Law: #20

Question 1

A corporation is a ____________ person, which means that it can do many things that a “natural” human being can do. (fill in the blank, answer 1)

What is the one advantage that a corporation has that a human does not (as mentioned in the lesson)? (answer two)

Answer 1

Legal (blank word)

It does not die.

Question 2

Why would someone choose a corporation over a LLC partnership?

Answer 2

A corporation can raise funds much more rapidly through stocks, bonds, fund raising, etc.

Question 3

Domestic corporations are created by following requirements. Are these requirements found in state or federal statutes?

Answer 3

These requirements are found in state statutes.

Question 4

The articles of incorporation must include four things in all states, what are they?

Answer 4

1) Corporate name
2) Number of Shares
3) Registered Agent (street address of the original corporation is stated)
4) Incorporators (the names and addresses of each incorporator)

Question 5

There are four other items mentioned in the lesson that can be included in the articles of incorporation, and that SOME states require.

Answer 5

1) Business Activities
2) Corporation Duration (usually “perpetual existence” is allowed)
3) Paid-in Capital (the amount that must be paid into the business before it can commence business)
4) Initial Directors (names and addresses, this can be the incorporators)

Question 6

When thinking of the “little guy” what were the biggest problems in a partnership set up and a corporation set up that seemed to cause a “catch-22 situation”? What type of “corporation” was birthed due to this “catch-22”?

Answer 6

The problem with partnerships were their unlimited liability, and the problem with corporations was the double tax.

This birthed the s-corporation.

Question 7

What are the 6 requirements needed to be classified as a s-corporation?

Answer 7

1) The corporation must be a domestic corporation
2) Must not be a member of a group of corporations that are legally tied together.
3) The shareholders must be individuals (and some trust or estates).
4) No more than 100 shareholders
5) Only one class of stock
6) Shareholder cant be a non-resident alien

Question 8

What trend has been seen in s-corps now that there is the LLC? Why?

Answer 8

There has been a lesser amount of s-corps. This is because an LLC is much easier to set up.

Question 9

What is the main reason(s) someone would chose an s-corp over an LLC?

Answer 9

In an s-corp you can have multiple investors (up to 100) who will not participate in the business.

Question 10

What legal claim could be made by a shareholder in an s-corp against another shareholder of the same company from selling off their shares to a corporation, and thus forfeiting the s-corps status as an s-corp?

Answer 10

Fiduciary responsibility. If the other shareholders do not want this, then there is a fiduciary responsibility prohibiting the shareholder who wants to sell.

Question 11

In regards to a corporation, what does the term “promoters” refer to?

Answer 11

The person who takes the steps necessary to form a corporation.

Question 12

Can a contract be signed by a promoter for a corporation before the corporation is approved as a corporation?

Answer 12

In this situation the person signing the contract would become personally liable. A promoter cannot bind a corporation that does not exist (unless otherwise specifically agreed).

Question 13

In what situation can a promoter make a contract without personally liability for a corporation that is not yet formed?

Answer 13

This can be done when it is understood by both parties that the corporation only will be liable and not the promoter.

Question 14

With whom are the articles of incorporation submitted?

Answer 14

To the secretary of state.

Question 15

If a company makes a mistake when filing to be a corporation, say an assistant files the papers with the wrong government office and they get lost, the corporation can still be viewed as a corporation if they fit 3 criteria. what are they?

Answer 15

1) Is there a statute that allows the corporation
2) Did the incorporators (acting in good faith) attempt to follow the statute
3) Has the enterprise in question been acting as if it was a corporation

Question 16

What does it mean for a corporation to be a “de facto” corporation?

Answer 16

It means that even though there was a problem with their incorporation, the government was willing to recognize them as a corporation because they fit the three criteria that make them essentially a corporation…

1) Is there a statute that allows the corporation
2) Did the incorporators (acting in good faith) attempt to follow the statute
3) Has the enterprise in question been acting as if it was a corporation

Question 17

Why would the government be willing to recognize a corporation as a “de facto” corporation?

