Deck 15: Corporations

Question 1

The authority of an officer to bind the corporation must expressly flow from the bylaws or through board of director mandates.

Answer 1

False
Explanation: Officers authority to bind the corporation may be expressly granted or may be implied from their position as officer of the corporation.

Question 2

The officer with the least amount of implied authority in relation to the other officers is the _______.

Answer 2

Treasurer

Question 3

A corporation is considered formed the moment the articles of incorporation are filed by the principals.

Answer 3

False
Explanation: After the articles of incorporation are filed, the state must approve them. After approval the state registers the document and the corporation is considered formed.

Question 4

A corporation incorporated in Utah and doing business in Nevada is classified as ________ in Nevada.

Question 5

One benefit of the Subchapter S corporation is that there is no double taxation.

Question 6

The expiration date of a corporate bond is also called its _______.

Question 7

A lawsuit against an officer or director brought by a shareholder is called a ________ suit.

Question 8

Corporate bylaws are public documents that must be filed with the appropriate state corporation office.

Question 9

Debentures are unsecured promises to pay back money with interest at a certain date backed by the strength of the general credit of the corporation.

Question 10

Corporations may be created by written agreement between the principals and no strict or formal filing is required as long as the agreement is written.

Question 11

A corporation exists as an independent person separate from its principals.

Question 12

Officers and directors owe fiduciary duties to the corporation and its shareholders,however; none of the shareholders owe such duties because they cannot bind the company.

Question 13

A person who performs preincorporation duties on behalf of the forming corporation is called a _______.

Question 14

To qualify for Subchapter S status,a supermajority of the shareholders must consent to the Subchapter S designation.

Question 15

Any corporation that does not make money is classified as a nonprofit corporation.

Question 16

Owners of nonvoting stock who receive a share of the corporate profits have received what is called a _______.

Question 17

A corporate bond issued in the amount of $500,000 is called a ________ bond.

Question 18

In a minority of the states,the articles of incorporation are called the ________.

Question 19

Private equity funding provided by a group of professional investors for use in developing a business is called _______.

Question 20

Officers,directors and controlling shareholders are often called _______.

Question 21

All publicly held corporations are also classified as public corporations.

Question 22

Shareholders are the owners of the corporation and,in part,act principally through electing and removing officers.

Question 23

Joe and Josephine have started a plumbing business and have incorporated.They invest nothing into the corporation and the corporation has minimal assets.One day Josephine negligently damages a main pipe in a customer's home causing the basement to flood and resulting in $20,000 in damages.The homeowner's only remedy is to sue the corporation and because the corporation has no funding and minimal assets,the homeowner must bear the loss because Joe and Josephine are shielded from liability due to the corporate protections the business entity affords them.

Question 24

A new startup corporation has gone to a bank for a commercial loan.Recognizing the startup status of the business and the limited assets the corporation currently possesses,the bank,to protect its interests,may require that either collateral be pledged or a personal guarantee be signed by shareholders but may not require both.

Question 25

A startup business planning to incorporate must file for incorporation in the state they originally plan to do business in.

Question 26

Unless limited by the articles of incorporation,shareholders may vote to remove a director with or without cause,however; the courts may only remove a board member for cause.

Question 27

Courts are generally inclined to be predisposed to piercing the corporate veil whenever a corporation causes economic harm to others.

Question 28

Eight businesswomen have formed a privately held corporation.Their stock certificates and the stock register of the corporation are public documents.

Question 29

Corporations are afforded full First Amendment political speech protection.

Question 30

For a corporation to be privately held,the number of shareholders will be limited as will the permitted total of gross revenues.

Question 31

The Revised Model Business Corporation Act mandates that all corporations other than single member corporations maintain a board of directors with at least three members who are independent of the officers and shareholders.

Question 32

Privately held corporations are more common than are publicly held corporations.

Question 33

Kathy is the president of a corporation.She has just made the news by being discovered with a male prostitute while at a conference.Mike,a shareholder,may successfully present a proposal at the next shareholder meeting calling for a shareholder vote to have her removed from office.

Question 34

A closely held corporation may be privately held or publicly held depending on the status determined at creation.

Question 35

The Revised Model Business Corporation Act provides that a self-dealing transaction is not a breach of the duty of loyalty if a majority of disinterested parties approve the transaction after disclosure of the conflict.

Question 36

An insurance company can not qualify for Subchapter S corporate status.

