Pg 16

Question 1

If tort, contract, or criminal liability comes from the activities of the corporation, is that the liability of the shareholders?

Answer 1

No, because the corporation is a separate legal entity

Question 2

If a shareholder does something like personally guarantee a debt or commit a crime for the corporation, is he liable?

Answer 2

Yes

Question 3

Because corporations have a separate legal existence but no physical existence, what are the penalties that they get assessed?

Answer 3

Fines or involuntary dissolution

Question 4

How do corporations pay taxes?

Answer 4

They are taxed on any income that is earned by the entity

Question 5

What are the three major subchapters of the internal revenue code that apply to corporations?

Answer 5

– subchapter C/C Corp: double taxation
– subchapter K: pass-through taxation
– subchapter S/S corporation: pass-through

Question 6

What is a subchapter C or C corporation?

Answer 6

This is the default status. Since corporations are separate entities from their owners, they pay income tax on their earnings. Then the corporation distributes dividends to shareholders, and the shareholders pay income on those earnings. This amounts to double taxation.

Question 7

What is subchapter K under the internal revenue code with regard to corporations?

Answer 7

This applies to partnerships and associations that are taxable as if they are partnerships. The business is not a separate taxable unit from its owners, so the entity does not pay tax on income received, but instead it passes through the corporation to the owners and the owners pay tax. This is called pass-through taxation.

Question 8

What is a subchapter S or S corporation?

Answer 8

If a corporation meets certain criteria it can get pass-through tax treatment. This only counts for closely-held corporations that meet these requirements:
– request subchapter S status
– formed in the US
– maximum of 100 shareholders
– shareholders cannot be corporations
– shareholders must be citizens or residents of the United States
- can only issue one class of stock
– ownership interests are not freely transferrable

Question 9

What are the major differences between an S corporation and a C corporation?

Answer 9

– number of shares
– shareholders
– taxation: pass-through versus double

***if you are taking a corporation public, that means there will be more than 100 shareholders, so you cannot have an S corporation go public

Question 10

What does it mean to pierce the corporate veil?

Answer 10

Disregard the corporate entity and hold a specific director, officer, or shareholder personally liable for a specific corporate obligation. This pretends the corporation doesn’t exist so the obligations of the corporation become those of the owners.

Question 11

What is the purpose of piercing the corporate veil?

Answer 11

To get justice by treating the corporation and its stockholders identically

Question 12

What do you have to figure out if you’re trying to pierce the corporate veil?

Answer 12

Who the real party in interest is, whether it’s a corporation or an individual.

Question 13

Is it common for a corporate veil to be pierced?

Answer 13

No, courts are very reluctant to disregard the corporate form. But they are more willing to do it in tort cases than contract cases because tort victims don’t choose to interact with the corporation, but contract victims do

Question 14

What is the only type of corporation that you can pierce the corporate veil for?

Answer 14

Closely held corporations.

Question 15

What are the characteristics of a corporation generally if piercing of the corporate veil happens?

Answer 15

• closely held corporation or one person corporation
  – usually has fewer than 10 shareholders
  – not publicly traded

Question 16

How does liability for piercing the corporate veil work between passive and active shareholders?

Answer 16

Passive shareholders are usually shielded from liability, but more active ones are not

Question 17

Who has the burden when piercing the corporate veil?

Answer 17

The party bringing the claim must establish a basis to disregard the corporate entity

Question 18

What does it mean that piercing the corporate veil claims are regarded as sui generis?

Answer 18

They are decided on a case by case basis and determined on their own underlying facts

Question 19

If a person knowingly and voluntarily agrees to deal with a marginally financed corporation without requesting any assurance from the shareholders, can he then hold the shareholders liable by piercing the corporate veil?

Answer 19

No, because he assumed the risk.

Question 20

What are some important factors that would likely lead to piercing the corporate veil?

Answer 20

– not observing corporate formalities
– not paying dividends
– officers and directors not functioning
– no corporate record
– insolvency at formation
– using the corporate chequebook to pay personal expenses
– syphoning funds off by a dominant shareholder
– no Board of Directors
– undercapitalization
– fraudulent misrepresentation of directors
– corporation is just a façade for the dominant shareholder’s operations
– corporation pays for individual obligations
– corporation used for fraud, injustice, or illegality
– all corporation stock is owned by one person
– executing the corporation’s lease in your own name
– not having director or shareholder meetings
– giving interest-free loans to subsidiaries without documenting with a promissory note

Question 21

If a corporation disregards corporate formalities, is that enough to pierce the corporate veil?

Answer 21

No, that is just one consideration. There usually must also be fraud, illegality, or unfairness