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Basic Business Forms Corporations Class 6. Forming a Business The first question: The first question: What form should the business take? What form should.

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Presentation on theme: "Basic Business Forms Corporations Class 6. Forming a Business The first question: The first question: What form should the business take? What form should."— Presentation transcript:

1 Basic Business Forms Corporations Class 6

2 Forming a Business The first question: The first question: What form should the business take? What form should the business take? Sole proprietorship Sole proprietorship Partnership Partnership Corporation Corporation Limited liability company Limited liability company

3 Choosing the Form Consider: Consider: Formation issues Formation issues Filing/formation requirements? Filing/formation requirements? Liability protection Liability protection Management structure Management structure Taxation issues Taxation issues Exit strategies/transferability of interests Exit strategies/transferability of interests

4 Corporations A corporation is a creature of statute, an artificial “person.” A corporation is a creature of statute, an artificial “person.” The corporation is a “person” for the purpose of conducting a business and can The corporation is a “person” for the purpose of conducting a business and can Own property Own property Enter into contracts Enter into contracts Sue and be sued Sue and be sued Ownership of corporation is shared by shareholders (or stockholders). Ownership of corporation is shared by shareholders (or stockholders).

5 Rights of the Corporation Because a corporation is a legal “person,” it has constitutional rights. Because a corporation is a legal “person,” it has constitutional rights. Equal protection; Equal protection; Access to the courts, can sue and be sued; Access to the courts, can sue and be sued; Right to due process; Right to due process; Freedom from unreasonable search and seizure and double jeopardy. Freedom from unreasonable search and seizure and double jeopardy. Freedom of speech. Freedom of speech.

6 Torts and Criminal Acts A corporation is liable for the torts committed by its agents or officers within the course and scope of their employment under the doctrine of respondeat superior. A corporation is liable for the torts committed by its agents or officers within the course and scope of their employment under the doctrine of respondeat superior. Corporation can be liable for criminal acts, but only fined. Responsible officers may go to prison. Corporation can be liable for criminal acts, but only fined. Responsible officers may go to prison.

7 Advantages The personal liability of shareholders (the owners) for corporate obligations is normally limited to the individual’s investment. The personal liability of shareholders (the owners) for corporate obligations is normally limited to the individual’s investment. The business has a perpetual existence The business has a perpetual existence

8 Disadvantages Complexity of formation. Complexity of formation. Double taxation. Double taxation.

9 Corporate Powers A corporation may act and enter into contracts as any natural person, except as limited by: A corporation may act and enter into contracts as any natural person, except as limited by: U.S. Constitution. U.S. Constitution. State constitutions. State constitutions. State statutes. State statutes. Its own articles of incorporation. Its own articles of incorporation. Its own corporate bylaws. Its own corporate bylaws. Resolutions by its own board. Resolutions by its own board.

10 Corporate Powers The express powers of a corporation are found in the corporation’s articles of incorporation, the laws of the state of incorporation, and in the state and federal corporations. The express powers of a corporation are found in the corporation’s articles of incorporation, the laws of the state of incorporation, and in the state and federal corporations. Corporate by-laws may also grant or limit a corporation’s express powers. Corporate by-laws may also grant or limit a corporation’s express powers.

11 Corporate Powers Corporation has implied powers to perform all acts reasonably necessary to accomplish its corporate purposes: Corporation has implied powers to perform all acts reasonably necessary to accomplish its corporate purposes: Borrow and lend money. Borrow and lend money. Extend credit. Extend credit. Make charitable contributions. Make charitable contributions. A corporate officer can bind corporation in contract in matters connected with the ordinary business affairs of the corporation. A corporate officer can bind corporation in contract in matters connected with the ordinary business affairs of the corporation.

12 Ultra Vires Doctrine Corporate acts that are beyond the express or implied powers of the corporation are considered to be “ultra vires” and unlawful. Corporate acts that are beyond the express or implied powers of the corporation are considered to be “ultra vires” and unlawful. Shareholders can bring action for injunction. Shareholders can bring action for injunction. Corporation can recover damages from its officers and directors. Corporation can recover damages from its officers and directors. Attorney general of state may bring action to dissolve corporation for ultra vires acts. Attorney general of state may bring action to dissolve corporation for ultra vires acts.

