Corporations Flashcards
Corporation
a fictitious legal entity that exists as an independent “person” separate from its principals
obligations are separate and distinct from personal obligations of their principals
Privately Held Corporation
a corporation that does not sell ownership interests through sales via a broker to the general public or to financial institutions or investors
What are some benefits of a Privately Held Corporation?
(1) flexible internal operating procedures
(2) do NOT have to comply with rigorous corporate structures or formalities (fewer regulations)
unanimous consent resolution
a single document signed by each principal to dispose of necessary tasks like electing directors or issuing stock
What two types of entity can Privately Held Corporations choose to become?
(1) closely held
(2) family held
these types restrict the number or type of owners, but are more flexible on organization and management
True/False: Privately held corporations have a small number of shareholders, but there’s no limit in terms of revenue.
True
What does the flexibility of Privately Held Corporations have the capability to do?
it outweighs any desire of principals to be able to capitalize business through a sale to the general public
How does a Privately Held Corporation fund capitalization?
(1) sale of ownership to general public
(2) commercial investors
What must a Privately Held Corporation pursue in order to exist as a PUBLICLY Held Corporation?
an initial public offering (IPO)
What are Publicly Held Corporations subject to?
federal/state regulation and close scrutiny by agencies to ensure integrity among insiders and global investors
Domestic Corporation
operates in state of incorporation
Foreign Corporation
conducts business in a state other than its state of incorporation
Alien Corporation
a corporation formed outside the US that does business in the US though
Nonprofit Corporation
no profit seeking owners and performs a service to the public
Benefit Corporation
for-profit with societal objectives
Public Corporation
formed by government body to serve public at large but with no owners
Professional Corporation
ownership is restricted to a particular profession and members in good standing
True/False: Corporations have the least formal filing and reporting requirements.
False
(Corporation have the MOST formal filing and reporting requirements)
articles of incorporation
the document filed with state authority that sets in motion the incorporation process, includes the corporation’s name and purpose, numbers of shares issued, and address the corporation’s headquarters
it MUST have by laws
What must Corporations choose when becoming to incorporate?
the state to incorporate in
Are a business venture’s taken on before or after filing?
before
promoter
an individual who performs arrangement of capitalization, personal recruitment, property leasing, and incorporating the business
What do principals address in organizational meetings after filing the AoI?
(1) bylaws
(2) board of directors and officers
(3) issuance of shares
bylaws
issues left for the principals to decide; files aren’t public but kept in corporate recors
Who are the three types of people operating a Corporation?
(1) shareholders
(2) board of directors
(3) officers
board of directors
individuals responsible for oversight and management of the corporation’s course of direction; sets the strategy; are independent from shareholders and officers
officers
individuals responsible for oversight and management of the corporation’s course of direction; the day-to-day management
express authority
gives specific authority to particular officer; comes from bylaw or director resolution
implied/inherent authority
based on position to act on behalf of the corporation
issuance of shares
official issuing of ownership interest; recorded in a stock register kept by the secretary
shares
ownership interests (indicates owner’s name and number of shares)
shareholders
owners of a corporation that act principally through electing and removing directors and approving or withholding approval of major corporate decisions
Do directors and officers comply with federal or state requirements?
state statutory requirements
corporate formalities
(1) meetings with shareholders and directors
(2) filing annual reports
(3) disclosures to shareholders
(4) must keep records and by laws up to date
sources of financing for Corporations
(1) debt (lengthy process)
- bonds: debt money issued by a corporation with promises to pay back at a specified rate of interest for a length of time and repay full amount upon expiration of bond (maturity date); “credit”
- debentures: like bonds, but issued on the strength of the general credit of the corporation
(2) equity
- to capitalize operations but is highly regulated due to process of issuing securities
(3) venture capital firms
- venture capital: funding provided by a group of professional investors for use in a developing business; focused on one industry
(4) public offerings
-complex and time consuming process
List the advantages of a Corporation.
(1) 1+ owners
(2) limited liability
(3) well developed case law
(4) entity of choice for going public
List the disadvantages of a Corporation.
(1) more regulations
(2) expensive
corporate veil
liability protection shareholders, directors, and officers of a corporation have from personal liability in case the corporation runs up large debts or suffers
piercing the corporate veil
when the court discards the corporate veil and holds some or all of the shareholders personally liable because fairness demands doing so in certain cases of inadequate capitalization, fraud, and failing to follow corporate formalities
True/False: Piercing the corporate veil is an extreme remedy.
True
What does a personal guarantee that creditors request allow?
allows creditors to obtain a judgement against personal assets of one or more shareholder in event of a default by the corporation in addition to any collateral that’s pledged by shareholders or corporation
insiders
officers, directors, and controlling shareholders
all owe the durty of care and duty of loyalty
duty of care
(1) act in good faith
(2) act in care
(3) carry out duties
negligence
a breach of the duty of care where there is a failure to complete tasks/role accordingly
failure to act with diligence
a breach of the duty of care that doesn’t necessary mean suspicious activity but does sometimes require outside experts to investigate or have the corporation and its practices monitored
rubber stamp
a breach of the duty of care when transactions proposed by officers aren’t from the best possible information and in the best interest
business judgement rule
a “shield”; a principle that protects officers and directors from liability when they have made an unwise decision that results in a loss to the corporation but they have acted in good faith, had no private financial self-interest, and used diligence to acquire the best information related to the decision
corporation opportunity doctrine
disclosure that considers if the corporation had current/expected interest in the opportunity, if it’s fair to the corporation’s shareholders to allow another to usurp, and if the opportunity is closely related to existing/prospective activities
Trefoil Park v. Key Holdings
Plaintiff = Trefoil
Defendant = Key
Federal Trial Court
Case involving corporate commercial real estate and the corporate veil
Court’s reasoning…
- there was no injustice or fraud
- Key followed all corporate formalities
