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Business Law > Ch. 39 Corporations - Formation and Financing > Flashcards

Ch. 39 Corporations - Formation and Financing Flashcards

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1
Q

What is the Model Business Corporation Act (MBCA)?

A
  • Codification of modern corporation law that has been influential in shaping state corporation statutes
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2
Q

What is the most recent version of the MBCA referred to as?

A

Revised Model Business Corporation Act (RMBCA)

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3
Q

Is a corporation recognized as a “person”?

A

YES

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4
Q

In a corporation, who is responsible for the overall management of the firm?

A

Board of Directors

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5
Q

How are members of the BOD chosen?

A

Elected by shareholders

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6
Q

When a corporation earns profits, what are two things it can do?

A

1) Pass them to S/Hs in form of dividends

2) Retain them as profits (RE)

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7
Q

In regards to taxes, what is a major disadvantage of the corporate form?

A

Double taxation

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8
Q

Why do some US companies use holding companies?

A

To reduce or defer their US income taxes

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9
Q

What is a holding company (sometimes referred to as a parent company)?

A

Company whose business activity consists of holding shares in another company

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10
Q

Why would a US corporation set up a holding company in a low-tax offshore environment?

A

B/c any profits received by the holding company on these investments are taxed at the rate of the offshore jurisdiction

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11
Q

Is a corporation liable for the torts committed by its agents or officers outside the course and scope of their employment?

A

NO

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12
Q

Is a corporation liable for the torts committed by its agents or officers within the course and scope of their employment?

A

YES (follows doctrine of respondeat superior)

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13
Q

What was the key question in the Belmont v MB Investment Partners case?

A

Whether corporate employer of the officer (who perpetrated fraudulent scheme) could be liable for his actions

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14
Q

May a corporation be held liable for the criminal acts of its agents and employees?

A

YES (fines)

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15
Q

The classification of a corporation normally depends on what three things?

A
  • its location
  • its purpose
  • its ownership characteristics
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16
Q

What would a corporation’s home state refer to it as?

A

Domestic corporation

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17
Q

What is a corporation formed in one state but doing business in another referred to as in the second state?

A

Foreign corporation

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18
Q

What is a corporation formed in another country but doing business in the US referred to as in the US?

A

Alien corporation

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19
Q

What may a corporation have to obtain to do business in a state other than its state of incorporation?

A

Certificate of authority

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20
Q

Does a foreign corporation normally need a certificate of authority to sell goods or services via the Internet or by mail? Why or why not?

A
  • NO
  • B/c most state statutes specify certain activities (i.e soliciting orders via Internet) that are not considered doing business within the state
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21
Q

What would you call a corporation formed by the government to meet some political or governmental purpose?

A

Public corporation

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22
Q

What would you call a corporation whose shares are publicly traded in a securities market, such as the NY Stock Exchange or the NASDAQ?

A

Publicly held corporation

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23
Q

Give an example of a public corporation.

A
  • Cities and towns that incorporate
  • USPS
  • AMTRAK
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24
Q

What would you call a corporation formed for purposes other than making a profit?

A

Non-profit or not-for-profit corporation

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25
Q

Give an example of a nonprofit corporation.

A
  • Private hospitals
  • Educational institutions
  • Charities
  • Religious organizations
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26
Q

What would you call a corporation whose shares are held by members of a family or by relatively few persons?

A

Close corporation (b/c # shareholders so small, there is no trading market for the shares)

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27
Q

What are close corporations also referred to as?

A
  • Closely held, family, or privately held corporations
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28
Q

In practice, how are close corporations often operated?

A

Often operated like a partnership

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29
Q

What flexibility does the RMBCA give a close corporation in determining its rules of operation?

A
  • If all corporation’s S/Hs agree in writing, the corporation can operate w/o directors and bylaws
  • Corporation can operate w/o annual or special S/Hs or directors’ meetings, stock certificates, or formal records of S/Hs or directors’ decisions
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30
Q

What does management of a close corporation resemble? How?

A
  • Sole proprietorship or partnership

- A single S/H or tightly knit group of S/Hs usually hold the positions of directors and officers

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31
Q

What problem arises with transfer of shares in close corporations?

