Corporations Section 28.1

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation What You’ll Learn How to define corporation (p. 606) How to distinguish among various types of corporations (p. 607) How to create a corporation (p. 608)

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation What You’ll Learn How to finance a corporation (p. 614) How to distinguish between a corporation and a limited liability company (p. 616)

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Why It’s Important Understanding the nature of a corporation will help you decide when to form one rather than the other associations that are available.

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Legal Terms corporation (p. 606) shareholder (p. 606) share (p. 606) promoter (p. 608) articles of incorporation (p. 610)

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Legal Terms certificate of incorporation (p. 612) common stock (p. 614) dividends (p. 614) preferred stock (p. 614) limited liability company (LLC) (p. 616)

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation The Nature of a Corporation Advantages of a Corporation Disadvantages of a Corporation Types of Corporations Section Outline

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Forming a Corporation The Incorporation Process Corporate Financing Section Outline Forming a Limited Liability Company

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Incorporation Problems De Facto Corporation Corporation by Estoppel Piercing the Corporate Veil Section Outline

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Pre-Learning Question What is a corporation?

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation A corporation is a body formed and authorized by law to act as a single person, distinct from its members or owners. The Nature of a Corporation

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation About 90 percent of all business in the United States is done by corporations. Not all corporations are large businesses. Approximately 40 percent of all corporations employ fewer than five employees. The Nature of a Corporation

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation An individual who owns shares of a corporation is called a shareholder or a stockholder. A share is a single unit of ownership of a corporation. The Nature of a Corporation

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Each shareholder has one vote for each share of stock that he or she owns. Shareholders cast their votes to elect a board of directors whose duty is to direct the corporation’s business. The Nature of a Corporation

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Selling shares enables a corporation to tap into a large source of capital Shareholder’s liability is limited to the amount of money he or she paid for shares in the corporation. Advantages of a Corporation

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation It is a legal entity and has the power to make contracts, buy and sell goods, and sue and be sued. It has continuity of existence, regardless of the lifespans of founders, shareholders, and directors. Advantages of a Corporation

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation A corporation’s income may be taxed more than once. First as company profits; then shareholders’ dividends become part of their taxable income. Large corporations face extensive government regulation. Disadvantages of a Corporation

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Original founders can lose not only control but also actual ownership. Because of the prominence of some corporations, business decisions may be subject to close scrutiny. Disadvantages of a Corporation

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation 28.1 Types of Corporations

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Pre-Learning Question How is a corporation formed?

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Each state has its own version of corporate law. States may use: Forming a Corporation the Model Business Corporation Act (MBCA) the Revised Model Business Corporation Act (RMBCA) their own statutes

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation 1.A promoter carries out the incorporation process by taking the initial steps to organize and finance a business. 2.Promoters choose a corporate name. The Incorporation Process

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation 3.Promoters are responsible for drawing up and filing the articles of incorporation, an application for incorporation of a business that describes a corporation’s organization, powers, and authority. The Incorporation Process

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation 4.A filing fee completes the application. The Incorporation Process

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation 5.After the application is approved by the secretary of state, the corporation receives a certificate of incorporation, its official authorization to do business in the state (also called a charter). The Incorporation Process

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation 6.Initial shareholders elect a board of directors who replace the original incorporators. 7.Directors elect a chairman and top corporate officers to manage the company. The Incorporation Process

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation The articles of incorporation usually include the following information. Articles of Incorporation name of the corporation, including the words company, incorporated, or corporation or appropriate abbreviations.

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation proposed duration of the corporation purpose(s) of the corporation number, classes, and value of corporate shares Articles of Incorporation

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation shareholders’ rights in relation to shares, classes of shares, and special shares address of the original registered or statutory agent Articles of Incorporation

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation names and signature of the initial directors names and signatures of the incorporators Articles of Incorporation

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation A corporation may choose to issue several different kinds of stock. Along with each share of stock come certain rights Corporate Financing

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Common stock is the basic form of corporation ownership. Types of Stock Owners have voting rights. It pays dividends, or profits, to the shareholders based on the corporation’s performance.

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Preferred stock is the second type of stock issued by a corporation. Types of Stock Owners have no voting rights. But do receive a fixed dividend. Preferred stock dividends are paid before common stock dividends.

