Corp & LLCs

Question 1

Rule for incorporation

Answer 1

To incorporate, articles of incorporation are filed with the state. The articles must contain the corporate name. number of authorized shares, name and address of registered office and agent, and name and address of each incorporator.

Question 2

Rule for bylaws conflicting with articles of incorporation

Answer 2

If the articles of incorporation conflict with the bylaws, the articles control.

Question 3

Rule for corporation liability on K prior to incorporation

Answer 3

A corporation is not generally liable for a contract entered into prior to incorporation unless it adopts (ratifies) the contract.

Question 4

Rule for promoter and promoter’s liability

Answer 4

A promoter is a person acting on behalf of a corporation before it is formed. A promoter is liable for all contracts entered into prior to formation of the corporation, unless the corporation later ratifies the contract or there is a novation.

Question 5

Define and rule for Bylaws

Answer 5

Bylaws are rules adopted by the Board of Directors that govern the internal operations and management of the corporation.

Bylaws may be amended or repealed by shareholders.

Question 6

Rules for Formation of a LLC

Answer 6

A Limited Liability Corporation (LLC) is formed when the articles of ORGANIZATION are filed with the state and the company has at least one member.

Question 7

Rule for Management of a LLC

Answer 7

Unless stated otherwise, the Operating Agreement governs the management and operation of a LLC.

Question 8

Personal Liability in a corporation and a LLC

Answer 8

Generally, shareholders, directors, and officers are NOT personally liable for the liabilities and obligations of the corporation, unless a court pierces the corporate veil. (LLC: members or managers in lieu of shareholders, directors, and officers)

Normally, passive investors who do not participate in the business will NOT be held liable, even if the corporate veil is pierced.

Question 9

Rule for piercing the corporate veil

Answer 9

A court will pierce the corporate veil and hold the shareholders personally liable when:

• the corporation is acting as the alter ego of the shareholders (where an individual utilizes the corporate form for personal reasons);
• the shareholders failed to follow corporate formalities (not factor fr LLC);
• the corporation was inadequately capitalized at its inception;
• to prevent fraud.

Question 10

Rule for authorized shares

Answer 10

Authorized shares are the maximum number of shares a corporation may issue, as set forth in the Articles of Incorporation.

To increase the number of shares, the Articles must be amended, changes adopted by the Board of Directors; approved by a majority vote of shareholders.

Question 11

Rule for outstanding shares

Answer 11

Outstanding shares are the total number of shares issued by the corporation and held by the shareholders. Each outstanding share is entitled to one vote.

Question 12

Rule for fiduciary duties of directors

Answer 12

Under the Business Judgment Rule, directors are fiduciaries of a corporation and owe a duty of care to the corporation. This means they must discharge their duties in good faith, in a manner reasonably believed to be in the best interest of the corporation, and with the appropriate care of a reasonable person in similar circumstances.

Question 13

Rule for Duty of Care

Answer 13

The duty of care requires that Directors be reasonably informed on the decisions made. A director my rely on the reasonable advise of advisors, as long as the advisor was qualified to provide such advice.

If a director breaches the duty of care, he may be held personally liable for the corporation’s losses as a result.

Question 14

when does the business judgment rule NOT apply to directors

Answer 14

The business judgment rule does apply or protect directors:

• financially interest in a transaction (conflict of interest);
• not acting in good faith; OR
• who is engaged in fraud or illegality.

Question 15

Rule for Duty of Loyalty

Answer 15

A Director owes the corporation a fiduciary duty of loyalty to act in the best interest of the corporation and without personal conflict.

The duty of loyalty forbids directors from:

• entering into conflicting interest transactions;
• usurping a corporate opportunity;
• competing with the corporation; OR
• trading on inside information.

Question 16

Rule for conflicting interest transactions

Answer 16

A conflicting interest transaction with corporation is a breach of the duty of loyalty UNLESS:

• it was approved by a majority of disinterested directors after full disclosure;
• it was approved by a majority of disinterested shareholders after full disclosure; OR
• the transaction as a whole is fair to the corporation.

Question 17

Rule for when a conflict of interest occurs

Answer 17

A conflict of interest occurs when the director/officer or a family member is a party to the transaction, has a beneficial interest in the transaction, or is involved with another entity that is conducting business with the corporation.

Question 18

Rule for derivative action

Answer 18

In a derivative action, a shareholder is suing to enforce the corporation’s claim, not his own claim. The suit must be one in which the corporation could have brought itself, and has harmed the corporation in some way.

Question 19

Rule for commencing a derivative action

Answer 19

To commence or maintain a derivative suit, the plaintiff-shareholder must:

• be a shareholder at the time of the act or omission;
• be a shareholder through entry of judgment;
• fairly and adequately represent the interest of the corporation; AND
• make a written demand upon the corporation to take suitable action.

A derivative suit cannot be commenced until 90 days after written demand, unless the corporation rejects the demand or the corporation will suffer irreparable harm if forced to wait.