Deck 33: Corporate Formation and Financing

Question 1

A close corporation need not meet all of the specific requirements set forth in state statutes for corporations because it is essentially a sole proprietorship.

Answer 1

False

Question 2

Because a close corporation is one whose shares are held by a relatively small group of persons, the firm often operates like a partnership.

Answer 2

True

Question 3

In many states, close corporations have more flexibility in determining their rules of operation.

Answer 3

True

Question 4

Shareholders' assumption of personal liability, as guarantors, for the obligations of a corporation can enable the firm to obtain credit.

Question 5

A business firm whose shares are held by a single person may be a sole proprietorship, but it cannot be a corporation.

Question 6

A corporation is recognized under U.S. law as a person.

Question 7

A corporation needs to be careful about whom it hires because a firm may be liable for the misconduct of its employees.

Question 8

A corporation whose shares are held by relatively few persons is a close corporation.

Question 9

A shareholder in a professional corporation generally cannot be held liable for malpractice by other professionals at the firm.

Question 10

A benefit corporation is designed to make a profit and thereby provide long-term shareholder benefit.

Question 11

The directors of a benefit corporation must, during the decision-making process, consider the impact of a decision on society and the environment.

Question 12

A foreign corporation that has not obtained a certificate of authority to do business in a state can nevertheless maintain an action in the state's courts.

Question 13

A corporation is not liable for the misconduct of its agents or officers.

Question 14

Because state corporate laws differ, persons wishing to incorporate may look for the state that offers the most advantageous tax or other provisions.

Question 15

The implied powers of a corporation can be found in the state and federal constitutions.

Question 16

A corporation is intangible and invisible, and exists only in the contemplation of the law.

Question 17

A key advantage of the corporate form is the unlimited liability of its owners.

Question 18

Individual state laws should be relied on to determine corporate law because, despite the existence and use of model corporation acts, there is considerable variation among the states.

Question 19

Like the partners in a partnership, the shareholders in a corporation cannot change without affecting the continued existence of the firm.

Question 20

If the procedures for incorporation are not followed precisely, others may be able to challenge the existence of the corporation.

Question 21

The primary document needed to incorporate a business is the articles of incorporation-the primary source of authority for the firm's organization and functions.

Question 22

Corporate resolutions of the corporation's board of directors provide guidelines but cannot grant or restrict corporate powers.

Question 23

Common stockholders and preferred stockholders benefit when the market price of the stock increases.

Question 24

Under the doctrine of respondeat superior, a corporation can be held liable for

A) acts perpetrated by its market competitors.
B) breaches of contract by its customers and suppliers.
C) torts committed by its agents or officers.
D) none of the choices.

Question 25

Issuing securities is the only way for a new corporation to raise capital.

Question 26

A de jure corporation is one that is formed to accomplish a single purpose within a limited time.

Question 27

A businessperson who enters into a contract with an investor on behalf of a future corporation is not personally liable on the deal, even though the firm is not yet formed, because the nature of investment is risk.

Question 28

To pierce the corporate veil means to reveal the identity of its true owner.

Question 29

A corporation is

A) a natural being.
B) a tangible thing.
C) an artificial legal person.
D) a non-entity.

Question 30

A court will pierce the corporate veil of a corporation when the corporate privilege is abused for personal benefit.

Question 31

The primary document needed to incorporate a business is the bylaws-the primary source of guidelines for the firm's management and operation.

Question 32

A corporation's authority to act and its liability for those actions is, with respect to the firm's owners,

A) proportional.
B) one and the same.
C) joint and several.
D) separate and apart.

Question 33

To pierce the corporate veil is to disregard the corporate entity and hold the directors liable for a corporate obligation.

Question 34

Stocks, or equity securities, represent the purchase of ownership in the business firm.

Question 35

The day-to-day operations of a corporation are overseen by

A) the directors.
B) the officers.
C) the owners.
D) the shareholders.

Question 36

When a shareholder commingles personal and corporate interests so that the firm has no separate identity, the shareholder may be held liable for the firm's debts.

Question 37

Because corporate officers have the implied power to bind the firm in matters directly connected to its business, there is no limit to what the officer can do.

Question 38

If a business says it is a corporation, and a third party deals with it as a corporation, neither party can question the validity of the business's status.

