ch 18: corps Flashcards
what is corp
legal entity created and recognized by state law
what does corp consist of
1 or more owners which are shareholders
who can be shareholders in corp
Individuals and other businesses can be share holders
is corp considered a person
yes- artificial legal person
what is true of corp rights since they are a person
they are allowed the same rights as ppl such as free speech, freedom of unreasonable searchs, due process
The responsibility for mgmt is w
the board of D
who elects board of d
share holders
who does BOD hire to run daily operations
corporate officers
when an individual purchases stock in a corp, what happens
they become a shareholder / owner of the org
what is the advantage of limited liability for corp as a shareholder
Corp shareholders liability is limited to the amt of their investments
Not liable of the debts of the corp
corporate profits n sharing w shareholders
When a corp earns profits it can either pass it to shareholders in dividends or retain them as profits (retained earnings) and reinvest this which can gain more profits in the future rising stock price in which shareholders will reap benefits more since itll be more $$ when they sell their stock
corp tax disadvantage
Corps can be subject to double taxation if profits are passed thru dividends
Domestic corp
term used by state where corp was formed - ex if ulta set up in VA, the VA considers it a domestic corp
foreign corp
if a corp operates in a diff state, ex if ulta does in texas, then textas views ulta as foreign corp
align corp
corp formed in another country (ex ulta formed in mexico) but doing BUS in US, it is an align corp
do corps have automatic right to do business in other states
no, they might need a certificate of authority unless its thru digital.
failing to adhere may result in fines
Public corp + examples
formed by the govt to meet political/govt purpose
AMTRACK, postal servic
diff btw public corp vs public company
pub company/publicly held corp -shares are publicly traded thru NY stock exchange , etc
Private corp
created either in wholly or in part for private benefit
Most are private
non profit corp + examples
formed without profit making purpose
-Ex charities, schools, religious orgs
Close corporations who are shares held by?
Corp in which shares are held by very few- usually family
Since number is so small in close corp there is no trading market for the shares
t or f
t
what is a + for close corps
Flexibility in determining their operating rules- for ex if they all agree they can operate without directors
Mgmt in close corps + how to avoid giving too much power
Mgmt is similar to sole p or partnership in which one shareholder or small group takes on role of directors/officers
To avoid giving power to majority shareholder, close corps require more than simple majority vote for some decisions
Transfer of shares dilemma in close corps + how to avoid
Since close corp is alr small, transferring shares could have a major affect on the corp
To avoid this, corp could restrict transferring to outside person or require them to offer shares to corp or other shareholders before selling to an outsider
Misappropriation of Close Corporation Funds
Maj shareholder might misuse position by taking comp funds for personal benefit - fix this by giving minority shareholders shares valued at fair market price
S corp
comp avoids paying taxes at corp level
and passes profits to SH to pay inc tax on that
(avoids double taxation)
Taxed like a partnership
Professional corps + types + requirement
Bus formed by professionals such as lawyers which allow them to incorporate their practice while retaining benefits as a corp
S.C. (Service Corporation)
P.C. (Professional Corporation)
P.A. (Professional Association)
shareholders must generally be licensed professionals
t or f
Many states allow businesses to incorporate via the Internet.
t
Incorporation procedures (1-4)
1- select state of incorporation
2- secure an appropriate corp name
3- prepare articles of incorporation
4- file articles of incorporation
selecting state of inc
Most corp looks at the states that offer the most advantage tax laws, for example delaware bc it has the least restrictive laws and good favor of corporate management
select appropriate name
Requires state approval to prevent duplication
Crucial to secure a name available as a domain
Can not be identical or super similar to an existing corp name
3 - prepare articles of incorporation
primary doc needed to incorporate which include basic info abt the corp
4 - file it
Once the articles of incorporation have been prepared and signed
they are sent to the appropriate state official.
Securities
stocks and bonds that represent ownership in corp
Bonds and its details
Represents borrowing of funds (evidence of funds borrowed from investors)
Have a maturity date in which it has to be returned
Details specified in a landing agreement
Bondholders also receive fixed-dollar interest payments, usually semiannually, during the period of time before maturity. - For that reason, bonds are sometimes referred to as fixed-income securities
Preferred stock advantage
Holders of preferred stock usually have priority over holders of common stock
what is true ownership
common stock
Piercing the corporate veil
Courts may “perice the corp viel” if the corp is used for illegal purposes in which it exposes shareholders to personal liabilities
t or f
If a shareholder uses the corporation to evade personal responsibility, resulting in significant injustice, the court may hold the shareholder personally liable for corporate debts.
t
t or f
BOD = ultimate authority in every corp
t
Duties include BOD
selecting/removing corp officers
Determining cap structure
Declaring dividends
t or f
One person cannot hold multiple roles and can be an officer and director
f- they can
Directors and officers considered fiduciaries
t or f
t
Duty of care for directors/officers
Standard of due care requires dictors/officers to act in good faith and honestly and do it reasonably
Act in a way they consider the best interests for the corp
t or f
directors/officers who fail to exercise due care may be held liable for negligence
Duty to make informed reasonable decisions
Expected to be informed on corporate matters and conduct a reasonable investigation of the situation before making a decision
They must do what is necessary to keep informed such as attending meetings and asking for info from those who have it
They cant make decisions without research
Business judgment rule
Protects dir/off from liabilities for judgments made in good faith/honest mistakes
dir/off must use best judgment in managing a corp
When the business judgement rule applies
If the officer took reasonable steps to be informed on the matter
Had rational basis for decision
Did not have conflict btw personal interests and interests of the corporation
Duty of loyalty of dir/off
Requires dir/off to subordinate their personal interests to the welfare of the corp
Cannot use corp funds or info for personal advantage
Shareholder derivative suit
Idf a 3rd party harms a corp, directors can file lawsuit on corps behalf
If directors don’t take action, shareholders can file a shareholder’s derivative suit to pursue the claim on behalf of the corporation
