CORPORATIONS

corporation
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CORPORATIONS

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  1. CORPORATIONS

    Slide 1 - CORPORATIONS

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  2. A legal entity having a specified life and certain powers, liabilities, and constitutional rights.

    Slide 2 - A legal entity having a specified life and certain powers, liabilities, and constitutional rights.

    • 2
  3. HRS Chapter 414

    Slide 3 - HRS Chapter 414

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  4. What are some of the key aspects or features about a Corporation that generally sets it apart from a “Sole Proprietorship” or a “Partnership?”

    Slide 4 - What are some of the key aspects or features about a Corporation that generally sets it apart from a “Sole Proprietorship” or a “Partnership?”

    • 4
  5. KEY ASPECTS

    Slide 5 - KEY ASPECTS

    • CREATURE OF STATE STATUTE:
    • 1. An artificial being existing in law only
    • and is neither tangible nor visible
    • 2. Powers granted by statute, articles, and bylaws –
    • a. Express (articles/by-laws)
    • b. Implied (necessary for operation)
    • MANAGEMENT IS SEPARATE FROM
    • OWNERSHIP (centralized)
    • LIMITED LIABILITY
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  6. What are the advantages

    Slide 6 - What are the advantages

    • of a CORPORATION?
    • 6
  7. ADVANTAGES

    Slide 7 - ADVANTAGES

    • Limited personal liability for corporate
    • debts and obligations
    • Ease of transferability (ownership)
    • Perpetual existence
    • 1. Unless incorporated for a fixed period of time
    • 2. Compared to partnership, which dies at death,
    • bankruptcy, or withdrawal of any partner
    • Limited tax advantages
    • Centralized management
    • 7
  8. What are the disadvantages

    Slide 8 - What are the disadvantages

    • of a CORPORATION?
    • 8
  9. DISADVANTAGES

    Slide 9 - DISADVANTAGES

    • Double taxation
    • Statutory formalities and reporting
    • requirements
    • Corporation is liable for the torts and
    • criminal acts of its agents committed
    • within the scope of their employment
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  10. What are the sources of the

    Slide 10 - What are the sources of the

    • EXPRESS and IMPLIED
    • contractual powers of a
    • Corporation?
    • 10
  11. EXPRESS POWERS

    Slide 11 - EXPRESS POWERS

    • ARTICLES OF INCORPORATION
    • BYLAWS
    • STATUTORY LAWS GOVERNING STATE
    • INCORPORATION
    • STATE AND FEDERAL CONSTITUTIONS
    • 11
  12. IMPLIED POWERS

    Slide 12 - IMPLIED POWERS

    • Barring any statutory provision, corporations
    • have the implied power to perform all acts
    • reasonably appropriate and necessary to
    • accomplish its corporate purpose; such as:
    • 1. Borrowing of money
    • 2. Binding the Corporation to matters directly connected
    • with the ordinary affairs of business
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  13. ULTRA VIRES DOCTRINE

    Slide 13 - ULTRA VIRES DOCTRINE

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  14. Acts of a Corporation that are

    Slide 14 - Acts of a Corporation that are

    • beyond its express or implied
    • Powers…..
    • (e.g. contracts entered into for unauthorized purposes)
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  15. When does a corporationcome into existence?

    Slide 15 - When does a corporationcome into existence?

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  16. CORPORATE EXISTENCE

    Slide 16 - CORPORATE EXISTENCE

    • AT TIME OF FILING; or
    • AT ISSUANCE OF CERTIFICATE
    • OF INCORPORATION
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  17. What are the three basic types

    Slide 17 - What are the three basic types

    • of Corporations that may arise
    • from improper incorporation?
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  18. IMPROPER INCORPORATIONS

    Slide 18 - IMPROPER INCORPORATIONS

    • DEJURE CORPORATION- Substantial compliance (minor
    • application defect)
    • DEFACTO CORPORATION- A defective statutory compliance
    • 1. Must be a statute under which the Corporation can be validly
    • incorporated
    • 2. Good faith attempt to comply with appropriate state law
    • 3. Must act and do business as a corporation
    • CORPORATION BY ESTOPPEL- Corporate existence may
    • not be denied by persons who have represented themselves to be, or held
    • themselves out as, a corporation
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  19. CORPORATION CATEGORIES

