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“A corporation is an artificial being, invisible, intangible, and existing only in the
contemplation of law. Being the mere creature of the law, it possesses only those properties
which the charter of its creation confers upon it, either expressly or as incidental to its very
existence. These are such as supposed best calculated to effect the object for which it was
created. Among the most important are immortality, and, if the expression may be allowed,
individuality; properties by which a perpetual succession of many persons are considered the
same, and may act as a single individual.”
John Marshall, Chief Justice, U.S. Supreme Court
I. Teacher to Teacher Dialogue
United States uses the corporate format. This chapter has several objectives: to illustrate how the
corporate form is established legally and how it is infused with funds. In addition, the process of
establishing the basic ground rules for the key players will be examined.
The formation of a corporation starts with a contracting process initiated by a person called a
the interim.
The promoter’s main duties are bifurcated toward two main audiences—the state and
potential investors. He or she will be involved in contracts with both of these constituencies. With
regard to the state, the actual creation of the new corporate entity is the outgrowth of a document
called the charter. This document is the foundation contract between the promoter and the state.
financing.
Once the proper procedures for the establishment of the corporation have been complied with
and adequate financing has been secured, the next step is to see what the basic ground rules will
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of companies will encompass those entities listed in the Fortune 500, the Dow Jones Industrial, or
companies publicly traded on the New York or American Stock Exchanges. In terms of financial
importance, these companies certainly do dominate the corporate landscape. The world of
corporations has, however, a much less public face—the face of the closely held corporation.
What is interesting about this two-sided (public vs. closed) corporate landscape is that, except for
some special rules set out in individual state closed corporation statutes, the rules of corporate
formation are virtually the same for both. The basic rights, duties, and expectations of
shareholders, directors, and corporate officers are the same on paper for both large and small
managers, directors, or shareholders. They get into trouble because they sometimes do not follow
the rules of corporate formation and operation.
This chapter lends itself to the old “black letter” law approach because of the sheer volume of
rules, definitions, and procedures set out in these materials. One of the most important aspects of
technique, it might be helpful to present this material in the following order:
1. A diagram of the corporate lines of authority.
2. The respective rights and duties of the various parties in that line of authority.
II. Chapter Objectives
1. Define corporation and list the major characteristics of a corporation.
2. Describe the process of forming a corporation.
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5. Describe the importance of Delaware corporation law.
III. Key Question Checklist
How is a corporation established?
What express and implied powers does a corporation have?
How is a corporation financed?
IV. Text Materials
Introduction to Corporate Formation and Financing
Corporations are the most dominant form of business organization in the United States,
generating more than 85 percent of the country’s gross business receipts. Corporations were first
Nature of the Corporation
These laws—commonly referred to as corporation codes—regulate the formation, operation, and
The Corporation as a Legal “Person” – Corporations are treated, in effect, as artificial persons
Free Transferability of Shares – Corporate shares are freely transferable, and may be sold,
Perpetual Existence – Corporations exist in perpetuity unless a specific duration is stated in a
Centralized Management – The board of directors makes the policy decisions and appoints the
Limited Liability of Shareholders – Corporations offer limited liability to shareholders to the
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corporations would reach unlimited levels.
Case 36.1 Shareholder’s Limited Liability: Menendez v. O’Niell
986 So.2d 255 (2008), Court of Appeal of Louisiana
Facts: A vehicle driven by Michael O’Niell crashed while traveling on Louisiana Highway 30.
Judgment asserting that as a shareholder of Triumvirate Corporation, he was not liable for the
corporation’s debts. The trial court granted summary judgment to Fraioli and dismissed him as a
defendant in the case. Savoy appealed.
Issue: Is Fraioli personally liable for the debts of Triumvirate, a corporation of which he is the
sole shareholder?
Ethics Questions: The law permits shareholders to avoid personal liability for the debts of the
corporation they own because corporations are separate legal entities and they are liable for their
own debts and obligations. It will not be practically possible for Fraioli to check the age of each
of his customers before serving them liquor. Also, on the day of the accident, Fraioli was not
Triumvirate from its liability.
Public and Private Corporations – Government-owned corporations (or public corporations)
profit to members, directors, or officers.
Publicly Held and Closely Held Corporations – Publicly held corporations have many
shareholders and are usually traded on stock exchanges. Closely held corporations have shares
that are owned by few shareholders. In the latter, there is usually a buy-and-sell agreement which
Professional Corporations – These corporations are formed by licensed professionals, and are
identified by P.C., P.A., or S.C. Shareholders of professional corporations are often called
members. Generally, only licensed professionals may become members.
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corporations.
Incorporation Procedure
The procedure for incorporating a corporation varies somewhat from state to state.
corporation’s internal operations.
Selecting a Corporate Name – Organizers choose the name of the entity, which must contain the
words company, corporation, incorporated, or limited. The selected name should not be federally
trademarked by another company. Also, it is important to find out if the selected name is
over the Internet.
Digital Law: Choosing a Domain Name for a Corporation
Since the advent of the Internet and the ability to conduct e-commerce using a domain name,
corporations often register their corporate name as their domain name. Upon forming a
domain name.
Incorporators – Persons, corporations, partnerships, or other associations serve as the
incorporators and sign the articles of incorporation.
Articles of Incorporation – The corporate charter is the basic governing document for the
corporation. It includes the name of the corporation, number of authorized shares, address of the
initial office, the name of the initial registered agent, and the name and address of each
incorporator. It must be filed with the secretary of state of the state of incorporation.
Corporate Status – Corporate existence begins when the articles are filed. After that, only the
state can bring a proceeding to cancel or revoke the incorporation or involuntarily dissolve it.
Failure to file articles is taken as conclusive proof of the nonexistence of the corporation.
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Purpose of a Corporation – Most articles include a general-purpose clause allowing them to
engage in any legal activities, but some states include a limited-purpose clause, restricting their
activities to specific purposes.
Business Environment: Close Corporation Election
Many of the formal rules in state corporation statutes are designed to govern the management of
large, publicly held corporations. These rules may not be relevant for regulating the management
of close corporations—that is, corporations formed by entrepreneurs with few shareholders who
Corporate Bylaws – In addition to the articles of incorporation, corporations are governed by
their bylaws. The bylaws are much more detailed than the articles of incorporation are. They do
on certain legal documents.
Organizational Meeting of the Board of Directors – Following the filing of the Articles of
Incorporation, the directors meet to adopt bylaws, elect officers, and transact business.
filing Form 2553 with the Internal Revenue Service (IRS).
Corporate Powers
person.
Express Powers – A corporation’s express powers are found in (1) the U.S. Constitution, (2)