Business Entities & Corporate Governance: Key Concepts and Legal Principles

What is a corporation?

A fictitious legal entity that exists as an independent 'person' separate from its principals, typically owned by shareholders.

Who are the principals or owners of a corporation?

The principals or owners of a corporation are the shareholders (SHs).

What is a close corporation?

A close corporation is one where shares are held by a single or closely-knit group of shareholders, generally without public investors.

What is the tax structure of corporations?

Corporations are taxed based on the corporation's tax rate (1st layer of tax), and once distributed, dividends are taxed again at the shareholder's tax rate (2nd layer of tax).

What is the duty of obedience?

The duty of obedience requires officers and directors to act within the authority granted by law, the corporation's governing documents, and any board resolutions.

What is the duty of care?

The duty of care requires officers and directors to use care and diligence, discharging their duties in good faith and in a manner reasonably believed to be in the best interests of the corporation.

What is the duty of loyalty?

The duty of loyalty mandates that officers and directors must be faithful to the corporation, subordinating personal interests to the company's welfare and avoiding actions adverse to the corporation's interests.

What is the business judgment rule?

The business judgment rule protects officers and directors from liability for decisions made in good faith, in the best interests of the corporation, and with reasonable care.

What is a domestic corporation?

A domestic corporation is one that is incorporated in the state where it is doing business.

What is a foreign corporation?

A foreign corporation is one that is incorporated in one state but doing business in another state.

What is piercing the corporate veil?

Piercing the corporate veil is a legal action in which a court disregards the corporate entity and holds shareholders personally liable for corporate debts and obligations.

What is a conflict of interest?

A conflict of interest occurs when an individual has competing interests or loyalties, such as a board member being the CEO of a competing company.

What is the primary responsibility for the overall management of a corporation?

The primary responsibility for the overall management of a corporation belongs to the board of directors.

What is the best form of business entity for a family-run catering business wanting to maintain ownership within the family?

The best form of entity for them would be a close corporation.

What type of corporation can avoid double taxation?

S corporations can avoid the double taxation normally associated with corporations.

What happens if you sue a corporation and its shareholders?

Typically, only the corporation might be held responsible, not the individual shareholders, unless the corporate veil is pierced.

What are the primary fiduciary duties of officers and directors?

The primary fiduciary duties include the duty of obedience, duty of care, and duty of loyalty.

What is the significance of shareholder voting?

Shareholder voting is typically used for electing directors and making significant corporate decisions.

What is the role of corporate officers?

Corporate officers are responsible for the day-to-day operations and management of the corporation.

What is the role of the board of directors?

The board of directors is responsible for overseeing the corporation's management and making major decisions.

What is the transferability of shares?

Transferability of shares refers to the ability of shareholders to sell or transfer their shares to others.