Business Organizations
T/F: The minority shareholder of a close held corporation may be locked into the corporation because there is no market for his stock
True
T/F: The owner of a sole proprietorship has unlimited personal liability for business contracts and for business torts
True
T/F: The plaintiff in a derivative action must own shares at the time of the alleged wrong doing, at the time suit is filed and must still own shares at the time of judgment
True
Ownership of Equity securities confers 3 basic rights
1. Right to share in distributions of corporate profits declared by board 2. Right to vote on important corporate matters 3. Right to proportionate share of net assets upon liquidation
Qualifications for a Chapter S Corporations are
100 members natural persons no corporatations or partnerships only one class of stock No nonresident aliens as shareholders
For what period of time is a proxy effective
11 months
Unlimited Partnership Act was revised in BLANK and amended in BLANK by the Revised Unlimited Partnership Act
1976, 1985
Older corporate statues require a minimum of how many directors
3
Flexibility; owner operates within bounds of law as he chooses; owner has ultimate responsibility for business decisions are the
Advantages of Sole Proprietorship
What is a corporation?
An artificial person created by state statute
This type of authority arises when the corporation leads third parties to believe that a corporate officer has authority to act on the corporation's behalf
Apparent authority
What is the controlling document of the corporations. Amendments of the articles must follow statutory rules and it is usually required that all amendments be filed with secretary of state
Articles of Incorporation
What may limit or deny the voting rights of any class of stock
Articles of Incorporation
Where is the number of directors specified
Articles of Incorporation
To prevent citizens from being swindled by worthless stock schemes, may states adopted legislation in the early 1900s to regulate securities, known as
Blue sky laws
Who may require that scrip becomes void if not exchanged within a certain time period
Board of Directors
Who sets payment terms for stock subscriptions
Board of Directors
Who sets the value of the price of stock
Board of Directors
This rule states that officers and directors are not liable for honest unbiased transactions undertaken with reasonable care, even if it later turns out the act was ill advised or mistaken
Business Judgment Rule
A corporations rules for procedures to sell and value shares, method of filling vacancies for officers or directors, duties and authority of directors and officers
Bylaws
This business organization is an artificial person created under authority of state statute separately from its creators, owners or investors.
CORPORATION
For large business the following is an advantage: -centralization of management -free transferability of ownership interests -perpetual existence -limited liability of of owners (shareholders) For small businesses or close held corporations the value of limited liability is NOT SO GREAT when creditors require shareholders to personally guarantee corporate obligations
CORPORATION: Benefits of incorporation
Written rules which supplement the articles of incorporation, (adopted at organizational meetings) are called
CORPORATION: Bylaws
This type of corporation in which corporate income is passed through in proportion to shareholders ownership interest and is taxed at each shareholder's respective individual income tax rate is a
Chapter S Corporation
A small business corporation which may elect to have its undistributed taxable income taxed to shareholders under federal tax laws as if it were a partnership.
Chapter S corporation
Which provision does the RMBCA use to limit a director's liability to the corporation and shareholder's only, but not to third parties
Charter option
What type of statute permits a corporation's articles of incorporation to to limit or eliminate a director's liability
Charter option statutes
Preferred shares, common shares, redeemable shares, convertible shares, in the Articles of Incorporation are referred to as
Classes of stock
Corporations with few stockholders who play significant roles in management are called
Close held corporations
The type of share that exists if a corporation has only one class of shares it is called
Common Stock
An issue in which the sale of corporate property to a director, the purchase of property from a direct or contracts between a director and the corporation is called a
Conflict of interest
This duty of loyalty may be breached when the director or officer has a BLANK with the interest of the corporation which she fails to disclose and which results in unfairness to the corporation.
Conflict of interest
AOI may provide that shares of a given class can be converted into shares of another class on some predetermined ratio. Some state restrict the conversions: that is, preferred stock may be converted to common stock, but common may not be converted to preferred
Convertible shares
Many wrongful competition cases involve this theory which prevents corporate officers and directors from diverting business opportunities in which the corporation has some expectancy, property interest or right
Corporate Opportunity Doctrine
If this entity serves as a general partner, it may diminish the concept of unlimited personal liability of the general partner in some circumstances
Corporation
Financing for a sole proprietorship depends upon the
Creditworthiness of owner
What are two types of preferred stock
Cumulative preferred and Non-cumulative preferred
This type of stock receives a PRESCRIBED dividend for the current year as well as for all prior years in which a preferred dividend was not paid - BEFORE any dividend may be paid for common stock
Cumulative preferred stock
This type of stock carries forward and accumulates any unpaid dividends to the extent the corporation has earnings to pay the dividend but did not
Cumulative to the extent earned preferred stock
One which does business as a corporation, but has not complied with statutory requirements. Court may permit limited liability or it may "pierce the corporate veil" and impose personal liability on shareholders.
De facto corporation
A corporation which has complied with all statutory requirements is a
De jure corporation
These are issued in exchange for loans made to the corporation; the holder of a debt security is a creditor and has a claim on corporate assets in priority to claims of shareholders
Debt securities
Which state had the most favorable incorporation laws
Delaware
A suit by a corporation shareholders, in the name of the corporation, against officers and directors accused of wrong doing is called what type of action?
Derivative action
-Business and owner are one - credit worthiness depends upon owner -Unlimited personal liability; owner may lose his business and personal assets -Ends with the life of the owner
Disadvantages of Sole Proprietorship
The transfer of corporate money or property to shareholders is a
Distribution
If the distribution comes from the corporation's present or past earnings it is a
Dividend
It is possible for a corporation to be domesticated in multiple states at the same time.
