Deck 26: The Corporate Entity

Question 1

Kincaid, a promoter, enters into contracts that include XYZ Co., a corporation not yet formed. Kincaid is personally liable on these contracts.

Answer 1

True
Explanation: A corporation is not bound by any of the promoter's contracts unless it adopts those contracts. Even after adoption of the contracts, promoters are still potentially liable under the preincorporation contracts.

Question 2

An LLC operating agreement is required by law in all states.

Answer 2

False
Explanation: Drawing up an LLC operating agreement is very beneficial for the members of the LLC. Although such an agreement is not required by law in all states, it is still very helpful in establishing the bylaws of the LLC which outline the structure and operation of the LLC.

Question 3

When a corporation is set up as a mere instrumentality of a parent corporation, it is sometimes referred to as a dummy corporation or a corporate shell.

Answer 3

True
Explanation: When a corporation is set up as a mere instrumentality of a parent, it is sometimes referred to as a dummy corporation or a corporate shell. This issue comes up when courts are asked to investigate the creating of dummy companies to avoid liability by the parent. While the courts respect the separate corporate identity of most subsidiaries, they cannot allow a subsidiary to be used by the parent so that the parent can escape liability, especially if the instrumentality was set up in the first place to commit fraud.

Question 4

If a group of people act as if they are a corporation when in fact and in law they are not, they have the right to deny that the corporation exists.

Question 5

If XYZ Co. was improperly incorporated, it may nevertheless possibly qualify as a de facto corporation.

Question 6

A corporation is considered a citizen of the state in which it is incorporated and not the state where it has its principal place of business.

Question 7

The doctrine of de facto corporations can be altered by the courts and by statutory law.

Question 8

Outstanding shares of stock of the Bittman Corporation were held by seven shareholders, all from the same Bittman family. The Bittman Corporation may be designated as a close corporation.

Question 9

An electric company would be an example of a quasi-public corporation.

Question 10

The shareholders of an S corporation have the profits or losses of the corporation taxed directly to them in order to avoid double taxation.

Question 11

The Twelfth Amendment grants due process rights to corporations.

Question 12

A business concern incorporated in Canada and doing business in Ohio would be called an alien corporation.

Question 13

Viola, a promoter, wants to be certain the name Xenographics, Inc. is available for her corporation. She can reserve the name in advance of incorporation.

Question 14

A statutory agent has the authority to grant a corporation the right to do business in a particular state.

Question 15

Par value is the value placed on the shares of stock at incorporation by the Secretary of Commerce.

Question 16

A corporation is a legal entity created under international law that gives individuals the capacity to operate an enterprise.

Question 17

Limited liability means that shareholders cannot be held personally liable for the debts of the corporation, but may still lose the amount of their capital investment.

Question 18

Janet is the promoter of a corporation called Time Inc., which is in the process of being formed. Janet rents office space in Time's name. Time is bound by Janet's contract.

Question 19

The process of doing business as a self-governing corporation is called associative corporativism.

Question 20

LLCs are not usually subjected to double taxation.

Question 21

Liz, a promoter, hired an office support staff for a corporation that had not yet been incorporated. If there is a novation clause in a subsequent contract with the corporation and the staff, which of these is correct?

A) The corporation will not be bound by any of Liz's contracts.
B) The office support staff will work without pay until the corporation becomes incorporated.
C) Liz will escape potential liability under the novation contract entered into.
D) Liz and the corporation will be held equally liable under all contracts entered into.

Question 22

____________ refer(s) to the written application to the state for permission to form a limited liability company.

A) Novation
B) Estoppel
C) Operating agreement
D) Articles of organization

Question 23

Grant wants to know the date of the annual shareholders meeting of Big Co. Which document will contain this information?

A) Articles of corporation
B) Articles of organization
C) Bylaws or regulations
D) Operating agreement

Question 24

A promoter can escape liability by having the corporation and the third party create a(n):

A) novation.
B) estoppel.
C) operating agreement.
D) certificate of organization.

Question 25

Vivian, owner of Titan Corp., uses Titan Corp. as a way to order merchandise for her personal benefit and fails to pay for the merchandise. Creditors who have shipped merchandise to Titan want to sue Vivian personally. Which of the following legal doctrines would allow a personal suit against Vivian?

A) Corporation by estoppel
B) Piercing the corporate veil
C) De facto corporation
D) De jure corporation

Question 26

Jan signs the articles of incorporation for a corporation being formed, and Tom wants to locate possible investors in the new corporation. Jan is a(n):

A) incorporator.
B) promoter.
C) registered agent.
D) shareholder.

Question 27

A(n) ____________ is one that has been formed properly by incorporators who followed all of the steps outlined by the state incorporation statute.

A) corporation by estoppel
B) de facto corporation
C) de jure corporation
D) alien corporation

Question 28

A limited liability company is best thought of as a cross between a partnership and a:

A) sole proprietorship.
B) governmental institution.
C) limited partnership.
D) corporation.

Question 29

A(n) ____________ is a corporation where the outstanding shares of stock and managerial control are held by fewer than ____________ shareholders.

A) S corporation; 25
B) close corporation; 50
C) alien corporation; 50
D) shell corporation; 100

Question 30

Patricia holds 150 shares of common stock in a large corporation. Patricia:

A) is guaranteed the rights to some of the profits of the corporation.
B) is most likely entitled to two votes for each share of stock she holds.
C) will not be included in the distribution of capital upon dissolution of the corporation.
D) risks whatever money she invested in the 150 shares of common stock.

Question 31

Janice requires information about the voting rights of members of Titan, LLC. Which document will contain this information?

