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CH 38 – Corporations: Formation and Financing (keyterms)

Characteristics of Corporations
-Legal Entity
-Rights as a person and a citizen
-Creature of the state
-Limited Liability
-Free transfer ability of corporate shares
-Perpetual existence
-Centralized management
-Corporate taxation
– Liability for officers and employees
Legal Entity
Under U.S. law, corporations are legal entities; in other words, they exist separately from their shareholders. Thus, corporations can sue or be sued by others.
Articles of Incorporation
The document a corporation files with the state explaining its organization, may include a restriction on the duration of the corporation.
Corporate Taxation
Corporations must pay federal and state taxes on their income, but they have control over that income. They can distribute it to shareholders in the form of DIVIDENDS, although they do not receive tax deductions for doing so.
Retained Earnings
Corporations can also keep profits, or retained earnings, to reinvest. This can raise their stock prices, benefiting shareholders when they sell their stocks.
Legal Principles (Corporate powers)
The only authority possessed by corporations is the powers granted to them in their articles of incorporation and through state incorporation statutes.
Express Powers
-power to have perpetual existence
-power to sue and be sued in the corporations name
-power to acquire property; power to make contracts and borrow money
-power to lend money
-power to make charitable donations
-power to establish rules for managing the corporation
Implied Powers
-Power to take whatever actions are necessary to execute powers
-Power given in the statement of corporate purpose in the articles of incorporation
Public Corporation
corporation created by the government to help administer law.
Private Corporation
For private purposes. private corporations do not have government duties.
For-Profit Corporations
Objective is to operate for profit. Shareholders seeking to make a profit purchase the stock these corporations issue.
Nonprofit Corporations
May earn profits, but they do not distribute them to shareholders. They do no have shareholders, their objective is not to earn profit, and they do not issue stock.
Domestic Corporation
in a particular state in which it is incorporated.
Foreign Corporation
In states in which it conducts business but is not incorporated.
Alien Corporation
A business incorporated in another country
Publicly Held Corporations
Is available to the public. Thus, if you wanted to invest in the corporation, you could purchase stock in a publicly help corporation.
Closely Held Corporations
(also called close, family, or privately held corporations) generally do not offer stock to the general public. Shareholders are usually family and friends, who often are active in or manage the business and maintain restrictions on the transfer of shares to prevent outsiders from gaining control.
S Corporations
(named after the subchapter of the Internal Revenue Code that provides for them), a particular type of closely help corporation that enjoys the tax status of partnerships, thus, S corporation shareholders report their income from the corporation only once, as personal income.
Formation of the Corporation
The creation of a corporation has two steps: general organizational activities and legal activities.
Promoters
Begin the corporate creation and organization process by arranging for necessary capital, financing, and licenses.
Subscription Agreements
They raise capital for the infant corporation by making subscription agreements with subscribers (investors) who agree to purchase stock in the new corporation.
Factors when selecting a state for incorporation
-How much flexibility does the state grant to corporate management?
-What rights do state statutes give to shareholders?
-What restrictions does the state place on the distribution of dividends?
-Does the state offer any kind of protection against takeovers?
Incorporator
An individual who applies to the state for incorporation on behalf of a corporation.
Articles of Incorporation must include
1) name of the corporation
2)address of the registered office
3) name of the registered agent (the specific person who receives legal documents n behalf of the corporation)
4) names and addresses of the incorporators
Certificate of Incorporation
Document certifying that the corporation is incorporated in the state and authorized to conduct business.
Bylaws
Rules and regulations that govern the corporation’s internal management.
De Jure Corporation
(literally, “a corporation from law,” or a lawful corporation) has met the substantial elements of the incorporation process.
De Facto Corporation
(literally, “a corporation from the fact,” or a corporation in fact)
De Facto corporations must meet the requirments
-The promoters, subscribers, and incorporator made a good-faith attempt to comply with the incorporation statute.
-The organization has already conducted business as a corporation
Corporation by estopel
thus, they estop (bar) the corporation from denying its corporate status.
Pierce the corporate veil
Impose personal liability on shareholders.
Legal Principle (pierce the corp. veil)
The limited liability of corporate shareholders may not exist when shareholders have acted in an illegal or wrongful manner.
Debt Securities (or bonds)
represent loans to a corporation from another party. Bonds are usually long-term loans on which the corporation promised to pay interest.
Equity Securities
While bond owners have loaned money to a corporation, stock owners actually own part of the corporation, in the form of shares of stock called equity securities.
Preferred Stock (or preferred shares)
enjoy preferences in this distribution of assets and dividends.
Common Stock (or common shares)
owners of common stock own a portion of a corporation but do not enjoy any preferences. A common stock owner is entitled to corporate dividends in proportions to the number of shares he owns and has the right to vote in corporate elections.

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