Business Structures 3 of 3 (40)

Question 1

S Corportation

Answer 1

A corporation that provides its owners the same liability-related benefits as a C Corporation (limited liability), but it is not taxed as a separate entity but instead, treated as a pass-through entity with its owners responsible for taxes on its taxable activities. Must be small (no more than 100 shareholders) and simple with only one class of stock.

Question 2

Board of Directors

Answer 2

The board of directors are in charge of the general operations of the corporation. Some of the important principles associated with the board are:

• They must act as a board (act as a group).
• They are Not considered agents.
• Adopt the Bylaws (rules and regulations that help to guide the internal management).
• Reacquire treasury stock (TS), unless insolvent or makes them insolvent (TS is stock that is authorized, issued, but Not outstanding).
• Declare dividends.
• The Board Selects the officers (e.g., president) who:
• Are in charge of day-to-day operations
• Are considered Agents of the Corporation
• Have the right to be Indemnified (right to reimbursement)

Question 3

Shareholders’ Rights

Answer 3

The shareholders of a corporation have various rights.

• Right to vote for the following:

1. Board of Directors
2. Liquidating Dividends
3. Dissolve Corporation
4. Mergers/Consolidations
5. Amend the Articles of Incorporation
6. Loans to Directors

• They are Not considered an Agent.
• Transfer shares without approval (freely transferable).
• Right to declared dividends (unsecured creditor).
• Right to inspect books and records (Inspection Rights).
• Appraisal Right – Right to get stock appraised if disagree with merger.
• Right to bring a derivative lawsuit → sue in name of corporation.
• Preemptive right – prevent dilution of ownership with newly authorized stock only.
• Limited liability unless pierce the corporate veil (if fraudulent corporation, commingled funds, undercapitalized).