Structure of Healthcare Enterprises
Whether a donation to a tax-exempt corporation is deductible on the donor's tax return depends upon the category of tax-exempt organization to which the donation is made.
True
The organizers/promoters of a legal entity may be liable for preorganization activities and obligations.
True (one or more individuals must take the steps necessary to organize the entity - maybe called organizers, incorporators, promoters, etc) Help bring the entity into existence.
When a tax-exempt corporation is dissolved, its assets must be transferred to another nonprofit entity or used for tax-exempt purposes
True, (even assets can't go to an individual)
A corporation is called a _______ corporation in its state of formation.
domestic
Which entity structure is commonly used in the delivery of healthcare services?
nonprofit organizations
The profits (or excess revenues) of a nonprofit corporation generally are:
Retained by the corporation and used for capital and operational needs.
"Piercing the Corporate Veil" can occur when:
A corporation do not follow the required corporate formalities (LLC funds must carefully separated from the funds of Members and/or Managers and can't be used for personal reasons. LLC actions (either by Members or Managers) must be approved by a written document signed by the number of members or managers required to approve the action, must be approved at a meeting at which a quorum is present.
An incorporator is:
A person who signs the organizational document of a corporation
Which of the following types of tax-exempt entities has specific, additional requirements regarding conflicts of interest and distributions?
A private Foundation (self dealing restrictions, must distribute a % of assets each year to other qualified tax-exempt entities, investment limitations
A tax-exempt entity that is created and funded by one individual or family typically is:
A private foundation (e.g., 501(c)(3) - this entity is presumed to be a private foundation unless it seeks and qualifies for IRS recognition as a public charity. Private foundations are subject to additional operating restrictions: self dealing, must distribute a % of assets each year to other qualified tax-exemptions, investment limitations.
A legal entity's capitalization is often influenced by the exact business it will operate and the financial needs of such business.
TRue
What is a prospectus?
A written description of detailed information about a new legal entity.
A de facto corporation is a corporation:
That acts as a valid corporation but fails to meet all legal requirements.
Voting control of a legal entity typically is
Allocated based upon the % of shares/units owned
Most types of legal entities can provide some liability protection for directors/managers, so long as their actions are in good faith and do not involve a breach of loyalty or self-dealing.
True
Defective Corporation
An attempted corporation that has failed to complete all the requirements for legal corporate status successfully.
Which of the following is not considered a "disqualified person" of a tax-exempt corporation: A director, an employee with no supervisory responsibilities, CEO, CFO
An employee with no supervisory responsibilities
Holders of corporate bonds:
Are entitled to payment before profits are distributed to shareholders
Who are Subscribers?
Are people who agree to purchase ownership interests (e.g., shares of stock) in a new legal entity.
Upon the dissolution of a tax-exempt corporation, its assets:
Are transferred to another tax-exempt entity or are used for tax-exempt purposes
Which of the following must be filed with the appropriate state agency to create a corporation: Operating Agreement, Bylaws, Shareholders Agreement, or Articles of Incorporation/Certificate of Incorporation
Articles of Incorporation/Certificate of Incorporation
Tax-exempt entities generally are prohibited from participating in political and lobbying activities.
True
How is control of a business entity typically based upon?
Based upon the % of ownership interests an owner has in the business.
The document that provides the vision for the business regarding services to be provided, personnel needs, equipment and supply requirements, potential liabilities and other items is the
Business Plan
How can transferability of ownership be limited?
By the organizational documents of the business entity
The document that specifies the basic rules and regulations of a corporation is:
Bylaws (internal document)
Which legal entity is taxed at the entity level and the owner level?
C Corporation
Which of the following is subject to taxation at the entity level and the owner level:
C Corporation (subject to double taxation - corp income is separately taxes at corp tax level and income distributed to shareholders is taxes at the shareholders applicable income tax rate.
The creation of a document detailing operational control, voting rights, selection of directors/managers, transfer of ownership interests, etc. What are these called for different entities?
Called By-laws for a corporation, Called Operating Agreement for an LLC, Called Partnership Agreement for a general or limited partnership.
Which of the following is not a benefit of tax-exemption: Can receive grants from other tax-exempt entities, Is exempt from federal income tax, Can distribute earnings to members, is exempt from federal employment tax
Can distribute earnings to members
Stockholder agreements are most likely to be found in:
Closely held corporations (owners of a closely held corporation often want to control who they do business with, and don't want to be owners with strangers)
The ________ was the first type of legal entity that provided liability protection for the owners/shareholders.
Corporation
A corporation that has failed to meet some legal requirement for valid existence is a:
De Facto Corporation
A legal entity formed in compliance with all state law requirements is called a ______ entity.
De Jure
Because of significant interpretation of its corporate law, many corporations are formed in the state of_______.
Delaware
What is a de jure entity?
Entities formed in compliance with all state law requirements.