    Slide 19 - CORPORATION CATEGORIES

    • “C” CORPORATION
    • “S” CORPORATION
    • PROFESSIONAL CORPORATION
    • NON-PROFIT CORPORATION
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  20. “C” CORPORATION

    Slide 20 - “C” CORPORATION

    • Most common form of statutory business
    • organization
    • 3 Categories:
    • - For Profit
    • - Non-profit
    • - Professional
    • Taxed under Sub-chapter C, IRS Code (1986)
    • [The corporation is taxed on its earnings and its shareholders may be taxed on
    • the dividends from the corporation]
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  21. “C” CORPORATION ADVANTAGES

    Slide 21 - “C” CORPORATION ADVANTAGES

    • Limited personal liability of owners
    • (the shareholders)
    • Centralized and hierarchical management
    • Continuity of business (perpetual)
    • 1. Does not cease with death of owner
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  22. DISADVANTAGES

    Slide 22 - DISADVANTAGES

    • Cost and difficulty of formation
    • Difficult to maintain and observe
    • formalities
    • Greater difficulty and cost of tax
    • preparation
    • Double taxation
    • 1. Corporation pay taxes on profits
    • 2. Shareholder pays taxes on dividend
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  23. “S” CORPORATION

    Slide 23 - “S” CORPORATION

    • A “for-profit” corporation that has elected to be taxed under sub-chapter S of the IRS code.
    • Treated as a pass-through entity whose earnings are taxed only at the owner, or shareholder, level...whether or nor distributed.
    • Difference with “C” is the tax treatment
    • 23
  24. “S” CORPORATION ADVANTAGES

    Slide 24 - “S” CORPORATION ADVANTAGES

    • Avoidance of double taxation
    • 1. Corporation does not pay tax on it’s profits
    • 2. Shareholders are taxed on their allocable share of
    • their profits—whether or not the profits have been
    • distributed
    • Owners may receive distribution of profits
    • free of self-employment taxes
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  25. DISADVANTAGES

    Slide 25 - DISADVANTAGES

    • Number of owners is limited
    • Type of eligible owner is limited
    • Tax allocation and distribution rules are
    • fairly rigid
    • Technical tax requirements must be
    • observed
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  26. PROFESSIONAL CORPORATIONS

    Slide 26 - PROFESSIONAL CORPORATIONS

    • Governed by HRS Chapter 415A
    • Only professionals licensed to practice in
    • business may own shares of stock
    • Owners usually do not incur “double
    • taxation”
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  27. NON-PROFIT CORPORATION

    Slide 27 - NON-PROFIT CORPORATION

    • Governed by HRS 414D
    • Non-profits do not have:
    • 1. Shareholders
    • 2. Owners
    • 3. Dividends
    • Typically tax exempt 501(c) or 501(c)(3)
    • Typically do not pursue private/profit
    • seeking business endeavors
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  28. PRE-INCORPORATIONPHASE

    Slide 28 - PRE-INCORPORATIONPHASE

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  29. PRE-INCORPORATION ACTIVITIES

    Slide 29 - PRE-INCORPORATION ACTIVITIES

    • Preliminary organizational and promotional
    • undertakings
    • Legal process of incorporation
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  30.  Role of the Promoter (Incorporator)

    Slide 30 - Role of the Promoter (Incorporator)

    • 1. CONTRACTING/INVESTING
    • 2. PURCHASE OR LEASE PROPERTY
    • 3. ISSUE A PROSPECTUS
    • Promoter’s LIABILITIES (are they agents?)
    • NOVATION (ratification without a principal?)
    • ORGANIZATION AND PROMOTION
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  31. INCORPORATION PROCEDURES

    Slide 31 - INCORPORATION PROCEDURES

    • Selection of state to incorporate
    • Complete required filing:
    • 1. The Articles of Incorporation
    • 2. Additional jurisdictionally required
    • forms
    • 3. Payment of appropriate fees
    • Issuance of Certificate of Incorporation
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  32. What function does the Articles of Incorporation serve and, generally, what specific issues or requirements does it address?