A
  • Transfer of one S/H’s shares to someone else can cause serious management problems
  • B/c other S/Hs may find themselves required to share control with someone they do not know or like
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32
Q

What do some states do to prevent the problem that arises with transfer of shares in close corporations?

A
  • Some states prohibit transfer of close corporation shares unless certain persons (S/Hs, family members, the corporation) are first given the opportunity to purchase the shares for the same price
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33
Q

How can control of a close corporation be stabilized?

A

Through use of shareholder agreement

34
Q

If a majority S/H in a close corporation misappropriates close corporation funds, what is the normal remedy?

A
  • Injured minority S/Hs have their shares appraised and are paid FMV for them
35
Q

What was the allegation in the Rubin v. Murray case? How did the Court rule?

A
  • Minority S/H alleged that majority S/Hs paid themselves excessive compensation in breach of their fiduciary duty
  • Court ruled in minority S/Hs favor
36
Q

A close corporation that meets the qualifying requirements specified in Subchapter S of the Internal Revenue Code can choose to operate as a what?

A

S corporation

37
Q

If a corporation doesn’t elect S corporation status, how will it automatically be taxed?

A

Automatically be taxed under Subchapter C

38
Q

If a corporation has S corporation status, what can it avoid?

A

Imposition of income taxes at the corporate level (while retaining limited liability)

39
Q

What are the most important requirements for S corporation status?

A

1) Corp must be a domestic corp.
2) Corp must not be a member of an affiliated group of corporations
3) S/Hs of corp must be individuals, estates, or certain trusts and tax-exempt organizations
4) Corp must have no more than 100 S/Hs
5) Corp must have only one class of stock, although all S/Hs need not have the same voting rights
6) No S/H of the corp may be a non-resident alien

40
Q

If a corporation has losses, the S election allows the S/Hs to do what?

A
  • Use the losses to offset other income
41
Q

For liability purposes, how do some courts treat a professional corporation?

A

Somewhat like a partnership and hold each professional liable for any malpractice committed w/i the scope of the business by the others in the firm

42
Q

With the exception of malpractice or a breach of duty to clients or patients, can a S/H in a professional corporation generally be held liable for the torts committed by other professionals at the firm?

A

NO

43
Q

What would you call a for-profit corporation that seeks to have a material positive impact on society and the environment?

A

Benefit corporation

44
Q

What are three ways that benefit corporations differ from traditional corporations?

A

1) Purpose: Corp is designed to make a profit, but its purpose is to benefit the public as a whole.
2) Accountability: S/Hs of a benefit corporation determine whether the corp has achieved a material positive impact
3) Transparency: Corp must issue annual benefit report on its overall social and environmental performance that uses a recognized third-party standard to assess its performance (report must be delivered to S/Hs and posted on a public website)

45
Q

In regards to benefit corporations, if S/Hs believe the corporation failed to pursue or create public benefit, what do they have the right to do?

A
  • Have right of private action (called benefit enforcement proceeding) enabling them to sue
46
Q

Due to the relative ease of forming a corporation in most states today, are promotional activities often used?

A
  • No

- Persons incorporating their business rarely engage in preliminary promotional activities

47
Q

Personal liability continues until the newly formed corporation assumes liability for the preincorporation contracts through a what?

A

Novation

48
Q

What are the basic steps of incorporation?

A

1) Select a state of incorp
2) Secure corporate name
3) Prep articles of incorp
4) File articles of incorp with secretary of state

49
Q

Which state has historically had the least restrictive laws and provisions that favor corporate management?

A

Delaware

50
Q

For reasons of convenience and cost, businesses often choose to incorporate in which state?

A

State in which most of the corporation’s business will be conducted

51
Q

The choice of corporate name is subject to whose approval?

A

State approval (to ensure against duplication or deception)

52
Q

In securing a corporate name, what should you check first?

A

First check available domain names

53
Q

Can a new corporation’s name be the same (or deceptively similar to) the name of an existing corporation doing business w/i the same state?

A

NO

54
Q

If a firm does business under a name that is the same as or deceptively similar to an existing company’s name, what may it be liable for?

A

Trade name infringement

55
Q

What is the primary document needed to incorporate a business?

