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   Nature of a Corporation

A corporation is an artificial being created by operation of law. This artificial being, or entity, is entirely separate from its shareholders, directors, officers, and employees. This separation gives the corporation a life of its own and the responsibility and accountability to the law that are attributable to a natural person.

If all the shareholders, directors, officers, and employees of corporation (A) were to die simultaneously in a common accident, corporation (A) would continue to exist: stock ownership would pass to heirs of the deceased shareholders; these new shareholders would name new directors and hire new officers and employees.

   Background of Corporations

Although the imperial government of Rome suppressed private societies and associations of every kind, it permitted individuals to form collegia, that is, non-profit, membership clubs for such diverse purposes as education, fire control, and burial of members. In the late Middle Ages and early modern period (the twelfth through the sixteenth centuries) the Roman model was expanded in France and Germany to permit merchants to form trading societies and craft guilds for investment and larger business purposes.

In the late 1500s the English government began to grant monopolies to individuals, or groups of individuals, for trading and for revenue purposes, with the Crown receiving a share of the monopoly profits. Colonization of the New World was undertaken by such monopolies, which, when granted a charter for the colonization and development of specified territories, operated as governments under the general supervision of the kind.

During the colonization period corporate charters were granted to private individuals by special acts of the colonial legislatures.

Nevertheless, a corporation must be a good citizen. It may be punished for its crimes, sued for its torts, and held accountable for its contracts. At all times it must be operated for the benefit of its shareholders, who are its owners.

   Corporate Attributes: A Legal Person

For most legal purposes a corporation is a person. Like any citizen, it can sue and be sued, make contracts, own property, and perform other personal acts. Moreover, it can be charged with almost any crime except crimes the sole punishment for which is imprisonment . for most purposes, a corporation is entitled to the protections afforded citizens under the Bill of Rights except the right against self-incrimination. 

   Creation by Statute

A corporation is created under the provisions of applicable statues by contract with the state. The evidence of this contract is the corporation’s charter. Under modern corporation law most state statutes provide that, as a condition to the grant of charter, the state may, by regulation or statute, unilaterally modify the terms of charters already granted. {In the case of Dartmouth College v. Woodward, 17 U.S. 518 (1819), the Supreme Court held that, without such statutory Permission, a state could not modify or revoke a corporate charter without “impairing the obligation of contracts” as forbidden by Article I, Section 10, of the United States Constitution} 

   Limited Liability of Shareholders

Since a corporation is a legal entity separate from its shareholders, it, and not the shareholders, is liable for its debts. However, the courts will disregard the corporate entity, that is, will “pierce the corporate veil”, if the corporate name is used as a false front or “stalking horse” behind which the owners or operators perpetrate fraud upon creditors or others dealing with them. 

Thus the principal creates a corporation and uses a corporate name; however, the principal holds no corporate meetings, keeps few corporate books or records, and disregards the corporation that he/she has created. In addition, the principal fraudulently permits or causes others to believe that he/she is, in fact, responsible for the corporate business.

Although the courts will do so reluctantly, they may pierce the corporate veil and hold the principal liable as though the corporation did not exist. 

   PERPETUAL EXISTENCE

As previously indicated, a corporation has a life of its own, independent of its shareholders and managers. Modern corporations are usually granted perpetual existence as a routine charter provision, although corporate existence may also be for a stated or limited period of time. 

You should remember
  For most legal purposes a corporation is a person. 
  A corporation is created by statutes and is granted a charter, usually by the state. 
  A corporation is liable for its debts. 
  A corporation is usually granted perpetual existence.

   Formation of the Corporation

Although the promoter is not an agent of the corporation to be created, he/she occupies a fiduciary relationship (position of trust) in regard to the proposed corporation and its investors, shareholders, and creditors. Basically, this trust relation requires that the promoter make full disclosure of his/her anticipated personal gain, the nature of the business, its prospects, and the promoter’s plans with regard thereto.

In the course of forming the corporation, the promoter may incur costs, make contracts, and do other acts in furtherance of the corporation. Since the promoter is not an agent, the corporation is not automatically responsible or liable for these obligations and contracts; however, it may ratify, adopt, or accept them, provided that there is full and open disclosure by the promoter to the corporation. The promoter remains obligated with respect to such obligations or contracts unless released by the obligee or unless the corporation is substituted for him by a novation.

The persons wishing to form a corporation (the incorporators) make application to the state corporation commission for a charter by presenting to the commission a form of the charter they want to have granted. Although the charter is usually prepared by an attorney, this is not strictly necessary. A detailed discussion of the nature and content of the charter follows later in this chapter.

