Formation of a Corporation

Question 1

A corporation has four key characteristics:

Answer 1

1. perpetual or continuous existence; it survives the death or replacement of its owners (shareholders);
2. centralized management of its assets and business;
3. limited liability for its owners (shareholders), who are generally shielded from personal liability for the corporation’s debts and obligations; and
4. free transferability of ownership interest (shares).

Question 2

Double taxation of a corporation

Answer 2

1. Corporation’s profits are taxed; and,

2. profits distributed to shareholders as dividends are taxed as income

Question 3

Corporation Required Formalities

Answer 3

Annual shareholder and director meetings,
maintain separate bank account,
strict book-keeping,

Question 4

LLC Required Formalities

Answer 4

1. maintain separate bank account;
2. and books and records,
3. file annual reports
4. and follow any procedures added by the Operating Agreement.

Question 5

Who manages the day to day business of corporations?

Answer 5

Corporate officers

Question 6

Who manages the day to day business of close corporations?

Answer 6

The Board of Directors can or the Shareholders can

Question 7

Who manages day to day of LLCs?

Answer 7

Can be manager managed or member managed

Question 8

Who manages day to day B of LLCs?

Answer 8

All general partners have co-equal right to manage business

Question 9

3 main groups of players in a corporation?

Answer 9

Directors, officers, shareholders

Question 10

Corporate directors do what

Answer 10

sit on the board and are responsible for governing the corporation

Question 11

Corporate officers do what?

Answer 11

delegated the responsibility for managing the corporate business and serve as agents of the corporation.

Question 12

Shareholders are?

Answer 12

owners of the corporation but generally will not exercise control over the management of the corporate business.

Question 13

Who are promoters?

Answer 13

Promoters take the necessary preliminary steps for creating a corporation; these steps often involve contracts that the promoters enter into for the benefit of the not-yet-formed corporation.

Question 14

What are promoter’s liability?

Answer 14

In general, promoters are personally liable on the contracts they enter into for the benefit of a not yet existant corporation

Question 15

Promoters are not liable on pre-incorporation contracts if:

Answer 15

the preincorporation contract specifically disclaims the personal liability of the promoter; or,
Circumstances demonstrate that the other party agreed to look only to the corporation for performance

Question 16

What is a Corporation’s Liability on a Preincorporation Contract

Answer 16

A corporation is not liable on any pre-incorporation agreements its promoters entered into on its behalf unless, after it comes into existence, the corporation assumes liability by its own act through
adoption or
novation.

Question 17

If a corporation adopts the contract of a promoter, the promoters will

Answer 17

remain liable on the contract to the third party

but are no entitled to indemnification from the newly created corporation

Question 18

If a novation occurs, the promoters are:

Answer 18

Are released from all personal liability on the preincorporation contract

Question 19

A novation occurs when

Answer 19

3 Parties
the promoter,
the other party to the original contract,
and the corporation
—agree to substitution of the corporation as a party to the contract in place of the promoter.

Question 20

Adoption of preincorporation acts can be either

Answer 20

express or implied

Question 21

Express adoption occurs

Answer 21

when the board passes a resolution

Question 22

Implied adoption occurs

Answer 22

when the corporation accepts or acknowledges the benefits of the contract in some manner.

Question 23

How can a corporation ratify pre-incorporation transactions?

Answer 23

A corporation is unable to ratify a pre-incorporation transaction because ratification requires that the principal would have been lawfully able to authorize the unauthorized act when it was done.

Question 24

What is the best protection for promoters?

Answer 24

Novation when corporation comes into existance

Question 25

What is needed to bring a corporation into existence?

Answer 25

Articles of Incorporation

Question 26

What are the Articles of Incorporation Requirements

Answer 26

○ the name and address of each incorporator;
○ the number of shares the corporation is authorized to issue;
○ the address of its initial registered office and name of its initial registered agent;
○ the address and county of its initial principal office, if any; and
○ a corporate name.

Question 27

What corporate document is filed with the secretary of state?

Answer 27

Articles of Incorporation

Question 28

What must the corporate name contain

Answer 28

“corporation,” “incorporated,” “company,” or “limited,” or the abbreviation “corp.,” “inc.,” “co.,” or “ltd.” Furthermore, the corporate name must be distinguishable from other corporate names authorized to transact business in North Carolina.

Question 29

If Articles of Incorporation are in conflict with By-Laws, what governs?

Answer 29

Articles

Question 30

To fulfill North Carolina’s incorporation requirements, an incorporator (or incorporators) must deliver to the Secretary of State’s office:

Answer 30

Filing Fee + Articles of Incorporation

Question 31

What is the effective date of incorporation?

Answer 31

Date of filing

Question 32

When initial directors are named in the articles of incorporation, these directors must

Answer 32

hold an organizational meeting to complete the organization of the corporation.

Question 33

Completing the organization of the corporation requires

Answer 33

The appointment of

1. Corporate officers; and,
2. Adoption of bylaws

Question 34

When initial directors are NOT named in the articles of incorporation, the incorporators must

Answer 34

hold an organizational meeting to elect the directors; thereafter, completing the organization of corporation (officers + bylaws) can be accomplished by either the

1. incorporators;
2. or directors

Question 35

When a contractual dispute arises between a third party and an entity believed to be a corporation, a court may estop the third party from alleging that:

Answer 35

The corporation is defectively incorporated, if that would unjustly expose the corporate principals to liability

Question 36

When a contractual dispute arises between a third party and an entity believed to be a corporation, a court may estop the business entity from alleging that:

Answer 36

It is not a legally a corporation liable on the contract as a corporation, if that would unjustly harm the third party

Question 37

When can corporation by estopple apply? When can it not?

Answer 37

Can apply in contract claims

Cannot apply in tort claims