Business Structure Paper 5

(c) A major advantage is that shareholders have limited liability, that is, typically limited to what they paid for the stock. However, managers do not have limited liability for their actions as managers. If a manager is also a shareholder, that person has limited liability for the ownership in the stock but can still be sued for misdeeds as a manager. Answers (a), (b), and (d) are all considered to be advantages of a corporation. Note that since a person can manage a corporation without necessarily being an owner, this can encourage professional managers to get involved.

(d) The death of one or more of a corporation’s shareholders does not automatically terminate it. Answer (a) is incorrect because a corporation continues to exist until it is dissolved, merged or otherwise terminated. Answer (b) is incorrect because shares in a corporation, represented by stocks, can be freely bought, sold, or assigned unless the shareholders have agreed to restrict this. Answer (c) is incorrect because a corporation is legally a separate entity apart from its shareholders.

(d) A corporation may make contracts in its own name with both its shareholders and third parties. Answer (a) is incorrect because it may also make contracts with third parties. Answer (b) is incorrect because corporations do not generally need the consent of other shareholders to contract with one shareholder. Answer (c) is incorrect because it may also contract with its shareholders.

(d) Persons who manage a corporation may be, but need not be, shareholders of that corporation. Also, a corporation as a separate legal entity may convey or hold property. It may also sue or be sued in its own name. Answers (a), (b), and (c) are not comprehensive enough.

(a) A Subchapter S corporation is often formed to help avoid the double taxation that a Subchapter C corporation may face. Answer (b) is incorrect because partners in a general partnership have unlimited personal liability. Shareholders of a corporation have limited liability with few exceptions. Answer (c) is incorrect because a Subchapter C corporation is any corporation that is not a Subchapter S corporation. Answer (d) is incorrect because both Subchapter C and Subchapter S corporations provide their shareholders with limited liability with few exceptions.

(b) Bond is a domestic corporation in Florida since it incorporated there. It is a foreign corporation in Georgia since it did not incorporate there. Bond does not need to incorporate in Georgia but must qualify to do business there because it has branch offices in Georgia. This qualifying normally entails filing required documents with the state.

(b) In a professional corporation, the professional has most of the benefits of a corporation such as limited liability for corporate debts. However, the professional has personal liability for professional acts. Colby cannot avoid liability for the damage caused the client due to negligence in a professional act.

(c) A domestic corporation is one that operates and does business in the state in which it was incorporated. Answer (a) is incorrect because Macro, instead of incorporating in Nevada, may qualify to do business by obtaining a certificate of authority from Nevada. Answer (b) is incorrect because Macro is a foreign corporation in Nevada because it did not incorporate there. Answer (d) is incorrect because the statement in (c) is the only one that is true.

(d) None of the listed items are normally considered doing business in the other states such that Cleanit would be required to qualify to do business and thus have to obtain certificates of authority from those states. Therefore, answers (a), (b), and (c) are incorrect.

(c) Normally, under state laws, only licensed professionals may own shares in professional corporations. Furthermore, the licensed professionals retain personal liability for their professional acts in the professional corporation. Therefore (a), (b), and (d) are incorrect.