University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

285

Pages:

2
Author:

bratrochanter

The excerpt covers several important corporate concepts, specifically related to incorporation procedures, the consequences of defective incorporation, and the organization and operation of newly formed corporations. Key Points Summary 1. Incorporation and Annual Reporting: o To establish a corporation, the incorporators file articles of incorporation with the state’s Secretary of State, who then stamps the articles as “Filed,” marking the corporation’s legal existence. Some states require duplicate filings in the county of principal business. o Once established, corporations must file annual reports and pay franchise taxes to retain good standing, with non-compliance potentially resulting in dissolution. 2. Organization Meeting: o After incorporation, the board of directors holds an organization meeting to adopt bylaws, authorize share issuance, approve preincorporation contracts, and assign officer salaries. o Bylaws supplement the articles of incorporation by outlining operational procedures (e.g., meeting rules, share transfer mechanisms, and dividend policies). 3. Defective Incorporation: o If incorporation fails to meet mandatory legal requirements, individuals may be personally liable for the business's debts and obligations. o Types of corporations resulting from incomplete incorporation:  De Jure Corporation: Fully compliant with incorporation requirements.  De Facto Corporation: Substantially compliant but has minor defects; still treated as a corporation by the court.  Corporation by Estoppel: Prevents individuals who believed they were dealing with a corporation from denying its existence to escape liability.  If none of these apply, the business may be treated as a partnership, holding managers and shareholders personally liable. 4. Liability of Promoters: o Until the corporation is officially formed, promoters can be liable for contracts signed on behalf of the not-yet-existent corporation unless a novation clause releases them upon the corporation’s adoption of the contract. 5. Case Example - Christmas Lumber Co., Inc. v. Valiga: o This case demonstrates the risk of personal liability when incorporation requirements are incomplete. Waddell and Graves acted on behalf of a corporation not yet legally formed, resulting in the court classifying them as partners, and thus personally liable for debts. 6. Close Corporations and Domestic Tax Havens: o Close Corporations: Many states have statutes tailored to the needs of close corporations, allowing, for example, shareholder management. o Domestic Tax Havens: Corporations may form subsidiaries in states with low tax rates (e.g., Delaware) to manage tax liability on intangible assets like trademarks, sparking ethical and social responsibility debates. Ethical Considerations and Modern Approaches Corporations face ethical questions in choosing tax-friendly jurisdictions. Legislators in high-tax states may propose measures to retain businesses, potentially drawing on utilitarian principles to benefit the majority or justice theories for equitable outcomes. Modern corporate statutes, like the MBCA, clarify liability by making the filing date definitive proof of a corporation’s existence and simplifying defective incorporation rules.