Deck 38: Corporations: Formation and Financing

Question 1

The only authority possessed by corporations is the powers granted to them in their articles of incorporation and through state incorporation statutes.

Answer 1

True

Question 2

Convertible bonds allow shareholders to exchange their bonds for shares of company stock.

Answer 2

True

Question 3

A statement of purpose grants a corporation power to engage in certain business activities.

Answer 3

True

Question 4

Stock for sale to the general public is frequently offered by closely held corporations.

Question 5

Shareholders may not be held personally liable for a defective corporation's actions.

Question 6

Corporations are not required to indicate in the name of the corporation that the business is incorporated.

Question 7

Which of the following was the result on appeal in King v.American Family Mutual Insurance Company;American Standard Insurance Company of Wisconsin,the case in the text involving whether for an injury occurring outside the state,personal jurisdiction in Montana could be asserted over the defending insurers who had appointed an agent for service of process there but had done no business in the state?

A)That regardless of whether an agent for service of process had been appointed,as a matter of law,insurers may be sued in any state in the U.S.
B)That Montana law regarding appointment of an agent for service of process does not,standing alone,subject foreign corporations to jurisdiction in Montana for acts performed outside of Montana,at least when the corporations transact no business in the state.
C)That regardless of whether an agent for service of process had been appointed,as a matter of law,an insurer may only be sued in its state of incorporation.
D)That appointment of an agent for service of process does,standing alone,subject foreign corporations to jurisdiction in Montana for acts performed outside of Montana.
E)That regardless of whether an agent for service of process had been appointed,as a matter of law,an insurer may only be sued in the state in which its principal place of business is located.

Question 8

Regarding Chinese Law,which of the following statements is accurate?

A)Under the two tiers of corporate power in China,the board of directors is the lowest and corporate officers compose the top tier.
B)Under the two tiers of corporate power in China,the board of supervisors is the lowest and corporate officers compose the top tier.
C)Under the three tiers of corporate power in China,the board of supervisors is the lowest,the board of directors makes up the second,and corporate officers compose the top tier.
D)Under the three tiers of corporate power in China,corporate officers make up the lowest tier,the board of supervisors makes up the second,and the board of directors composes the top tier.
E)Under the three tiers of corporate power in China,the board of directors is the lowest,the board of supervisors makes up the second,and corporate officers compose the top tier.

Question 9

A corporation must be incorporated in the state in which it has its principal place of business.

Question 10

Debt securities,or bonds,represent loans to a corporation from another party.

Question 11

Corporations do not exist separately from their shareholders.

Question 12

If over 50% of the shareholders die,a corporation must be dissolved.

Question 13

Corporations are considered to be legal persons.

Question 14

Which of the following is false regarding corporations?

A)Courts consider corporations to be "legal persons."
B)Corporations are legal entities.
C)Corporations exist separately from their shareholders.
D)Corporations cannot claim rights under the U.S.Constitution.
E)Corporations can sue or be sued by others.

Question 15

A promoter is not permitted to enter into contracts.

Question 16

The determination of who has the power to amend the corporate bylaws after the first organizational meeting is made by the articles of incorporation.

Question 17

Among the shareholders of an S corporation,no shareholder may be a nonresident alien.

Question 18

Which of the following is false regarding Société Anonymes SA)and Société à Responsabilité Limitée SARL)companies in France?

A)SARL companies sell shares exclusively to company members.
B)French law does not require that SARL companies appoint an auditor.
C)French law requires that all SA companies appoint an independent auditor to verify the legality of their accounts.
D)SA companies offer shares to the public and must have only one shareholder.
E)Members of SARL companies are liable only to the extent of their contributions to the company.

Question 19

Which of the following is false regarding the question presented in the Case Opener regarding Facebook's status as a corporation?

A)Its corporate status allows it to acquire property.
B)Its corporate status allows it to make contracts.
C)Its corporate status allows it to sue and be sued.
D)Its corporate status allows it to enjoy existence for up to 100 years.
E)Its corporate status allows it to make charitable donations.

Question 20

Corporations have implied powers.

Question 21

Which of the following is a disadvantage of the corporate form?

A)Free transfer of corporate shares
B)Double taxation
C)Protection from liability
D)Perpetual existence
E)Retained earnings

Question 22

Which of the following is an implied power of a corporation?

A)Power to establish rules for managing the corporation.
B)Power to have perpetual existence.
C)Power given in the statement of corporate purpose in the articles of incorporation.
D)Power to lend money.
E)Power to sue and be sued in the corporations' name.

Question 23

Corporations distribute their income to shareholders through ________.

