Deck 15: Corporations

Question 1

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

Answer 1

False

Question 2

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

Answer 2

dividend

Question 3

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

Answer 3

True

Question 4

If there is a written agreement between the principals to form a corporation,there is no need for the corporation to formally file articles of incorporation with the state.

Question 5

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 6

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

Question 7

Subchapter S corporations are not subject to double taxation.

Question 8

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

Question 9

A corporation incorporated in Utah and doing business in Nevada is classified as a(n)
corporation in Nevada.

Question 10

Officers,directors,and controlling shareholders are often called .

Question 11

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

Question 12

A person who performs pre-incorporation duties on behalf of the forming corporation is called a
.

Question 13

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

Question 14

A corporate bond issued in the amount of is called a micro bond.

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

A corporation's officers are appointed by-and may be removed by-the .

Question 21

Courts will routinely pierce the corporate veil in situations where a corporation causes economic harm to others.

Question 22

Political speech by corporations is fully protected under the First Amendment.

Question 23

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 24

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

Question 25

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

Question 26

Not all publicly held corporations are classified as public corporations.

Question 27

Shareholders are owners,while bondholders are merely creditors without an ownership interest.

Question 28

Joe and Josephine have started a plumbing business.The business is incorporated,but they have not invested any money in the business,which has only 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,but because the corporation has no funds and only minimal assets,the homeowner will bear the loss.Joe and Josephine are personally shielded from liability due to the corporate protections the business entity affords them.

Question 29

A closely held corporation may be categorized as a privately held or publicly held corporation,depending on its status at creation.

Question 30

Kate owns 1,000 shares of stock in a corporation,making her part-owner of the corporation.As an owner,if Kate enters into a contract on behalf of the corporation,the company will be bound by her actions.

Question 31

Shareholders are the owners of the corporation,and part of their responsibility as such is to elect and remove corporate officers.

Question 32

Both the number of shareholders and the permitted total of gross revenues are limited in a privately held corporation.

Question 33

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

Question 34

Once a corporation is recognized by the state,the corporation automatically becomes liable for all pre-incorporation contracts entered into by a promoter on behalf of the corporation.

Question 35

When planning to incorporate,a start-up business must file for incorporation in the state in which it originally plans to do business.

Question 36

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 37

Insurance companies and banks do not qualify for Subchapter S corporate status.

Question 38

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

Question 39

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 40

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

Question 41

In Smith v.Van Gorkom,the court considered 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.Regarding the board's liability in this case,the court stated each of the following except

A) normally, the board of directors is entitled to give some weight to statements made by its chairman regarding the valuation of stock.
B) the board in this case had the expertise to make decisions without consulting outside experts but 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 42

The type of corporation that generally has the highest number of shareholders is the
A) public corporation.

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

Question 43

In Florence Cement Company v.Vittraino,Florence sought to pierce Shelby's corporate veil and hold the principals personally liable by claiming Shelby mixed personal and business transactions and had engaged in fraud in a loan application.The appeals court held that

A) the veil could be pierced.
B) piercing the corporate veil was not warranted.
C) Shelby was liable for the $114,557 owed to Florence.
D) Florence had an opportunity to mitigate damages.

Question 44

Which body of law governs the rules regarding the offering or trading of ownership interests in corporations?

A) State law.
B) Federal law.
C) The Revised Model Business Corporation Act.
D) Common law.

Question 45

Privately held corporations may issue a in lieu of conducting a formal annual meeting.
A) statement of meeting substitution

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

Question 46

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 on flyers they post.All stock is owned by the 13 principals,and none is offered to anyone outside the 1.This corporation would be classified as a

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

Question 47

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

A) They are generally long-term investors.
B) They generally concentrate on one specific 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 48

Toby was elected to the board of trustees of the Chi-Town Corporation (CTC)four years ago.He loves to brag about his position as a board member,but he cares more about the prestige than doing a good job.As a member of the board at CTC,Toby serves on several committees.However,although the board and all of the committees meet on a regular basis,Toby has never attended any of these meetings and doesn't participate in any board decisions.If the insiders at CTC enter into a series of bad business deals that cause CTC to suffer a financial loss,what is Toby's potential liability?

A) Toby will be shielded from liability by the corporate veil.
B) Toby cannot be held responsible because he did not vote to approve the transactions.
C) Toby will be liable because his inattention will likely be considered negligence and a breach of his fiduciary duty of care.
D) Toby will be held liable because by accepting the board position he has opened himself up to liability for the actions of the corporation.

Question 49

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

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

Question 50

In H.Carl McCall,Trustee of the New York Common Retirement Fund,et al.,Derivatively on Behalf of Columbia/HCA Healthcare Corporation v.Scott,the plaintiffs sued the board,alleging that the officers and directors breached their fiduciary duties.The court addressed the corporate charter,which limited the liability of directors for breach-of-duty claims.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's unconsidered failure to act where due attention might have prevented the loss constituted bad faith. Therefore, the limitation of liability provision in the charter should not apply.
D) the shareholders' suit was improper as a derivative action and should have been filed as a direct action.

Question 51

Which of the following is a primary disadvantage of choosing to form corporations as opposed to other forms of business?

A) Pass-through taxation.
B) Unlimited liability of officers and directors.
C) Costs and formalities of setup.
D) The difficulty of raising capital.

Question 52

Which of the following statements is incorrect?

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 not incur obligations separate from those of its principals.

Question 53

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

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

Question 54

Which of the following is NOT a factor used by courts to determine whether to pierce the corporate veil?

