Corporations (Final Exam)

Question 1

Default distribution of income in partnerships and LLCs is?

Answer 1

if there is nothing specifically set forth in the agreement, the distribution is EQUAL

Question 2

What is pass through taxation? and what business organizations does it apply to?

Answer 2

1. pass through taxation is (only taxed once)
2. sole proprietorship, general partnership, limited partnerships, limited liability partnerships, LLC, and S Corporations (if they elect to not have double taxation)

Question 3

What is the document that provides the rules for the LLC and corporations?

Answer 3

1. LLC is Operating Agreement

2. Corporation is Bylaws

Question 4

What is the document that CREATES a LLC and a Corporation?

Answer 4

1. LLC is Articles of Organization

2. Corporations is Articles of Incorporations

Question 5

What is a Par value?

Answer 5

the lowest price for which a share of stock can be sold

Question 6

What is a parent company?

Answer 6

a company that controls other companies by owning an influential amount of voting stock or control. Parent companies will typically be larger firms that has control over one or more small subsidiaries.

Question 7

What is the primary source of law for business organizations?

Answer 7

State statutes generally are the primary source of law

Question 8

what is piercing the corporate veil? who does it apply to?

Answer 8

a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders; this can also be applied to LLC’s and its members.

Question 9

What is a stock subscription?

Answer 9

a mechanism which is used for a person to agree to purchase shares in a corporation that does not exist yet
- basically, it’s a contract requiring an investor to purchase a set number of unissued shares from the corporation at a future date for a specific price

Question 10

Corporations are domiciled where?

Answer 10

Corps are domiciled where the articles of incorporation are filed

Question 11

Cumulative Voting

Answer 11

• a type of voting system that helps strengthen the ability of minority shareholders to elect a director.
• this method allows shareholders to cast all of their votes for a single nominee for the board of directors

Question 12

Proxy Voting

Answer 12

• most shareholders cannot attend meetings at which voting occurs; corporations provide shareholders with the option to cast a proxy vote; shareholders receive a proxy ballot in the mail along with a proxy statement describing the issues to be voted on; Shareholders return a form by mail agreeing to have their vote cast by proxy
• basically voting by mail

Question 13

What is a derivative action

Answer 13

• a lawsuit brought by a corporation shareholder against the directors, management and/or other shareholders of the corporation, for a failure by management; the shareholder claims to be acting on behalf of the corporation, b/c management are failing to exercise their authority for the benefit of the company
• this type of suit often arises when there is fraud, mismanagement, self-dealing and/or dishonesty which are being ignored by officers and the Board of Directors of a corporation

Question 14

What is a stock split and how does it work?

Answer 14

• A stock split is a decision by the company’s board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders
• every shareholder with one stock is given an additional share; So, if a company had 10 million shares outstanding before the split, it will have 20 million shares outstanding after a 2-for-1 split

Question 15

Corporations involved 3 groups of people, what are they? what do they do? and how do exist?

Answer 15

1. share holders - own the corp., but do not mange it, their participation primary takes the form of voting to elect directors and other actions
2. directors - manage the corporation and are elected by share holders; they meet is regular or special meetings
3. officers - are appointed by directors to carry out whatever functions are assigned to them by the directors

Question 16

what is a Dividend and what are the key features of Corporate Dividends (3)?

Answer 16

• a dividend is a distribution of a corporate’s profits to its share holders
  1. generally, shareholders have no absolute right to receive dividends, and they are declared in the discretion of the board
  2. dividends MUST be uniform within a CLASS but can VARY from class to class
  3. to distribute a dividend, a corp. must be solvent (meaning it is able to pay its debts as they come due)

Question 17

an involuntary dissolution of a corporation arises and becomes?

Answer 17

an administrative and judicial decision

Question 18

the number of authorized shares are?

Answer 18

the max number of shares that can be issued (distinguished when articles of incorporation is filed)

Question 19

What are the advantages and disadvantages of a Preferred Stock? What is a Common Stock?

Answer 19

• Preferred has some sort of right or preference other classes do not have (such as distribution, conversion, and redemption rights), but often do not have the right to vote
• A common stock is ordinary stock and usually has voting rights, distribution (after preferred stock holders) and liquidation rights

Question 20

Identify Merger and Consolidation

Answer 20

1. Merger: a contractual and statutory process by which 1 corp. acquires all of the assets and liabilities of another corp. causing the merged corp. to become defunct (A+B=A)
2. Consolidation: a contractual and statutory process by which 2 or more corps. jointly become a completely new corp.; the original corps. cease to exist and the successor corp. acquires all of the assets and liabilities of the original corps. (A+B=C)

Question 21

What is the Articles of Incorporation and what does it require?

Answer 21

• it is the document that creates a corporation and its contents are dictated by state statutes
• the information needed to prepare this article includes:
  1. identify of incorporators (promoters)
  2. principal address of the corp.
  3. registered agent
  4. initial directors
  5. identify stock of company (such as common or preferred, number of authorized shares, par value)

Question 22

Employment agreements versus none in at-will states

Answer 22

• employment agreements are often used for more senior or key employees, they can restrict an employee from competing against the employer upon termination; they distinguish the duties of the parties, compensation, term, and confidentiality
• “at will”, means that either the employer or employee is free to terminate the relationship at any time for any reason or no reason

Question 23

What is an Organizational Meeting and what does is discussed at this meeting (10)?

