Chapter 17 - Governance and Structure

Corporations

a business organization that is a separate entity with limited liability and full transferability

publicly held corporations

a company whose ownership is sold to the public in shares of stock that are freely traded in over-the-counter markets or on stock exchanges

Pulling agreement

a contract among shareholders to vote their shares a certain way or for a certain director

Domestic corporations

a corporation is domestic in the state in which its incorporation is filed

alter ego theory

a doctrine used by the court to lift the corporate veil; it deems that the owners of the corporation have used it as a personal resource rather than treating it as a separate entity

Articles of limited partnership

a document that contains the rights and obligations of the partners in a limited partnership

Limited partnership agreement

a document that contains the rights and obligations of the partners in a limited partnership

limited liability company (LLC)

a form of business organization in which liability is limited for all owners except for conduct that is illegal

limited liability partnership (LLP)

a form of business organization in which the partners' liability is limited; it offers unique statutory protection for all members in professional LLPs

Derivative suit

a form of class action suit in which shareholders sue on behalf of a corporation to recover damages for actions taken by the corporation

Voting trust

a form of shareholder cooperation that involves the separation of legal and equitable title in shares to ensure voting of shares in one way

Executive committee

a group of three or more board members who handle the routine responsibilities of running the corporation

freeze-out

a merger undertaken to remove the minority shareholders in a corporation

joint ventures

a partnership between existing businesses for a limited time or a limited purpose

Limited partnership

a partnership with two types of partners: general and limited, with limited partners having no personal liability for the partnership debts

Corporate veil

a personal liability shield for corporate owners

Partnership by estoppel

a presumption of partnership that arises by the perception of the third parties of its existence

Dodd Frank Wall Street reform in consumer financial protection act

a set of federal regulations that promote financial stability by improving accountability and transparency; protect the consumer from incorrect financial practices

Dissenting shareholders

a shareholder who does not vote in favor of a merger or a consolidation

Business judgment rule

a standard of corporate governance that grants a presumption of validity to business decisions made by officers and directors who have followed proper procedures and engaged in careful study and discussion

proper purpose

a statement explaining the shareholder's legitimate interest in reviewing corporate progress, financial status, and fiduciary responsibilities

Nonprofit corporations

a type of corporation that does not seek to earn a return for the investors; it primarily exists in social, educational, religious, and charitable endeavors

Profit corporations

a type of corporation that seeks to earn a return for the investors

General partner

a type of partner in a limited partnership who takes full liability and responsibility for the management of the business

Limited partner

a type of partner in a limited partnership whose personal liability is limited to capital contributions

Ratification

a voluntary recognition of an agent's authority by the principal, after the said agent without proper authority, enters into a contract

Which of the following is the standard applied to directors in doing their duties on a corporation's board? a. Business judgment rule b. Negligence c. Strict liability d. Directors cannot be held liable as long as the corporation was formed correctly.

a.

Which of the following terms refers to a corporation that seeks to earn a return for investors? a. Profit corporation b. Professional corporation c. Close corporation d. Domestic corporation

a.

GTS, Inc. has developed a new product and would like to build a new facility to run the production. It needs money to do this and is looking for a source of debt financing. Which of the following would meet its needs? a. Bonds b. Common stock c. Preferred stock d. Shares

a. *A company can issue bonds, or promissory notes, which they have to repay at a certain date making them debt financing*

Clay, Devin, and Elliott decide to go into business together and open a bowling alley in their hometown. They have invested $100,000 each, and all three want to share in the management decisions; however, they do not want to have unlimited liability. Which business structure would be best for them? a. Limited partnership b. General partnership c. Public corporation d. Limited liability company

d. *A limited liability company (LLC) offers unlimited liability for owners with the same tax benefits as a partnership. The owners could choose to set up a member-managed LLC and continue to manage the business.*

Melissa wants to form an entity to start her new business. Which of the following forms of business structure should she choose if she would like the business to be of unlimited duration, have free transferability of interest, limited liability for herself and shareholders, and centralized management? a. Limited liability company (LLC) b. Limited liability partnership (LLP) c. Sole proprietorship d. Corporation

d. *Melissa should choose a corporation, as corporations have all the characteristics for which she is looking.*

