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
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
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
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)
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
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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