Deck 32: Nature of a Corporation

Question 1

The Resource Center was formed to serve mentally handicapped persons in Chautauqua County. The next year, it affiliated as a chapter with and agreed to be bound by the rules of NYSARC Inc., a not-for-profit corporation. Fifty years later, The Resource Center wanted to disaffiliate from NYSARC and keep its assets. It asked a court to determine that it had done so. NYSARC's bylaws stated that all property owned by one of its chapters was held in trust for NYSARC. Should the court allow disaffiliation of The Resource Center and allow it to keep its property?

Answer 1

Legal Reasoning:
In The Resource Center v. NYSARC, Inc. , 2010 NY Slop Op 05061 (2010), the trial court held that all assets were properly held in trust by NYSARC and not property of The Resource Center.
Further, the court stated that according to NYSARC's bylaws and rules, all property held by one of its chapters is held in trust for NYSARC. As such, The Resource Center has always held itself out as a chapter of NYSARc.The appellate court affirmed.Therefore, allowed disaffiliation with NYSARC but DID NOT ALLOW The Resource Center to keep the property that was in trust.

Question 2

How is a tax savings achieved when a corporation is designated a Subchapter S corporation?

Answer 2

Corporate Double Taxation:
Double taxation occurs when taxes are paid twice on the same source of earned income. Tax is paid on dividends paid to shareholders after the corporation has paid tax on the same income.
Dividends are voluntary distributions to shareholders and corporations may avoid having the same earnings taxed twice by electing to withhold distributions to shareholders. Shareholders disclose the earnings on their individual tax forms and are taxed on the amount of earnings derived from the corporate distribution.
S Corporation:
A subchapter S corporation is advantageous when starting out because loss is expected for the first several years. Under an S corporation structure, the advantages for a business include the ability to share the loss within the corporation and that loss is immediately deductible on the returns of the shareholders.
An S corporation may not have more than seventy-five shareholders. Owners of an S corporation are called shareholders or partners and when a shareholder dies, the interest in the company has free transferability.
The S corporation is structured for the purpose of avoiding double taxation. The shareholder has the option to treat the corporation as a partnership on his/her income taxes, but must file an information return with the Internal Revenue Service.If the S corporation has a profitable year and does not distribute dividends to its shareholders, then income tax will be assessed on earnings not received. This means that the undistributed earnings will be taxed on top of the tax that the S corporation pays.
This structure would provide the benefit of limited liability, while being treated in the manner of partners for purposes of taxation. The liability protection provided to us would not make us individually liable for debts and obligations of the corporation arising from wrongful acts committed by another partner or employee.
As shareholder employees of an S Corporation we will be less likely to be subject to IRS claims of excessive compensation, as compared to shareholder employees of C Corporations. Also, we would not be subject to double taxation unless we do not distribute earnings.

Question 3

On November 1, Joseph Mastroianni who owned an unimproved lot leased it to Domenic D'Attilo and Tony Dilorio doing business as Fairfield County Paving Construction Inc. D'Attilo and Dilorio both signed the lease above their names. The initial term was for one year, with an option to renew. The lease required the lessee to "clear, properly grade, pave, and secure by fencing, the perimeter of the lot with a gate at the entrance" and "use the property in compliance with the zoning regulations." At the time the lease was signed, Fairfield County Paving Construction Inc. was not in existence. The following November 19, the lessees sent Mastroianni notice of renewal. Mastroianni had sent the lessees a notice to quit. A lawsuit ensued in which Mastroianni alleged the property had not been properly tended as required by the lease and that D'Attilo and Dilorio were personally liable. Were they?

Answer 3

Yes , as DD and TD were owners of the incorporation and at that time incorporation was not in existence. Secondly, they have signed the contract in their names and so have taken personal liability and it has not been stated that after formation of the corporation, whether corporation will adopt the contract or not.
If it does so then the personal liability will transfer to the corporation. This has not been detailed in the case. Otherwise, one knows that the corporation does not automatically become a party in the contract.
Even then two cases are possible:
1) They can be exempted only when in the contract there is a provision that they have no personal liability if the corporation does approve or does not adopt the contract.
2) Weather they are responsible or not before or after the formation of the corporation. But here in this case it is not clearly stated.

Question 4

Is a corporation automatically a party to contracts made by promoters?

Question 5

Brookhaven Academy Inc.'s articles of incorporation stated several purposes, including: to own and operate schools; to purchase, lease, and sell property; and "to have and to exercise all powers conferred by the laws of the State of Mississippi upon corporations." Brookhaven Academy formed Brookhaven Academy Educational Foundation Inc. (the "Foundation") and transferred assets via a lease to the Foundation for educational activities. As a shareholder, Dudley Keene filed suit against Brookhaven Academy. Keene argued that Brookhaven Academy was a specific-purpose corporation, created to provide education to youth, and that the formation of the Foundation and lease of property was ultra vires. Was Keene correct?