Pedro, Tim, Sarah, and Adrian are partners in a real estate firm. Adrian has just died. Adrian's widow: a. owns one-fourth of all the partnership land. b. is a tenant in partnership with Pedro, Tim, and Sarah. c. can force the sale of the partnership property. d. only receives the value of the partner's interest.

d. *On the death of one of the partners, rights in the property are transferred to the surviving partner(s). The partnership interest is not transferred to the estate. The estate would simply receive the value of the partner's interest*

The chief executive officer (CEO) of Dunham Corporation stepped down after announcing an $8 billion write-down for the company because of bad loans. Which of the following statements is correct in the context of this scenario? a. The president has the authority to appoint a new CEO from among the board of directors. b. The shareholders must approve the appointment of the new CEO. c. The new CEO should be elected from among the shareholders. d. The board has the authority to appoint a new CEO.

d. The board has the authority to appoint a CEO.

Which of the following is an obligation of legal counsel for a corporation? a. Noisy withdrawal that includes reporting issues at the corporation to the Securities and Exchange Commission (SEC) b. Reporting material violations to the chief executive officer (CEO) c. "Up-the-ladder" reporting to the board d. Noisy withdrawal that includes reporting issues at the corporation to the Securities and Exchange Commission (SEC) and reporting material violations to the chief executive officer (CEO) e. Both reporting material violations to the chief executive officer (CEO) and "up-the ladder" reporting to the board

e.

Which of the following is required for formation of a corporation? a. Internal Revenue filing b. The name of the corporation c. The statutory agent d. Both Internal Revenue filing and the name of the corporation e. Both the name of the corporation and the statutory agent

e.

The least frequently used forms of financing by corporations are debt and equity.

false

In a novation, the corporation assumes primary liability for payment, but the incorporator still remains liable

false, in ratification

Audit committees

independent board bodies that assure the accuracy of the financial reports issued by the management of the corporation

Sole Proprietorship

it consists of an individual who operates a business

Uniform partnership act

law on partnerships that is adopted in 49 states; defines a "partnership" as being a voluntary "association of 2 or more persons . . . to carry on as co-owners a business for profit"

dissolution

legal means of ending a business entity

Derivative suits are suits by boards against officers.

false

Dodd-Frank requires a "say on pay" by shareholders every year

false

Partnership by implication

the creation of a partnership by the parties' conduct; behaviors of the parties lead others to believe that there is a partnership

Articles of incorporation

the document that is filed to organize a corporation; contains the structure and basic information about the corporation

Initial meeting

the first meeting after incorporation, where the officers of the corporation are elected and bylaws are adopted

Companies that fall under Sarbanes-Oxley regulations must have codes of ethics for financial officers.

true

In Germany, corporations have corporate boards and shareholder advisory boards.

true

The Internal Revenue Service (IRS) has issued guidelines on the four characteristics of a limited liability company (LLC) entitled to pass-through or flow-through status.

true

Close corporations

a type of smaller corporation that operates in a simplified and flexible manner without strict formalities; its owners are generally given more discretion in their internal operations

Revised uniform limited partnership act

an update of the Uniform Limited Partnership act that is designed to improve the flexibility and stability of limited partnerships

Revised uniform partnership act

an update of the partnership law that defines a partnership as "the association of two or more persons to carry on as co-owners of a business for profit forms a partnership, whether or not the persons intend to form a partnership"

Partnerships

association of two or more persons to carry on as co-owners of a business for profit

After incorporation, a corporation must begin its day-to-day operations with an initial meeting where: a. the name of the corporation should be decided. b. the bylaws should be adopted. c. the share structure of the corporation should be discussed. d. the statutory agent for the corporation should be finalized.

b.

How is a dissenting shareholder in a merger compensated? a. With damages for the cost of dissenting b. Through appraisal rights c. Through a voting trust d. Through Dodd-Frank rights

b.

If an LLP fails to file the appropriate paperwork for its creation, what would it be? a. A limited partnership b. A general partnership c. It is still an LLC d. A close corporation

b.

Which of the following acts, drafted and revised by the American Bar Association, is the uniform law on corporations? a. The Dodd-Frank Wall Street Reform and Consumer Financial Protection Act b. The Model Business Corporation Act (MBCA) c. The Uniform Limited Partnership Act (ULPA) d. The Uniform Commercial Code (UCC)

b.

