Hi @CoachEmUp,
“The limited liability of the shareholder of a closely held corporation will most likely be disregarded if the shareholders
A. Lend money to the corporation.
B. Are also corporate officers, directors, or employees.
C. Undercapitalized the corporation when it was formed.
D. Formed the corporation solely to limit their personal liability.
Answer: C. Probably another one that won't get asked, but surprised me a bit (I chose B but can see why it's wrong).”
This is more like related to areas of shareholder's topic that is not so clear at first. Tricky actually. If a shareholder becomes one of the corporate officers, directors, or employees of the corporation, fiduciary duty is expected; and likely can be compromised in some cases, shareholder can be accountable for “piercing the corporate veil”.
So, “C” (Undercapitalized the corporation when it was formed) is one of those ‘corporate veil piercing' issues. Sort of similar to a case of limited partner, started doing management duties, and ended up as general partner instead. General partner has unlimited liability.
In C. Corp., think of the less than 20% shareholder ownership, which uses cost method of allocation, but then started having ‘significant influence, that's when the ‘equity method' of allocation is adapted. Who are those who participate in raising capital? Can corporate officers, directors, or employees be shareholders? Yes.
Well, that's my opinion. My answer will like be ‘C' for the actual exam.
By the way, we're on the same boat, taking 2017 Q4 REG as well.
Good luck to us.
.