Quiz 44: Corporation Formation


A) Both partnerships and corporations are legal entities and must be registered by the state. Correct. b) General partners in a partnership are personally liable for their partnership. Incorrect. c) Corporation is recognized as a separate entity for tax, but a partnership is not a separate entity on tax. Incorrect. d) Corporations have perpetual existence, (exist even at death of shareholder), however, partnership can cease to exist with death of the partners. Incorrect.

Facts to this case: • Plaintiff is suing owners of a corporation for unpaid balance of gasoline supplied to their corporation. • The gasoline was sold to the corporation. Case Issue: The issue is whether the owners themselves are liable for the debt of their corporation. Relevant Terms, Laws, and Cases: Corporation - a company that limits liability (owners lose their investment only) of their owners. Corporations are treated as a separate person from their owners; debts owed by the corporations are not necessarily owed by the owners. Piercing the corporate veil - a tactic courts use to hold owners of limited liability companies personally liable for the company's debts. Courts consider factors such as fraud by owners, lack of corporate formalities (lack of meetings, no bookkeeping), mingling assets between company and the shareholder, undercapitalization of business, etc. Analysis and Conclusion Normally owners are not liable for their corporation's debts. Note the court in the case opinion mentioned "piercing the corporate veil", the plaintiff needs this in order to make the plaintiff's themselves liable. However, plaintiff failed to show evidence sufficient to pierce the veil. The court held for the owners. They argued that: • Running a corporation or doing the buying and selling of operations for their corporation don't make the owners personally liable for their corporation's debt. • Plaintiff failed to show that the corporation was used for fraudulent means. • Thus, not enough to pierce the corporate veil. Therefore, as separate legal entities the owners are not liable for their corporation's debts.

A) Promoters are people who act for a corporation which had not formed. A promoter is held personally liable for contracts made on behalf of them and the other parties. R the promoter is liable for the contract made between him and the accounting company. The corporation, also accepted and received the services this ratifies the contract between them and the accounting company. Thus, the corporation is liable as well. Both corporation and promoter is liable. This statement is correct. b) The promoter is not the only one liable since the corporation ratified the service contract with the accounting company by accepting services rendered by them. This statement is incorrect. c) While the corporation is liable due to ratification of the service contract, the promoter is liable contract made on behalf of the corporation. This statement is incorrect. d) Both corporation and promoter are liable. This statement is incorrect.

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