Corporate Formation and Classification Quiz

Overview of Corporate Formation and Classification

• A corporation is a legal entity recognized by the law of a particular state with one or more owners (shareholders).

• The corporation substitutes itself for its shareholders when conducting corporate business and incurring liability, and its authority to act and the liability for its actions are separate and apart from the shareholders who own it.

• Corporations possess the same right of access to the courts as citizens and can sue or be sued.

• The responsibility for the overall management of the firm is entrusted to a board of directors, whose members are elected by the shareholders.

• Corporate shareholders are not personally liable for the obligations of the corporation beyond the extent of their investments, except in certain limited situations where a court may pierce the corporate veil and impose liability on shareholders for the corporation's obligations.

• Corporate profits can be subject to double taxation, where the company pays tax on its profits, and the shareholders must also pay income tax on them.

• Corporations can be classified by location, purpose, and ownership characteristics, such as domestic, foreign, alien, public, private, and nonprofit corporations.

• Close corporations have a small number of shareholders, and management resembles that of a sole proprietorship or a partnership, and shareholders can restrict the transferability of shares to outside persons by spelling them out in a shareholder agreement.

• A Subchapter S Corporation is a corporation that has most of the attributes of a close corporation, including limited liability, but qualifies under the Internal Revenue Code to be taxed as a partnership.

• Incorporation procedures involve selecting the state of incorporation, securing an appropriate corporate name, preparing the articles of incorporation, and filing the articles of incorporation with the state.

• The first organizational meeting after incorporation is held to elect the board of directors and adopt corporate bylaws, which are the internal rules of management adopted by a corporation.

• A corporation has express and implied powers necessary to achieve its purpose, and courts may pierce the corporate veil to disregard the corporate entity and hold the shareholders personally liable for certain corporate debts and obligations if the corporate privilege is abused for personal benefit or if the corporate business is treated carelessly.Corporate Financing and Commingling of Personal and Corporate Interests

• Close corporations require careful preservation of the separate status of the corporate entity and shareholders, as personal and corporate interests can easily become commingled.

• Commingling of corporate and personal funds and continuous personal use of corporate property can invite trouble for a close corporation.

• Corporations are typically financed through the issuance and sale of corporate securities, including shares of stock and bonds.

• Shares of stock can be common or preferred, with common stock providing a proportionate interest in the corporation's control, earnings, and net assets, and preferred stock entitling the holder to preference in the payment of dividends and priority over common stock in the distribution of assets upon dissolution.

• Holders of common stock are not guaranteed a dividend and benefit from an increase in the stock's market price.

• Bonds are debt securities that represent borrowing of funds with a designated maturity date and fixed-dollar interest payments.

• Stocks represent ownership, while bonds represent debt, with stockholders having a claim against the property and income of the corporation after all creditors' claims have been met, and bondholders having a claim that must be met before the claims of stockholders.

• Common stock is lowest in priority with respect to payment of dividends and distribution of assets upon dissolution.

• Corporations are not obligated to repay stockholders, as opposed to bondholders who must be repaid the face value of the bond upon maturity.

• Stockholders can elect the board of directors, which controls the corporation, while bondholders usually have no voice or control over management.

• All corporations issue or offer to sell stocks, while corporations do not necessarily issue bonds.

• Understanding the differences between stocks and bonds is important for investors and businesses seeking financing options.

Overview of Corporate Formation and Classification

• A corporation is a legal entity recognized by the law of a particular state with one or more owners (shareholders).

• The corporation substitutes itself for its shareholders when conducting corporate business and incurring liability, and its authority to act and the liability for its actions are separate and apart from the shareholders who own it.

• Corporations possess the same right of access to the courts as citizens and can sue or be sued.

• The responsibility for the overall management of the firm is entrusted to a board of directors, whose members are elected by the shareholders.

• Corporate shareholders are not personally liable for the obligations of the corporation beyond the extent of their investments, except in certain limited situations where a court may pierce the corporate veil and impose liability on shareholders for the corporation's obligations.

• Corporate profits can be subject to double taxation, where the company pays tax on its profits, and the shareholders must also pay income tax on them.

• Corporations can be classified by location, purpose, and ownership characteristics, such as domestic, foreign, alien, public, private, and nonprofit corporations.

• Close corporations have a small number of shareholders, and management resembles that of a sole proprietorship or a partnership, and shareholders can restrict the transferability of shares to outside persons by spelling them out in a shareholder agreement.

• A Subchapter S Corporation is a corporation that has most of the attributes of a close corporation, including limited liability, but qualifies under the Internal Revenue Code to be taxed as a partnership.

• Incorporation procedures involve selecting the state of incorporation, securing an appropriate corporate name, preparing the articles of incorporation, and filing the articles of incorporation with the state.

• The first organizational meeting after incorporation is held to elect the board of directors and adopt corporate bylaws, which are the internal rules of management adopted by a corporation.

• A corporation has express and implied powers necessary to achieve its purpose, and courts may pierce the corporate veil to disregard the corporate entity and hold the shareholders personally liable for certain corporate debts and obligations if the corporate privilege is abused for personal benefit or if the corporate business is treated carelessly.Corporate Financing and Commingling of Personal and Corporate Interests

• Close corporations require careful preservation of the separate status of the corporate entity and shareholders, as personal and corporate interests can easily become commingled.

• Commingling of corporate and personal funds and continuous personal use of corporate property can invite trouble for a close corporation.

• Corporations are typically financed through the issuance and sale of corporate securities, including shares of stock and bonds.

• Shares of stock can be common or preferred, with common stock providing a proportionate interest in the corporation's control, earnings, and net assets, and preferred stock entitling the holder to preference in the payment of dividends and priority over common stock in the distribution of assets upon dissolution.

• Holders of common stock are not guaranteed a dividend and benefit from an increase in the stock's market price.

• Bonds are debt securities that represent borrowing of funds with a designated maturity date and fixed-dollar interest payments.

• Stocks represent ownership, while bonds represent debt, with stockholders having a claim against the property and income of the corporation after all creditors' claims have been met, and bondholders having a claim that must be met before the claims of stockholders.

• Common stock is lowest in priority with respect to payment of dividends and distribution of assets upon dissolution.

• Corporations are not obligated to repay stockholders, as opposed to bondholders who must be repaid the face value of the bond upon maturity.

• Stockholders can elect the board of directors, which controls the corporation, while bondholders usually have no voice or control over management.

• All corporations issue or offer to sell stocks, while corporations do not necessarily issue bonds.

• Understanding the differences between stocks and bonds is important for investors and businesses seeking financing options.