R8.3 – Business Structures Flashcards

Question

Corporations – C corporations

Answer 1

C corporations tax as entity distinct from owners Shareholders not taxed on C corporation's profit until distributed as dividends Double taxation

Answer 2

S Corporation taxed like partnership: Flow-through to owners – No double taxation Restrictions on S corporation – No more than 100 stockholders – Shareholders must be individuals, estates, or certain trust not C corporation – Corporation must be domestic corporation – Only one class of stock – No foreign shareholders

Answer 3

Formation: File articles of incorporation with state Articles of incorporation filed with the states – Name of Corporation – Name an address of Corporation's registered agent – Name and addresses of each of the incorporators – Number of shares authorized to be issued – One or more classes of shares must have unlimited voting rights – Corporations can choose to include a statement of its business purpose and articles. Some states require a purpose clause – If a corporation has a narrow purpose and acts outside it, it is said to be acting “Ultra Vires”. – Director or officer who authorizes act may be liable to corporation for damages caused Bylaws = rules for running corporation – Not part of articles of incorporation and are not required to be filed with the state

Answer 4

Piercing the Corporate Veil = holding shareholders, officers, or directors of a corporation who were active in management or operation of business personally liable because the privilege of conducting business in corporate form is being abused Reasons corporate veil pierced – Shareholders commingle personal funds with corporate funds – Corporation was inadequately capitalized at time of formation – Committing fraud on existing creditors Corporate Veil will not be pierced for: – Incorporating as S corporation – Incorporating as a partnership – Bankruptcy of a corporation that was adequately capitalized at the outset.

Answer 5

Debt securities = Bonds Corporation as borrowed funds from an outside investor and promises to repay them Equity Securities – Shares – Stock warrants – Options to purchase shares granted by corporation – Stock Options – Option to purchase shares granted by others ``` Corporation must issue stock – If only one class of stock, it is called common stock – Can choose to issue several classes or series of stock with varying rights ``` If par value, Corporation can not issue stock at less than par value. Board can decide to issue uncertified shares if article or bylaws don’t prevent it Unless prohibited by articles, board can issue stock at any price it considers appropriate – As long as board values property received in good faith, its determination of value is conclusive

Answer 6

Elect or remove directors Approve fundamental changes to the corporation – Dissolution – Amending articles of incorporation – Mergers, consolidations, and compulsory share exchanges – Sale of substantially all of the corporate assets. Inspect books and records (5 days written notice stating a proper purpose) Preemptive rights – Right of first refusal when corporation proposes to issue additional shares of stock Dissenting Shareholder Appraisal Rights – When shareholder dissatisfied with fundamental corporation changes can ask corporation to pay them fair value of shares rather than remain shareholders. Derivative actions – Corporation has legal cause of action against someone but refuses to bring action, shareholders have right to bring shareholder derivative action, against directors or outsiders, to enforce corporation’s rights – Recovery goes to corporation, not shareholder who brought action Generally, one share = once vote Some classes may be denied the right to vote, or may be granted a voting preference Cumulating voting for directors Shareholders don’t have right to a distribution until and unless declared by board of directors. Preferred Shareholders must be paid first non preferred shareholders

Answer 7

Duties – Elect, remove, and supervise officers – Adopt, amend, and repeal bylaws – Fix management compensation – Initiate fundamental changes to the corporation’s structure – Sole discretion to declare distribution to shareholders – Shareholders have no power to compel a distribution – Have fiduciary duty to corporation Business judgment rule – directors liable to corporation only fo negligent acts or omissions Duty of loyalty Right to Rely on info provided Can be indemnified lawsuit brought against them in their corporate capacity Can not be indemnified against shareholder derivative suit

Answer 8

Agents (employees) of the corporation Conduct its day to day operations and Can bind the corporation to contracts made on its behalf. Selected by the directors Serve at the discretion of board – Can be removed with or without cause Not elected by shareholders Officers have fiduciary duty to corporation Protected by business judgment rule Can be indemnified Officers can serve as director Officer not required to be shareholder, but can be

Answer 9

Require corporate shareholder approval – Dissolution – Amendments to the articles of incorporation – Merger’s consolidation, and compulsory share exchanges – Sales of substantially all of the corporation’s assets outside the regular course of business.

Answer 10

Merger = 1 or more corporation joins with another corporation – 1 corporation survives merger, and continues in existence, other corporations cease to exist Consolidation = 1 or more corporation joins together to form new corporation – New corporation emerges; old corporations all cease to exist – New corporation liable for debts of old corporations Share exchanges = 1 corporation acquires all of the outstanding shares of one or more classes of stock of another corporation – No new corporation; all corporations continue to exist Share exchange: only the corporation whose shares are being acquired goes through fundamental changes procedure Merger of subsidiary - parent corporation owning 90%+ of subsidiary can merge subsidiary into parent without approval of subsidiary’s shareholders, parent’s shareholders, or subsidiary board.

Answer 11

Persuade shareholders to reject offer Sue person or company attempting takeover for misrepresentation or omission and obtain injunction against takeover Merge with white knight (company that wants to merge) Make self-tender (offer to acquire stock form own shareholders) Pay greenmail (pay person/company to abandon takeover attempt) Lock up crown jewels (give third party option to buy company’s best assets) Scorched earth policy (sell off assets or load up on debt) Apply Shark Repellant (amend articles of incorporation or bylaws to make takeover more difficult)

Answer 12

Dissolution = fundamental change – Needs director and shareholder approval May also be pursuant to court order After dissolution, corporation exists until liquidation process complete.

Answer 13

Can choose between calendar year or fiscal year For tax purposes, fiscal year must be approved by IRS