The Law of Corporations and Other Business Organizations

Chapter Review Questions

1. What are four characteristics of a corporation
that distinguish it from the sole proprietorship
and the partnership?
1. The corporation is an artificial entity
created by law.
2. The corporation is an entity separate
from its owners or managers.
3. The corporation has certain rights
and powers, which it exercises
through its agents.
4. The corporation has the capacity to
exist perpetually.
2. If a corporation defaults on its debts, may
the creditors typically look to the shareholders
for payment?
No
Under what circumstances might the
shareholders become personally liable for
the debts of the corporation?
If the corporate veil is pierced or if the
shareholders give personal guarantees
for the debts of the corporation.
3. Suppose that John’s Appliance, Inc. is a
corporation formed by John Miller. John
Miller is the only owner and employee of
John’s Appliance, Inc., an appliance repair
service business. John Miller has formed
the corporation to shelter his personal assets.
He has put title to the repair truck
(which he often uses for his own personal
enjoyment), all of his equipment and tools,
and his workshop in his own name, although
he leases these items back to the
corporation. What are some of the potential
problems with this arrangement?
The commingling of corporate and personal
assets could be negative considerations
in the event of an attempt to pierce
the corporate veil.
What can John Miller do to decrease the
risk that the corporate veil of John’s Appliances,
Inc. could be pierced in the event of
a lawsuit?
1. He should be sure to keep corporate
and personal funds separate and to
keep separate books for the corporation.
2. He should be sure to follow all statutory
formalities with regard to the
corporation.
3. He should be sure to put himself
forth as the agent of the corporation
(and not personally) in all dealings
with others.
4. He should be sure that the corporation
is adequately capitalized.
4. Dave Breen and Sue Martin would like to
start a business involving themselves and
D&S Equipment, Inc., a corporation that
holds certain of their assets. Could they
form a regular business corporation with
Dave Breen, Sue Martin, and D&S Equipment,
Inc. being the shareholders?
Yes
Could they form an S Corporation?
No, corporations may not be shareholders
of S Corporations.
5. Who elects the directors of a corporation?
The shareholders
Who elects the officers?
The directors
Could an individual be a shareholder, director,
and officer all at the same time?
Yes
6. Could a group of attorneys and physicians
form a single professional corporation?
No
Why or why not?
A professional corporation may be
formed to provide services only within a
single profession.
7. Are all corporations incorporated as nonprofit
corporations automatically exempt
from paying income tax?
No, nonprofit corporations must meet
the requirements set forth in the Internal
Revenue Code to qualify for tax-exempt
status.
8. Explain the general differences between a
regular business corporation and an S Corporation.
The main difference between S Corporations
and regular business corporations
is that the shareholders of S
Corporations are taxed much like partners,
thus avoiding double taxation.
Other differences relate to the restrictions
placed on the eligibility of
shareholders of S Corporations.
9. What are some of the practical differences
between regular business corporations and
statutory close corporations?
1. There is a limit on the number of
shareholders that a statutory close
corporation may have, usually 50 or
fewer.
2. There may be statutory restrictions
placed on the transfer of the stock of
statutory close corporations.
3. In many instances statutory close
corporations are managed by the
shareholders and no board of directors
is elected.
4. Statutory close corporations often
are not required to adopt bylaws.
10. Suppose that Anna and Grace want to start
a business to market a new food product
they have invented. Limited liability is important
to them because of the potential
product liability problems associated with
manufacturing and selling food products.
Initially, Anna and Grace will be the only
investors, and they may not see a profit in
their business for a few years. What types
of business organizations are available to
Anna and Grace?
Anna and Grace would not consider a
partnership or limited partnership if
they are the only investors and they are
both concerned with limiting their personal
liability. Options that may work
for Anna and Grace include a limited liability
company, a limited liability partnership,
a business corporation, or an S
Corporation.
What type of organization would you suggest?
Why?
A limited liability company or S Corporation
may be the most advantageous
form of business organization, because
of the income tax benefits that these
types of organizations offer. However,
any one of the above-mentioned forms of
business entity would be acceptable so
long as the reasons are valid.