Cyclopedia of Commerce, Accountancy, Business Administration, v. 03 (of 10)

by American School of Correspondence

CORPORATIONS

86. Nature of a Corporation. A corporation has been defined to be "a collection of many individuals into one body, under a specific denomination having perpetual succession, under an artificial form and vested by the policy of the law, with the capacity of acting in several respects as an individual." In other words corporation is the name applied to an association of persons authorized by law to create, by mutual contribution, a common fund for the purpose of transacting business without rendering the individual members personally liable for the debts of the association, beyond a certain amount. The object is to permit persons to obtain the advantage of large combinations of capital without involving, beyond certain limits, the private property of the individuals composing it. A corporation is an artificial person having an existence in many respects separate and apart from the members composing it. While it can only transact business by means of agents, the obligations created are the obligations of the artificial person, the corporation. The common fund or capital of the corporation, is the only property that can be subjected in payment of the debts. The individual property of the members is not the property of the corporation.

UNITED STATES PATENT OFFICE, WASHINGTON. D. C.

87. Corporations Distinguished from Partnerships. A partnership may be created by mutual consent of the parties desiring to engage in that joint enterprise. The only limitation is that the enterprise must be for a lawful purpose. A person may form a partnership for the transaction of any kind of business which he may transact as an individual. A corporation, on the other hand, must have permission from the government to transact business. This permission is called its franchise. Corporations cannot be formed for every purpose. That is, individuals are permitted to engage in lines of business denied to corporations. A corporation is an artificial person, regarded in law as distinct from the individuals composing it. A partnership is not distinct from the individuals composing it, and the individual members are personally liable for the debts of the partnership. A corporation has a continuous existence; it continues to live regardless of death of some of its members, or regardless of a change of membership. A partnership ceases to exist upon the death of a member, or by a change of membership. A corporation's members do not have the right, as such, to act as agents of the corporation for the purpose of transacting business. The agents of the corporation are appointed in a manner prescribed by law, and by the rules of the corporation. In a partnership, each member is the recognized and authorized agent of the partnership. Each member may bind the partnership by any contract made within the scope of the partnership business. For example, if A and B form a partnership for the purpose of selling real estate, either A or B by reason of the partnership agreement, is authorized to sell real estate in the name of the firm. If A, B, C, D, and E are stockholders in the X Co. neither A, B, C, D or E is entitled, by reason of his being a stockholder, to make contracts for the corporation. A board of directors must be elected by the stockholders, who in turn elect officers, and appoint agents authorized to transact the business of the corporation.

88. Powers of a Corporation. Corporations are not permitted, as such, to transact business of every kind. A corporation is an artificial being created by law. It can exist only for those purposes enumerated by law. Corporations, as such, have well recognized, or distinguished, powers or characteristics. The ordinary powers of a corporation are as follows:

First—	The power of perpetual succession.
Second—	The right to sue and be sued, and to receive and grant in their corporate name.
Third—	The right to purchase and hold real estate and personal property.
Fourth—	The right to have a common seal.
Fifth—	The right to make by-laws.

It was long ago decided that a franchise given by the government to a corporation, cannot be revoked or changed by the government, unless such a reservation is made by the government at the time the franchise is granted. At present, such reservations are made in granting most franchises, either by express reservation in the franchise itself, by general statutory provision, or by constitutional limitations.

89. Creation of Corporations. A corporation cannot be organized merely by agreement of the members. It must obtain permission of the government, state or national, to operate as a corporation, before it can lawfully exercise any corporate rights.

Originally, the right to become a corporation was granted by express permission of the king. The franchise, or right granted, was called the corporate charter. In this country, charters originally were granted by special legislative grants. While the United States Constitution does not expressly provide for the formation of national corporations, Congress is deemed to have the right to create them for the purpose of carrying out the express functions of the government, expressly granted by the United States Constitution. For example, the Constitution expressly grants the United States Congress the power to coin money and regulate the value thereof, and to levy and collect taxes. It is given no express power to organize national banks, but under the provisions giving it power to make laws to carry into execution all of the powers expressly granted, it is held to have the power to provide for the organization of national banks.

