Corporations

Question 1

What document, if any, creates a corporation?

Answer 1

Compared to other entities, corps have the most formal filing & reporting requirements

Corporations are formed when principals file an “articles of incorporation” w/ the corporation bureau of the secretary of state’s office

After this, principals will have a meeting to resolve any issues addressing:
- bylaws (specify date, time, & place for annual shareholder meetings, # of officers/directors, process for elections, etc.

• assigning a board of directors & officers
• issuance of shares
• members (shareholders) of the corporation

Question 2

Who is in charge of managing a corporation?

Answer 2

Its board of directors

Question 3

Are “big” & “small” decisions treated differently in a general partnership?

Answer 3

Yes, responsibilities are divided amongst 3 roles:

Shareholders:
- Owners of corporation
- Can add or remove directors/officers
- Make major corporate decisions
- Approve changes to corporation by amending by articles of incorporation or bylaws

Board of directors
- Oversee & manage corporation
- Must be independent from shareholders & officers
- Appoint officers

Officers
- Take direction of directors in the day-to-day operations of the business
- Enjoy “express authority,” outlined by bylaws or board of directors
- Certain officers enjoy “implied authority” to be agents of the corp

Question 4

To what extent are members of corporations liable for the company?

Answer 4

Members of corporations enjoy a “corporate veil” of protection that protects them from liability except for in rare cases where a court finds it necessary to break.

Question 5

Are some owners treated differently than others in a corporation?

Answer 5

Yes. The responsibilities of corporations are divided amongst its shareholders, directors, & officers.

Question 6

How does taxation work in corporations?

Answer 6

Sometimes forming corporations is not the best course of action when considering taxes

Corporations are taxed on their capital/income
A corporations profits are taxed 2x, once to the corp when earned, and next to the shareholders once the profit is distributed as dividends

Question 7

What is a corporation?

Answer 7

A corporation is a fictitious legal entity that exists separate from its principals

Question 8

What are the 2 classifications of corporations?

Answer 8

privately held & publicly held

Question 9

What is the most common type of corporation?

Answer 9

Privately held

Question 10

What are the benefits of privately held corporations?

Answer 10

1. Don’t sell ownership interests through sale to the general public/financial institutions/public investors
2. Enjoy substantial flexibility in regards to their internal operation (instead of meetings, corps may use a single document signed by each principal to make decisions)
3. Have the option to become “closely” or “family” held
4. No limit on revenues

Question 11

If a privately held corporation wishes to sell ownership of interest how should they go about doing that?

Answer 11

Its principals must pursue an initial public offering (IPO), and then continue as publicly held corporations

Question 12

What are some of the cons of operating as a publicly held corporation?

Answer 12

1. Subject to state & federal regulation
   a. security laws
   b. corporate governance statutes (e.g. Sarbanes-
   Oxley Act)
2. Subject to scrutiny of regulatory agencies (necessary in order to maintain trust b/w investors & corps)

Question 13

What are some other categories of corporations besides privately and publicly held?

Answer 13

1. Domestic - in the state it was incorporated, a corp is referred to as domestic
2. Foreign - corp that conducts in a state other than the one it was incorporated
3. Alien - corp incorporated outside the U.S. that transacts business in the U.S.
4. Nonprofit - corps w/out profit-seeking owners
5. Benefit - for-profit corps that align business objectives w/ improving community or environment
6. Public - formed by gov’t to serve the public (e.g. public transit)
7. Professional - ownership restricted to a particular profession licensed in that field (e.g. law firms)

Question 14

How do corporations capitalize?

Answer 14

1. Debt
   a. borrowing loans from commercial
   lenders/private investors
   b. issuing bonds/debentures (lower interest
   rates)
2. Equity - hire broker-dealers to draft a document describing the company & its intended use of funds to be distributed to potential investors who may buy equity
3. Venture Capital Firms - other firms invest in the corporation
4. Public Offerings - allow corporation to raise equity & sell it to the general public/financial institutions (only publicly held corps can be funded through public offerings)

Question 15

What is the corporate veil protection?

Answer 15

Refers to the immense protections officers/directors enjoy in corporations

Question 16

In what instances will a court “pierce the corporate veil”?

Answer 16

A court will do this if it believes fairness demands if but it is rare. A considers 4 factors

1. Inadequate capitalization
2. Nature of the claim (made by voluntary creditor or based on negligence?)
3. Evidence of fraud/wrongdoing
4. Failing to follow corporate formalities

Question 17

A personal guarantee allows a(n) _____ to obtain a judgement against the personal assets of one or more shareholders in the events of a _____ by the corporation

Answer 17

creditor ; default

Question 18

The allocation of corporate power b/w shareholders, directors, & officers is primarily based on _____

Answer 18

the RMBCA (Revised Model Business Corporation Act)

Question 19

If a corporation is a start-up or has limited assets, creditors will almost always require that the shareholders give a(n) _____

Answer 19

personal guarantee

Question 20

True or false: Venture capitalists are typically long-term investors

Answer 20

False

Question 21

True or false: A corporation’s bylaws are not filed w/ the state

Answer 21

True

Question 22

Selling equity constitutes the issuance of _____

Answer 22

a security

Question 23

Failing to attend to corporate formalities may have what kind of consequences?

Answer 23

serious liability consequences

Question 24

True or false: For multi-person ventures, the tax-related needs of the individuals rarely differ

Answer 24

False

Question 25

The RMBCA provides that anyone purporting to act on behalf of a corporation, knowing incorporation has not yet occurred, is _____ for all liabilities created by the acts.

Answer 25

jointly & severally responsible

Question 26

What is the “duty of care”?

Answer 26

Officers & directors of corporations must act w/ the care that an objectively prudent person in a like position would.
Courts will rule that officers/directors have failed this duty in cases of:
1. negligence
2. failure to act w/ diligence
3. rubber stamp - not ensuring that transactions proposed by officers is informed by the best info available to them

Question 27

What is the “corporate opportunity doctrine”?

Answer 27

Establishes that the duty of loyalty extends to situations where an insider learns of a potential lucrative business opportunity that could personally enrich them at the cost of the business’ success.

Question 28

Why is it important for corporations to consider what state they want to incorporate in?

Answer 28

Corporations w/ little principals form in the states they plan to locate their office & conduct business.

Most publicly held corporations form in Delaware b/c the state has a well-established body of case law that allow for more reliable business planning.

Their tax structure isn’t attractive to out-of-state corps either b/c it primarily benefits domestic corps

Question 29

Which of the following is false regarding the rights of shareholders?

a. most states give shareholders certain rights to protect their ownership interests

b. assuming a majority of ownership consent, shareholders have the power to elect & remove directors at the annual shareholders meetings

c. shareholders directly manage the corporation

d. state statutes give rights to shareholders to veto any fundamental changes to the corporation that are propose by the directors & officers

Answer 29

the false statement is that “shareholders directly manage the corporation” b/c the board of directors manage corporations instead