15.1 - Formation (Corporation)

Question 1

What is a corporation?

Answer 1

• Separate and distinct entities from their owners

Question 2

How are corporations taxed?

Answer 2

• Taxation as a C corporation or S corporation

Question 3

How do S corporations report earnings?

Answer 3

• on personal returns regardless if they’ve received distributions

Question 4

How are C corporations taxed?

Answer 4

subject to corporate income tax

Question 5

Identify 2 disadvantages of “C” corporations

Answer 5

• Entity level tax
• Double taxation

Question 6

Identify 2 advantages of a “C” corporation

Answer 6

• Separate legal entity
• Shield from liability

Question 7

What is a public corporation?

Answer 7

organized for public purposes related to the administration of government (i.e., an incorporated municipality) & may be funded by local taxes

Question 8

What must a corporation acquire in order to do business as a foreign corporation in another state?

Answer 8

a certificate of authority

Question 9

Define an alien corporation

Answer 9

corporation organized in another country

Question 10

Identify the duties and obligations of a promoter in the formation of a corporation

Answer 10

• Arranges for formation of corporation
• Provides for:
  
  • Financing
  • Compliance w/ securities laws
  • Personnel

Question 11

Who is personally liable on contracts made on behalf of the corporation?

Answer 11

the promoter

Question 12

When is personally liability relieved for the promoter?

Answer 12

When the corporation adopts contract which is implied by accepting benefits of the contract

Question 13

What is a novation?

Answer 13

• Agreement entered into by the promoter, 3^rd party to contract and corporation which effectively substitutes the corporation for the promoter in any binding contracts

Question 14

Define a subscription agreement

Answer 14

• Process of soliciting commitments from potential investors

Question 15

What are articles of incorporation?

Answer 15

• Brief with specific contents
• Incorporation formally accomplished through filing with secretary of state or another designated official
• Once filed, corporation formally comes into existence

Question 16

What is the purpose of the initial board and how are they elected?

Answer 16

• Elected by incorporator(s) and may adopt bylaws
• Incorporators resign and board governs corporation

Question 17

What are bylaws?

Answer 17

• Detailed procedures for meetings, quorums, restrictions on stock sales, etc.
• Articles filed, bylaws adopted

Question 18

At what point does the board elect offiers to run the business?

Answer 18

Once the bylaws are adopted

Question 19

Define defect in formation and how the defect is classified

Answer 19

• One or more formation procedures completed in defective manner
• Classification depends on whether procedures complied with state law or were defective in some manner

Question 20

Define a DeJure corporation

Answer 20

Business that has filed its requirements for formation according to the regulations for earning a state charter

Question 21

Define a defacto corporation

Answer 21

• Filing was defective but parties thought corporation had been properly formed and acted that way
• Corporation is permitted to exist

Question 22

Provide an example of a defacto corporation

Answer 22

• promoter hired a lawyer — the lawyer took the fee, but never filed articles with the state

Question 23

Provide 2 examples of private corporations

Answer 23

• Close corporation (closely held corporations)
• Publicly held corporation

Question 24

Identify 4 characterizing traits of a close or closely held corporation

Answer 24

• Owned by small number of shareholders
• Do not sell stock to public
• Officers and directors commonly own stock in corporation
• Shareholders are active in management and control of corporation

Question 25

Identify 5 characterizing traits of a publicly held corporation

Answer 25

* Organized for public purposes * Sells stock on exchange to public * Share price quotes regularly published * Related to the administration of government * May be funded by local taxes

Question 26

How is an S-Corporation taxed?

Answer 26

similarly to a partnership

Question 27

How do shareholders report their share of earnings / distributions in an S - Corp?

Answer 27

Report their share regardless if they receive distributions

Question 28

What happens if an S-Corp has more than one class of stock?

Answer 28

it is terminated

Question 29

What is the maximum number of shareholders an S-Corp can have before it is terminated?

Answer 29

100 max shareholders

Question 30

Define a shareholder of an S - Corp

Answer 30

* individuals, * estates, * qualified trusts, * banks and * certain tax-exempt entities (i.e., certain charities)

Question 31

Can non-resident aliens hold shares in an S - Corp?

Answer 31

No - the corporation would be terminated

Question 32

What happens when an S - Corp has excessive net passive investment income?

Answer 32

It is terminated

Question 33

What happens to the domestic charter of an S - Corp if it is not incorporated in the U.S.?

Answer 33

it is terminated - must be incorporated in the U.S.

Question 34

What are professional corporations?

Answer 34

* Professional Service Association (PSA) * Give professional benefits of incorporation

Question 35

Are there any stock restrictions on professional corporations?

Answer 35

* Statutes restrict stock ownership to specific professionals licensed within that state

Question 36

What information must the incorporation articles contain?

Answer 36

* Corporation’s name * Number authorized shares of stock * Street address of corporations initial registered office * Name of registered agent at office * Name and address of each incorporator * May contain optional provisions

Question 37

What information would the optional provisions of the incorporation articles contain?

Answer 37

* Purpose and powers of the corporation, internal management, any subject to be addressed in bylaws

Question 38

What types of transactions would the board of directors engage in for furthering the business purpose? HINT: 4 transactions

Answer 38

* Adopting / rejecting pre-incorporation contracts of promoters * Adopting form of certificate representing shares of stock * Accepting / rejecting stock subscriptions * Comply with requirements for doing business in other states