1. COPYRIGHT © 2010 South-Western/Cengage Learning.

2. Promoter’s Liability Before the Corporation is Formed The promoter is personally liable on any contract signed before formation. The corporation is not liable unless it adopts the contract after incorporation. Even if the corporation adopts the contract, the promoter is still liable until the third party agrees to a novation (new contract), unless the contract clearly indicates that the other party is relying only on the corporation, which he knows does not yet exist.

3. COPYRIGHT © 2010 South-Western/Cengage Learning. Defective Incorporation De Jure Corporation – The promoter has substantially complied with the requirements for incorporation, but has made some minor error. De Facto Corporation – The promoter has made a good faith effort to incorporate and has actually used the corporation to conduct business. Corporation by Estoppel – If a party enters a contract believing in good faith the corporation exists, he cannot later take advantage of the fact that it does not.

4. COPYRIGHT © 2010 South-Western/Cengage Learning. Incorporation Process Where to Incorporate – In a state –either the home state of the business or a state which has favorable laws for corporations (often Delaware) Charter’s Required Provisions – Name of corporation – Address and Registered Agent – Incorporator –person who signs the charter and delivers it to the Secretary of State for filing (perhaps the lawyer or the promoter) – Purpose – this can be a broad statement, such as “to conduct lawful business” – Stock – number, par value and types offered

5. COPYRIGHT © 2010 South-Western/Cengage Learning. Stock Stock can be: – Authorized and unissued – Authorized and issued or outstanding – Treasury stock (been issued, then bought back by company) Par value - minimum issue price Classes and series – Owners of preferred stock have preference on dividends and liquidation. – Common stock is last in line for any corporate payouts, including dividends and liquidation.

6. COPYRIGHT © 2010 South-Western/Cengage Learning. Charter’s Optional Provisions Indemnification of Directors – Under most state statutes, a corporation may include in its charter a provision to pay any liability they incur from doing their job. – Directors are usually liable for their own misconduct. Cumulative Voting – Under a cumulative voting system, a shareholder is allowed to pool his shares and vote them all for the same person.

7. COPYRIGHT © 2010 South-Western/Cengage Learning. After Incorporation Directors and officers are elected, unless all shareholders agree to not have a board of directors. Minute book holds records of all meetings. Bylaws set the rules for the corporation.

8. COPYRIGHT © 2010 South-Western/Cengage Learning. After Incorporation (cont'd) Shareholder Agreements – set procedures for voting stock. Issuing Debt – corporations often need to borrow funds for start-up. – Bonds – long term debt secured by company assets. – Debentures – long term, unsecured debt. – Notes – short term, either secured or unsecured.

9. COPYRIGHT © 2010 South-Western/Cengage Learning. Foreign Corporations A foreign corporation is one that does business in any other state besides the state of incorporation. Qualifying to Do Business – To qualify, a corporation must register in any states where it is “doing business.” – Opening an office or establishing any other ongoing presence is doing business. – An unqualified company that is doing business cannot file a lawsuit until it has registered. It can, however, defend itself against a suit and it can file a lawsuit if it is NOT doing business in that state.

10. COPYRIGHT © 2010 South-Western/Cengage Learning. Death of a Corporation May be voluntary (shareholders vote) or forced (by court order). Piercing the Corporate Veil -- a court may hold shareholders liable for debt in four circumstances: – Failure to observe formalities (such as holding meetings, keeping records) – Commingling of assets (using corporate funds to pay personal debts, etc.) – Inadequate capitalization (the corporation should obtain insurance against liability for torts) – Fraud (injured party may recover from the guilty party, even if the action was the corporation’s)

11. COPYRIGHT © 2010 South-Western/Cengage Learning. Termination Terminating a corporation is a three- step process: – Vote by a majority of the shareholders. – Filing Articles of Dissolution with the Secretary of State. – Winding up – paying debts and distributing assets.

12. COPYRIGHT © 2010 South-Western/Cengage Learning. “Entrepreneurs often become impatient with the legal technicalities required to form and maintain a corporation. However, these legalities can have a profound impact on the success of the business.”