A

Articles of incorporation

56
Q

What do the articles in the articles of incorporation serve as?

A
  • Serve as a primary source of authority for its future organization and business functions
57
Q

What would you call the person or persons who execute (sign) the articles?

A

Incorporators

58
Q

The articles of incorporation must generally include what info?

A

1) Name of corp
2) #shares the corp is authorized to issue
3) Name and street address of corporation’s initial registered agent and registered office
4) Name and address of each incorporator

59
Q

In addition to the info that must be included in the articles of incorporation, what may be included as well?

A
  • Names and addresses of initial members of BOD

- Duration and purpose of the corporation

60
Q

What spells out the details of the firm’s operations?

A

Bylaws (internal rules of management adopted by the corporation at its first organization meeting)

61
Q

The corporation must indicate the name and address of a specific person who has been designated as an agent. The registered agent is the person who can do what?

A

Receive legal documents (such as orders to appear in court) on behalf of the corporation

62
Q

A corporation has a perpetual existence unless what states otherwise?

A

Articles of incorporation

63
Q

Can bylaws conflict with the incorporation statute or the articles of incorporation?

A

NO

64
Q

What do the bylaws typically describe?

A
  • Voting requirements for S/Hs
  • Election of the BOD
  • Methods of replacing directors
  • Manner and time of holding S/Hs’ and board meetings
65
Q

Once the articles of incorporation have been prepared and signed, where are they usually sent?

A
  • Sent to appropriate state official, usually secretary of state, along w/ required filing fee
66
Q

In most states, when the secretary of state receives the articles of incorporation, what do they do?

A
  • Stamps articles “Filed”

- Returns copy of articles to incorporators

67
Q

After incorporation, the first organizational meeting must be held to do what?

A

Adopt bylaws (internal rules of management for the corp)

68
Q

If the articles of incorporation named the BODs, then what do the BODs do in the first organizational meeting?

A
  • BODs (by majority vote) call the meeting to adopt the bylaws and complete the company’s organization
69
Q

If the articles of incorporation did not name the BODs, then what do the incorporators do in the first organizational meeting?

A
  • Call the meeting to elect the BODs and adopt the bylaws
70
Q

When can errors in incorporation procedures become important?

A

When a 3rd party who is attempting to enforce a contract or bring a suit for a tort injury learns of these errors

71
Q

If a corporation has substantially complied with all conditions precedent to incorporation, what kind of of existence is the corporation said to have?

A

De jure existence (rightful and lawful)

72
Q

In most states, what is conclusive proof that all mandatory statutory provisions have been met?

A

Secretary of state’s filing of articles of incorporation

73
Q

What does de jure mean?

A

Rightful and lawful

74
Q

Sometimes incorporators fail to comply with all statutory mandates. If the defect is minor (i.e. incorrect address listed on articles of incorporation), what will most courts do?

A

Overlook defect and find that a corporation (de jure) exists

75
Q

In states that still recognize the common law doctrine of de facto corporation, the courts will treat a corporation as a legal corporation despite the defect in its formation if what three requirements are met?

A

1) A state statute exists under which the corporation can be validly incorporated
2) The parties have made a good faith attempt to comply with the statute
3) The parties have already undertaken to do business as a corporation

76
Q

In most jurisdictions, if there is a substantial defect in complying with the incorporation statute, does the corporation legally exist?

A

NO (and incorporators are personally liable)

77
Q

In what document are the express powers of a corporation found?

A
  • In its articles of incorporation
  • In the law of the sate of incorporation
  • In the state and federal constitutions
78
Q

If conflict arises among the various documents involving a corporation, what is the order of priority used?

A

1) US Constitution
2) State constitutions
3) State statutes
4) Articles of incorporation
5) Bylaws
6) Resolutions of the BODs

79
Q

What does ultra vires mean?

A

“Beyond the power”

80
Q

True or false.

In corporate law, acts of a corporation that are beyond its express or implied powers are ultra vires acts.

A

True

81
Q

If the owners use a corporate entity to perpetrate a fraud, circumvent the law, or in some other way accomplish an illegitimate objective, what can the court do?

A
  • Court will ignore corporate structure and pierce the corporate veil, exposing the S/Hs to personal liability

Business Law (20 decks)

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