Most corporations are organized under state laws. Originally, charters were granted by special acts of the state legislatures. These charters were decided to be contracts between the state and the corporation, which could not be changed or revoked at the desire of the legislature. At the present time, most states have general permissive statutes, under which corporations may be organized. These statutes generally reserve the right to the state, to revoke or change the charter at the will of the legislature. Many states have constitutional provisions limiting the power of the legislature to grant irrevocable charters. The statutes of the different states vary somewhat as to the things required of persons desiring to organize a corporation, but the primary requirements are similar. In general, the following are the statutory requirements of the states for the organization of a corporation. The persons desiring to organize a corporation, not less than three (some states require more), a majority of whom are citizens of the state, must sign a paper, called the articles of corporation, which contains the name of the proposed corporation, the place where it is to be located, the purpose for which it is to be formed, and the place where its principal business is to be transacted, the amount of its capital stock, and the number of shares into which it is to be divided. The articles of incorporation are sent to a designated state officer, usually the Secretary of State. Upon the filing of the articles of incorporation with the proper state officers, the incorporators may open the books of the company, for stock subscriptions. The time and place of opening the books is announced, usually by thirty days advertising in a newspaper. A portion of the stock, usually ten percent, must be paid at the time the subscription is made. When the required portion of the authorized capital stock is subscribed, by advertising notice, the stockholders may meet and elect a board of directors. The board usually consists of from five to fifteen directors. The directors are required to take an oath of office. Some of the governing rules of the corporation, usually called by-laws or regulations, are enacted by the stockholders. Some regulations may be enacted by the board of directors. The board of directors may elect the officers provided for by the regulations, and then proceed to transact the business of the corporation. Corporations not for profit may be organized. Such corporations are organized in the same manner as corporations for profit, except that there is no capital stock, and the directors are usually called trustees. Church and fraternal organizations are common examples of corporations not for profit.

90. Names of Corporations. A corporation must of necessity have a name by which it may be designated, and under which it can transact business. The statutes of the different states generally provide that the incorporators must designate the name which the corporation is to use. One corporation is not permitted to use a name already appropriated by another corporation. A corporation has no right to use a name other than the one given it by its charter. A corporation may prevent by injunction another organization from using a name which interferes with its corporate name. This is subject to the limitations that a corporation is not permitted to appropriate a name descriptive of an article or place. For example, a storage company was incorporated under the name of the "Fireproof Storage Co." An individual with a fireproof building adopted the trade name "The Allen Fireproof Storage Co." The former company was not permitted to enjoin the latter from using the word Fireproof, in the name of his company, since the word, fireproof, is descriptive of the kind of building used in the business, and cannot be appropriated by any one company or person. The states generally, by statute, provide a means by which a corporation may change its name.

91. Kinds of Corporations. Corporations are usually classified as public and private. Public corporations include those corporations organized for the purpose of exercising public functions, and for carrying out government purposes. An incorporated city or village is a common example.

A private corporation is one organized for the private benefit of its members. Private corporations are either corporations for profit or corporations not for profit. Corporations for profit have a capital stock, and are organized for the financial benefit of the members. Ordinary trading or manufacturing corporations are examples. Corporations not for profit have no capital stock, and are organized for charitable or social purposes. Clubs, educational institutions, and churches are common examples.

Corporations organized for private gain, and which serve some public purpose, are sometimes classified as quasi-public corporations. Express companies and telegraph and railway companies are common examples of the class. These companies are strictly private corporations.

92. When Corporate Existence Commences. The states generally provide by statute, for the organization of corporations. At present, corporations seldom are created by special grant of the legislatures. Most states, by constitutional provisions, limit the power of the legislatures to create corporations by special act. Persons desiring to organize a corporation, must comply with the general laws regulating their formation. As was pointed out in the section on creation of corporations, several steps must be taken to complete the organization of a corporation. The question often arises as to when the legal existence of a corporation commences. It is quite generally held that a corporation's legal existence dates from the filing of the articles of incorporation with the designated state office. After that time the corporation cannot deny its legal existence. Neither can third persons dealing with the corporation deny the legal existence of the corporation. If the corporation fails to fulfil the remaining statutory provisions relating to the completion of the corporation, the state, through its officers, may revoke the corporation's right to continue as a corporation. A corporation does not have the right to transact business, until its organization is completed. It may have a legal existence before that time.

93. Estoppel from Denying Corporate Existence. An association of persons pretending, innocently or otherwise, to be a corporation, not having complied with the legal requirements for creating a corporation, is not permitted to deny its corporate existence, for the purpose of avoiding its obligations. Such an association is liable as a corporation for its obligations, and if there is no corporate property, the members of the association are liable personally.

On the other hand, persons who deal with an association of persons which claims either by name, or by express statement, to be a corporation, cannot evade their liability to the association on the ground that the corporation has not been legally organized.

As between the corporation and the state, which alone can give it power to exist as a corporation, no valid corporation exists until all the legal requirements are complied with. The state, through its proper officers, may deny corporate right to any association of persons who have not fully complied with the statutes regulating the creation of corporations. To create a corporation by estoppel, there must be an organization assuming to act as a corporation. If A trades in his own name, a person dealing with him cannot claim that A is a corporation by estoppel. But if A trades as "The Cook County Lumber Co.," and enters into a contract with B in the name of The Cook County Lumber Co., and signs his name as president of the company, he cannot deny its corporate existence. If B purchases material of The Cook County Lumber Co., he cannot refuse to pay for it on the ground that The Cook County Lumber Co., is not a legally incorporated company.

