Exam 7 Business Law

What is a corporation?

A completely separate legal entity from its owners.

What is one major benefit of forming a corporation?

Separation of personal liability.

Corporations have their own legal identity. Name three things they can do.

Sue and be sued, own property, contract, create debt.

Do corporations get constitutional rights?

Yes (e.g., political free speech).

What government office recognizes a corporation’s creation?

The Secretary of State.

Why is corporate ownership easily transferable?

Shares can be bought and sold.

What two types of value does a corporation have?

Book value & market value.

Can corporations exist forever?

Yes, due to separate legal status.

Who are the owners of a corporation?

Shareholders

Who makes major management decisions?

Board of Directors.

Who makes daily operational decisions?

Officers (agents of the company).

What is a public corporation?

One owned in whole or part by a government unit.

What is a private corporation?

Created by individuals to make money.

What is a domestic corporation?

The state where the corporation was originally formed.

What is a foreign corporation?

A corporation doing business in another state.

What is required for foreign corporations operating in another state?

Registration, taxes, and a registered agent.

What is assumed: for-profit or non-profit?

For-profit.

Requirements for a non-profit?

Must serve public good and cannot make profit; pays no tax.

What is a closely held corporation?

Few shareholders, few stock transfers.

What is a publicly held corporation?

Many shareholders, freely traded stock.

How are C corporations taxed?

Double taxed—corporate level + shareholder level.

How are S corporations taxed?

Pass-through: only shareholders pay tax.

Requirements for S corporation status?

<100 shareholders, one class of stock, all shareholders must be U.S. citizens.

When must you form a professional corporation (PC or SC)?

Selling services (law, medicine, etc.) in states that require it.

What is a promoter?

A person who takes steps to form a corporation.

Are promoters personally liable for pre-incorporation contracts?

Yes, unless a novation occurs.

What duties do promoters owe?

Fiduciary-like duties (but not full fiduciary duty).

What is a subscriber?

Someone who promises to buy stock (stock subscription agreement).

Requirements of a stock subscription agreement?

Must be in writing, irrevocable for 6 months, registered with SEC.

What document creates the corporation legally?

Articles of Incorporation.

What must Articles of Incorporation include?

Company name, incorporator info, authorized shares, registered agent info.

What happens once the Secretary of State approves the corporation?

The organization meeting is held.

What is adopted at the organizational meeting?

Bylaws (the corporate operating manual).

What do the bylaws include?

Board selection, officer authority, shareholder rules, stock issuing procedures.

Who elects the board of directors?

Incorporators/shareholders.

Who selects the officers?

Board of Directors.

What is a corporation de jure?

Minor defect in incorporation; treated as valid.

What is a corporation de facto?

Major mistake, but effort + business conducted = still recognized.

What is corporation by estoppel?

Third parties reasonably relied on corporate status.

Statutory approach to corporate status?

Approved = corporation; not approved = nothing.

What is piercing the corporate veil?

Disregarding corporate entity to attack owners personally.

When can the veil be pierced?

Fraud, undercapitalization, lack of corporate formalities.

Can a parent/shell company create liability issues?

Yes—must treat subsidiaries separately.

Who grants corporate powers?

State statutes.

What is “ultra vires”?

Acting outside corporate powers.

Two main ways corporations finance themselves?

Debt (bonds) & equity (stock).

Who decides whether to issue bonds?

The Board of Directors.

Define debenture bond.

Unsecured bond (junk bond), higher interest.

Define secured bond.

Backed by collateral; lower interest.

Define income bond.

Interest based on corporate earnings.

Define convertible bond.

Starts as a bond; converts into stock.

Define call bond.

Company can repay early (accelerate note).

What does stock represent?

Ownership interest, not a debt.

What are shareholder profit rights called?

Dividends.