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Business Organizations
Touro Law School
Post, Deborah W.

                               I.            Corporations: a corporation is a frame work through with people conduct modern business in which it is a convenient legal entity that can enter into contracts, own property, and be a party in court.
a. structure: Shareholders provide capital, directors and officers manage the business. Corporate participants are not personally liable for corporate debts; only the corporation.
                             II.            Forming a Corporation:
In forming a corporation, there is always a danger of overlooking some obvious matter or using “boiler plate” language that may have been suitable for the last corporation but is egregiously inappropriate for this corporation.
1.        Filing Articles of Incorporation with the Secretary of State: a corporation arises when articles of incorporation are filed. Bylaws set out the relationship between the parties and expectations of the parties. Art. 4 deals with formation. § 401 provides 1 or more natural persons of the age 18 may create a corporation and § 402 discusses the contents within the articles of incorporation:
a.        Names: find out if name is available and reserve it
b.        Duration
c.        Capital structure of the corporation: the articles must specify the securities (or shares) the corporation will have authority to issue. The corporation will raise capital by issuing its shares. The articles must describe the various classes of authorized shares, the number of shares of each class, and the privileges, rights, limitations and preferences of each class.
d.       Purpose: with the decline of the ultra vires doctrine, a “purposes” clause is far less important than it once was. The modern presumption is that the corporation can engage in any lawful business.
e.        Powers
f.         Registered office and registered agent: The corporation’s address for service of process and for sending official notices and name of registered agent on who process can be served.
g.       Initial directors and incorporators
h.       The number of incorporators, directors or shareholders: the board must be composed of one or more individuals.
i.         Initial capital
2.        Ultra Vires and its decline: used to invalidate corporate transactions beyond the powers stated in the corporation’s charter.
a.        Ultra Vires: provided a means for corporations to avoid certain contracts and get out of bad deals by stating that the action made by the corporation was beyond the powers by being outside its purpose.
b.        § 203 in NY states that you can’t use the doctrine of Ultra Vires to get out of a contract except for 3 exceptions:
shareholders to enjoin the corporate managers from engaging
shareholders can bring action for and on behalf of the corp for damages
Attorney general can bring suit
Most statutes are devised so that one cannot get out of a contract through ultra vires – the language stating that it is for “any lawful business purpose.”
c.        Charitable contributions: a for-profit corporation’s primary purpose is to make money for its constituents. Courts generally have accepted that corporations have implicit powers to make charitable gifts that in the long run may benefit the corporation.
·         Theodora Holding Corp. v. Henderson, dispute on how to spend $. Stated that purpose of corp is to make $. Arguments made (A) Corporate Waste, wasting corporations asset à but there are benefits that flow from charitable contribution 1. tax breaks 2. Good will brings about name recognition, consumers respond to corporations that do good (B) shareholders are owners and owners should make decision – but decision making had been given to directors & officers.
3.        Premature Commencement: Liability to a 3rd party who’s extended credit to the corporation: the tests may be applied.
a.        promoters liability doctrine: unless the 3rd party intended to look only to the corporation, the promoter will be liable (the responsibility/risk is on the promoter) (there is a statute in NY but it does not play a major role because there is no prevision that makes promoters liable. In NY only common law doctrines judicially created tests that cover this).
b.        Defacto Corporation Doctrine: (Defense) the statute was supposed to do away with de factor corp doctrine. The elements of proof are 3-fold:
                                                         i.            statute in jurisdiction that allows for formation of corporation
                                                        ii.            bonefide attempt at forming corporation
                                                      iii.            use of corporation franchise (equivalent to holding oneself out as the corp)
The 3rd party cannot recover if the promoter can use the defacto corporation doctrine. Simply stating that there was no corporation, but there was a defacto corporation.
c.        Corporation by Estoppel: (Defense) the promoter may use this but must show:
                                                         i.            the promoter had a good faith belief that the corporation was in existence
                                                        ii.            the 3rd party intended to deal with the corporation
The lack of knowledge of the formation of the corporation must be a reasonable belief. Attorney must show the minute book etc to

l, so that the individual claim the homestead exemption in which the individual gets to keep their home as well as 80 acres of land, however, if they are treated as a corporation, they would have to file for bankruptcy)
Courts don’t like to pierce the corporate veil, they will only do it if there are certain circumstances present
Instead, there are a variety of different tests:
Test #1-Doctrines of Piercing the Corporate Veil:
-there are three that are used most frequently:
1.        Piercing the corporate veil on the theory that the corporation is the “alter-ego” of the owner/shareholder; there is merging or blurring of the two identities
2.        Instrumentalities-the person who owns the corporation is using the corporation in an improper way, the corporation is being used to achieve some purpose which amounts to some unfair behavior
3.        “Enterprise Entity”-
Test #2-Rule-like Statements of when you pierce the corporate veil:
“To prevent fraud and to achieve equity”-Bartle v. Home Owners
The corporation has been used for an improper purpose
When there has been an abuse of the corporate form
Test #3-Factors-what factors are relevant in piecing the corporate veil:
There wasn’t sufficient capital put into the corporation in order to fund it from the beginning;
Disregarding corporate formalities (they didn’t have meetings or keep track of their meetings)-this factor BY ITSELF is NEVER ENOUGH to pierce the corporate veil;
Misappropriation of the funds of the corporation (taking money from the corporation which doesn’t belong to you; siphoning)
For an essay:  When you have to discuss piercing the corporate veil:  (1) discuss the doctrines; (2) give rule like statements; (3) apply the facts of the case and discuss the factors that are found
Courts do not like to pierce the corporate veil; thus, there must be a good reason to do so. Rule: Courts will pierce the veil when: the situation presents an element of injustice and fundamental unfairness (fraud is not necessary, but it would cause the court to pierce the corporate veil also.
Discuss Vertical or horizontal piercing.
1.        Piercing the Corporate Veil