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Chapter 27 Corporations.docx

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Brock University

Chapter 27 Corporations 1. Characteristics of Corporations and the Difference between a Corporation and a Partnership a) A partnership is an entity that will terminate when a partner or all partners die – A corporation is s separate legal entity that exist on its own and a corporation does not die but has infinite existence b) The shareholders are not partners and can not be sue – there is no personal liability for the shareholders – which is opposite to a partnership c) The shareholders do not owe „Fiduciary Duties‟ to each other – but partners do d) A partners income must be recorder as personal income tax return – but with a corporation all the income accumulates at the corporate level and taxed at the corporate level – corporations save almost half the taxes – only if income is kept at the corporate level – if income is sent to shareholders as dividends then it must be recorded as personal income 2. The Separate Corporate Personality and Limited Liability  when the corporation is incorporated – this means a separate legal entity has been created – like an „artificial person‟ has been created  the government sends you forms that informs that you have incorporated a corporation that have the date of incorporation – the corporations “birth date”  a corporation is a different person so they are taxed different Limited Liability  general partners are personally liable – this is the exacts opposite to a corporation  in a corporation the owners ( the shareholders ) are not liable for the corporation at all  a corporation is a separate legal entity that “shields” the shareholders from personal liability  this means that you may not sue the shareholders of the corporation but can only sue the actual corporation Rule of Salomon  Salomon was a shoe manufacturer who owned pretty much all of the shares of the corporation ( 20,002/20.007) which was a “one man show” corporation – the corporation had borrowed money from a creditor and due to bad times in the economy the corporation had became insolvent and was unable to pay the creditor back any of the loan – the creditor argued that because Salomon pretty much owned all of the shares of the corporation that he should be able to sue Salomon himself and not just the corporation – BUT – the House of the Lords held that because a corporation was a separate legal entity (its own person) then it should be held for its own debs and not Salomon – Salomon was not held liable  Salomon was protected by the „Corporate Vei‟  The Salomon case brought the Salomon Rule – that held that even for a „one man show‟ corporation the one shareholder is still protected by the „Corporate Veil‟ -SH‟s liability is limited only the amount invested -SH‟s personal assets are not at risk 3. Personal Liability and the “Corporate Veil”  The Salomon case showed how the corporation acts as a „shield‟ for it‟s shareholders from personal liability – even in cases of a „one man show‟  This protection in legal terms is known as the ‘Corporate Veil’  Corporate Veil – the corporate veil is like a „curtain‟ that the shareholders hide behind to be protected from personal liability – personal liability can not reach the shareholders because of the corporate veil shield Cases in which courts will lift the „Corporate Veil‟ – Very Rare!  After the Salomon cases in very rare cases the courts have been known to „life the corporate veil‟ in order for single shareholder to be sued – RARE!  Corporate Veil is only lifted when……. 1) If there is a single shareholder that own all shares and controls the corporation 2) The single person is using the corporation to perpetrate fraud
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