Jordan has just purchased 50 shares of stock in Kolman, Inc. The stock gives Jordan the right to vote at stockholder meetings but does not guarantee a dividend, and he does not have priority in receiving dividends if they are paid. What type of stock does Jordan hold? a. Bonds b. Common stock c. Preferred stock d. Cumulative preferred stock

b. *Common stock generally carries voting rights but does not have a fixed or guaranteed dividend.*

Dr. Citrin had an oral agreement with Dr. Mehta for Mehta to work in Citrin's medical office and to see his patients when he was on vacation. The oral agreement included a compensation provision that Citrin would receive 30 percent of any fees collected by Mehta. While Citrin was on vacation, Mehta saw a patient of Dr. Citrin, misdiagnosed the problem, and the patient died. The heirs of the patient sued Dr. Citrin and Dr. Mehta, claiming that they were partners, and that Dr. Citrin is liable for the actions of Dr. Mehta. Which of the following statements is correct? a. Dr. Citrin is not liable on the basis that he and Mehta were not partners. b. Dr. Citrin is not liable under the doctrine of respondeat superior. c. Dr. Citrin is not liable because Mehta was his agent, stepping into his shoes only when he was on vacation. d. Dr. Citrin is not liable because Mehta performed a medical act that Dr. Citrin did not approve.

a. *Dr. Citrin is not liable because no partnership was formed, and there is no employer-employee or independent contractor relationship evident from this scenario. In order to form a partnership, there must be an agreement to share in the profits and losses of a common enterprise. The only agreement was to share the profits from the medical services that Dr. Mehta performed.*

Acme, Ltd. is in the process of dissolution. Which is the proper order for distribution of assets upon dissolution of a limited partnership? a. Outside creditors; distributions owed to partners; capital contributions; remainder split according to distribution agreement b. Outside creditors; limited partners' profits; limited partners' capital; general partners' advances; general partners' profit; general partners' capital c. Limited partners' capital; outside creditors; limited partners' advances; general partners' capital and profits d. General partners; limited partners

a. *The correct order for distribution of assets upon dissolution of a limited partnership is outside creditors; distributions owed to partners; capital contributions; and remainder split according to distribution agreement.*

Four surgeons conducted their medical practices through a general partnership they owned, which obtained a $1.5 million loan from Enterprise Bank. The loan was secured by personal guarantees of the four doctors, each for $375,000. The partners have an agreement in writing that they will all be equally liable for any debts of the partnership. Two doctors then moved away. When the partnership failed to pay the remaining loan balance of $500,000, Enterprise moved to enforce the personal guarantees by the two remaining doctors and won a judgment. Those two doctors contended that they were only liable for one-quarter of the outstanding balance. Who is liable for the judgment? a. The two remaining doctors are liable for the judgment because they signed personal guarantees. b. All four doctors are equally liable for the judgment because they signed personal guarantees. c. All four doctors are liable, but the two remaining doctors will likely have to pay for a higher percentage of the judgment. d. The general partnership is liable, not the doctors.

a. *The two remaining doctors are liable for the judgment because they signed personal guarantees and the judgment is against them. Even though all four doctors signed an agreement stating they would share equally in any losses, the judgment is against those two.*

From the list below, select all that are true about a limited liability company (LLC). a. All personal owners of an LLC can participate in the management without risking liability. b. LLCs are limited in duration. c. Owners of an LLC are called partners. d. The LLC is the oldest form of business structure in the United States. e. An LLC is formed through the filing of the articles of organization.

a.b.e.

Joint ventures are used by existing businesses to operate internationally.

a.true

S corporation

an IRS category for corporations with flow-through characteristics in which the shareholders' income and losses are treated like those of the partners, but the shareholders enjoy the protection of limited liability behind a corporate veil; sometimes called Subchapter S or Sub S Corporation

Uniform limited in partnership act

an act designed to provide flexibility and stability to the ways limited partnerships were doing business

transfer restrictions

an agreement that restricts the partners or shareholders from selling their shares

Novation

an agreement to release one party to a contract in exchange for the substitution of a new party (for example, when a party under contract to deliver ice is released from the contract as the buyer for the ice agrees to a substitute company)

Professional corporation

an entity with limited liability except for malpractice or negligence by its owners