Question 37

A nonprofit corporation is not permitted to make or produce revenue.

Question 38

Kate owns 1000 shares of stock in a corporation.As an owner of the corporation by virtue of her stock ownership,if she enters into a contract on behalf of the corporation the company will be bound by her actions.

Question 39

Corporate bondholders are creditors of the corporation but not shareholders.

Question 40

Once a corporation is recognized as existing by the state,the corporation automatically becomes liable for all contracts which a promoter had entered into on behalf of the corporation.

Question 41

Which of the following is an incorrect statement?

A) a corporation may file suit in its own name without the principals filing suit
B) a corporation may form a contract in its own name without the principals guaranteeing the contract
C) a corporation can be sued without the principals being sued
D) a corporation may incur obligations separate from those of its principals

Question 42

Bonds,Inc.is incorporated in the state of Florida.In the state of Florida,Bonds would be characterized as a/an:

A) domestic corporation.
B) foreign corporation.
C) alien corporation.
D) native corporation

Question 43

The owners of a corporation are the:

A) promoters.
B) officers.
C) board of directors.
D) shareholders

Question 44

Thirteen sorority sisters decide to start a dog walking business.They incorporate under the name Pro Canine Walkers,Inc.and advertise their services throughout the city in newspapers and with flyers they post.All stock is owned by the thirteen principals and none is offered to anyone outside of the thirteen.This corporation would be classified as:

A) a privately held corporation.
B) a privately held public corporation.
C) a privately held professional corporation.
D) a privately held public professional corporation

Question 45

(p.Reflective Thinking)The corporation with the most shareholders is the:

A) public corporation.
B) professional corporation.
C) publicly held corporation.
D) nonprofit corporation

Question 46

A disadvantage of choosing a publicly held corporate form to operate a business is:

A) the pass through taxation.
B) the unlimited liability of officers and directors.
C) the cost and formalities of setup.
D) the difficulty of raising capital

Question 47

Saul was elected to the board of trustees of Round Way Corp.four years ago.He makes sure everyone knows he's a board member and always brings it up at parties.Unfortunately he cares more about the prestige than doing a good job so he hasn't attended board meetings nor is he attending committee meetings to which he's been assigned.If the insiders at Round Way enter into a series of bad business deals causing financial loss to the corporation:

A) Saul is shielded from liability under the corporate veil.
B) Saul cannot be held responsible because he didn't vote to approve the transactions.
C) Saul will be liable because his inattention will likely be considered negligence on his part.
D) Saul will be held liable because by accepting the board position he has opened himself up to liability for the actions of the corporation

Question 48

Corporate officers are:

A) elected by the shareholders.
B) appointed or elected by the board.
C) appointed by the board and ratified by the shareholders.
D) elected by the shareholders and ratified by the board

Question 49

In Smith v.Van Gorkom,the court had to determine whether the business judgment rule protected board members who permitted the sale of a significant amount of stock by the retiring chairman of the board at an undervalued price devaluing the company.The court stated each of the following except:

A) normally, the board of directors is entitled to give some weight to statements made by their chairman regarding the valuation of stock.
B) the board in this case had the expertise to make decisions without consulting outside experts but just made a poor decision.
C) failing to review the agreement to sell the stock showed a lack of care.
D) failure to do a valuation analysis of the company showed that the board could not have been working with all appropriate information to render a proper decision

Question 50

Creation and internal governance of corporations is governed by:

A) state laws.
B) federal laws.
C) the Revised Model Business Corporation Act.
D) common law

Question 51

Privately held corporations may issue a ________ in lieu of conducting a formal annual meeting.

A) testament of meeting occurrence
B) unanimous consent resolution
C) statement of meeting substitution
D) proof of alternative meeting

Question 52

Which of the following is not true regarding venture capital firms?

A) they are generally long term investors
B) they generally concentrate on one particular industry
C) they usually insist on substantial control of the corporation being funded through membership on its board or through appointments to certain officer positions
D) they are generally a source of expertise in operations and expansion of the corporation being funded

Question 53

A corporation formed for the purpose of maintaining a charitable operation is called a/an:

A) nonprofit corporation.
B) Subchapter S corporation.
C) public corporation.
D) closely held corporation

Question 54

Each of the following is a factor used by courts to determine whether to pierce the corporate veil except:

A) poor management and decision making performed by inadequately trained or educated manager.
B) inadequate capitalization.
C) evidence of fraud or willful misconduct.
D) failure to follow necessary corporate formalities

Question 55

Which of the following gives a person the right to vote at an annual meeting?