A)Allowances
B)Dividends
C)Provisions
D)Allocations
E)Grants

Question 24

A corporation may call in and repay at specific times which of the following types of bonds?

A)Income
B)Convertible
C)Unsecured
D)Callable
E)Secured

Question 25

Which of the following is not an express power of a corporation?

A)Power to be free from double taxation.
B)Power to sue and be sued in the corporations' name.
C)Power to have perpetual existence.
D)Power to acquire property,make contracts and borrow money.
E)Power to lend money.

Question 26

Profits kept by a corporation for reinvestment are known by which of the following terms?

A)Saved profit
B)Approved income
C)Added earnings
D)Added profit
E)Retained earnings

Question 27

Regarding management of a corporation,which of the following is false?

A)Shareholders elect a board of directors.
B)The board of directors selects officers to manage the day-to-day business of the corporation.
C)If shareholders die,corporations do not dissolve.
D)In most states,corporations can exist indefinitely.
E)Shareholders generally participate in corporate management.

Question 28

A document a corporation files with the state explaining its organization is known by which of the following terms?

A)Proof of capitalization
B)Certificate of organization
C)Proof of incorporation
D)Articles of incorporation
E)Establishment of corporation

Question 29

Which of the following references the liability of corporations for torts and crimes committed by their agents during the scope of their employment?

A)Stare decisis
B)Actus reus
C)Ab initio
D)Respondeat superior
E)Res ipsa loquitur

Question 30

The FDIC is an example of what type of corporation?

A)Publicly held
B)Private
C)Domestic
D)Public
E)Closely held

Question 31

Which of the following was the result on appeal in Federal Election Comm'n v.Beaumont,the case in the text in which the Supreme Court considered whether certain of the Federal Election Commission's regulations including,for example,regulating corporate political participation through the use of PAC's,constitute unconstitutional limits on speech?

A)That the regulations permissibly regulated speech because the regulations allowed some control of campaign activity without jeopardizing the associational rights of advocacy organizations' members.
B)That the regulations permissibly regulated speech because nonprofit corporations,unlike corporations operated on a for profit basis,lack constitutional protection in the area of free speech.
C)That the regulations impermissibly regulated speech because,using a strict scrutiny standard,the regulations were overly broad.
D)That the regulations impermissibly regulated speech because unreasonable distinctions were made between exemptions granted to certain nonprofit corporations but not to others.
E)That the regulations impermissibly regulated speech because nonprofit corporations were treated differently than corporations operated on a for profit basis.

Question 32

Tony and Tim are shareholders of a closely held corporation that engages in illegal activity.They mixed business and corporate assets regularly.Do Tony and Tim have limited liability?

A)Yes,because their corporation was closely held.
B)No,because they used the corporation to engage in illegal and wrongful acts and because they comingled personal and corporate interests.
C)No,because closely held corporations never benefit from liability protection.
D)Yes,because of corporation by estoppel.
E)Yes,because limited liability is absolute.

Question 33

When a corporation pays taxes on dividends and shareholders pay taxes on dividends receive,this is an example of:

A)The shareholder tax penalty
B)The corporate tax penalty
C)The special dividend tax rule
D)Tax fairness
E)Double taxation

Question 34

Which of the following if true regarding powers state incorporation statutes typically grant to corporations?

A)State incorporation statutes give corporations the power to make charitable contributions.
B)State incorporation statutes expressly state the powers granted to corporations thereby negating the existence of implied powers.
C)State incorporation statutes give corporations existence for up to 100 years.
D)State incorporation statutes prohibit corporations from loaning money because that is within the realm of state banks recognized by the state banking regulatory authority.
E)State incorporation statutes generally expressly give corporations only the broad authority to operate within the law to the benefit of stockholders resulting in most actions of corporations arising from implied powers.

Question 35

Yolanda is a shareholder in a corporation which is sued.Which of the following is true of Yolanda's potential liability?

A)Yolanda is fully liable for the corporation's actions
B)Yolanda's liability is limited to her investment in the corporation
C)Yolanda may be liable for the corporation's actions if she was on the corporate board.
D)Yolanda may be liable for the corporations' actions if the corporation is a C-corp but not an S-corp
E)Yolanda may be liable for the corporation's actions if the corporation is an S-corp but not a C-corp

Question 36

What type of corporation is created by the government to help administer law?

A)Domestic
B)Publicly held
C)Public
D)Closely held
E)Private

Question 37

Under limited liability rules,who assumes liability for corporate actions?