94. Corporate Charter a Contract. Originally in this country, the right to exist as a corporation was granted by special act of the legislature. It was early decided that this grant by a legislature could not be revoked or changed by subsequent act of the legislature. It was regarded as a contract. By reason of the fact that corporate charters are contracts, giving corporations the right to a continuous existence under the terms of the original grant, many states now have constitutional provisions, limiting the right of legislatures to grant irrevocable charters. Those states having no such constitutional limitations, have a provision in their statutes authorizing the creation of corporations, and providing that all corporate charters or franchises be revocable or changeable at the will of the legislature. At the present time in most, if not all of the states, a corporation cannot obtain an irrevocable charter. Their charters are granted with the reservation, or upon the condition, that the terms may be changed or revoked at any time.

95. De Facto Corporations. In connection with corporations, the terms de facto and de jure are often used. By de jure corporation is meant a corporation that has a perfectly legal existence; one that has complied with all the laws relating to its creation; one that cannot have its right to exist as a corporation denied by the state under whose laws it was created, on the ground that it has not complied with all the laws relating to its creation. By de facto corporation is meant a corporation that has performed some of the functions of a corporation without having complied with all the legal requirements relating to its incorporation. To constitute a corporation de facto, it is usually conceded that there must have been laws under which the pretended corporation might lawfully have been organized, followed by some kind of an attempt to organize under these laws, and by a use of corporate functions. As between the corporation and the state, the state may stop the corporation from exercising corporate functions. As between the corporation and third persons dealing with it as such, in the absence of fraud, corporate existence of a de facto corporation cannot be denied.

96. Promoters. Persons who undertake the organization of corporations are called promoters. The promoter of a corporation need not be one of the incorporators, but he is the active man who engineers the enterprise. He is the one who interests capital, who induces persons to take the required amount of stock, who assembles the parties desiring or induced to organize the corporation. In short, he is the one who manages the organizing and starting of the corporation. Oftimes much work must be done, many contracts made, and liabilities incurred before a corporation has any legal existence. Just what connection the promoter has with the corporation, whether he may bind the future corporation, or make it liable for his acts of necessity, or by adoption, is often a close question. It must be borne in mind that before a corporation has a legal existence, it can incur no obligations as a corporation. Before a corporation's legal existence commences it can have no authorized agents. If A, knowing where valuable undeveloped stone quarries are located, obtains options on the lands, interests men of means to promise to take stock in a future organization, performs all the preliminary work to the creation of a corporation, organized for the purpose of purchasing and operating said lands, and incurs debts in connection therewith in the name of the proposed company, the corporation, when completed, cannot be compelled to pay such obligations. It did not incur them. It had no power to incur them since its legal existence did not commence until a subsequent time. The obligation belongs to the promoter, or to those persons, if any, who authorized him to incur the debts. If, however, recurring to the former example, "The Cuyahoga Stone Co.," is organized by A to develop and operate such stone lands, and after the organization is completed with full knowledge of the obligations of A, it, as a corporation, agrees to pay said obligations, and to purchase A's options on the lands for a specified amount, the obligations now become the obligations of the corporation. The corporation may be sued thereon, and its property subjected. This is called the adoption of a promoter's obligation by a corporation.

A corporation is liable on its express, as well as on its implied contracts, and if it accepts valuable services of a promoter after it becomes a corporation, it is liable on an implied contract to pay for the same. Services rendered by a promoter for a future corporation do not render a corporation liable therefor, unless adopted by the corporation after its legal existence commences. The states generally provide by statute, the time when a corporation's existence commences. These statutes vary somewhat, but in general provide that the corporation's existence commences when the proper articles of incorporation are filed with the Secretary of State.

97. Reorganization of Corporations. The right to exist as a corporation is a special privilege which cannot be sold or transferred to another. Any property acquired by a corporation may be mortgaged, sold or transferred at the will of the corporation. The right to exist as a corporation, however, is a special privilege granted by the state, and cannot be transferred. Any association of persons desiring to exercise the rights and privileges of a corporation must obtain such rights from the state. They cannot purchase such a right from an existing corporation. Many of the states provide by statute for the organization of a corporation by those persons purchasing the property of public service corporations at a foreclosure sale. A common example is in case of a foreclosure of a mortgage on a railway. Statutes of some states provide that the purchasers of such property at foreclosure sale may, and shall organize a corporation which shall carry out the purposes of the original corporation.

Where a corporation is organized and purchases the assets of the former corporation, the new corporation is not liable for the obligations of the old. Sometimes the new corporation takes over the assets of the old corporation, and expressly assumes the obligations of the old. In this event, the new corporation is liable for its predecessor's debts. If the new corporation, in purchasing the assets of the old, uses unfair or fraudulent methods, the transfer will be set aside at the instance of creditors of the old corporation, or the new corporation will be deemed liable for the debts of the old corporation. In carrying out reorganization schemes, a transfer of assets must be fair and bonâ fide, or the sale will either be set aside as fraudulent, or the new organization will be deemed a continuation of the old, and liable for its debts.