A) a debenture
B) a share of stock
C) a bond
D) a promissory note

Question 56

An enterprise may not be a Subchapter S corporation if it owns more than ________ of the stock of a subsidiary corporation.

A) 50%
B) 60%
C) 70%
D) 80%

Question 57

Offering or trading ownership interests in corporations is governed by:

A) state laws.
B) federal laws.
C) the Revised Model Business Corporation Act.
D) common law

Question 58

In Goldman v.Chapman and Region Associates,the court was asked to pierce Region's corporate veil and find Chapman personally liable because Chapman was the sole owner and operator of Region Associates who Goldman had successfully sued.The court found that:

A) being the sole owner and decision maker is not sufficient cause to pierce the corporate veil without evidence of misconduct.
B) the fact that Chapman's corporation was found liable for $209,320 is evidence of misconduct sufficient to pierce the corporate veil.
C) any time there is one owner and decision maker, the corporation is considered to be that persons "alter ego" and the corporate veil may be pierced without the need to provide additional evidence.
D) the liability protections afforded to owners of corporations were not intended to protect one party businesses due to the enhanced possibility of frauds due to lack of oversight by others so one person corporations do not protect that individual from liability

Question 59

Le Magasin de Vêtements,Inc.is a clothing retailer incorporated in France.If they transact business in New York,Le Magasin de Vêtements would be characterized as a/an:

A) domestic corporation.
B) foreign corporation.
C) alien corporation.
D) native corporation

Question 60

In H.Carl McCall,Trustee of the New York Common Retirement Fund,et al.,Derivatively on Behalf of Columbia/HCA Healthcare Corporation v.Scott,suit was brought claiming a breach of their fiduciary duties by the board with regard to alleged fraudulent billing practices.The board defended by citing the corporate charter which limits the liability of directors for breach of duty claims as long as they did not act in bad faith.The court determined that:

A) an inclusion in the charter limiting liability for fiduciary duties owed is void as it is against public policy.
B) the board lacked the necessary experience to understand the nature of the practices but did not act in bad faith so the charter inclusion would act to shield the board from liability.
C) the board ignored direct and indirect signs pointing to the fact that fraudulent practices were occurring and their failure to investigate breached their duty of care.
D) the shareholders suit was improper as a derivative action and needed to be filed as a direct action

Question 61

What does it mean when it is said that corporations are double taxed?

Question 62

Under the Revised Model Business Corporation Act,if a promoter acts on behalf of a corporation knowing that incorporation has not yet been completed and liability occurs:

A) the corporation becomes liable once formed with the promoter shielded from liability.
B) the principals of the forming corporation are liable with the promoter shielded from liability.
C) the promoter is jointly and severally liable for the liability incurred even after the corporation is formed.
D) the promoter is personally liable with the principals shielded from liability

Question 63

Fred and Barney have incorporated and obtained a $100,000 loan payable with interest over five years in the corporate name.After paying on the loan regularly for two years,the business falters due to the economy and they default on their loan.Their business has no assets.

A) Fred and Barney are jointly and severally liable for the entire balance
B) Fred and Barney are each individually liable for one quarter of the debt with the corporation liable for the remaining half
C) Fred and Barney are each individually liable for one third of the debt with the corporation liable for the remaining third
D) Fred and Barney have no personal liability for the debt

Question 64

The corporation is considered to come into existence when:

A) the board adopts the bylaws.
B) the officers are chosen.
C) the organizational meeting has commenced.
D) the state accepts the articles of incorporation and issues the charter

Question 65

What is the difference between a derivative action and a direct action regarding shareholder lawsuits and what are the typical grounds for these suits?

Question 66

Which of the following is an incorrect statement regarding Subchapter S corporations?

A) they may issue only one class of stock
B) they may be domestic or foreign but cannot be alien
C) taxation is pass-through similar to partnership taxation
D) they may not have more than 100 shareholders

Question 67

Artisan Tools,Inc.manufactures and sells quality hand tools to commercial and consumer users.Due to an excellent marketing campaign,their business is growing quickly.After careful consideration the board decides that a new factory needs to be built to accommodate current and future business.This factory will cost millions of dollars.In order to fund this project the board has decided to issue and sell bonds and debentures.What is the difference between a bond and a debenture and why might they be more advantageous than simply obtaining a commercial bank loan to finance the factory?