An ______ security issued by a corporation represents a right of ownership in the corporation.
Equity (Stock is a type of equity security, and this means that the shareholder is a stakeholder in the corporations's assets, and has the right to a proportionate share of the assets of the corporation in the event the entity is dissolved or terminated .
The IRS may fine directors of a tax-exempt corporation who approve the payment of excess compensation to a "disqualified person"
True
In selecting an entity name, the organizers only need to be sure the name is available in the state of organization.
False
The owner of a business operated as a sole proprietorship is protected from the debts and obligations of the business.
False (business owned and operated by a single person without any formalities and is personally liable for obligations of business - debts, losses, legal judgement)
The holders of common stock typically receive dividends before holders of preferred stock.
False (owners of preferred stock may have priority rights to as certain proportion of the profits before common stockholders are paid)
A business's situs refers to its structure -- sole proprietorship, LLC, corporation, etc.
False - Situs is the legal and operating jurisdiction of a business
An alien corporation is one that is qualified to do business in a state other than its state of organization.
False, Corporation charted under the laws of another country that is doing business in the US.
Tax-exempt status is automatically received upon the appropriate formation of a nonprofit corporation under state law.
False, Must apply to the IRS for tax-exempt status
Tax-exempt entities generally are permitted to participate in political and lobbying activities.
False. One Requirement in the organizational document
In order to obtain tax-exempt status, a corporation must:
File the appropriate organizational document with the applicable state agency. File the appropriate application with the IRS, and receive confirmation of tax-exemption from the IRS. Include required language in the organizational documents
If a corporation does business in a foreign state illegally, it can be subject to:
Fines, the inability to bring lawsuits against other parties, the inability to continue lawsuits.
A corporation that does business in a state other than the state of its incorporation is called?
Foreign Corporation
If ABC Corporation is owned and operated by Helen in NY, incorporated in Delaware, and qualified to do business in NY, ABC is which type of entity in NY?
Foreign Corporation
What is not a specific purpose for which tax-exemption may be granted?
Healthcare Purpose. Some purposes are: Charitable Purpose, Religious Purpose, Educational Purpose
What is Estoppel?
Is a legal doctrine that allows a third party to deny the existence of a defective corporation.
What is Common Law?
Is the basis of the legal systems in most countries that were colonized by England, including the US (except Louisana). The common law system relies on judge-made law from similar cases in similar circumstances, so that the law in the jurisdiction is applied in "common" to all.
What method can a corporation utilize to obtain funds for operations?
Issue equity securities, Issue debt securities, and obtain traditional loans
Which legal entity provides liability protection for owners?
Limited Liability, Limited Partnership (limited partner has liability protection but general partner does not) Limited Limited Liability Partnership, Limited Liability Company, Professional Entity( not protected from liability resulting from their professional negligence), corporation
C Corporation Attributes
Most flexible Corporation from an owner perspective. Individuals or entities eligible to be shareholders. No limit on # of shareholders. Subject to double taxation (corp. income is separately taxed at corporate tax level; income distributed to shareholders is taxed at the shareholder's applicable income tax rate)
Are Corporate Bylaws required to be publicly filed to be effective?
No, Bylaws are the basic individualized rules and regulations internal to a corporation that govern those internal workings and the relationships between all of the shareholders, directors and officers of the corporation. They are in essence the "constitution" of the corporation but are generally NOT filed with the state.
Are donations made by an individual to any category of tax-exempt corporation deductible on the individual's tax return
No, Contributions made by individuals are tax deductible to donors in certain circumstances
All hospitals operate as tax-exempt entities
No, a corporation must be organized and operated exclusively for an exempt purpose (charitable, religious, educational, etc. - hospitals are considered charitable if certain requirements are met)
Are shareholder agreements often created by "closely held" corporations to control the transferability of stock?
No, a shareholder agreement is often used for closely held corporations wit ha small # of shareholders (specifies the ability of a shareholder to transfer his/her shares to another person - may give other shareholders the "right of first refusal to purchase the shares before they can be sold to a third party, Specifies what happens to shares when the owner dies, may require an independent appraisal, may prohibit a shareholder from competing with the corp. after the shareholder sells his/her shares in the corp "noncompete agreement)
Are Corporate Bonds a type of equity security?
No, a stock is an equity security, while a bond is a debt security. When an investor buys a corporate bond, they are essentially loaning the corporation money, and they have the right to be repaid the principal and interest on the bond.
Is an S Corporation subject to income tax at both the entity level and the answer level?
No, income from the business is directly attributed to the owner (taxes at his/her marginal tax rate and losses from business can offset owners income form other sources)
Does a sole proprietorship require the filing of documents with a state agency?
No, not required to file any documents with any state agency. Business owned and operated by a single person without any other formalities. Owner has total control.
A dividend is the amount awarded to the owners when a legal entity is dissolved and liquidated.