Domestic Corporations
The duty of officers and directors to act honestly, in good faith and solely in the interest of the corporation regarding matters within the scope of the fiduciary relationship is the duty of _____.
Duty of Loyalty
How does cumulative voting work?
Each shareholder multiplies her number of shares X the number of director positions and that total is the total number of votes for that shareholder. She may then allocate that number as she wishes -use them all on one position or spread them out.
What term means retained earnings and typically includes all accumulated profits of the corporation since its formation, reduced primarily by prior dividend distributions
Earned suplus
This corporation is organized for educational, religious or charitable purposes
Eleemosynary corporation
Without a partnership agreement, regardless of each partner's percentage of contribution, as managers they each have an
Equal voice and one vote
This term describes shares of stock, which units into which the ownership of the corporation is divided.
Equity securites
Mixing affaires of the corporation with affairs of shareholders; not maintaining separate corporate records, commingling corporate and shareholder assets, paying shareholder debts with corporate debts
Failing to treat the corporation as separate entity
The value of shares immediately before action was taken to which the dissenter objects is the
Fair value
T/F: A dividend is always proportional to share ownership
False
T/F: A partnership is not required to carry on a business for profit.
False
T/F: A partnership is taxed sperately from its owners
False
T/F: A partnership may be formed for charitable fraternal or labor union purposes.
False
T/F: A sole proprietorship requires a charter from the state to exist.
False
T/F: All states have adopted the Revised Unlimited Partnership Act (RULPA)
False
T/F: the existence of a sole proprietorship may go on forever
False
The Uniform Partnership Act has been adopted in all states.
False
What are examples of public corporations created by the federal government
Federal Home Mortgage Association, FDIC
At the first organizational meeting, this is what happens: Subscriptions for stock from potential shareholders are accepted or rejected. A Corporate seal may be adopted if required by state law. Preincorporation contracts may be accepted or rejected. A Corporate bank account is authorized Bylaws are adopted First meetings of shareholders and directors may follow if required by state law
First organizational meeting
Each partner is taxed on his proportionate share of deductions, credits, profits and losses at his own personal tax rate.
General Partnership: "pass-through" entity for taxation
Under common law, a partnership is viewed as an _____________, which means all partners must be named as defendants when partnership is sued; UPA uses both - all partners are personally responsible for partnership debt. Taxing laws treat the partnership as an aggregate; income and expenses are attributed to individual partners
General Partnership: Aggregate of Partners
assumes benefits and burdens of partner status, except in management decisions
General Partnership: Silent partner
When a partnership is dissolved and the partnership assets are gathered and liquidated; all debts are paid, after which the remainder is distributed to the partners is referred to as
General Partnership: Winding up
May be shared equally or in some other combination, which must be clearly stated in a partnership agreement, otherwise the assumption will be all partners share equally.
General Partnership: investment
In this case, the partnership may be named as the defendant without the need to name each partner. Under UPA rules, the partnership, as an entity,may acquire, hold and convey property. Partnership assets, liabilities and transactions are separate from those of individual partners. Most states allow the partnership to sue and be sued in the name of the partnership.
General Partnership: separate legal entity
When one corporation purchases a controlling block of another corporation, simply by negotiating directly with shareholders of the other corporation or by buying available shares on the market, it is referred to as a
Hostile takeover
Procedures vary from state to state, but generally, INCORPORATORS (consisting of one or more persons) execute or draft ARTICLES OF INCORPORATION, which are filed with the Secretary of State, who issues a CERTIFICATE OF INCORPORATION
Incorporation procedures
Under this test dividend payments are prohibited if the corporation is insolvent or would be rendered insolvent by the distribution
Insolvency test
What is the effect of a preemptive right if it is exercised
It prevents dilution of the shareholder's financial or voting interest.
Members pool their capital into a common fund instead of owning the stock separately. Typically involves an unincorporated business enterprise with ownership interest evidenced by shares of stock.
JOINT STOCK COMPANY
The combining of efforts by 2 or more persons for one transaction or one event only is a
JOINT VENTURE
Hybrid - offers the limited liability of a corporation and the income pass-through of a partnership for tax purposes
LIMITED LIABILITY COMPANY (LLC)
A partnership of 2 or more person formed in compliance with a state's limited partnership statute, consisting of one or more general partners and one or more limited partners
LIMITED PARTNERSHIP
When the Certificate of Incorporation is issued it results in
Legal formation of a corporation
If agreement is silent, ULPA does not provide a basis for distributions. RULPA provides that distributions are allocated on the basis of each partner's contribution (different from general partnership where allocation is equal
Limited Partnership: Allocation of profits if no partnership agreement
-LPship must comply with statutory requirements, including filing a certificate to provide notice to creditors that some partners have limited liability for partnership debts
Limited Partnership: how it differs from general partnership
Which state has not adopted any version of the Uniform Limited Partnership Act or the Revised Uniform Limited Partnership Act
Louisiana
Non-voting classes of shares may also be entitled to vote when the question relates to what 2 things?
Merger or voluntary dissolution of the corporation.
Which acts adopted by the ABA resulted in more states becoming competitive with Delaware's friendly corporation laws.
Model Business Corporation Act and the Revised Model Business Corporation Act or MBCA and RMBCA
Careless selection or supervision of employees, inadequate consideration or research of major decisions or authorizing unnecessary risky or unusual transactions are examples of
Negligent mismanagement
Only a few states allow the payment of dividends from current profits even if a deficit exists in the earned surplus accounts from losses in prior years. This is referred to as
Nimble dividends
Are Treasury stock and stock held by other corporations entitled to vote?
