Corporations Outline - Lecture notes Second half of the term PDF

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Professional Limited Liability Company (PLLC)- 621.01-.14 Fla. StatVII Foreign Limited Liability CompanyINTRODUCTION TO CORPORATIONS I.

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Chapter Organization 1. History and definitions 2. Applicable laws 3. Characteristics of corporations 4. Piercing the veil 5. Types and classifications of corporations 6. Advantages and disadvantages 7. Role of paralegal Introduction/Definitions  Corporations were invented hundreds of years ago to promote risky ventures.  Today corporations are extremely popular and profitable.  Corporation- a separate legal entity created by statute which is distinct from its shareholders and which make exercise the same rights and privileges as a natural person.  Shareholder (a/k/a “stockholder”)- a person who owns stock in a corporation  Officers- elected officials who run the day to day affairs of the business (usually include president, vice president, secretary and treasurer). They are elected by the board of directors. (in FL one person can hold all positions). No risk of personal liability.  Board of directors- the controlling body of the corporation. They… o make all of the major corporate decisions. o elect the officers. o meet once a year o are elected by the shareholders.  Registered agent (RA)- a person designated by the corporation to receive legal papers which are served upon the corporation. The RA should be available at the registered office.  Articles of incorporation- (“articles”)- the document that is filed with the secretary of state to start the corporation.  Bylaws- the rules governing the structure and operation of the corporation. Governing law  STATE: 1.Chapter 607- the Florida business corporations act. o Like RUPA 2.Chapter 517- the Florida securities and investor protection act (“The Florida Blue Sky Law”) o Came to be when lots of corporations were spending retirement funds and going bankrupt because they weren’t regulated o You have a right as a shareholder to see what is going on in the books, right to annual report, money investments, etc. 3.Administrative regulations from the division of corporations of the secretary of state and of the department of banking and finance.  FEDERAL: 1.Securities act of 1933

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2.Securities and exchange act of 1934- set up because of 1929 stock market crash 3.Administrative regulations of the securities and exchange commission  COMMON LAW: 1.Case law interpreting these statutes and regulations Characteristics of Corporations 1. Entity status-a corporation is an artificial person that exists separate and apart from the shareholder. The corporation can… o Hold property in its name o Borrow money o Lend money o Enter contracts o Be liable for its own debts o Be liable for torts committed by its agents 2. Limited liability of the shareholders- The Corporation is responsible for its own debts. Shareholder liability is limited to the amount of investment. 3. Free transferability of interests- ownership interest is represented by shares which are easily transferable. 4. Centralized management and control- the management and control are centralized in a board with officers acting upon the board’s authority. o Shareholder’s only control is in electing the board of directors 5. Continuity of existence- corporations exist regardless of the death or incapacity (mental instability) of a shareholder. This results in perpetual existence. Piercing the corporate veil  There are certain circumstances under which a corporate entity may be disregarded and the SH may be considered personally liable for its debts and obligations. This is referred to as “piercing the corporate veil” or “disregarding the corporate entity.”  Courts look at the following criteria when determining whether to hold SH personally liable. 1.Lack of corporate formalities- the corporation must…  Properly incorporate  Issue stock  Hold an annual meeting every year  File reports (shareholders all receive a copy showing a whole picture of the past year, (fiscally and decisions made))  Elect board and officers  If they don’t do all of these things, the corporate veil can be pierced. 2.Commingling of corporation’s assets with personal assets of the shareholders- if a shareholder is using corporate funds to pay their private debts, then the corporate veil may be pierced. 3.Undercapitalization- Occurs when a corporation was not organized with sufficient resources to meet the obligations reasonably expected to arise. 4.To prevent fraud or injustice- if the corporation was set up to defraud others in some manner, then you can pierce the corporate veil. Was it made to be a sham/fraud?  QUERY: Who may attempt to pierce the corporate veil? 1. Creditors (frequently in bankruptcy situations) 2. IRS

