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Business Associations/Corporations
South Texas College of Law Houston
Rosin, Gary S.

Corporations Outline–Rosin–Fall 2013


A. Incorporation

1. Big Picture

a. A corporation is a separate legal entity that can make and sign contracts, own property, violate the law, commit torts, etc. It is a legal fiction but can do these things through the activity of the managers or others who operate within it. From a business perspective, there are agency costs involved in running the business. The corporation, along with corporate law, gives us off-the-shelf solutions to these agency problems.

2. Choice of Entity Factors

a. Liability

b. Continuity

c. Powers and Management Structure

d. Transferability of Interests

e. Taxation

3. Characteristics of the (Publicly Held) Corporation

a. Limited Liability

i. Shareholders (S/H) not personally liable for corporate obligations

ii. Managers not personally liable for corporate obligations, provided:

a. They act on the corporation’s behalf; and

b. Within their authority

b. Free Transferability of Ownership Interests

i. Partnership: transfer of interest requires consent of all partners

c. Continuity of Existence

i. Perpetual life unless specified otherwise in Certificate of Formation (COF)

a. Prevents unexpected early termination (i.e. sudden death of partner)

b. Allows for long-term planning

d. Centralized Management

i. Power to manage is vested in Board of Directors (B/D)

ii. S/H have no right to participate in management

e. Entity Status

i. The Corporation is a legal person; it can exercise powers and have rights in its own name

a. Right to own property

b. Right to make contracts

c. Right to sue and be sued

ii. Federal income tax: the corporation is taxed as a separate entity; it files its own tax return showing profits/losses, and pays its own taxes independently of the shareholders.

a. Firm taxation – if a business firm has income or expenses, those items go into the firm’s taxable income, not into the taxable income of the firm’s owners. If the firm then pays out dividends to its owners, then the owners will pay taxes on those dividends (referred to as “double taxation”).

b. Flow through taxation –the firm’s total income and expenses are taxable directly to the firm’s owners, and dividends are not taxed, so no “double taxation” (e.g., a partnership is not a taxable entity so the partners only pay income taxes once).

iii. Employment taxes – distinguish between income earnings, and income capital. Only have to pay on income from earnings.

4. Architecture of Corporate Law

a. Conflict

i. Traditional Conflict: self-interested transactions between managers and the corporation

ii. Positional Conflict: actions by managers to maintain and enhance their positions within the corporation

b. Sources of Law

i. State Statutory Law

a. Enables organization; provides endowments; facilitates corporate transactions

b. Texas Business Organizations Code (TBOC)

i. Was Texas Business and Corporations Act (TBCA) prior to 12/31/06

ii. 1/1/07 to 12/31/09 applies to:

a. New corps being organized

b. Corps. that adopted TBOC early

iii. As of 1/1/10: TBOC applies to ALL corps. (whenever organized)

a. Except as to disputes arising under earlier law

iv. “Hub and Spoke” structure

a. Hub: Title 1 (general provisions)

b. Mini-hub: Title 2 (corporations)

1. Ch. 20 (gen provisions)

2. Ch. 21 (for profit)

3. Ch. 22 (non-profit)

c. Spokes: discus particular types of entities

ii. State Judge-made Law

a. Sets level of care required for officers and directors; regulate conflicts of interests; provide substance of law regarding S/H rights and claims

iii. Federal Law

a. Directly regulates certain conflicts; insider trading rules; proxy voting rules

iv. Private Ordering Rules

a. “soft law;” such as stock exchange rules for listed companies

b. Require independent board and committees to monitor executives

5. Internal Affairs Doctrine

a. RULE: A corporation’s internal affairs are governed and determined solely by the law of the state in which the corporation was incorporated

i. e.g. CA applying CA corp. law to “pseudo-foreign” entities held unconstitutional

b. Common-law Principle

i. Internal Affairs (Texas corp. statutes contained entirely in TBOC)

a. Rights powers, duties of governing authority (B/D), governing persons, officers, owners and other members

b. Matters relating to membership or ownership interests

c. Liability of owners/obligators to entity

ii. Policy: more consistency; protect the justified ex

ure restrictions/issues

ii. OTOH if purpose is too broad, will remove some S/H powers

iii. Good practice to say the actual purpose “and any lawful purpose”

iv. Prohibited Purposes**

a. Unlawful business or activity

b. Can’t legally be a corporation (e.g. law firm)

c. Operating as a bank, trust company, savings association, insurance co, or cemetery organization

v. For-profit corps: can’t organize as a co-op or labor union

vi. Prohibited combos:

a. Raising cattle AND owning land to do so (except feedlots, etc.)

b. Stockyards AND slaughtering, refrigerating, canning, curing, and packing meats

c. Oil producing AND oil pipelines (except through subsidiaries)

vii. Cant form a corporation if your business requires a license that cannot be issued to a corporation (e.g. law firm)

d. Duration

i. perpetual if no mention of duration

e. Name of registered agent and street address of agent (and registered office)

i. Address of service and where state sends communiques

f. Name and address of each organizer

i. Organizer will be on hook for margin (franchise) tax if corp. died in past year without notifying state (e.g. lawyer)

ii. Must have legal capacity and sign COF

g. Name and address of each initial manager

i. Members of B/D or

ii. Others pursuant to S/H agreement

c. File COF ($300)

i. 4.3.001(b) COF requirements

ii. Filing

a. Organizers sign COF and deliver to Secretary of State

b. Secretary of State

i. Determines if COF conforms to law and all fees paid, then

ii. Files (accepts into filing system)

iii. Delivers written acknowledgement of filing to entity or its representative

iii. Life begins at time of filing (by sec. of state’s clerk)

a. Unless you specify a desire for delayed effectiveness

d. Organizers