Question 1

A court will not pierce the corporate veil of a corporation that is merely too "thinly" capitalized.

Accepted Answer

A court may pierce the corporate veil if a corporation is too "thinly" capitalized, as it may indicate that the corporation is not a separate entity from its owners and is being used to avoid liabilities.

Question 2

Each incorporator must have an interest in the corporation.

Accepted Answer

Incorporators are responsible for forming the corporation and may not necessarily have an interest or ownership in the corporation once it is established.

Question 3

A corporation formed in another country but doing business in the United States is referred to in the United States as an alien corporation.

Accepted Answer

An alien corporation is a corporation formed in another country but conducting business in the United States.

Question 4

For liability purposes,some courts treat professional corporations somewhat like a partnership.

Accepted Answer

Professional corporations are often subject to similar liability rules as partnerships, as both types of entities involve multiple individuals working together and sharing responsibility for the business. This can include holding all shareholders/partners liable for the actions of the company, as well as allowing lawsuits against the entity itself rather than only individual shareholders/partners.

Question 5

A corporation generally can engage in any act and enter into any contract available to a natural person.

Accepted Answer

The legal concept of corporate personhood allows a corporation to have many of the same rights and responsibilities as an individual, including the ability to enter into contracts and engage in a wide range of activities. However, there may be certain limitations or restrictions placed on corporations by laws and regulations.

Question 6

Corporate profits can be subject to double taxation.

Accepted Answer

Corporate profits are taxed at the corporate level when earned and again at the individual level when distributed as dividends to shareholders. This results in double taxation.

Question 7

Firms are obligated to return a principal amount per share to each holder of common stock.

Accepted Answer

Firms are not obligated to return a principal amount per share to each holder of common stock. Common stock represents ownership in the company and provides the possibility of earning dividends and capital gains, but there is no guarantee of a set return of principal. The value of the stock fluctuates based on market demand and company performance.

Question 8

A promoter is personally liable for a preincorporation contract until the corporation assumes liability.

Accepted Answer

A promoter is an individual or group of individuals who takes the necessary steps to create a corporation. Before incorporation, the promoter enters into contracts on behalf of the corporation. Until the corporation assumes liability by entering into a contract, the promoter remains personally liable for those contracts.

Question 9

An agreement between shareholders to restrict the transfer of a closely held corporation's stock is illegal.

Accepted Answer

A restriction on the transfer of a closely held corporation's stock can be legally established through a shareholders' agreement, commonly known as a buy-sell agreement. This can help to maintain control of the ownership and management of the company among the existing shareholders.

Question 10

The articles of incorporation serve as a primary source of authority for a corporation.

Accepted Answer

The articles of incorporation, also known as the corporate charter, provide the legal framework for a corporation and outline critical information such as the corporation's purpose, structure, and ownership. They serve as a primary source of authority for the corporation and are filed with the state in which the corporation is incorporated.

Question 11

Stocks represent the borrowing of funds by firms.

Accepted Answer

Stocks represent ownership in a company and do not necessarily represent borrowing of funds. Bonds, on the other hand, represent borrowing of funds by firms.

Question 12

To pierce the corporate veil means to ignore the corporate structure,exposing the shareholders to personal liability.

Accepted Answer

To pierce the corporate veil means that the legal entity of the corporation is disregarded, and shareholders can be held personally liable for the corporation's debts or actions. This is done when a court determines that the corporation was not operating as a separate entity, but rather as an extension of the individual(s) controlling it.

Question 13

A holding company is a company whose business activity consists of holding shares in another company.

Accepted Answer

A holding company is a type of company that primarily holds ownership or controlling shares in other companies, rather than engaging in its own operational activities.

Question 14

A corporation is a legal entity created and recognized by federal law.

Accepted Answer

A corporation is a legal entity created and recognized by state law, not federal law.

Question 15

Courts in some states will treat an alleged corporation as if it were an actual corporation for the purpose of determining the rights and liabilities in particular circumstances.

Accepted Answer

This is known as the "judicial fiction" doctrine, where a court will treat an entity as if it were a corporation even if it has not been properly incorporated, in order to avoid injustice in certain circumstances. However, this is not a universal legal principle and may vary by state or jurisdiction.

Question 16

Venture capital is capital provided to new business ventures by professional,outside investors.

Accepted Answer

Venture capital is a type of financing provided to early-stage companies by investors who take an ownership stake in the company in exchange for their investment. These investors typically come from venture capital firms or other institutional sources and are experts in identifying and nurturing promising startups.

Question 17

Bylaws can conflict with the incorporation statute or the articles of incorporation.

Accepted Answer

Bylaws cannot conflict with the incorporation statute or the articles of incorporation; they must be consistent with these higher governing documents.

Question 18

A corporation whose shares are not publicly traded is a partnership.

Accepted Answer

A corporation whose shares are not publicly traded is still classified as a corporation, not a partnership. A partnership is a type of business organization made up of two or more individuals who share in the profits and losses of the business.

Question 19

Common stock provides a proportionate interest in the corporation with regard to control.

Accepted Answer

Common stock typically grants shareholders the right to vote on important corporate matters such as electing the board of directors and approving major business decisions. Therefore, common stockholders have a proportionate interest in the control of the corporation.

Question 20

A corporation cannot be held liable for the criminal acts of its employees.

Accepted Answer

A corporation can be held liable for the criminal acts committed by its employees if the act was committed within the scope of their employment or for the benefit of the corporation. This is known as vicarious liability.

Quiz 39: Corporate Formation and Financing