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 A good place in Florida explaining “Piercing the Corporate Veil” is the case of Dania Jai-Alai Palace, Inc., v. Skyes, 450 So. 2d 1114 (Fla 1984). Types and classifications of corporations  A person desiring to form a corporation must first choose a state in which to incorporate. 1.They can form a Florida corporation; or 2.They can form a corporation in another state and register to do business in Florida as a “Foreign corporation.” o Next, the person forming the corporation must choose what type of entity they want to be: 1. S Corporation-0 created by IRC 1361 et. Seq. (a/k/a “subchapter S”)  Characteristics: MISSING INFORMATION o avoid double taxation. o Do not have to pay the Florida corporate income tax. o Shareholders who do not materially participate in the business cannot deduct losses. o Some fringe benefits of the S corp may not be tax deductible.  Qualification: o Cannot have more than 100 shareholders o Can only have one class of stock o Only US taxpayers or residents can be shareholders  NOTE: See an accountant!  Procedures: o File form 2553 with the IRS o Every year file an informational return with the IRS  Can you switch from S to C-? Yes, but you can’t switch back to an S class for 5 years. 2. C Corporations  Characteristics o Pays taxes on its net earnings at corporate rates o The salaries of the officers, directors, and employees are deducted from the income so they are not taxed by the corporation. (many corporations take all the money out to pay the salaries, so they aren’t taxed as a corporation) o Money paid out in dividends is taxed twice. (taxed by corporation and then taxed for shareholders) o Some fringe benefits are deductible (like health insurance, accident and life insurances that they purchase for the employees)  Requirements o If not an “S” Corp it is a “C”

3. Professional Service Corporations- Chp. 621  Characteristics o The purpose must be to practice a profession (doctors, lawyers, architects etc.) which requires licensure and state regulation. o May not engage in any other business o Shareholder must be a member of the profession o May not merge with a corporation except another Florida professional service corporation that is licensed to perform the same services  Requirements o Must put purpose in the articles of incorporation (must state type of profession) o The name has to contain the words PA or professional association or chartered o Florida corporate law governs o Only licensed persons can be shareholders 4. Non-Profit Corporation chp. 617  These are generally formed for charitable, civic, benevolent, historical, patriotic, civic, cultural, athletic, or religious purposes.  They must incorporate like other incorporations  Governed by chapter 617.  Have to use the words not for profit or nonprofit in their name  No stock issued  No taxes are paid 5. Public Corporation (a/k/a “publically held” or “publically traded”)  These are just corporations who sell their stock to the public (like Disney) 6. Privately held corporation  These are just corporations whose ownership of shares is limited to a few people. (like how Southwest only issues stock to its employees) VII.

Advantages  Limited liability- shareholders enjoy limited liability. o When there has been fraud, shareholders may be liable (piercing the corporate veil) o Shareholders in new or smaller corporations are sometimes required to give personal guarantees as condition of a loan  Business continuity- they exist perpetually  Enhanced ability to raise capital- they can sell stock  Centralized management- officers elected by the board of directors manage the corporation  Ease of transferability of ownership

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o Shares are easily bought and sold o Shares can be passed through a will or passed down through the estate Separate record keeping- the shareholder have their financial records that are completely different and uninvolved from the corporation’s record keeping. Ease of estate planning- shares are easier to devise than a partnership interest or sole proprietorship Separate Credit Rating Corporation can go bankrupt without affecting the shareholder’s credit. And vice versa. Many deductions available o Rent, salaries, interest, utilities, travel, entertainment, insurances, legal and accounting costs, and supplies, benefit plans, 401K benefit matches

VIII. Disadvantages 1. Corporate formalities and reporting requirements o Corporations must be properly formed o Corporations must comply with the law o Corporations are expensive (and time consuming)  Must qualify to do business in other states o Only if you want to  Very formal management o Must hold annual meeting o Strict formalities  Must file a separate tax return for C Corps. o Note: S must file an “information.”  Double taxation (except for S corps.) o The profits are taxed and then dividends are taxed. In 2003, dividends were taxed at 15%. This expires in 2010. Expected to rise drastically. o There are indeed ways to avoid double taxation a. Form an S corporation or an LLC b. Business can give bonuses or salary increases which are later deductible. *NOTE the tax is still owed by the individual and the corporation c. 1244- Corporations can get favorable tax treatment if they sell stock at a loss. d. Qualified small business stock- 1202-If you hold small business stock for more than 5 years, and you go to sell it, then you only pay ½ of the capital gains tax. This is only for C corporations; the assets have to be less than 50 million; and at least 80% of the assets must be from trade or business. e. State taxation (except for S corporations)