98. Consolidation of Corporations. The right to exist as a corporation does not carry with it the right to combine or consolidate with other corporations. Where two or more corporations combine or consolidate, the resulting corporation is distinct from the combining corporations. The right to consolidate, like the right to exist as a corporation, is a special privilege granted by the state. Consent must be obtained from the state before a valid consolidation can be made. Most states provide by statute for the consolidation of certain corporations under certain prescribed conditions. Before a valid consolidation can be effected, the provisions of these statutes must be complied with. Some states require the payment of a consolidation tax. Others require that parallel and competing railroads cannot consolidate.

Unless the charter of the corporation permits of consolidation without the consent of all the shareholders, and unless the shareholders have by valid resolution given the directors the right to consolidate, a consolidation cannot be made over the objection of any shareholder. An attempted consolidation under these circumstances may be enjoined by a dissenting stockholder, or if the consolidation is made over his objection the resulting consolidated company is liable in damages to him.

When a consolidation has been legally made, the consolidated company is liable for the debts, and is entitled to the assets of the component corporations.

99. Meetings and Elections of Corporations. A corporation transacts its business through a board of managers. The shareholders or members of the corporation do not transact the business of the corporation directly, but through the governing board. In case of a corporation having a capital stock, this governing board is called the board of directors. In case the corporation has no capital stock, such as a church or charitable organization, the governing board is called the board of trustees. The charter, or statute under which corporations are formed, usually provides for annual meetings for the election of officers. If the corporation has no fixed place of meeting, notice must be given each stockholder of the place of such meeting. A corporation has no power to hold its meetings outside the state of its organization. It may employ agents to represent the corporation outside the state of its creation, but it should hold its corporate meetings within the state. If the time of holding the election of officers is fixed by statute, or by a regulation or by-laws of the corporation, the meeting should be held at that time. If for any reason a corporate election cannot, or is not held at the time designated, the old directors hold over until the new board is regularly elected.

100. Voting at Corporate Meetings, Quorum and Proxy. Each shareholder or stockholder of a corporation is entitled to vote at the corporate meeting for the election of officers. Usually the vote is by shares. Each shareholder is entitled to one vote for each share he holds. Some states, by statute, limit the right of a single shareholder to a certain number of votes. When this limitation is fixed, it usually limits the shareholders to one vote regardless of the number of shares held. Such a limitation, where found, is for the protection of small shareholders. Corporations keep books in which are kept the names of the shareholders. Only the persons whose names appear upon the corporation's book as shareholders are entitled to vote.

Some states provide by statute for what is known as cumulative voting. Instead of voting the number of shares he owns for each director, by cumulative voting a stockholder is entitled to vote for one director the number of shares he owns, multiplied by the number of directors to be elected. This is sometimes called ticket voting. For example, three directors are to be elected, and a shareholder holds ten shares. He may have ten votes for each director, or thirty votes for one director. This is for the protection of the small shareholder.

By quorum is meant the number of votes required to constitute an election. Sometimes a quorum is based upon a majority of the number of shareholders present. In the absence of statute or corporate regulations to the contrary, this rule applies. Statutes of some states provide that a two thirds majority of the shares of the corporation shall constitute a quorum.

Most states provide by statute for voting by proxy. This entitles one shareholder to give another written authority to vote his shares at a corporate meeting. This right does not exist in the absence of statute. A proxy may be revoked at the will of the shareholder giving it.

101. Stockholders of a Corporation. The membership of a corporation is made up of the stockholders or shareholders. A corporation for profit is authorized by its charter to have a certain capitalization, or the capitalization is the total amount of the shares authorized to be issued. The charter usually requires that a certain percentage of shares subscribed be paid in before the corporation is authorized to elect directors. The charter usually provides that at least ten per cent of the capitalization be subscribed, and at least ten per cent of the amount subscribed be paid in, before directors can be elected. A stockholder is liable to the corporation on his subscription and, in the absence of any additional liability fixed by the charter, is not liable for the debts of the corporation for any amount in addition. Formerly some of the states provided by statute for double liability of stockholders. In case of insolvency of the corporation, stockholders could be required to contribute an amount equal to their subscription in addition to paying their subscription in full. Stockholders' double liability has been abolished by most states. At present a stockholder can be compelled to pay the full amount of his stock subscription, and no more.

Stockholders of national banks, corporations organized under United States laws, are liable for double the amount of their stock. Those persons are regarded as stockholders who appear as such on the books of the company. A person may become a stockholder by purchasing stock from the corporation, or by purchasing it from another stockholder. Any person legally competent to contract may become a stockholder.