No
This stock receives only prescribed dividends for the current year before dividends are paid for common stock.
Noncumulative preferred
This type of stock receives only the preferred dividend stated in th Articles of Incorporation
Nonparticipating preferred
A Charitable (eleemosynary) generally organized for educational, religious or charitable purposes
Nonprofit corporation
Question: Holders of scrip are or are not entitled to voting, dividends or liquidation as does fractional shares?
Not
When a partnership is dissolved, this notice must be provided to all persons who may have a claim against a partnership.
Notice of Dissolution
What LLC document should include the - purpose of LLC; type and amount of member investment allocation of income transferability of member's interest procedure for dissolution
Operating Agreement
What has been the effect of court decisions which have eroded the protection of the business judgment rule
Outside directors have resigned, refused to sit for re-election or refused nominations.
The dollar amount stated as the value of the share in the articles of incorporation is referred to as
Par value
This type of stock receives the preferred dividend fixed by the Articles of Incorporation, and participates in dividends paid to other classes of stock
Participating preferred stock
When a court disregards the existence of the corporation and imposes personal liability for corporate debts upon shareholders, this is referred to as
Piercing the Corporate Veil (p 530-531)
Circumstance which may lead to a court piercing the corporate veil: Insufficient capital invested Failure to observe corporate formalities Failure to treat the corporation as a separate entity Excessive fragmentation of a single business into separate corporations Affirmative wrongdoing, such as creating a corporation to avoid an existing obligation, or siphoning off corporate assets by a shareholder
Piercing the corporate veil
This right allows an existing shareholder to purchase new issues of shares in proportion to her present interest before shares are sold to others
Preemptive right
This type of corporation is created by government to administer government purposes
Public corporation
Which act requires a voting trust to be in writing, signed by all participating shareholders and only be effective for 10 years
RMBCA
A corporations power to issue more stock, (usually preferred) and then to acquire it again is the process of what?
Redemption
These persons may choose to continue the operation and they form a new partnership, otherwise the entire partnership is dissolved and "wound up."
Remaining partners
most common form of business organization; one person owns a business, requires no charter from the state to exist
SOLE PROPIETORSHIP
Where are Articles of Corporation filed?
Secretary of State
Articles of dissolution are filed with the
Secretary of state
A portion of stock sold by a corporation which provides more favorable tax treatment if section 1244 stock is sold or if the stock becomes worthless. Rather than take a capital loss, the shareholder can treat the loss as ordinary loss, meaning it can be credited against ordinary income to reduce personal tax liability.
Section 1244 Stock
What section of the International Revenue code provides a separate method for shareholders of small business corporations to receive favorable tax treatment?
Section 1244 stock
This type of statute automatically limits a director's liability subject to stated exceptions
Self-executing statutes
What type of agreement is extremely common in close held corporations?
Shareholder agreements
Owners of equity security are called
Shareholders
Shares of issued stock are represented by
Stock certificates
This distributes additional shares of stock for each share owned; and has the effect of increasing the number of shares and reducing proportionately the percentage of ownership of each share. Additional shares are generally of the same class as original shares.
Stock dividends
Corporation may issue BLANK which entitle option holders to purchase a stated number of shares of a giving class from the corporation at a specific price with in a limited time.
Stock options
Short term share options are called
Stock rights
Stock options are evidence by certificates called
Stock warrants
If one partner leaves the partnership is __________
Terminated
Why might a number of dissents block a corporation's proposed action?
The dissenters must be paid in cash.
What is the impact of straight voting
The shareholder with the most shares elects of the directors
The corporate veil may be pierced in either circumstance, however the court will be more likely to hold shareholders responsible in a tort case. A tort claimant is an involuntary creditor.
Tort and Contract cases
If any outstanding shares are reacquired through redemption, conversion or repurchase they are known as treasury stock.
Treasury stock
Creditor's rights are NOT affected by merger or consolidation
True
T/F A large asset of stock purchase will require a resolution of the board and shareholder approval by the selling corporation.
True
T/F If a subsidiary corporation is at least 90% or wholly owned by a parent corporation, a short form merger is available
True
T/F If an amendment will adversely affect one or more classes of shareholders, specific approval of the affected class is required, in addition to approval of the directors and shareholders
True
T/F The remaining or new corporation assumes the rights and liabilities of the prior corporations
True
T/F Under authority to regulate interstate commerce, Antitrust legislation resulted in passage of the Sherman Antiturst Act, Clayton Act and Federal Trade Commision Act
True
T/F: A case in which a parent corporation used an under capitalized subsidiary to undertake a risky venture may result in the court piercing the corporate veil
True
T/F: A corporation is an artificial person created by state statute
True
T/F: A corporation is generally allowed to have more than one class of common stock, each possessing different rights and privileges
True
T/F: A corporation which sells most of its inventory, equipment, and real estate in exchange for cash or securities may then liquidate and distribute assets to shareholders or remain in existence as a holding company or investment company
True
T/F: A corporation's assets may be liquidated in bankruptcy and the proceeds used to pay creditors
True
T/F: A fiduciary cannot solicit corporate customers for personal ventures or receive secret profits, kickbacks or commissions on corporate transactions
True
T/F: Any partner who uses personal assets to pay undisputed partnership debts is entitled to proportionate reimbursement from other partners.