    Slide 32 - What function does the Articles of Incorporation serve and, generally, what specific issues or requirements does it address?

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  33. ARTICLES OF INCORPORATION

    Slide 33 - ARTICLES OF INCORPORATION

    • Primary statutorily required document for
    • filing as a corporation
    • Includes basic structural/organizational
    • information about the corporation
    • Serves as the primary source of authority
    • for its future organization and business
    • functions [a business constitution]
    • 33
  34. ARTICLES OF INCORPORATION(General Information)

    Slide 34 - ARTICLES OF INCORPORATION(General Information)

    • Name of corporation (subject to state approval)
    • Purpose
    • Corporate duration
    • Capital stock structure
    • Classes of shares (if divided into classes)
    • Registered Office and agent
    • Number of initial directors
    • Names and addresses of incorporators
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  35. When and for what purpose is the  “first organizational meeting” held?

    Slide 35 - When and for what purpose is the “first organizational meeting” held?

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  36. FIRST ORGANIZATIONAL MEETING

    Slide 36 - FIRST ORGANIZATIONAL MEETING

    • Provided for in the Articles of Incorporation
    • Election of first Board of Directors
    • Initiate/complete the incorporation process:
    • 1. ADOPT BYLAWS
    • 2. ISSUE STOCK
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  37. BY-LAWS

    Slide 37 - BY-LAWS

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  38. BY-LAWS

    Slide 38 - BY-LAWS

    • Rules of management adopted by the
    • corporation at its first organizational
    • meeting
    • 1. Similar to an SOP
    • 2. Operationally fleshes out the articles of incorporation
    • Not required for filing
    • Must be kept at place of business
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  39. DIRECTOR’S ROLE, DUTIES AND LIABILITIES

    Slide 39 - DIRECTOR’S ROLE, DUTIES AND LIABILITIES

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  40. A Director manages the corporation’s

    Slide 40 - A Director manages the corporation’s

    • business and affairs but does not
    • function as either an agent or a trustee
    • 1. Manages the corporation to best of their ability
    • a. Plan long term strategy
    • b. Approve major transactions
    • c. Appoint officers who run day-to-day operation
    • 2. Are not insurers of business success
    • 3. Charged with exercising good business judgment
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  41. DUTY OF CARE

    Slide 41 - DUTY OF CARE

    • Act in good faith
    • Exercise care that an ordinarily prudent person
    • would exercise in similar circumstances
    • 1. Act in accordance with own training and knowledge
    • (experience)
    • 2. Expectation to be informed
    • Act in (what he considers) to be the best interest
    • of the corporation
    • Make informed and reasonable decisions
    • Exercise reasonable supervision
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  42. DUTY OF CARE

    Slide 42 - DUTY OF CARE

    • Courts will not interfere with the activities of the Director unless the following can be shown:
    • 1. Fraud
    • 2. Illegal Conduct
    • 3. Irrational business judgment
    • 42
  43. BUSINESS JUDGMENT RULE *

    Slide 43 - BUSINESS JUDGMENT RULE *

    • Generally, director’s are insulated from
    • liability for the consequences of a
    • Business judgment, if they exercised:
    • 1. Due care
    • 2. Acted in good faith
    • 3. Rational basis for the decision
    • * May be personally liable
    • 43
  44. DUTY OF CARE LIABILITY

    Slide 44 - DUTY OF CARE LIABILITY

    • Breach the duty of care and Director may be
    • held personally responsible for losses
    • Liability for misconduct of officers or co-
    • directors only if:
    • 1. Participated in the misconduct
    • 2. Negligent in not discovering the wrong
    • 3. Negligent in the appointment of the wrong-doer
    • Liable if caused corporation to violate a statute,
    • even if he exercised good business judgment
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  45. DUTY OF LOYALTY

    Slide 45 - DUTY OF LOYALTY

    • A director owes a duty of loyalty to his
    • corporation and will not be permitted to
    • profit at the expense of the corporation
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  46. FIDUCIARY ISSUES(LOYALTY)

    Slide 46 - FIDUCIARY ISSUES(LOYALTY)

