Question 1

Most incorporated businesses are close corporations.

Accepted Answer

Most businesses are incorporated as close corporations, also known as closely held corporations, which are typically smaller and have a limited number of shareholders who are often family members or close associates.

Question 2

A court may pierce the corporate veil if the corporation is undercapitalized.

Accepted Answer

Undercapitalization can be one of the factors that a court considers when determining whether or not to pierce the corporate veil. If a corporation does not have enough capital to meet its financial obligations, a court may view it as a sham entity and hold the shareholders personally liable for the corporation's debts and liabilities. However, undercapitalization alone is not sufficient to pierce the corporate veil and other factors such as fraudulent or illegal activities must be present as well.

Question 3

As a general rule, corporations are required to compensate promoters for the services they render during the preincorporation process.

Accepted Answer

Promoters are individuals who undertake the formation of a company and its organization. While they may enter into contracts and make arrangements for the corporation before it is legally formed, there is no general rule requiring corporations to compensate promoters for their services during the preincorporation process unless there is a specific agreement to do so. Compensation is often subject to negotiation and agreement between the promoters and the corporation.

Question 4

Close corporation shares are seldom intended to be sold to the public at large.

Accepted Answer

Close corporation shares are typically held by a small group of individuals who have a close personal or business relationship with the company, and are not intended to be sold to the general public.

Question 5

As a general rule, promoters are not liable for contracts they make on behalf of corporations that are not yet formed.

Accepted Answer

Promoters are generally liable for contracts they make on behalf of corporations that are not yet formed, unless there is an agreement to the contrary or the corporation adopts the contract upon formation.

Question 6

Courts have begun to recognize a fiduciary duty in corporate officers and majority shareholders to treat minority shareholders fairly.

Accepted Answer

This statement is true. Courts have recognized a fiduciary duty in corporate officers and majority shareholders to treat minority shareholders fairly in order to prevent abuse of power and protect the interests of all shareholders. This duty includes a duty of loyalty and a duty of care.

Question 7

A municipal corporation:

Accepted Answer

The governmental corporation is often called a municipal corporation. Such governmental corporations usually, although not always, have the power to tax. They frequently operate much like business corporations except that they do not seek to make a profit.

Question 8

Helen is a promoter who, prior to forming Bayne Corp., contracted to purchase tile-manufacturing machinery from Owen Machinery Inc. The contract was negotiated and entered into in the name of Bayne Corp. Subsequently, a certificate of incorporation was issued to Bayne Corp. Which of the following statements is true of this scenario?

Accepted Answer

Promoters are generally held liable on contracts they make on behalf of corporations that are not yet formed. If the corporation is never formed, or if it fails to adopt the promoter's preincorporation agreement, the promoter is liable. This is based on agency law: An agent who makes a contract for a nonexistent principal is personally liable for it. In this scenario, Helen would be liable for the contract with Owen Machinery Inc.

Question 9

Nonprofit corporations:

Accepted Answer

Nonprofit corporations are similar to nontaxing governmental corporations. They differ, however, in that they are formed and operated by private persons. Their founders and members are not permitted to make a profit from the operation of the corporation, although the officers and employees are paid salaries.

Question 10

Esther and Salim are promoters for Kale Inc. Prior to its incorporation, Esther negotiated several preincorporation contracts with Ian, an investor. She signed each contract in the name of Kale Inc. Kale subsequently was incorporated, but the Kale Board of Directors refused to adopt the contracts. Ian later sues Kale, Esther, and Salim on the contracts. Which of the following statements is true of this case?

Accepted Answer

Promoters are generally held liable on contracts they make on behalf of corporations that are not yet formed. If the corporation is never formed, or if it fails to adopt the promoter's preincorporation agreement, the promoter is liable. This is based on agency law: An agent who makes a contract for a nonexistent principal is personally liable for it. If there is more than one promoter, they are all liable under a joint enterprise theory. In this scenario, Esther and Salim are liable as they are promoters of Kale Inc.

Question 11

A corporation that merges into another is dissolved.

Accepted Answer

When a corporation merges into another, it ceases to exist as a separate legal entity and is therefore dissolved.

Question 12

A corporation domiciled in another country but doing business in the United States is called an alien corporation.

Accepted Answer

An alien corporation is a corporation that is domiciled in another country but doing business in the United States.

Question 13

The traditional judicial rule is that the court will pierce the corporate veil when the corporation has been dominated by one or more of its shareholders and the domination has resulted in an improper purpose.

Accepted Answer

This is a commonly accepted rule in many jurisdictions, although the specific criteria may vary slightly.

Question 14

Which of the following types of corporations sells shares to people who often have little interest in it except as investors?

Accepted Answer

For-profit corporations are often divided into publicly held and close corporations. The close corporation can be contrasted with the publicly held corporation, which sells shares to people who often have little interest in it except as investors.

Question 15

According to the Model Business Corporation Act (MBCA), the number of shares of capital stock the corporation is authorized to issue need not be included in the articles of incorporation.

Accepted Answer

The Model Business Corporation Act (MBCA) requires that the articles of incorporation include the number of shares of capital stock the corporation is authorized to issue, as this information is fundamental to the corporation's structure and governance.

Question 16

A promoter's liability on preincorporation contracts terminates when a novation is signed.

Accepted Answer

A novation is a new agreement that replaces an existing contract, and it releases the original parties from their obligations. Therefore, when a novation is signed, the liability on preincorporation contracts will no longer be on the promoter, but on the new parties to the novation.

Question 17

Promoters are not agents of the corporation prior to its incorporation.

Accepted Answer

Promoters are individuals who are responsible for setting up a corporation, but until the corporation is actually formed, they are not acting on behalf of the corporation and therefore not considered agents of the corporation.

Question 18

The articles of incorporation serve the same function as a charter.

Accepted Answer

The articles of incorporation and a charter both establish a corporation and its purpose, but the term "charter" is less commonly used in modern times.

Question 19

Failure to appoint a registered agent in the state of incorporation is grounds for an involuntary dissolution.

Accepted Answer

In most states, failing to appoint a registered agent in the state of incorporation can result in an involuntary dissolution of the corporation.

Question 20

The current trend in law is to permit the corporation to issue shares in return for the promoters' preincorporation services.

Accepted Answer

This statement is true. It is common practice for corporations to issue shares to their promoters in exchange for their preincorporation services. This helps to provide initial capital to the corporation and encourages the promoters to work towards the success of the corporation.

Quiz 28: Formation and Termination of Corporations