Chapter 39

Question 1

Corporation

Answer 1

an artificial being, recognized under US law as a person – an artificial legal person; it has access to courts and the concepts of due process and other constitutional guarantees apply to corporations.

Question 2

Who can be shareholders of a corporation?

Answer 2

Individuals and other businesses

Question 3

Shareholders

Answer 3

have limited liability (not personal liability) risk is investment only – however, it is possible for the court to “pierce the veil”, then shareholders would be liable

Question 4

What does “shareholders have limited personal liability mean?”

Answer 4

• Shareholders are not personally liable for the debts of the corporation?
• Corporations are never sued?
• Shareholders risk their investment if the company goes bankrupt?

Question 5

Board of Directors

Answer 5

Members are elected by shareholders. The board of directors makes the policy decisions and hires corporate officers.

Question 6

Officers

Answer 6

Run the daily business operations

Question 7

Limited Liability of Shareholders

Answer 7

normally corporate shareholders are NOT personally liable for the debts/liabilities of the corporation. Financially all they risk is their initial investment.

Question 8

Earnings

Answer 8

Corporate profits

Question 9

Dividends

Answer 9

Corporate profits paid out to shareholders in proportion to their shares

Question 10

Retained Earnings

Answer 10

Keep profits to invest and grow more profits

Question 11

What is a disadvantage to a corporation?

Answer 11

Double taxation

Question 12

Double Taxation

Answer 12

Taxes are paid twice. The corporation does not pay taxes twice. Corporation pays tax, then dividends are distributed and they are taxed at the personal level.

Question 13

Criminal Acts - Corporation

Answer 13

The corporation may be held liable for the criminal acts of its agents and employees – pays fines and directors and officers can go to jail. SOX holds CEO and CFO accountable for fraudulent activity.

Question 14

Tort Liability

Answer 14

Respondeat Superior applies. The corporation is responsible (officers act as “agents” of the corporation)

Question 15

Domestic Corp

Answer 15

refers to the corp. home state (state of incorporation). So, a corp. formed in Texas and doing business in Texas is a domestic corp.

Question 16

Foreign Corp

Answer 16

what the corp. is called in a second state. So, a Texas corp. doing business in Oklahoma is referred to as a foreign corp. in the state of Oklahoma.

Question 17

Alien Corp

Answer 17

what we call a corp. formed in another country but doing business in the US

Question 18

Public Corp

Answer 18

formed by the government to meet political or governmental purpose (EG: USPS, AMTRAK)

Question 19

Private Corp

Answer 19

created in whole or in part for profit; most corporations are private, even if they serve a public purpose – like Suddenlink or Atmos Gas

Question 20

Are publicly held or publicly traded corporations private or public?

Answer 20

They are private.
“Publicly traded”: shares are offered to the public to be purchased

Question 21

Nonprofit Corp

Answer 21

corporations formed for purposes other than making a profit – private hospitals, educational institutions, charities, religious organizations; allows these groups to own property and form contracts without individual members having personal liability (5013c status)

Question 22

Close Corp.

Answer 22

shares of stock are held by relatively few people; could be family members; could be employees; “closely held”; “family”; “privately held” all refer to a close corp.; no trading market for the shares and a close corp. is often operated like a partnership, even though it usually has a board of directors (usually c corps become s corps)

Question 23

S Corp.

Answer 23

a close corp. that meets requirements of Subchapter S of the IRC – can operate as an S Corp.; files an S Corp. election with the IRS and it is taxed like a partnership; must meet 6 requirements

Question 24

6 Requirements of an S Corp

Answer 24

1. The corporation must be a domestic corporation
2. The corporation must not be a member of an affiliated group of corporations
3. The shareholders must be individuals, estates, or certain trusts and tax-exempt organizations (partnerships and non qualifying trusts cannot be shareholders) Corporations can be shareholders under certain circumstances
4. The corporation must have no more than 100 shareholders
5. The corporation must have only 1 class of stock
6. No shareholder of the corporation may be a nonresident alien.

Question 25

Why would companies that could be a close corp or s corp elect to form an LLC?

Answer 25

Same tax advantages, greater flexibility

Question 26

Professional Corp.

