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Reference Guide

Corporations - Reference Guides

2 Pages
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Fall 2015

Department
BA - Business Administration
Course Code
BA 2283
Professor
All
Chapter
Permachart

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Formation of Corporation
STATE SELECTION
Place where business is conducted
Delaware General Corporation Law is most flexible, leading
most major companies to incorporate there
STATUTORY REQUIREMENTS
Single filing with state official; some local filing required
Variations with fees, taxes, stock options, etc.
Nomenclature usually follows Revised Model Business
Corporations Act requirements
File certificate of incorporation
ARTICLES OF INCORPORATION
Corporate name • Must contain reference to corporate nature or identity
• May not resemble a name already in use
• May not imply business not lawfully allowed
Duration • Perpetual
Purpose • Engage in lawful business
Securities • Those authorized to issue
• Minimum initial capitalization requirements
Registered agent • Name and location of office
Board of directors • Initial names and addresses
Incorporator(s) Name and address
Corporations
What is a Corporation?
Corporate Financing
COMMON SHARES
Number of shares authorized to issue set out in articles of incorporation
Provides entitlement to vote and net assets when distributed or dissolved
Par value applies to subjective value associated with shares of stock
Allowance of no par value shares
No minimum price requirements
Watered shares are issued for less than par, and recipient is required
to pay difference between par value and shareholder’s price
Capital accounts
Stated capital consists of aggregate of par values of issued shares
Capital surplus includes excess received for issuance of shares
over stated capital
Stated capital is usually kept for creditors’ benefit
Capital surplus may be distributed to shareholders or used to repurchase
outstanding shares
Stated capital determines legality of dividends and distributions
Shares issued for consideration over par value allocated to capital surplus
Shares may not be issued in exchange for promissory notes or promises
for future services
Treasury shares are shares that were lawfully issued but were repurchased
by the corporation and held in treasury
PREFERRED SHARES
Shares have preference over common shares with regards to dividends
and/or liquidation, with or without voting rights
Entitlement to payment before common shares
Rights defined in articles of incorporation
May be redeemable and convertible into common shares
TYPES OF PREFERR ED SHARES
Cumulative • Unpaid dividends carry over to next year and
are paid before common shares
Noncumulative • Unpaid dividends do not accumulate in future
Non-participating • No further participation after preferred payment
Partially cumulative • Carries over when there are earnings
Participating • Participates with common shares in
added distribution
BONDS AND DEBENTURES
Long-term, negotiable, unconditional written obligations to pay a
required amount in the future
Bonds are secured, where debentures are not
Pay legally required interest
Usually have a fixed maturity rate
Bonds offer right to foreclosure on secured property
Created under indentures which appoint trustee to handle security
holders’ rights
Third party loans provide leverage, but do not allow tax or
planning benefits
Promissory notes are short-term negotiable instruments payable to specific
persons representing unconditional promise to pay
Debt/equity ratio compares corporate equity to long term debt
EQUITY
Capital contributed by investors in exchange for stock shares
Internally generated funds from the corporation’s business
GOING CONCERN SHARES
Issued shares affect current shareholders’ interests
Preemptive rights doctrine provides shareholders with the right to
subscribe and pay for their relative part of securities newly issued
by the corporation
Bought at the price set by board of directors
DIVIDENDS & DISTRIBUTIONS
Dividends are payments to shareholders out of current or past
earnings by corporation
Distribution refers to allocation of capital, not earnings
In publicly held corporations, policy usually permits regular and periodic
distributions regardless of corporate income level
Closely held corporations usually follow income tax policy
Legal requirements
Equity insolvency test requires corporation to meet debt obligations after
distributions are made
Balance sheet test requires assets to exceed liabilities plus preferred
amounts due to any class upon dissolution once distributions are made
Earned surplus is generated from profits
Dividends usually paid out of earned surplus, but may be allowed
distribution from capital surplus
Violation of rules may lead to statutory liability imposed on directors
who are responsible
Shareholders are liable for restoration of illegally received dividends or
distribution where knowledge of legal status exists
OUTSTANDING SHARES
Redemption and repurchase of outstanding shares by corporation has
similar economic result of dividends or distribution
Redeemed shares are cancelled, and reduce state capital
Repurchased shares do not affect state capital, as they remain as
treasury shares
SHARE DIVIDENDS & SHARE SPLITS
No dissipation of corporate assets
Share dividends do not affect share’s par value, and stated capital is
increased by number of shares
Share splits divide initial par value of shares among new shares
SECURITIES ACTS
Securities refer to any contract, transaction, or plan through which a person
invests money in common venture with the expectation of profits
Protect public investor from fraudulent promotions or sales of securities
Require full disclosure of facts surrounding securities
Restrictions on security transfers under exemption
Secondary distribution involves public disbursement of unregistered
shares by control person, who is not the issuer
State blue sky laws do not always require full disclosure, but require
distributions to be fair, just and equitable
LOANS
Capital loaned by shareholders may be substituted for equity capital