True
T/F: At this time stock trusts were controlling virtually all commercial activity in specific areas: railroad, oil, sugar, cotton, whiskey
True
T/F: Before filing a derivative action the shareholder MUST either: make demand upon the board to enforce the claim OR prove the demand would be futile
True
T/F: Both MBCA and RMBCA provide that if a corporation's board exceeds 9 members, there may be different classes of directors and they serve staggered terms
True
T/F: Creditors may obtain judicial dissolution if a judgment is unpaid
True
T/F: Directors are under a statutory duty which prevents them from favoring one shareholder group at the expense of another.
True
T/F: Generally a quorum consists of the majority of the number of directors specified in the Articles of Incorporation
True
T/F: If a limited partner participates in the management of the limited partnership in an unlawful way, he loses his limited liability insulation
True
T/F: If a limited partner's name appears in the name of the limited partnership he loses his limited liability insulation.
True
T/F: If false statements are made in the certificate of limited partnership, and the limited partner takes no action to correct it, he loses his limited liability insulation
True
T/F: If it would be unfair or unjust to allow shareholders to hide behind the corporate shield, a court may disregard the existence of the corporation
True
T/F: In a close held corporation, it is common for a person or a group who control the majority of shares to consistently elect a majority of the board, and to have the power to out vote the minority consistently
True
T/F: In a corporation the Board of Directors is responsible for determining executive compensation, as well as pension and retirement plans
True
T/F: In a short-form merger, the boards of directors of each corporation approve the merger resolution and the matter is not presented to stockholders
True
T/F: It is a good practice to include dissolution terms in the original partnership agreement.
True
T/F: Stock may not be sold for less than par value. Historically, par value was the selling price of the stock. Today it has little meaning an is often shown as $1
True
T/F: The award (judgment) in a derivative action is paid to the corporation, not the shareholders
True
T/F: The initial board of directors serves until the first meeting of shareholders
True
T/F: The liability of one who serves as both general and limited partnersame as that of a general partner with regard to creditors
True
T/F: The majority vote of the quorum present constitutes action
True
T/F: This controlling majority in a close held corporation can drain corporate earnings in the form of salaries, bonuses or mental payments to majority shareholders
True
T/F: Upon dissolution, ULPA gives preference to certain distributions to limited partners over general partners; RULPA does not.
True
T/F: When watered stock dilutes the value of stock held by other shareholders the remedy is cancellation of the offending shares
True
T/F: co-ownership of property and the sharing of income derived from same does not necessarily indicate that a partnership exists.
True
T/F: the sole proprietor may negotiate to limit contract liability to business assets only
True
T/F:A director whose term has expired continues to serve until a successor is elected and qualified
True
T/F The appraisal remedy allows dissenting shareholders to be paid the "fair value" of their shares
True - dissenting shareholder receive fair value of their shares.
T/F: When an appraisal remedy will be available, potential adversely affected shareholders must receive notice that a meeting will take place and must inform them of their right to dissent
True affected shareholders must receive notice that a meeting will take place and must inform them of their right to dissent
T/F: When a corporation is solvent, all states permit dividends to be paid to the extent of the corporations' unrestricted and unreserved earned surplus.
True unrestricted and unreserved earned surplus.
ULPA adopted in 1916 by National Conference of Commissioners on Uniform State Laws; revised in 1976 (RULPA) and amended in 1985.
Uniform Limited Partnership Act
General Partnerships are governed by the
Uniform Partnership Act
This is created when a group of stockholders transfers legal title to their shares to a trustee in exchange for voting trust certificates
Voting trust
stock that is issued at less than full value is called
Watered stock
Under what circumstances might a proxy be irrevocable
When a shareholder pledges his shares as collateral
Cases which seek to pierce the corporate veil generally arises in these circumstances
Where one shareholder or a close held corporation, where the shareholder uses the corporate entity as a facade for personal dealings.
Do the MBCA and RMBCA allow a director to be removed without cause by a shareholder vote?
Yes
If a class of shares is non-voting and an amendment to the articles will affect the rights of that class, can the shares of that class be voted?
Yes
Are redeemable shares entitled to vote
Yes, unless a notice of redemption has been mailed and the corporation has sufficient funds on deposit to redeem the shares
What generally constitutes a quorum
a majority of the SHARES entitled to vote
UCC and federal bankruptcy law define person to include
a partnership.
What makes up earned surplus of a corporation?
accumulated profits since formation
For a large business free transferability of ownership interest afforded by a corporation is an advantage or disadvantage
advantage
Tax laws treat partnership as an ______ by attributing income and expenses to individual partners
aggregate
What other business may occur at annual meeting?
annual management reports bylaws amended management resolutions present and voted upon
How often are permanent directors elected
annually
The break up of A T and T was the result of
antitrust laws
A corporation is also the citizen of
any state where it does sufficient business.
Shareholders who dissent to the sale of the bulk of corporate assets are entitled to
appraisal remedies
This allows minority shareholders who dissent to major corporate changes to be paid in cash for their shares
appraisal remedy
What is generally required to authorize issuance of additional shares
approval of BOD or amendment of AOI
The act of a corporation which buys most of its inventory, equipment and real estate of another engages in an
asset or stock purchase
excess of total liabilities over total assets
bankruptcy insolvency
An offer for a stock subscription made before formation of a corporation is a
bilateral contract
Who manages a joint stock company?
board of directors
Who sets the management policy for a corporation
board of directors
A long term obligation secured by a lien or mortgage on a specific corporate property
bond
This corporation is for-profit; organized to operate a business enterprise with profits distributed to owners
business corporation
How is dissented noted?
by a recording in the minutes or a written notice of dissent
Where are the duties of corporate officers outlined?
bylaws
It is important to state the value of each partner's____ ____ especially if it varies from partner to partner.
