ACP Entity Formation & Corporate Governance 3 — Questions and Answers
Question 1: Which of the following best describes a 'professional corporation' (PC)?
- A corporation formed solely for nonprofit charitable purposes
- A special corporate form available to licensed professionals such as doctors, lawyers, and accountants (Correct answer)
- A publicly traded corporation subject to SEC registration
- A corporation organized under federal rather than state law
Correct answer: A special corporate form available to licensed professionals such as doctors, lawyers, and accountants
Professional corporations allow licensed professionals to incorporate while maintaining personal liability for their own professional malpractice.
Question 2: In corporate law, what does 'piercing the corporate veil' mean?
- Amending the articles of incorporation to change the corporate name
- Holding shareholders personally liable for corporate obligations by disregarding the entity's separate legal status (Correct answer)
- Merging two corporations without shareholder approval
- Voluntarily dissolving a corporation and distributing its assets
Correct answer: Holding shareholders personally liable for corporate obligations by disregarding the entity's separate legal status
Courts pierce the corporate veil when the corporation is used as an alter ego or to perpetrate fraud, making shareholders personally liable.
Question 3: What is the role of the incorporator in forming a corporation?
- To manage the corporation's day-to-day operations after formation
- To sign and file the articles of incorporation with the state (Correct answer)
- To elect the initial board of directors on an ongoing basis
- To serve as the registered agent for service of process
Correct answer: To sign and file the articles of incorporation with the state
The incorporator's primary function is to execute and file the articles of incorporation; their role typically ends once the initial organizational meeting is held.
Question 4: A 'supermajority voting requirement' in a corporation's charter serves what purpose?
- To ensure routine business decisions are made quickly by a simple majority
- To protect minority shareholders by requiring more than a simple majority for significant transactions (Correct answer)
- To give the CEO unilateral authority over major corporate decisions
- To comply with SEC rules for public companies
Correct answer: To protect minority shareholders by requiring more than a simple majority for significant transactions
Supermajority provisions (e.g., 66⅔% or 80%) require heightened approval for fundamental changes, giving minority shareholders greater influence.
Question 5: Under the Revised Model Business Corporation Act (RMBCA), what is 'authorized shares'?
- Shares currently held by shareholders of record
- The maximum number of shares a corporation is legally permitted to issue as specified in its articles (Correct answer)
- Shares repurchased by the corporation and held as treasury stock
- Shares reserved for employee stock option plans
Correct answer: The maximum number of shares a corporation is legally permitted to issue as specified in its articles
Authorized shares represent the ceiling on share issuance set in the articles of incorporation; the corporation may issue up to but not exceed this number.
Question 6: Which clause in articles of incorporation allows the corporation to conduct any lawful business activity?
- Indemnification clause
- Preemptive rights clause
- General purpose clause (Correct answer)
- Exculpation clause
Correct answer: General purpose clause
A general purpose clause (e.g., 'to engage in any lawful act or activity') removes the need to list specific business purposes and provides maximum operational flexibility.
Question 7: What distinguishes a 'close corporation' from a standard corporation under most state statutes?
- It is incorporated under federal law rather than state law
- It has a small number of shareholders and is exempt from many formalities required of public corporations (Correct answer)
- It must be organized as a limited liability company
- It cannot issue preferred stock
Correct answer: It has a small number of shareholders and is exempt from many formalities required of public corporations
Close corporations typically have few shareholders (often capped by statute), restrictions on share transfer, and reduced governance formalities like board meetings.
ACP Entity Formation & Corporate Governance 3
Which of the following best describes a 'professional corporation' (PC)?