Business Law CH39 S2025 - LEW

Chapter 39: Corporate Formation and Financing

Corporate Formation Overview

• Purpose: To understand the basics of corporate formation and financing and the legal implications.

• Chapters Outline:

  • The Nature and Classification of Corporations

  • Corporate Formation & Powers

  • Piercing the Corporate Veil

  • Corporate Financing

The Nature and Classification of Corporations

Definition of a Corporation

• A corporation is a legal entity created under state law, treated as a separate entity from its owners.

• Structure: May have one or more owners called shareholders.

• Recognized as a legal “person” under U.S. law, with its actions separated from its shareholders.

Corporate Personnel

• Board of Directors: Elected by shareholders to manage the corporation’s affairs.

• Corporate Officers: Hired by the board to conduct day-to-day operations.

• Shareholders: Owners of the corporation through ownership of shares.

Limited Liability of Shareholders

• One of the major advantages of corporations is limited liability; shareholders are typically not personally liable beyond their investment.

• Courts can pierce the corporate veil under certain circumstances, holding shareholders personally liable.

Corporate Earnings and Taxation

• Earnings Distribution:

  • Corporations can distribute profits as dividends or retain them as retained earnings.

• Taxation:

  • Corporate profits are subject to income tax, potentially resulting in double taxation when profits are distributed as dividends to shareholders.

Holding/Parent Companies

• Corporations formed primarily to hold controlling interests in other companies (subsidiaries).

• Often structured to optimize tax efficiency, taking advantage of favorable tax laws in various jurisdictions.

Liability in Criminal Acts

• A corporation can be held liable for the criminal acts of its employees and agents, which can lead to fines or penalties imposed on the corporation.

Tort Liability

• Doctrine of Respondeat Superior: Corporations are liable for civil torts committed by agents in the scope of their employment.

Classification of Corporations

• Classification Criteria include:

  • Location: Domestic, Foreign, and Alien Corporations.

    • Domestic: Incorporated in the state of operation.

    • Foreign: Based outside but operating in the state, may require a certificate of authority.

    • Alien: Incorporated outside the U.S. but operates within.

  • Ownership Characteristics:

    • Public Corporations: Owned by government entities.

    • Private Corporations: Formed for profit.

    • Nonprofit Corporations: Created for non-profit purposes.

    • Close Corporations: Shareholders are limited to a small group, often family, and operate similarly to partnerships. Flexible operations and the ability to restrict the transferability of shares through a shareholder agreement.

    • S Corporations: Features of both corporations and partnerships; limits on number of shareholders. Mostly replaced by LLC/LLP because of the high requirements.

    • Professional Corporations: Limited to licensed professionals.

    • Benefit Corporations: For-profit corporations with a mission to positively impact society. (e.g. Patagonia)

Corporate Formation and Powers

Formation Procedures

1. Pre-incorporation Activities: Businesspersons remain personally liable for contracts made pre-incorporation until the corporation assumes them.

2. Incorporation Procedures:

   • Choose the state of incorporation.

   • Secure an approved corporate name.

   • Prepare and file articles of incorporation with state officials.

   • Hold the first organizational meeting to adopt bylaws, either elected or by incorporators.

**must name type of corporation in the name, submit articles including address, # stock, etc w/ government

After incorporation

1. articles of corporation….. board of directors

Types of Corporate Existence

• De Jure Corporations: Fully compliant with state incorporation laws. Slight error (typo)

• De Facto Corporations: Recognized despite defects in compliance under specific conditions.

• Corporation by Estoppel: Held to corporate status despite non-formation if represented as such to third parties.

Corporate Powers

• Express Powers: Derived from constitutions, state law, articles of incorporation, and bylaws.

• Implied Powers: Necessary for achieving corporate aims, such as borrowing or lending funds.

• Ultra Vires Doctrine: Addresses acts beyond corporate powers, with remedies including injunctions and lawsuits against responsible officers or directors.

Piercing the Corporate Veil

• Definition: Legal action to hold shareholders personally accountable for corporate debts under specific circumstances.

• Reasons for Piercing:

  • Abuse of corporate privileges for personal gain.

  • Indistinct business practices merging corporate and personal interests.

Corporate Financing

Funding Sources

• Corporations finance through securities: stocks and bonds.

• Bonds: Represent debts with designated maturity dates; fixed interest during the borrowing period.

• Stocks: Ownership interests categorized into common and preferred stock.

  • Common Stock: Holders have voting rights and proportional interest but not guaranteed dividends.

  • Preferred Stock: Fixed dividend priority over common stock, potentially limited voting rights.

• Venture Capital: Investment in fledgling businesses by wealthy investors.

• Private Equity Capital: Funds used to acquire existing corporations.

• Crowdfunding: Systems where people pool resources online to support ventures and assist small businesses in raising capital.

Wulf vs Bravo case. woman waitress knocked him over and hurt his hip. sued the company (not waitress). The doctrine of Respondeat Superior. Employee acted under scope of employment and did not need to be identified. This legal principle holds that an employer can be held liable for the actions of an employee if those actions occur within the course of their employment.