Answer 26

used by professionals like attorneys/accountants/doctors in business together; have lost their appeal after LLPs became possible. A PC or PA is still possible, but in many states each partner is held liable for the malpractice of each other partner; still used if a professional is a solo practitioner.

Question 27

Corporate Formation and Powers

Answer 27

Relatively simple and fast, forms are now uploaded online

Question 28

Promotional Activities

Answer 28

Business people are personally liable for any preincorpoartion contracts made with investors, accountants, or others on behalf of the future corporation. Personal liability continues until the newly formed corporation assumes liability through novation.

Question 29

Incorporation Procedures

Answer 29

Select a state, select a name, websites, include “corporation” or an abbreviation of corporation in the name, file Articles of Incorporation, pay a fee

Question 30

Bylaws

Answer 30

Bylaws are the internal rules for management of the corporation. Bylaws are synonymous to operating agreement in a partnership.
Rules related to voting, how to elect the board, how to replace the board, how to run a meeting.

Question 31

Corporate Resolutions

Answer 31

documents that show actions corporations take (recordkeeping).

Question 32

Improper incorporation

Answer 32

if rules for creating a corporation are not followed it can lead to third parties challenging the existence of the corporation.

Question 33

De Jure Corporation

Answer 33

describes a corporation which has substantially complied with all requirements.
*minor defects may be overlooked by most courts
Still treated as a corporation, corporate shield stays in place.

Question 34

Corporate Powers: order of priority

Answer 34

1. The US Constitution
2. State Constitutions
3. State statutes
4. The articles of incorporation
5. Bylaws
6. Resolutions of the board of directors

Question 35

Piercing the Corporate Veil

Answer 35

exposing shareholders to personal liability; done by the courts when the owners use a corporate entity to perpetrate a fraud or other illegitimate objective. Corporate Veil is supposed to be protecting shareholders from personal liability. The court usually doesn’t do this unless it is something SUPER major.

Question 36

5 Factors Used by Courts to Determine Whether or not to Pierce the Corporate Veil:

Answer 36

1. A party is tricked or misled into dealing with the corporation rather than the individual. (Looks like fraud)
2. It is set up to never make a profit…is always insolvent… or too thinly capitalized.
3. It is formed to evade an existing legal obligation
4. Statutory corporate formalities, such as holding required meetins, are not followed. (NOT ENOUGH on it’s own to peirce the veil.)
5. Personal and corporate interest are commingled to such an extent that the corporate identity doesn’t appear separate.

Question 37

What factors are super relevant to closely held corporations?

Answer 37

4 and 5 (Don’t have meetings, don’t keep good records)

Question 38

Close corporation and an LLC. Tennessee. Landlord tenant breach of lease. Jerry Teal, the sole owner of Teal Properties, Inc. which is the landlord, is held personally liable for the breach of lease. Flood in the space. The property if flooded and not usable, the landlord is supposed to be repairing the property. Dog House hired repair people and paid out of pocket, Jerry won’t pay them back. What was the verdict?

Answer 38

Teal properties, Inc. owned no other property, had no assets and had no cash except the rents it took in and immediately dispersed to Jerry Teal personally. So Teal Properties, Inc. was the alter ego of Jerry Teal and the courts pierced the corporate veil and held Jerry Teal personally liable to the tenant Dob House Investments, LLC.

Question 39

The Alter Ego Theory

Answer 39

Theory that the corporation does not operate as a separate entity - rather it was just another side of the individual or group that actually controlled the corporation

Question 40

Bonds

Answer 40

debt securities; borrowing of funds from investors

Question 41

Stocks

Answer 41

equity securities; represent purchase of ownership in the company

Question 42

Common Stock

Answer 42

true ownership of the corporation, the shareholder has control, they have voting rights, shareholders are the last in line

Question 43

Preferred Stock

Answer 43

priority over dividends and payment on dissolution, do not always have the right to vote

Question 44

Venture Capital

Answer 44

(alternative funding): outside wealthy investors that are willing to provide money

Question 45

Private Equity Capital

Answer 45

(alternative funding): funds pulled from wealthy investors (like a private equity firm)