Deck 16: Corporations

Question 1

The officer with the least amount of implied authority in relation to the other officers is the _______.

Answer 1

treasurer

Question 2

Officers, directors, and controlling shareholders are often called _______.

Answer 2

insiders

Question 3

A corporate bond issued in the amount of $500,000 is called a ________ bond.

Answer 3

micro

Question 4

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

Question 5

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

Question 6

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.

Question 7

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

Question 8

Corporations may be created by written agreement between the principals, and no strict or formal filing is required as long as the agreement is written.

Question 9

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 10

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

Question 11

A person who performs preincorporation duties on behalf of the forming corporation is called a _______.

Question 12

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

Question 13

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

Question 14

One benefit of the Subchapter S corporation is that there is no double taxation.

Question 15

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

Question 16

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

Question 17

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

Question 18

A corporation incorporated in Utah and doing business in Nevada is classified as ________ in Nevada.

Question 19

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

Question 20

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

Question 21

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 22

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

Question 23

An insurance company cannot qualify for Subchapter S corporate status.

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, to protect its interests, may require that either collateral be pledged or a personal guarantee be signed by shareholders but may not require both.

Question 25

Joe and Josephine have started a plumbing business and have incorporated. They invest nothing into the corporation, and the corporation has 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 the corporation has no funding and only minimal assets. Thus the homeowner must bear the loss because Joe and Josephine are shielded from liability due to the corporate protections the business entity affords them.

Question 26

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

Question 27

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

Question 28

Shareholders are the owners of the corporation and, in part, act principally through electing and removing officers.

Question 29

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

Question 30

Corporate bondholders are creditors of the corporation but are not shareholders.

Question 31

Courts are generally inclined to be predisposed to piercing the corporate veil whenever a corporation causes economic harm to others.

Question 32

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 33

Corporations are afforded full First Amendment political speech protection.

Question 34

A closely held corporation may be privately held or publicly held depending on the status determined at creation.

Question 35

For a corporation to be privately held, the number of shareholders will be limited as will the permitted total of gross revenues.

Question 36

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 37

All publicly held corporations are classified as public corporations.

Question 38

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 39

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

Question 40

Once a corporation is recognized as existing by the state, the corporation automatically becomes liable for all contracts that a promoter had entered into on behalf of the corporation.

Question 41

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

A) They are generally long-term investors.
B) They generally concentrate on one particular 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 42

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 43

In Florence Cement Company v. Vittraino, Florence sought to pierce Shelby's corporate veil and hold the principals personally liable, 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

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 13. 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 45

Which of the following is an incorrect statement?

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 46

Privately held corporations may issue a ________ in lieu of conducting a formal annual meeting.

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

Question 47

The corporation with the most shareholders is the:

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

Question 48

Bonds Inc., is incorporated in the state of Florida. In Florida, Bonds would be characterized as:

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

Question 49

In Smith v. Van Gorkom, the court had to determine 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. 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 just 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 50

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 51

A corporation formed for the purpose of maintaining a charitable operation is called a:

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

Question 52

Offering or trading ownership interests in corporations is governed by:

A) state laws.
B) federal laws.
C) the Revised Model Business Corporation Act.
D) common law.

Question 53

In H. Carl McCall, Trustee of the New York Common Retirement Fund, et al., Derivatively on Behalf of Columbia/HCA Healthcare Corporation v. Scott, suit was brought claiming a breach of fiduciary duties by the board with regard to alleged fraudulent billing practices. The board defended by citing the corporate charter, which limits the liability of directors for breach-of-duty claims as long as they did not act in bad faith. 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 ignored direct and indirect signs pointing to the fact that fraudulent practices were occurring and its failure to investigate breached its duty of care.
D) the shareholders suit was improper as a derivative action and needed to be filed as a direct action.

Question 54

A disadvantage of choosing a publicly held corporate form to operate a business is:

A) the pass-through taxation.
B) the unlimited liability of officers and directors.
C) the cost and formalities of setup.
D) the difficulty of raising capital.

Question 55

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 56

The owners of a corporation are the:

A) promoters.
B) officers.
C) board of directors.
D) shareholders.

Question 57

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

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

Question 58

Each of the following is a factor used by courts to determine whether to pierce the corporate veil except:

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 59

Saul was elected to the board of trustees of Round Way Corp. four years ago. He makes sure everyone knows he's a board member and always brings it up at parties. Unfortunately, he cares more about the prestige than doing a good job, so he hasn't attended board meetings or meetings of committees to which he's been assigned. If the insiders at Round Way enter into a series of bad business deals causing financial loss to the corporation:

A) Saul is shielded from liability under the corporate veil.
B) Saul cannot be held responsible because he didn't vote to approve the transactions.
C) Saul will be liable because his inattention will likely be considered negligence on his part.
D) Saul will be held liable because by accepting the board position he has opened himself up to liability for the actions of the corporation.