capital contribution
Dividends generally take 3 forms:
cash, property or stock
For large businesses a the benefit of incorporation is
centralization of managment
In this corporation, shareholders often serve as officers and directors and management is more informal
close held
Also known as "close corporation"; owned by one shareholder or a small closely connected group. The shareholders generally serve as officers and directors.
closely held corporation
Transactions between the corporation and its fiduciary personally or between the corporation and another entity in which the fiduciary is an officer or direct is financially interest is also a
conflict of interest
Both corporations dissolve and a new corporation is formed is called a
consolidation
Courts are more likely to be reluctant to pierce the corporate veil in which matter contract or tort?
contract
These voting agreement can be enforced under BLANK principles
contract
Unless there is a written partnership agreement it is expected that the partners share equally in
contributions, losses, management
Repurchases and redemptions are classified as what?
corporate distributions
The board of directors generally appoint BLANK and give them authority to operate the corporation
corporate officers
Boards of Directors of large corporations often delegate management responsibilities to whom
corporate officers, executive committees orr other committees appointed by the board
This business organization is entitled to protections of natural persons under federal and state constitutions
corporation
the rate for long term obligations such as bond and debentures.
coupon rate
To ensure the representation of minority shareholders, many state require what type of voting with regard to election of directors only.
cumulative voting
An unsecured corporate obligation is a
debenture
This other type of obligation of a corporation and which must be repaid is
debt security
Stock purchased by a shareholder at less than full value is
discount stock
What must a director who object to the action authorized by the majority of board do
dissent
A corporation is terminated how?
dissolution
This corporation operates in the state of incorporation.
domestic corporation
A corporation is taxed on its income at a corporate tax rate. After tax balance is distributed to shareholders as dividends and the dividends received by individual taxpayers are taxed again. This is referred to as
double taxation
Does each shareholder get one vote or does each share of stock get one vote?
each share of stock gets one vote
What is the primary purpose of the annual meeting of shareholders?
election of Board of Directors
If no amount is stated it is assumed the contribution of each partner is
equal to contributions of other partners
The inability to pay debts as they become due in the ordinary course of business is
equity insolvency
The corporate officers then may appoint BLANK who hire employees to undertake day to day activities
executive officers
Directors who authorize additional shares in an attempt to dilute the voting power of minority shareholder engages in a violation of
fiduciary duties
How is an Limited Liability Company formed?
file a certificate of organization usually with secretary of state
The greatest advantage of a sole proprietorship
flexibility
This corporation operates in a state other than state of creation
foreign corporation
Voting trusts are commonly used in corporate reorganizations to give control to
former creditors
In a limited partnership who incurs personal liability to creditors
general partners
In a limited partnership, these partners have unlimited personal liability for partnership debts
general partners
In a limited partnership, who makes management decisions
general partners
Significant repurchases may be made to drive up stock prices and prevent what?
hostile takeover bid
How may shareholders cast votes
in person or proxy
If limited liability is important and if the federal income tax treatment is favorable these are reasons to
incorporate
Tax laws treat partnership as an ______ by attributing income and expenses to
individual partners
Person in reference to a partnership may consist of
individual, corporation or partnership
Large publicly held corporations include a mixture of both
inside and outside directors
Directors who are also officers or employees of the corporation are referred to as
insiders
Unless specific liability results from personal conduct (such as malpractice), the liability of a member is limited to his
investment
An offer for a stock subscription made after formation, according to MBCA and RMBCA is an
irrevocable offer
Generally, what is the initial method of raising corporate funds?
issuance of corporate securities in exchange for cash, property or services transferred to the corporation.
"trading on equity" This occurs when the total investment (debt + equity) yields a higher rate of return than the cost of borrowing money (interest rate)
leverage
Under both Model Act a director who votes in favor of dividend payments, in violation of statutory limits or in violation of the articles of incorporation may be
liable to the corporation for losses
A primary purpose of operating in the corporate form is
limited liability
In a limited partnership, if this partner participates in management he loses his limited liability insulation and is treated as a general partner.
limited partner
The liability of owners of a corporation is
limited to the amount of their investment
An LLC is composed of BLANK, not partners or shareholders
members
When one corporation survives and another dissolves it is called a
merger
A shareholder with controlling interest in a block of stock may have fiduciary duties to
minority shareholders
What is an example of a public corporation created by local government
municipal corporation
When preemptive rights exist, they can be exercised only for what type of stock
new issues of stock
UNLESS their name appears in the name of the Limited Partnership or unless the Limited Partner participates in management of partnership business or unless the Limited Partner makes false statements in the certificate of Limited Partnership and the Limited Partner takes no action to correct it, the limited partner bears this amount of liability
no liability of limited partners
promissory notes are obtained by the corporation as either short or long term loans, secured or unsecured
notes
Three types of debt securities of a corporation are
notes, debentures and bonds
In order to qualify as Section 1244 particular stock, the money raised by selling such stock, plus the corporation's equity capital cannot exceed
one million dollars
If there are multiple stock types, those with common stock are entitled to payment of dividends when?
only after shares with a dividend preference are paid.