Question 6

When does a subscription agreement become binding upon a corporation and a subscriber?

Question 7

Luvena Miegs was a manicurist who wanted to open her own salon. She drew up a business plan and found a building to lease but was unable to secure a loan for the start-up costs. Madge Mobley, the grandmother of Miegs's husband, agreed to loan Miegs $50,000. Miegs opened a bank account and listed the owner of the account as "Luvena Miegs dba Allure Studio Inc." Mobley sent a check to Miegs and then wired funds to the bank account set up for the business. The outgoing wiretransfer referred to the beneficiary account as "Luvena K. Miegs." Two days later, Allure Studio Inc. filed its articles of incorporation, listing Miegs as the promoter. Miegs was the sole shareholder, and she and her husband were named as the two corporate directors. The entire $50,000 loan proceeds were spent on Allure Studio Inc.'s start-up costs, and Miegs made payments on the loan balance with checks bearing the name Allure Studio Inc. After Mobley's death, Miegs defaulted on the loan. Mobley's estate filed suit against Miegs individually to recover the outstanding loan balance. Miegs claimed that the loan was made to Allure Studio Inc. and that she was not personally liable as the promoter. Should Miegs be liable?

Question 8

What does the law frequently require to be included in a corporation's name?

Question 9

Willie Ann Madison incorporated Cherokee Children Family Services Inc. (CCFS) as a nonprofit public benefit corporation and was its executive director. CCFS was to provide childcare brokerage services to low-income families. The corporation had no members. Its income was almost exclusively state and federal grants. CCFS paid for travel to Hawaii, personal travel the next year, and a trip to London-all by Madison and several of her relatives. Madison was regularly paid bonuses of 50 percent of her salary. She bought a building and leased it to CCFS (signing on behalf of CCFS) for five years at an annual rent of $49,932. During the first year, the lease was renegotiated at a retroactive annual rent of $72,000. Prior to expiration, the lease was renegotiated again to reflect leasing 20,000 square feet, although the building had only 9,700 square feet, at an annual rent of $210,000. The next year, three members of the board of directors approved the payment of "prorated back rent" for the contract period. This was $210,000 rent times five, minus what CCFS had paid in rent to Madison. This amounted to $437,000 and was paid to Madison's company. The state attorney general sued to dissolve CCFS, saying it had abandoned its public purpose and had become devoted to private gain. Should it be dissolved?

Question 10

What is a corporation's articles of incorporation, and what is their importance?

Question 11

Universal Real Estate Solution Inc. was a closely held corporation with two shareholders, Randy Snowden and William Wendell, each of whom owned 50 percent of the corporation's shares. Universal bought, sold, and rented real estate properties. Snowden maintained properties owned by the corporation and negotiated the purchase of new real estate. Wendell funded the corporation. In one business transaction, Snowden located a group of houses for Universal to purchase, but Wendell felt the properties were in poor condition and did not want the corporation to purchase the properties. Snowden then purchased the properties himself and less than a year later resold the properties to Universal at a significant markup. Snowden then sold his shares in Universal to Wendell for $1 and Wendell assumed the corporation's debt. Universal filed suit against Snowden, alleging among other things, that Snowden breached his fiduciary duty to Universal by withholding material information. Snowden argued that he owed a fiduciary duty to the other shareholder of the closely held corporation but not to the corporation itself. Was he correct?

Question 12

How may a shareholder respond to an ultra vires contract entered into by the corporation?

Question 13

Robert Hayden entered into an oral agreement with P. Zarkadas that provided he would be paid one-third of the legal fees recovered by Zarkadas in any personal injury cases upon which Hayden performed work. After entering into the agreement, Zarkadas created a professional corporation, P. Zarkadas, P.C., and the corporation adopted the agreement. When Hayden was not paid according to the agreement, he sued Zarkadas and the corporation, alleging she was personally liable because the corporation did not exist at the time of the agreement. Is she personally liable?

Question 14

What powers does a corporation have in addition to incidental or express powers?

Question 15

Acacia Country Club Co. (the club), a nonprofit golf club corporation, decided to sell some real estate. Acacia Development Co., Ltd. (ADC) agreed to buy 17.9 acres. The club shareholders had authorized the sale of 16 acres. After the sale, a club member was upset and brought a lawsuit. In the suit, ADC claimed that the lack of shareholder authority for the sale was a cloud on title to the land and thus that the sale was beyond the power of the club. Assuming the sale did breach the regulations by which the club operated, was this a valid argument for ADC against the club?

Question 16

Explain the difference between public and private corporations.