Corporations (Final Exam) Flashcards
1
Q
Default distribution of income in partnerships and LLCs is?
A
if there is nothing specifically set forth in the agreement, the distribution is EQUAL
2
Q
What is pass through taxation? and what business organizations does it apply to?
A
- pass through taxation is (only taxed once)
- sole proprietorship, general partnership, limited partnerships, limited liability partnerships, LLC, and S Corporations (if they elect to not have double taxation)
3
Q
What is the document that provides the rules for the LLC and corporations?
A
- LLC is Operating Agreement
2. Corporation is Bylaws
4
Q
What is the document that CREATES a LLC and a Corporation?
A
- LLC is Articles of Organization
2. Corporations is Articles of Incorporations
5
Q
What is a Par value?
A
the lowest price for which a share of stock can be sold
6
Q
What is a parent company?
A
a company that controls other companies by owning an influential amount of voting stock or control. Parent companies will typically be larger firms that has control over one or more small subsidiaries.
7
Q
What is the primary source of law for business organizations?
A
State statutes generally are the primary source of law
8
Q
what is piercing the corporate veil? who does it apply to?
A
a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders; this can also be applied to LLC’s and its members.
9
Q
What is a stock subscription?
A
a mechanism which is used for a person to agree to purchase shares in a corporation that does not exist yet
- basically, it’s a contract requiring an investor to purchase a set number of unissued shares from the corporation at a future date for a specific price
10
Q
Corporations are domiciled where?
A
Corps are domiciled where the articles of incorporation are filed
11
Q
Cumulative Voting
A
- a type of voting system that helps strengthen the ability of minority shareholders to elect a director.
- this method allows shareholders to cast all of their votes for a single nominee for the board of directors
12
Q
Proxy Voting
A
- most shareholders cannot attend meetings at which voting occurs; corporations provide shareholders with the option to cast a proxy vote; shareholders receive a proxy ballot in the mail along with a proxy statement describing the issues to be voted on; Shareholders return a form by mail agreeing to have their vote cast by proxy
- basically voting by mail
13
Q
What is a derivative action
A
- a lawsuit brought by a corporation shareholder against the directors, management and/or other shareholders of the corporation, for a failure by management; the shareholder claims to be acting on behalf of the corporation, b/c management are failing to exercise their authority for the benefit of the company
- this type of suit often arises when there is fraud, mismanagement, self-dealing and/or dishonesty which are being ignored by officers and the Board of Directors of a corporation
14
Q
What is a stock split and how does it work?
A
- A stock split is a decision by the company’s board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders
- every shareholder with one stock is given an additional share; So, if a company had 10 million shares outstanding before the split, it will have 20 million shares outstanding after a 2-for-1 split
15
Q
Corporations involved 3 groups of people, what are they? what do they do? and how do exist?
A
- share holders - own the corp., but do not mange it, their participation primary takes the form of voting to elect directors and other actions
- directors - manage the corporation and are elected by share holders; they meet is regular or special meetings
- officers - are appointed by directors to carry out whatever functions are assigned to them by the directors
16
Q
what is a Dividend and what are the key features of Corporate Dividends (3)?
A
- a dividend is a distribution of a corporate’s profits to its share holders
1. generally, shareholders have no absolute right to receive dividends, and they are declared in the discretion of the board
2. dividends MUST be uniform within a CLASS but can VARY from class to class
3. to distribute a dividend, a corp. must be solvent (meaning it is able to pay its debts as they come due)
17
Q
an involuntary dissolution of a corporation arises and becomes?
A
an administrative and judicial decision
18
Q
the number of authorized shares are?
A
the max number of shares that can be issued (distinguished when articles of incorporation is filed)
19
Q
What are the advantages and disadvantages of a Preferred Stock? What is a Common Stock?
A
- Preferred has some sort of right or preference other classes do not have (such as distribution, conversion, and redemption rights), but often do not have the right to vote
- A common stock is ordinary stock and usually has voting rights, distribution (after preferred stock holders) and liquidation rights
20
Q
Identify Merger and Consolidation
A
- Merger: a contractual and statutory process by which 1 corp. acquires all of the assets and liabilities of another corp. causing the merged corp. to become defunct (A+B=A)
- Consolidation: a contractual and statutory process by which 2 or more corps. jointly become a completely new corp.; the original corps. cease to exist and the successor corp. acquires all of the assets and liabilities of the original corps. (A+B=C)
21
Q
What is the Articles of Incorporation and what does it require?
A
- it is the document that creates a corporation and its contents are dictated by state statutes
- the information needed to prepare this article includes:
1. identify of incorporators (promoters)
2. principal address of the corp.
3. registered agent
4. initial directors
5. identify stock of company (such as common or preferred, number of authorized shares, par value)
22
Q
Employment agreements versus none in at-will states
A
- employment agreements are often used for more senior or key employees, they can restrict an employee from competing against the employer upon termination; they distinguish the duties of the parties, compensation, term, and confidentiality
- “at will”, means that either the employer or employee is free to terminate the relationship at any time for any reason or no reason
23
Q
What is an Organizational Meeting and what does is discussed at this meeting (10)?
