Chapter 20 Forms of Business Organizations Flashcards
alter ego theory
When owners have so mingled their own affairs with those of a corporation that the corporation does not exist as a distinct entity, it is an alter ego (second self) of its owners, permitting the piercing of the corporate veil.
appraisal rights
In a merger or sale of assets, shareholders who voted against the transaction have appraisal rights, that is, the right to receive the fair cash value of the shares they were forced to give up as a result of the transaction.
articles of incorporation
The basic document filed with the appropriate governmental agency upon the incorporation of a business. The contents are prescribed in the general corporation statutes but generally include the name, purpose, agent for service of process, authorized number of shares, and classes of stock of a corporation. It is executed by the incorporator(s). Also called the charter or the certificate of incorporation.
articles of organization
The charter document for a limited liability company. Also called certificate of formation.
bidder
The party who makes a tender offer.
board of directors
The individuals elected by the shareholders of a corporation who by law are responsible for the overall management of a corporation.
bylaws
The internal rules governing a corporation.
C corporation
A business organization that is taxed at both the entity level and the owner level.
certificate of formation
The charter document for a limited liability company. Also called articles of organization.
certificate of incorporation
The basic document filed with the appropriate governmental agency upon the incorporation of a business. The contents are prescribed in the general corporation statutes but generally include the name, purpose, agent for service of process, authorized number of shares, and classes of stock of a corporation. It is executed by the incorporator(s).
classified board
A board on which directors serve for specified terms, usually three years, with only a fraction of them up for reelection at any one time. Also called staggered board.
cliff vesting
A common vesting schedule that provides that if a person granted stock options leaves within a certain period of time after employment (usually six months or a year), he or she forfeits all rights to any stock.
close corporation
A corporation owned by a limited number of shareholders, usually thirty, most of whom are actively involved in the management of the corporation, that elects close corporation status in its charter.
closely held corporation
A corporation characterized by the absence of a market for its stock, though it may have any number of shareholders.
corporate charter
The document issued by a state agency or authority granting a corporation legal existence and the right to function as a corporation. Also called the articles or certificate of
incorporation.
corporate domicile
The state under whose laws a corporation is
formed.
corporation
An organization authorized by state law to act as a legal entity distinct from its owners.
corporation by estoppel
When a third party, in all its transactions with an enterprise, acts as if it were doing business with a corporation, the third party is prevented or estopped from claiming that the enterprise is not a corporation.
cumulative voting
The process by which a shareholder can cast all its votes for one director nominee or allocate them among nominees as it sees fit.
de facto corporation
When incorporators cannot show substantial compliance with incorporation requirements, a court may find a corporation is a de facto corporation (corporation in fact), even though it is not technically a corporation by law, if the incorporators demonstrate that they were unaware of the defect and that they made a good faith effort to incorporate correctly.
de jure corporation
When incorporators have substantially complied with incorporation requirements, the entity is a de jure corporation (a corporation by right).
disappearing corporation
In a merger of two corporations, the corporation that no longer maintains its separate corporate existence is the disappearing corporation.
dissenting shareholder
A shareholder who voted against a merger, sale of assets, or other reorganization.
dissolution
The designation of the point in time when partners no longer carry on their business together.
encroachment
Occurs when a franchisor sells a franchisee an outlet and later sells another outlet nearby to another franchisee.
equity capital
The cash or property contributed to an enterprise in
exchange for an ownership interest.
estopped
A defendant is legally barred from alleging or denying a certain fact when the defendant’s words and/or actions have been to the contrary.
fictitious business name
The name of a business that is other than that of the owner.
foreign corporation
A corporation doing business in one state though chartered or incorporated in another state is a foreign corporation as to the first state.
forgotten founder
A problem that can arise when several persons work together on an informal basis with a common business objective, and then one leaves. The person who left (the forgotten founder) may have ownership rights in the enterprise.
franchise
A business relationship in which one party (the franchisor) grants to another party (the franchisee) the right to use the franchisor’s name and logo and to distribute the franchisor’s products from a specified locale.
franchising
An arrangement whereby the franchisor receives cash up front, followed by monthly payments based on a reseller’s gross receipts, in exchange for granting the franchisee the right to use the franchisor’s trademarks and marketing plan.
freeze-out merger
In a merger with a controlling shareholder, some shareholders (usually the public shareholders) are required to surrender their shares in the disappearing corporation for cash.
general partners
Partners of a general or limited partnership responsible for managing the partnership. They are jointly and severally liable for partnership obligations.
general partnership
A form of business organization between two or more persons in which the partners share in the profits or losses of a common business enterprise.
