corporation's stock or assets by another corporation, leading to the target entity disappearing by operation of law.