Corporations: Formation and Financing

Chapter 38Corporations: Formation and FinancingCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.38-2Characteristics of CorporationsLegal entityRights as person and citizenCreature of stateLimited liability of shareholdersUnrestricted transferability of corporate sharesPerpetual existenceCentralized managementCorporate taxation38-3Corporate PowersCorporations have both “express” and “implied” powersExpress Powers: Perpetual existence; right to litigate; right to make contracts; right to borrow/loan money; right to make charitable donations; ability to establish rules for managing corporationImplied Powers: Whatever actions necessary (within the law) to execute express powers38-4Classifications of CorporationsPublic/PrivateFor-Profit/Non-ProfitDomestic/Foreign/AlienPublicly Held/Closely HeldS-CorporationProfessional Corporation38-5Public Versus Private CorporationPublic Corporation: Corporation created by government to administer law, with specific government duties to fulfillExample: Federal Deposit Insurance Corporation (FDIC)Private Corporation: Corporation create for private purposes38-6For-Profit Versus Non-Profit Corporations For-Profit Corporation: Objective is to operate for profit; shareholders seeking to make profit purchase stock these corporations issueNon-Profit Corporation: May earn profits, but they do not distribute these profits to shareholders (non-profit corporation does not issue stock, nor does it have shareholders); instead, corporation reinvests profits in business38-7Domestic, Foreign, and Alien CorporationsDomestic Corporation: Doing business within state of incorporationForeign Corporation: Doing business in states other than state of incorporationAlien Corporation: Doing business country other than country of incorporation38-8Publicly Held Versus Closely Held CorporationPublicly Held Corporation: Stock available to publicClosely Held Corporation (a.k.a. “Close”, “Family”, “Privately Held” Corporation):Generally does not offer stock to public38-9“Subchapter S” CorporationNamed after provision of Internal Revenue Service (IRS) code that provides for itParticular type of closely held corporation (no more than one hundred shareholders)Combines advantages of limited liability and single taxation38-10Formation of CorporationPromoters organize corporate formationSubscribers offer to purchase stock in corporation in formation processState selected for incorporation38-11Questions to Consider in Selecting a State For IncorporationHow 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?38-12Legal Process of IncorporationSelection of corporate nameDrafting and filing articles of incorporationFirst organizational meeting held38-13Remedies For Defective Incorporation:“De jure” corporation: Lawful corporation that has met the substantial elements of incorporation process“De facto” corporation: Corporation that has not met the requirements of state incorporation statute, but courts recognize it as a corporation for most purposes to avoid unfairness to third parties who reasonably believed it was properly incorporatedCorporation by estoppel: Corporation prevented by court from denying its corporate statusPiercing corporate veil: Shareholders personally liable when they have used corporation to engage in illegal/wrongful acts38-14Situations When Courts Likely To Pierce Corporate VeilCorporation lacked adequate capital when initially formedCorporation did not follow statutory mandates regarding corporate businessShareholders’ personal interests and corporate interests are commingled (corporation has no separate identity)Shareholders attempt to commit fraud through corporation38-15Debt Securities Versus Equity SecuritiesDebt Securities: Bonds (representing loans to corporation from another party)Equity Securities: Stock38-16Types of Debt Securities (Bonds):Unsecured Bond (“Debenture”): No assets support corporation’s obligation to repay face value of bondSecured Bond (“Mortgage Bond”): Specific property supports corporation’s obligation to repay; creditor can seize secured interest if bond not repaidIncome Bond: Corporation pays interest on bond in proportion to earningsConvertible Bond: Allows shareholders to exchange bond for shares of company stock“Callable” Bond: Allows corporation to call in and repay bond at specific times38-17Equity Securities: Preferred Stock Versus Common StockPreferred Stock: Stockholder enjoys preferences regarding assets and dividendsCommon Stock: Stockholder owns portion of corporation, but no preferences regarding assets and dividends