Question 68

Robert Hill Corp.is incorporated in the state of Delaware.If they transact business in Iowa,in Iowa Robert Hill would be characterized as a/an:

A) domestic corporation.
B) foreign corporation.
C) alien corporation.
D) native corporation

Question 69

The document filed with the state that begins the incorporation process in the majority of states is called the:

A) articles of incorporation.
B) declaration of incorporation.
C) statement of incorporation.
D) certificate of incorporation

Question 70

Michelle has just passed the bar and is ready to start practicing law.She draws up articles of incorporation and puts them into the mail to the appropriate state office.After leaving the post office she immediately drives to an office building and rents an office signing on behalf of Michelle's Law Services Inc.A week later she discovers that her uncle who was lending her money to startup her business has filed bankruptcy and is unable to provide her with the promised funds.She realizes that she cannot open her solo firm and accepts a position working for a local firm.Discuss Michelle's liability for the lease she signed for the office?

Question 71

The articles of incorporation for Pedal Power,Inc.have been approved and registered by the state.What needs to be done at the initial organizational meeting?

Question 72

What does the corporate opportunity doctrine state and what factors does the court examine to determine whether an opportunity belongs to a corporation?

Question 73

Happy Hops Brewery,Inc.has found that there business is expanding very quickly.The decision to fire three new delivery drivers would be made by:

A) the shareholders.
B) the officers.
C) the board of directors.
D) the board of directors with the consent of the officers

Question 74

Delaware is a popular state for many corporations to incorporate in.Each of the following is a Delaware incorporation advantage except:

A) Delaware has a well-established body of case law so the reliability and consistency of judicial decisions is enhanced.
B) Delaware statutes give officers and directors a wide range of decision making latitude not requiring shareholder consent.
C) Delaware statutes provide officers and directors strong protections from shareholder lawsuits alleging management negligence.
D) Delaware's tax structure provides significant tax benefits to out of state corporations incorporating in the state of Delaware

Question 75

Power Play,Inc.has decided to raise capital to grow and strengthen the company to make it attractive to competitors who might wish to purchase the business.A board member has suggested that they seek funding through a venture capital firm.How does a venture capital firm operate and is there a disadvantage to using venture capital?

Question 76

Initial public offerings occur when:

A) a public corporation seeks to become a professional corporation.
B) a publicly held corporation seeks to become a privately held corporation.
C) a privately held corporation seeks to become a publicly held corporation.
D) a for profit corporation seeks to become a nonprofit corporation

Question 77

Robin is the treasurer of Big Bottle Brewery,Inc.Big Bottle is a small local brewery that has recently started and has minimal assets.At 4:30 pm one day,she realizes that she hasn't made an important bank deposit and only has one half hour to get to the bank.She takes a corporate car and is speeding to the bank when she hits Gretchen,a pedestrian legally in a cross walk.Gretchen is seriously injured and the car which then careened into a pole is totaled.Gretchen sues both Big Bottle and Robin.The bank which financed the car has also sued Big Bottle and Robin because Big Bottle stopped making the loan installment payments after the accident and is in default.Discuss Big Bottle's and Robin's liability,if any.

Question 78

Burt has come across an excellent recipe for a new beer and he and twenty college friends decide to go into business.They form a corporation named New Brew Inc.,issuing stock only to the twenty one of them and not selling any stock outside of the group.The beer is a huge success and they soon have the need to expand.They decide to sell stock to members of the public to raise capital.Aside from stock disclosure requirements,what must they do and how will it affect their corporate status?

Question 79

Shareholders generally have the power and right to do each of the following except:

A) veto a board decision to issue more capital stock.
B) veto a board decision to pursue venture capital financing.
C) approve structural changes in the corporation through the amending of the articles of incorporation.
D) elect and remove officers

Question 80

Suds Corp.has just suffered a huge loss of revenue for three quarters and the shareholders are furious.Much of the loss can be attributed to a board decision to change the focus of the company from traditional lager beer to a lighter and smoother brew.Unfortunately the new recipe alienated current customers and failed to bring in new customers.Although Suds has announced that they will return to their original product,the shareholders are claiming a violation of the board's fiduciary duty of care and they are suing the directors personally for their significant losses.What must the shareholders prove to be successful? What defense is available to the directors and what must they prove to prevail?