A requested charter is reviewed by the commission; and if provisions of the law are complied with, the charter along with a certificate of incorporation will be issued by the appropriate state official.

The certificate of incorporation is the state’s official authorization for the corporation to start doing business.

The incorporators, after receipt of the certificate of incorporation, call a meeting of the interim board of directors named in the charter to be held, at which time bylaws are adopted, officers are elected, and other necessary business is transacted. Once stock is issued and sold, the shareholder duly meet and name the regular board of directors.

A de jure corporation is one that has been formed in accordance with all of the requirements of law; a de facto corporation is one that has not been properly formed, even though the incorporators made a good-faith effort to do so. The defect in the formation of the de facto corporation is technical – there is some omission, for example, in the charter – but the certificate of incorporation is nonetheless granted. 

The status of the de factor corporation can be challenged only by the state; third parties must accept it as a valid, authentic corporate entity.

You should remember
A corporation is created through the grant of a charter. This charter, although prepared by the incorporators, is officially approved and certified by the state corporation commission. Even if the corporation is imperfectly created, it may function as a de factor corporation. 

   Types of Corporations

Generally, a public corporation is created for the direct function or government – town, city, or country.

Most corporations fall into the category of private corporations – corporations created for private purposes. In the context of commercial law, the word “corporation” generally connotes a private entity. Public utilities have some features of both public and private corporations.

There is an important group of corporations that might be considered “hybrids”, that is, they have features of both public and private corporations. These quasi-pubic corporations are public utilities – privately owned business created for public purposes. Although these monopolies, or partial monopolies, are strictly controlled both as to services and as to prices (rates), they are permitted a reasonable return on investment, established during the course of a regulatory rate case.

Business law primarily concerns corporations organized for profit. However, non-profit, charitable, or eleemosynary corporations are of great importance, even in the business world, not only because of the important tax benefits and concessions accruing to such corporations but also because of the importance of permitting these charitable groups to own property, form contracts, and otherwise engage in business without individual members having personal liability for business matters. Such corporations may be stock corporations, or membership corporations (owned by their members without issuing stock).

A corporation is said to be domestic in the jurisdiction of its incorporation, the jurisdiction of its “birth”. In respect to all other jurisdictions, it is a foreign corporation. 

Corporations formed in foreign countries are called alien corporations.

A close corporation is a stock corporation whose shares are held by a relatively few persons, frequently members of a family. Such a corporation may be operated like a partnership, sometimes with no board of directors, or with other informalities not permitted to general stock corporations for profit. 

To permit such loose organization, the laws of most states limit the number of stockholders and permit restrictions on stock transfer by agreement among the shareholders or by charter provision.

S Corporations are organized to minimize the effect of federal income taxes on small businesses, principally by doing away with corporate “double taxation”. This double taxation, as explained in Types of Business, is taxation applied first to the corporation’s income, and second to the individual shareholders’ income in the form of earnings and dividends.

The S corporation does not pay a corporate income tax on earnings; the entire income is taxed to the shareholders, whether distributed or not.

S corporations must meet an umber of requirements. The principal one is that they have 75 or fewer shareholders, all of whom own the same class of stock. Ordinarily, corporations, partnerships, or other non-natural persons cannot be S corporation shareholders.

A Limited Liability Company has no restrictions on the number of kind of owners (e.g., partnerships, corporations, and other LLC can be LLC “members”), the class of stock, and the owning of subsidiaries; unlike general or limited partnerships, the LLC permits investors to manage the business yet not be personally liable for the business debts. The LLC thus is a partnership corporation hybrid, with the corporate shield protecting against personal liability, but with LLC members like partners in that two of these three partnership characteristics must be present:

  The LLC is managed by all of the members rather than elected managers or directors. 
Legal analysis, though, must be tentative: LLC law is in its infancy. The legal principles often are uncertain both within a state and across state borders. For instance, some states tax LLCs as if they were corporations (a few states do the same for S corporations), and some states do not permit professionals to form LLCs

Professional corporations are created by lawyers, doctors, accountants, architects, engineers, and other professionals in order to gain corporate tax advantages for traditional partnership or proprietorship activities. These corporations, organized under state law enacted in conformity with internal revenue code requirements, are generally identified by abbreviations: P.A. (Professional Association), P.C. (Professional Corporation), or S.C. (Service Corporation).

