Deck 17: Law and Business Associations

Question 1

Which of the following is true of a corporation?

A)It is the least dominant form of business organization.
B)It can only be created by federal law.
C)It is legally treated as a single person.
D)It is legally owned by only one person.

Answer 1

C

Question 2

A corporation whose stock is not traded on the national securities exchanges but is held by a small group of people is a ________ corporation.

A)transnational
B)multinational
C)publicly held
D)closely held

Answer 2

D

Question 3

Which of the following statements is true when creating a corporation in the U.S.?

A)Each of the 50 states has a general incorporation statute that stipulates the articles of incorporation to be used in that state.
B)Incorporation is a federal matter and requires the recording of articles of incorporation with the U.S. Secretary of State.
C)Corporations cannot be created without the enactment of a local ordinance in the city or county where the corporate headquarters is to be located.
D)Corporations are created by private agreement and do not require the filing of any documents with a government official.

Answer 3

A

Question 4

Nonprofit corporations are also called ________.

A)eleemosynary institutions
B)Subchapter C corporations
C)alien corporations
D)private corporations

Question 5

Which of the following statements is true of closely held corporations?

A)The stock of these corporations is traded on national securities exchanges.
B)The stock of these corporations is usually held by a small number of people.
C)The shareholders of these corporations are considered to be limited partners.
D)The shareholders of these corporations are not permitted to serve as directors.

Question 6

A corporation formed in one country but doing business in the United States is referred to in the United States as a(n) ________ corporation.

A)domestic
B)alien
C)foreign
D)Subchapter S

Question 7

The capital that a corporation raises through the sale of shares that entitle the shareholders to certain rights of ownership is known as ________.

A)stock
B)currency
C)dividend
D)interest

Question 8

Wheelz Enterprises, a car manufacturer, is a closely held corporation. Profits are taxed to the owners as ordinary income but not to the corporation as a unit. The owners have mutually agreed that their total number will never exceed 35 and that none of the shareholders can be a non-resident alien. In this scenario, Wheelz is an example of a(n) ________ corporation.

A)professional
B)Subchapter S
C)eleemosynary
D)Subchapter C

Question 9

Trayon Industries is a public corporation established in California in 1987. It decides to expand its base of operations and starts operating in the state of Nevada, too. In Nevada, Trayon will be known as a(n) ________ corporation.

A)alien
B)foreign
C)domestic
D)eleemosynary

Question 10

To qualify for Subchapter S treatment under the Internal Revenue Code, a domestic corporation must have ________.

A)membership in an affiliated group of corporations
B)more than 35 shareholders
C)only one class of stock outstanding
D)at least one nonresident alien shareholder

Question 11

An unsecured long-term corporate loan is called a ________.

A)bond
B)note
C)debenture
D)share

Question 12

Which of the following is a characteristic of a professional corporation?

A)It is organized as a public corporation but taxed as a partnership.
B)Its owners cannot take the tax advantages of deductions for health.
C)Its owners are considered limited partners rather than general partners.
D)Its owners do not enjoy limited liability for their negligence.

Question 13

Which of the following statements is true of a Subchapter S corporation?

A)It is taxed like a publicly held corporation.
B)It is organized and operated as a general partnership.
C)It is taxed like a partnership.
D)It is organized and operated as a limited liability partnership.

Question 14

Which of the following is true of nonprofit corporations?

A)They include hospitals, educational institutions, and charities, but exclude religious groups.
B)They are always privately held corporations that are created for charitable and benevolent purposes.
C)They are used by groups to carry out transactions and own property without individuals being held liable.
D)In legal papers, they are referred to as Subchapter S corporations.

Question 15

A long-term corporate loan secured by a lien on corporate assets is called a ________.

A)bond
B)note
C)debenture
D)share

Question 16

Which of the following usually occurs at a corporation's first board meeting?

A)The articles of incorporation are filed.
B)Bylaws are enacted.
C)The face value of the stock to be issued is decided.
D)A certificate of incorporation is issued.

Question 17

A corporation whose stock is traded on at least one national securities exchange is known as a(n) ________ corporation.

A)private
B)publicly held
C)closely held
D)eleemosynary

Question 18

Which court is considered the most influential court in the U.S. with regard to corporate governance and the chief arbiter of conflicts between corporations?

