1. Section 28.1

2. 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)

3. What You’ll Learn
How to finance a corporation (p. 614)
How to distinguish between a corporation and a limited liability company (p. 616)

4. 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.

5. Legal Terms
corporation (p. 606)
shareholder (p. 606)
share (p. 606)
promoter (p. 608)
articles of incorporation (p. 610)

6. Legal Terms
certificate of incorporation (p. 612)
common stock (p. 614)
dividends (p. 614)
preferred stock (p. 614)
limited liability company (LLC) (p. 616)

7. Section Outline The Nature of a Corporation
Advantages of a Corporation
Disadvantages of a Corporation
Types of Corporations

8. Section Outline Forming a Corporation
The Incorporation Process
Corporate Financing
Forming a Limited Liability Company

9. Section Outline Incorporation Problems De Facto Corporation
Corporation by Estoppel
Piercing the Corporate Veil

10. Pre-Learning Question
What is a corporation?

11. The Nature of a Corporation
A corporation is a body formed and authorized by law to act as a single person, distinct from its members or owners.

12. The Nature of 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.

13. The Nature of 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.

14. The Nature of 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.

15. Advantages of 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.

16. Advantages of 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.

17. Disadvantages of 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.

18. Disadvantages of 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.

19. 28.1
Types of Corporations

20. Pre-Learning Question
How is a corporation formed?

21. Forming a Corporation
Each state has its own version of corporate law. States may use:
the Model Business Corporation Act (MBCA)
the Revised Model Business Corporation Act (RMBCA)
their own statutes

22. The Incorporation Process
A promoter carries out the incorporation process by taking the initial steps to organize and finance a business.
Promoters choose a corporate name.

23. The Incorporation Process
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.

24. The Incorporation Process
A filing fee completes the application.

25. The Incorporation Process
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).

26. The Incorporation Process
Initial shareholders elect a board of directors who replace the original incorporators.
Directors elect a chairman and top corporate officers to manage the company.

27. Articles of Incorporation
The articles of incorporation usually include the following information.
name of the corporation, including the words company, incorporated, or corporation or appropriate abbreviations.

28. Articles of Incorporation
proposed duration of the corporation
purpose(s) of the corporation
number, classes, and value of corporate shares

29. Articles of Incorporation
shareholders’ rights in relation to shares, classes of shares, and special shares
address of the original registered or statutory agent

30. Articles of Incorporation
names and signature of the initial directors
names and signatures of the incorporators

31. Corporate Financing
A corporation may choose to issue several different kinds of stock. Along with each share of stock come certain rights

32. Types of Stock
Common stock is the basic form of corporation ownership.
Owners have voting rights.
It pays dividends, or profits, to the shareholders based on the corporation’s performance.

33. Types of Stock
Preferred stock is the second type of stock issued by a corporation.
Owners have no voting rights.
But do receive a fixed dividend.
Preferred stock dividends are paid before common stock dividends.

34. Draw a flow chart that describes the relationship between the following people.
Board of directors
Initial shareholders
Chairperson
Top corporate officers

35. ANSWER
Initial shareholders hire board of directors who elect the chairperson and top corporate officers.

36. Pre-Learning Question
What is a limited liability company?

37. Forming a Limited Liability Company
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.

38. Forming a Limited Liability Company
LLCs offer limited liability to its owners.
Like the partners in a partnership, the owners of an LLC escape double taxation.

39. Forming a Limited Liability Company
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.

40. Pre-Learning Question
How does the law deal with incorporation problems?

41. Incorporation Problems
The courts have developed two doctrines: de facto corporations and corporation by estoppel to deal with incorporation problems.

42. De Facto Corporation
Even when making a good faith attempt to incorporate, promoters sometimes inadvertently make an error in filing, or fail to complete the incorporation.

43. De Facto 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.

44. Corporation by Estoppel
Like other estoppel doctrines, corporation by estoppel stops people from denying the consequences of their own actions.

45. Corporation by Estoppel
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.

46. Corporation by Estoppel
When this happens, the court will not allow that party to then deny the existence of the corporation because doing so would be unfair.

47. Piercing the Corporate Veil
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.

48. Reviewing What You Learned What is a corporation? Who are its owners?
Section Assessment
Reviewing What You Learned
What is a corporation? Who are its owners?

49. Reviewing What You Learned Answer
Section Assessment
Reviewing What You Learned
Answer
An artificial person created by law owned by shareholders or stockholders.

50. Reviewing What You Learned
Section Assessment
Reviewing What You Learned
What are the two main types of corporations?

51. Reviewing What You Learned Answer
Section Assessment
Reviewing What You Learned
Answer
Public and private.

52. Reviewing What You Learned
Section Assessment
Reviewing What You Learned
What are the steps necessary to form a corporation?

53. Reviewing What You Learned Answer
Section Assessment
Reviewing What You Learned
Answer
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;

54. Reviewing What You Learned Answer
Section Assessment
Reviewing What You Learned
Answer
initial shareholders elect a board of directors; and directors elect a chairman and top officers to manage the corporation.

55. Reviewing What You Learned How are corporations financed?
Section Assessment
Reviewing What You Learned
How are corporations financed?

56. Reviewing What You Learned Answer
Section Assessment
Reviewing What You Learned
Answer
By selling shares of stock in the corporation.

57. Reviewing What You Learned
Section Assessment
Reviewing What You Learned
What is the difference between a corporation and a limited liability company?

58. Reviewing What You Learned Answer
Section Assessment
Reviewing What You Learned
Answer
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.

59. Critical Thinking Activity
Section 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?

60. Critical Thinking Activity Answer
Section 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.

61. Legal Skills in Action Forming a Corporation
Section 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.

62. Legal Skills in Action Forming a Corporation
Section 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.

63. Legal Skills in Action Forming a Corporation
Section Assessment
Legal Skills in Action
Forming a Corporation
Write a letter to Dirk outlining the steps he should take to incorporate his business.

64. Legal Skills in Action Answer
Section 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.

65. End of Section 28.1