R6 - M5 - Business Structures Part 2 Flashcards
(42 cards)
Who is liable for a corporations obligations?
The corporation is a sperate legal entity from its shareholders. That means that generally, shareholders and others are not liable for the debts and lawsuits.
Now if a shareholder was directly involved in a tort, then then they are personally liable. Other shareholders will not be impacted by the one shareholder that committed the tort.
You really just lose your investment.
Is a C corp subject to double taxation?
Yes, through the profits.
Do shareholders run the business, or is it directors and officers that run?
Normally shareholders hire those officers and directors to run the business.
Unless a closely held corporation.
What are the pros to an S or C copr, over an LLC?
Corps normally have a perpetual life. You do not need to dissolve if a shareholder leaves.
You can transfer your ownership freely, without consent of other shareholders. Unless otherwise agreed.
Where do you file to form a Corporation?
You file under the state you want to incorporate in. Most states follow the revised model business corporation act.
What is a promoter in a corporation?
Their job is to secure capital commitments and loans to form a corporation.
They normally do this before the corporation is formed, so they are bound to those contracts that they make. The corporation then makes a novation to replace the promoter for those loans and capital contributions.
What form must the corporation file?
Its called the articles of incorporation, and they must disclose the name of the corp, name and address of registered agent, and the name and address of each incorporators. Also the share of stock they will authorize.
Director and officer’s name is not required.
What are the type of stock C corporations can issue? Also what is the order of payment for liquidation?
Preferred stockholders and common stockholders.
In liquidation, first creditors, then preferred stockholders, and lastly common shareholders.
What is the ultra vires clause?
Under the articles of incorporation, they can disclose the purpose of their business if they want.
This basically says that the corporation will operate in a very narrow line of business, and if the officer or director operates outside of that, they can be liable for damages.
What are they Bylaws for a corporation?
These are addition to the articles where they have rules on how to run the corporation.
They are created by the board of incorporators, but they can be modified by the board with no approval.
They do not have to be filed with the state.
What is piercing the corporate vail?
This is when the courts determine that shareholders, officers, or directors are going to be held liable because the privilege of conducting business practices is being abused.
Normally happens in three situations:
Shareholder is commingle personal funds and business funds, or use of corporate assets for personal use.
Not enough capital to start the business, they need to make sure they have enough.
Corporation was formed to commit fraud against creditors.
How do corporations raise capital?
Normally through the sell of equity obligations (stock) or debt obligations (bonds).
Debt securities increases return on equity since there are less owners, return on equity decreases as there are more owners.
What are some of the characteristics of equity securities for a C Corporation?
Corporations may only issue one class of stock, or two.
Preferred stock is nonvoting, and assumes less risk. Common stock assume more risk and get paid last in liquidation.
The board can choose what the stock issuance price is. Stock can be paid via property or other value other than cash.
Shareholders have voting rights. What are the things that they can vote on?
They can vote to elect or remove directors and
whether to approve fundamental changes to the corporation, such as dissolution.
The general rule is one share one vote, what is the exception to this rule?
Normally it is one share one vote, unless articles of incorporation state otherwise.
The exception is cumulative voting for directors:
If you are voting for five director positions, you normally have one vote per each position, since you only have one share. Instead of voting for each position, you can accumulated your votes and put 5 votes for one candidate.
Once the board declares a dividend, are the shareholders treated as unsecured creditors?
Yes, until paid, they are treated as unsecured creditors.
Debit RE, Credit Div Payable
What is the difference between noncumulative and cumulative preferred shares?
Preferred shareholders get paid before common shareholders, but there are two types.
Noncumulative - These are shareholders that do not get paid for past declarations not made. For example, if a company you hold shares in declared a dividend in 2024 but not 2023, you only get the 2024 amount.
Cumulative - You get paid dividends for all the years where dividends were not declared. So in this example, you would get the 2023 amount and the 2024 amount.
When a corporation issues a stock dividend are those taxable?
Once it is issued, you are not taxed on it. Once you sell it you are.
Can shareholders inspect the books and records?
Yes, as long as it is for proper purpose and gives a written notice. Not improper purpose.
Shareholder could also send an attorney, accountant, or other agent to inspect the books and records.
What are preemptive rights?
This is when a corporation decides to issue additional shares of stock, and current shareholders want to purchase it so they can keep their voting strength.
Common law grants this, but under RMBCA, these rights do not exist unless the articles or incorporation include them.
What is a derivative action?
This is when a corporation has legal cause of action against someone but does not bring the action. The shareholders can bring that action instead of the corporation for the corporation. Directors, officers, or outsiders.
Whatever damages they won, they have to give that to the corporation.
What is a direct action?
This is when the shareholders seek action against the corporation, and the corporation is the defendant.
This time, shareholders would receive the damages.
What are the directors rights, duties, obligations, and authority?
They are not agents, but still owe fiduciary duties to the corporation.
The directors can, elect, remove, and supervise the officers
adopt, amend, and repeal the bylaws. Remember articles of incorporation require more approval.
Fix management compensation.
Initiate fundamental changes to the corporates structure. Then the shareholders would vote on that.
Who has the power to declare a distribution (dividend)?
The board of directors normally do it, shareholders normally have no power to do so.
Now if a director declares a dividend that is illegal, then they can be held personally liable. So, they declare a dividend that is so large, the corp can not pay their other debts. Stuff like that.
If the shareholder knows that the dividend was illegal or too large, they have to give that money back to the corporation.