Corporation Study Guide

📖 Core Concepts Corporation – A state‑authorized legal person that can own property, sue, and be sued. Limited Liability – Shareholders are not personally liable for corporate contracts or torts beyond their investment. Stock vs. Non‑stock Corporations – Stock corporations issue shares to shareholders; non‑stock corporations have members (e.g., cooperatives, credit unions). For‑profit vs. Not‑for‑profit – Purpose distinguishes whether the entity aims to generate profit for owners. Incorporation – Formed by filing articles of incorporation (purpose, authorized stock, directors) and designating a principal address and registered agent. Treasury Stock – Shares repurchased by the corporation; they reduce outstanding shares and are shown as unissued capital on the balance sheet. Internal Affairs Doctrine – The law of the state of incorporation governs internal corporate matters (shareholder‑director disputes, etc.). Board of Directors – Appointed by shareholders; holds fiduciary duties of care and loyalty and controls strategic decisions. Corporate Naming – Must be unique; often includes designators (Inc., Ltd., LLC) that signal corporate status. Close Corporation (CA) – Small, limited‑shareholder corporation subject to a disclosure requirement about its corporate status. 📌 Must Remember Separate legal personality confirmed in Salomon v. Salomon (1897). Limited liability applies only to passive shareholders; directors/officers can be personally liable for breaches of fiduciary duty. Articles of incorporation must list: purpose, authorized stock, directors, principal address, registered agent. Treasury stock = unissued capital; does not count as outstanding shares. Internal affairs are governed by the incorporation jurisdiction, not where the corporation does business. Board composition varies: single board (common‑law) vs. two‑tier (civil‑law) systems. Corporate designators may be mandatory (e.g., “Ltd.” in the UK) or optional (e.g., “Inc.” in CA). Close corporation disclosure (CA, 1977) – must provide specific information about corporate status; no mandatory name change. 🔄 Key Processes Incorporation Choose jurisdiction → file articles of incorporation (purpose, stock, directors) → appoint registered agent → receive certificate of incorporation → adopt bylaws. Issuing Shares Authorize total shares → allocate to founders/investors → record on stock ledger → issue stock certificates (or electronic equivalents). Treasury Stock Purchase Board authorizes repurchase → buy shares on open market → retire or hold as treasury stock → adjust outstanding share count on balance sheet. Foreign Registration File foreign qualification in each state where doing business → appoint local registered agent → maintain compliance with home and foreign jurisdictions. Annual Governance Shareholders elect directors → directors appoint officers/committees → officers manage day‑to‑day operations → directors oversee and fulfill fiduciary duties. 🔍 Key Comparisons Stock corporation vs. Non‑stock corporation Stock: Issues shares → owners are shareholders. Non‑stock: No share issuance → owners are members (e.g., cooperatives). For‑profit vs. Not‑for‑profit corporation For‑profit: Operates to generate profit for owners. Not‑for‑profit: No profit distribution; purpose is charitable, educational, etc. Single‑tier board (common‑law) vs. Two‑tier board (civil‑law) Single‑tier: One board combines oversight and management. Two‑tier: Separate supervisory board (oversight) and managing board (day‑to‑day). Close corporation (CA) vs. General corporation Close: Limited shareholders, disclosure requirement; no mandatory name change. General: No specific disclosure rule; standard filing requirements only. ⚠️ Common Misunderstandings “Limited liability protects directors.” – It protects shareholders; directors can be personally liable for breach of fiduciary duties. “Corporations can never own their own stock.” – They can own treasury stock, which is treated as unissued capital. “All corporations must include a corporate designator in the name.” – Some jurisdictions require it (e.g., UK), others make it optional (e.g., California). “Foreign corporations are exempt from local laws.” – They must register and comply with the local jurisdiction’s corporate law. 🧠 Mental Models / Intuition Corporate “shell” – Think of a corporation as a sealed box: the box (corporation) can own things and act, but the people inside (shareholders) are insulated unless they break the box (e.g., fraud, breach of duty). Stacked governance – Visualize shareholders → board → officers as a three‑tier ladder; each step delegates authority downward while retaining oversight upward. Treasury stock as “reserved seats” – Treasury shares are like empty seats in a theater: they exist but are not occupied by the audience (public shareholders). 🚩 Exceptions & Edge Cases Piercing the corporate veil – Courts may hold shareholders liable if corporate formalities are ignored, fraud is present, or the corporation is an alter ego of its owners. Co‑determination – In some jurisdictions (e.g., Germany), workers have a statutory right to elect a portion of board members, overriding the pure shareholder‑only model. Criminal liability – Corporations can be convicted of offenses (e.g., fraud, corporate manslaughter) even though they are “persons.” California 1977 naming rule – Proposed corporate‑status naming requirement was rejected; only disclosure for close corporations was enacted. 📍 When to Use Which Choose single‑tier board → Most common‑law jurisdictions (U.S., Canada) where simplicity and flexibility are valued. Choose two‑tier board → Civil‑law jurisdictions (Germany, France) where legal tradition mandates separation of oversight and management. Issue treasury stock → When the corporation wants to reduce dilution, support stock price, or reclaim capital for future re‑issuance. Apply internal affairs doctrine → For any dispute about shareholder‑director relations, look to the state of incorporation rather than the state of operation. Apply close corporation disclosure → Only for California close corporations with limited shareholders; other entities follow standard filing rules. 👀 Patterns to Recognize “Shareholder % = shares owned ÷ total authorized shares” – Directly ties ownership, voting power, and dividend rights. “Board → Fiduciary duties → Liability” – Whenever a question mentions board actions, look for care and loyalty standards. “Incorporation → Articles → Bylaws → Governance” – The typical sequence for forming a corporation and establishing internal rules. “Foreign qualification → Registered agent → Compliance” – Spot this pattern when a corporation operates in multiple states. 🗂️ Exam Traps Trap: “All corporations must include “Inc.” in their name.” Why tempting: Many states require a designator. Reality: Designators vary; some are optional (CA) or mandatory (UK). Trap: “Limited liability means directors are never personally liable.” Why tempting: Confuses shareholder protection with director duties. Reality: Directors can be liable for breaches of fiduciary duty or illegal acts. Trap: “Treasury stock counts as outstanding shares.” Why tempting: Shares are still on the corporation’s books. Reality: Treasury stock is unissued capital and reduces outstanding share count. Trap: “Close corporations are exempt from any disclosure.” Why tempting: “Close” sounds like “closed off.” Reality: CA law requires specific disclosure about corporate status. Trap: “Internal affairs are governed by the state where the corporation does business.” Why tempting: Business activities occur there. Reality: The state of incorporation controls internal matters; the foreign state controls external compliance.