102. Certificate of Stock. Written certificates are usually furnished shareholders, by corporations, as evidence of membership. These certificates are made transferable, in order that they may be indorsed by a shareholder, and made payable to a purchaser. When so indorsed, the purchaser is entitled to have the shares transferred on the books of the company, showing that he is a shareholder in the company. A certificate of stock does not of itself constitute ownership. It is merely evidence of ownership. A person may be a stockholder in a corporation by making a valid subscription, and by paying for the same, regardless of having received a certificate of stock. The following is a common form of stock certificate:

The Consolidated Tack Co.
Cleveland, Ohio.
Incorporated under the laws of the state of Ohio.
No. 99	No. of shares -15-
Capital stock $1,000,000.00
This certifies that John Smith is the owner of fifteen shares of$100 each of the capital stock of The Consolidated Tack Co., transferableonly on the books of the company, in person or by attorney,upon surrender of this certificate properly indorsed. Inwitness whereof said corporation has caused this certificate to besigned by its duly authorized officers, and to be sealed with theseal of the corporation. At Cleveland, Ohio, this 1st day of October, A. D. 1909.
Jack Brown,	Tom Jenkins,
Treasurer.	President.
Corporate
Seal.

Blank for transfer, on back of certificate.

For value received................ hereby sell, assign and transfer unto.............,............ shares of the capital stock represented by the within certificate, and do hereby irrevocably constitute and appoint.............. to transfer the said stock on the books of the within named corporation.
Dated................190..

_______________________

In the presence of
___________________

103. Directors of a Corporation. The managing officers of a corporation are called directors. They are the representatives elected by the stockholders, or members of the corporation, to transact the business of the corporation. While in the absence of statutory regulations a director need not be a stockholder, practically all states require directors to be stockholders.

Directors are authorized to act as agents for the corporation in the management of the corporation's business. Their authority is limited not only by the charter of the corporation, but by the regulations, and by-laws of the corporation as well. The directors of a corporation are not authorized by virtue of their office to dispose of the entire assets of the corporation, neither can they transfer their right to act as directors to others. They have the right to purchase property, to sell and mortgage assets of the corporation within the limits prescribed by the charter, regulations and by-laws of the corporation.

The directors of a corporation must act as a board. They are not permitted to act by proxy. The majority of the entire number of directors constitutes a quorum for the purpose of doing business. They may employ agents to make and carry out contracts, and perform ministerial acts of the corporation, but cannot delegate their discretionary powers as directors. Unless provided otherwise by statute, directors must hold their meetings within the state under whose laws the corporation is created. Notice of the meeting giving the place, time and purpose must be given to all the directors before a valid meeting can be held. Directors, like agents, cannot act for their own private interests if opposed to those of their corporation. Directors who privately profit to the disadvantage of the corporation are liable in damages for such acts to the corporation. It is generally conceded that a director may contract with his corporation, if no fraud is used, and if a quorum of directors without him consents. Directors are liable to the corporation for their dishonesty or negligence.

104. By-Laws, Rules and Regulations of a Corporation. The by-laws of a corporation are the rules and regulations by which the corporation is governed. Sometimes a distinction is drawn between the term by-law, and the term regulation. For example, the statutes of some states provide that the stockholders may pass regulations for the government of the corporation relating to the time, place and manner of holding corporate meetings, the number of stockholders that shall constitute a quorum, the time and manner of electing directors, the duties and compensation of officers, and the qualification of officers; while the directors have the power to pass by-laws relating to the government of the corporation, not inconsistent with the charter of the corporation and the regulations. This distinction between regulations and by-laws does not seem to be generally recognized. The entire government of the corporation is generally included in the term by-laws. If the charter does not provide otherwise, the by-laws shall be passed by the stockholders rather than by the board of directors.

A resolution is not a by-law. By resolution is meant the recorded and legally passed determination of a corporation to perform some particular thing or item of business. A vote of a board of directors to make certain bids on certain contracts is an example of a resolution. By-laws must not be contrary to the corporation's charter, or to general law. They are not presumed to be known by third persons, but if third persons dealing with a corporation have actual knowledge of them, they are bound by notice of their provisions.

105. Capital Stock of Corporations. The capitalization of a corporation is the aggregate amount of stock it is authorized by its charter to issue. If a corporation is authorized to issue one hundred thousand dollars ($100,000.00) of stock, it is said to be capitalized at one hundred thousand dollars ($100,000.00). This does not mean that the corporation has property worth one hundred thousand dollars ($100,000.00). A corporation is usually authorized to elect directors after one tenth of its stock has been subscribed, and after one tenth of the amount subscribed is paid in. Thus, a corporation capitalized at one hundred thousand dollars ($100,000.00), may elect directors and start business with only one thousand dollars ($1,000.00) actually paid in. The term, capital stock of a corporation, is used in many different ways. It is commonly used to designate the capitalization. Sometimes it is used to designate the amount actually subscribed. Strictly, it probably means the money actually paid in on subscriptions. A corporation's assets may be far in excess of its capitalization, or far below its capitalization. It may have property worth five hundred thousand dollars ($500,000.00) and be capitalized at one hundred thousand dollars ($100,000.00) more or less, or it may be capitalized at one hundred thousand dollars ($100,000.00) and have no assets.

