Legal Significance of the Formation of the Corporation

Question 1

What is the “internal affairs” doctrine?

Answer 1

Internal affairs of a corporation (e.g., roles and duties of directors, officers, and shareholders) are governed by law of the state in which the corporation is formed, no matter where the corporation does business

Question 2

Is a corporation a separate legal person?

Answer 2

YES - It can sue and be sued, hold property, be a partner in a partnership, make charitable contributions, etc. It is taxed on its profits; in addition, shareholders are taxed on distributions. So there’s “double taxation.”

Question 3

Can we form a corporation and avoid having it pay income tax at the corporate level?

Answer 3

Yes - We form an S corporation instead of a C Corp (S corps do not pay) - This is a chapter in the internal revenue code

Question 4

What is an S corp?

Answer 4

An S Corporation has no more than 100 shareholders, all of whom are human and U.S. citizens or residents. There is one class of stock and it is not publicly traded

Question 5

1. Are the directors or the shareholders liable for what the corp. does? 2. So, generally, who is liable for what the corporation does?

Answer 5

NO - This is “limited liability,” which means that shareholders generally are liable only for the price of their stock; 2. The Corp itself - True even if there is only one shareholder (this has been on the bar exam) -*You have to have formed the corp