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I. CORP CHARACTERISTICS
1. Creation
2. Liability
3. Management
4. Transferablility
5. Continuity of Life
- 1. Creation: Distinct from owner. Created only by filing.
- 2. Limited Liability for owners (shareholders). Only the corp itself is liable for corp liabilities. Owners (shareholders) risk only their investment they make to purchase ownership interest (shares).
- 3. Mgt: Centralized in board of directors, not among owners (shareholders). Bd of Dir delegates day-to-day affairs to officers.
- 4. Transferability: Freely transerable.
- 5. Continuity of Life: perpetual and not affected by changes in ownership (sale of shares).
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I. CORP TAXATION
1. C-Corp
2. S-Corp
1. C-Corp: taxed as entity dinstinct from owners. Lower than personal tax rate. Double taxation. When corp makes distributions, it is taxable income to shareholders.
- 2. S-Corp: Taxed like p-ship (no double taxation). Profits and Losses flow through to owners (shareholders). REQUIREMENTS TO BE S-CORP:
- (1) < = 100 S/H
- (2) S/H must be individuals
- (3) only one class stock
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I. COMPARISON TO OTHER BUSINESS ENTITIES
1. Sole Proprietorship
2. Partnership
3. LP
4. LLC
1. SP: One person owns all assets. No distinct business entity. Owner personally liable all obligations. Cannot continue beyond life of owner. Ownership freely transferable. Profit/Loss flow through to owner.
2. P'Ship: P'ship: >=2 owners, no formalities (just intent to carry on). No distinct business entity. Partners personally liable. Management spread among partners. Ownership interests NOT freely transferable (must have consent ALL partners). Does NOT continue beyond lives of owners. Profit/Loss flow through.
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I. COMPARISON TO OTHER BUSINESS ENTITIES
1. Sole Proprietorship
2. Partnership
3. LP
4. LLC
3. LP: Patnership providing limited liability for LPs. Formed only by compliance with statute. At least one GP w/full personal liability and most management rights.
4. LLC: Limited liability of corp + flow through tax of p'ship. Formed only by filing docs with SOS. Flexible business form. Choose b/t member or manager-managed, free transferability unless restricted by articles.
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II. CONSTITUTIONAL CHARACTERISTICS
1. Person
2. Citizen
3. Resident
4. Domicile
1. Person: A corp is a "person" entitled to DP, EP, and attorney-client privilege, BUT NOT 5th A against Self-Incrim.
- 2. Citizen:
- P&I Cluase: NOT a citizen.
- Fed Diversity J: Corp is a citizen of any state of incorporation AND the state of it's Principal Place of Business (HQ).
3. Resident: A corp is a resident of its state of incorporation, where it does business AND where it is QUALIFIED to do business.
4. Domicile: A corp is a domiciliary of ANY state in which it is incorporated.
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III. FORMATION
A. Pursuant to Statute
B. Terminology
C. De Jure Corporation
D. Corporatness w/Defective Formation
E. Disregard Corp Entity (Pierce Veil)
- A. Created by complying with state statute. Usually RMBCA.
- B. A corp created in accordance w/laws = de jure corp.
- If all formalities not followed = defacto corp.
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III. FORMATION
A. Pursuant to Statute
B. Terminology
C. De Jure Corporation
D. Corporatness w/Defective Formation
E. Disregard Corp Entity (Pierce Veil)
- DE JURE CORP:
- Must comply w/all requirements.
- (1) File AOI w/SOS.
- (a) AOI must contain name copr, # shares authoirzed, name/addy RA, name/addy each incorporator.
- (2) Business Purpose: All things necessary/convenient to effect its purpose. Any lawful purpose. Can restrict in AOI.
- (3) Ultra Vires Acts: If restrictive business purpose, no undertaking of unrelated business purpose allowed. Activities beyond scope of stated business purpose = ultra vires. Under RMBCA, ultra vires acts generally are enforceable (contrary to CL).