What is held by directors, after the certificate of incorporation is issued.
organizational meeting
The remaining partners may continue to operate under the
original partnership agreement
Some or all of the authorized shares issued to shareholders for consideration
outstanding shares
A corporation may be unaffected by changes in
ownership
A corporation owning majority of shares in a subsidiary corporation
parent corporation
A true limited partner may not do this
participate in management or control
Property of the partnership may be held in
partnership's name or the name of any partner as agent
A corporation may exist
perpetually
Regarding corporate debt, corporations require shareholders to
personally guarantee
If a corporation has not complied with statutory requirements a court may impose personal liability upon its shareholders, which is referred to as
piercing the corporate veil
In the close held corporation corporate formalities may become more casual, management functions become blurred and this may lead to outsiders imposing personal liability on the shareholders by
piercing the corporate veil
A voting agreement is sometimes called a
pooling agreement
New partners are only responsible for BLANK debt if they agree, otherwise the new partner is only responsible for debt incurred after becoming partner.
pre-existing debt
This type of stock generally receives dividends before other types of stock
preferred stock
This corporation is formed by professionals, doctors, lawyers, accountants. The professionals remain personally liable for malpractice. They incorporate to take advantage of retirement plans and tax benefits that were not available to self-employed persons
professional corporation
Generally a Chapter S corporation it avoids corporate income tax on what?
profits
Those who plan and organized the affairs of a potential corporation, including discovery and development of the business idea, raising capital, secure property and personnel to operate the business and comply with statutory formalities to create the corporation are the
promoters
Shareholders have the right to inspect corporate records for what?
proper purpose
Stock of a subsidiary corporation of the corporation declaring the dividend is not stock, it is
property
Distribution of dividends is generally in proportion to ownership interest.
proportion
What is the term for the grant of authority to another to vote a stockholder's shares?
proxy
State statutes are designed with what type of corporation in mind?
public
This corporation owned by many shareholders and its stock is bought and sold on open market (i.e. general motors)
publicly held corporation
Corporate management (officers, directors and sometimes controlling shareholders) two main duties:
reasonable care and loyalty
This is a date that is set at some point before the meeting, and those persons listed in the corporate record and registered owners of voting shares on this date are allowed to vote
record date
Under both Model Acts, a corporation has the power to acquire its own shares of stock through what?
repurchase
It is safest for an officer to not act until the board passes what
resolution authorizing the transaction
What is earned surplus?
retained earnings
As opposed to fractional shares, this certificate represents a percentage of a full share and when the holder has of these to equal a full share, they may be surrendered for a full share of stock.
scrip
The holder of a bond is what type of creditor
secured
What is the term for a share or other interest in the property of a corporation?
security
Corporate losses of a Chapter S corporation may be claimed by whom?
shareholders
In a joint stock company, who are personally liable for association obligations?
shareholders
Who are the owners of a corporation?
shareholders
Who elect the board of directors
shareholders
Corporate management responsibility is divided among what 3 groups:
shareholders, board of directors, corporate officers
A repurchase or redemption is not like a dividend. Repurchase or redemption requires an element of exchange: what is exchanged for what?
shares of stock are exchanged for corporate assets
Does Section 1244 stock apply to all shares of the corporation or only to a specific group or shares?
specific group
Rules of incorporation are governed by
state statute
How are vacancies on a corporations board of directors filled:
statutory provisions or bylaws
This creates more shares of stock, each share valued at the proportionally lesser amount
stock split
Term for an offer by a potential shareholder to purchase a specified number of unissued shares of the corporation is called a
stock subscription
The method by which each share is entitled to one vote on each matter, including one vote for each director position to be filled is
straight voting
Suits filed merely to secure a favorable private settlement rather than to redress a corporate wrong are called
strike suits
This corporation's stock is owned entirely or substantially by another corporation
subsidiary corporation
When a corporation is solvent some states also allow dividends to be paid from what?
surplus capital or earned suplus
An offer by a corporation to shareholders of another to buy a bulk of stock is a
tender offer
A dissolution may require
termination and winding up
Certain classes of stock shares may get more than one vote, however all shares within that class must have
the same rights
A corporation is a citizen of
the state of its incorporation
A corporation with a high debt to equity ratio (4 to 1) or more
thin corporation
In a close held corporation, why might the corporation repurchase shares:
to buy out shareholders
In a public corporation, the corporation may repurchase shares for two common reasons
to fund employee compensation plans or to acquire other corproations
The stock of closely held corporations is subject to ____ restrictions which limit the pool of purchasers.
transfer restrictions
T/F: Chapter S status is attractive for a corporation that is likely to incur losses
true
T/F: Some states allow close held corporations to dispense entirely with board of directors
true
T/f: Stock options are generally issued as incentives to corporate directors, officers or employees
true
a financial institution which serves as a trustee under a trust agreement is also known as
trust indenture
Under a voting trust, who has power to vote the shares subject to limitations of the trust agreement
trustee
The liability for corporate obligations is
unlimited
The holder of a debenture is what type of creditor?
unsecured creditor
The type of dissolution where the board adopts a resolution to dissolve the corporation is
voluntary
A contract between 2 or more shareholders concerning the way in which their shares will be voted on certain issues is a
voting agreement.
May certain classes of stock shares have more than one vote?
yes
T/F: The board supervises the overall operation of the business.
True
Modern statues permit this number of directors
1-2
What year did the National Conference of Commissioners on Uniform State Laws adopt the Uniform Limited Partnership Act.
1916
What remedy is available to dissenting stockholders of any corporation involved in a merger
Appraisal remedy
How is the merger or plan of consolidation accomplished?
