CORPORATIONS FALL 2006
Choice of Organizational Form:
Corporations- legal entity distinct from its owners.
Optimal choice for a business when there are many constituents in the company.
Has the same legal rights as people (can own/hold/convey property, enter into Ks, can sue and be sued)
Governed by the state statute
Formation of a Corporation:
Internal Affairs Doctrine: a corporation can incorporate in any state that it chooses but once it does, it’s internal affairs are subject to the laws of that state. (state law governs: the right of shareholders to vote, receive distribution of corporate power, to receive information from management regarding the corporation, limiting the powers of the corporation, defines the fiduciary duty the managers owe to shareholders, procedures by which the board of directors will act, indemnification of officers and directors…)
External affairs: the external affairs of a corporation are generally governed by the law of the place where the activities occur and by federal and state regulatory statutes NOT by the place of incorporation.
Ex: Corporation Y is incorporated in Delaware but its principal place of business is NY, so Delaware law governs the internal affairs of the corporation, but NY law will govern labor conditions and minimum wages.
1. Incorporation: an “incorporator” files the Articles of Incorporation with the Secretary of the State and pays the required fee, and this marks the existence of the corporation. In NY: incorporation is marked by the issuance of a “Certificate of Incorporation” by the Secretary of the State. AOI are harder to amend than the bylaws since they require the votes of both the directors and the shareholders, so anything that you want to be solidified in the company, should be placed in the AOI.
MBCA § 2.02: Articles of Incorporation must set forth:
(1) a corporate name for the corporation
(2) the number of shares that the corporation is authorized to isse
(3) the street address of the corporation’s initial registered office and the name of its initial registered agent at that office; and
(4) the name and address of each incorporator.
Defects in Incorporation: if there is a defect in the process of incorporation, the individuals are risking personal liability and may not be protected by the limited liability.
De Facto Corporation: there was technical defect in the incorporation ( ex: a missing signature), however the coporation is still legally recognized if there was a good faith effort to incorporate correctly.
MBCA § 2.04: imposes personal liability when persons acted on behalf of the corporation knowing that the coporation doesn’t exist.
Corporation by Estoppel cant deny that it is a corporation, after you have interacted with it as a corporation.
2. Initial Meeting: an organizational meeting must be held.
MB
rd of Directors: elected by the shareholders. The board oversees the big decisions of the corporation, does not manage the day-to-day activities.
Managers/Officers(CEO,CFO, Pres..) : appointed by the Board of Directors, involved in the day-to-day decision making of the corporation.
3. Free Transferability of Ownership
Shareholders can sell their stock whenever and to whomever they want without liability concerns for the remaining shareholders b/c of the limited liability.
4. Perpetual Life
A corporation may never expire and isn’t affected by a change in ownership. The corporation exists apart from and beyond its current owners.
Disadvantages:
1. Double Taxation
The corporation is taxed on its profits and the shareholders are also taxed on their dividends.
Solution:
Salaries: salaries are tax deductible for the corp can pay the money out as salaries instead of dividends, BUT, it has to be a legitimate salary, cant be a dividend disguised as a salary.
Debt Securities: Have an investor invest in the company in the form of a loan, this way the money they receive is not a dividend, but it is a fixed interest on the loan.