- Ultra Vires nature of any Conduct Raised ONLY:
- (1) S/H sue to enjoin proposed ultra vires conduct
- (2) corp sue officer for damages for approving UV conduct
- (3) state may bring action to dissolve corp for UV conduct.
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III. FORMATION
A. Pursuant to Statute
B. Terminology
C. De Jure Corporation
D. Corporatness w/Defective Formation
E. Disregard Corp Entity (Pierce Veil)
- DE JURE:
- - corp existence begins on filing. Conclusive proof of existence.
- - After AOI filed, organizational meeting to elect directors, appoint officers, adopt bylaws. Bylaws may not be inconsistent with AOI.
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III. FORMATION
A. Pursuant to Statute
B. Terminology
C. De Jure Corporation
D. Corporatness w/Defective Formation
E. Disregard Corp Entity (Pierce Veil)
- DE FACTO CORP: (Not personally liable)
- All rights and powers of a de jure corp but remains subject to attack by state. For DE FACTO, must have been:
- (1) a statute under which the entitiy could've validly incorporated,
- (2) colorable compliance with statute and GF attempt to comply, and
- (3) conduct of business in corp name and exercise of corp privilges.
- LIMITATION:
- RMBCA provides any person purporting to act on behlaf of copr knowing it doesn't exist is liable for all obligations in so acting.
- CORP BY ESTOPPEL:
- 3P who have dealt with entity as if it were a corp are estopped from denying its existence.
If no De Facto, only active business members personally liable (J&S).
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III. FORMATION
A. Pursuant to Statute
B. Terminology
C. De Jure Corporation
D. Corporatness w/Defective Formation
E. Disregard Corp Entity (Pierce Veil)
- PIERCING THE VEIL:
- Disregarding a corporate entity to hold individuals personally liable for corporate obligations.
- 1. Elements Justifying
- 2. Who is Liable
- 3. Types of Liability
- 4. Who May Pierce
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E. Disregard Corp Entity (Pierce Veil)
1. Elements Justifying
2. Who is Liable
3. Types of Liability
4. Who May Pierce
- 3 Situations When Piercing Occurs:(1) Alter Ego
- (2) Inadequate Capitalization at Time Formed
- (3) Avoidance of Existing Obligations, Fraud, Evasion
ALTER EGO: Where corp ignores formalities such that it may be considered the "alter ego" of the S/H. Treat corp assets as own AND some injustice results.
INADEQUATE CAPITAL: Not enough money to cover prospective liabilities at time of formation (didn't collect the money from shares sold).
FRAUD: Corp Veil may be pierced to prevent fraud or an individual S/H from using the corp to avoid existing personal obligations.
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E. Disregard Corp Entity (Pierce Veil)
1. Elements Justifying
2. Who is Liable
3. Types of Liability
4. Who May Pierce
- WHO LIABLE: Only S/H active in operation of business.
- J&S liability.
TYPES: Easily in tort cases but not so much in k cases.
WHO: Creditors may be allowed to pierce. Almost never at request of S/H.
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III. CAPITAL STOCK STRUCTURE
A. Debt Securities
B. Equity Securities (Shares)
1. Terminology
2. Classification
3. Stock Subscription
4. Consideration
- DEBT SEC: Arise where corp has borrowed $ from outside investors and promises to repay them. Holders do NOT have ownership interest.
- May be secured (bond) or unsecured (debenture)
- EQUITY (SHARES): Give holders ownership interest.
- Authoirzed Shares: Described in AOI.
- Issued and Outstanding: shares sold and outstanding.
- Authoirzed but Unissued: shares reacquired by corp via repurchase or redemption.
CLASSIFICATION: Common Shares: 1 type of share. Each owner equal ownership right. OR may be dividided into classes or series within a class.
CLASSES AND SERIES: Must be described in AOI. AOI Must: (i) prescribe the # of shares of each class, (ii) prescribe a distinguishing designation for each class, (iii) either describe the rights, preferences, and limitations or provide it'll be determined by BOD prior to issuance.
STOCK SUBSCRIPTION: Promises from subscribers to buy stock in the corp.
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