Question 60

Le Magasin de Vêtements Inc., is a clothing retailer incorporated in France. If it transacts business in New York, Le Magasin de Vêtements would be characterized as:

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

Question 61

The document filed with the state that begins the incorporation process in the majority of states is called the:

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

Question 62

Initial public offerings occur when:

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

Question 63

Power Play Inc., has decided to raise capital to grow and strengthen the company in order to make it attractive to 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 64

Fred and Barney have incorporated and obtained a $100,000 loan, payable with interest over five years, in the corporate name. After paying on the loan regularly for two years, the business falters due to the economy, and they default on their loan. Their business has no assets.

A) Fred and Barney are jointly and severally liable for the entire balance.
B) Fred and Barney are each individually liable for one quarter of the debt, with the corporation liable for the remaining half.
C) Fred and Barney are each individually liable for one-third of the debt, with the corporation liable for the remaining third.
D) Fred and Barney have no personal liability for the debt.

Question 65

What is the difference between a derivative action and a direct action regarding shareholder lawsuits, and what are the typical grounds for these suits?

Question 66

Shareholders generally have the power and right to do each of the following except:

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

Question 67

Delaware is a popular state for many corporations to incorporate in. Each of the following is a Delaware incorporation advantage except:

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 68

Happy Hops Brewery Inc., has found that its business is expanding very quickly. The decision to fire 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 69

The corporation is considered to come 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 70

Robin is the treasurer of Big Bottle Brewery Inc., Big Bottle is a small local brewery that recently started and has minimal assets. At 4:30 p.m. one day, Robin realizes that she hasn't made an important bank deposit and only has a half hour to get to the bank. She takes a corporate car and is speeding to the bank when she hits Gretchen, a pedestrian legally in a cross walk. Gretchen is seriously injured, and the car, which then careened into a pole, is totaled. Gretchen sues both Big Bottle and Robin. The bank that financed the car has also sued Big Bottle and Robin because Big Bottle stopped making the loan installment payments after the accident and is in default. Discuss Big Bottle's and Robin's liability, if any.

Question 71

Under the Revised Model Business Corporation Act, if a promoter acts on behalf of a corporation knowing that incorporation has not yet been completed and liability occurs:

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

Question 72

Artisan Tools Inc., manufactures and sells quality hand tools to commercial and consumer users. Due to an excellent marketing campaign, the business is growing quickly. After careful consideration the board decides that a new factory needs to be built to accommodate current and future business. This factory will cost millions of dollars. In order to fund this project, the board has decided to issue and sell bonds and debentures. What is the difference between a bond and a debenture, and why might they be more advantageous than simply obtaining a commercial bank loan to finance the factory?

Question 73

Michelle 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 Michelle'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 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 Michelle's liability for the lease she signed for the office.

Question 74

What does the corporate opportunity doctrine state, and what factors does the court examine to determine whether an opportunity belongs to a corporation?
The corporate opportunity doctrine requires disclosure by insiders whenever an insider learns of a potentially lucrative or beneficial business opportunity that would benefit the corporation. It further mandates that insiders may not usurp for themselves a business opportunity that belongs to the corporation. The court will examine the following three factors to determine whether an opportunity belongs to the corporation: (1) Did the corporation have a current interest or an expected interest in the specific opportunity in question? (2) Is it fair to the corporation's shareholders to allow an insider to usurp the opportunity? (3) Is the opportunity closely related to the corporation's existing or prospective business activities?

Question 75

Robert Hill Corp. is incorporated in the state of Delaware. If it transacts business in Iowa, Robert Hill would be characterized in Iowa as:

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

Question 76

The articles of incorporation for Pedal Power Inc., have been approved and registered by the state. What needs to be done at the initial organizational meeting?

Question 77

Suds Corp. has just suffered a huge loss of revenue for three quarters, and the shareholders are furious. Much of the loss can be attributed to a board decision to change the focus of the company from 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 a violation of the board's fiduciary duty of care, and they are suing the directors personally for their significant losses. What must the shareholders prove to be successful? What defense is available to the directors, and what must they prove to prevail?

Question 78

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

A) They may issue only one class of stock.
B) They may be domestic or foreign but cannot be alien.
C) Taxation is pass-through, similar to partnership taxation.
D) They may not have more than 100 shareholders.

Question 79

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 have the need to expand. They decide to sell stock to members of the public to raise capital. Aside from stock disclosure requirements, what must they do and how will it affect their corporate status?

Question 80

What is meant by the expression "double taxation" of corporations?