Question 39

Sweetwater Corporation is incorporated in Texas. Outside that state, within the United States, the firm is

A) a domestic corporation.
B) a foreign corporation.
C) an alien corporation.
D) a corporation by estoppel.

Question 40

Because bonds do not represent debt, they need never be repaid.

Question 41

Most likely to appear in the articles of incorporation are the names of the company's initial

A) officers and employees.
B) shareholders and creditors.
C) market and competitors.
D) registered office and agent.

Question 42

To prevent a majority shareholder from dominating the management and operation of a close corporation, the firm should

A) require more than a majority of directors approve any board action.
B) restrict the transferability of shares to outside persons.
C) reorganize into a sole proprietorship or partnership.
D) hold special shareholders' or directors' meetings on an annual basis.

Question 43

Pipe Inc.'s stated purpose is to install plumbing. Pipe contracts with Quality Contracting to pour a new building's foundation despite lacking the skill and license to do such work. This is most likely

A) an ultra vires act.
B) within the corporation's express powers.
C) within the corporation's implied powers.
D) allowable and proper as an act to profit corporate shareholders.

Question 44

Oil Industries Inc. is a private, for-profit corporation that is owned by five shareholders who are members of the same family. Po, the majority shareholder, misappropriates company funds. The shareholders whose interests are injured by Po's misconduct should

A) have their shares appraised and be paid the fair market value for them.
B) promote the transferability of the company's shares to outside persons.
C) reorganize the firm into a sole proprietorship or partnership.
D) hold a special shareholders' meeting to elect new directors.

Question 45

Cattle Ranch Inc. is a for-profit corporation that is owned by six shareholders who are members of the same family. Cattle Ranch is

A) an S corporation.
B) a close corporation.
C) a benefit corporation.
D) a public corporation and a private corporation.

Question 46

Market Data Corporation's articles list an incorrect address for its incorporator. Under this circumstance, Market Data is most likely

A) a corporation by estoppel.
B) a de facto corporation.
C) a de jure corporation.
D) ultra vires.

Question 47

The primary document needed to incorporate a business is

A) the website of the secretary of state of the state of incorporation.
B) the minutes of the first organizational meeting.
C) the articles of incorporation.
D) the bylaws.

Question 48

The first step in the incorporation of a business firm is to

A) identify the appropriate market and adopt a business plan.
B) select the state of incorporation.
C) secure promises of financial support from potential investors.
D) hold the first organizational meeting.

Question 49

Welding Corporation makes a good faith attempt to incorporate but there is a defect in its incorporation. Welding undertakes business as a corporation. In this circumstance, the firm's existence may be challenged by

A) any third party.
B) the state.
C) a director, officer, or shareholder.
D) any corporation with which it does business.

Question 50

To avoid sharing control with someone they do not know or like, it would be most effective for the shareholders of a close corporation to

A) require more than a majority of directors approve any board action.
B) restrict the transferability of shares to outside persons.
C) reorganize into a sole proprietorship or partnership.
D) hold special shareholders' or directors' meetings on an annual basis.

Question 51

Robotics Inc. is a corporation. Its express powers can be found in

A) all of the choices.
B) its articles of incorporation.
C) the law of the state of incorporation.
D) the state and federal constitutions.

Question 52

With the exception of malpractice, liability for torts committed by others in a firm cannot be imposed on the shareholders of

A) a professional corporation.
B) a benefit corporation.
C) a close corporation.
D) any corporation.

Question 53

All of a certain corporation's small number of shareholders agree that the firm can operate without directors, bylaws, shareholder meetings, stock certificates, and formal records of shareholders' decisions. This firm is most likely

A) a close corporation.
B) a corporation by estoppel.
C) a de facto corporation.
D) a de jure corporation.

Question 54

Masonry Inc.'s stated purpose is to perform the stonework on buildings and other structures. Masonry contracts with New Contracting to pour the pilings for a bridge's foundation despite lacking the skill and license to do the work. This is most likely

A) an ultra vires act.
B) within the corporation's express powers.
C) within the corporation's implied powers.
D) allowable and proper as an act to profit corporate shareholders.

Question 55

To bring a corporation into existence requires securing a corporate name that is

A) the same or deceptively similar to the name of an existing corporation.
B) selected by the state of incorporation, for convenience and cost.
C) promises to attract financial support from investors.
D) available as a domain name, subject to state approval.