A)The New York State Supreme Court
B)The Supreme Court of California
C)The Supreme Court of Illinois
D)The Delaware Supreme Court

Question 19

Which of the following statements is true of a multinational corporation?

A)It is declining in importance around the world because it is increasingly being replaced by private corporations.
B)Its stock is generally traded on the securities exchanges of several nations.
C)It restricts its production to a single nation but maintains worldwide distribution sites.
D)Its managers should be citizens of the same country in which its corporate headquarters is located.

Question 20

Which of the following best defines a corporation?

A)It is an entity created and authorized by federal law that raises capital by issuing stock to limited partners.
B)It is an entity created and authorized by state law that raises capital by issuing stock to investors, who own the corporation.
C)It is an entity created and authorized by federal law that raises capital by issuing stock to investors, who own the corporation.
D)It is an entity created and authorized by state law that raises capital by issuing stock to limited partners.

Question 21

The day-to-day management of a corporation is carried out by ________.

A)the shareholders
B)the board of directors
C)the corporate officers
D)the financial investors

Question 22

Patricia holds stock in Avitrep Drugs, a leading pharmaceutical company. In 2005, Patricia traded her stock for another type of stock that granted her the right to vote and the right to participate in income through dividends. Which class of stock did Patricia own initially?

A)cumulative preferred stock
B)participating preferred stock
C)convertible stock
D)common stock

Question 23

Owners of ________ stock do not lose their rights to a dividend in a year in which no dividends are declared.

A)cumulative preferred
B)participating preferred
C)convertible
D)common

Question 24

Which class of stock entitles its owner to special options relating either to dividends or to the distribution of assets?

A)preferred stock
B)privileged stock
C)common stock
D)limited stock

Question 25

Which of the following is true of officers of a corporation?

A)They are not agents of the corporation.
B)They are appointed and supervised by the shareholders.
C)They are responsible for the actual management of corporate affairs.
D)They do not control the proxy election of the board of directors of the corporation.

Question 26

Which of the following is a difference between a note and a bond?

A)A note is a form of equity financing, whereas a bond is a form of debt financing.
B)A note is a form of debt financing, whereas a bond is a form of equity financing.
C)A note is a long-term loan, whereas a bond is a short-term loan.
D)A note is a short-term loan, whereas a bond is a long-term loan.

Question 27

Nick and Jamie own stock in Chronoz Industries, a watch manufacturer. In the year 2008, Nick received dividend at the rate of 2 percent, whereas Jamie received dividend at the rate of 0.5 percent. In this scenario, which type of stock did Nick own?

A)cumulative preferred
B)common
C)convertible
D)participating preferred

Question 28

The good-faith rule presumes that ________.

A)corporate officers, directors, and agents will not take personal advantage of an opportunity that, in all fairness, should have belonged to the corporation
B)buyback programs prevent stock options and the new shares resulting from the exercise of options from diluting stock prices and earnings per share
C)officers and directors will exercise their duties in a manner they reasonably believe to be in the best interests of the corporation
D)the valuation of the property or services given as consideration for the stock is fair as long as it is honestly made

Question 29

Which of the following is the difference between a stock warrant and a stock option?

A)A stock warrant can be freely traded, whereas a stock option cannot be traded.
B)A stock warrant can only be issued to employees, whereas a stock option can be issued to anyone.
C)A stock warrant authorizes its holder to purchase a stated number of shares at a stated price, whereas a stock option allows its holder to purchase any number of shares at any price.
D)Shares bought through a stock warrant can be bought back by the company issuing the shares, whereas shares bought through a stock option cannot be bought back.

Question 30

Which of the following is true of shareholders?

A)They can select the board of directors who will set corporate policy.
B)They have direct control over the corporation's operation.
C)They do not have any right to vote.
D)They are not the owners of the corporation.

Question 31

Which of the following is true of a proxy election for the board of directors of a corporation?

A)Shareholders must vote for a candidate but do not have the option to allow the proxy committee to vote the shares in any way it sees fit.
B)A biographical sketch of each of the candidates for the board of directors is sent to all shareholders.
C)Under the National Stock Exchange rules, the proxy committee must use a ballot form to solicit proxies.
D)The proxy committee sends only preferred shareholders a statement of resolutions on which the shareholders are to vote.

