Type
Solution Manual
Book Title
Business Law with UCC Applications 14th Edition
ISBN 13
978-0077733735

978-0077733735 Chapter 26 Lecture Notes

April 10, 2019
Chapter 26 - The Corporate Entity
Chapter 26
The Corporate Entity
I. Key Terms
Alien corporation (p. 565) Joint undertaking (p. 635)
Alter ego (p. 641) Joint venture (p. 635)
Articles of incorporation (p. 636) Limited liability (p. 627)
Articles of organization (p. 638) Limited liability company
Associative corporativism (p. 633) (LLC) (p. 634)
Bylaws (p. 638) Managers (p. 635)
Cash dividend (p. 644) Members (p. 635)
Certificate of authority (p. 634) Novation (p. 636)
Certificate of incorporation (p. 637) Operating agreement (p. 638)
Close corporation (p. 634) Originalism (p. 630)
Common stock (p. 644) Par value (p. 644)
Corporate entity (p. 626) Ierce the corporate veil (p. 641)
Corporate person (p. 626) Pragmatism (p. 631)
Corporate shell (p. 642) Preferred stock (p. 644)
Corporation (p. 626) Private corporation (p. 633)
Corporation by estoppel (p. 639) Promoters (p. 635)
Corporatiism (p. 633) Public corporation (p. 634)
De facto corporation (p. 639) Quasi-public corporation (p. 634)
De jure corporation (p. 639) Regulations (p. 638)
Dividends (p. 634) S corporation (p. 634)
Dodd Frank Wall Street Reform and Share (p. 627)
Consumer Protection Act (p. 632) Shareholders (p. 634)
Domestic corporation (p. 634) Statutory agent (p. 637)
Dummy corporation (p. 642) Stock certificate (p. 628)
Foreign corporation (p. 634) Stock dividend (p. 644)
Franchise (p. 635) Textualism (p. 630)
Incorporators (p. 635) Three-step test (p. 642)
Instrumentality test (p. 641)
II. Learning Objectives
1. Describe some strategies for avoiding a new 21st century economic crisis.
2. Explain what is meant by the term corporation.
3. List the four methods of protecting a corporation.
4. Describe the differences among a private, a public, and a quasi-public corporation.
5. Distinguish between a close and an S corporation.
6. List the typical elements within the articles of incorporation.
7. Distinguish between the articles of organization and the operating agreement of a limited
liability company.
8. Distinguish between a de jure and a de facto corporation.
9. Identify the objective of piercing the corporate veil.
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Chapter 26 - The Corporate Entity
10. Distinguish between common and preferred stock.
III. Major Concepts
26-1 The Economic Crisis and the Corporate Entity
The corporate entity lies at the heart of the American economy and, as such, can
orchestrate change on its own. To see why this is so, we need to examine the
characteristics and the power of the corporate entity. A corporation is a legal entity
created under the authority of a state or federal statute that gives certain individuals the
capacity to operate an enterprise. As such, corporations are products of capitalism. The
capitalistic economic system has operated in a way that has ensured that corporations are
protected in a variety of ways. However, the basis of that protection lies within four
fundamental legal principles that are designed to protect the corporate structure. These
four principles are corporate limited liability, free transfer of ownership, central
management, and corporate personhood itself.
26-2 Types of Corporate Entities
Corporations can be classified in many ways, including private, public, and quasi-public
corporations; domestic and foreign corporations; and close and S corporations. The
limited liability company offers the protection of limited liability but allows tax liability
to flow through the LLC and to its owners.
26-3 Formation of the Corporate Entity
A corporation can be incorporated in any state that has a general incorporation statute.
The people who actually start the corporation are the promoters. Promoters are liable on
preformation contracts until those contracts are adopted by the corporation. The articles
of incorporation are drawn up by the corporation’s incorporators. After reviewing the
articles of incorporation, the secretary of state will issue a corporate charter, and the
corporation becomes a legally incorporated entity. The members of a limited liability
company must also follow precise formation procedures.
26-4 Corporate Identity
A de jure corporation is a legally formed corporation. Two doctrines, de facto
corporation and corporation by estoppel, have been developed to deal with the problem
of defective incorporation. A de facto corporation exists if there has been a good faith
attempt to comply with an existing incorporation statute and an exercise of corporate
power. The doctrine of corporation by estoppel prevents later denial of corporate exis-
tence by parties willing to deal with an entity as if it were a corporation. Under the
doctrine of piercing the corporate veil, courts can refuse to recognize a legally formed
corporation to prevent injustice and to impose liability on the wrongdoers.
