Question 1

Corporations are artificial persons created under the law of a state.

Accepted Answer

Artificial persons,like corporations,are entities created under the law of a state (or nation),which are considered to have separate legal existence.Corporations can own property,be sued,take on debts,and otherwise act as separate entities.

Question 2

Online trading services provide professional guidance to investors.

Accepted Answer

One impact of the Internet was the bypassing of full-service securities brokers through online trading.In response,most major full-service brokers added online trading services,which can be less expensive,but which also tend to leave investors without professional guidance.

Question 3

Where mergers or direct acquisitions fail,a takeover can be attempted.

Accepted Answer

There are several ways to acquire control of a corporation.Where mergers or direct acquisitions fail,a tender offer (also called a takeover) can be attempted.Alternatively,the person seeking to acquire control can mount a proxy fight by nominating an alternative slate of directors and then soliciting shareholders for their annual proxies in preference to returning proxies to current management.
Multiple Choice Questions

Question 4

Sole proprietorships are mutual agencies.

Accepted Answer

Partnerships are mutual agencies.A sole proprietorship comes into existence by the mere decision of the proprietor to pursue a venture.Thus,it is the default business form for single owners.

Question 5

In the context of the capital structure of corporations,equity capital has a short-term horizon.

Accepted Answer

In the context of the capital structure of corporations,equity capital (stock) has a long-term horizon.Although any given shareholder may intend to hold the stock for only a short period,the stock itself is generally expected to exist for the full life of the corporation.

Question 6

An S corporation pays double tax on its income.

Accepted Answer

In 1958,Congress amended the Internal Revenue Code to establish a separate tax status for some corporations,now known as S corporations.An S corporation's income is taxed only once-to the shareholders on their personal returns-much like partnerships.

Question 7

Corporations incur the disadvantage of double taxation.

Accepted Answer

One of the disadvantages of a corporation is double taxation.Because the corporation is a separate legal entity,it is subject to taxation in its own right.In the United States,a corporation pays tax on its income.When it later distributes its after-tax income to its shareholders as dividends,the shareholders are taxed on that amount as well,hence,"double taxation."

Question 8

In a limited liability company,the owners are referred to as interest holders.

Accepted Answer

Limited liability companies are entities in which the owners of the company are referred to as members.

Question 9

In a limited partnership,the limited partners manage the business and are personally liable for all losses.

Accepted Answer

Limited partners invest in the entity by contributing capital but do not participate in control.In exchange for limited control,they receive limited liability.

Question 10

The owners of a corporation are called stockholders.

Accepted Answer

The owners of a corporation are called stockholders or shareholders because the ownership interests are called shares of stock.The fundamental legal duties that corporations,corporate boards,and officers owe to their shareholders are defined by the state where the corporation was incorporated.

Question 11

Closely held corporations face the loss of limited liability through application of the doctrine known as piercing the corporate veil.

Accepted Answer

Closely held corporations face the loss of limited liability through application of the doctrine known as piercing the corporate veil.This doctrine usually has two elements: (1) misuse of the corporate form and (2) an unjust result if limited liability is allowed to stand.

Question 12

A shareholder derivative suit is brought by a minority shareholder,but any recovery inures to the corporation.

Accepted Answer

A shareholder derivative suit is initiated when the corporation is being harmed or defrauded and neither the board nor the senior executives will take action to protect it.This often involves self-dealing by these parties.The suit is brought by a minority shareholder,but any recovery inures to the corporation.

Question 13

Which of the following statements about corporations is true?

Accepted Answer

To create a corporation,a promoter or incorporator files articles of incorporation with the state government.A modest fee is typically charged.

Question 14

In general,the creditors of a corporation cannot reach the personal assets of the shareholders to satisfy the corporation's obligations.

Accepted Answer

The owners of a corporation are generally not responsible for the corporation's obligations.Should the corporation find that its liabilities overwhelm its assets,its creditors cannot reach the personal assets of the shareholders.

Question 15

A partnership offers limited liability to its owners.

Accepted Answer

A partnership does not offer limited liability to its owners.The partners are personally liable for all of the partnership's obligations should it default.

Question 16

Common stockholders share all three property rights associated with stock ownership in proportion to their holdings.

Accepted Answer

Three property rights are associated with stock ownership: the right to participate in earnings (that is,dividends),the right to participate in assets upon liquidation,and the right to participate in control.Common stockholders share all three property rights in proportion to their holdings.

Question 17

Although shareholders are the owners of the corporation,control rests with the board.

Accepted Answer

Although shareholders own the corporation,control rests with the board.State law significantly restricts the shareholders' ability to control management,other than indirectly through the annual election of the board.

Question 18

Blue sky laws are primarily applicable to solely intrastate offerings.

Accepted Answer

State securities regulations,known as blue sky laws,are now only a shadow of their former significance.They are primarily applicable to solely intrastate offerings.

Question 19

Equity holders' claims are always satisfied before creditors' claims.

Accepted Answer

The providers of both debt and equity capital hold claims against the corporation's assets.However,creditors' claims are always satisfied before equity holders' claims.

Question 20

The Securities Act of 1933 seeks to ensure full disclosure of all material facts about the investment opportunity to offerees before they invest.

Accepted Answer

The Securities Act of 1933 (1933 Act),which is administered by the Securities and Exchange Commission,seeks (1) to ensure full disclosure of all material facts about the investment opportunity to offerees (potential investors) before they invest and (2) to eliminate fraudulent conduct in the markets.

Quiz 9: Business Organizations and Securities Regulation