R8-M5 Business Structures 2

Question 1

what are characteristics of a C corp?

Answer 1

• a corp is treated as an entity distinct from its shareholders and shareholders are not liable for the corp’s debts
• bylaws documents adopted by incorporators or directors contain rules regarding the operation of the corp. It is not required to be filed
• shareholders’ inspection of books and records: 5 days written notice and have proper purpose are required

Question 2

what are characteristics of a S corp?

Question 3

what items must be included in the articles of incorporation?

Answer 3

• name of the corp
• names and address of the corp’s registered agent (who serve when corp gets sued)
• names and address of each of the incorporators
• numbers of shares authorized to be issued
• one or more classes of shares must have unlimited voting rights

Question 4

what is promoters procure capital commitments?

Answer 4

• a promoter is the founder or organizer of a corp
• when promoter enter into contracts before the corp is formed to obtain financing and things corp will need once formed, promoters are personally bound on the contracts they make.
• the corp is not bound unless and until the corp adopts the contracts after the corp is formed (either expressly or by accepting the benefits of contracts)
• even the corp adopts the promoter’s contract, the promoter remains liable unless there is a novation (an agreement what the 3rd party will release the promoter and substitute the corp)

Question 5

what are 3 reasons the court will pierce the corp veil?

Answer 5

• shareholders commingle personal funds with corporate funds
• inadequate (thinly) capitalization (ex: shareholders must start the corp with sufficient capital to meet corp’s prospective liabilities)
• the corp was formed to commit fraud on existing creditors (ex: a sole proprietor transfers all assets to a newly formed corp to avoid paying debt to existing creditors)

Question 6

what is ultra vires act?

Answer 6

an act outside of a director’s or an officer’s scope of authority and thus is a breach of duty to the corporation

Question 7

what is a derivative action?

Answer 7

action by a stockholder in the name of the corp to recover damages or to seek some other remedy on behalf of the corp when the corp does not enforce its own rights

Question 8

what are the fundamental changes that require shareholder approval?

Answer 8

DAMS
- dissolution
- amendments of the articles of the incorporation
- mergers, consolidations, and compulsory share exchanges
- sale of substantially all the corp’s assets outside the regular course of business

Question 9

what is the right of appraisal or the dissenting right?

Answer 9

shareholders who are not happy with the terms of a merger or short form merger (parent owns 90% of a sub corp), are permitted to compel the corp to buy their shares at FMV