Business Structures Flashcards
Part 2
Which of the following statements describes the same characteristic for both an S corporation and a C corporation?
Shareholders can contribute property into a corporation without being taxed.
Either entity’s shareholders may contribute property to the corporations without being taxed and may contribute such property as an exchange for stock as appraised by the directors.
Only an S corporation is prohibited from having foreign country shareholders.
Only the C corporation is subject to the double taxation disadvantage.
Trish is a promoter for Alpha Corporation. Generally, Trish is personally liable for any pre-incorporation contract until Alpha:
A corporate promoter is a firm or person who does the preliminary work related to the formation of a company, including its promotion, incorporation, and flotation, and solicits people to invest money in the company, usually when it is being formed.
Assumes the pre-incorporation contract by novation.
In a novation, a new party (the corporation) is substituted for an old party (the promoter) in the contract. All parties must agree to the novation.
Rejection of the contract does not affect the promoter’s liability.
Technically, only a principal can ratify a contract made by an agent. Because the corporation is not in existence when the promoter acts, the promoter cannot be acting on the corporation’s behalf. Thus, the corporation is not the promoter’s principal and cannot “ratify” the promoter’s contract. Instead, the corporation is said to “adopt” a promoter’s contract. In any case, ratification/adoption does not release the promoter from liability; instead, it merely makes the corporation liable along with the promoter.
A registered agent for a corporation incorporated in Delaware would:
Have legal documents served on it on behalf of the corporation, if the corporation is sued.
A registered agent is an agent for the corporation who would accept service of process in the event the corporation is involved in a lawsuit.
Promoters or the incorporators are responsible for organizing the corporation.
promoter
a promoter (a person who procures capital and other commitments for a corporation to be formed). Promoters are personally liable for contracts that they enter into on behalf of the corporation to be formed. They remain liable on the contracts even after the corporation is formed unless the parties enter into a novation (i.e., an agreement among the parties to substitute the corporation for the promoter).
A promoter remains liable on contracts he enters into on behalf of a corporation, even if the corporation is formed by filing articles of incorporation. The corporation does not become liable on the contracts merely because articles were filed.
are incorrect. Promoters remain liable on contracts they enter into on behalf of corporations even if the corporations are never formed.
Which of the following documents would most likely contain specific rules for the management of a business corporation?
Bylaws
The bylaws are adopted by the incorporators or directors, are not required to be filed, and generally will contain rules desired regarding the operation of the corporation.
A certificate of authority is filed with the foreign state that a business wishes to do business in and with permission from that state.
The president of a company has signed a $10 million contract with a construction company to build a new corporate office. Which of the following corporate documents sets forth the scope of authority under which this transaction is governed?
Bylaws
The bylaws usually contain the rules for running the corporation.
A proxy statement is a request to shareholders to allow their shares to be voted by a specified person in a specified way. It has nothing to do with a corporate president’s authority.
Which of the following securities are corporate debt securities?
Convertible
bonds and Debenture
bonds
Rules: Bonds are debt securities. Thus, convertible bonds and debenture bonds are debt securities. A warrant is a contractual right to purchase stock, which constitutes a share of corporate equity.
An indenture is an agreement or deed between parties specifying the terms of any debt. This should not be confused with debentures, which are certificates evidencing unsecured debt.
Peters owned 500 shares of common stock in Kidsmart, Inc. Accordingly, Peters had the right to:
Vote for the election and removal of the board of directors.
Shareholders have the right to vote to elect (typically annually) or remove directors. They also have the right to vote on whether to approve fundamental changes to the corporation, such as dissolution.
Officers are appointed by the directors; they are not elected by the shareholders.
Johns owns 400 shares of Abco Corp. cumulative preferred stock. In the absence of any specific contrary provisions in Abco’s articles of incorporation, which of the following statements is correct?
If Abco declares a cash dividend on its preferred stock, Johns becomes an unsecured creditor of Abco.
Price owns 2,000 shares of Universal Corp.’s $10 cumulative preferred stock. During its first year of operations, cash dividends of $5 per share were declared on the preferred stock but were never paid. In the second year, dividends on the preferred stock were neither declared nor paid. If Universal is dissolved, which of the following statements is correct?
Universal will be liable to Price as an unsecured creditor for $10,000.
After a dividend is declared but not paid on cumulative preferred stock, the unpaid dividend ranks with other “unsecured” debts.
The unpaid dividend ranks as an “unsecured” not a “secured” debt and Price has no right to a dividend for the second year because no dividend was declared that year.
What type of business organization may generally be formed without filing an organizational document or certificate with a state government agency or office?
A general partnership.
A general partnership may be formed without filing any organizational documents with the state. All that is needed to form a partnership is an agreement between at least two competent persons to carry on as co-owners a business for profit.
In order to form a corporation, a document, called the articles of incorporation in most states, must be filed with the state.
In order to form a limited partnership, a document, called the “certificate of limited partnership” in most states, must be filed with the state.
In order to form a limited liability company, a document, called the articles of organization in most states, must be filed with the state.
Patti is a director of Smackey, Inc. As a corporate director, Patti is:
A fiduciary.
Each director owes the corporation fiduciary duties and must act in the best interest of the corporation.
Absent a vote giving a director authority to act on behalf of the corporation, a director is not an agent of the corporation and cannot bind the corporation in contract.
A principal is the person on whose behalf an agent acts. The corporation does not act on behalf of the directors, and while the directors may delegate some of their power to agents of the corporation, the agents act on behalf of the corporation (i.e., the corporation is the principal) and not the directors.
Directors are not trustees of the corporation, as they do not hold legal title to anything belonging to the corporation for the benefit of another.
Tom is one of the original partners in a 6-month-old general partnership. If debts of the firm become due and the firm cannot pay them, can Tom be held personally liable for the debts?
Yes, he may be held liable for the entire amount of the debt.
Partners of general partnerships are jointly and severally liable for the debts and obligations of the partnership incurred within the scope of partnership business.
On December 1 of the current year, Krest, a self-employed cash basis taxpayer, borrowed $200,000 to use in her business. The loan was to be repaid on November 30 of the following year. Krest paid the entire interest amount of $24,000 on December 1 of the current year. What amount of interest was deductible on Krest’s current year income tax return (assuming business interest expense deduction limitation does not apply)?
$2,000