Answer 17

because may people may have dealt with the organization believing that is is a bona fide corporation and would be unfairly treated (at no fault of their own) if the company was changed to be a partnership.

Question 18

What is a “de jure corporation”?

Answer 18

This is a corporation that was set up correctly, or with very minor and insignificant errors.

Question 19

In what situations can someone pierce the corporate veil? (2 major situations)

Answer 19

it is a judgment call, but litigants are sometimes allowed to pierce the corporate veil and get to the associated business operators when the operators are

(1) engaged in fraudulent activity or
(2) when the operators mix corporation and personal interests.

Question 20

When does the doctrine of “ultra vires” refer to in regards to incorporation?

Answer 20

This is when a business engages in activities not permitted by its articles of incorporation, in a state where stating business activities in the articles is required.

Question 21

What does the term “ultra” vires” translate to mean in law regarding corporations?

Answer 21

This means “beyond the lawful powers” of the corporation.

Question 22

There are three groups/individuals that has the right to sue in a “ultra vires” situation. Who are they?

Answer 22

1) shareholders of the corporation
2) the corporation itself
3) the attorney general of the state of incorporation

Question 23

What does it mean to “pierce the corporate veil”?

Answer 23

To pierce the corporate veil means to disregard the existence of a corporation and hold the principal operators liable for the debts of the corporation.

Question 24

What is the meaning of “par” stock?

Answer 24

If “par value” is required in a particular state, it is meant to be a statement of the minimum price (for example “five cents per share”) at which common stock of the corporation may be sold by the corporation. (The par value concept applies to the sale of stock by a corporation and not to subsequent sales by stockholders.

Question 25

Assume for the moment that New Jersey recognizes the existence of de facto corporations. What must be proved to establish the existence of a de facto corporation?

Answer 25

court would ask the following three questions:
(a) Is there a statute that allows incorporation?

(b) Did the incorporators (acting in good faith) attempt to follow
(c) Has the enterprise in question been acting as if it was a corporation?

If the answer is “yes” to the three questions above, then the approach in many states is to label the corporation a label the corporation a de facto corporation.

Question 26

The Coopers & Lybrand v. Fox case was decided in Colorado. If history could be rewritten, what should Mr. Fox have inserted into his agreement with Coopers so that he could avoid personal liability if the bill was not paid?

Answer 26

Something like this would suffice: “The parties understand that Fox is acting in behalf of a corporation yet to be formed and Fox shall have no personal liability if fees from Coopers are not paid.”)

Question 27

If, indeed, corporations have many of the rights that a natural person possesses, would you suppose that a corporation has the right of “free speech” described in Amendment I (“Congress shall make no law . . . abridging the freedom of speech”) of the U.S. Constitution?

Answer 27

Heretofore the answer has been “no.” However, on Jan. 21, 2010, the U.S. Supreme Court ruled in Citizens United v. Federal Election Commission that corporations enjoy the same First Amendment free-speech as individuals.

Question 28

Describe the advantage to corporation stockholders if the corporation qualifies under Subchapter S of the Internal Revenue Code.

Answer 28

If a corporation qualifies as an “S Corporation,” the corporation pays no income tax. Instead, corporation profit and loss flows through to the shareholders like it does in a general partnership.

Question 29

What is a practical way for incorporators to avoid the possibility of future claims that their corporation has engaged in an ultra vires act?

Answer 29

The simplest way to avoid ultra vires claims is to use broad and permissive language in the articles of incorporation. An example is language that allows the corporation to engage in activities that have “any lawful purpose.”

Question 30

If the subject matter of this chapter was being discussed in a classroom, the professor might ask if it is possible that the same corporation can be properly labeled a “domestic corporation ,” “closely held corporation,” and “S corporation.” Can it?

Answer 30

The answer is “yes.” A routine, domestic corporation where all of the stock is owned only by members of a family or by a small group of unrelated people is “closely held.” Moreover, if the same corporation met other “small” corporation requirements described later in the chapter, it would also be an S corporation.

