After reading this chapter, you will be able to answer the following questions: What are the characteristics of corporations? What are the powers granted to corporations by the states? How are corporations classified? How are corporations formed? What are some potential problems with the formation of corporations? How do corporations get funding?
Chapter 38 Corporations: Formation and Financing Copyright © 2015 McGrawHill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGrawHill Education Characteristics of Corporations Legal entity Rights as person and citizen Unrestricted transferability of corporate shares Perpetual existence Centralized management Corporate taxation Creature of state Limited liability of shareholders 382 Corporate Powers Corporations have both “express” and “implied” powers Express Powers: Perpetual existence; right to litigate; right to make contracts; right to borrow/loan money; right to make charitable donations; ability to establish rules for managing corporation Implied Powers: Whatever actions necessary (within the law) to execute express powers 383 Classifications of Corporations Public/Private ForProfit/NonProfit Domestic/Foreign/Alien Publicly Held/Closely Held SCorporation Professional Corporation 384 Public Versus Private Corporation Public Corporation: Corporation created by government to administer law, with specific government duties to fulfill Example: Federal Deposit Insurance Corporation (FDIC) Private Corporation: Corporation create for private purposes 385 ForProfit Versus NonProfit Corporations ForProfit Corporation: Objective is to operate for profit; shareholders seeking to make profit purchase stock these corporations issue NonProfit Corporation: May earn profits, but they do not distribute these profits to shareholders (nonprofit corporation does not issue stock, nor does it have shareholders); instead, corporation reinvests profits in business 386 Domestic, Foreign, and Alien Corporations Domestic Corporation: Doing business within state of incorporation Foreign Corporation: Doing business in states other than state of incorporation Alien Corporation: Doing business country other than country of incorporation 387 Publicly Held Versus Closely Held Corporation Publicly Held Corporation: Stock available to public Closely Held Corporation (a.k.a. “Close”, “Family”, “Privately Held” Corporation): Generally does not offer stock to public 388 “Subchapter S” Corporation Named after provision of Internal Revenue Service (IRS) code that provides for it Particular type of closely held corporation (no more than one hundred shareholders) Combines advantages of limited liability and single taxation 389 Formation of Corporation Promoters organize corporate formation Subscribers offer to purchase stock in corporation in formation process State selected for incorporation 3810 Questions to Consider in Selecting a State For Incorporation How much flexibility does the state grant to corporate management? What rights do state statutes give to shareholders? What restrictions does the state place on the distribution of dividends? Does the state offer any kind of protection against takeovers? 3811 Legal Process of Incorporation Selection of corporate name Drafting and filing articles of incorporation First organizational meeting held 3812 Remedies For Defective Incorporation: “De jure” corporation: Lawful corporation that has met the substantial elements of incorporation process “De facto” corporation: Corporation that has not met the requirements of state incorporation statute, but courts recognize it as a corporation for most purposes to avoid unfairness to third parties who reasonably believed it was properly incorporated Corporation by estoppel: Corporation prevented by court from denying its corporate status Piercing corporate veil: Shareholders personally liable when they have used corporation to engage in illegal/wrongful acts 3813 Situations When Courts Likely To Pierce Corporate Veil Corporation lacked adequate capital when initially formed Corporation did not follow statutory mandates regarding corporate business Shareholders’ personal interests and corporate interests are commingled (corporation has no separate identity) Shareholders attempt to commit fraud through corporation 3814 Debt Securities Versus Equity Securities Debt Securities: Bonds (representing loans to corporation from another party) Equity Securities: Stock 3815 Types of Debt Securities (Bonds): Unsecured Bond (“Debenture”): No assets support corporation’s obligation to repay face value of bond Secured Bond (“Mortgage Bond”): Specific property supports corporation’s obligation to repay; creditor can seize secured interest if bond not repaid Income Bond: Corporation pays interest on bond in proportion to earnings Convertible Bond: Allows shareholders to exchange bond for shares of company stock “Callable” Bond: Allows corporation to call in and repay bond at specific times 3816 Equity Securities: Preferred Stock Versus Common Stock Preferred Stock: Stockholder enjoys preferences regarding assets and dividends Common Stock: Stockholder owns portion of corporation, but no preferences regarding assets and dividends 3817 ... corporation reinvests profits in business 386 Domestic, Foreign, and Alien Corporations Domestic Corporation: Doing business within state of incorporation Foreign Corporation: Doing business in states other than state ... Combines advantages of limited liability and single taxation 389 Formation of Corporation Promoters organize corporate formation Subscribers offer to purchase stock in corporation in formation process State selected for incorporation... Corporation lacked adequate capital when initially formed Corporation did not follow statutory mandates regarding corporate business Shareholders’ personal interests and corporate interests are commingled (corporation has no separate identity)