MGMT 402 - Exam #1 - Ch #4

What is a corporation?

A separate legal entity from its shareholders, directors, and officers.

What does it mean that a corporation is a separate legal entity?

The corporation is legally separate from the people who own and manage it.

What are the four characteristics of a corporation?

Limited liability, centralized management, free transferability of shares, and perpetual existence.

What is limited liability?

Shareholders generally are not personally liable for corporate debts and obligations.

Why is limited liability important?

Shareholders generally risk only what they invested in the corporation.

What is centralized management?

Shareholders own shares but directors and officers manage the corporation.

Who elects the directors of a corporation?

Shareholders.

Who appoints the officers of a corporation?

The board of directors.

Who runs the day-to-day operations of a corporation?

Corporate officers.

What is free transferability of shares?

Shareholders can generally buy and sell their shares without affecting the corporation's existence.

What is perpetual existence?

A corporation continues to exist even when shareholders die or sell their shares.

How can a corporation end?

Through affirmative action such as formal dissolution.

What is the memory trick for the four corporate characteristics?

L-C-F-P: Limited liability, Centralized management, Free transferability, Perpetual existence.

What is a C corporation?

A corporation subject to corporate income tax and shareholder tax on distributed profits.

What is double taxation?

The corporation pays tax on profits, then shareholders pay tax on distributed profits.

How is an S corporation taxed?

Profits generally pass through to shareholders and are taxed at the shareholder level.

What is the main tax difference between C and S corporations?

C corporations face double taxation; S corporations generally use pass-through taxation.

What is an important S corporation shareholder limit?

An S corporation generally cannot have more than 100 shareholders.

Why generally can't large publicly traded companies be S corporations?

They typically have far more than 100 shareholders.

Are C and S corporations different management structures?

No. C and S are primarily tax classifications.

What does publicly held mean?

Shares are traded on a public stock exchange.

What does privately held mean?

Shares are not traded on a public stock exchange.

Does privately held mean a corporation has few shareholders?

No. A privately held corporation can have many shareholders.

What is a for-profit corporation?

A corporation organized to operate for profit.

What is a not-for-profit corporation?

A corporation organized without a profit-distribution objective.

Do not-for-profit corporations have shareholders?

No. They generally do not have shareholders because there are no profits to distribute to owners.

Can a not-for-profit corporation have directors and officers?

Yes. It can still have a board of directors and officers.

What does domestic corporation mean?

A corporation organized under the law of the state being discussed.

What does foreign corporation mean?

A corporation organized under the law of another U.S. state.

What does alien corporation mean?

A corporation formed under the law of another country.

If a Delaware corporation operates in Arizona, what is it in Arizona?

A foreign corporation.

What is the difference between foreign and alien corporations?

Foreign means another U.S. state; alien means another country.

What is a public corporation?

A corporation owned or operated by the government.

What is a private corporation?

A corporation owned by private individuals or entities.

What is the difference between publicly held and public?

Publicly held concerns stock trading; public concerns government ownership.

What is the difference between privately held and private?

Privately held concerns stock trading; private concerns private ownership.

Where are corporations formed?

Under state law.

Is there one general federal corporation law?

No. Corporations are primarily created under state corporation statutes.

What is the first step in forming a corporation?

Choose the state of incorporation.

Can a corporation incorporate in a state where it does not operate?

Yes. A corporation can generally choose its state of incorporation.

What is the second step in forming a corporation?

Choose a corporate name.

What words can generally appear in a corporate name?

Corporation, Incorporated, Company, Limited, or approved abbreviations.

Why must a corporate name be unique?

It generally cannot be confusingly similar to another corporation in the same state.

What is the third step in forming a corporation?

Draft and file the required formation documents.

What are Articles of Incorporation?

The document filed with the state to legally create the corporation.

Where are Articles of Incorporation generally filed?

With the state's Secretary of State.

What happens when the state accepts the Articles of Incorporation?

The corporation is legally formed.

What are corporate bylaws?

Rules governing how the corporation operates.

What do bylaws generally address?

Corporate procedures, governance, meetings, and decision-making.

What is the fourth step in forming a corporation?

Hold required organizational meetings.

What happens at the shareholder meeting?

Shareholders elect the board of directors.