Question 31

If Jed wishes to sue the XYZ Corporation, he would usually deliver (or have delivered) the legal papers to which of the following?

corporation registered agent

corporation treasurer

corporation president

corporation shareholders

Answer 31

a

By statute, the “registered agent” is the person to whom documents may be delivered and delivery to the registered agent is considered delivery to the corporation.

Question 32

Which of the following would disqualify a corporation from being an “S Corporation”?

having 110 shareholders

being a foreign corporation

having two classes of common stock

All of these would disqualify a corporation from being an “S Corporation.”

Answer 32

d

To qualify as an “S Corporation” the applicant must be a domestic corporation, have no more than one hundred shareholders and have only one class of stock.

Question 33

What does the “pierce the corporate veil” mean?

Corporation status will be disregarded.

The corporation is insolvent.

The corporation is not a de jure corporation.

Answer 33

a

If a court decides that corporation status has been abused by disregarding corporation procedures, the court may “pierce the corporate veil” and hold officers or directors personally liable for claims by creditors.

Question 34

Suppose that a state statute requires that the signatures of people on articles of incorporation be notarized. The signatures on the articles of incorporation for ABC Specialities, Corp. are indeed notarized by Jed and the corporation is approved. Later, however, it is discovered that the notary public commission of Jed had expired and, thus, the articles of incorporation are technically not “notarized.” Who is allowed to challenge the existence of the incorporation?

corporation shareholders

corporation directors

corporation creditors

none of these is correct.

Answer 34

d

Section 203(b) of the Revised Model business Corporation Act provides that only the state that approved the incorporation may thereafter challenge it.

Question 35

Which of the following is correct concerning the taxation of a corporation?

The corporation is taxed on its profits.

Shareholders are taxed on the profits that are distributed to them as dividends.

Both of these are correct.

Neither of these is correct.

Answer 35

c

Corporation profits are taxed and then distributed to shareholders. The money distributed to holders (called dividends) is taxable to the shareholders. This is the double tax.

Question 36

Suppose that Rowena was a promoter (but not a shareholder, officer or director) who helped organize the ABC Specialities Corp. Prior to formal approval of the articles of incorporation, Rowena purchased Blackacre from Bart using the following language: “Rowena, agent for ABC Specialities.” Which of the following is true?

Rowena (only) is liable to Bart on the contract.

ABC Specialities (only) is liable to Bart on the contract.

Rowena and ABC Specialities (both) are liable to Bart on the contract.

Answer 36

a

A corporation is not liable on a contract that was formed before it existed unless it afterward ratifies the contract, and in this case there is no indication of ratification. Thus Rowena (only) is liable on the contract.

Question 37

Which of the following uses the name “corporation” but really refers to an Internal Revenue Service (IRS) qualification?

S corporation

public corporation

foreign corporation

domestic corporation

Answer 37

a

An S corporation is a corporation that has qualified under Subchapter S of the IRS Code.

Question 38

Which of the following is best suited to having hundreds or thousands of investors?

a limited liability company (LLC)

a general partnership

a limited liability partnership (LLP)

a corporation

Answer 38

d

A corporation can have hundreds or thousands of shareholders and the shareholders may be divided into classes and have different shareholder rights. No other business organization comes close to the number, size and rights of hundreds, thousands or millions of investors.

Question 39

In Pharmaceutical Sales and Con. v. J. W. S. Delavau, what did the court decide?

The corporation in question was not a corporation at all.

The corporation in question was a corporation de facto.

The corporation in question was a corporation de jure.

Answer 39

a

It was admitted that the corporation in question was not a de jure corporation. It was claimed, however, that the corporation in question was a corporation de facto. Because there had not been a bona fide attempt to form the corporation, there was no basis for recognizing a corporation de facto.

Question 40

What is a corporation formed in California but doing business in Utah called?

S corporation

domestic corporation

public corporation

foreign corporation

Answer 40

d

A corporation formed in state A but doing business in state B is referred to as a “foreign” corporation. As commonly used, the term “foreign” does not refer to a corporation organized outside of the United States.