Organization and Formation

Question 1

Corporation

Answer 1

A corporation is a legal entity distinct from its owners and may be created only by filing documents with the state

Question 2

Who are the key players in corporations?

Answer 2

1. Shareholders (owners)
2. Board of Directors (management)
3. Officers (agents who carry out the corporation’s policies)

Question 3

What are the key characteristics of a corporation?

Answer 3

(i) limited personal liability for shareholders, directors, and officers
(ii) centralized management (board)
(iii) ownership is freely transferable (shareholders)

Question 4

Taxation of a C-Corp

Answer 4

—taxed as an entity distinct from its owners

—‘double taxation’ at the corporate level and again at the shareholder level after a distribution

Question 5

Taxation of an S-Corp

Answer 5

—taxed as a partnership

—no double taxation; profits and losses flow through the entity to its owners

Question 6

The articles of incorporation include:

Answer 6

1. Name of the corporation
2. Number of authorized shares
3. Names and addresses of incorporation & registered agent

be aware if clauses limiting the corporate purpose, exceeding the scope can lead to liability

Question 7

When does the corporation’s existence begin?

Answer 7

Upon filing of the articles of incorporation. Once formed, the corporation has entity status as a legal person and has limited liability.

Question 8

Even if there is a defect in the formation of a corporation, there is no liability if there is a de facto corporation:

Answer 8

1. Colorable compliance with the incorporation statute; and

2. Exercise of corporate privileges (i.e., acting as though a corporation exists)

Question 9

Even if there is a defect in the formation of a corporation, there is no liability if there is a corporation by estoppel:

Answer 9

People treating the business as a valid corporation are estopped from denying the corporation’s existence

Question 10

Piercing the Corporate Veil

Answer 10

(1) Alter ego doctrine grounds
—owners do not treat the corporation as separate
—co-mingling of personal & corporate funds
—use of corporate assets for personal purposes
—owners do not hold meetings

(2)Inadequate capitalization at inception
—need sufficient capital to meet prospective liabilities

(3) Perpetrating a fraud
— can’t be formed to avoid liabilities

(4) If the court pierces, generally only active shareholders are liable and typically only for tort obligations

Question 11

Corporations capital structure

Answer 11

1. Debt securities (bonds) create debtor-creditor relationship
2. Equity securities (stocks) create ownership interests

Question 12

Authorized but unissued shares

Answer 12

Described in articles but not currently used

Question 13

Issued and outstanding shares

Answer 13

Shares sold to investors

Question 14

Treasury shares

Answer 14

Shares repurchased by the corporation (now called authorized but unissued shares)

Question 15

Subscription agreement

Answer 15

Agreements to purchase shares from corporation.

Pre-incorporation subscription agreements are irrevocable for 6 months

Question 16

Form of consideration for shares

Answer 16

Under the MBCA, stock/stock options may be issued for any tangible or intangible property or benefit to the corporation

Question 17

Amount of consideration for shares

Answer 17

Under the MBCA, the amount is set by the board of directors, and their good faith valuation is conclusive.