No, they have a right to a proportionate share of the assets of the corporation in the event of dissolution.
What are some attributes of S Corporation?
Only individuals, certain trusts and estates can be shareholders (shares can't be owned by corporations, LLCs, or other legal entities). S Corp. can own interests in other types of legal entities'. No more than 100 shareholders permitted. May have only 1 class of stock. No double taxation (no tax at corp. level; income is taxed at shareholder level based upon shareholders applicable tax rate)
Which legal entity cannot be formed with one owner?
Partnership (also called a general partnership or unincorporated association). (no limited liability; partners are personally liable for debts and losses)
Legal entities typically have _____ duration, unless otherwise indicated in the organizational documents of the entity.
Perpectual meaning as long as the corporation fulfills the basic requirements to be a corporation that are set up by the state.
Under the concept of _______, the directors, officers, and shareholders can become liable for the debts of a legal entity that fails to observe entity formalities such as (i) approval of actions and (ii) separation of entity assets from personal assets.
Piercing the Corporate Veil
In most states, in most cases, who is personally liable for reorganization activities?
Promoters
The primary function of a registered agent is to:
Receive service of official documents on behalf of a legal entity
Who is the representative of a legal entity who typically accepts service of a process of a lawsuit?
Registered Agent
Which entity can issue only one class of stock?
S Corporation
Which type of legal entity limits the number of owners?
S Corporation
A _____________, also called a ______________, typically sets forth restrictions on the transferability of ownership interests in a closely held corporation.
Shareholder Agreement or Stockholder Agreement
Which type of entity is not dependent upon filing organizational documents with a state agency:
Sole Proprietorship
The Securities Act of 1933 was enacted in response to what historic, U.S. event?
Stock Market Crash of 1929
The persons who agree to purchase ownership interests in a legal entity are called:
Subscribers (maybe responsible for selling ownership interests to proposed owners)
In the event excess compensation is paid by a tax-exempt corporation to a "disqualified person":
The IRS may fine the disqualified person who received the excess compensation
The issuance of stock and other equity and debt interests in corporations is subject to regulation by:
The Securities and Exchange Commission
What are Bylaws?
The basic rules and regulations of a corporation that govern the internal workings and relationships between shareholders, directors and officers.
Given an example of a disqualified person.
The compliance officer of a healthcare business possibly be a disqualified person, to the extent he/she implements a board policy and supervises any mgmt personnel.
A Corporation's shareholders can have their personal assets used to satisfy corporate liabilities if:
The corporation is not operating as a separate entity from the shareholders.
What is a dividend?
The distribution of profits of the corporation
The organizational documents of nonprofit organizations are generally similar to those of a For Profit corporation. What language is needed for nonprofit organization document?
The documents are required to include certain specific language to qualify as nonprofit, and to qualify for tax-exemption.
A nonprofit corporation is created by:
The filing of the required organizational document(s) with the appropriate state agency
A corporation typically can be created with only one owner.
True
A corporation: can be formed by its incorporators win any state?
True
An S corporation can have an unlimited number of shareholders.
True
Estoppel is a legal doctrine that prevents a person from asserting a claim that contradicts what that person has said or done before or what has been established as true.
True
What is the situs of a business?
The state in which the business is formed
In many states, the name of a legal entity is required to include certain words or abbreviations.
True
Many early hospitals were operated by religious organizations.
True
Do most states allow language in the organizational documents of a legal entity that protect directors and/or managers from liability, so long as their actions are in good faith and do not involve a breach of loyalty or self-dealing.
Yes
Does a legal entity have to be formed in the state where its organizers/promoters reside?
Yes
Do owners of common stock typically have the right to vote based on the percentage of outstanding shares they own?
Yes, common stock is the standard stock issued by a corporation that provides the right to vote, to dividends, and to a share of the assets of the corporation upon dissolution.
Are directors of a tax-exempt corporation considered "disqualified persons" for purposes of the laws/regulations that permit the IRS to impose fines/excise taxes on excess benefit transactions?
Yes, disqualified persons includes: voting members of the Board of Directors, President, CEO, COO, Treasurer, CFO, any individual who has ultimate responsibility for implementing Board decisions or supervising mgmt, and any individual who is in a position to exercise substantial influence over the affairs of the corporation.
Is the Securities and Exchange commission (SEC) responsible for enforcing the securities laws of the US?
Yes. SEC, the administrative agency of the federal government that is responsible, in part, for enforcing securities laws of the Us.
What is an Alien Corporation?
a corporation chartered by a foreign government and conducting business in the US
What is a Domestic Corporation?
a corporation in the state in which it is incorporated
What is the difference between a equity security and debt security?
a stock is an equity security, while a bond is a debt security. When an investor buys a corporate bond, they are essentially loaning the corporation money, and they have the right to be repaid the principal and interest on the bond.
Most tax-exempt healthcare entities qualify for tax exemption as ________ organizations.
charitable
