KY Corporations flashcards

An S corporation is taxed like a partnership; profits and losses flow directly through to the owners.

Stock can be held by no more than 100 persons, generally shareholders must be individuals, there can be only one class of stock.

Corporations are entitled to due process of law and equal protection of the law. A corporation may raise the attorney-client privelege, but cannot invoke the privilege against self-incrimination. Generally, constitutional or statutory provisions, unless referring to "natural" persons, apply to corporations.

A corporation is not a citizen for purposes of the Privileges and Immunities CLause of the Constitution. therefore, state-imposed restrictions on a foreign corporation's activities are valid if they are a reasonable exercise of the state's police power. A foreign corporations is one conducting business in a particular state but not incorporated under that state's laws.

Any state in which corporation is incorporated and the state that is the corporation's principle place of business.

* Corporate Nerve Center (location of executive offices) or
* center of Corporate Operations (location of major business activity

A corporation may be a resident of the state where it is incorporated, where it is doing business, and perhaps where it is merely qualified to do business.

A corporation's domicile is the state of its incorporation.

Incorporators (persons who undertake to form a corporation) must file "articles of incorporation" with the state and pay the fees directed by the state.

An incorporator is simply a person who signs the articles of incorporation. Under the RMBCA, only one incorporator is necessary, but there may be more than one. Incorporator may be natural persons or artificial entitties, such as a corporation.

1. Name of corporation, which must include the word "corporation", "incorporated; Limited" or the like, and may not be similar to the name of another business entity qualified to do business in the state, unless the other business consents
2. The number of shares the corporation is authorized to issue.
3. The street address of the corporation's initial registered office and the name of the corporation's initial registered agent for service of process (office must be in state of incorporation and the agent must be a resident of the state).

4. The name and address of each incorporator.

An Ultra Vires Act is an act that is beyond the scope of a corporation's stated purpose, if such purpose was stated in the Article of Incorporation.

The modern trend is that Ultra Vires Acts are enforceable, and the ultra vires nature of an act may be raised in only 3 circumstances:
1. A shareholder may sue the corporation to enjoin a proposed ultra Vires act;
2. The corporation may sue an officer or director for damages arigin from the commission of an ultra vires act authorized b the officer or director; and
3. The state may bring an action against the corporation to have it dissolved for committing an ultra vires act.


IF an officer or director is found liable for committing an ultra vires act, the officer or director may be held personally liable for damages. Ultra vires acts will be enjoined only if it is equitable to do so (ie, if third party knew it was beyond the corporation's stated purpose.)

A corporation exists one the state files the articles of incorporation. A state will file the articles of incorporation after the articles are submitted to the state along with the required filing fee. If the state finds that the articles comply with the requirements of law and all required fees have been paid, it will file the articles.

No. At one time, charitable donations were thought to be outisde the scope of any business purpose, but most states and the RMBCA now allow corporations to make charitable donations.

Formerly, some courts held that corporations did not have the power to make loans to employees, officers, or directors. Today, most states and the RMBCA allow such loans.

1) Business purpose-While business purpose statements were required to be in the articles of incorporation, the RMBCA presumes that a coproation is formed for any lawful business unless the articles provide a more restricted business purpose.
2) Intitial directors- the articles may provide the names and addresses of the persons who will serve as the corporation's initial directors until new directors are elected.

After the articles are filed, the initial directors will hold an organizational meeting to adopt bylaws, elect officers, and transact other business. If the articles do not names the initial directors, the incorporators call the organizational meeting.

Bylaws may contain any provision for managing the corporation that is not inconsistent with law or the articles of incorporation. Bylaws are adopted by the directors, but can be modified or repealed by either the directors or the shareholders. However, the aricles of incorproation may reserved this power exlusively to the shareholders. Even without such a reservation, the shareholders may provide that a particular bylaw adopted or amended by them may not be repealed or amended by the directors.

Articles of incorporation usually may be amended by a vote of both the directors and the shareholders.

The de facto corporation doctrine extends a de jure corporation's veil of protection from personal liability to an entity where the steps to become a corporation are not properly followed or defective.

To form a de facto corporation:
1. There must be a statute available for valid incorporation (ie law exists for formation of a de jure corporation)
2. There must be a colorable (good faith) attempt to comply with said statute.
3. and the corporation must act like a corporation by conducting business in its corproate name and by exercising corp. privileges.
However, under the RMBCA, the de facto corporation doctrine is available to prevent the liability of persons not knowing that no corporation was formed. When an organization is considered to be a de facto corporation, it is treated as if it were de jure, except in a direct attck by the state.

i) When corporated formalities are ignored
ii) when the corproation is inadequately capitalized at the outset and
iii) to prevent fraud.