Question 32

In order to be issued, the number of shares of stock must be ________.

A)authorized in the corporation's articles of incorporation
B)purchased by the directors of the corporation
C)registered under the incorporation statute of Delaware
D)approved by the U.S. Secretary of Treasury

Question 33

Which class of stock entitles its owner to vote for a corporation's board of directors, receive dividends, and participate in the net assets upon liquidation of the corporation?

A)preferred stock
B)privileged stock
C)common stock
D)convertible stock

Question 34

The nominal or face value of a stock or bond is called the ________.

A)stated capital value
B)share price
C)stock price
D)par value

Question 35

Owners of ________ receive either the par value of their stock or a specified monetary amount before the common shareholders share pro rata in the remainder of the assets.

A)cumulative preferred stock
B)common stock
C)convertible stock
D)liquidation preferred stock

Question 36

Which of the following groups is responsible for approving changes in the fundamental structure of the business?

A)the shareholders
B)the board of directors
C)the corporate officers
D)the financial investors

Question 37

The management of a publicly held corporation effectively controls the election process of the board of directors because ________.

A)the management typically owns almost all the shares
B)shareholders are scattered across the country and vote by proxy, thus allowing the proxy committee to vote the shares in any way it sees fit
C)the management rigs the election through the use of fraudulent and nonexistent proxies, thus increasing the votes for the candidate it has backed to win
D)proxies are typically ignored at the shareholders' meeting

Question 38

Whenever the property of one party is placed in the control of another, a(n) ________ relationship exists between the two.

A)intermediary
B)beneficiary
C)judiciary
D)fiduciary

Question 39

Which of the following best defines the term proxy?

A)It is a document that entitles its owner to special preferences relating either to dividends or to the distribution of assets.
B)It is a document that entitles its owner to vote for a corporation's board of directors, receive dividends, and participate in the net assets upon liquidation of the corporation.
C)It is a document authorizing its holder to purchase a stated number of shares of stock at a stated price, usually for a stated period of time.
D)It is a document by which shareholders can transfer their rights to vote at a shareholders' meeting to a second party.

Question 40

Which of the following statements is true about a corporation's boards of directors?

A)They typically abdicate their policy-making function and, being agents of the corporation, serve as proxies for shareholders.
B)They are actively involved in daily corporate affairs.
C)They actively manage the policies of the corporation but leave day-to-day affairs to the shareholders.
D)They are considered as agents of a corporation.

Question 41

All shares authorized by the corporation's articles of incorporation must be issued and sold to shareholders immediately.

Question 42

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

Question 43

A corporation is a legal entity created by federal law.

Question 44

The Revised Model Business Corporations Act states that a director is entitled to rely on information and reports provided or prepared by ________.

A)a committee of directors of which the director is a part, if the committee merits confidence
B)legal counsel or accountants in regard to matters that the director believes are within that professional's competence
C)officers of a competing corporation who, the director reasonably believes, are reliable and competent
D)employees of the Securities and Exchange Commission who are responsible for creating the proxy rules

Question 45

A hybrid corporation-partnership similar to a Subchapter S corporation but with far fewer restrictions is called a ________.

A)transnational company
B)limited liability company
C)private corporation
D)closely held corporation

Question 46

Which of the following is a characteristic of a limited liability company (LLC)?

A)It is a separate legal person (or entity)under state law.
B)It cannot be found civilly liable for violations of law.
C)Its owners are called directors.
D)Its owners are personally liable to third parties for debts of the LLC.

Question 47

A transnational corporation does not restrict its production to a single nation.

Question 48

Under the ________, the courts generally avoid second-guessing corporate executives and let stand any business decisions made in good faith that are uninfluenced by personal considerations.

A)business judgment rule
B)corporate opportunity doctrine
C)conflict of interest rule
D)expense item rule

Question 49

Which of the following is true of the Greek bailout in 2010?

A)The exposure of foreign banks and other institutions was the smallest in France, Germany, Britain, the Netherlands, Italy, and Belgium.
B)The European Central Bank (ECB)joined with the International Monetary Fund (IMF)to offer $1 trillion in loan guarantees to Europe's banks.
C)The private- and public-sector banks and other institutions of Europe and the United States lent money only to one another.
D)The U.S. dollar fell dramatically, and the euro became a safe haven.