13 Classification of Corporations Domestic corporation does business in its state of its incorporation. Domestic corporation does business in its state of its incorporation. Foreign corporation from another state doing business in Washington. Foreign corporation from another state doing business in Washington. Alien Corporation: formed in another country doing business in United States. Alien Corporation: formed in another country doing business in United States.

14 Kinds of Corporations Public and Private. Public and Private. Nonprofit. Nonprofit. Close Corporations. Close Corporations. Shares held by few shareholders. Shares held by few shareholders. More informal management – similar to a partnership. More informal management – similar to a partnership. Restriction on transfer of shares. Restriction on transfer of shares.

15 Kinds of Corporations “S Corporations” – IRS classification that enables corporation to avoid “double taxation” – only dividends to the shareholders, not corporate profits, are taxed. IRS requirements: “S Corporations” – IRS classification that enables corporation to avoid “double taxation” – only dividends to the shareholders, not corporate profits, are taxed. IRS requirements: Corporation is domestic, with fewer than 75 shareholders, only one class of stock, no shareholder can be a non-resident alien. Corporation is domestic, with fewer than 75 shareholders, only one class of stock, no shareholder can be a non-resident alien. Professional Corporations. Professional Corporations.

16 Basics of Formation The corporation is created by Articles of Incorporation The corporation is created by Articles of Incorporation These must include These must include Name of the corporation Name of the corporation Purpose Purpose List of incorporators and directors List of incorporators and directors Name and address of registered agent Name and address of registered agent Share structure Share structure The Articles are filed with the Secretary of State The Articles are filed with the Secretary of State

17 First Organizational Meeting After the corporation is “chartered” (created) it and can do business. After the corporation is “chartered” (created) it and can do business. First, shareholders should have the first organizational meeting to: approve the bylaws, elect directors, hire officers and adopt pre-incorporation contracts and activities. First, shareholders should have the first organizational meeting to: approve the bylaws, elect directors, hire officers and adopt pre-incorporation contracts and activities.

18 Corporate Status De Jure: substantial statutory requirements are met; cannot be attacked by state or 3 rd parties. De Jure: substantial statutory requirements are met; cannot be attacked by state or 3 rd parties. De Facto: statutory requirements not met, but promoters made good faith effort to comply with corporate law; corporate status can only be attacked by state. De Facto: statutory requirements not met, but promoters made good faith effort to comply with corporate law; corporate status can only be attacked by state. By Estoppel: if it acts like a corporation, it cannot avoid liability by claiming that no corporation exists. By Estoppel: if it acts like a corporation, it cannot avoid liability by claiming that no corporation exists.

19 Piercing the Corporate Veil Where the corporate form is used solely to shield individuals from liability Where the corporate form is used solely to shield individuals from liability Generally, owner co-mingles personal and corporate assets Generally, owner co-mingles personal and corporate assets Sometimes no stock is issued or Sometimes no stock is issued or Formation or regulatory rules are ignored Formation or regulatory rules are ignored

20 Corporate Financing Bonds v. Stocks DebtOwnership/equity Fixed ROI Dividends (variable) Fixed ROI Dividends (variable) No votesVote for Management No votesVote for Management OptionalRequired OptionalRequired Priority over stock Paid last Priority over stock Paid last Stocks: Common vs. Preferred Stocks: Common vs. Preferred

21 Merger and Consolidation Corporations can grow and expand by: Corporations can grow and expand by: Mergers. Mergers. Consolidation. Consolidation. Purchase of another corporation’s assets. Purchase of another corporation’s assets. Purchases of a controlling interest in another corporation. Purchases of a controlling interest in another corporation.

22 Termination Termination of a corporation, like a partnership, consists of two phases: Termination of a corporation, like a partnership, consists of two phases: Dissolution (voluntary or involuntary); and Dissolution (voluntary or involuntary); and Liquidation. Liquidation.

23 Liquidation Voluntary Dissolution. Voluntary Dissolution. Board liquidates and acts as trustees of assets. Board liquidates and acts as trustees of assets. Court will appoint a receiver if: Court will appoint a receiver if: Board refuses; or Board refuses; or Creditors want a receiver. Creditors want a receiver. Involuntary Dissolution. Involuntary Dissolution. Court appoints receiver. Court appoints receiver.