106. Payment of Shares of Stock. It may be stated as a general rule that a corporation has no authority to dispose of its stock for less than par value. If a corporation is solvent, ordinarily no objection is raised, but if the corporation becomes insolvent, creditors may complain, and force, by proper legal action, the shareholders to pay the difference between the face value of their stock and the amount actually paid.

In the absence of a statute requiring stock subscriptions to be paid in cash, there is nothing to prevent a corporation from accepting property at a fair valuation in payment of stock. The rule is usually stated to be, that shares of stock must be paid for in money or in money's worth. Shares of stock may be paid for in bonâ fide services. The rule by which purchasers of stock are compelled to pay the full par value either in money or money's worth applies only to those who purchase direct from the company, or who purchase from stockholders with notice that the shares have not been fully paid for. If the certificates of stock state that they are fully paid for and the purchaser has no notice otherwise, or if the purchaser does not know that the stock has not been paid for in full, he cannot be made to suffer for the act of the corporation in unlawfully issuing the stock.

107. Calls and Assessments. An assessment may be defined to be a levy by a corporation upon a shareholder for an unpaid portion of his stock subscription; a call is a notice to a shareholder of an assessment. Ordinarily, assessments may be made by call, at the direction of the directors, until the entire par value of subscriptions are paid in full. Stock cannot be assessed beyond its par value, unless so provided for by the corporate charter, or unless the subscriber so contracts.

108. Watered Stock. In case property or services are accepted in payment for stock at an inflated valuation, or if stock is issued as fully paid up when it is not, the stock is said to be watered. For example, if A, a promoter of a corporation, turns over options to the company, actually worth one thousand dollars ($1,000.00), and receives stock in payment, the par value of which is five thousand dollars ($5,000.00), the stock is said to be watered, and the four thousand dollars ($4,000.00) excess valuation is said to represent the amount of water in the stock.

109. Increasing or Decreasing Capitalization. A corporation has no power, by reason of being a corporation, to increase or decrease its capitalization. The states generally provide by statute for the increasing or decreasing of the capitalization. The corporation must comply with these statutes, before its capitalization can be changed. In case the capitalization is increased, the purchasers of such stock are subjected to pay the full face value at the instance of creditors, the same as purchasers of an original issue. That is, if a corporation is unable to pay its debts, one who has purchased direct from the company, shares of stock upon an increased capitalization, at a price below par, may be compelled by creditors to pay the difference between what he has actually paid and the par value. In case of an increase of capitalization, the present stockholders, in the absence of express statutory regulations to the contrary, are entitled to receive the increased shares in proportion to their holdings. This is usually called a stock dividend.

110. Common and Preferred Stock. Stock of a corporation may be of two kinds, common and preferred. When stock is issued by a corporation without any agreement to pay certain dividends out of the profits, or to repay the original stock investments if the corporation ceases doing business, in preference to other stock, it is called common stock. Corporations are sometimes authorized by their charters to issue what is called preferred stock. That is, the corporation pledges to pay a certain percent of its profits, as dividends to the preferred stockholders, before paying anything to common stockholders. If the corporation ceases doing business, preferred stockholders are first paid the amount of their subscriptions, and if any balance remains, it is paid to common stockholders. In the absence of statutory authority, probably an existing corporation has the right to issue preferred stock by the unanimous consent of all the common stockholders. This is commonly done for the purpose of raising additional funds.

111. Dividends. Dividends is the term applied to the money distributed to shareholders, out of the profits of a corporation. The directors are usually empowered to declare dividends. A stockholder cannot compel the corporation to pay him a percentage of the profits until a dividend has been declared. After a dividend has been declared, it is regarded as a debt of the corporation in favor of the shareholder. When a dividend has been declared at the discretion of the board of directors, the preferred stockholders must first be paid the amount of their preference, and the balance must be distributed equally between the common stockholders. No partiality can be shown stockholders. They must be treated alike. Dividends can be declared only out of the profits, except when a corporation ceases doing business, in which event the property of the corporation, after paying liabilities, is distributed as dividends.