going private
A corporation that has fewer than 300 shareholders (or 500 if the corporation’s assets total less than $10 million)
and ceases to be required to file public periodic reports under the Securities Exchange Act of 1934.
incorporation
The process by which a corporation is formed.
inside director
A member of a board who is also an officer.
joint venture
A one-time group of two or more persons in a single specific business enterprise or transaction.
leveraged buyout (LBO)
A takeover financed with loans secured by the acquired company’s assets, in which groups of investors, often including management, use borrowed money along with some of their own money to buy back the company’s stock from its current shareholders.
limited liability company (LLC)
A form of business entity authorized by state law that is taxed like a limited partnership and provides its members with limited liability, but like a corporation gives its members the right to participate in management without incurring unlimited liability.
limited liability partnership
LLP
A form of limited partnership designed primarily for professionals who typically do business as a partnership that insulates its partners from vicarious liability for certain partnership obligations.
limited partners
The participants in a limited partnership whose liability for partnership business is limited to their capital contribution.
limited partnership
A form of business organization in which limited partners must refrain from actively participating in the management of the partnership but are liable for the debts of the partnership only up to the amount they personally contributed to the partnership.
majority voting
A requirement that a nominee for the board of directors of a corporation must receive a majority of the shares voted to be elected. Contrast with plurality voting.
malpractice
A claim of professional negligence.
managers
Persons elected by the members (owners) of a limited liability company who, like a board of directors in a corporation, are responsible for managing the business, property, and affairs of the company.
members
The owners of a limited liability company.
merger
The combination of two or more corporations into one.
operating agreement
A contract that sets forth the rights, obligations, and powers of the owners, managers, and officers of a limited liability company.
outside director
A member of a board who is not also an officer.
pass-through entity
A business organization that is not a separate taxpayer; all its income and losses are passed through and taxed to its owner. S Corporations, partnerships, and limited liability companies are pass-through entities.
pierce the corporate veil
When a court denies limited liability to a corporation and holds shareholders personally responsible for claims against the corporation, the court has pierced the corporate veil.
plurality standard
A process whereby a nominee for the board of directors can be elected as long as he or she receives a plurality of the votes cast for any nominee, without regard to the number of votes withheld. Contrast with majority voting.
proxy
A written authorization by a shareholder to another person to vote on the shareholder’s behalf.
proxy contest
A battle for corporate control whereby someone wishing to replace the board with its own candidates seeks to acquire a sufficient number of shareholder votes to do so.
quorum
The holders of more than 50 percent of the outstanding shares of a corporation.
raider
In a hostile takeover, a third party who seeks to obtain control of a corporation, called the target, over the objections of its management.
reverse piercing
A doctrine whereby a corporation (including a subsidiary) may be held liable for the debts of a shareholder (including a parent corporation).
S corporation
A corporation meeting certain requirements that is
taxed only at the owner level.
second-step back-end merger
The second step in a corporate takeover whereby the shareholders who did not tender their shares receive cash or securities in a subsequent merger.
shareholders (stockholders)
A holder of equity securities of a corporation. Also called stockholder.
shareholders of record
The persons whose names appear on a corporation’s shareholder list on a specified date who are entitled to vote.
sole proprietorship
One person owns all the assets of the business, has complete control of the business, and is solely liable for all the debts of the business.
staggered board
A board on which directors serve for specified terms, usually three years, with only a fraction of them up for reelection at any one time. Also called classified board.
straight voting
A voting process whereby a shareholder can cast one vote for each share the shareholder owns for each nominee.
surviving corporation
In a merger of two corporations, the corporation that maintains its corporate existence is the surviving corporation.
takeover
A bidder acquires sufficient stock from a corporation’s shareholders to obtain control of the corporation.
target corporation
The subject of a tender offer or hostile corporate takeover attempt. Also a company that another firm controls after acquiring it via merger, a sale of stock by the target’s shareholders, or a sale of substantially all the assets of the target.
tender offer
A public offer to all the shareholders of a corporation to buy their shares at a stated price, usually higher than the market price.
termination
The point after the dissolution of a partnership when all the partnership affairs are wound up and partners’ authority to act for the partnership is completely extinguished.
undercapitalization theory
A corporation is a separate entity, but its lack of adequate capital may constitute a fraud on the public. May be a basis for piercing corporate veil.
vicarious liability
The imposition of civil or criminal liability on one party (e.g., an employer) for the wrongful acts of another (e.g., an employee). Also called imputed liability.
winding up
The process of settling partnership affairs after dissolution.