A) Poor management and decision making by an inadequately trained or educated manager.
B) Inadequate capitalization.
C) Evidence of fraud or willful misconduct.
D) Failure to follow necessary corporate formalities.

Question 55

Mark and Riley live in Orlando and decide to open a souvenir shop.They incorporate their shop,Sunshine Gifts,Inc.,in the state of Florida.In Florida,Sunshine Gifts would best be characterized as
A) a domestic corporation.

A) an alien corporation.
B) a foreign corporation.
D) a native corporation.

Question 56

The are the owners of a corporation.
A) board of directors

A) promoters
B) officers
D) shareholders

Question 57

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 58

Le Maillot Jaune,Inc.,is a sports clothing retailer incorporated in France.If it transacts business in Chicago,Le Maillot Jaune,Inc.would be characterized as
A) a domestic corporation.

A) an alien corporation.
B) a foreign corporation.
D) a native corporation.

Question 59

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 60

A corporation formed to maintain a charitable operation is called a
A) nonprofit corporation.

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

Question 61

The document filed with the state that begins the incorporation process in most states is called the
A) articles of incorporation.

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

Question 62

Describe the process of "double taxation," as it applies to corporations.

Question 63

Which of the following is NOT a right enjoyed by shareholders of a corporation?

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

Question 64

Artisan Tools,Inc.,manufactures and sells quality hand tools to commercial and consumer users.Due to an excellent marketing campaign,the business grew quickly.After careful consideration,the board decided that a new factory needed to be built to accommodate current and future business.The factory is a multi-million dollar project.To fund it,the board decided to issue and sell bonds and debentures.What is the difference between a bond and a debenture? Explain why choosing bonds and debentures over a traditional commercial bank loan might be more advantageous in financing the factory construction.

Question 65

Donna is the treasurer of Sweet Things,Inc.,a small local bakery that recently started and has minimal assets.At 4:30 p.m.one day,Donna realized that she had not made an important bank deposit and only had a half hour to get to the bank.She took a corporate car and was speeding to the bank when she hit Josh,a pedestrian legally in a cross walk.Josh was seriously injured,and the car,which then careened into a pole,was totaled.Josh sued both Sweet Things and Donna.The bank that financed the car has also sued Sweet Things and Donna because Sweet Things stopped making the loan installment payments after the accident and was in default.Discuss Sweet Things' and Donna's potential liability to Josh and the bank in this case.

Question 66

Describe the corporate opportunity doctrine.What factors does the court examine to determine whether an opportunity belongs to a corporation?

Question 67

A corporation comes 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 68

The Suds Corporation has just suffered significant losses of revenue for three quarters in a row,and the shareholders are furious.Much of the loss can be attributed to the board's decision to change from their 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 it will return to its original product,the shareholders are claiming the board violated its fiduciary duty of care,and they are suing the directors personally for their significant losses.What must the shareholders prove to win their lawsuit? What defense is available to the directors,and what must they prove to prevail?

Question 69

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

A) Subchapter S corporations may issue only one class of stock.
B) Subchapter S corporations may be domestic or foreign, but they cannot be alien.
C) Taxation in Subchapter S corporations is pass-through, like partnership taxation.
D) Subchapter S corporations may not have more than 100 shareholders.

Question 70

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

Question 71

Sam is a promoter acting on behalf of a corporation that has not yet been fully incorporated.Under the Revised Model Business Corporation Act,if Sam acts on behalf of the yet-to-be-formed corporation,who is liable in the event of a breach of contract?

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

Question 72

Many corporations choose to incorporate in Delaware.Which of the following is NOT an advantage to incorporating in Delaware?

A) Delaware has a well-established body of case law, so the reliability and consistency of judicial decisions are 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 73

Happy Hops Brewery,Inc.,has found that its business is expanding very quickly.The decision to hire 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

When does an initial public offering (IPO)occur?

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

Question 75

Burt has come across an excellent recipe for a new beer,and he and 20 college friends decide to go into business.They form a corporation named New Brew Inc.,issuing stock only to the 21 of them and not selling any stock outside the group.The beer is a huge success,and they soon need to expand.They decide to sell stock to members of the public to raise capital.What type of corporation is New Brew before the sale of stock to the public? Aside from stock disclosure requirements,what must they do,and how will it affect their corporate status?

Question 76

Robert Hill Corp.(RHC)is incorporated in the state of Delaware.If it transacts business in Iowa,RHC would be characterized in Iowa as
A) a domestic corporation.

A) an alien corporation.
B) a foreign corporation.
D) a native corporation.

Question 77

CJ and Danny have incorporated and obtained a $100,000 loan in their corporate name.The loan is payable with interest over five years.After paying on the loan regularly for two years,the business falters due to the economy,and CJ and Danny default on the loan.Their business has no assets.Which of the following statements best describes CJ and Danny's liability in this case?

A) CJ and Danny are jointly and severally liable for the entire balance.
B) CJ and Danny are each individually liable for one quarter of the debt, with the corporation liable for the remaining half.
C) CJ and Danny are each individually liable for one-third of the debt, with the corporation liable for the remaining third.
D) CJ and Danny have no personal liability for the debt unless they pledged personal assets as collateral or signed a personal guarantee.

Question 78

The articles of incorporation for Pedal Power,Inc.,have been approved and registered with the state.Describe the next steps that the corporation must take at the initial organizational meeting.

Question 79

Carla has just passed the bar exam,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 Carla's Law Services Inc.A week later she discovers that her uncle,who was going to lend her money to start her business,has filed for 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 Carla's liability for the lease she signed for the office.

Question 80

Describe the difference between a derivative action and a direct action shareholder lawsuit.What are the typical grounds for each of these suits?