Melissa formed a corporation with three of her friends for the purpose of operating a wedding consulting company. Melissa used her own checking account to deposit the client payments and to make distributions of the corporation's profits to her three friends, who together owned 50 percent of the shares, with Melissa owning the remainder of the shares. Melissa promised her friends "no meetings, no formalities, we'll just run the consulting business." Several wedding guests at a reception catered by Melissa's company became ill. Melissa had not purchased insurance. The guests brought suit to recover their medical bills and other damages from Melissa and her three friends. Melissa says she has no personal liability for the bad food that resulted in their illness. Which of the following statements is correct? a. Melissa is correct; their suit should be against the corporation. b. Melissa is incorrect because of the corporate veil and the alter ego theory. c. Melissa is liable, but her friends are not. d. Melissa and her friends are not liable because shareholders can never be held personally liable.

b. *Melissa can be held personally liable because of the corporate veil and the alter ego theory. The corporate veil or shield will not give individuals personal immunity for professional negligence despite their general liability limitation through incorporation. Also, the court can use the alter ego theory as she has not been following the necessary corporate formalities.*

Select all that are true about the transferability of interest of a limited liability company (LLC). a. The transferee of an LLC interest becomes a member of the LLC automatically upon transfer. b. LLC members do not hold title to LLC property. c. Owners of the LLC should structure their LLC and its operation in order to address their tax status issues. d. A member's LLC interest is not personal property and is not transferable.

b.c.

The Winston family owns a chain of restaurants in California by partnership. Due to liability concerns, they want to be protected from unlimited liability but still maintain discretion in the operations. They do not want to make their share of stock open to the public as they want to maintain management control. What type of corporation would be best for them? a. Publicly held corporation b. Close corporation c. Professional corporation d. There is not a type of corporation that would provide these benefits.

c *A close corporation has only a few shareholders and is not traded publicly. The owners enjoy limited liability while still maintaining management control*

A common stock: a. does not carry voting rights. b. does not have a fixed dividend rate. c. dividend depends only on the decisions of the board of directors. d. is the least voluminous in terms of the number of shares.

c.

Brant is forming an entity to start a new business and wants to ensure that his personal assets are protected from a judgment creditor. Which of the following forms of business structure would provide limited liability for the personal assets of the owner? a. Sole proprietorship b. General partnership c. Limited liability company (LLC) d. Partnership by implication

c. *An LLC would provide protection for the personal assets of the owner*

Misaki has a great idea for a new company and approaches Daryl about possibly partnering in the company. Daryl thinks the idea is great but does not have time to be a part of the management team. While Misaki seems knowledgeable about the business, Daryl is also worried about becoming personally liable if the company fails. What type of business structure would be best for Daryl and Misaki to agree on? a. Sole proprietorship b. General partnership c. Limited partnership d. Corporation

c. *In a limited partnership, the limited partner (Daryl) would have limited liability and would be prohibited from participating in the management of the firm.*

Foreign corporations

corporation in all states except the state in which it is incorporated

The general requirements for limited liability partnership registration include: a. the filing the name of the LLP. b. the name of the registered agent. c. the number of partners. d. all of these.

d.

Corporate Opportunity Doctrine

legal principle that prohibits officers and directors to exploit a business opportunity that could benefit the corporation

Advances

loan by a partner to the partnership

Proxy

method for delegating voting authority such as when shareholders transfer their right to vote to another person

Cumulative preferred stock

stock with guaranteed payment of a dividend so that if a dividend is not paid one year, the holder's right to be paid carries over until funds are available

Fiduciaries

the officers and directors of the corporation who act in the best interests of the corporation and not profit at the corporation's expense

Incorporators

the parties responsible for setting up the corporation

Board of directors

the policy-setting body of corporations

Bylaws

the rules and regulations adopted by corporations to govern their processes for governance and shareholder rights

Watered shares

the shares held by a shareholder who has not paid the par value for the shares

Preferred stock

the type of stock whose owners enjoy preferred payment status over holders of a corporation's common stock

Common stock

the typical stock in a corporation; usually the most voluminous in terms of the number of shares; allows shareholders to vote

Model business corporation act

the uniform law on corporations that is drafted and revised by the Corporate, Banking, and Business Section of the American Bar Association; adopted in approximately one-third of the states

Appraisal rights

the value of shares immediately before the merger that is paid to the dissenting shareholders