Learn whether and how to set up your practice as a corporation
As we form business relationships, the question arises whether a sole proprietorship or corporation is needed. A corporation is a legal entity, separate from its shareholders, created under the authority of the legislature. As an entity, a corporation is responsible for its debts. The shareholders are not responsible for the corporate debts. Shareholders’ risk is limited to the amount of their investment. The ownership interests of the corporation are represented by shares, which are freely transferable.
Management control of a corporation is centralized in the board of directors and officers acting under the direction of the board’s authority. Shareholders generally elect the board but cannot control its activities and have no power in management of corporate business.
Corporations have distinct differences from partnerships. Partnerships are governed by the Uniform Partnership Act (UPA). Partnerships are not legal entities but aggregates of two or more persons engaged in a business. With corporations, shareholders are limited to their investments. In partnerships, each partner is subject to unlimited personal liability for all debts of the partnership. Know your goals in what you want, and research each before deciding on a partnership or corporation (refer to my April 2003 Chiropractic Products article, “Howdy Partner”).
A corporation, as a legal entity notwithstanding the death or incapacity of its shareholders, can have a perpetual duration. Partnerships are not subject to perpetuation. If a corporation goes bankrupt, any debts owed by the corporation may, under certain circumstances, be subordinated to the debtors. This means the debts would have to be paid before the shareholders receive any money (Taylor v Standard Gas and Electric Corp) and is called Deep Rock Doctrine.
Formation or organization of a corporation is completed under general corporate law or business law statutes of the state in which you are incorporating. Usually a corporation is organized by the execution and filing of the certificate of articles of incorporation by the person or persons forming the corporation. The articles must show the names of the shareholders, address and name of the corporations registered agent, and name and the address of each person forming the corporation. Optional provisions can include: 1) purpose of the incorporation, 2) names of board of directors and management powers, and 3) par value of shares or class of shares.
Corporations can engage in any legal business without spelling out a long list of corporate purposes. Most states confer certain powers for every corporation whether or not those powers are stated in the articles. Typically a corporation is granted the following rights and powers:
• Perpetual existence
• The ability to sue and be sued
• A corporate seal
• Acquire, hold, and dispose of personal and real property
• Appoint officers
• Adopt and amend by-laws
• Conduct business in and out of state
• Make contracts
• Make donations
When a corporation acts beyond the purpose and powers, it is called ultra vires. This is not a defense in tort law or liability to escape civil damages by claiming the corporation had no legal power to commit a wrongful act. This also applies to criminal liability. A corporation must act within its powers and purpose as stated in state statues.
Most state statutes prohibit the use of ultra vires as a defense in a suit between contracting parties. However, if a contract has been performed and has resulted in a loss to the corporation, the corporation can sue the officers or directors for damages for exceeding their authority. If the corporation refuses to sue, a shareholder may bring a derivative suit. States may sue to enjoin the corporation from transacting unauthorized business. If the prevailing party wins, it may be entitled to compensatory damages.
Incorporation Process Setting up a corporation is a fairly easy process, but may differ from state to state. The first step is to get a corporation filing packet from the Secretary of State for your particular state. Decide what type of corporation you want to be: general partnership or limited partnership type and S or limited liability corporation. The following is required: - Name of corporation;
- First director’s name and address;
- Number of shares the corporation is authorized to issue and the par value;
- Contact name, usually an officer (needed to ship your corporate kit); and
- Secretary of State filing fees (varies for each state and generally includes stock certificates, stock transfer ledger, corporate seal, minutes, tax forms, and bylaws).
You may wish to incorporate in another state other than where you practice. In that case you contact the Secretary of State where you want to incorporate. When you receive your packet, pick a resident agent in that state. The purpose is to have a person or organization to receive mail addressed to the named corporation and file all necessary documents for incorporation. Generally, incorporating can range from $500 to $1000. CP |
Go By the Board
Generally, the powers to manage the corporation belong to the board of directors and not the shareholders. The shareholders cannot order the board of directors to take certain actions in managing the corporation. However, the shareholders’ approval is required for certain fundamental changes, including: amendment to the articles of the corporation, mergers, and sale of substantial assets and dissolution of the corporation. Shareholders also have the power to remove a director for cause. Shareholders also have the right to:
• ratify certain kinds of management transactions,
• adopt nonbinding resolutions, and
• adopt and amend bylaws.
A close corporation is defined by ownership by a small number of shareholders, has no general market for the stocks, has limitations nf the transfer of the stocks, and adopts special governance rules. In this respect a close corporation is similar to a partnership. Most states define a close corporation by the number of shareholders. Each state varies as to that number. In California, it is 35 shareholders; in Delaware, 30.
Person in Charge
Original directors are those persons who initially set up the corporation. The shareholders at the annual meeting elect board members, which can also be the original directors if there are no other shareholders. Once elected, shareholders can be removed onlyfor cause—ie, fraud, dishonesty. Directors can be removed by the shareholders without cause if there is specific authority to do so in the articles of incorporation.
The director to be removed is entitled to a hearing before a final vote on removal is cast. Courts generally do not have the authority to remove directors, but some courts have taken the position of removing directors for a specific reason such as fraud or a dishonest act.
Each director has a fiduciary relationship to the corporation and must exercise the care an ordinary, prudent, and diligent person would take under similar circumstances. Courts vary on what constitutes a bad decision by directors who breach their duty to the corporation. CP
Kenneth S. Ross, DC, JD, MBA, LHRM, is a retired criminal law enforcement officer and practices chiropractic in Orlando, Fla. He is a faculty member of Texas Chiropractic College and conducts a national expert witness certification course. He can be reached at 866-225-5055, or via website: www.medtechusa.net.
The information in this article is intended for informational puposes only and does not constitute any legal advice whatsoever. Consult an attorney in your state for more specific information.
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