24 Corporate Hierarchy Shareholders Board of Directors Officers Employees Clients/Customers

25 Corporate Structure The owners of the corporation are the shareholders. The owners of the corporation are the shareholders. Create the capital of the corporation Create the capital of the corporation Have no management authority Have no management authority Elect board of directors Elect board of directors Must approve changes in articles of incorporation and other major changes Must approve changes in articles of incorporation and other major changes

26 Corporate Structure The Board of Directors The Board of Directors Elected by the shareholders Elected by the shareholders Have management responsibility Have management responsibility Appoint, supervise, remove officers of the corporation Appoint, supervise, remove officers of the corporation The Directors have a fiduciary relationship with shareholders The Directors have a fiduciary relationship with shareholderswww.theyrule.net

27 Corporate Structure Officers and Executives Officers and Executives Elected or appointed by the board of directors Elected or appointed by the board of directors Responsible for carrying out board’s policies and directives Responsible for carrying out board’s policies and directives Responsible for management of business Responsible for management of business Have a fiduciary duty to act in the best interests of the shareholders and the corporation Have a fiduciary duty to act in the best interests of the shareholders and the corporation

28 Duties of Directors and Officers Directors and officers are fiduciaries of the corporation. They owe ethical and legal duties to the corporation and shareholders: Directors and officers are fiduciaries of the corporation. They owe ethical and legal duties to the corporation and shareholders: Duty of Care : They are expected to act in good faith and the best interests of the corporation. Duty of Care : They are expected to act in good faith and the best interests of the corporation. Duty of Loyalty: Subordination of personal interests to the welfare of the corporation. Duty of Loyalty: Subordination of personal interests to the welfare of the corporation.

29 Conflicts of Interest Full disclosure of any potential conflicts of interest and abstain from voting on any transaction that may benefit the director or officer personally. Full disclosure of any potential conflicts of interest and abstain from voting on any transaction that may benefit the director or officer personally.

30 Liability of Board/Officers Directors and officers may be liable for: Directors and officers may be liable for: Their own negligent acts. Their own negligent acts. Crimes and torts committed individually as well as those committed by employees under their supervision. Crimes and torts committed individually as well as those committed by employees under their supervision. Shareholder derivative suits where shareholders sue directors on behalf of corporation. Shareholder derivative suits where shareholders sue directors on behalf of corporation.

31 Regulations and Requirements Corporations are required to: Corporations are required to: Hold annual meetings of shareholders. Hold annual meetings of shareholders. Give reasonable notice of meetings. Give reasonable notice of meetings. Provide reasonable access to books and records to shareholders. Provide reasonable access to books and records to shareholders.

32 Business Ethics What is Business Ethics? What is Business Ethics? Legal compliance is the moral minimum. Legal compliance is the moral minimum. Laws regulating business. Laws regulating business. “Gray” areas in the law. “Gray” areas in the law.

33 Securities Regulation Two major securities laws Two major securities laws Securities Act of 1933 Securities Act of 1933 Securities Exchange Act of 1934 Securities Exchange Act of 1934

34 Securities Act The Act requires corporations to file a registration statement with the SEC and provide a prospectus to investors before offering or selling the security to the public. The Act requires corporations to file a registration statement with the SEC and provide a prospectus to investors before offering or selling the security to the public. A security is a transaction in which the buyer A security is a transaction in which the buyer Invests money in a common enterprise and Invests money in a common enterprise and Expects to earn a profit predominantly from the efforts of others. Expects to earn a profit predominantly from the efforts of others.

35 Securities Exchange Act Requires corporations to file certain documents regarding the financial health and the control of the corporation. Requires corporations to file certain documents regarding the financial health and the control of the corporation.

36 Insider Trading “Definition of insider trading: Stealing too fast.” Calvin Trillist “Definition of insider trading: Stealing too fast.” Calvin Trillist Occurs when someone with reliable secret information uses that information to benefit from stock trades. Occurs when someone with reliable secret information uses that information to benefit from stock trades. Is a crime, punishable by fine and imprisonment. Is a crime, punishable by fine and imprisonment.

37 Sarbanes-Oxley Act Enacted after the Enron accounting scandal to require additional protections for investors. Enacted after the Enron accounting scandal to require additional protections for investors.

38 Additional Regulations Sherman (Antitrust) Act Sherman (Antitrust) Act Prohibits price fixing and illegal monopolies Prohibits price fixing and illegal monopolies Clayton Act Clayton Act Prohibits anticompetitive mergers Prohibits anticompetitive mergers Robinson-Patman Act Robinson-Patman Act Prohibits price discrimination aimed at putting small competitors out of business Prohibits price discrimination aimed at putting small competitors out of business


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