Answer 23

• corporations must hold a first meeting to commence the corporation’s business
• the meeting should cover:
  1. election of directors
  2. appointment of officers
  3. adoption of bylaws
  4. acceptance of reincorporation stock subscriptions
  5. acceptance of reincorporation contracts
  6. approval of corporate seal and form of stock certificate
  7. banking and accounting info
  8. S election
  9. confirmation of Section 1244 stock
  10. issuance of stock

Question 24

What is the difference between stocks and bonds (5)?

Answer 24

1. stocks are equity securities; bonds are debts security
2. shareholder is an owner and receive distributions only if earnings permit; a bondholder is an outside creditor entitled to timely repayment
3. if a corp. is insolvent, no distributions will be paid to shareholder; bondholder may be entitled to payments of interest and principal whether or not the corp. is solvent
4. corp. may not deduct distributions paid to shareholders; interest paid on bonds is a detectable expense for a Corp.
5. in the even of liquidation, shareholders receive assets after outside creditors/bondholders; bondholders receive assets before shareholders

Question 25

If an entity is disregarded for income tax purposes, that means what?

Answer 25

Pass through taxation is available

Question 26

What is double taxation and who is subject to it?

Answer 26

Corporations are subject to double taxation: the income of a corporation is taxed, and when profits are distributed to shareholders, they also pay tax

Question 27

S corp

Answer 27

a corporation that can elect to have pass through taxation; limited to only 100 shareholders; can only have one class of stock

Question 28

C corp

Answer 28

Close Corp, usually held by just a few people that know each other and everyone wants to run the business

Question 29

Who is a promoter? discuss their liability issue

Answer 29

• someone who is involved in forming a corporation and organizing its structure (aka incorporator)
• they are held jointly and severally liable for their actions on behalf of the “proposed corp.” until the actions are ratified and accepted by the “valid corp.” (at which case, the corp becomes liable)

Question 30

what are the titles of OFFICERS

Answer 30

1. president
2. vice president
3. secretary
4. treasurer
5. others: CEO/Chariman/CFO

Question 31

What are the types of business organization (10)?

Answer 31

1. sole proprietorship - owned and operated by one person
2. general partnership - co-owned by 2 or more
3. limited partnership - created under a state statute in which only some partners have limited liability
4. LLP - provides limited liability for its PARTNERS
5. LLC - provides limited liability and pass through taxation for members
6. Business Corporation - legal entity existing under the authority of the state legislature
7. Professional Corporation - corp. formed by professionals
8. S Corporation - corporate that passes income to its shareholders
9. Close Corporation - small corp. whose shareholders are active in managing the business and operates informally
10. Parent and subsidiary Corporations

Question 32

What is a foreign corporation?

Answer 32

a term for an existing corporation that is registered to do business in a state or jurisdiction other than where it was originally incorporated

Question 33

What are the advantages of a corporation (4)?

Answer 33

1. limited liability
2. corporate deductions
3. continuity of existence
4. transferability of share ownership

Question 34

What are the disadvantages of a corporation (3)?

Answer 34

1. double taxation
2. formalities of organization and operation
3. centralized management

Question 35

LLC and Corporations must have a designating work or abbreviation indicating what?

Answer 35

that it is a corporation, such as LLC, Inc.,

Question 36

What is a preemptive right

Answer 36

the right of a shareholder to purchase a proportional share of newly issued shares

Question 37

Equity Security is?

Answer 37

basically a share; a shareholders ownership interest in a corporation

Question 38

1244 stock

Answer 38

aka “qualified small business stock”, provides certain tax advantages to corporate shareholders

Question 39

directors; how many can a corporation have? under what circumstances can a corp. not have a board?

Answer 39

1. each corp. must have 1 or more people as a director; there can be a range of 5-7
2. each corp. must have a board of directors unless there are Less than 50 shareholders and they are identified as taking on the responsibilities of a director

Question 40

stock option

Answer 40

a contract in which the buyer purchases the right to buy 100 shares of an under lying stock at a predetermined price within a specified period of time

Question 41

when can a shareholder become liable for corporate obligations?

Answer 41

they may be liable if they

1. commingling assets
2. failing to observe corporate formalities
3. undercapitalizing the corp.

Question 42

articles of dissolution set forth the following:

Answer 42

1. name of corp.
2. date dissolution was authorized
3. the dissolution was approved by the requisite shareholder vote
4. articles of dissolution

Question 43

grounds for dissolution by the state (5)

Answer 43

1. failing to pay taxes
2. failing to have a registered agent (or failing to notify it has changed)
3. operating after the corporation’s period of duration expires
4. obtaining articles of incorporation through fraud
5. abusing the authority given to the corp. by the state

Question 44

in a case where involuntary dissolution was initiated by the state for administrative or technical reasons, a corp. can do what?

Answer 44

a corp. that is dissolved for such reasons can generally apply to be reinstated

Question 45

in a case where shareholders initiate dissolution (due to waste of assets or fraud, etc.), a court can allow what?

Answer 45

a court can allow the complaining shareholder’s shares to be purchased

Question 46

creditors can initiate a dissolution if the corporation is what? What will a court order?

Answer 46

if the corp. is insolvent and their claim is undisputed; the court will order winding up and liquidation so the creditor may be paid

Question 47

corps. must notify known claimants and instruct them to submit their claims within a certain period of time, as for unknown claims, what must be done?

Answer 47

the corp. must publish a notice in a newspaper and claimants can enforce the claim within 3 years

Question 48

during liquidation, what is paid of first and so forth?

Answer 48

1. expense of liquidation
2. creditors
3. distribution to shareholders