Deck 33: Nature and Formation of Corporations

Question 1

Under the Statutory Close Corporation Supplement to the MBCA, a close corporation must have bylaws on file with the office of the secretary of state or some other public office.

Answer 1

False

Question 2

Big Burger Co. sues Bakum Corporation for breach of contract for $1,000 of hamburger buns that were not delivered. Bakum may assert as a defense to payment that Big Burger is not a de jure corporation.

Answer 2

False

Question 3

If an act is ultra vires, it is beyond the legal authority of the corporation.

Answer 3

True

Question 4

The Model Business Corporation Act is a state statute that, like the UCC, has been adopted by all of the states in the United States to make state incorporation statutes uniform throughout the United States.

Question 5

Zeron Corporation is incorporated in the state of West Virginia. It now wants to open a retail outlet in Kentucky. Zeron must obtain a certificate qualifying it to do business in the state of Kentucky.

Question 6

A promoter who enters a preincorporation contract in the name of the corporation usually remains liable on the contract even if the corporation adopts it.

Question 7

A corporation is considered a citizen under the Fourteenth Amendment provision that, "No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States."

Question 8

Title to corporate property belongs to the shareholders.

Question 9

A corporation is a creature of the state and may be formed only by substantial compliance with a state incorporation statute.

Question 10

The modern approach follows the common law rule in holding that a corporation cannot commit a criminal act.

Question 11

"Piercing the corporate veil" will result in personal liability of shareholders.

Question 12

The RMBCA has been adopted, in whole or in part, by most states.

Question 13

A corporation has perpetual existence unless otherwise stated in its articles of incorporation.

Question 14

Under the RMBCA, the bylaws may be amended and must be publicly filed with the articles of incorporation.

Question 15

Once a shareholder sells the stock of the corporation, since the ownership of the corporation changes, a new corporation is formed.

Question 16

A corporation owned by one person is treated under the law as separate from that person.

Question 17

Under the RMBCA, a pre-incorporation subscription may be revoked at any time without the consent of the subscribers.

Question 18

A corporation is a domestic corporation in the state in which it is incorporated.

Question 19

Promoters have a fiduciary relationship with the corporation.

Question 20

Under the RMBCA, a newly formed corporation need not hold an organizational meeting.

Question 21

In many states, the services of the incorporators are perfunctory and short-lived.

Question 22

Shareholders do not have limited liability for corporate debts.

Question 23

Bylaws are rules governing a corporation's internal management.

Question 24

A corporation has no constitutional protection against unreasonable searches and seizures.

Question 25

A preincorporation subscription is an offer to purchase capital stock in a corporation yet to be formed.

Question 26

Subchapter S is a section of the Model Business Corporation Act that provides special benefits for small corporations.

Question 27

A promoter is a person who takes the preliminary steps to organize a corporation.

Question 28

Most incorporation statutes have adopted an intermediate position regarding the revocability of preincorporation subscriptions, making them irrevocable for a stated period without regard to whether they are supported by consideration.

Question 29

Under the Revised Act, the filing of the articles of incorporation by the secretary of state is conclusive proof that the incorporators have satisfied all conditions precedent to incorporation so that a shareholder or creditor would be unable to challenge the existence of the corporation.

Question 30

Under the Revised Act, a corporation can act as an incorporator of another corporation.

Question 31

A corporation is considered to be a person within the meaning of the Fifth Amendment protection against self-incrimination.

Question 32

All of the following are characteristics of a corporation EXCEPT:

A) it has perpetual existence.
B) it is a legal entity of its own.
C) it is able to be sued and to sue.
D) it is usually managed by its shareholders.

Question 33

Under Subchapter S of the Internal Revenue Code, a corporation's income is taxed only at the shareholder level.

Question 34

Most states have special incorporation statutes governing nonprofit corporations.

Question 35

Estoppel may create a corporation.

Question 36

The "corporate veil" is most likely to be pierced in the case of closely held corporations and in parent-subsidiary relationships.

Question 37

Carroll, Daniels, and Elmore organized their veterinary practice as a professional corporation. This organization of professionals will be treated as a partnership for liability purposes.

Question 38

The Revised Act provides that at least two persons need to act as incorporators, though more may do so.

Question 39

The Statutory Close Corporation Supplement to the Model and Revised Acts applies only to corporations having fewer than 100 shareholders that elect statutory close corporation status.

Question 40

The doctrine of ultra vires is of more significance today than it has been in the past.

Question 41

The incorporators would typically do which of the following?

A) Purchase the outstanding shares.
B) Assemble the assets.
C) Sign the charter.
D) Prepare the incorporation papers.

Question 42

Opal, a promoter of Victory Corporation, has a fiduciary duty to:

A) any other promoters of Victory Corporation.
B) only Victory Corporation.
C) the initial shareholders of Victory Corporation.
D) A ny other promoters of Victory Corporation and also  the initial shareholders of Victory Corporation.

Question 43

Which of the following is NOT a characteristic of the corporate form of doing business?

A) Limited liability.
B) Perpetual existence.
C) Informal organization.
D) Transferability of corporate shares.

