Section 28.1

Corporations Corporations Section 28.1Section 28.1

Understanding Business and Personal Law


Forming and Financing a Corporation

What You’ll Learn

How to define corporation (p. 606)How to define corporation (p. 606)

How to distinguish among various types of How to distinguish among various types of corporations (p. 607)corporations (p. 607)

How to create a corporation (p. 608)How to create a corporation (p. 608)




What You’ll Learn

How to finance a corporation (p. 614)How to finance a corporation (p. 614)

How to distinguish between a corporation How to distinguish between a corporation and a limited liability company (p. 616)and a limited liability company (p. 616)




Why It’s Important

Understanding the nature of a corporation Understanding the nature of a corporation will help you decide when to form one rather will help you decide when to form one rather than the other associations that are than the other associations that are available.available.




Legal Terms

corporation (p. 606)corporation (p. 606)shareholder (p. 606)shareholder (p. 606)share (p. 606)share (p. 606)promoter (p. 608)promoter (p. 608)articles of incorporation (p. 610) articles of incorporation (p. 610)




Legal Terms

certificate of incorporation (p. 612)certificate of incorporation (p. 612)common stock (p. 614)common stock (p. 614)dividends (p. 614)dividends (p. 614)preferred stock (p. 614)preferred stock (p. 614)limited liability company (p. 616)limited liability company (p. 616)




The Nature of a Corporation Advantages of a CorporationDisadvantages of a CorporationTypes of Corporations

Section OutlineSection Outline




Forming a CorporationThe Incorporation ProcessCorporate Financing


Forming a Limited Liability Company




Incorporation Problems De Facto CorporationCorporation by EstoppelPiercing the Corporate Veil





Pre-Learning Question Pre-Learning Question

What is a corporation?




A A corporationcorporation is a body formed and is a body formed and authorized by law to act as a single authorized by law to act as a single person, distinct from its members or person, distinct from its members or owners. owners.

The Nature of a Corporation The Nature of a Corporation




About 90 percent of all business in About 90 percent of all business in the United States is done by the United States is done by corporations.corporations.Not all corporations are large Not all corporations are large businesses. Approximately 40 businesses. Approximately 40 percent of all corporations employ percent of all corporations employ fewer than five employees.fewer than five employees.





An individual who owns shares of a An individual who owns shares of a corporation is called a corporation is called a shareholdershareholder or a stockholder. or a stockholder. A A shareshare is a single unit of is a single unit of ownership of a corporation.ownership of a corporation.





Each shareholder has one vote for Each shareholder has one vote for each share of stock that he or she each share of stock that he or she owns.owns.Shareholders cast their votes to Shareholders cast their votes to elect a board of directors whose elect a board of directors whose duty is to direct the corporation’s duty is to direct the corporation’s business.business.





Selling shares enables a Selling shares enables a corporation to tap into a large corporation to tap into a large source of capital.source of capital.Shareholder’s liability is limited to Shareholder’s liability is limited to the amount of money he or she paid the amount of money he or she paid for shares in the corporation.for shares in the corporation.

Advantages of a Corporation Advantages of a Corporation




It is a legal entity and has the power It is a legal entity and has the power to make contracts, buy and sell to make contracts, buy and sell goods, and sue and be sued.goods, and sue and be sued.It has continuity of existence, It has continuity of existence, regardless of the lifespans of regardless of the lifespans of founders, shareholders, and founders, shareholders, and directors.directors.

Advantages of a Corporation Advantages of a Corporation




A corporation’s income may be A corporation’s income may be taxed more than once. First as the taxed more than once. First as the company profits; then shareholders’ company profits; then shareholders’ dividends become part of their dividends become part of their taxable income.taxable income.Large corporations face extensive Large corporations face extensive government regulation.government regulation.

Disadvantages of a Corporation Disadvantages of a Corporation




Original founders can lose not only Original founders can lose not only control but also actual ownership.control but also actual ownership.Because of the prominence of some Because of the prominence of some corporations, business decisions corporations, business decisions may be subject to close scrutiny.may be subject to close scrutiny.