26-5 Financing the Corporate Entity
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distribution without the prior written consent of McGraw-Hill Education.
Chapter 26 - The Corporate Entity
Corporate financing begins when the incorporators give money to set up the business.
Subsequent financing takes many forms. The issuing and selling of shares of stock to
raise capital is called equity financing. The two most popular classes of stock are
common stock and preferred stock. Stock can also be par value or no par value stock.
Dividends can be issued as cash or as stock.
IV. Outline
I. The Economic Crisis and the Corporate Entity (26-1)
A. Crisis Management and the Corporate Entity
1. Orlov promotes two radical strategies, a ban on new gas-powered vehicles and a
radical alteration in the nature of the corporation, both of which are ultimately are too
idealistic and impractical for adoption.
2. Roubini and Mihm propose the subdivision and reorganization of financial
institutions into smaller, independent units and making it illegal for large financial
institutions to invest in any venture from which they cannot extricate themselves with
the capital reserves they have on hand.
3. Roubini and Mihm also propose a plan under which bonuses paid to top executives be
placed in escrow accounts for several years to test the value of programs and projects
instituted by each executive.
B. Capitalism and the Corporate Entity
1. Corporate leadership can orchestrate changes on its own without waiting for
government intervention.
2. A corporation is a legal entity created under the authority of a state or federal statute
that gives certain individuals the capacity to operate an enterprise.
3. While the corporation of today bears little resemblance to the corporate entity as it
emerged in the 19th century, it provides the needed power, protection, and protocols
to deal with future economic problems and to profit from future economic
opportunities.
C. Stabilizing Corporate Legal Principles
1. The four fundamental legal principles that are designed to safeguard the corporate
entity are corporate limited liability, free transfer of ownership, central management,
and the corporate person, itself.
2. Corporate Limited Liability
a. One of the most attractive feature of the corporation is limited liability which
means that the corporate investors cannot be held personally liable for the debts of
the corporation.
b. The most an investor can lose is the amount of money used to purchase his or her
shares of the corporation.
3. Free Transfer of Ownership
a. The issuing and selling of shares of stock to raise capital is known as equity
financing and equity securities give their owners a legal interest in the assets,
earnings, and control of the corporation.
b. The part of a corporation’s net profits or surplus set aside for the shareholders is
known as dividends.
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Chapter 26 - The Corporate Entity
c. A stock certificate is written evidence of ownership of a unit of interest in the
corporation.
4. Central Management
a. Most state incorporation statutes provide that a corporation’s business affairs are
to be managed under the direction of a board of directors.
b. The board of directors establishes broad policies, and the officers and other
employees implement those policies.
c. The shareholders are the owners of the corporation.
d. A single individual often functions as a director, an officer, and a shareholder.
B. The Corporate Balancing Act
1. Corporate structure is a manifestation of balancing acts.
2. Corporations are governed by bylaws which must be balanced with federal statutes,
state corporate law, and court decisions.
3. Federal Congressional Action: Congress and the Dodd-Frank Act
a. The federal government’s power to regulate business emerged from the commerce
clause.
b. The federal government can regulate any business activity that affects interstate
commerce, even if that activity takes place solely within the borders of a single
state.
c. The federal government may not force citizens to participate in an activity
whether they want to or not.
d. In response to the 21st century financial crisis, Congress passed several pieces of
legislation, including the Dodd-Frank Wall Street Reform and Consumer
Protection Act.
e. Provisions are included in the Dodd-Frank Act to deal with the shortcomings and
the errors of the securities industry.
4. State Legislative Action: The Model Business Corporation Act
a. The states have the power to regulate business under their inherent police power.
b. The statutory template that most states follow in developing their corporate law
statutes is the Model Business Corporation Act.
5. Judicial Action: State Common Law Decisions
a. Some common law decisions are preempted when a state legislature adopts the
MBCA although some states have been reluctant to surrender common law
principles and sometimes have found creative ways to interpret the MBCA.
b. The process of doing business as a self-governing business association, that is, as
a corporate person, is called associative corporativism, or simply corporativism.
II. Types of Corporate Entities (26-2)
A. Private, Public, and Quasi-Public Corporate Persons
1. A private corporation is a corporation formed by private persons to accomplish a task
best undertaken by an entity that can raise large amounts of capital quickly or that can
grant the protection of limited liability.
