Special Types of Corporations

Question 1

Define

Closely held/Close Corporation

Answer 1

• only has a few SHs
• stock not publicly traded
• more relaxed style of governance

Question 2

Define

Foreign Corporation

Answer 2

• incorporated in another state
• must register and seek a certificate of authority from the current state

Question 3

Define

Professional Corporation

Answer 3

the purpose is statutorily limited to the rendering of a professional service

Question 4

Define

S Corporation

Answer 4

Corporation avoids double taxation by passing income and expenses through to its SHs, who are then taxed directly

Question 5

Define

Benefit Corporation

Answer 5

• for profit
• corporate purpose is creating social/enviromental benefit rather than maximizing shareholder profit

Question 6

Define

Limited Liability Corporation (LLC)

Answer 6

enjoys the pass-through tax advantage of a partnership and limited liability of a corporation

Question 7

How is a LLC created?

Answer 7

Filing of articles of organization with the state

Question 8

What must be in an LLCs articles of organization?

Answer 8

• LLCs name
• mailing address
• and if there are no members upon filing - a statement to that effect
• **does not come into existence **until it has at least one member

Some states allow de facto and estoppel if there was good faith

Question 9

What is an operating agreement?

Answer 9

Operating agreement is in addition to the articles of incorporation and is made between the owners/shareholders of an LLC

Question 10

In what way is an operating agreement made?

Answer 10

can be oral, in a record, or implied by conduct

Question 11

What applies if there is no operating agreement?

Answer 11

statutory default provisions apply when there is not and operating agreement or if the operating agreement is silent

Question 12

What are the minimum and maximum membership requirements for an LLC?

Answer 12

minimum - one member
maximum - none

Question 13

How does one become a member of an LLC?

Answer 13

Must have consent of all other LLC members

Question 14

What does a transfer of a membership require?

Answer 14

the consent of all LLC members

Question 15

What rights do a transferee acquire?

Answer 15

the transferee only acquires the transferor’s right to share in the LLC’s profits and losses, not a right to participate in the LLC’s management

Question 16

Does termination of membership automatically trigger dissolution of an LLC?

Answer 16

No

LLC may elect to liquidate the fair value of that person’s interests

Question 17

Unless determined in an operating agreement, how are profits and losses allocated?

Answer 17

allocations are made according to each member’s contributions to the LLC

Question 18

Do members of an LLC have the same right to inspectas Shareholders?

Answer 18

Yes

Question 19

What are the two ways management can occur for a LLC?

Answer 19

Direct (by members)
Centralized (by one or more managers who need not be members)

Question 20

Are members generally liably for the LLC’s obligations?

Answer 20

No

Question 21

Are managers of an LLC personally liable for obligations incurred on behalf of the LLC?

Answer 21

No

Question 22

When is piercing the veil in an LLC appropriate?

Answer 22

• undercaptalization
• commingling assets
• confusion of business affairs
• deception of creditors

Question 23

What is the mere instrumentality test?

For piercing the veil

Answer 23

1) members dominated the entity such that the LLC has no will of its own
2) members used that domination to commit a fraud or wrong and
3) the control and wrongful action proximately caused an injury

Question 24

What is the unity of interest and ownership test?

Used for piercing the veil

Answer 24

• the LLC did no thave an existence independent of the members because there was such a unity of interest and ownership between the entity and the members that the failure to pierce the veil would be unjust or inequitable

Question 25

What duties are owed by member or manager of an LLC?

Answer 25

owe duties or **loyalty and care** to the LLC and its members

Question 26

What duties of loyalty are owed?

Answer 26

- Must members **account to the LLC for any benefit derived** by the member **related to the LLC's business** - **refrain from dealing** with the LLC on behalf of one **having an adverse interest** - refrain from competing with the LLC **(Non-compete)**

Question 27

T/F: the duty of care to LLC is subject to the BJR not liable for simple negligence

Answer 27

True

Question 28

Do managers have the authority to bind the LLC?

Answer 28

Yes

Question 29

When may members withdraw from an LLC?

Answer 29

Can withdraw at any time

Question 30

How can members withdraw from an LLC?

Answer 30

for any reason without written notice

Question 31

Does a withdrawal necessarily trigger dissolution and winding up?

Answer 31

No

Question 32

What does a direct suit try and do? | For an LLC

Answer 32

enforce a member's rights as a member under the operating agreement and state LLC statute

Question 33

What is required for a Direct suit?

Answer 33

there must be an **actual or threatened injury** that is not just a result of an LLC injury

Question 34

What is a derivatice action?

Answer 34

an action by a member on behalf of the LLC to enforce the rights of the LLC

Question 35

What is required for a derivative suit? | For an LLC

Answer 35

must show that a demand was made or that demand would be futile

Question 36

When does an LLC disolve?

Answer 36

- merge with another LLC/business entity - mutual consent of members - lack of members for 90 consecutive days - cour order - events provided in operating agreement

Question 37

When may members seek involuntary dissolution?

Answer 37

if a controlling member acts in a way that is oppressive and directly harmful to the member seeking the order - the action by controlling member must violate member's reasonable expectations

Question 38

When winding up what must an LLC do?

Answer 38

- **discharge** the LLC's debts, obligations, or other **liabilities**, and - **settle and close the LLC's activities**, and marshal and distribute the LLC's assets - **may perform acts necessary or appropriate to the winding up**