Approved resolution of both boards and stockholders of each corporation
The required contents of Articles of Incorporation include: 1. Name 2. Duration - perpetual or limited 3. Purpose - i.e. "to transact any lawful business for which corporations may be incorporated in this state" 4. Statement of authorized classes of stock, number of shares, par value of shares and rights and preferences of shares or shareholders; 5. Corporation's registered address and registered agent 6. Names and addresses of original directors 7. Name and address of each incorporator
Articles of Incorporation - required contents
T/F: The courts generally recognize the separate legal existence of the corporation from its shareholders
True
Who declares when corporate dividends may be paid:
Board of directors
The combination of debt securities and equity securities within a corporation is known as its
Capital structure
Estoppel is generally applied when the defect is not caused by a willful failure to comply with incorporation statutes. If a third party deals with a defectively organized corporation, unaware of its defectiveness, then later discovers the defectiveness, the third party is "estopped" from holding owners personally liable.
Corporation by estoppel
a share or other interest in the property of the corporation (equity security) or an obligation of the issuer (debt security)
Corporation: security
-an association of 2 or more persons to carry on as co-owners in a business for profit (example: traditional law firm) -May be a combination of individuals, partnership, corporation or other entity.
GENERAL PARTNERSHIP
written agreement which governs the rights and obligations of partners, otherwise or where silent, UPA governs
General Partnership: Articles of Partnership
any partner may inspect at any time or request an accounting of
General Partnership: Books and records
Initial contribution + subsequent advances + surplus profits, less undistributed losses and withdrawals.
General Partnership: Calculating value of a partnership interest
The partners may contribute cash, real property, personal services and if the percentage of each partners' contribution is unequal, it is important to state the value contributed by each partner, otherwise it will be assumed each contributed equally and profits and losses will be allocated equally.
General Partnership: Contributions
Like sole proprieters, the general partners have unlimited personal liability to creditors if the partnership assets are insufficient to satisfy creditors. New partners are only responsible for pre-existing debt if they agree, otherwise the new partner is only responsible for debt incurred after becoming partner.
General Partnership: DEBT
Must be "for profit." A partnership may not exist for charitable, fraternal, religious, trade association or labor union purposes
General Partnership: Intention
Unless otherwise stated in agreement, it is assumed each partner has equal management authority - their time in management is not compensated
General Partnership: Management
Partner may not sell partnership property without consent of other partners. However a partner may sell or assign his partnership interest to a third party. Partnership interest may be reached by that individual's creditors. The new owner of the interest is entitled to payment of its value, profits but does not become a partner and has no management authority.
General Partnership: Partnership interest
Acquisitions of the partnership are considered partnership property and no partner may sell without the consent of other partners. Creditors may not reach partnership property to satisfy individual debt. Upon the death of a partner, partnership property belongs to the partnership, not to the heirs of the deceased partner.
General Partnership: Property
Unless the partners do business in their own names, the name of the partnership must be registered in individual states. Generally the state will deny access to court system, if partnership name is not registered.
General Partnership: Registration of Partnership name
If a partnership is to exist for more than one year, a written agreement is required
General Partnership: Statute of Frauds
The contribution of the partner must equal what is set forth in the certificate. -RULPA allows a contribution to take the form of services; ULPA does not
Limited Partnership: Contributions (financial structure)
Dissolution may occur with -agreement of partners -withdrawal or death of general partner (unless remaining partners agree to continue or partnership agreement makes other provisions -dissolution of a corporate general partner -bankruptcy of general partner ULPA give preference in distribution to limited partners over general partners. RULPA makes no distinction.
Limited Partnership: Dissolution and Termination
permissible, however, ULPA has restrictions if the loan is secured by a firm asset. RULPA defers to each state's fraudulent conveyance statute
Limited Partnership: Loans by limited partners
The term "limited partnership" must be included as part of the firm name. The surname of a LP may not be used otherwise the LP may become liable to creditors, just as a general partner
Limited Partnership: NAME
RULPA requires LP to maintain an office in the state of incorporation, with the following records available for inspection: -current list of names and addresses of all partners -copy of certificate of limited partnership and all amendments -copy of financial statements and tax returns for three years -copy of written partnership agreement that exists -agent for service in the state of incorporation
Limited Partnership: OFFICE
RULPA requires unanimous consent
Limited Partnership: admission of general partner
This is allowed in most states, and this may diminish the concept of unlimited personal liability of the general partner in some circumstances
Limited Partnership: corporation as a general partner
RULPA requires members to sign and file a certificate with the Secretary of State providing -name and address of the LPship, -name and address of each partner; -identification of agent for service -When changes in the capitalization or LPship occur, amendments to the certificate must be filed -Generally a private LPship agreement is executed by the members to govern affairs of the business
Limited Partnership: formation and existence
- serving as contractor, agent or employee of the limited partnership or of general partner - consulting or advising general partner with regard to partnership business - acting as surety for partnership business -attending or requesting a meeting of partners - voting on vital partnership matters such as dissolution, changing the nature of the business or admission or removal of partners
Limited Partnership: permissible conduct of Limited partner to maintain insulation from liability
This is generally not accepted; however RMBCA permits stock to be issued either in exchange for a promissory note or in exchange for a contract for future services to corporation
Promissory note for stock
When the shareholder has the right to purchase a proportionate share of a new issue of common stock before it is offered for sale to others. Provides a method of protecting a shareholder's proportionate interest in the corporation
Preemptive rights
Special classes that have preference over other classes in the payment of dividends or distribution of assets of the corporation upon liquidation. These shares are generally NONVOTING shares.
Preferred Shares
Corporate officers generally consist of
President, vice presidents, secretary, treasurer
This type of corporation is created by private persons for private purposes and may be for-profit or nonprofit.
Private corporation
The Articles of Incorporation (AOI) may make certain classes of stock shares subject to reacquisition (redemption) by the corporation at a fixed price. Usually applies to preferred shares. May be mandatory or optional and may be total or partial, determined by AOI.