2. Private corporations can be organized for a profit-making business purpose or for a
nonprofit charitable, educational, or scientific purpose.
3. If the corporation is organized for profit-making purposes, those profits may be
distributed to the shareholders in the form of dividends.
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Chapter 26 - The Corporate Entity
4. Large private corporations generally sell their stock to the public at large and are,
therefore, often referred to a public corporations; however, the term public
corporation is more properly used to describe a corporation created by the federal,
state, or local government for governmental purposes.
5. Corporations that are privately organized for profit but also provide a service upon
which the public is dependent are generally referred to as quasi-public corporations.
B. Domestic, Foreign, and Alien Corporate Persons
1. A corporation is a domestic corporation in the state that grants its charter.
2. It is a foreign corporation in all other states.
3. A certificate of authority is a document that grants a foreign corporation permission to
do business in another state.
4. An alien corporation is one that, though incorporated in a foreign country, is doing
business in the United States.
C. Close and S Corporations
1. A business corporation may be designated as a close corporation when the
outstanding shares of stock and managerial control are closely held by fewer than
fifty shareholders or by one person.
2. The Subchapter S Revision of 1982 gives small, closely held business corporations
the option of obtaining special tax advantages by becoming an S corporation.
3. In an S corporation shareholders have agreed to have the profits of the corporation
taxed directly to them rather than to the corporation thereby avoiding double taxation.
4. Because of restrictions on the number and types of owners that can be involved in an
S corporation, many individuals look to limited liability companies to escape double
taxation.
D. Limited Liability Companies, Joint Ventures, and Franchises
1. The LLC is a cross between a partnership and a corporation.
a. The LLC offers the protection of limited liability to its owners.
b. The LLC’s tax liability flows through the LLC and to the owners thereby avoiding
double taxation.
c. LLC’s are statutory, which means that they may come into existence only if the
owners follow the precise steps laid out in the applicable state code.
2. A joint venture involves a contractual arrangement by which individuals unite for a
limited time to create a new entity in which the founders share control, expenses, and
profits.
3. A franchise involves leasing to use a parent entity’s business operation, trademark,
goods, services, and goodwill under a fee arrangement provided to the parent.
III. Formation of the Corporate Entity (26-3)
A. Promoters
1. Promoters are the people who want to begin a new corporation or who want to
incorporate an existing business and do the day-to-day work involved in the
incorporation process.
2. Incorporators are the people who actually sign the articles of incorporation and
submit them to the appropriate state officials.
3. Promoters may enter contracts for the unborn corporation; but, once formed, the
corporation is only liable for any such contract if the contract is adopted.
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Chapter 26 - The Corporate Entity
4. Even after contracts are adopted, promoters are still potentially liable under
pre-incorporation contracts.
5. One way a promoter may escape potential liability is by having the corporation and
third party agree to release the promoter under an agreement known as a novation.
6. A promoter may also include an automatic release clause in contracts negotiated for
the unborn corporation which specifically releases the promoter from liability.
B. Articles of Incorporation
1. Introduction
a. The articles of incorporation are the written application to the state for permission
to incorporate.
b. The articles, together with the status of incorporation, represent the legal
boundaries within which a corporation must conduct its business.
2. The Corporate Name
a. One of the first steps in forming a corporation is to choose a corporate name.
b. Usually the words or an abbreviation of the words “corporation,” “company,” or
“incorporated” must appear somewhere in the corporate name.
c. The corporation cannot choose a name that some other corporation already uses or
a name that would confuse the new corporation with one already in existence.
3. Approval of Articles
a. Legal requirements must be met such as naming a statutory agent for service of
process when a lawsuit is filed against the corporation.
b. Once satisfied that all legal formalities have been met, the secretary of state will
issue the corporation’s charter, or certificate of incorporation.
c. The charter is the corporation’s official authorization to do business in the state.
d. After the charter is issued, the corporation then becomes a fully and legally
incorporated entity.
4. Commencement of the Business
a. Many state statutes provide that the first order of business upon incorporation is
holding an organizational meeting.
b. The first order of business at an incorporator-run meeting is to elect the directors.
c. In addition to the appointment of the first directors, the adoption of bylaws to
guide the corporation’s day-to-day internal affairs also occurs at the
organizational meeting.
C. Formation of a Limited Liability Company
1. For incorporation to occur, a limited liability company requires only one person
(liberally defined to include not only people but also corporations and other legal
entities).
