Business Law: Chapter 3

Corporation

"C" corp; legal entity formed under the laws of a state to do business - double taxation, limited liability - shareholders, shares, stocks,

Merger

Combination of two or more companies into a single firm

Piercing the Corporate Veil

The action of a court to disregard the corporate entity and hold the shareholders personally liable for corporate debts and obligations - just b/c you have "limited liability" since you are a corporation or LLC, it doesn't mean you can't get sued for a wrongdoing

S Corporation

a corporation that is taxed as though it were a partnership

Corporate Promoter

a person who solicits investors for a corporation before it is formed

What is a public benefit corporation? a) A for-profit corporation that has a purpose to create material positive benefit to society or the environment b) A non-profit corporation that has a purpose to create material positive benefit to society or the environment c) A tax-exempt charitable corporation d) A state-formed corporation that operates independently for some public interest

a) A for-profit corporation that has a purpose to create material positive benefit to society or the environment

What is a sole proprietorship? a) An unincorporated business with only one owner b) A corporation with only one shareholder c) A corporation or LLC with no employees other than the owners d) A partnership that has dissolved

a) An unincorporated business with only one owner

Franchise

agreement that allows one party have access to another's knowledge, processes, and trademarks in order to sell a product or provide a service

Ultra Vires

an action outside the legal ability of an entity to perform

What is a franchise? a) A partnership between two corporations b) An agreement that lets one person operate a business using a trademark owned by another person c) A business that operates in multiple locations d) An agreement between independent businesses to engage in joint marketing efforts

b) An agreement that lets one person operate a business using a trademark owned by another person

"Piercing the corporate veil" refers to: a) Dissolving a corporation because the board of directors is deadlocked b) Holding the owners of a corporation personally liable for corporate obligations c) Converting a corporation to an LLC d) Allowing closely held corporations to skip some corporate formalities

b) Holding the owners of a corporation personally liable for corporate obligations

Max has formed a limited partnership to produce a new movie. He is the sole general partner. Leo, one of the limited partners, tells Max he has some relatives who should be cast in the movie. Does Leo have the authority to make casting decisions? a) Yes. His partnership interest is large enough to overrule the other partners. b) No. Limited partners have no say in the operation of the business. c) No. Limited partners receive a vote but do not have the final authority over how the partnership is run. d) Yes. Unless the partnership agreement says otherwise, all partners have an equal say in the operation of the partnership.

b) No. Limited partners have no say in the operation of the business.

In most states, how long does a corporation exist? a) Five to ten years, with an option to renew indefinitely b) Until dissolved, unless otherwise stated in the articles of incorporation c) It depends on the type of business engaged in d) It depends on the size of the corporation

b) Until dissolved, unless otherwise stated in the articles of incorporation

Yan and Joel form an S corporation. Each of them owns 50% of the stock. After their first year of doing business, the corporation has made a profit of $50,000. Yan and Joel set aside $15,000 for a cash reserve and split the remaining $35,000 equally. Which of the following best describes the income tax liabilities from this situation? a) No income tax is required, because S corporations are tax exempt. b) Yan and Joel will each have to pay taxes on $25,000, one-half of the profits. c) Yan and Joel will each have to pay taxes on the $17,500 they each received. d) The corporation will pay taxes on the $15,000 retained, and Yan and Joel will have to pay taxes on the $17,500 they each received.

b) Yan and Joel will each have to pay taxes on $25,000, one-half of the profits.

Non-Profit Corporation

business organization formed to serve some public purpose rather than making money

What is the document that must be filed in order to form a limited liability company (LLC)? a) Articles of incorporation b) Statement of intent c) Articles of organization d) Declaration of limited liability

c) Articles of organization

What does a partnership have to do in order to be a limited liability partnership? a) Use the initials "LLP" as a part of its name b) Get a court order declaring it to be an LLP c) File a declaration or statement with the state authorities d) Obtain permission from state regulators

c) File a declaration or statement with the state authorities

When is a limited liability company (LLC) exempt from federal tax? a) It is exempt if it would qualify as a Subchapter S corporation if it were incorporated b) An LLC is never tax-exempt, but it pays tax at a lower rate. c) It is always exempt, unless the LLC elects to be taxed as a corporation. d) Only if it is formed for a charitable purpose.

c) It is always exempt, unless the LLC elects to be taxed as a corporation.

