A1 Business and Technical College Bussiness Law Discussion

Chapter 38 Discussion

Jim Halter, the majority shareholder of J-Mart Jewelry Outlets, Inc., was aware that J-Mart was in financial trouble. Before J-Mart went out of business, Halter paid off his personal credit cards using corporate funds. There was specific evidence that the $6, 902.87 balance on Halter’s American Express personal account was paid by J-Mart, eight days before it ceased doing business. The check was marked “PAYMENT IN FULL – JIM’S PERSONAL”. There was also evidence that J-Mart, knowing that it would soon cease doing business, purchased a new Cadillac for Halter’s use. J-Mart then made three (3) payments on the vehicle before transferring it to Halter for $1.00 and allowing him to assume the remaining payments.

After J-Mart ceased operations, four (4) of its creditors brought suit against Halter in an attempt to recover amounts they were owed. The jury at the trial court level pierced the corporate veil and held Halter personally responsible for the debts. Halter appealed and the appellate court affirmed the ruling of the trial court.

Given what you know of the facts of the case, could Halter have provided any information that would lead you to believe he was not responsible for the debts? What would it be?

INSTRUCTIONS

Make an initial post that is responsive to the above prompt.

Your post must be between 200-500 words.

attached PDF+ two videos for the chapter

4/29/2018
Chapter 38
Corporations: Formation and
Financing
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Overview
• LO38-1: What are the characteristics of
corporations?
• LO38-2: What are the powers granted to
corporations by the states?
• LO38-3: How are corporations classified?
• LO38-4: How are corporations formed?
• LO38-5: What are some potential problems
with the formation of corporations?
• LO38-6: How do corporations get funding?
38-2
Characteristics of Corporations
• Legal entity
• Rights as person and citizen
• Creature of state
• Limited liability of shareholders
• Unrestricted transferability of corporate shares
• Perpetual existence
• Centralized management
• Corporate taxation
38-3
1
4/29/2018
Corporate Powers
• Corporations have both express and implied
powers
• Express powers: Perpetual existence; right to
litigate; right to make contracts; right to
borrow/loan money; right to make charitable
donations; ability to establish rules for
managing corporation
• Implied powers: Whatever actions necessary
(within the law) to execute express powers
38-4
Classifications of Corporations
• Public/private
• For-profit/nonprofit
• Domestic/foreign/alien
• Publicly held/closely held
• S corporation
• Professional corporation
38-5
Public versus Private Corporation
• Public corporation: Corporation created by
government to administer law, with
specific government duties to fulfill
• Example: Federal Deposit Insurance
Corporation (FDIC)
• Private corporation: Corporation created
for private purposes
38-6
2
4/29/2018
For-Profit versus Nonprofit
Corporations
• For-profit corporation: Objective is to operate
for profit; shareholders seeking to make
profit purchase stock that these corporations
issue
• Nonprofit corporation: May earn profits, but
they do not distribute these profits to
shareholders (nonprofit corporation does not
issue stock, nor does it have shareholders);
instead, corporation reinvests profits in
business
38-7
Domestic, Foreign, and Alien
Corporations
• Domestic: Doing business within state of
incorporation
• Foreign: Doing business in states other
than state of incorporation
• Alien: Doing business country other than
country of incorporation
38-8
Publicly Held versus
Closely Held Corporation
• Publicly held corporation: Stock available
to public
• Closely held corporation (aka a close,
family, or privately held corporation):
Generally does not offer stock to public
38-9
3
4/29/2018
Subchapter S Corporation
• Named after provision of Internal Revenue
Service (IRS) code that provides for it
• Particular type of closely held corporation
(no more than 100 shareholders)
• Combines advantages of limited liability
and single taxation
38-10
Formation of Corporation
• Promoters organize corporate formation
• Subscribers offer to purchase stock in
corporation in formation process
• State selected for incorporation
38-11
Considerations When Selecting a
State for Incorporation
• How much flexibility does the state grant
to corporate management?
• What rights do state statutes give to
shareholders?
• What restrictions does the state place on
the distribution of dividends?
• Does the state offer any kind of protection
against takeovers?
38-12
4
4/29/2018
Legal Process of Incorporation
• Selection of corporation name
• Drafting and filing articles of incorporation
• First organizational meeting held
38-13
Remedies for Defective
Incorporation
• De jure corporation: Lawful corporation that has met the
substantial elements of incorporation process
• De facto corporation: Corporation that has not met the
requirements of state incorporation statute, but courts
recognize it as a corporation for most purposes to avoid
unfairness to third parties who reasonably believed it was
properly incorporated
• Corporation by estoppel: Corporation prevented by court
from denying its corporate status
• Piercing corporate veil: Shareholders personally liable when
they have used corporation to engage in illegal/wrongful
acts
38-14
Situations When Courts May
Pierce Corporate Veil
• Corporation lacked adequate capital when
initially formed
• Corporation did not follow statutory
mandates regarding corporate business
• Shareholders’ personal interests and
corporate interests are commingled
(corporation has no separate identity)
• Shareholders attempt to commit fraud
through corporation
38-15
5
4/29/2018
Debt Securities versus
Equity Securities
• Debt securities: Bonds (representing loans
to corporation from another party)
• Equity securities: Stock
38-16
Types of Bond Debt Securities
• Unsecured bond (debenture): No assets support corporation’s
obligation to repay face value of bond
• Secured bond (mortgage bond): Specific property supports
corporation’s obligation to repay; creditor can seize secured
interest if bond not repaid
• Income bond: Corporation pays interest on bond in proportion
to earnings
• Convertible bond: Allows shareholders to exchange bond for
shares of company stock
• Callable bond: Allows corporation to call in and repay bond at
specific times
38-17
Equity Securities: Preferred versus
Common Stock
• Preferred stock: Stockholder enjoys
preferences regarding assets and
dividends
• Common stock: Stockholder owns portion
of corporation, but no preferences
regarding assets and dividends
38-18
6