A)Shareholders
B)The corporation,shareholders,and the board of directors
C)The corporation and shareholders
D)Corporate executives
E)The corporation

Question 38

Which of the following is not a reason that a court would likely pierce the corporate veil?

A)Shareholders attempt to commit fraud through a corporation.
B)Shareholders' personal interests and corporate interests are commingled such that the corporation has no separate identity.
C)A corporation did not follow statutory mandates regarding corporate business.
D)A corporation has de facto status.
E)A corporation lacks adequate capital when initially formed.

Question 39

Which of the following is true of taxes and dividends?

A)Corporations pay federal,but not state taxes on dividends
B)Shareholders pay taxes on dividends they receive
C)Dividends are not taxed
D)Corporations may take a tax deduction for dividends
E)Corporations pay state,but not federal,taxes on dividends

Question 40

Five friends decide to form a corporation together.They wish to participate in corporate management.What must they do to participate?

A)They should specify in corporate bylaws that they will participate in corporate management.
B)They will not be allowed to participate in corporate management as shareholders.
C)They must form an S-corp,as C-corp shareholders are not permitted to participate in corporate management.
D)They should form a partnership instead.
E)Nothing,shareholders generally participate in corporate management.

Question 41

Which of the following adopts corporate bylaws?

A)Officers
B)Incorporators
C)Shareholders
D)Promoters
E)Directors

Question 42

An individual who applies to the state for incorporation on behalf of a corporation is known as which of the following?

A)A certification analyst
B)A facilitator
C)An incorporator
D)A promoter
E)An obtainer

Question 43

Rules and regulations that govern the corporation's internal management are known as corporate ________.

A)Authorizations
B)Prohibitions
C)Bylaws
D)Statutes
E)Requirements

Question 44

Which of the following is false regarding a nonprofit corporation?

A)A nonprofit corporation may not earn profits.
B)Nonprofit corporations do not have shareholders.
C)Nonprofit corporations do not issue stock.
D)Churches and charitable organizations are examples of nonprofit corporations.
E)Nonprofit corporations provide services to their members.

Question 45

In the corporate formation process,which of the following provides basic information about the corporation?

A)The agreement to promote
B)The agreement to incorporate
C)The articles of incorporation
D)The articles of subscription
E)The agreement to subscribe

Question 46

Which of the following is a corporation that has not substantially met the requirements of the state incorporation statute,but courts recognize it as a corporation for most purposes to avoid unfairness to third parties who believed it was properly incorporated?

A)A de jure corporation
B)A corporation by reservation
C)A corporation by estoppel
D)A de facto corporation
E)An inactive corporation

Question 47

In the state in which it is incorporated,a corporation is a[n] ________ corporation.

A)Approved
B)Home
C)Domestic
D)Certified
E)Recognized

Question 48

When a corporation is incorporated,the secretary of state usually issues a[n] ,a document certifying that the corporation is incorporated in the state and is authorized to conduct business.

A)Approval of incorporation
B)Certificate of incorporation
C)Certification of legality
D)Authorization of incorporation
E)Chronicle of legality

Question 49

What do nonprofit corporations do with profits?

A)Provide services to members and reinvest in the business.
B)Distribute them to shareholders.
C)Sell them to stockholders.
D)Distribute them to stockholders.
E)Nonprofit corporations are not allowed to earn profits.

Question 50

In states in which it conducts business but is not incorporated,a corporation is a[n] ________ corporation.

A)Interstate
B)Approve d
C)?Foreign
D)Visiting
E)Intrastate

Question 51

Two sisters and their parents own an incorporated hotel chain together.No stock is sold to the general public.What type of corporation is the hotel chain most likely to be?

A)Alien corporations
B)Minority shareholder controlled corporations
C)Closely held corporations
D)Foreign corporations
E)Carefully held corporations

Question 52

Which of the following types of businesses is a business incorporated in another country?

A)Visiting
B)Foreign
C)Approve d
D)?Alien
E)Interstate

Question 53

Which of the following generally does not offer stock to the public?

A)Closely held corporations
B)Alien corporations
C)Minority shareholder controlled corporations
D)Foreign corporations
E)Carefully held corporations

Question 54

Regarding promoters,which of the following is false?

A)Promoters are agents for the company being formed.
B)A promoter may insert a clause into a contract with a supplier stating that the corporation's adoption of the contract terminates the liability of the promoter.
C)Promoters prepare the corporation's incorporation papers.
D)Promoters raise capital for the infant corporation.
E)Promoters can purchase buildings for the corporation.

Question 55

Louisa runs a corporation which sells bracelets to generate money to run a soup kitchen that feeds the needy.The corporation earns profits,but has no shareholders.Instead,all profits are used to provide food for the needy.The corporation is most likely a ________.