Disadvantages of a Corporation Disadvantages of a Corporation




28.128.1

Types of CorporationsTypes of Corporations





How is a corporation formed?




Each state has its own version of Each state has its own version of corporate law. States may use:corporate law. States may use:

Forming a Corporation Forming a Corporation

The Model Business Corporation The Model Business Corporation Act (MBCA) Act (MBCA) The Revised Model Business The Revised Model Business Corporation Act (RMBCA) Corporation Act (RMBCA) Their own statutes Their own statutes




1.1. A A promoterpromoter carries out the carries out the incorporation process by taking the incorporation process by taking the initial steps to organize and finance initial steps to organize and finance a business.a business.

2.2. Promoters choose a corporate Promoters choose a corporate name.name.

The Incorporation Process The Incorporation Process




3.3. Promoters are responsible for Promoters are responsible for drawing up and filing the drawing up and filing the articles of articles of incorporationincorporation, an application for , an application for incorporation of a business that incorporation of a business that describes a corporation’s describes a corporation’s organization, powers, and authority. organization, powers, and authority.





4.4. A filing fee completes the A filing fee completes the application.application.





5.5. After the application is approved by After the application is approved by the secretary of state, the the secretary of state, the corporation receives a corporation receives a certificate of certificate of incorporationincorporation, its official , its official authorization to do business in the authorization to do business in the state (also called a charter).state (also called a charter).





6.6. Initial shareholders elect a board of Initial shareholders elect a board of directors who replace the original directors who replace the original incorporators.incorporators.

7.7. Directors elect a chairman and top Directors elect a chairman and top corporate officers to manage the corporate officers to manage the company.company.





The articles of incorporation usually The articles of incorporation usually include the following information:include the following information:

Articles of Incorporation Articles of Incorporation

Name of the corporation, including Name of the corporation, including the words the words company, incorporatedcompany, incorporated, , or or corporationcorporation or appropriate or appropriate abbreviations.abbreviations.




Proposed duration of the Proposed duration of the corporation.corporation.Purpose(s) of the corporation.Purpose(s) of the corporation.Number, classes, and value of Number, classes, and value of corporate shares.corporate shares.





Shareholders’ rights in relation to Shareholders’ rights in relation to shares, classes of shares, and shares, classes of shares, and special shares.special shares.Address of the original registered or Address of the original registered or statutory agent.statutory agent.





Names and signature of the initial Names and signature of the initial directors.directors.Names and signatures of the Names and signatures of the incorporators.incorporators.





A corporation may choose to issue A corporation may choose to issue several different kinds of stock. Along several different kinds of stock. Along with each share of stock come certain with each share of stock come certain rights. rights.

Corporate Financing Corporate Financing




Common stockCommon stock is the basic form of is the basic form of corporation ownership. corporation ownership.

Types of Stock Types of Stock

Owners have voting rights. Owners have voting rights. It pays It pays dividendsdividends, or profits, to the , or profits, to the shareholders based on the shareholders based on the corporation’s performance.corporation’s performance.




Preferred stockPreferred stock is the second type of is the second type of stock issued by a corporation. stock issued by a corporation.

Types of Stock Types of Stock

Owners have no voting rights.Owners have no voting rights.But do receive a fixed dividend.But do receive a fixed dividend.Preferred stock dividends are paid Preferred stock dividends are paid before common stock dividends.before common stock dividends.




Draw a flow chart that describes the relationship between the following people.

Board of directorsBoard of directorsInitial shareholdersInitial shareholdersChairpersonChairpersonTop corporate officers Top corporate officers




ANSWERANSWER

Initial shareholders hire board of directors who elect the chairperson and top corporate officers.





What is a limited liability company?




A A limited liability company (LLC)limited liability company (LLC) is is a new type of business enterprise that a new type of business enterprise that has been adopted by all states. It is a has been adopted by all states. It is a combination of a partnership and a combination of a partnership and a corporation.corporation.

Forming a Limited Forming a Limited Liability Company Liability Company




LLCs offer limited liability to its LLCs offer limited liability to its owners.owners.Like the partners in a partnership, Like the partners in a partnership, the owners of an LLC escape the owners of an LLC escape double taxation.double taxation.