    • Competing with the corporation
    • Usurping a corporate advantage
    • Having an interest that conflicts with the
    • interest of the corporation
    • Engaging in insider trading
    • Authorizing a corporate transaction that is
    • detrimental to minority shareholders
    • Selling control over the corporation
    • 46
  47. SHAREHOLDER’S ROLE, DUTIES, AND LIABILITIES

    Slide 47 - SHAREHOLDER’S ROLE, DUTIES, AND LIABILITIES

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  48. Equitable interest (ownership) of the corporation without benefit of legal title to any corporate property, which is vested in the corporation

    Slide 48 - Equitable interest (ownership) of the corporation without benefit of legal title to any corporate property, which is vested in the corporation

    • 48
  49. SHAREHOLDERS

    Slide 49 - SHAREHOLDERS

    • No responsibility for the daily
    • management of the corporation
    • Amend Articles of Incorporation/Bylaws
    • Elect and remove Directors
    • No legal relationship exist between the
    • shareholder and the creditor’s of the
    • corporation
    • 49
  50. SHAREHOLDER’S RIGHTS

    Slide 50 - SHAREHOLDER’S RIGHTS

    • Voting Rights
    • Right to receive stock certificates
    • Pre-emptive rights: Preference is given to shareholder over all
    • other purchasers to subscribe to or purchase a pro-rated share of a new
    • issue of stock.
    • Right to receive a dividend
    • Right to inspect corporate records
    • Right to transfer shares
    • Right to receive share of corporate assets when
    • corporation is dissolved
    • Right to sue on behalf of the corporation (shareholder’s
    • derivative suit)
    • 50
  51. SHAREHOLDER LIABILITIES

    Slide 51 - SHAREHOLDER LIABILITIES

    • No fiduciary duty to the corporation or
    • other shareholders and not personally
    • liable for the debts of the corporation
    • EXCEPTIONS:
    • 1. Unpaid or watered stock (issued less than stated value);
    • 2. Loss of investment
    • 3. Pierced corporate veil; or
    • 4. Absence of a defacto corporation
    • 51
  52. SHAREHOLDER’ MEETINGS

    Slide 52 - SHAREHOLDER’ MEETINGS

    • Must be held annually with the primary
    • purpose of electing Directors
    • 1. Eligibility to vote is based on shareholders of record in corporations stock
    • transfer book on a date fixed by the directors.
    • 2. Proxies:
    • a. Valid for 6 months
    • b. Revocable by shareholder unless made irrevocable
    • Notice:
    • 1. Generally written
    • 2. Delivered not less than 10 days or not more than 50 days
    • before the meeting
    • 3. Mail permitted
    • 4. Contents: Place, Day, and Hour (if special meeting then must
    • have purpose statement)
    • 52
  53. How is a corporation terminated?

    Slide 53 - How is a corporation terminated?

    • 53
  54. TERMINATION PHASES

    Slide 54 - TERMINATION PHASES

    • DISSOLUTION (legal death of the corporation)
    • 1. Voluntary
    • 2. Involuntary
    • LIQUIDATION (conversion and distribution of assets)
    • 54
  55. DISSOLUTION

    Slide 55 - DISSOLUTION

    • VOLUNTARY
    • 1. Shareholders by unanimous vote*
    • 2. Board of Directors proposal submitted to
    • shareholders
    • INVOLUNTARY
    • 1. Action brought by state:
    • a. Failure to comply with admin requirements
    • b. Incorporation through fraud or misrepresentation
    • c. Abuse of corporate powers
    • d. Violation of state criminal code
    • e. Failure to commence business
    • f. Abandonment
    • 2. Action by shareholder
    • 3. Action by Courts (e.g. mismanagement/deadlock)
    • 55
  56. LIQUIDATION PHASE

    Slide 56 - LIQUIDATION PHASE

    • THE “WINDING–UP” PROCESS
    • Can be accomplished without court
    • supervision unless:
    • 1. Board members do not wish to act as trustees for this action
    • 2. Shareholders or creditors can show cause why the board
    • should not be permitted to assume trustee function
    • A “receiver” is always appointed when
    • dissolution is involuntary
    • 56
  57. QUESTIONS

    Slide 57 - QUESTIONS

    • 57