Chapter 7 – Introduction to Corporations

• Corporation – A legal entity created by a state to carry out business.
• Model Business Corporation Act
  • MBCA:  act on which many individual state statutes governing corporations are based
• Powers Typically Granted to a Corporation By State Law
  • To sue and be sued and to defend in the corporation’s own name
  • To make and amend bylaws for regulating the business of the corporation
  • To purchase, acquire, own, hold, improve, sell, lease, or mortgage real or personal property
  • To enter into contracts, incur liabilities, borrow money, issue bonds, and lend money
  • To elect directors and appoint officers, employees, and agents
• Powers Typically Granted to a Corporation By State Law
  • To establish benefit plans for directors, officers, agents, and employees
  • To make donations, both for the public welfare and those that further the corporation’s business, such as political donations
  • To be a member or manager of a partnership or other entity and to purchase and hold shares or other interests in other entities
• Powers Typically Granted to a Corporation By State Law
  • To transact any lawful business
  • To exist perpetually
• Types of Corporations
  • Domestic corporations
  • Foreign corporations
  • Federal or state corporations
  • Public corporations
  • Privately held corporations
  • Nonprofit corporations
  • Benefit Corporations
  • Close corporations
  • Professional corporations
  • S corporations
  • C corporations
  • Parent and subsidiary corporations
• Domestic Corporation
  • A corporation operating in the state of its incorporation
• Foreign Corporation
  • A corporation operating in a state other than its state of incorporation
• Alien Corporation
  • A corporation formed outside the United States
• Federal or State Corporation
  • An entity formed under the authority of a federal or state statute for some public good
  • Best known example:  U.S. Postal Service
• Public Corporation
  • A corporation whose shares are sold to the public at large
• Privately Held Corporations
  • A corporation whose shares are owned by a small group, usually family or friends
• Nonprofit Corporations
  • A corporation formed not to make a profit but for public benefit, religious purposes, or the mutual benefit of its members
• Benefit Corporations
  • A corporation formed under a state statute that combines profit-making with social good 
• Close Corporations
  • A corporation whose shares are held by a small group of shareholders and that is allowed to act informally
• Professional Corporation
  • A corporation organized by professionals, such as doctors
• S Corporation
  • A corporation that avoids double taxation by passing through all of its income to its 100 or fewer shareholders
• C Corporation
  • A corporation that is not an S corporation and that is subject to double taxation
• Parent and Subsidiary Corporations
  • Parent corporation:  A corporation that creates another corporation (the subsidiary)
  • Subsidiary corporation:  A corporation created by another (the parent)
• Advantages of a Corporation
  • Limited liability protection for shareholders, directors, and officers
  • Corporate deductions
  • Continuity of existence
  • Transferability of share ownership
• Disadvantages of  a Corporation
  • Double taxation
  • Formalities of organization and operation
  • Centralized management
• Double Taxation
  • Concept in corporate law in which money earned by a corporation is taxed; when remainder is distributed to shareholders, they are also taxed
• Section 1244 Stock
  • Stock upon the sale of which (at a loss) receives favorable tax treatment and is taxed as an ordinary loss
• Qualified Small Business Stock
  • Corporations can avoid or minimize the effect of double taxation through the provisions of § 1202 of the Internal Revenue Code (26 U.S.C. § 1202), enacted to allow individuals who hold qualified small business stock for more than five years to exclude one-half of any gain they realize on the sale of such stock. The remaining one-half of the gain is taxed as a capital gain.
  • A qualified small business must have total gross assets of less than $50 million at the time the stock is issued, and at least 80 percent of its assets must be used in certain trades and businesses .
• Key Features of Corporations
  • Corporations are persons and exist separate and apart from their owner-shareholders
  • Offer limited liability for their shareholders, officers, and directors, because the corporation itself is liable for its own debts and obligations
  • Can exist perpetually
  • Ownership is easily transferred
• Key Features of Corporations
  • Corporations are subject to double taxation: the income of a corporation is taxed, and when profits are distributed to shareholders, they also pay tax.
  • Corporations are somewhat expensive to form and maintain.
  • Management of corporations is centralized in a board of directors; the owner-shareholders do not manage the typical large business corporation.