Improper Incorporation

ü Errors in incorporation procedures when a 3^rd party seeks to bring an action against a corporation that may not have complied perfectly with every incorporation law.

ü Problematic for shareholders who may be personally liable.

ü In addition, entity may not be able to enforce contracts.

ü De Jure: substantial statutory requirements are met; cannot be attacked by state or 3^rd parties.

ü De Facto: statutory requirements not met, but promoters made good faith effort to comply with corporate law;corporate status can only be attacked by state.

ü By Estoppel: if it acts like a corporation, cannot avoid liability by claiming that no corporation exists.

Disregarding the Corporate Entity

ü “Piercing the Corporate Veil” occurs when a court, in the interest of justice or fairness,” holds shareholders personally liable for corporate acts.

ü Court concludes that shareholders used corporation as a “shield” from illegal activity.

Piercing the Corporate Veil

ü Factors a court considers:

3^rd party tricked into dealing with a corporation rather than the individual.

Corporation is set up never to make a profit or remain insolvent or is under capitalized.

Statutory formalities are not followed.

ü Corporation is “alter ego” of majority shareholder and personal and corporate interest are commingled such that the corporation has no separate identity.

Corporate Financing

Bonds vs. Stocks

Debt Ownership/equity

Fixed ROI Dividends (variable)

No votes Vote for Management

Optional Required

Priority over stock Paid last

Stocks: Common vs. Preferred

Bonds

Stocks

ü Common Stock: represents true ownership of a corporation. Provides pro-rata (proportional) ownership interest reflected in control, earnings and assets.

ü Preferred Stock: has preferences over common stock.

Cumulative Preferred.

Participating Preferred.

Convertible Preferred.

Redeemable or Callable Preferred.

Directors, Officers and Shareholders.