A
- corporations must hold a first meeting to commence the corporation’s business
- the meeting should cover:
1. election of directors
2. appointment of officers
3. adoption of bylaws
4. acceptance of reincorporation stock subscriptions
5. acceptance of reincorporation contracts
6. approval of corporate seal and form of stock certificate
7. banking and accounting info
8. S election
9. confirmation of Section 1244 stock
10. issuance of stock
24
Q
What is the difference between stocks and bonds (5)?
A
- stocks are equity securities; bonds are debts security
- shareholder is an owner and receive distributions only if earnings permit; a bondholder is an outside creditor entitled to timely repayment
- if a corp. is insolvent, no distributions will be paid to shareholder; bondholder may be entitled to payments of interest and principal whether or not the corp. is solvent
- corp. may not deduct distributions paid to shareholders; interest paid on bonds is a detectable expense for a Corp.
- in the even of liquidation, shareholders receive assets after outside creditors/bondholders; bondholders receive assets before shareholders
25
If an entity is disregarded for income tax purposes, that means what?
Pass through taxation is available
26
What is double taxation and who is subject to it?
Corporations are subject to double taxation: the income of a corporation is taxed, and when profits are distributed to shareholders, they also pay tax
27
S corp
a corporation that can elect to have pass through taxation; limited to only 100 shareholders; can only have one class of stock
28
C corp
Close Corp, usually held by just a few people that know each other and everyone wants to run the business
29
Who is a promoter? discuss their liability issue
- someone who is involved in forming a corporation and organizing its structure (aka incorporator)
- they are held jointly and severally liable for their actions on behalf of the "proposed corp." until the actions are ratified and accepted by the "valid corp." (at which case, the corp becomes liable)
30
what are the titles of OFFICERS
1. president
2. vice president
3. secretary
4. treasurer
5. others: CEO/Chariman/CFO
31
What are the types of business organization (10)?
1. sole proprietorship - owned and operated by one person
2. general partnership - co-owned by 2 or more
3. limited partnership - created under a state statute in which only some partners have limited liability
4. LLP - provides limited liability for its PARTNERS
5. LLC - provides limited liability and pass through taxation for members
6. Business Corporation - legal entity existing under the authority of the state legislature
7. Professional Corporation - corp. formed by professionals
8. S Corporation - corporate that passes income to its shareholders
9. Close Corporation - small corp. whose shareholders are active in managing the business and operates informally
10. Parent and subsidiary Corporations
32
What is a foreign corporation?
a term for an existing corporation that is registered to do business in a state or jurisdiction other than where it was originally incorporated
33
What are the advantages of a corporation (4)?
1. limited liability
2. corporate deductions
3. continuity of existence
4. transferability of share ownership
34
What are the disadvantages of a corporation (3)?
1. double taxation
2. formalities of organization and operation
3. centralized management
35
LLC and Corporations must have a designating work or abbreviation indicating what?
that it is a corporation, such as LLC, Inc.,
36
What is a preemptive right
the right of a shareholder to purchase a proportional share of newly issued shares
37
Equity Security is?
basically a share; a shareholders ownership interest in a corporation
38
1244 stock
aka "qualified small business stock", provides certain tax advantages to corporate shareholders
39
directors; how many can a corporation have? under what circumstances can a corp. not have a board?
1. each corp. must have 1 or more people as a director; there can be a range of 5-7
2. each corp. must have a board of directors unless there are Less than 50 shareholders and they are identified as taking on the responsibilities of a director
40
stock option
a contract in which the buyer purchases the right to buy 100 shares of an under lying stock at a predetermined price within a specified period of time
41
when can a shareholder become liable for corporate obligations?
they may be liable if they
1. commingling assets
2. failing to observe corporate formalities
3. undercapitalizing the corp.
42
articles of dissolution set forth the following:
1. name of corp.
2. date dissolution was authorized
3. the dissolution was approved by the requisite shareholder vote
4. articles of dissolution
43
grounds for dissolution by the state (5)
1. failing to pay taxes
2. failing to have a registered agent (or failing to notify it has changed)
3. operating after the corporation's period of duration expires
4. obtaining articles of incorporation through fraud
5. abusing the authority given to the corp. by the state
44
in a case where involuntary dissolution was initiated by the state for administrative or technical reasons, a corp. can do what?
a corp. that is dissolved for such reasons can generally apply to be reinstated
45
in a case where shareholders initiate dissolution (due to waste of assets or fraud, etc.), a court can allow what?
a court can allow the complaining shareholder's shares to be purchased
46
creditors can initiate a dissolution if the corporation is what? What will a court order?
if the corp. is insolvent and their claim is undisputed; the court will order winding up and liquidation so the creditor may be paid
47
corps. must notify known claimants and instruct them to submit their claims within a certain period of time, as for unknown claims, what must be done?
the corp. must publish a notice in a newspaper and claimants can enforce the claim within 3 years
48
during liquidation, what is paid of first and so forth?
1. expense of liquidation
2. creditors
3. distribution to shareholders