What happens at the directors' meeting?

Directors appoint officers and make major governance decisions.

What is the fifth step in the corporate life cycle?

Dissolution.

What is dissolution?

The formal process of ending a corporation.

Why are corporate formalities important?

Failing to follow them can contribute to piercing the corporate veil.

Who are shareholders?

People or entities that own shares of corporate stock.

Do shareholders technically own the corporation itself?

No. They own shares that provide ownership rights in the corporation.

How often must shareholders generally meet?

At least once each year.

What is a special shareholder meeting?

A meeting held outside the regular annual meeting for a specific purpose.

What is meeting by consent?

Shareholders sign a document agreeing to an action instead of holding a physical meeting.

What is the primary shareholder voting right?

Voting to elect directors.

What other matters may require shareholder voting?

Mergers, acquisitions, and certain shareholder resolutions.

What is straight voting?

Each share gets one vote for each director position being filled.

How does straight voting work with 1 share and 2 director seats?

The shareholder casts 1 vote for each of the two seats.

What is cumulative voting?

A shareholder can combine all votes and allocate them among candidates as desired.

How does cumulative voting work with 1 share and 2 seats?

The shareholder has 2 votes and can cast both for one candidate.

Why is cumulative voting important?

It gives smaller shareholders a better chance to elect a preferred director.

What is the memory trick for straight voting?

Straight = Stay Separate.

What is the memory trick for cumulative voting?

Cumulative = Combine.

What is a voting agreement?

A contract where shareholders agree to vote their shares in a certain way.

Why might shareholders use a voting agreement?

To combine their voting power into a larger voting block.

What is a voting trust?

An arrangement where shareholders transfer legal title of shares to a trustee to vote them.

Who votes shares in a voting trust?

The trustee.

What do shareholders retain in a voting trust?

Beneficial ownership and the economic benefits of the shares.

What is the difference between a voting agreement and voting trust?

Agreement = contract to vote together; trust = trustee receives legal title and votes.

Are shareholders generally personally liable for corporate debts?

No, because of limited liability.

What is piercing the corporate veil?

A court disregards the corporation's separate legal identity and holds shareholders personally liable.

When is piercing the corporate veil most likely?

When owners fail to treat the corporation as a separate legal entity.

What is one reason a court may pierce the corporate veil?

Failure to observe corporate formalities.

What is another reason a court may pierce the corporate veil?

Commingling personal and corporate funds.

What is commingling?

Mixing personal money and corporate money instead of keeping them separate.

What is an example of commingling?

Using the corporation's bank account like a personal checking account.

Why can failing to hold corporate meetings be dangerous?

It can show that owners are not treating the corporation as separate.

How can shareholders help protect limited liability?

Follow corporate formalities and keep personal and corporate finances separate.

Does piercing the corporate veil happen frequently in large public corporations?

No. It is generally associated with smaller corporations.

What is a shareholder's right to transfer shares?

Shareholders generally may sell or transfer their shares.

Can restrictions be placed on transferring shares?

Yes. Agreements may include buy-sell restrictions or rights of first refusal.

What are preemptive rights?

The right to buy new shares to maintain a proportional ownership percentage.

Why are preemptive rights important?

They can prevent dilution of a shareholder's ownership percentage.

What is dilution?

A decrease in an existing shareholder's ownership percentage when new shares are issued.

What is the memory trick for preemptive rights?

Preemptive = Prevent dilution.

Can shareholders sue directors or officers?

Yes, under certain circumstances.

What is a shareholder derivative lawsuit?

A lawsuit where a shareholder acts on behalf of the corporation against directors or officers.

Why might a shareholder bring a derivative lawsuit?

To address harm done to the corporation by directors or officers.

What is a shareholder's inspection right?

The right to inspect certain corporate records.

What can shareholders potentially seek through the courts?

Dissolution of the corporation under appropriate circumstances.

What is a dividend?

A distribution of corporate profits to shareholders.

Do shareholders automatically have a right to dividends?

No. Directors generally have discretion over whether to distribute profits.

Who generally decides whether corporate profits are distributed as dividends?

The board of directors.

What is the basic corporate management chain?

Shareholders elect directors; directors appoint officers; officers run the corporation.