Chapter 20 Forms of Business Organizations

Question 1

alter ego theory

Answer 1

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.

Question 2

appraisal rights

Answer 2

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.

Question 3

articles of incorporation

Answer 3

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.

Question 4

articles of organization

Answer 4

The charter document for a limited liability company. Also called certificate of formation.

Question 5

bidder

Answer 5

The party who makes a tender offer.

Question 6

board of directors

Answer 6

The individuals elected by the shareholders of a corporation who by law are responsible for the overall management of a corporation.

Question 7

bylaws

Answer 7

The internal rules governing a corporation.

Question 8

C corporation

Answer 8

A business organization that is taxed at both the entity level and the owner level.

Question 9

certificate of formation

Answer 9

The charter document for a limited liability company. Also called articles of organization.

Question 10

certificate of incorporation

Answer 10

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).

Question 11

classified board

Answer 11

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.

Question 12

cliff vesting

Answer 12

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.

Question 13

close corporation

Answer 13

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.

Question 14

closely held corporation

Answer 14

A corporation characterized by the absence of a market for its stock, though it may have any number of shareholders.

Question 15

corporate charter

Answer 15

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.

Question 16

corporate domicile

Answer 16

The state under whose laws a corporation is

formed.

Question 17

corporation

Answer 17

An organization authorized by state law to act as a legal entity distinct from its owners.

Question 18

corporation by estoppel

Answer 18

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.

Question 19

cumulative voting

Answer 19

The process by which a shareholder can cast all its votes for one director nominee or allocate them among nominees as it sees fit.

Question 20

de facto corporation

Answer 20

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.

Question 21

de jure corporation

Answer 21

When incorporators have substantially complied with incorporation requirements, the entity is a de jure corporation (a corporation by right).

Question 22

disappearing corporation

Answer 22

In a merger of two corporations, the corporation that no longer maintains its separate corporate existence is the disappearing corporation.

Question 23

dissenting shareholder

Answer 23

A shareholder who voted against a merger, sale of assets, or other reorganization.

Question 24

dissolution

Answer 24

The designation of the point in time when partners no longer carry on their business together.

Question 25

encroachment

Answer 25

Occurs when a franchisor sells a franchisee an outlet and later sells another outlet nearby to another franchisee.

Question 26

equity capital

Answer 26

The cash or property contributed to an enterprise in

exchange for an ownership interest.

Question 27

estopped

Answer 27

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.

Question 28

fictitious business name

Answer 28

The name of a business that is other than that of the owner.

Question 29

foreign corporation

Answer 29

A corporation doing business in one state though chartered or incorporated in another state is a foreign corporation as to the first state.

Question 30

forgotten founder

Answer 30

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.

Question 31

franchise

Answer 31

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.

Question 32

franchising

Answer 32

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.

Question 33

freeze-out merger

Answer 33

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.

Question 34

general partners

Answer 34

Partners of a general or limited partnership responsible for managing the partnership. They are jointly and severally liable for partnership obligations.

Question 35

general partnership

Answer 35

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.

Question 36

going private

Answer 36

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.

Question 37

incorporation

Answer 37

The process by which a corporation is formed.

Question 38

inside director

Answer 38

A member of a board who is also an officer.

Question 39

joint venture

Answer 39

A one-time group of two or more persons in a single specific business enterprise or transaction.

Question 40

leveraged buyout (LBO)

Answer 40

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.

Question 41

limited liability company (LLC)

Answer 41

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.

Question 42

limited liability partnership

LLP

Answer 42

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.

Question 43

limited partners

Answer 43

The participants in a limited partnership whose liability for partnership business is limited to their capital contribution.

Question 44

limited partnership

Answer 44

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.

Question 45

majority voting

Answer 45

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.

Question 46

malpractice

Answer 46

A claim of professional negligence.

Question 47

managers

Answer 47

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.

Question 48

members

Answer 48

The owners of a limited liability company.

Question 49

merger

Answer 49

The combination of two or more corporations into one.

Question 50

operating agreement

Answer 50

A contract that sets forth the rights, obligations, and powers of the owners, managers, and officers of a limited liability company.

Question 51

outside director

Answer 51

A member of a board who is not also an officer.

Question 52

pass-through entity

Answer 52

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.

Question 53

pierce the corporate veil

Answer 53

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.

Question 54

plurality standard

Answer 54

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.

Question 55

proxy

Answer 55

A written authorization by a shareholder to another person to vote on the shareholder’s behalf.

Question 56

proxy contest

Answer 56

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.

Question 57

quorum

Answer 57

The holders of more than 50 percent of the outstanding shares of a corporation.

Question 58

raider

Answer 58

In a hostile takeover, a third party who seeks to obtain control of a corporation, called the target, over the objections of its management.

Question 59

reverse piercing

Answer 59

A doctrine whereby a corporation (including a subsidiary) may be held liable for the debts of a shareholder (including a parent corporation).

Question 60

S corporation

Answer 60

A corporation meeting certain requirements that is

taxed only at the owner level.

Question 61

second-step back-end merger

Answer 61

The second step in a corporate takeover whereby the shareholders who did not tender their shares receive cash or securities in a subsequent merger.

Question 62

shareholders (stockholders)

Answer 62

A holder of equity securities of a corporation. Also called stockholder.

Question 63

shareholders of record

Answer 63

The persons whose names appear on a corporation’s shareholder list on a specified date who are entitled to vote.

Question 64

sole proprietorship

Answer 64

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.

Question 65

staggered board

Answer 65

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.

Question 66

straight voting

Answer 66

A voting process whereby a shareholder can cast one vote for each share the shareholder owns for each nominee.

Question 67

surviving corporation

Answer 67

In a merger of two corporations, the corporation that maintains its corporate existence is the surviving corporation.

Question 68

takeover

Answer 68

A bidder acquires sufficient stock from a corporation’s shareholders to obtain control of the corporation.

Question 69

target corporation

Answer 69

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.

Question 70

tender offer

Answer 70

A public offer to all the shareholders of a corporation to buy their shares at a stated price, usually higher than the market price.

Question 71

termination

Answer 71

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.

Question 72

undercapitalization theory

Answer 72

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.

Question 73

vicarious liability

Answer 73

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.

Question 74

winding up

Answer 74

The process of settling partnership affairs after dissolution.