Chapter 19– Corporations Chapter 19– Corporations

A corporation is a creature of statute, an artificial “person.”

Corporations can have one or more shareholders.

Owners can be people or other businesses.

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Classification of CorporationsClassification of Corporations

– Domestic: does business within its state of incorporation.

– Foreign: formed in X state, doing business in Z state.

– Alien: formed in another country.

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Corporate PersonnelCorporate Personnel

• Who owns corporation?

Who runs the company:

JurisdictionJurisdiction

Corp is citizen of the state where it is incorporated and maintains principal business.

So Corp can be sued where incorp and maintains principal business as well as minimum contacts

Corporations are recognized as legal “persons” and enjoy virtually same rights and privileges under our Constitution as natural persons.

Can be sued and has Bill of Rights protection – Citizens United Case.

CorporationsCorporations

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Shareholders are generally not liable for the contracts or torts of the corporation.

If the corporation fails, shareholders generally cannot lose more than their investment.

Liabilities of ShareholdersLiabilities of Shareholders

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Responsibility for overall management of company rests with board of directors (elected by shareholders).

Board of directors makes policy decisions and hires officers to run corporation on a daily basis.

Board of DirectorsBoard of Directors

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ShareholdersShareholders

Shareholders generally have no right to manage the daily affairs of the corporation,

but Shareholder elect the Board of Directors.

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Profit and LossesProfit and Losses

Profit and Losses: all profits, losses are allocated according to each shareholder's proportionate shares of stock.

This means that if you own 50 percent of the stock, you must receive 50 percent of the losses, profits, credits, etc.

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Corporate Earnings and Taxation.Corporate Earnings and Taxation.

Profits can either be kept as retained earnings or passed on to the shareholders as dividends.

Corporate Taxation: can be taxed twice, first to corporation, then to shareholders via dividends.

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Torts and Criminal ActsTorts and Criminal Acts

• What is a tort? • A corporation is liable for the torts committed by

its agents or officers within the course and scope of their employment (CALLED - respondeat superior.)

• Corporation can be liable for criminal acts, but only fined.

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Incorporation Process-WebsiteIncorporation Process-Website

Name SearchName Search

File Articles of Incorporation

File Articles of Incorporation

Prepare docts

Prepare docts

1st Organiza-tional Meeting1st Organiza-tional MeetingPay feesPay fees

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Incorporation ProceduresIncorporation Procedures

• 1st – Decide a State

• 2nd – Decide a name.– What must name have in it? – What is assumed name?

• 3rd - Articles of Incorporation – – who file with _____________– Cost to file ________________

TN - NameTN - Name

A name for the new corporation must meet the requirements of TCA §48-14-101•name must contain the word _____________

•A corporation’s name must be distinguished from any other name on file with the Division of Business Services.

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Reserve/Assume NameReserve/Assume Name

What is reserve name?

4 months $20

VS.

What is assumed name?

5 years $20

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The charter or “articles of incorporation” :

1. A corporate name that satisfies the name requirements

2. The number of shares the corporation is authorized to issue;

3. Registered agent

4. Principal office

5. Shares, classes stock and

6. A statement that the corporation is for-profit.

Articles of IncorporationArticles of Incorporation

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First Organizational MeetingFirst Organizational Meeting

• Must be chartered.

• First organizational meeting asap with

• shareholders

• And elect board of directors

• Must meet 1 a year

S CorporationS Corporation

• Why form S corporation instead of C corporation:

• TAXES - S can be taxed as partnership vs.

• C which is taxed like corporation

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S corporationsS corporations

No more than 100 shares of one type stock – one type of stock

Cannot be non resident foreign investors vs. LLC

Profits divided like corp.

An S corporation is operated in the same way as a corp. An S corp. must follow the same formalities and record keeping procedures. The directors or officers of an S corp. manage the company.

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S CORP v. LLCS CORP v. LLC

• S corp LLCShareholders Member

US resident Foreign Investors

Split according to investment split according to agreement

SIMILARITIES

File with SOS File with SOS

Limited Liability Limited Liability

Tax partnership Tax partnership

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DefectsDefects

• If messed up in forming corporation – can individuals be sued?

• What if do not hold self out as a corporation

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Powers of a Corp - WrittenPowers of a Corp - Written

• Look to articles of incorporation, the laws of the state of incorporation

• Operating Agreement – internal working of Corp.

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Powers that are not writtenPowers that are not written

• A corporate officer can bind corporation in contract in matters connected with the ordinary business affairs of the enterprise.

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Duty of Care : Directors/officers are expected to act in good faith and the best interests of the corporation.

Duties of Directors and OfficersDuties of Directors and Officers

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Liability of Directors and OfficersLiability of Directors and Officers

• Directors and officers may be liable for crimes and injuries committed by individually and/or those committed by employees under their supervision.

– BP

• Piercing the “corporate veil – exception to suing the shareholders.

• Typically something illegal going on where stockholders or owners part of corruption.

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Piercing the Corporate Veil- suing shareholdersPiercing the Corporate Veil- suing shareholders

• Examples:– 3rd party tricked into dealing with a corporation

rather than the individual.– “Fake” corp - Corporation is set up never to

make a profit or remain insolvent or is under capitalized.

– formalities to set up corporation are not followed.