Question 44

Which of the following is correct regarding a foreign corporation?

A) A foreign corporation is incorporated in a foreign country.
B) Failure to obtain a certificate of authority to transact business in the state impairs the validity of a contract entered into by the corporation.
C) A foreign corporation transacting business within a particular state without having first qualified cannot use the state court to maintain a lawsuit until the corporation obtains a certificate of authority.
D) All of these are correct.

Question 45

Corporate powers granted by the RMBCA include all but which of the following?

A) To establish profit-sharing plans and other employee benefit plans.
B) To make charitable donations.
C) To be considered a person under the Fourth Amendment's search and seizures clause and the Fifth Amendment's self-incrimination clause.
D) To borrow and lend money.

Question 46

Whether a corporation is a de facto corporation may be challenged by:

A) an individual.
B) another corporation.
C) the state in which the business attempted to incorporate.
D) All of these.

Question 47

Which of the following is correct regarding the characteristics of a corporation?

A) A corporation is considered a person within the meaning of the Fourteenth Amendment's equal protection clause.
B) The Fifth Amendment provisions against self-incrimination protect a corporation.
C) A corporation is protected by the Fourth Amendment's provision against unreasonable searches and seizures.
D) A corporation is considered a person within the meaning of the Fourteenth Amendment's equal protection clause and  is also protected by the Fourth Amendment's provision against unreasonable searches and seizures.

Question 48

Which of the following may be used to redress the ultra vires acts committed by a corporation?

A) Proceeding by shareholders for an injunction.
B) Suit by the corporation or shareholders derivatively against present or former directors or officers for commission of the acts.
C) A proceeding by the attorney general of the state of incorporation to enjoin it from the transaction of unauthorized business.
D) All of these may be used.

Question 49

Bill Bonney, the sole stockholder of Kidd Corporation, wrongfully used the corporation to avoid a personal liability. A court order that disregards the corporate entity and holds Bonney personally liable is called:

A) limited liability.
B) ultra vires.
C) diversity of interest.
D) piercing the corporate veil.

Question 50

Which of the following is the basic governing document of a corporation?

A) A subscription.
B) A charter, after filing.
C) The set of bylaws.
D) A certificate of authority.

Question 51

Use of "Evans & Hall, Ltd." as a corporate name would be:

A) permissible as long as it is distinguishable from the name of any domestic corporation or any foreign corporation authorized to do business within the state.
B) impermissible because it does not clearly designate that the organization is a corporation.
C) impermissible because it includes surnames.
D) permissible because the selection of a corporate name is purely up to the organizers of the corporation.

Question 52

A corporation formed in substantial compliance with the incorporation statute and the required organizational procedures is a:

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

Question 53

The possible consequences of a defective incorporation include which of the following?

A) The state may bring an action against the association for involuntary dissolution.
B) A third party may assert that it is not liable to the association.
C) The associates are held personally liable to a third party.
D) All of these.
E) None of these.

Question 54

The City of Chicago would best be described as which of the following?

A) A corporation formed pursuant to the Model Business Corporation Act.
B) A close corporation.
C) A public corporation.
D) A domestic corporation.

Question 55

A corporation is considered a citizen:

A) of the state in which it has its principal office, for the purpose of determining diversity of citizenship.
B) of the state of its incorporation, for the purpose of determining diversity of citizenship.
C) in both of these situations.
D) in neither of these situations.

Question 56

Corporations have achieved dominance in which of the following ways?

A) This form of organization accounts for 85 percent of the gross revenues of all business entities.
B) Over 50 percent of all U.S. businesses are organized in the corporate form.
C) Over 75 percent of American adults own stock directly or indirectly.
D) All of these.

Question 57

Which of the following may influence a promoter to choose to incorporate in a particular state?

A) Corporate laws.
B) State government that is business-friendly, efficient, and accessible.
C) The state court system.
D) All of these.

Question 58

Under the RMBCA, the charter of the corporation is required to provide all of the following EXCEPT:

A) the number of shares authorized.
B) the street address of the registered office.
C) names of the initial directors.
D) the name and address of each incorporator.

Question 59

All of the following are true of promoters of a corporation EXCEPT:

A) They solicit investors to begin the corporation.
B) They prepare the formal documents of incorporation.
C) They may make contracts in the name of the corporation.
D) They continue to solicit capital whenever needed after incorporation.

Question 60

The case of Harris v. Looney dealt with the issue of:

A) a de facto corporation.
B) defective incorporation.
C) personal liability for a debt by a person purporting to act as or on behalf of a corporation, knowing no corporation existed.
D) the effect of an ultra vires act.

Question 61

The Revised Act authorizes shareholders in closely held corporations to adopt shareholder agreements that depart from statutory norms by altering the governance of the corporation. These agreements:

A) are effective if adopted by a majority of the shareholders.
B) are valid for the life of the corporation unless a new agreement is reached.
C) are binding on shareholders, the state, creditors, and other third parties.
D) terminate automatically if the corporation's shares are traded publicly.