112. Certificates of Stock not Negotiable Instruments. A certificate of stock is merely evidence that the holder is a member of the corporation. A person may be a member of a corporation, and be entitled to the rights of a stockholder, without having a certificate of stock. Certificates are convenient as evidence of membership. Transfers of stock are usually made by filling in a blank on the back of the certificate for that purpose, by which the owner declares the transfer to the purchaser, and designates the purchaser, or someone, his attorney to present the certificate to the corporation, to have the transfer registered on the books of the company. It is the usual custom to surrender certificates to the purchaser. A corporation has a right to rely upon its books, and if a person wrongfully or fraudulently attempts to transfer a certificate of stock which he does not own, or has no right to transfer, the purchaser takes no better title than the seller had. In this particular, certificates of stock are not negotiable instruments. Negotiable instruments are good for value in the hands of innocent purchasers, who purchase before the instrument is due. As between the parties themselves, a transfer of a certificate of stock is good, but as to the corporation or creditors of the seller, the transfer is not effectual until recorded on the books of the corporation.

A CORNER IN THE SALES DEPARTMENT OF THE MICHIGAN STOVE COMPANY, DETROIT, MICH.

113. Individual Liability of Stockholders for Debts of a Corporation. A corporation is an artificial person having an existence in law, separate and apart from that of its members. Its profits cannot be divided until the managing agents of the corporation so decree. Its property does not belong to the members, but to the corporation itself. At one time some states provided by statute for double liability of stockholders. In case a corporation was unable to pay its debts, creditors could compel stockholders to pay to the corporation an amount equal to the par value of their stock, after paying the full face or par value of their stock. Statutes providing for double liability have quite generally been abrogated. At the present time, except in the case of national banks, corporations organized under United States law, few states provide for double liability of stockholders. If A has subscribed for ten shares of stock, the par value of each share being one hundred dollars ($100.00), and pays one-half the amount of his subscription to the company, in case of insolvency of the corporation, creditors can force A to pay the balance of his stock subscription, or five hundred dollars ($500.00). Even though not insolvent, the corporation can collect the balance of five hundred dollars ($500.00) from A by call and assessment, and can enforce collection by suit. A's subscription is a contract between himself, and the corporation. Unlike partners, stockholders are not personally responsible for the debts of the corporation of which they are members. In dealing with partnerships, a person may rely upon the personal financial worth of the individual members of the partnership. The property of the individual members may be subjected to pay the debts of the partnership. But in case of a party dealing with a corporation, he cannot rely upon the personal worth or responsibility of the members of the corporation, since the members individually are not liable for the corporation's debts. The corporation is separate and distinct from its members, and when the assets of the corporation are exhausted, the property of the individual members is not liable.

114. Officers and Agents of a Corporation. A corporation is an artificial person which must necessarily conduct its affairs through agents. The managing board of a corporation having a capital stock is usually called the board of directors. The managing board of a corporation having no capital stock is usually called the board of trustees. These managing boards are elected by the members of the corporation. In case the corporation is one organized for profit, the members are called stockholders or shareholders. The directors or managing board, of a corporation may delegate the performance of what are called ministerial duties. They may appoint officers and agents to assist them in the performance of their duties of a certain character. The officers of a corporation elected by the directors usually consist of a president, vice-president, secretary and treasurer. If a corporation's business transactions are limited, practically the only duty of the president is to preside at the meeting of the board of directors. If the affairs of the corporation are many and complicated, the president is usually intrusted with many duties. The board of directors meets at stated times, authorizes and passes on certain important matters, but the duty of carrying them into execution, and of performing the routine work, falls on the president. In a corporation of large affairs, the president may pay current bills, make purchases, give notes, if necessary, make sales and give and take mortgages on property. He is often given authority to act as general manager for the corporation. In this event, he may perform all the duties connected with the general operation of the business. The vice-president has authority to perform the duties of the president during his absence or disability. It is the duty of the secretary to keep the records of the corporation. It is the duty of the treasurer to take care of the funds of the corporation. The officers of a corporation are liable to the corporation for breach of trust. They are personally liable to third persons when they exceed their authority. A corporation, through its properly appointed officers, as well as through its board of directors, may appoint subordinate agents to perform work for the corporation. The corporation is responsible for the acts of its agent, performed within the real or apparent scope of the agent's authority.

115. Execution of Contracts and Negotiable Instruments by a Corporation. A corporation can act only through its agents. The agents authorized to act for a corporation are the board of directors, the officers appointed by the board, or the officers. A corporation, as one of its powers, has the right to use a common seal. While a corporation commonly uses its seal in signing written instruments of importance, for the purpose of showing authority of its agents to enter into such contracts, a corporation need not use its seal except in those cases when it is necessary that a natural person use a seal. A corporation usually authorizes its officers to make contracts. A president and secretary, acting together, have the right to make contracts for their corporation, by reason of the general authority conferred upon them by the board of directors. The proper signature of a corporation to a written document is the name of the corporation, followed by the signature of the president as its president, and by the signature of the secretary as its secretary. For example, if the India Rubber Company is to sign a contract, the proper signature is:

The India Rubber Co.,
By John Smith, its President.
By John Jones, its Secretary.

When the signature must be acknowledged before an officer authorized to administer oaths, before it will be received for record, as in the case of a deed, the officer authorized to sign the name of the corporation to the deed may make the acknowledgment.