CORPORATE FORMATION

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Chapter organization 1. Preincorporation 2. procedures for creating a corporation 3. Role of a paralegal Preincorporation Matters 1. Gather client information to incorporate  Usually done by paralegal 2. Choose a domicile  What state are they going to incorporate in?  Look for the state which is most advantageous for the business  Incorporate where you intend to do business unless it is an unfavorable business climate  WHY DELAWARE?- 30% of state’s income comes from corporate fees, 60% fortune 500 companies incorporate there, ½ if all publically traded companies. 1. Less taxes, can incorporate online with live chat, easy to incorporate 3. Decide on a corporate structure  Can be an “S” (small) corporation  Can be a “C” corporation  Can be a PA (professional association)  Can be a nonprofit 4. “Promoters” begin creating, projecting and organizing the corporation  Begin creating and projecting the corporation  “pre-incorporation transactions”- any transaction made by the promoter on behalf of the corporation, but before the incorporation  Note: any preincorporation transaction or contract must be ratified by the corporation after the corporation is formed to validate the contract. If not the promoter may be personally liable for all contracts entered into on behalf of the future corporation.  Note: any preincorporation contract may specify that the promoter is acting only on behalf of a future corporation and is not personally liable  Note: 607.0204 Fla. Stat. promoters are liable if the person with whom they are dealing does not know there is no corporation 5. Enter into preincorporation agreement (optional)  An agreement between future shareholders regarding the terms of formation 1. Content of articles and bylaws 1. Identifies and sets forth the terms of the initial board of directors  State taxation (except for s corporation) 6. Enter into stock subscription agreement (Optional)  Agreement to purchase a stated # of shares of a future corp’s stock at a stated price. It must be in writing and signed by the subscriber. Also how many votes are associated per share  607.0620, Fla. StatProcedures for Starting Up a Corporation 1. Select a name- 607.0401, Fla. Stat  Select a name (prior to printing business cards) and research whether it is available. Your name must be distinguishable from all other entities whose names are on file with the division of corporations.  Where do you check?

1. Sunbiz.org a. Corporate name search-you can look for active or inactive names, but if you pick one close to another one that is inactive, creditors may come looking b. Fictitious name search2. Trademark name lista. US patent and trademark office- www.uspto.gov (since 1999) 3. Miscellaneous places: a. Official reports in the county courthouse b. Telephone book or yellow pages.com c. Google or yahoo search d. Switchboard.com  Are there name restrictions in Florida? YES! 1. There must be distinguishable from the names of all other entities whose names are on file with the division of corporations, plus… a. The name must contain corporation, incorporation or company (or any of their abbreviations) b. If it isn’t in the name, the members may be liable 2. There is a list of forbidden names! The department of state has issued very specific rules regarding name selection (found in 1N of the Fla. Admin. Code) 3. Cannot be the same or deceptively similar to any existing corporation name. what does this mean? a. Ex/ a difference in the corporate suffix shall not constitute a name difference. (Sampson, Inc. vs. Sampson Corporation) b. Ex/ An article of speech difference shall not constitute a name difference (Smith company vs. The Smith Company) c. Ex/The use of periods, spaces or symbols shall not constitute a name difference (AGX, Inc. vs. A.G.X., Inc.) d. Ex/ The use of singular, possessive or plural spellings (Green Tree Inc., vs. Green Trees, inc.) e. The list goes on… see the regulation (1N of the Florida administrative code) 4. If necessary, file for fictitious name(s). a. This is done if a corporation wants to operate several different businesses under different names and the business name isn’t available as a corporate name 5. Prepare and file articles of incorporation with the Fl. Sec. of State/ (sometimes this is called the “Charter”)  FL law requires the following things to be included in the Articles of Incorp: (HINT: Keep it simple) i. Effective date ii. Name of Corporation iii. Address of the corporation (principal and mailing office) iv. Number of shares of stock the corporation is authorized to use

