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Flashcards in Chapter Fifteen Deck (50):


A distribution to corporate shareholders of corporate profits or income, disbursed in proportion to the number of shares held.


Retained Earnings

The portion of a corporation's profits that has not been paid out as dividends to shareholders.



A legal entity formed in compliance with statutory requirements that is distinct


Domestic Corporation

In a given state, a corporation that does business in, and is organized under the law of, that state.


Foreign Corporation

In a given state, a corporation that does business in the state without being incorporate therein.


Alien Corporation

A designation in the United States for a corporation formed in another country but doing business in the United States.


Close corporation

A corporation whose shareholders are limited to a small group of persons, often only family members. In a close corporation, the shareholders' rights to transfer shares to others are usually restricted.


S Corporation

A close business corporation that has met certain requirements set out in the Internal Revenue Code and thus qualifies for special income tax treatment. Essentially, an S corporation is taxed the same as a partnership, but its owners enjoy the privilege of limited liability.


Articles of Incorporation

The document filed with the appropriate governmental agency, usually the secretary of state, when a business is incorporated. State statute usually prescribe what kind of information must be contained in the articles of incorporation.



A set of governing rules adopted by a corporation or other association


Ultra Vires

A latin term meaning "beyond the powers"; in corporation law, acts of a corporation that are beyond its express and implied powers to undertake.


Piercing the Corporate Veil

An action in which a court disregards the corporate entity and holds the shareholders personally liable for corporate debts and obligations.



To put funds or goods together into one mass so that they are mixed to such a degree that they no longer have separate identities. In corporate law, if personal and corporate interets are commingled to the extent that the corporation has no separate identity, a court may "pierce the corporate veil" and expose the shareholders to personal liabilities.


Insider Director

A member of the board of directors who is also an officer of the corporation.


Outside director

A member of the board of directors who does not hold a management position at the corporation.



The number of members of a decision-making body that must be present before business may be transacted.


Business judgement rule

A rule that immunizes corporate management from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith and are within both the power of the corporation and the authority of management to make.



In corporation law, a written agreement between a stockholder and another party in which the stockholder authorizes the other party to vote the stockholder's shares in a certain manner.


Stock Certificate

A certificate issued by a corporation evidencing the ownership of a specified number of shares in the corporation


Preemptive Rights

Rights held by shareholders that entitle them to purchase newly issued shares of a corporation's stock, equal in percentage to shares already held, before the stock is offered ton any outside buyers. Preemptive rights enable shareholders to maintain their proportionate ownership and voice in the corporation.


Stock Warrant

A certificate that grants the owner the option to buy a given number of shares of stock, usually within a set time period.


Shareholder's Derivative Suit

A suit brought by a shareholder to enforce a corporate cause of action against a third party.


Watered Stock

Shares of stock issued by a corporation for which the corporation receives, as a payment, less than the stated value of the shares.


Types of Corporations

-Domestic, Foreign and Alien Corporations
-Closely-held/close corporation
-Publicly-held corporation
-Professional corporation
-S Corporation


Closely-Held/close corporation

Limited number of stockholders (often times family members); stock is not traded on a stock exchange


Publicly-held corporation

Stock is traded on a stock exchange; is likely to have many shareholders.


Professional Corporation

Created for associations of lawyers, doctors, accountants.


S corporations

Created under subchapter S of the internal revenue code; limited liability of a corporation, "passthrough" status of a partnership


S corporation details

Limited number (no more than 100) of shareholders and specific limitations as to who can be a shareholder- no non resident aliens (foreign investors) can invest in a S corporation.


Duty of Loyalty

The duty of loyalty prohibits managers from making a decision that benefits them at the expense of the corporation or from engaging behavior that constitutes



"Using corporate funds or confidential corporate information for personal advantage" is a violation of the duty of loyalty


Corporate Opportunity

Mangers/Officers are in violation of the corporate opportunity doctrine if they compete against the corporation without its consent


Corporate Opportunity Case

Guth v. Loft Inc.


Business Judgement Rule

The board member and corporate management has a duty of loyalty and a duty of care.


The Business Judgement rule must act

Must act without a conflict of interest, with the care of an ordinary prudent person and in the best interests of the company.


The business Judgement this rule allows directos

This rule allows directors to do their job with out fear of excessive court intervention (and encourages people to serve as directors.)


Duty of Care

The duty of care requires officers and directors "to be honest and use prudent business judgement in the conduct of corporate affairs.


Duty of Care list

-Decision must have a rational business purpose
-Decision and actions are legal
-Decision must be "informed"
-Also includes a duty to exercise reasonable supervision of other officers and employees.



The owners of a corporation are called shareholders.



Legal "entities"/Persons" (With legal rights and privileges) created by state statute.


Corporations overall responsibility

The overall responsibility for managing a corporation rests with the board of directors. The board of directors is elected by shareholders. the board of directors hires managers (corporate officers like the chief executive officer) to take care of day-to-day operations of the corporation.


Corporation v Partnership

A corporation, unlike a partnership, can be owned by a single person.


Shareholders elect

Shareholders elect the corporation's board of directors but generally are not involved in the day-to-day management of the business.


Corporate officers

Corporate officers are appointed by the board of directors.


The "Double Taxation" issue

must pay federal corporate tax on profits and shareholders must pay tax on the dividends they receive from the corporation.



Corporate shareholders normally are not personally liable for the obligations of the corporations beyond the extent of their investments.


Piercing the Corporate Veil

The usual rule is that shareholders are not held personally liable for corporation's debts- beyond their capital contributions.


Pierce the Corporate Veil in some cases

In some cases, however, courts may "pierce the corporate veil, and make the shareholders personally liable for the corporation's debts/obligations


Pierce the corporate veil case

Schultz v. General Electric healthcare Financial Services (2010)


Piercing the corporate veil examples

Failing to follow corporate "formalities", signing corporate documents as an individual, co-mingling assets, inadequate capitalization and fraud.