Darla has been hired to paint a room in her neighbor's house for $500. In order to get the job done more quickly, she asks her friend Jennifer to help her, saying "I'll pay you for your time." Jennifer agrees. When the job is done, Darla offers Jennifer $100 for her time. Jennifer says she wants $250, because "I was your partner, and we're supposed to split everything 50-50." Was Jennifer Darla's partner? a) No, because there was no written partnership agreement. b) Yes, because Darla didn't say she was just asking Jennifer to work for her. c) No, because there is no evidence of intent to be partners. d) Yes, but her share of the $500 should be reduced to cover the costs of the paint and supplies for the job.

c) No, because there is no evidence of intent to be partners.

Do shareholders have any role in managing a corporation? a) No, they are only investors who are eligible to share in the profits or losses of the corporation. b) Yes, because shareholders must approve the actions of the board of directors. c) Yes, because shareholders elect the members of the board of directors. d) No, unless the corporate by-laws give them a management role.

c) Yes, because shareholders elect the members of the board of directors.

Fiduciary

corporate promoter acts in a "fiduciary" relationship to the new company and its owners - person who had the duty to act for another with total good faith, trust, and honesty

Public Benefit Corporation

corporation that has a public or social purpose in addition to the purpose of earning a profit for shareholders

What is the maximum number of shareholders a subchapter S corporation may have? a) 20 b) 100, all of whom must be U.S. citizens c) 100, at least half of whom are U.S. citizens or lawful residents d) 100, all of whom are U.S. citizens or lawful residents

d) 100, all of whom are U.S. citizens or lawful residents

What is a "hostile takeover?" a) An illegal attempt to take control of a company b) Unfair business practices to put a competitor out of business c) An attempt to take control of a company that is kept secret d) An attempt to take control of a company that does not have the approval of management

d) An attempt to take control of a company that does not have the approval of management

Yan and Joel form a corporation, but do not elect to make it a Subchapter S corporation. Each of them owns 50% of the stock. After their first year of doing business, the corporation has made a profit of $50,000. Yan and Joel set aside $15,000 for a cash reserve and split the remaining $35,000 equally. Which of the following best describes the income tax liabilities from this situation? a) The corporation will pay taxes on the $50,000 profits, but Yan and Joel will not have to pay taxes on their shares. b) Yan and Joel will each have to pay taxes on $25,000, one-half of the profits. c) Yan and Joel will each have to pay taxes on the $17,500 they each received, and the corporation will have to pay taxes on the remaining $15,000. d) The corporation will pay taxes on the $50,000 in profits, and Yan and Joel will have to pay taxes on the $17,500 they each received.

d) The corporation will pay taxes on the $50,000 in profits, and Yan and Joel will have to pay taxes on the $17,500 they each received.

Articles of Organization

document filed with the state to form a LLC

LLC (Limited Liability Company)

hybrid between partnership (avoid double taxation) and corporation (limited liability)

Board of Governors

individuals elected to act as reps of members in running a LLC

Board of Directors

individuals elected to act as reps of shareholders in running a corporation

Member

owner of LLC

Limited Partnership (LP)

partnership in which one or more partners are liable only to the extent of the amount of $ they have invested - general partner: party who operates the business (unlimited liability) - limited partners: receives a share of the profits but personal liability is limited to their investment

Limited Liability Partnership (LLP)

partnership in which partners are not personally liable for partnership debts and obligations

Acquisition

purchase of a corporation by another entity or group of investors

By-laws v. Operating Agreement

rules and regulations of a corporation v. rules and regulations of a LLC

C Corporation

subject to corporate income tax

Articles of Incorporation

the document filed with the state for the formation of a company

Tradename

the full legal name of an organization

Sole Proprietorship

unincorporated business owned entirely by one person (pass through entity) - unlimited liability, simple, avoid double taxation

Partnership

unincorporated business with 2 or more owners - joint and several liability: all members are liable - simple