Usually 100 or 1000 or 1000000 (doesn’t matter because FL doesn’t charge a charter tax any longer)  NOTE: If there is different classes of stock, then the articles must set forth this structure with specificity  NOTE: if shareholders are to be given preemptive rights to acquire shares issued subsequently by the corporation, a provision setting forth the extend to such rights must be included. If not, shareholders have no preemptive rights. v. The name of the registered agent and the address of the registered office. (Attach RA to acceptance) vi. Name and address of incorporator (people who signed articles) vii. Duration (doesn’t have to be included when perpetual because that is the default) viii. Special addition for professional associations (must include the purpose of the corporation. Limited to one profession an must contain professional association, PA, or chartered) ix. Can list officers or directors, OR just list them in the annual report the following year. x. Signed by incorporator and dated (no notary needed)  File the articles, acceptance of RA, and fees: Division of corporations. Department of State. P.O. Box 6327 Tallahassee, FL 32314  Can also file online  FEES: filing fees- $35, Design. Of RA- $35  NOTE: If you need a certified copy of the articles or a certificate of status, add another $8.75 to each. This is unnecessary. Instead enclose a photocopy along with the articles and ask that it be “stamped with the filing date” and returned. If you made a mistake in the articles, you can correct within 10 days for $35. “Articles of correction.” If you notice the mistake after the 10 day window, then you may filee an “article of amendment to the articles of incorporation.” Prepare a shareholder agreement (optional) i. This document is used if there aree more than 2 shareholders and spells out rights/obligations of the parties in the event of a dispute. ii. It is to protect shareholders and will include…  Rights of minority shareholders  What is expected of each shareholder  Rights of shareholders to serve as directors  Salaries 

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Nominating officers and employees (process_ What to do in the event of a buyout and what the price is  How to transfer shares  How/when to add additional shares  Transfer or sale of substantial assets  607.0731 and 607.0732 Fla. Stat- if there is a shareholder agreement, it must be noted on the stock certificates in order to bind future transferees of the stock. Prepare the organizational paperwork i. Bylaws- 607.0206, Fla. Stat- notes for organization and operation of corporation ii. Waiver of notice  Florida law requires notice of all meetings to be given to all shareholders and directors  Have all the shareholders and directors sign a written notice of waiver for the organizational and annual meetings (can be done after the fact) iii. Minutes  According to florida law, minutes must be kept of all meetings of SH and of all meetings of the board of directors (usually each just has one meeting per year.)  The first minutes to be prepared are minutes of the organizational meeting are called the minutes of the organizational meeting of the incorporators and directors: a. WHAT OFFICERS AND DIREECTORS ARE ELECTED b. The adoption of i. Bylaws ii. Corp. seal iii. Stock certificates c. Any other organizational decisions which were made. d. Signed by president and secretary iv. Resolutions  When board of directors or shareholders make a major decision, it is done in the form of a resolution. Important examples of this are… choosing a bank, ratification of preincorporation transactions and adopting S corp status v. Tax forms  Tax form SS-4 for an employer identification # a. Need this # prior to opening bank account  

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b. It is the equivalent to a SS# c. Can get by phone, fax or by internet at www.irs.gov/business d. After applying for this #, you can get on the IRS’s mailing list for w-4 forms for each employee and tax deposit coupons (SS-4, w-4, tax deposit coupons) vi. Form 2553 (S Corp) vii. DR-1 (state sales tax registration)  If you will be selling or renting goods at retail, you must collect FL sales tax  You must fill out a one page form and pay five dollars to the department of revenue or you can file online for free  Obtain this form from www.myflorida.com/dor/forms: (you’ll receive #) For the first year, every corporation must file a Florida corporate tax return (both s and c corps) Order corporate supply kit o A corporation is required to keep a permanent record of its legal affairs. This should include all the corporation paperwork o Should have a corporate seal for important documents that contains the full name of the corporation, the word seal and the year of incorporation) o Generally you purchase a corporate kit although this is unnecessary (any three ring binder will do) and should have…  Title page (corporate records of…)  Table of contents  Copy of articles of incorporation  Copy of fictitious name registration  Waiver of notice of organizational meeting  Minutes of organizational meeting  Bylaws  Tax forms  Stock ledger Make ...