Question 62

Claire opened Claire's Beauty Parlor in her home. She solicited funds to begin the business from Jack, who believed that the business was incorporated. Claire had, in fact, never filed the papers. One day, Claire fell asleep while giving a customer a perm and the solution caused her customer severe burns. The customer sued the Beauty Parlor for $500,000, an amount enormously in excess of the business assets. Under the Revised Model Act, what would be the result?

A) Claire and Jack would not be personally liable.
B) Claire would not be personally liable, but Jack would.
C) Jack would not be personally liable, but Claire would.
D) Both would be personally liable since there was no corporation formed.

Question 63

Mark complied with all formation requirements for incorporating his taxicab business. He is the sole shareholder in the corporation. The corporation owns two automobiles that Mark frequently uses for his own personal use. In addition, he sometimes deposits the money he takes in during the day into his personal checking account. One day, an employee of the company, while driving one of the company vehicles, accidentally hits a pedestrian in a crosswalk. The pedestrian sues both Mark and the taxi company for $100,000. The corporate assets are only $32,000. Is the corporation liable for the acts of its employee? Will Mark be personally liable under the facts? Explain.

Question 64

What are the principal attributes of a corporation?

Question 65

Define "promoter" in reference to a corporation.

Question 66

Discuss what is required in most states to form a corporation.

Question 67

What powers does a corporation normally possess?

Question 68

What is a Subchapter S Corporation, and what are its requirements?

Question 69

What is the doctrine of ultra vires ? What is the effect of an ultra vires contract?

Question 70

Which of the following is not a requirement of a Subchapter S corporation?

A) It must be a domestic corporation.
B) It must have no more than 50 shareholders.
C) A corporation or partnership cannot be a shareholder.
D) It may have only one class of stock.

Question 71

Name the classifications of corporations.

Question 72

Courts have responded by piercing the veil when the shareholders have:

A) not followed the formalities of corporate procedures.
B) not provided an adequate financial basis for the business.
C) used the corporation to defraud.
D) All of these.
E) Not followed the formalities of corporate procedures or  used the corporation to defraud.

Question 73

Identify each of the following corporations by type.
a. Dr. Smith and Dr. Jones are both medical doctors who practice together. They incorporate their medical practice so that they can offer themselves and their employees better employment benefits.
b. A group of concerned citizens obtains a corporate charter from the state to form a local Water Planning and Management Corporation that is authorized to do water planning on a local level and to grant permits for such purposes as the installation of ditches, and the encouragement of good water usage practices in their jurisdictional area.
c. Agatha and Betty, who are sisters, form a corporation in which they are the sole shareholders. They plan to operate a large retail store that sells collectibles. Agatha is the president and Betty is the chairperson of the board of directors.
d. Bill and Carl form a corporation to prevent spouse and child abuse. The corporation operates a shelter for battered women and homeless children.
e. Zeron Corporation is incorporated in the state of West Virginia. It decides to expand its business to Kentucky. What type of corporation is it in West Virginia? What type of corporation is it in Kentucky?

Question 74

Identify and give the basic characteristics of each of the following specialized types of corporations.
a. Professional corporations
b. Public corporations
c. Nonprofit corporations

Question 75

Which of the following would not usually be found in the articles of incorporation of a corporation?

A) The number of directors necessary for a quorum.
B) The name of the corporation.
C) The name and address of each incorporator.
D) The number of authorized shares.

Question 76

What are the consequences of a defective incorporation?

Question 77

Under which of the following provisions of the U.S. Constitution is a corporation not a "person"?

A) The Fifth Amendment Due Process Clause.
B) The Fourteenth Amendment Due Process Clause.
C) The Fourteenth Amendment Equal Protection Clause.
D) The Fifth Amendment right against self-incrimination.
E) The Fourth Amendment protection against unreasonable searches and seizures.

Question 78

The president of Hi-Glow Cosmetics sends his top chemist to Hi-Glow's competitor's labs to steal its formula for shiny lipstick. The chemist gets caught and is sent to jail. Can Hi-Glow be found to be criminally liable?

A) Yes, under the doctrine of ultra vires .
B) Yes, since the president authorized the crime.
C) No, because a corporation cannot go to jail.
D) Yes, under the doctrine of  ultra vires and also  since the president authorized the crime.

Question 79

Which of the following is untrue regarding closely held corporations?

A) Most corporations in the U.S. are closely held.
B) Shareholders frequently restrict the transfer of shares to prevent "outsiders" from obtaining the stock.
C) Shareholders usually have little voice in the management and control of the business.
D) Some states have enacted special legislation to accommodate the needs of closely held corporations.

Question 80

General Supply owns all the stock of Playne Pencils. A Playne employee commits a tort for which the employer is liable. The suit results in a judgment for $1 million against Playne. Playne's assets total $650,000, but General Supply's assets are in the millions. In which of the following situations would the judgment have to be paid by General?

A) General Supply's board of directors is exactly the same as Playne's.
B) The president of General Supply is also the vice president of Playne.
C) Playne's income and General Supply's income is held in one account.
D) None of these.