Would Pharma Corporation be eligible to be an S Corporation? If one of the shareholders objected, would the other two do a vote to become an S corporation without the third?
Legally speaking, Pharma Corporation can become whatever type of corporation it wants to be. It is necessary, however, that it be able to fulfill all the regulatory and procedural requirements set by the federal and local government needed to obtain certification for being their chosen type of corporation. This means that Pharma can become an S Corporation. The United States Internal Revenue Service (IRS) defines S Corporations as “corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes” . It is a closely-held form of corporation where control, rewards, risks, and liabilities are divided among the shareholders; it is a corporation model typically used by startups, regardless of the industry. One unique feature of S Corporations that its owners (i.e. Adams, Barker, and Cornelius) may have wanted to take advantage of is the fact that they are not required to pay federal income taxes. Considering this, Pharma Corporation is indeed eligible to be an S Corporation. When it comes to the actual decision-making process, however, all shareholders must make a vote (regardless whether they are going to respond with a yay or nay). The two shareholders in this case cannot make a vote without the third. This is mainly because there is only one stock class for all outstanding shares in an S corporation and all of them have identical rights.
Did Adams have the right to hire Elliot without the others’ consent? Suppose that Cornelius believes that Elliot is not a good hire for Pharma, can he fire Elliot?
Adams is one of the major shareholders of the company. On top of that, he is also the acting president. The president, based on its common definition, is the highest person of authority when it comes to strategic development, performance management, and other aspects of organizational management and operations . Based on this definition alone, Adams has the right and authority to hire Elliot without consulting the other shareholders because it can be argued that he made such decision to further the interest of the company—it needed a person like Elliott. However, a more accurate answer is it depends. There are certain corporations that have certain limitations on the roles that a president can take and the decisions that he can make. It was mentioned in the case that the establishment of Pharma was done without any prior and succeeding directors and shareholders’ meeting; the by-laws and articles of incorporation are also not available even at the moment. Therefore, what one can rely on would be the generic definition of the roles of a president (i.e. Adams). Cornelius, on the other hand, is only a shareholder. He neither has the right nor the authority to intervene in any of the directors’ decisions. If anything, the most he can do is to cast a vote during decision-making processes, and provide counsel and advice.
I agree to what the author of this answer said about Pharma’s eligibility to be an S Corporation. I would like to add, however, that the main reason why this is so is because Pharma is a startup in the pharmaceuticals industry and establishing it, at least initially, as an S Corporation would be the most financially logical step to take. If one is going to rely on the general requirements set by the IRS on prospective S corporations, there is no denying that Pharma is indeed eligible. I also agree to what the writer said about the voting process. The voting process can only commence if all shareholders are available to cast their votes. There are only three shareholders in this case and creating a scenario where all of them would be put in one place to cast their respective votes on whether Pharma should be established as an S Corporation or not should not be a hard goal to accomplish. The author of the answer, however, forgot to mention the information that would justify and rationalize this voting requirement. To specify, it would be the fact that S Corporations are only allowed to have one class of stocks. This means that all outstanding stocks would automatically grant voting rights to their owner.
I generally agree to what the author of the answer said about Adams’ right to hire Elliot without the consent of the authors. However, he forgot to mention that there are certain provisions and limitations that may exist for the highest persons of authority in an organization, even for presidents, chief executive officers (among other executives), and directors. The most accurate answer here is that it depends on the company’s by-laws and articles of incorporation—documents which are so far not yet existent in Pharma’s case, which generally makes sense because it is well within the startup phase of doing a business. Therefore, the response that suggest that Adams indeed has the right to do what he did when he hired Elliott is only based on the preconceived notions about his role as Pharma’s president and one of the directors, and not on anything material or substantial (i.e. by-laws and articles of incorporation). He is also right when he said that Cornelius do not have a say who to hire and fire because shareholders do not have the authority to intervene in the business’ operations. This is, again, based on the preconceived notions about shareholders (i.e. Cornelius) in Pharma Corporation.
References
Henderson, K. (2016). What are the duties of the president of an organization. Chron Small Business, http://smallbusiness.chron.com/duties-president-organization-428.html.
U.S. Internal Revenue Service. (2016). S Corporations. IRS, https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporations.