2. Because not all states recognize the tax advantage usually granted to limited liability
companies, the legal status of such entities should be checked in all the states in
which business will be done.
3. The written application for permission to form a limited liability company is referred
to as articles of organization.
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Chapter 26 - The Corporate Entity
4. The name of the LLC must include the term “limited liability company,” or those
words abbreviated followed by the word “limited,” or the abbreviation “Ltd.”
5. A statutory agent for the service of process must be named at the time that the articles
are filed in the office of the secretary of state.
6. An operating agreement is very helpful in establishing bylaws which outline the
structure and operation of the LLC.
7. Some state LLC statutes specify that operating agreements can be oral although the
better practice is to require a writing.
8. Under IRS regulations, the tax status of the entity depends upon an election made by
the owners of the entity, and avoiding corporate tax status is possible.
IV. Corporate Identity (26-4)
A. Introduction
1. Corporations have a life of their own.
2. A legally formed corporation is referred to as a de jure corporation.
3. When the incorporation process is flawed or the corporation loses corporate standing,
the corporation may or may not be a de facto corporation, meaning one in fact but not
in law.
4. Sometimes a group never intends to incorporate but acts like a corporation to such an
extent that a corporation by estoppels results.
5. In a situation involving a corporation that is prevented from becoming an independent
entity, a victim of a wrongful act may pierce the corporate veil of a subsidiary to react
a parent.
B. De Jure and De Facto Corporation
1. When an error is made in the incorporation process, the corporation does not legally
exist and is not considered a de jure corporation; but as long as the following
conditions have been met, a de facto corporation will exist.
a. A valid state incorporation statute is in effect
b. The parties must have made a bona fide attempt to follow the statute’s
requirements for incorporation
c. The business acted as if it were a corporation
2. Only the state can directly challenge the existence of a de facto corporation.
3. The status of the de facto corporation is in a state of flux.
a. It appears that the Model Business Corporation Act eliminates the doctrine.
b. Some states have either altered the position of the Model Business Corporation
Act or ignored it.
c. Some states have found ways around the MBCA by reinstituting a doctrine called
corporation by estoppels.
C. Corporation by Estoppel
1. In some states, if a group of people act as if they are a corporation when in fact and in
law they are not, any parties who have accepted that counterfeit corporation’s
existence will not be allowed to deny that acceptance.
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Chapter 26 - The Corporate Entity
2. Individuals who acted as if they were a corporation will not be able to deny that the
corporation exists.
3. The doctrine has been labeled corporation by estoppel.
4. Corporation by estoppel is a legal fiction used by some courts on a case-by-case basis
to prevent injustice.
5. Generally, but not always, it is applied in contract cases rather than in tort cases.
D. Piercing the Corporate Veil
1. Sometimes the court will disregard corporate status to impose personal liability on
those who have used the corporation to commit fraud or crimes, or to harm the public.
2. The corporate veil test has three incarnations: the alter ego test, the instrumentality
test, and the three-step test for control, fraud, and injury.
3. The Alter Ego Test
a. Due to not following corporate formalities, shareholders of small close
corporations are more likely to fall victim to piercing the corporate veil.
b. The court will pierce the corporate veil when the corporation is nothing more than
the alter ego of the original incorporators.
4. The Instrumentality Test
a. The instrumentality test used to determine whether the corporate veil should be
pierced to reach the parent corporation.
b. This test requires that the parent corporation so dominate the subsidiary that the
subsidiary has become a “mere instrumentality of the parent.”
c. When a corporation is set up as a mere instrumentality of a parent, it is sometimes
referred to as a dummy corporation or a corporate shell.
5. The Three-Step Test
a. The stages in the three-step test for veil piercing are (1) complete control of the
alleged corporate person by the owners (shareholders or members in an LLC); (2)
the use of that control by the shareholders to commit fraud against the plaintiff;
and (3) that fraud has caused the plaintiff to undergo some sort of injury or loss.
b. Undercapitalization will be considered convincing evidence that the corporate
owners intended to use the corporate façade to escape liability, but more than
undercapitalization alone is needed.
c. The court requires that the corporation’s interests be indistinguishable from those
of the shareholders.
6. The Effects of the Hobby Lobby Case
a. In the Hobby Lobby case itself, the Court’s decision to disregard the corporate
person helped the owners of Hobby Lobby because their religious rights were
vindicated.
b. However, when the case is transformed into a straight veil-piercing case, the legal
result is the same, but the help to the owners has vanished.