Redeemable Shares
What powers did Congress use in 1933 to enact the Securities Act and in 1934 to enact the Securities Exchange Act
Regulation of interstate commerce
For tax purposes the business is an extension of its owner: the owner may apply business losses against other personal income. Individual tax rates are generally lower than corporate tax rates
Tax advantages of Sole Proprietorship
T/F: A corporation may be bound by an officers apparent authority
True
T/F: A corporation may be involuntarily dissolved by court order or if the corporation fails to adhere to statutory requirements such as filing annual reports, pay franchise tax, failing to appoint or maintain a registered agent
True
T/F: A fiduciary cannot use corporate assets to conduct personal business
True
T/F: A fiduciary cannot use the corporations customer lists or trade secrets for personal benefit, or for sale to others
True
T/F: A limited partnership is required to file a certificate to provide notice to creditors that some partners have limited liability for partnership debts.
True
T/F: A partner who leaves the partnership remains financially liable for debts incurred while they were a partner, unless the partnership agreement contains an indemnification provision.
True
T/F: A promoter who contracts on behalf of a proposed corporation is liable on the contract unless he discloses that the corporation is not yet formed
True
T/F: A statutory right of inspection is generally limited to those with a minimum number of shares or who have been shareholders for a minimum period.
True
T/F: An officer or director is expected to act in an informed or deliberate manner in reaching management decisions
True
T/F: Another tax advantage of corporations is they are allowed to deduct certain expenses incurred in providing fringe benefits to employees: health care, profit sharing plans
True
T/F: Antitrust laws prohibit directors from sitting on the boards of competing corporations
True
T/F: If the buyer accumulates enough shares, the corporation may be run as a subsidiary corporation, it may be merged into the purchasing corporation or may be liquidated
True
T/F: Improper purposes for inspection of corporate records include harassment, extortion, acquiring trade secrets, obtaining the stockholder list to sell for profit
True
T/F: In a small close held corporation, the same individuals may be the shareholders, directors and officers simultaneously.
True
T/F: Inspection of corporate records to communicate with other shareholder to solicit proxies or to publicize mismanagement is considered a proper purpose.
True
T/F: Limited partners are investors only and are liable only to the extent of their investment.
True
T/F: Many states allow board meeting to take place by telephone
True
T/F: Most states have enacted statutes to limit or eliminate a director's liability for damages
True
T/F: Officers and directors must act in good faith, in the best interests of the corporation with with care an ordinarily prudent person would take
True
T/F: Officers are agents of the corporation and their actions are governed by the general principles of agency law
True
T/F: Only the shareholders of the subsidiary corporation have appraisal remedies or appraisal rights
True
T/F: Preemptive rights cannot be exercised for shares previously authorized but unissued.
True
T/F: Preemptive rights cannot be issued for shares issued for property or services rather than for cash
True
T/F: Preemptive rights cannot be issued for shares issued in connection with a merger, or a consolidation or reorganization
True
T/F: Preemptive rights cannot be issued for shares issued to directors, officers or employees under compensation or incentive plans
True
T/F: Preemptive rights cannot be issued for shares issued to satisfy conversion or option rights
True
T/F: Preemptive rights cannot be issued for treasury shares
True
T/F: Premiums for health and life insurance plans are expenses to the corporation, but not treated as taxable income to the employee
True
T/F: Section 1244 Stock works this way: rather than take a capital loss, the shareholder can treat the loss as an ordinary loss, which means she can credit it against ordinary income to reduce her personal income tax liability.
True
T/F: The board adopts, amends and repeals bylaws, unless reserved to shareholders
True
T/F: The board determines if, when and in what for and what amount dividends will be paid
True
T/F: The board determines the financing an capital structure
True
T/F: The board participates with shareholders in major changes, such as merger, consolidation or dissolution
True
T/F: These types of transactions generally require participation by board and shareholders: amendment of articles of incorporation, merger, sale of substantially all corporate assets, voluntary dissolution
True
T/F:The buying corporation must have a resolution of the board, but shareholder approval is not required and objecting shareholders are not entitled to appraisal remedies
True
T/F: BEFORE the vote a dissenting shareholder must file a written notice of intent to demand fair compensation for her shares and must refrain from voting in approval of the action.
True, the dissenter must file a written notice of intent to demand fair compensation for her shares and must refrain from voting in approval of the action.
Model acts do not allow committees to perform the following
authorize distributions, approve merger, fill board vacancy, modify the bylaw, authorize or approve reacquisition or sale of shares.
when a shareholder pays nothing for the shares it is
bonus stock
The holder of a this type of share is entitled to a fractional voting right, a fractional dividend and a fractional distribution if the corporation is liquidated.
fractional shares
The holder of a this type of share is entitled to a portion of a voting right, a portion of a dividend and a portion of a distribution if the corporation is liquidated.
fractional shares
A joint venture resembles a BLANK however it does not contemplate a continuing relationship
partnership
Because so many decisions in a close held corporation are unanimous or have majority shareholder consent, it looks more like a
partnership
Corporate insolvency: If the corporation is insolvent under either equity or bankruptcy insolvency tests - the Model Acts prohibit this:
payment of dividends to shareholders
Some states require that the plaintiffs in a derivative action own a minimum percentage shares, otherwise they must
provide security or bond to cover the corporation's reasonable cost of litigation
The contribution of individual partners to the partnership capital account may take the form
real property, personal property, cash or personal services
Directors may act without a meeting if a written consent stating the action is signed by all directors. This has the effect of
unanimous vote