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Basic Business Forms

Basic Business Forms. Corporations Class 6. Forming a Business. The first question: What form should the business take? Sole proprietorship Partnership Corporation Limited liability company. Choosing the Form. Consider: Formation issues Filing/formation requirements?

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Basic Business Forms

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  1. Basic Business Forms Corporations Class 6

  2. Forming a Business • The first question: • What form should the business take? • Sole proprietorship • Partnership • Corporation • Limited liability company

  3. Choosing the Form • Consider: • Formation issues • Filing/formation requirements? • Liability protection • Management structure • Taxation issues • Exit strategies/transferability of interests

  4. Corporations • A corporation is a creature of statute, an artificial “person.” • The corporation is a “person” for the purpose of conducting a business and can • Own property • Enter into contracts • Sue and be sued • Ownership of corporation is shared by shareholders (or stockholders).

  5. Rights of the Corporation • Because a corporation is a legal “person,” it has constitutional rights. • Equal protection; • Access to the courts, can sue and be sued; • Right to due process; • Freedom from unreasonable search and seizure and double jeopardy. • Freedom of speech.

  6. Torts and Criminal Acts • A corporation is liable for the torts committed by its agents or officers within the course and scope of their employment under the doctrine of respondeat superior. • Corporation can be liable for criminal acts, but only fined. Responsible officers may go to prison.

  7. Advantages • The personal liability of shareholders (the owners) for corporate obligations is normally limited to the individual’s investment. • The business has a perpetual existence

  8. Disadvantages • Complexity of formation. • Double taxation.

  9. Corporate Powers • A corporation may act and enter into contracts as any natural person, except as limited by: • U.S. Constitution. • State constitutions. • State statutes. • Its own articles of incorporation. • Its own corporate bylaws. • Resolutions by its own board.

  10. Corporate Powers • The express powers of a corporation are found in the corporation’s articles of incorporation, the laws of the state of incorporation, and in the state and federal corporations. • Corporate by-laws may also grant or limit a corporation’s express powers.

  11. Corporate Powers • Corporation has implied powers to perform all acts reasonably necessary to accomplish its corporate purposes: • Borrow and lend money. • Extend credit. • Make charitable contributions. • A corporate officer can bind corporation in contract in matters connected with the ordinary business affairs of the corporation.

  12. Ultra Vires Doctrine • Corporate acts that are beyond the express or implied powers of the corporation are considered to be “ultra vires” and unlawful. • Shareholders can bring action for injunction. • Corporation can recover damages from its officers and directors. • Attorney general of state may bring action to dissolve corporation for ultra vires acts.

  13. Classification of Corporations • Domestic corporation does business in its state of its incorporation. • Foreign corporation from another state doing business in Washington. • Alien Corporation: formed in another country doing business in United States.

  14. Kinds of Corporations • Public and Private. • Nonprofit. • Close Corporations. • Shares held by few shareholders. • More informal management – similar to a partnership. • Restriction on transfer of shares.

  15. Kinds of Corporations • “S Corporations” – IRS classification that enables corporation to avoid “double taxation” – only dividends to the shareholders, not corporate profits, are taxed. IRS requirements: • Corporation is domestic, with fewer than 75 shareholders, only one class of stock, no shareholder can be a non-resident alien. • Professional Corporations.

  16. Basics of Formation • The corporation is created by Articles of Incorporation • These must include • Name of the corporation • Purpose • List of incorporators and directors • Name and address of registered agent • Share structure • The Articles are filed with the Secretary of State

  17. First Organizational Meeting • After the corporation is “chartered” (created) it and can do business. • First, shareholders should have the first organizational meeting to: approve the bylaws, elect directors, hire officers and adopt pre-incorporation contracts and activities.

  18. Corporate Status • De Jure: substantial statutory requirements are met; cannot be attacked by state or 3rd parties. • De Facto: statutory requirements not met, but promoters made good faith effort to comply with corporate law; corporate status can only be attacked by state. • By Estoppel: if it acts like a corporation, it cannot avoid liability by claiming that no corporation exists.

  19. Piercing the Corporate Veil • Where the corporate form is used solely to shield individuals from liability • Generally, owner co-mingles personal and corporate assets • Sometimes no stock is issued or • Formation or regulatory rules are ignored

  20. Corporate Financing Bonds v. Stocks Debt Ownership/equity Fixed ROI Dividends (variable) No votes Vote for Management Optional Required Priority over stock Paid last • Stocks: Common vs. Preferred

  21. Merger and Consolidation • Corporations can grow and expand by: • Mergers. • Consolidation. • Purchase of another corporation’s assets. • Purchases of a controlling interest in another corporation.

  22. Termination • Termination of a corporation, like a partnership, consists of two phases: • Dissolution (voluntary or involuntary); and • Liquidation.

  23. Liquidation • Voluntary Dissolution. • Board liquidates and acts as trustees of assets. • Court will appoint a receiver if: • Board refuses; or • Creditors want a receiver. • Involuntary Dissolution. • Court appoints receiver.

  24. Corporate Hierarchy

  25. Corporate Structure • The owners of the corporation are the shareholders. • Create the capital of the corporation • Have no management authority • Elect board of directors • Must approve changes in articles of incorporation and other major changes

  26. Corporate Structure • The Board of Directors • Elected by the shareholders • Have management responsibility • Appoint, supervise, remove officers of the corporation • The Directors have a fiduciary relationship with shareholders www.theyrule.net

  27. Corporate Structure • Officers and Executives • Elected or appointed by the board of directors • Responsible for carrying out board’s policies and directives • Responsible for management of business • Have a fiduciary duty to act in the best interests of the shareholders and the corporation

  28. Duties of Directors and Officers • Directors and officers are fiduciaries of the corporation. They owe ethical and legal duties to the corporation and shareholders: • Duty of Care : They are expected to act in good faith and the best interests of the corporation. • Duty of Loyalty: Subordination of personal interests to the welfare of the corporation.

  29. Conflicts of Interest • Full disclosure of any potential conflicts of interest and abstain from voting on any transaction that may benefit the director or officer personally.

  30. Liability of Board/Officers • Directors and officers may be liable for: • Their own negligent acts. • Crimes and torts committed individually as well as those committed by employees under their supervision. • Shareholder derivative suits where shareholders sue directors on behalf of corporation.

  31. Regulations and Requirements • Corporations are required to: • Hold annual meetings of shareholders. • Give reasonable notice of meetings. • Provide reasonable access to books and records to shareholders.

  32. Business Ethics • What is Business Ethics? • Legal compliance is the moral minimum. • Laws regulating business. • “Gray” areas in the law.

  33. Securities Regulation • Two major securities laws • Securities Act of 1933 • Securities Exchange Act of 1934

  34. Securities Act • The Act requires corporations to file a registration statement with the SEC and provide a prospectus to investors before offering or selling the security to the public. • A security is a transaction in which the buyer • Invests money in a common enterprise and • Expects to earn a profit predominantly from the efforts of others.

  35. Securities Exchange Act • Requires corporations to file certain documents regarding the financial health and the control of the corporation.

  36. Insider Trading • “Definition of insider trading: Stealing too fast.” Calvin Trillist • Occurs when someone with reliable secret information uses that information to benefit from stock trades. • Is a crime, punishable by fine and imprisonment.

  37. Sarbanes-Oxley Act • Enacted after the Enron accounting scandal to require additional protections for investors.

  38. Additional Regulations • Sherman (Antitrust) Act • Prohibits price fixing and illegal monopolies • Clayton Act • Prohibits anticompetitive mergers • Robinson-Patman Act • Prohibits price discrimination aimed at putting small competitors out of business

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