15.1 - Formation (Corporation) Flashcards
What is a corporation?
- Separate and distinct entities from their owners
How are corporations taxed?
- Taxation as a C corporation or S corporation
How do S corporations report earnings?
- on personal returns regardless if they’ve received distributions
How are C corporations taxed?
subject to corporate income tax
Identify 2 disadvantages of “C” corporations
- Entity level tax
- Double taxation
Identify 2 advantages of a “C” corporation
- Separate legal entity
- Shield from liability
What is a public corporation?
organized for public purposes related to the administration of government (i.e., an incorporated municipality) & may be funded by local taxes
What must a corporation acquire in order to do business as a foreign corporation in another state?
a certificate of authority
Define an alien corporation
corporation organized in another country
Identify the duties and obligations of a promoter in the formation of a corporation
- Arranges for formation of corporation
- Provides for:
- Financing
- Compliance w/ securities laws
- Personnel
Who is personally liable on contracts made on behalf of the corporation?
the promoter
When is personally liability relieved for the promoter?
When the corporation adopts contract which is implied by accepting benefits of the contract
What is a novation?
- Agreement entered into by the promoter, 3rd party to contract and corporation which effectively substitutes the corporation for the promoter in any binding contracts
Define a subscription agreement
- Process of soliciting commitments from potential investors
What are articles of incorporation?
- Brief with specific contents
- Incorporation formally accomplished through filing with secretary of state or another designated official
- Once filed, corporation formally comes into existence
What is the purpose of the initial board and how are they elected?
- Elected by incorporator(s) and may adopt bylaws
- Incorporators resign and board governs corporation
What are bylaws?
- Detailed procedures for meetings, quorums, restrictions on stock sales, etc.
- Articles filed, bylaws adopted
At what point does the board elect offiers to run the business?
Once the bylaws are adopted
Define defect in formation and how the defect is classified
- One or more formation procedures completed in defective manner
- Classification depends on whether procedures complied with state law or were defective in some manner
Define a DeJure corporation
Business that has filed its requirements for formation according to the regulations for earning a state charter
Define a defacto corporation
- Filing was defective but parties thought corporation had been properly formed and acted that way
- Corporation is permitted to exist
Provide an example of a defacto corporation
- promoter hired a lawyer — the lawyer took the fee, but never filed articles with the state
Provide 2 examples of private corporations
- Close corporation (closely held corporations)
- Publicly held corporation
Identify 4 characterizing traits of a close or closely held corporation
- Owned by small number of shareholders
- Do not sell stock to public
- Officers and directors commonly own stock in corporation
- Shareholders are active in management and control of corporation
Identify 5 characterizing traits of a publicly held corporation
- Organized for public purposes
- Sells stock on exchange to public
- Share price quotes regularly published
- Related to the administration of government
- May be funded by local taxes
How is an S-Corporation taxed?
similarly to a partnership
How do shareholders report their share of earnings / distributions in an S - Corp?
Report their share regardless if they receive distributions
What happens if an S-Corp has more than one class of stock?
it is terminated
What is the maximum number of shareholders an S-Corp can have before it is terminated?
100 max shareholders
Define a shareholder of an S - Corp
- individuals,
- estates,
- qualified trusts,
- banks and
- certain tax-exempt entities (i.e., certain charities)
Can non-resident aliens hold shares in an S - Corp?
No - the corporation would be terminated
What happens when an S - Corp has excessive net passive investment income?
It is terminated
What happens to the domestic charter of an S - Corp if it is not incorporated in the U.S.?
it is terminated - must be incorporated in the U.S.
What are professional corporations?
- Professional Service Association (PSA)
- Give professional benefits of incorporation
Are there any stock restrictions on professional corporations?
- Statutes restrict stock ownership to specific professionals licensed within that state
What information must the incorporation articles contain?
- Corporation’s name
- Number authorized shares of stock
- Street address of corporations initial registered office
- Name of registered agent at office
- Name and address of each incorporator
- May contain optional provisions
What information would the optional provisions of the incorporation articles contain?
- Purpose and powers of the corporation, internal management, any subject to be addressed in bylaws
What types of transactions would the board of directors engage in for furthering the business purpose?
HINT: 4 transactions
- Adopting / rejecting pre-incorporation contracts of promoters
- Adopting form of certificate representing shares of stock
- Accepting / rejecting stock subscriptions
- Comply with requirements for doing business in other states