Although it is a corporation for most purposes, the professional corporation cannot shield its shareholders and members from individual tort liability for professional negligence.

Most states leave the individual professional within the corporation free from personal liability for the professional negligence of another member of the organization, unless the individual was, in fact, supervising that negligent member or otherwise participating in the tortious acts.

Each partner is responsible for the torts and contracts of the other partners within the scope of the partnership venture. 

Courts have not decided whether this principle is applicable to the professionals comprising a professional corporation. 

You should remember
Most corporations are created under state law; federal corporations can be, and are, created for specific federal purposes. 
Business law is generally concerned with profit corporations; however, nonprofit corporations are also important, because of:
  Tax considerations and
  Protection of their members from personal liability in the course of corporate business. 
A corporation is domestic in the state of its creation; foreign, in all other states. 
Professional corporations are create strictly for tax sheltering purposes. They do not have the general attributes of corporations. 
Corporations are subject to a corporate income tax. In addition, the shareholders are also taxed on distributions or dividends received from the corporation. 
S corporations and limited liability companies are exceptions; they do not pay a separate tax.

   Nature and Content of the Charter

The charter (also sometimes called the articles of incorporation, or articles) is the grant of corporate existence, the birth certificate of the corporation. This formal document, executed by the state through its corporation commission, is the source of corporate authority. Also, the charter is a public document.

Although the charter may contain any number of provisions, drawn formally or informally, modern charters tend to cover only the minimum provisions required by law. the charter is more or less a “form” document; however, the required coverage may vary from state to state. 

The incorporators are the persons who make application for the charter. T heir only function is to lend their names and signatures to the incorporating documents. By do doing, they acquire no special legal liability. Generally, the only requirement is that an incorporator be old enough to make a contract, that is, at least 18 years of age. Usually, there must be at least three incorporators. Many states do not require that these incorporators be residents of the state.

a. The name indicate that the entity is a corporation by inclusion of one of the following words, or by one these abbreviated: Company, Corporation, Incorporated, Limited; and, 

b. The name is not the same as, or misleadingly similar to, the name of any other domestic corporation, or operating corporation. 

In addition, many jurisdictions limit, in corporate names, the use of certain words closely associated with particular types of businesses or industries. For example, a manufacturing concern would not be allowed to include in its name a word such as “insured”, “finance”, or “fiduciary”.

The corporate address is the principal address of the corporation. The registered agent is a person or another corporation authorized to receive service of process and other legal and official papers. The requirement that a legal agent be named is of more than passing importance; the state is concerned that persons having business with a corporation, or interested in bringing suit against it, be able to discover a way of finding the corporation in order to hold it accountable for its actions.

Modern statutes permit a corporation to be organized for any legal purpose, and the charter may contain merely a broad statement of purpose. Usually, however, the charter states the specific purpose for which the corporation is being formed – for example, “to operate a restaurant business” – followed by very broad grants of power and usually a statement of purpose to do any legal act. 
Charters that fail to contain the “for any legal purpose” provision are nevertheless granted such broad powers as a matter of right, unless the charter contains restrictions or limitations on certain powers or rights.

Requirements concerning charter statements about capital vary from state to state. Generally, state incorporation statutes require information about the number of shares of stock of all classes that the corporation has authority to issue, the number of shares of stock of each class, the par value, and other maters concerning both equity and capital.

State statutory requirements about organization are quite minimal: usually the only requirements are a provision as to the number of directors (e.g., “not more than seven”) and the names and addresses of those who will serve as an interim board until the shareholders meet and name the first board. 

The charter may include other provisions, not inconsistent with law, defining, limiting, or regulating the powers of the corporation, its directors and shareholders, or classes of shareholders. Included may be restrictions on the transferability of stock (creating a close or S corporation), requirements of a concurrence of shareholder greater than a majority for certain actions, provisions for minority shareholder representation by cumulative voting, provisions relating to preemptive rights (see Corporation Financial Structure), and other provisions that may be included in the bylaws.

Generally, the charter should be lean, sparse document and the bylaws should be more detailed. The reason is that charter amendments must be approved by the state as well as the shareholders. Bylaws are generally adopted by the directors and may or may not be approved by the shareholders. 

Bylaws contain specific provisions for the organization and operation of the corporation, including such matters as stocks, bonds, and dividends; the election, structure, and operation of the board of directors; quorum and voting requirements for shareholders’ meetings; notices, amendments, and places for meetings. 

The bylaws may not contain a provision contrary to, or inconsistent with, the charter.