Introduction

Question 1

GENERAL CHARACTERISTICS OF A
CORPORATION
.

Answer 1

• Corporation is a legal entity distinct from its owners & may be created only by filing certain docs w/ state

Question 2

Key Players

Answer 2

• Several key players we need to remember in context of corps:
  (1) Shareholders, or stockholders, are owners of corp;
  (2) Board of directors is group in charge of management of corp; and
  (3) Officers are agents of corp appointed to carry out corp’s policy

Question 3

Key Characteristics
a. Limited Liability for Owners, Directors, & Officers

Answer 3

• Shareholders generally are not personally liable for obligations of corp; neither are corp’s directors/ officers.
• Generally, only corp itself can be held liable for corporate obligations.
• Owners risk only investment that they make in business to purchase their “shares” (ownership interests).

Question 4

Centralized Management

Answer 4

• Right to manage a corp is not spread out among shareholders,
• Board of directors, who usually delegate day-to-day management duties to officers

Question 5

Free Transferability of Ownership

Answer 5

• Generally, ownership of a corp is freely transferable meaning shareholders are free to sell their shares to others unless it is provided otherwise.

Question 6

Continuity of Life

Answer 6

• Corp may exist perpetually & generally is not affected by changes in ownership (sale of shares).

Question 7

Taxation
z C Corporation

Answer 7

• Generally, a corp is taxed as an entity distinct from its owners. (Under tax laws, it is a “C corp.”)
• The corporate tax rate generally is lower than personal tax rate, & so this arrangement can be
  advantageous to persons who want to delay the realization of income.
• However, this advantage comes at a price—double taxation—b/c when corp does make distributions to shareholders, distributions are treated as taxable income to shareholders, even though corp has already paid taxes on its profits

Question 8

S Corporation

Answer 8

• Tax laws permit certain corps to elect to be taxed like partnerships & yet retain other advantages of corporate form (see above).
• Such corps are called “S corporations” under tax laws.
• Partnerships & S corporations are not subject to double taxation—profits & losses flow through entity to owners.
• There are a number of restrictions on S corps (ex. stock can be held by no more than 100 persons, generally shareholders must be individuals, & there can be only one class of stock).

Question 9

Key Fact Patterns for Corporations Questions

Answer 9

On the exam, Corporations questions fall into five main fact
patterns or topic areas:
* Organization of a corporation
* Issuance of stock
* Directors and officers
* Shareholders
* Fundamental corporate changes

Question 10

CORPORATION VS. OTHER BUSINESS
ENTITIES
1.2.1 Comparison with Sole Proprietorship

Answer 10

• In a sole proprietorship, one person owns all assets
  of business.
• There is no business entity distinct from owner
• Owner is personally liable for business’s obligations, & business “entity” cannot continue beyond life of owner.
• Ownership is freely transferable, & all profits & losses from business flow through directly to owner.

Question 11

Comparison with Partnership

Answer 11

• A partnership is similar to a sole proprietorship except that there are at least 2 owners of a partnership.
• Little formality is required to form a partnership (just an intention to carry on as co-owners a business for profit).
• Partnerships generally are not treated as legal entities apart from their owners.
• Partners are personally liable for obligations of partnership, & management rights generally are spread among the partners.
• Ownership interests of partners cannot be transferred w/o consent of other partners.
• A partnership generally does not continue beyond lives of owners.
• Finally, profits & losses flow directly to partners unless partners have elected to be taxed as a corporation.

Question 12

Comparison with Limited Partnership

Answer 12

• A limited partnership is a partnership that provides for limited liability of some investors (called “limited partners”), but otherwise is similar to other partnerships.
• A limited partnership can be formed only by compliance w/ limited partnership statute.
• There must be at least one general partner, who has full personal liability for partnership debts & has most management rights.

Question 13

Comparison with Limited Liability Company

Answer 13

• Limited liability company (“LLC”) is designed to offer limited liability of a corp & flow through tax advantages of a partnership (unless parties elect to be taxed as a corp).
• Like a corp, it may be formed only by filing appropriate docs w/ state, but otherwise it is a very flexible business form: owners may choose between centralized management & owner management, free transferability of ownership or restricted transferability, etc.

Question 14

Comparison with Benefit Corporations

Answer 14

• A benefit corp (“B corp”) intends to benefit the public & environment, in addition to its shareholders.
• B corps are treated same as C corps for tax purposes.
• A benefit corp’s articles of incorporation must state that it is a benefit corp.
• Directors & officers operate w/ same limited liability & fiduciary duties as their traditional counterparts
  in C corporations, but they are also required to consider the impact of their decisions on the B corp’s employees, customers, communities, & environment, not just its shareholders.
• B corps must also prepare an annual benefit report, which is delivered to all the shareholders & posted online and/or filed w/ secretary of state