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Chapter 36
Corporate Formation and Financing
VI. Answers to Critical Legal Thinking Cases
36.1 Legal Entity
Yes, Deister Corporation can be sued. Corporations are the most dominant form of business organization
today. When a corporation is properly incorporated pursuant to the laws of the state of incorporation, the
corporation becomes a separate legal entity for most purposes. Corporations are treated, in effect, as
artificial persons created by the state that can sue or be sued in their own names. Deister was a business
36.2 Corporation
Hutchinson Baseball Enterprises, Inc., is a private, nonprofit corporation. Nonprofit corporations are
formed for charitable, educational, religious, or scientific purposes. Although nonprofit corporations may
make a profit, they are prohibited by law from distributing this profit to their members, directors, or
officers. Hutchinson Baseball Enterprises was formed for a charitable purpose, to promote Little League
36.3 Corporation
Florida Fashions was a domestic corporation in the state of Pennsylvania. This meant that Florida
Fashions was a foreign corporation in the state of Florida, unlawfully doing business due to its failure to
register. A corporation is a domestic corporation in the state in which it is incorporated. It is a foreign
36.4 Promoters’ Contracts
Jacobson is incorrect, since a novation of the contract between the two parties did not occur. A
corporation can become liable on a promoter’s contract by executing a novation. A novation is a three-
party agreement whereby one party (the corporation) agrees to assume the contractual liability of another
occur without the consent of the third party. Jacobson v. Stern, 605 P.2d 198, 1980 Nev. Lexis 522
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(Supreme Court of Nevada)
36.5 Preferred Stock
when the market changed, Edison was able to buy back the stock for $110 a share, $10 a share more than
it had to sell the shares for, because the preferred stock was redeemable. By issuing redeemable preferred
VII. Answer to Ethics Case
36.6 Ethics Case
renovation contract, it would have to be by adoption. Upon adoption, the corporation becomes liable for
the contract. However, the promoter remains personally liable on the contract, unless the third party
agrees to release him. Since DDS did not agree to release Goodman from liability on the renovation
contract, he remained personally liable with the newly formed corporation. It probably was unethical for
(Supreme Court of Washington)
