Section 28.1

1. Section 28.1

2. What You’ll Learn • How to define corporation (p. 606) • How to distinguish among various types of corporations (p. 607) • How to create a corporation (p. 608)

3. What You’ll Learn • How to finance a corporation (p. 614) • How to distinguish between a corporation and a limited liability company (p. 616)

4. Why It’s Important Understanding the nature of a corporation will help you decide when to form one rather than the other associations that are available.

5. Legal Terms • corporation (p. 606) • shareholder (p. 606) • share (p. 606) • promoter (p. 608) • articles of incorporation (p. 610)

6. Legal Terms • certificate of incorporation (p. 612) • common stock (p. 614) • dividends (p. 614) • preferred stock (p. 614) • limited liability company (p. 616)

7. Section Outline The Nature of a Corporation Advantages of a Corporation Disadvantages of a Corporation Types of Corporations

8. Section Outline Forming a Corporation The Incorporation Process Corporate Financing Forming a Limited Liability Company

9. Section Outline Incorporation Problems De Facto Corporation Corporation by Estoppel Piercing the Corporate Veil

10. Pre-Learning Question What is a corporation?

11. The Nature of a Corporation A corporation is a body formed and authorized by law to act as a single person, distinct from its members or owners.

12. The Nature of a Corporation • About 90 percent of all business in the United States is done by corporations. • Not all corporations are large businesses. Approximately 40 percent of all corporations employ fewer than five employees.

13. The Nature of a Corporation • An individual who owns shares of a corporation is called a shareholder or a stockholder. • A share is a single unit of ownership of a corporation.

14. The Nature of a Corporation • Each shareholder has one vote for each share of stock that he or she owns. • Shareholders cast their votes to elect a board of directors whose duty is to direct the corporation’s business.

15. Advantages of a Corporation • Selling shares enables a corporation to tap into a large source of capital. • Shareholder’s liability is limited to the amount of money he or she paid for shares in the corporation.

16. Advantages of a Corporation • It is a legal entity and has the power to make contracts, buy and sell goods, and sue and be sued. • It has continuity of existence, regardless of the lifespans of founders, shareholders, and directors.

17. Disadvantages of a Corporation • A corporation’s income may be taxed more than once. First as the company profits; then shareholders’ dividends become part of their taxable income. • Large corporations face extensive government regulation.

18. Disadvantages of a Corporation • Original founders can lose not only control but also actual ownership. • Because of the prominence of some corporations, business decisions may be subject to close scrutiny.

19. 28.1 Types of Corporations

20. Pre-Learning Question How is a corporation formed?

21. Forming a Corporation Each state has its own version of corporate law. States may use: • The Model Business Corporation Act (MBCA) • The Revised Model Business Corporation Act (RMBCA) • Their own statutes

22. The Incorporation Process • A promoter carries out the incorporation process by taking the initial steps to organize and finance a business. • Promoters choose a corporate name.

23. The Incorporation Process • Promoters are responsible for drawing up and filing the articles of incorporation, an application for incorporation of a business that describes a corporation’s organization, powers, and authority.

24. The Incorporation Process • A filing fee completes the application.

25. The Incorporation Process • After the application is approved by the secretary of state, the corporation receives a certificate of incorporation, its official authorization to do business in the state (also called a charter).

26. The Incorporation Process • Initial shareholders elect a board of directors who replace the original incorporators. • Directors elect a chairman and top corporate officers to manage the company.

27. Articles of Incorporation The articles of incorporation usually include the following information: • Name of the corporation, including the words company, incorporated, or corporation or appropriate abbreviations.

28. Articles of Incorporation • Proposed duration of the corporation. • Purpose(s) of the corporation. • Number, classes, and value of corporate shares.

29. Articles of Incorporation • Shareholders’ rights in relation to shares, classes of shares, and special shares. • Address of the original registered or statutory agent.

30. Articles of Incorporation • Names and signature of the initial directors. • Names and signatures of the incorporators.

31. Corporate Financing A corporation may choose to issue several different kinds of stock. Along with each share of stock come certain rights.

32. Types of Stock Common stock is the basic form of corporation ownership. • Owners have voting rights. • It pays dividends, or profits, to the shareholders based on the corporation’s performance.

33. Types of Stock Preferred stock is the second type of stock issued by a corporation. • Owners have no voting rights. • But do receive a fixed dividend. • Preferred stock dividends are paid before common stock dividends.

34. Draw a flow chart that describes the relationship between the following people. • Board of directors • Initial shareholders • Chairperson • Top corporate officers

35. ANSWER Initial shareholders hire board of directors who elect the chairperson and top corporate officers.

36. Pre-Learning Question What is a limited liability company?

37. Forming a Limited Liability Company A limited liability company (LLC) is a new type of business enterprise that has been adopted by all states. It is a combination of a partnership and a corporation.

38. Forming a Limited Liability Company • LLCs offer limited liability to its owners. • Like the partners in a partnership, the owners of an LLC escape double taxation.

39. Forming a Limited Liability Company LLCs are statutory entities—they can be formed only if owners follow the legal steps required—and must also have a statutory agent for service of process.

40. Pre-Learning Question How does the law deal with incorporation problems?

41. Incorporation Problems The courts have developed two doctrines—de facto corporations and corporation by estoppel—to deal with incorporation problems.

42. De Facto Corporation Even when making a good faith attempt to incorporate, promoters sometimes inadvertently make an error in filing, or fail to complete the incorporation.

43. De Facto Corporation The laws says that, although the corporation does not exist in law (de jure), it does exist in fact (de facto). This type of corporation is called a de facto corporation.

44. Corporation by Estoppel Like other estoppel doctrines, corporation by estoppel stops people from denying the consequences of their own actions.

45. Corporation by Estoppel Corporation by estoppel usually occurs when some party has been willing to treat a person or a group of people as a corporation, generally reaping some benefit from the relationship.

46. Corporation by Estoppel When this happens, the court will not allow that party to then deny the existence of the corporation because doing so would be unfair.

47. Piercing the Corporate Veil Sometimes there are extreme circumstances in which the courts will deny shareholders the benefits of limited liability and hold them personally liable. This is known as piercing the corporate veil.

48. Section 28.1Assessment Reviewing What You Learned • What is a corporation? Who are its owners?

49. Section 28.1Assessment Reviewing What You Learned Answer An artificial person created by law owned by shareholders or stockholders.

50. Section 28.1Assessment Reviewing What You Learned • What are the two main types of corporations?