Question 56

Any corporation whose shares are publicly traded in securities markets is

A) a benefit corporation.
B) a private corporation.
C) a public corporation.
D) a publicly held corporation.

Question 57

Adapt Inc. is formed to coordinate the design and delivery of projects and products to help communities cope with the effects of climate change. The stated purpose is to have a material positive impact on society and the environment, and to make a profit. Adapt is

A) a nonprofit corporation.
B) not a corporation.
C) a benefit corporation.
D) a public corporation.

Question 58

Limited liability business forms, such as LLCs, LPs, and LLPs, offer tax advantages that are similar to those offered by

A) an S corporation.
B) a benefit corporation.
C) a close corporation.
D) any corporation.

Question 59

Local Moving Service holds itself out to customers as being a corporation but makes no attempt to incorporate. In this circumstance, the outfit is most likely

A) a corporation by estoppel.
B) a de facto corporation.
C) a de jure corporation.
D) ultra vires.

Question 60

An S corporation avoids taxes at

A) none of the choices.
B) the market level.
C) the corporate level.
D) the shareholder level.

Question 61

Because it may result in a piercing of the corporate veil, shareholders' continuous use of corporate property should most especially be avoided by

A) a benefit corporation.
B) a publicly held corporation.
C) no corporation-corporate shareholders' liability is limited.
D) a close corporation.

Question 62

Instead of issuing securities, Artificial Intelligence Inc. pursues other sources of funds. To obtain venture capital financing, the firm will most likely

A) borrow funds to be returned on a designated maturity date.
B) give up a share of its ownership.
C) pool funds to invest in a business venture.
D) pay periodic dividends.

Question 63

Gwen is a holder of preferred stock in Hearthstone Hotels, Inc. Gwen

A) has no ownership interest in the corporation.
B) has priority over holders of common stock as to payment of dividends.
C) follows common stockholders as to payment on the firm's termination.
D) has a proportionate interest in the corporation with regard to control.

Question 64

Don sets up Empty Vessel Inc. (EVI), but fails to provide the firm with sufficient capital. Don formed EVI not to make a profit but to assume debts that he does not wish to pay. This most likely warrants

A) tricking Don into disclosing EVI's true purpose to Don's creditors.
B) recognizing EVI as a de facto corporation.
C) piercing EVI's corporate veil.
D) requiring Don to commingle his personal funds and EVI's funds.

Question 65

Corporate shareholders will most likely be held personally liable for the firm's debts if they

A) insist on separating their personal interests from those of the firm.
B) refuse to transfer their shares to dilute control of the firm.
C) encourage the firm to unsuccessfully enter a new market.
D) use the firm to perpetrate a fraud.

Question 66

Russ owns Statewide Freight Company. He uses the firm's funds to pay his personal expenses, creates Trucking Inc. to engage in the same business, transfers the assets to Trucking, and petitions Statewide into bankruptcy. This most likely warrants

A) a bonus to Russ for effectively eliminating the firm's debts.
B) a discharge for Statewide in bankruptcy.
C) a pierce of the corporate veil.
D) the application of the doctrine of corporation by estoppel.

Question 67

A number of medical and investment professionals network and pool funds to invest in Medical Consult Inc. This is

A) venture capitalizing.
B) crowdfunding.
C) piercing the corporate veil.
D) ultra vires.

Question 68

To help small businesses raise capital, the Securities and Exchange Commission allows the companies to advertise investment opportunities to the public. This most likely encourages

A) venture capitalizing.
B) crowdfunding.
C) piercing the corporate veil.
D) private equity capitalizing.

Question 69

Agents and employees of Deco Arts Corporation and Echo Imitations Inc. are convicted of conspiring to violate a federal law that is punishable by a term of imprisonment and a fine. Can the corporations be held liable for these crimes? If so, how can they be punished?

Question 70

Funds invested in an existing corporation to buy and reorganize it, and possibly sell shares in the reorganized company in an initial public offering, are known as

A) preferred shares of corporate stock.
B) private equity capital.
C) crowdfunds.
D) corporate bonds.

Question 71

Corporate bonds

A) represent the true ownership of a corporation.
B) have priority over holders of common stock as to payment of dividends.
C) require a corporation to remain profitable until maturity.
D) provide a proportionate interest in a corporation with regard to control.

Question 72

PrimarySource.com Corporation is a new online, textbook, and school supply business. How can PrimarySource.com obtain capital to finance its operations?