V. Financing of the Corporate Entity (26-6)
A. Introduction
1. The issuing and selling of shares of stock to raise capital is known as equity
financing.
2. The part of a corporation’s net profits or surplus set aside for the shareholders is
known as dividends.
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distribution without the prior written consent of McGraw-Hill Education.
Chapter 26 - The Corporate Entity
B. Classes of Corporate Stock
1. The number of shares and classes of stock that a corporation is authorized to issue are
established in its certificate of incorporation.
2. A stock certificate is written evidence of ownership of a unit of interest in the
corporation.
C. Dividends
1. The most common type of dividend is the cash dividend which is declared and paid
out of current corporate earnings or accumulated surplus at regular intervals.
2. A distribution of earnings made in shares of capital stock is called a stock dividend.
3. The most usual type of corporate stock is common stock which carries with it all the
risks of the business inasmuch as it does not guarantee its holder the right to profits.
4. Stock that has rights or preferences over other classes of stock is known as preferred
stock.
5. Par value is the value that is placed on the shares of stock at incorporation.
6. The practice of placing a par value on a share of stock has been criticized as
misleading as to the actual market value of the shares.
7. Par value stock has been eliminated under provisions found in the newest version of
the MBCA.
V. Background Information
A. Cross-Cultural Notes
1. In Japan in the 1950s, powerful conglomerates called keiretsu were formed. The
keiretsu, which included Mitsubishi and Mitsui, are composed of different companies,
linked by cross-shareholding and cross-directorship that cooperate and compete with
each other in business dealings. The idea of the keiretsu is based on the Japanese
principle that interdependence is a healthy approach to successful commerce.
2. Other countries besides the United States have adopted forms of the limited liability
company. In Germany an LLC is known as “Gessellschaft mit beschrenkter Haftung”
(“GmbH”). In Latin America it is referred to as “Limitada.” In Japan a “godo geisha”
is a type of organization modeled after the American limited liability company.
3. Headquartered in Tokyo, the Tokyo Stock Exchange is the largest stock exchange in
Japan. Established in 1878, it is the third-largest exchange in the world and is home
to entities such as Toyota, Honda, and Mitsubishi.
B. Historical Notes
1. In the Roman Empire, corporations were recognized as entities with legal identities
separate from those of their individual members. As business organizations grew
more powerful, the Roman government created mandates to control and tax these
early corporations.
C. State Variations
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Chapter 26 - The Corporate Entity
1. A corporation’s certificate of incorporation may be changed; however, it costs time
and money to do so. With variations from state to state, parts of the certificate that can
be changed include the corporate name, corporate purpose, and office address. Also,
the duration of the corporation can be extended or renewed, and the number of shares
can be increased or decreased.
2. It is not unusual that as in New York, Ohio, and Texas, an LLC may be formed by
only one person.
3. Each state’s law should be carefully considered before proceeding with incorporation.
For example, in New York, certain words and phrases require consents and approvals
from other agencies prior to using a name in a filing with the Division of
Corporations. For more information on New York requirements see the web site for
New York State’s Division of Corporations, State Records & UCC at
http://www.dos.ny.gov/corps/buscorp.html#certinc.
D. Quotations
1. [A corporation is] an ingenious device for obtaining individual profit without
individual responsibility.
— Ambrose Bierce (1842–1914), American author
2. [Corporations] cannot commit treason, nor be outlawed, nor excommunicated, for
they have no souls.
— Sir Edward Coke (1552–1634), English jurist
VI. Terms
1. An S corporation is sometimes called a pseudo-corporation.
The word corporation derives from the Latin word corpus for body, representing a body of people authorized to act as an individual
2. The word “corporation” derives from the Latin word “corpus” for body, representing
a body of people authorized to act as an individual
VII. Related Cases
1. Fox, acting as a promoter, signed a contract for accounting with Cooper. When Fox
and his newly formed company refused to pay the accounting bill, Cooper sued. The
court ruled Fox was personally liable for the debt under the doctrine of promoter
liability when the corporation failed to ratify the debt. Cooper & Lybrand v. Fox, 758
P.2d 683 (Colo. App. 1988).
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distribution without the prior written consent of McGraw-Hill Education.
