© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Corporations © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Corporation A fictitious legal entity that is created according to statutory requirements. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

The Corporation as a Legal “Person” A corporation is a separate legal entity (or legal person). Corporations can: Sue or be sued in their own names. Enter into and enforce contracts. Hold title to and transfer property. Be found civilly and criminally liable for violations of law. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Characteristics of Corporations Limited Liability of Shareholders Free Transferability of Shares Perpetual Existence Centralized Management © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 3

Limited Liability of Shareholders Shareholders are only liable to the extent of their capital contributions for the contracts and debts of their corporation. Are not personally liable for the contracts and debts of the corporation. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Free Transferability of Shares Corporate shares are freely transferable by the shareholder. May sell, assign, pledge, or gift. Unless issued pursuant to certain exceptions from securities registration. Shareholders may agree among themselves on restriction on the transfer of shares. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Perpetual Existence Corporations exist in perpetuity Unless specific duration is stated in articles of incorporation. Can be voluntarily terminated by the shareholders. May be involuntarily terminated by the corporation’s creditors . © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Centralized Management Board of directors makes policy decisions concerning the operation of the corporation. Members of the board of directors are elected by the shareholders. Directors appoint corporate officers to run the corporation’s day-to-day operations. Directors and the officers form the corporate “management.” © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Public v. Private Public Corporation A corporation formed to meet a specific governmental or political purpose. Private Corporation A corporation formed to conduct privately owned business. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Profit v. Nonprofit Profit Corporation A corporation created to conduct a business for profit. Can distribute profits to shareholders in the form of dividends. Nonprofit Corporation A corporation that is formed to operate charitable institutions, colleges, universities, and other not-for-profit entities. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Publicly Held v. Closely Held Publicly Held Corporation A corporation that has many shareholders. It’s securities are traded on organized security markets. Closely Held Corporation A corporation owned by few shareholders. Shareholders often involved in management. Shareholders may have buy-and-sell agreements © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Professional Corporation A corporation formed by lawyers, doctors, or other professionals. Shareholders called members. Members not usually liable for torts committed by members or agents Liability usually imposed for malpractice of members. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Financing the Corporation A corporation needs to finance the operation of its business. Equity securities (or stocks) – represent ownership rights in the corporation. Debt securities – establish a debtor-creditor relationship in which the corporation borrows money from the investor to whom the debt security is issued. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Equity Securities Common Stock – A type of equity security that represents the residual value of the corporation. Common stock has no preferences. Common stock does not have a fixed maturity date. Common shareholders have limited liability. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Equity Securities (continued) Preferred Stock – A type of equity security that is given certain preferences and rights over common stock. Preferred stock can be issued in classes or series. One class of preferred stock can be given preferences over another class of preferred stock. Preferred shareholders have limited liability. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Preferred Stock Dividend Preference Liquidation Preference Conversion Right Cumulative Dividend Right Right to Participate in Profits © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 3