Third party loans are usually referred to as debt financing and are
distinguished from shareholders’ loans
Promoters Piercing the Corporate Veil
DUTIES
Arrange for required assets and personnel for proper functioning
of business
Secure required capital for financing venture
Complete formation of corporation
CONTRACTS
Promoter may enter into contract in the name of corporation yet to be formed
Promoter’s liability for performance may vary, i.e., personal liability for
contract, liability until contract is adopted, or no liability at all
Contract may be entered into in the corporate name
A person who acts as principal’s agent is personally liable for contract
A person acting as principal’s agent requires the principal’s authority
Corporation de jure complies with all required legal incorporation
requirements; promoter is absolved of liability
Corporation de facto is partially but incompletely formed; not
immune from the state
De facto requires valid statute under which incorporation may occur,
good faith attempt to comply with statute, and actual use of
corporate privilege
Corporation by estoppel prevents third party from denying corporate
existence to avoid contract
Corporate liability
Not automatically liable for promoter’s contracts
Acceptance of preincorporation contract is considered adoption
Subsequent investors may review contract
Corporate existence does not mean adoption of contract
FIDUCIARY DUTIES
Corporation may obtain rights or benefits obtained by promoter
Promoter’s gains must be shared with co-promoters
Protection of subsequent shareholders and investors
Creditors may be protected against unfair transactions by promoters
Traditional tests for piercing the corporate veil (PCV) are meant to prevent
fraud and achieve equity
Court refuses to recognize separate existence of corporation despite
proper formation
General rule states that corporation is independent of shareholders
Strict application to closely held corporations
SHAREHOLDERS LIABILITY
Shareholders should not be liable for corporate debts
Where third person dealt voluntarily with corporation, risk is assumed
and shareholders should not be liable
PCV may be used in nonconsensual transactions, i.e., torts
Failure to follow corporate formalities may be a factor
Insufficient capital may apply in tort cases
Transactions between corporations which affect third parties
may be considered in PCV case
PARENT CORPORATION’S LIABILITY
Parent liability for subsidiary’s debts may arise in a number of ways
Affect on third parties of parent-subsidiary transactions
Parent may conspire with subsidiary
Confusion of parent-subsidiary affairs may lead to liability
TAXATION CASES
Recognition of separate corporate existence for tax purposes
Estoppel against taxpayer looking to ignore corporate status
BANKRUPTCY
Creditors’ rights where corporation cannot meet debts
Shareholders may be held individually liable
Transactions may be cancelled or altered
Deep Rock doctrine is treated as a bankruptcy statute, where
shareholders’ claims are subordinated to those of the creditors
FINAL INCORPORATION
Establish bylaws
Prepare minutes from various
organizational meetings
Obtain, prepare, and issue
blank share certificates
Finalize shareholders’
agreement
Open corporate bank account
Obtain taxpayer identification numbers
Oversee preparation and execution
of required forms and documents
Make required S corporation
tax election
Establish powers and duties for
officers and directors
A corporation is an artificial entity independent of owners or investors
It conducts business as if it were a real person, with the same
responsibilities and liabilities of an individual running a business
ARTIFICIAL ENTITY
Power to conduct business completely in its own name
Formed by government agency’s grant of authority
Generally recognized by creating state, federal government,
and involved private citizens
Does not exist in any real sense
CONCESSION
Grant or concession of the state based on state’s role in formation
CONTRACT
Contract between the state and corporation, corporation and
shareholders, or among shareholders
Nexus of contracts where shareholders provide capital for return
APPLICABLE STATUTES
Revised Model Business Corporations Act
Delaware General Corporation Law
Securities Exchange Act
Securities Act
EFFICIENT CAPITAL MARKET HYPOTHESIS
Many buyers and sellers looking to make a profit
Rapid price movement based on available information regarding securities
Individual stock price movements are random
Predicting stock price direction is impossible
CORPORATE POWERS
Sue and be sued
Have a corporate seal
Have dealings in real and
personal property
Have financial dealings
with third parties
Conduct business in and
out of state
Control powers, duties, and benefits
of appointed officers or agents
Purchase shares or interests in itself
or other entities
Make contributions for public welfare
Act as partner or manager of
another business
Make and change bylaws
Definition
Corporation acts outside scope
of powers or stated purposes
Control
Use of multiple and general
purpose clauses
Extension of statutory corporate
powers
Amendment of articles of
incorporation
Statutes dealing with subject
Issues
Political lobbying or donations to
influence legislation
Unusual employee fringe benefits
Forming partnerships
Large charitable donations without
apparent self-benefit
Guaranteeing third-party
indebtedness with little benefit
Making loans to officers or
directors
Statute Affected parties bring equitable suit
Corporate proceeding against former officers or directors
Proceeding by state attorney general
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Description
Corporations are explained with clarity and precision in this informative Guide! This guide helps to remove some of the confusion that popularly exists concerning the purpose, the extent, and the legal effect of different types of corporate structures. The role of corporate officers and directors is highlighted, as are the distinctions between publicly held and closely held companies
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