LLCs are statutory entities—they can LLCs are statutory entities—they can be formed only if owners follow the be formed only if owners follow the legal steps required—and must also legal steps required—and must also have a statutory agent for service of have a statutory agent for service of process.process.






How does the law deal with incorporation problems?




The courts have developed two The courts have developed two doctrinesdoctrines——de factode facto corporations and corporations and corporation by estoppelcorporation by estoppel——to deal with to deal with incorporation problems.incorporation problems.

Incorporation ProblemsIncorporation Problems




Even when making a good faith Even when making a good faith attempt to incorporate, promoters attempt to incorporate, promoters sometimes inadvertently make an sometimes inadvertently make an error in filing, or fail to complete the error in filing, or fail to complete the incorporation. incorporation.

De FactoDe Facto Corporation Corporation




The laws says that, although the The laws says that, although the corporation does not exist in law (corporation does not exist in law (de de jurejure), it does exist in fact (), it does exist in fact (de factode facto). ). This type of corporation is called a This type of corporation is called a de de factofacto corporation. corporation.

De FactoDe Facto Corporation Corporation




Like other estoppel doctrines, Like other estoppel doctrines, corporation by estoppel stops people corporation by estoppel stops people from denying the consequences of from denying the consequences of their own actions.their own actions.

Corporation by Estoppel Corporation by Estoppel




Corporation by estoppel usually Corporation by estoppel usually occurs when some party has been occurs when some party has been willing to treat a person or a group of willing to treat a person or a group of people as a corporation, generally people as a corporation, generally reaping some benefit from the reaping some benefit from the relationship.relationship.





When this happens, the court will not When this happens, the court will not allow that party to then deny the allow that party to then deny the existence of the corporation because existence of the corporation because doing so would be unfair.doing so would be unfair.





Sometimes there are extreme Sometimes there are extreme circumstances in which the courts will circumstances in which the courts will deny shareholders the benefits of deny shareholders the benefits of limited liability and hold them limited liability and hold them personally liable. This is known as personally liable. This is known as piercing the corporate veilpiercing the corporate veil..

Piercing the Corporate Veil Piercing the Corporate Veil




Reviewing What You Learned

1. What is a corporation? Who are its owners?

Section 28.1 Assessment





An artificial person created by law owned by shareholders or stockholders.


Answer





2. What are the two main types of corporations?






Public and private.


Answer





3. What are the steps necessary to form a corporation?






Promoters choose a corporate name, draw up and file articles of incorporation with the office of the secretary of state, pay the filing fee, and receive the certificate of incorporation;


Answer





initial shareholders elect a board of directors; and directors elect a chairman and top officers to manage the corporation.


Answer





4. How are corporations financed?






By selling shares of stock in the corporation.


Answer





5. What is the difference between a corporation and a limited liability company?






A limited liability company is a combination of a partnership and a corporation. Like a corporation, it offers limited liability to its owners. Like a partnership, the owners escape double taxation.


Answer





Critical Thinking ActivityAdvantages and Disadvantages of a Corporation If you had a chain of very successful restaurants in a large city, why might you decide to incorporate the business? Why might you decide not to incorporate?





Critical Thinking Activity AnswerAdvantages and Disadvantages of a Corporation Answers will vary, but could include raising capital for further expansion as an advantage and additional government regulation as a disadvantage.





Legal Skills in ActionForming a Corporation Your brother, Dirk, wants to start a business manufacturing playground equipment using recyclable materials, such as plastics and old tires.





Legal Skills in ActionForming a Corporation He wants to organize his company as a corporation in order to raise capital to build his manufacturing plant, but he isn’t sure how to go about it.





Legal Skills in ActionForming a Corporation Write a letter to Dirk outlining the steps he should take to incorporate his business.





Legal Skills in Action AnswerForming a Corporation Letters will vary, but should include contacting the secretary of state’s office in Dirk’s state.

Corporations Corporations End of Section 28.1End of Section 28.1

Documents

Section 28.1