Implied Corporate Powers

• Corporation has implied powers to: to perform all acts reasonably necessary to accomplish its corporate purposes, e.g.,:

  • Borrow and lend money.

  • Extend credit.

  • Make charitable contributions.

• A corporate officer can bind corporation in contract in matters connected with the ordinary business affairs of the enterprise.

Ultra Vires Doctrine

• Corporate acts are beyond the express or implied powers of the corporation as stated in state statute or the corporation’s own articles of incorporations and are considered to be “ultra vires” (beyond the powers).

• Corporate articles of incorporations now adopt very broad purposes to prevent lawsuits against the corporation.

• The Following remedies are available for ultra vires acts:

  • Shareholders can bring action for corporation.

  • Corporation can recover damages from its officers and directors.

  • Attorney general of state may bring action to dissolve corporation for ultra vires acts.

§ 3: Classification of Corporations

• Domestic corporation does business in its state of incorporation.

• Foreign corporation from X state doing business in Z state.

• Alien Corporation: formed in another country doing business in United States.

• Public and Private.

• Nonprofit.

• Close Corporations.

  • Shares held by few shareholders.

  • More informal management,similar to a partnership.

  • Restriction on transfer of shares.

• “S Corporations”: Avoids the federal “double taxation” of regular corporations at the corporate level. Only dividends are taxed to the shareholders as personal income. IRS requirements:

  • Corporation is domestic, fewer than 75 shareholders, only one class of stock, no shareholder can be a non-resident alien.

• Professional Corporations.

§ 4: Corporate Formation

• The process of incorporation generally involves two steps:

  • Preliminary and Promotional Activities; and

  • The Legal Process of Incorporation.

Promotional Activities

• Before corporation is formed, promoters are the persons who take the preliminary steps of organizing the venture and attracting investors via subscription agreements.

Promoter’s Liability

• A Promoter (or corporation) can create a prospectus required by federal and state securities laws to inform and protect investors.

• Promoter is personally liable for pre-incorporation contracts on behalf of the corporation, unless 3^rd party agrees to hold future corporation liable.

• After corporate formation, corporation can adopt the pre-incorporation contract and release the promoter by creating a “novation”.

• Subscribers and Subscription Agreements: continuing contracts to purchase stock. Generally, subscribers become stockholders upon corporate formation.

Incorporation Procedures

• State Chartering:

  • Select state (some states such as Delaware cater to corporations http://www.state.de.us/corp/ ).

  • Articles of Incorporation: primary enabling document filed with the Secretary of State that includes basic information about the corporation. Person(s) who execute the articles are the incorporators. See sample articles of incorporation at the Texas Secretary of State. http://www.sos.state.tx.us/corp/forms.shtml

  • Choose and reserve a Corporate Name. Name must have the proper suffix: “Corporation,” “Corp.,” “Incorporated.”

  • You should also consider registering the corporation as a “dot com” at networksolutions.com or register.com.

  • Purpose: trend towards “any legal business.”

  • Duration: usually perpetual.

  • Capital Structure: Most states require some minimal capitalization (Texas requires $1,000), plus number and class(es) of shares authorized and “par value” of shares at incorporation.

  • Internal Organization: usually included in the bylaws.

  • Registered Office and Agent: specific person that will receive any legal notice and documents from state and/or 3^rd parties.

  • Incorporators (usually the promoter): at least one with name and address.

First Organizational Meeting

• After the corporation is “chartered” (created) it can do business.

• Shareholders should have the first organizational meeting to: approve the bylaws, elect directors, hire officers and adopt pre-incorporation contracts and activities.