A) Articles of incorporation
B) Articles of organization
C) Bylaws
D) Operating agreement

Question 32

In terms of the steps in the incorporation process, which of the following occurs after the charter is issued?

A) A statutory agent is appointed.
B) The organizational meeting is held.
C) Filing fees are paid.
D) Promoters do preliminary work.

Question 33

Which of the following is the official authorization of a corporation to do business in a state?

A) Articles of incorporation
B) Certificate of incorporation
C) Articles of organization
D) Certificate of authority

Question 34

The Panon Corporation is incorporated in Tennessee, but its corporate headquarters is in Massachusetts. As a result, the Panon Corporation is:

A) considered a citizen of only Massachusetts.
B) considered a citizen of only Tennessee.
C) not considered a citizen of either Massachusetts or Tennessee.
D) considered a citizen of both Massachusetts and Tennessee.

Question 35

The four fundamental legal principles that are designed to protect the corporate structure are (1) corporate status as an entity, (2) corporate constitutional rights, (3) corporate citizenship and (4):

A) anticipatory repudiation.
B) unconscionable contract.
C) mutual recession.
D) limited liability.

Question 36

Kay, an 80% shareholder of Big Corp., dies leaving her stock to her nephew, Carl. Big Corp. will be:

A) unaffected.
B) reorganized.
C) dissolved and then reconstituted.
D) dissolved.

Question 37

Alan sells merchandise on credit to ABC Co. ABC fails to pay for the merchandise. Alan later discovers that ABC is not a corporation, but a partnership consisting of Alice, Betty, and Charles. Which legal doctrine might shield Alice, Betty, and Charles from personal liability?

A) De facto corporation
B) De jure corporation
C) Corporation by estoppel
D) Piercing the corporate veil

Question 38

Henry, a promoter, signs a five-year lease agreement for office space for Ajax Corp., which has not yet been formed. After formation, Ajax moves into the office space, pays rent and occupies it for six months, but then finds a cheaper location and moves out. Which party is liable on the lease?

A) Henry
B) Ajax
C) No one, since it was a tenancy at will
D) Both Henry and Ajax

Question 39

Nodest Co., a Delaware corporation, wants to do business in California. Since Nodest is a foreign corporation, it ____________.

A) does not need to take any particular action
B) must incorporate in California
C) must obtain a certificate of authority from California
D) must obtain certificates of authority from both California and Delaware

Question 40

The status of a de facto corporation can be directly challenged by:

A) private citizens.
B) the state government.
C) both private citizens and the state government.
D) neither private citizens nor the state government.

Question 41

Jon, a promoter, is concerned about being personally liable on preincorporation contracts he signs on behalf of corporations that have not yet been formed. Discuss what Jon may lawfully do to avoid this liability.

Question 42

In creating ABZ Inc., Newman and Zimmer followed all the steps in the incorporation process as authorized in their state's incorporation statute except for the appointment of a statutory agent. They were never informed of the oversight and proceeded under the assumption that they were properly incorporated. Several years later, a customer was injured by one of their products. The customer's lawyer told Newman and Zimmer that they were individually liable because ABZ Inc. was not properly incorporated. Was the lawyer correct? Explain.

Question 43

ABC Co. owns land that is in the path of a new proposed interstate highway. ABC does not want to surrender this land. Discuss what rights ABC or the shareholders of ABC have to challenge this proposed taking?

Question 44

Big Co. creates a wholly owned subsidiary, Small Co. Small Co. sells poor quality merchandise on credit to consumers at unlawful rates of interest and violates the warranty agreements made with consumers. Discuss if Big Co. may be held liable for the actions of Small Co.

Question 45

Tom and Jim from JT Co. plan to engage in the building construction business. They obtain contracts in the name of JT Co., but fail to keep separate bank accounts for JT Co. funds, placing JT Co. money in their personal bank accounts. In addition, much of the JT Co. equipment is titled in the name of Tom and Jim. JT Co. breaches a construction contract with Titan Co. Discuss if Tom and Jim might have personal liability for this breach of contract.

Question 46

Global Corp. is incorporated in Mexico and wants to do business in Ohio. Discuss the legal status of Global in relationship to Ohio and what Global must do to qualify to do business in Ohio.

Question 47

Zeno Corp. has issued common stock and noncumulative preferred stock. The board of directors of Zeno has not paid a dividend in 10 years. Discuss the rights of shareholders to demand a dividend payment and the ability of the noncumulative preferred shareholders to collect back dividends for the years in which no dividend was paid.

Question 48

Wong and Burton owned several hundred shares of preferred stock in Classic, Inc. For three years, neither were paid dividends. In the fourth year, Classic paid dividends to both shareholders. Wong also received payment for dividends from the preceding three years. Burton did not receive any dividends from those years. Identify the type of stock owned by each shareholder.

Question 49

Clothe You Inc. was incorporated as a nonprofit organization that gave away secondhand clothes to homeless persons. In order to pay overhead and administration costs, Clothe You Inc. also sold the secondhand clothes to any interested individuals who did not qualify as homeless. One year after its formation, Clothe Me Inc. was incorporated in the same state. Clothe Me Inc. was a consignment shop that sold its secondhand clothes cheaply. Clothe Me Inc. ran an aggressive print advertising campaign, marketing its clothes "to everyone, for every reason, for practically no cost." After this campaign, Clothe You Inc. discovered that people, especially homeless individuals, were confusing the two organizations. What legal action, if any, can be taken by Clothe You Inc.?

Question 50

A&B, a general partnership, wants to become "A&B, LLC." "A&B Co." is already in use by another business, and the state agency refuses to allow the new corporation to use the name "A&B." Discuss how A&B should proceed.