Negotiable instruments, such as promissory notes, drafts and checks, should be signed with the corporate name by the proper officer, as its officer. It is held, however, that by custom, a cashier of a bank may make and indorse negotiable paper in his own name, merely adding the designation cashier to his signature, and by this means make the paper that of the corporation, and not incur any personal liability therefor. This is an exception to the general rule. Where a person signs as agent, he should sign the name of his principal, by himself, as agent. If he signs his own name, followed by the word, agent, or president, or whatever his office may be, he binds himself personally, and not his principal.

116. Ultra Vires Acts. A corporation by its charter is granted certain privileges. It has a right to act within the terms of its charter, but no right to go beyond the terms of its charter. If it performs acts beyond the terms of its charter these acts are said to be ultra vires. This does not mean that all the acts which may be performed by a corporation must expressly be enumerated in its charter. Corporations are created for certain purposes. They are permitted to perform all the acts necessary, and incidental to the purpose of their organization. The general laws under which a corporation is created are a part of its charter. A corporation organized to do a general banking business has no authority to sign bonds as surety for persons or corporations. Attempts to perform such acts of suretyship are beyond their power, and are ultra vires. Ultra vires acts are unlawful, and a single stockholder may prevent, by legal action, the officers of a corporation from completing an ultra vires contract. Third persons are deemed to have notice of the limitation of the powers of a corporation. They are not permitted to act in such a manner as to benefit by ultra vires acts, and then escape liability on the ground that the obligation is ultra vires. If an ultra vires contract is wholly executory on both sides, neither party can enforce it, if the other party complains by reason thereof. But one cannot accept benefits thereunder, and refuse to carry out the contract on his part. He is said to be estopped from so doing. The doctrine laid down by the last statement is disputed in some jurisdictions.

117. Rights and Liabilities of a Foreign Corporation. Corporations have no rights, as such, outside of the jurisdiction of the power creating them. A corporation organized under the laws of one state may be excluded from performing any of its corporate functions in another state. States may permit foreign corporations to exercise their function within their borders, if they so desire. But states cannot be compelled to recognize the corporate rights of foreign corporations. While the United States constitution provides that citizens of each state shall be entitled to all the privileges and immunities of citizens of the several states, a corporation is not a citizen within the meaning of this provision. The United States Government may employ or organize corporations to carry out its purposes. Such corporations cannot be denied the right to exercise their functions by any state. For example, the United States Constitution gives Congress the right to regulate commerce with foreign nations, among the several states, and with the Indian tribes. A corporation engaged in interstate commerce cannot be excluded by any state, in the exercise of this function. Outside these governmental agencies, each state has the right to exclude a foreign corporation from exercising any of its corporate functions within their jurisdictions. The states generally provide by statute that foreign corporations may transact business within their territory by filing with the Secretary of State a statement of their capitalization, the amount actually paid in, the nature of their business, and the names of their officers. Then, by paying a certain tax, they are permitted to maintain an office and transact business within the state thus granting them the privilege. The statutes of the various states regulating foreign corporations commonly use the term, "doing business." They prohibit foreign corporations from doing business within their borders unless they comply with their statutes. The term, "doing business," has been held to mean the maintaining an office or place of business, or manufacturing plant within a state, and does not prohibit a foreign corporation from selling goods by traveling salesmen, or from making or suing on contracts.

118. Liability of a Corporation for its Torts and Crimes. A corporation, as well as an individual, may commit torts and crimes. If an agent, acting within the scope of his employment, defrauds another, the corporation is liable in damages for his act. If, however, an officer or agent goes outside his employment, and commits a wrong, it is his own act, and he, personally, and not the corporation, is liable. A corporation, as well as an individual, may commit a crime for which it may be punished. It must, of course, commit the crime through its officers and agents. If a corporation is guilty of criminal negligence in failing to keep its works in repair, and persons are injured thereby, it is subject to indictment and punishment. If a corporation obstructs navigation or breaks the Sabbath, it is subject to criminal action. The usual punishment for the crime of a corporation is the payment of a fine, but the officers of a corporation may be imprisoned as well.

119. Dissolution of Corporations. A corporation continues to exist indefinitely, unless the period of its existence is limited by its charter, unless its charter is revoked by the power that granted it, or unless it voluntarily or by a decree of court ceases business. A corporation may forfeit its right to continue as a corporation, if it abuses its privileges, if it assumes to have powers and rights which it does not have, or if it fails to exercise its corporate functions. The latter is called nonruser. Most states provide by statute that corporations shall not commence business until a certain portion of its capital has been raised. If the corporation violates this provision or any provision of the statutes regulating the completion of its organization, its franchise may be revoked by the state. Most states provide by statute, a means by which a corporation may wind up its affairs. After paying its liabilities the balance of its assets may be divided ratably among its stockholders.