IL Bar Business Associations 1 — Questions and Answers
Question 1: Under Illinois law, which of the following is required for valid formation of a corporation?
- Filing articles of incorporation with the Illinois Secretary of State (Correct answer)
- Filing articles with the county clerk where the principal office is located
- Obtaining a federal employer identification number before filing
- Having at least three incorporators sign the articles
Correct answer: Filing articles of incorporation with the Illinois Secretary of State
Under the Illinois Business Corporation Act, a corporation is formed by filing articles of incorporation with the Illinois Secretary of State.
Question 2: Under the Model Business Corporation Act as adopted in Illinois, a director's duty of care requires that the director act:
- With absolute certainty that the decision will benefit shareholders
- In good faith with the care an ordinarily prudent person would exercise in like circumstances (Correct answer)
- Only after consulting with outside legal counsel on every decision
- In a manner that guarantees profits for the corporation
Correct answer: In good faith with the care an ordinarily prudent person would exercise in like circumstances
The duty of care requires directors to act in good faith with the care that an ordinarily prudent person in a like position would exercise under similar circumstances.
Question 3: Which of the following best describes piercing the corporate veil?
- The corporation merging with another entity to form a new legal person
- A shareholder's personal liability being shielded by the corporate form
- A court holding shareholders personally liable for corporate obligations by disregarding the corporate form (Correct answer)
- The process of converting a corporation to an LLC
Correct answer: A court holding shareholders personally liable for corporate obligations by disregarding the corporate form
Piercing the corporate veil allows courts to hold shareholders personally liable for corporate obligations when the corporate form is used to perpetrate fraud or when corporate formalities are disregarded.
Question 4: Under the Illinois Limited Liability Company Act, which of the following is true regarding members' fiduciary duties in a member-managed LLC?
- Members owe no fiduciary duties as a default rule
- Members owe duties of loyalty and care that may be modified but not eliminated by the operating agreement (Correct answer)
- Members have unlimited power to eliminate all fiduciary duties in the operating agreement
- Fiduciary duties in an LLC are identical in all respects to those owed by corporate directors
Correct answer: Members owe duties of loyalty and care that may be modified but not eliminated by the operating agreement
The Illinois LLC Act imposes duties of loyalty and care on members of a member-managed LLC, and while these duties may be modified by the operating agreement, they cannot be entirely eliminated.
Question 5: Which of the following statements accurately describes a general partnership under Illinois law?
- A general partnership requires filing a certificate of partnership with the Secretary of State
- General partners have limited liability for all partnership debts
- A general partnership can be formed by agreement without any formal filing requirements (Correct answer)
- A general partner's liability is capped at the amount of their capital contribution
Correct answer: A general partnership can be formed by agreement without any formal filing requirements
Under the Revised Uniform Partnership Act as adopted in Illinois, a general partnership is formed by agreement and does not require any formal state filing to be legally recognized.
Question 6: Under the business judgment rule in Illinois, a court will defer to a board's business decision if the directors:
- Made a decision that resulted in a profit for the corporation
- Were personally interested in the outcome of the transaction
- Acted on an informed basis, in good faith, and in the honest belief the action was in the corporation's best interest (Correct answer)
- Obtained shareholder ratification of the decision after the fact
Correct answer: Acted on an informed basis, in good faith, and in the honest belief the action was in the corporation's best interest
The business judgment rule protects directors who act on an informed basis, in good faith, and with the honest belief that the action serves the best interests of the corporation.
Question 7: Which of the following transfers of a partnership interest requires the consent of all other partners?
- Transfer of economic rights such as the right to receive profits and distributions
- Transfer of management rights and voting rights in partnership affairs (Correct answer)
- Transfer of the right to receive a specific liquidation distribution
- Assignment of the right to receive a single identified payment
Correct answer: Transfer of management rights and voting rights in partnership affairs
Under partnership law, a partner may freely assign economic rights without consent of other partners, but transferring management and voting rights requires unanimous consent.
IL Bar Business Associations 1
Under Illinois law, which of the following is required for valid formation of a corporation?