Close Corporations and Special Corporate Entities

Question 1

What is a close corporation?

Answer 1

A corporation that has a relatively small number of shareholders and whose shareholders also serve as the directors and officers of the corporation

Question 2

What is a statutory close corporation?

Answer 2

A close corporation that is treated like a normal corporation but with some special rules.

Question 3

How do you become a statutory close corporation?

Answer 3

By including it in the articles of incorporation OR by amending the articles of incorporation.

Question 4

What special rulse apply to a statutory close corporation?

Answer 4

1. Preemptive rights: shareholders are presumed to have the right to buy their proportion of any new shares that the corporation creates.
2. Restrictions on transfer: Generally shares can only be transferred
   
   1. to an existing shareholder
   2. to a family member OR
   3. to somebody else on the unanimous vote by the other shareholders
3. Management by shareholders: the corporation may provide in its bylaws that the corporation will be managed by its shareholders, not directors; simplifies governance formalities
4. Custodian: allows the corporation to ask the court to appoint a custodian or provisional director if the shareholders are deadocked and the business is threatened with immediate and irreparable injury.

Question 5

What is a professional corporation?

Answer 5

A corporation that renders a particular professional service (like lawyering) and whose shareholders are all members of that profession.

Question 6

What’s special about a professional corporation?

Answer 6

The shareholders are NOT shielded for their own professional liability or that of their supervisees, but are protected for other shareholders’ malpractice and other obligations of the corporation.

Question 7

What is an S Corporation?

Answer 7

A normal corporation, except that it isn’t subject to double taxation.

• Income and expenses of the corporation are passed through to the shareholders, like a partnership.

Question 8

When will a corporation qualify as an S Corporation?

Answer 8

When it

1. Has a limited number of shareholders AND
2. only allows one class of stock.

Question 9

What is a benefit corporation?

Answer 9

A corporation with a special or general public benefit as one of its purposes.

Question 10

When will a corporation qualify as a benefit corporation?

Answer 10

When it

1. specifies in its articles of incorporation that it is a benefit corporation AND
2. reports on an annual basis as to how it is fulfilling its public purpose.

Question 11

What are the benefits of an LLC?

Answer 11

A type of company that combines the federal tax advantages of a partnership (no double taxation) with the limited liability of a corporation.

• No size or number of classes restrictions that apply to S Corps

Question 12

What special features of an LLC are important to note?

Answer 12

1. They file articles of organization, not incorporation.
2. They adopt an operating agreement instead of bylaws.
3. The owners are members, not shareholders.
4. The LLC is presumed to be managed by all of its members, not separate managers.
   
   1. Can be specified otherwise.
5. If a member sells a membership interest, the buyer has a right to share in the LLC’s profits and losses, but is not entitled to participate in management unless all other members consent.

N.B.: Analysis will be very similar as for a corporation, so just note the differences in terminology and go from there.