Chapter 26 - The Corporate Entity
2. The plaintiffs in Webmediabrands, Inc. v. Latinvision, Inc., 3 N.Y.S.3d 262, (N.Y.
App. Div. 2014), sued an individual, who served as the principal shareholder, officer
and director of Latinvision, Inc., and a defunct corporation seeking to pierce the
corporate veil and hold the defendants liable for a judgment obtained against
Latinvision, Inc. The court noted that factors to be considered in determining whether
the corporate veil should be pierced include the failure to abide by corporate
formalities, inadequate capitalization, commingling of assets, and use of corporate
funds for personal use. As recognized by the court, an overlap in ownership and
directorship or common use of office space and equipment is also considered. Citing
evidence of commingling of funds and lack of adherence to corporate formalities, the
court concluded that on an alter ego theory, the corporate veil would be pierced both
as to both defendants.
VIII. Teaching Tips and Additional Resources
1. Ask students to discuss under what circumstances they believe piercing the corporate
veil is appropriate. An article titled “When is the Parent Company Liable?”
addressing piercing of the corporate veil in connection with alleged harm to the
environment is available from the Internet site of the American Bar Association at
http://apps.americanbar.org/buslaw/blt/2002-11-12/davis.html.
2. Information regarding the government’s financial fraud enforcement task force is
available at http://www.stopfraud.gov/.
3. The FBI has a web page on corporate fraud addressing issues such as falsification of
financial information and self-dealing at
https://www.fbi.gov/about-us/investigate/white_collar/corporate-fraud. The cite also
has links to various types of white-collar crime.
4. A webpage from the State of Delaware titled “How to Form a New Business Entity”
is available at https://corp.delaware.gov/howtoform.shtml.
5. Information regarding limited liability companies including election issues is
available from the Internal Revenue Service at
https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Limited-Liabilit
y-Company-LLC.
6. For more information on corporate charters in the nineteenth century see Lawrence
W. Friedman’s Law in America: A Short History (New York: The Modern Library,
2002), pp. 48–49.
7. For more information on associative corporativism, see Allen M. Sievers, Revolution,
Evolution, and the Economic Order (Englewood Cliffs, NJ: Prentice Hall, 1962), p.
39.
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distribution without the prior written consent of McGraw-Hill Education.
Chapter 26 - The Corporate Entity
8. States often provide tax and other incentives to encourage businesses to expand or
relocate. For example, review incentives available in Texas at Texas Wide Open for
Business at https://texaswideopenforbusiness.com/services/incentives-financing.
9. Certification of authority is obtained by filling out an application, along with other
required documents, and submitting them with the Secretary of State. It is important
for the applying corporation to consult the Secretary of State to ensure that all statutes
are being followed.
10. Write descriptions of the missions and purposes of several imaginary corporations
that are in the process of being formed. Assign a different corporation to each group
of five students. Each student should represent a type of corporation: public, private,
quasi-public, close, S, or LLC. Each student should try to persuade fellow group
members that the classification he or she represents is the best for their corporation.
Group members should then vote on the classification they think is best.
11. Any transactions by the promoter on behalf of the corporation before incorporation
are considered to be pre-incorporation transactions. These transactions must be
ratified by the corporation after it is formed if they are to be valid and binding on the
corporation.
12. To facilitate discussion of this section, obtain the form for a certificate of
incorporation and for the appointment of a statutory agent from your local secretary
of state’s office. Distribute the copies to the class.
13. Ask two or three student volunteers to research the incorporation statutes in your state
and report to the class on their findings. Students may need your help in interpreting
the legal terminology.
14. Inform students of the factors that the courts consider in deciding whether to pierce
the corporate veil including improper or incomplete incorporation; commingling of
corporate and shareholder funds; failure to follow statutory formalities; failure to hold
regular share-holders’ and directors’ meetings; failure of shareholders to represent
themselves as agents of a corporation, rather than individuals, when dealing with
outside parties; and under-capitalization.
15. Discuss whether it is ethical for business owners to protect themselves by forming
corporations. Remind students that a corporation is an entity unto itself and, therefore,
is referred to as a legal person in contrast to a natural person.
16. Have students obtain the annual reports of three or four corporations. Annual reports
are available at most public libraries, on the Internet, or directly from local
corporations. Ask students to analyze the reports and select companies for investment.
Have students explain the rationale for their choices.
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Chapter 26 - The Corporate Entity
17. The economist Milton Friedman has proposed abolishing corporate income tax and
taxing shareholders on the total earnings of corporations, rather than just on their own
dividends. Friedman argues that this action will focus shareholder interest on what a
corporation does with its profits, increasing shareholder involvement. Discuss this
idea in class, and ask students if they think it would be effective.
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distribution without the prior written consent of McGraw-Hill Education.
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