Question 50

The funds for a rollover business start-up corporation come from an individual's 401K plan.

Question 51

The corporate opportunity doctrine ________.

A)prohibits corporate officers and directors from taking personal advantage of opportunities that, in all fairness, should be given to the corporation
B)requires corporate officers to allow other firms the opportunity to compete in the same market
C)prohibits corporate shareholders from taking personal advantage of opportunities that, in all fairness, should be given to the corporation
D)requires corporate officers to continually look for opportunities for the corporation to expand into new markets

Question 52

How does a limited liability company (LLC) differ from a Subchapter S corporation?

A)An LLC is taxed at a higher rate than a Subchapter S corporation.
B)There is no limit on the number of members in an LLC, whereas a Subchapter S corporation limits the number of members to 35.
C)An LLC is taxed as a corporation, whereas a Subchapter S corporation is taxed as a partnership.
D)The liability limit for members of an LLC is higher than that for a Subchapter S corporation.

Question 53

Dividend payments made to owners under equity financing are tax deductible, whereas interest payments on debt securities are not.

Question 54

Notes are long-term loans secured by a lien or mortgage on corporate assets.

Question 55

Which of the following is true of a limited liability company?

A)It is taxed as a corporation and not as a partnership.
B)It is taxed under state laws and not under federal laws.
C)Its members cannot exercise any control over the daily management.
D)It can have any number of members.

Question 56

Closely held corporations are publicly held corporations.

Question 57

To qualify for Subchapter S treatment under the Internal Revenue Code (IRC), a domestic corporation must have more than 35 shareholders.

Question 58

Those corporations whose stock is traded on the national securities exchanges are known as publicly held corporations.

Question 59

The owners of a limited liability company are called ________.

A)members
B)shareholders
C)officers
D)directors

Question 60

A potentially troublesome situation occurs when an officer or a director, or a corporation in which the officer or director has an interest, enters into a transaction with the corporation. This problem is known as a(n) ________.

A)conflict of authority
B)proxy error
C)error of judgment
D)conflict of interest

Question 61

A proxy is a written delegation of authority to cast one's votes. This authority rests with the shareholder of a corporation. Explain why the proxy process gives management, and not the shareholder, effective control over the election of the board of directors or over policy resolutions.

Question 62

Although employees are granted the rights to purchase shares at a stated price, these rights cannot be traded.

Question 63

The proxy process gives management effective control over the election to the board of directors.

Question 64

Discuss the advantages and disadvantages of limited liability companies (LLCs) over other forms of business organizations.

Question 65

Like shareholders, directors of a corporation are allowed to vote by proxy.

Question 66

Only four states of the U.S.A. have adopted all or part of the Uniform Limited Liability Company Act (ULLCA) as a state statute.

Question 67

List the functions that the board of directors of a corporation must perform as specified by the Revised Model Business Corporations Act (RMBCA).

Question 68

Unlike directors and shareholders, officers are agents of a corporation.

Question 69

Nicolas is the director of Brakers Industries, a drill manufacturer. He is also a major shareholder of Alivert Corp., a leading landscaping tools manufacturer. Brakers undergoes a financial crunch and finds it difficult to raise money. Nicolas signs up Brakers as a supplier of drills to Alivert Corp. Having obtained a new client, Brakers manages to avoid financial distress. However, Nicolas has not informed anyone of what he has done. Can this transaction be voided? If yes, on what grounds can it be voided?

Question 70

What is preferred stock? What are its various categories?

Question 71

Explain how corporations are incorporated in the United States.

Question 72

The shareholders are the owners of the corporation and have direct control over its operation.

Question 73

Formal responsibility for management of a corporation is vested in its board of directors, who are elected by the shareholders.

Question 74

If a corporation issues shares for less than the stated value, it remains liable to the shareholder for the difference between the stated value and the amount of consideration actually paid.

Question 75

Unless a limited liability company has specified otherwise in its articles of organization, its duration is unlimited or at will, meaning that it has no specific term.

Question 76

Buyback programs are used to prevent stock options and the new shares resulting from the exercise of options from diluting stock prices and earnings per share.

Question 77

How can a limited liability company (LLC) be created in the United States?