Chapter 17 Corporation Law o They are free to carry out the general
management functions of the corporation in
Definition of a Corporation: accordance with the corporations objects, but
their power is limited by any restriction imposed
An entity that has an existence at law that is separate from those on them in the articles of incorporation or the
who form it, those who possess shares in it from time to time, and charter.
those responsible for direction and control. o They are obliged to report to shareholders on a
- A Manager or an Officer is appointed by the directors to
fill a particular office such as the president, secretary, etc.
1. Who owns the equity in the business? Shareholders. - Bondholders are the creditors who get interest payments
2. Who is entitled to make management decisions? regardless of profitability. They have no right to vote or
Managers. approve changes. They are paid over the shareholders and
3. Who is responsible or liable for the activities of the
can exert a lot of influence.
business? Board of Directors.
Major Differences between A Partnership and A Corporation:
Nature of a Corporation:
- A corporation is a separate legal entity (body) in the sense o In a partnership, every partner is an agent of the
that it has an existence at law, but no material existence.
- It has attributes of a natural person but it is artificially o In a corporation, shareholders do not participate
created and never dies. in management and they do not possess the
- In a modern sense, corporations are rightly described as right to bind the corporation in contact.
having the powers of a natural person at least in terms of o While the directors have the authority to make
their ability to contract.
all decisions subject to limitations contained in
- A natural person has limited liability, in that liability only the Articles of Incorporation or any unanimous
extends to the limits of his or her individual property. shareholders agreement.
- Its rights and duties are delineated by the law and it can be o At times, shareholders may be called upon to
terminated by the state. approve major decisions.
- Limited Liability
Important Characteristics of a Corporation: o In a partnership, unlimited liability means any
partner may bind the other partners in contract
a. A corporation is separate and distinct from its by his or her actions.
shareholders and it acts not through them but through its
authorized agents. o In a corporation, shareholders losses are limited
to their investment and their personal estate
b. A properly authorized agent may bind the corporation in wont be touched by creditors.
contract with third parties. o But no dividend payments when the company
c. The shareholders of a corporation possess limited liability has no profit.
for the debts of the corporation, and the creditors may
look only to the assets of the corporation to satisfy their - Transfer of Interests
o A partnership is a contractual relationship that is
claims. (Note that a partnership has unlimited liability.) personal in nature and based upon trust and
- A Shareholder is a person who holds a share interest in a o The retirement of partner means his/her interest
corporation; a part owner of a corporation.
o Do not participate in the management except is not freely transferrable, thus remaining
partners must acquire the retiring partners
when major changes in the corporation are share in the partnership or wind up the business.
proposed. They must approve the proposal It is the same with the death of a partner.
before it becomes effective. o In a corporation, the identity of a shareholder
o They may freely dispose of their interests in the
corporation. It is not a personal nature. isnt important. No further contribution may be
demanded from the shareholder after payment
o The shareholders liability is limited to the is received.
amount that they paid or agreed to pay for the o If a shareholder transfers the share to another, it
shares that they purchased from the has no real effect upon the corporation except
o Lifting the Corporate Veil means revealing the for a change in the identity of the person holding
the share. Thus, shares are freely transferrable in
shareholders who are protected and hidden. It a public company
would take to lift the corporate veil if the
shareholders must control the corporation the Other Advantages of a Corporation over a Partnership:
control must be exercised to commit fraud, a
tort, or breach of duty the misconduct must - Term of Operation of the Business
cause the injury complained of. o In a partnership, its existence is limited by the
o Dividend - Taxed in the hands of shareholders as life of its members. A partnership has to be
income. dissolved when a member dies or if he/she
- A Board of Director are individuals elected by the retires. It may be reformed by the remaining
shareholders to manage its affairs. parties if the agreement provides.o A corporation has an unlimited term of to ensure that the powers of the corporation are not
operation. It never dies even if a shareholder restricted with respect to the contemplated transaction.
does. - ***The Doctrine of Constructive Notice is the presumption
o A corporation is free to accumulate or acquire at law that everyone has knowledge of the content of all
large amounts of capital either through issuance statutes.
of shares, bonds, or debentures. - ***The general effect of this clause is to protect third
- Operation of the Business Entity parties from any unusual limitations on the powers of
o A partnership is governed by an agreement that directors on the corporation itself.
establishes rights and duties. In the abs