1. When a corproation is merely an "alter ego", agent or instrumentality for a sole proprietor, or other corp; if the shareholders treat the assets of the corporation as their own; if shareholders pay their private debt with corp. funds; failure to keep separate corp. books; or failure to (hold meetings, issuing stock, or conducting business by resolution. Sloppy administration is NOT enough; must be so bad the equity requires piercing the corporate veil. Dominating of stock ownerhship by an affiliated corporation is not enough to pierce the corporate veilm, unless the shareholder dominates finances, policies and practice of both corporations so that both are a business conduit for the principal shareholder.

It is generally accepted that shareholders will be personally liable for their corporation's obligations if at incorporation they fail to provide adequate capitalization. The shareholders must "put at risk of the business unencumbered capital reasonably adequate for its prospective liabilities. Under capitalization cannot be proved merely by showing that the corporation is now insolvent. However, if insolvency occurs soon after incorporation, it may be a primary indicator of under capitalization.

A corporation must have adequate capital to "pay debts when they become due." The scope of the contemplated operations of the corporation, and the potential liability foreseeable from the operations, are factors to consider.

A parent corporation's inadequate capitalization of a subsidiary corporation may constitute constructive frud on all persons who deal with that subsidiary. One additional test should be applied in the parent-subsidiary situation (in addition to "able to pay debts as the come due"): whether the subsidiary may reasonably expect to achieve independent financial stability from its operaton.

A corporate entity will be disregarded to prevent fraud or to prevent an individual shareholder from using the corporate entity to avoid existing personal obligations.
However, a person adopting a corporate form of business to avoid personal liability is not itself a reason to pierce the corporate veil.

-- Corporate veil will be pierced whenever the avoidance of personal liability through the formation of a corporation operates as a fraud on creditors or other outsiders.

When the corporate entity is ignored and the shield of limited liability is pierced, the persons composing the corporate entity may be held personally liable. Normally, only the persons who were active in the management or operation of the business will be held personally liable. Passive investors acting in good faith will not be held liable for corporate obligations.
(Joint and several liability)

In cases where a corporation is insolvent and some of the shareholders have claims as "creditors" in the corporation's bankruptcy, the shareholders' claims may be subordinated to those of other creditors if equity so requires (due to fraud). This is "piercing the corporate veil" by refusing to recognize the shareholers as creditors of a separate legal entity (a corporation).

A debt security represents a creditor-debtor relationship w/ the corporation, whereby the corporation has borrowed funds from an "outside creditor" and promises to repay the creditor (eg bonds). A debt security holder has no ownership interest in the corporation.

Secured (Mortgage bond)
Unsecured (debenture)

An equity security is an instrument representign an investment in the corporation whereby its holder become a part owner of the business. Equity securities are shares of the corporation and the investor is called a shareholder.

The first step in forming a corporation is the procurement of commitments for capital and other instrumentalities that will be used by the corporation after formation. This is one by promoters. Generally, promoters enter into contract w/ third parties who are interested in becoming shareholder of the corporation once it is formed (stock subscriptions). Promoters might also enter into contract w/ others for good or services to be provided to the corporation once it is formed. Usually, the promoters will go on to serve as incorporators, but this is not necessary.

Absent an agreement to the contrary, promoters are considered joint venturers, and they occupy a fiduciary relationship to each other. As fiduciaries, promoters are prohibited from secretly pursuing personal gain at the expense of their fellow promoters or the corporation to be formed.

Upon incorporation, the promoters owe fiduciary duties to the corporation and to those persons investing in it. The promoters' duty in this respect is one of fair disclosure and good faith. Promoters are not permitted to retain a secret profit resulting from transactions w/ or on behalf of the corporation.

Promoter's liability will arise under: 1. Breach of fiduciary duty (sale to corporation will bring this, unless the promoter has disclosed all of the material facts of the transcation) 2. fraud or misrepresentation or 3. obtaining unpaid stock.

The RMBCA provides that if a person acts on behalf of a corporation, knowing that there has been no incorporation, the person is jointly and severally liable for any obligations incurred. Thus, as a general rule, if a promoter enters into an agreemetn w/ a 3rd party to benefit a planned, but as of yet unformed corporation, the promoter is personally liable on the agreement.

A promoter's liability on pre-incorporation contract continues after formation absent a novation. IF an agreement between the parties expressly indicates that the promoter is not to be bound, there is no contract, and such an arrangement may be construed as a revocable offer to the proposed corporation.

A corporation may become bound on a promoter contract by adopting them. The effect of an adoption is to make the corporation a party to the contract at the time it adopts; the promoter is not relieved of his liability. Adoption may be express or implied.

At common law, shareholders have no right to directly control the day-to-day management of their corporation. INstead, the right to manage is vested in the board of directors, who usually delegate their day-to-day management duties to officers. This is still the general rule under the RMBCA. However, the RMBCA also allows a departure from the general rule: Shaerholders may enter into agreements concerning management of the corporation, includign an agreement to vest the powers that the board would ordinarily have in one or more shareholders.

Shareholders have the right to elect directors. The shareholders may also remove a director, with or without cause, at any time.

2. Shareholders may modify bylaws.

3. Shareholders must approve fundamental corporate changes.