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Draw a flow chart that describes the relationship between the following people. Board of directors Initial shareholders Chairperson Top corporate officers

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation ANSWER Initial shareholders hire board of directors who elect the chairperson and top corporate officers.

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Pre-Learning Question What is a limited liability company?

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation A limited liability company (LLC) is a new type of business enterprise that has been adopted by all states. It is a combination of a partnership and a corporation. Forming a Limited Liability Company

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation LLCs offer limited liability to its owners. Like the partners in a partnership, the owners of an LLC escape double taxation. Forming a Limited Liability Company

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation LLCs are statutory entities—they can be formed only if owners follow the legal steps required—and must also have a statutory agent for service of process. Forming a Limited Liability Company

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Pre-Learning Question How does the law deal with incorporation problems?

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation The courts have developed two doctrines: de facto corporations and corporation by estoppel to deal with incorporation problems. Incorporation Problems

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Even when making a good faith attempt to incorporate, promoters sometimes inadvertently make an error in filing, or fail to complete the incorporation. De Facto Corporation

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation The laws says that, although the corporation does not exist in law (de jure), it does exist in fact (de facto). This type of corporation is called a de facto corporation. De Facto Corporation

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Like other estoppel doctrines, corporation by estoppel stops people from denying the consequences of their own actions. Corporation by Estoppel

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Corporation by estoppel usually occurs when some party has been willing to treat a person or a group of people as a corporation, generally reaping some benefit from the relationship. Corporation by Estoppel

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation When this happens, the court will not allow that party to then deny the existence of the corporation because doing so would be unfair. Corporation by Estoppel

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Sometimes there are extreme circumstances in which the courts will deny shareholders the benefits of limited liability and hold them personally liable. This is known as piercing the corporate veil. Piercing the Corporate Veil

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Reviewing What You Learned 1. 1.What is a corporation? Who are its owners? Section 28.1 Assessment

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Reviewing What You Learned An artificial person created by law owned by shareholders or stockholders. Section 28.1 Assessment Answer

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Reviewing What You Learned 2. 2.What are the two main types of corporations? Section 28.1 Assessment

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Reviewing What You Learned Public and private. Section 28.1 Assessment Answer

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Reviewing What You Learned 3. 3.What are the steps necessary to form a corporation? Section 28.1 Assessment

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Reviewing What You Learned Promoters choose a corporate name, draw up and file articles of incorporation with the office of the secretary of state, pay the filing fee, and receive the certificate of incorporation; Section 28.1 Assessment Answer

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Reviewing What You Learned initial shareholders elect a board of directors; and directors elect a chairman and top officers to manage the corporation. Section 28.1 Assessment Answer

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Reviewing What You Learned 4. 4.How are corporations financed? Section 28.1 Assessment

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Reviewing What You Learned By selling shares of stock in the corporation. Section 28.1 Assessment Answer

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Reviewing What You Learned 5. 5.What is the difference between a corporation and a limited liability company? Section 28.1 Assessment

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Reviewing What You Learned A limited liability company is a combination of a partnership and a corporation. Like a corporation, it offers limited liability to its owners. Like a partnership, the owners escape double taxation. Section 28.1 Assessment Answer

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Section 28.1 Assessment Critical Thinking Activity Advantages and Disadvantages of a Corporation If you had a chain of very successful restaurants in a large city, why might you decide to incorporate the business? Why might you decide not to incorporate?

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Section 28.1 Assessment Critical Thinking Activity Answer Advantages and Disadvantages of a Corporation Answers will vary but could include raising capital for further expansion as an advantage and additional government regulation as a disadvantage.

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Section 28.1 Assessment Legal Skills in Action Forming a Corporation Your brother, Dirk, wants to start a business manufacturing playground equipment using recyclable materials, such as plastics and old tires.

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Section 28.1 Assessment Legal Skills in Action Forming a Corporation He wants to organize his company as a corporation in order to raise capital to build his manufacturing plant, but he isn’t sure how to go about it.

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Section 28.1 Assessment Legal Skills in Action Forming a Corporation Write a letter to Dirk outlining the steps he should take to incorporate his business.

Understanding Business and Personal Law Corporations Section 28.1 Forming and Financing a Corporation Section 28.1 Assessment Legal Skills in Action Answer Forming a Corporation Letters will vary but should include contacting the secretary of state’s office in Dirk’s state.

Corporations End of Section 28.1