A)A corporation.
B)Nonprofit corporation.
C)S corporation.
D)Public corporation.
E)Private corporation.

Question 56

Which of the following is not required in a corporation's articles of incorporation under the Revised Model Business Corporation Act?

A)The names and addresses of the incorporators
B)The address of the registered office
C)The name of the registered agent
D)The name of the corporation
E)Information regarding the purpose of the corporation

Question 57

Which of the following is false regarding requirements needed for a business to qualify as an S corporation?

A)Individuals,trusts,partnerships,and in some circumstances corporations can be shareholders.
B)It must have no more than 100 shareholders.
C)All S corporations must be domestic corporations.
D)S corporations can issue only one class of shares,although they need not have identical voting rights.
E)No shareholder can be a nonresident alien.

Question 58

Most corporations are ________.

A)De facto
B)Non-prof it
C)Public
D)Foreign
E)For profit

Question 59

Which of the following is true regarding corporate structure in Germany?

A)Germany has three tiers of corporate power with management at the lowest tier,the board on the second tier,and the supervisory board on the top tier.
B)Germany has three tiers of corporate power with management at the lowest tier,the supervisory board on the second tier,and the board on the top tier.
C)Germany has three tiers of corporate power with the supervisory board at the lowest tier,management on the second tier,and the board on the top tier.
D)Germany has three tiers of corporate power with the board at the lowest tier,the supervisory board on the second tier,and management on the top tier.
E)Germany has three tiers of corporate power with the board at the lowest tier,management on the second tier,and the supervisory board on the top tier.

Question 60

Private persons create ________ corporations for private purposes.

A)Public
B)Domestic
C)Private
D)Closely held
E)Publicly held

Question 61

The contracts Min-ji,Marcus,and Penelope made with their friends to buy stock are known by what term?

A)Promotion agreements
B)Novation agreements
C)Acceptor agreements
D)Capital agreements
E)Subscription agreements

Question 62

Which of the following types of securities represent loans to a corporation?

A)Debt
B)Formal
C)Equity
D)Certified
E)Finance

Question 63

A corporation that,with minor errors,has substantially met the requirements of the state incorporation statute is known as which of the following?

A)A de jure corporation
B)A corporation by estoppel
C)A corporation by reservation
D)An inactive corporation
E)A de facto corporation

Question 64

Which of the following is not a type of bond that a corporation may issue?

A)Income
B)Equity
C)Secured
D)Unsecured
E)Convertible

Question 65

A bond in which specific property supports the corporations' obligation to repay the face value of the bond is called an)________ bond?

A)Convertible
B)Unsecured
C)Secured
D)Income
E)Equity

Question 66

Only the state can challenge a de facto corporation's existence as a corporate entity in a suit called an action of ________.

A)Res ipsa
B)Quo warranto
C)Quo facto
D)Sine qua non
E)Quo jure

Question 67

If Callie sues Min-ji,Marcus,and Penelope for unpaid amounts without a novation in place,what would be the most likely result?

A)Min-ji,Marcus,and Penelope will win so long as they can prove that Callie knew that the feed was purchased for a new corporation and not for their personal farm use.
B)Callie would likely win unless it can be established that the new corporation is making a profit and is able to pay her.
C)Callie would likely win because courts generally hold promoters liable and rule that preincorporation contracts do not bind the new corporation.
D)Callie would likely win unless it can be established that the new corporation was capitalized with at least $100,000 and is able to pay her.
E)Min-ji,Marcus,and Penelope will win unless they have already paid partial amounts leading Callie to expect that they,not the corporation,had accepted liability.

Question 68

A bond in which no assets support the corporations' obligation to repay the face value of the bond is called an)________ bond?

A)Income
B)Equity
C)Secured
D)Convertible
E)Unsecured

Question 69

In regard to losses,what type of tax treatment would an S corporation provide?

A)Losses may only be deducted from shareholders' personal income when the S corporation has shown a profit for at least three straight years.
B)Shareholders may deduct corporate losses from their personal income.
C)Losses may only be deducted from the S corporation's taxes,not the shareholders' personal income.
D)Losses may only be deducted from shareholders' personal income when the S corporation has shown a profit for at least two years.
E)Losses may only be deducted from shareholders' personal income when the shareholder's gains from other endeavors exceed losses from the S corporation.

Question 70

A bond which allows shareholders to exchange the bond for shares of company stock is an) ________ bond?

A)Income
B)Convertible
C)Secured
D)Unsecured
E)Equity

Question 71

[Nail Salon] Thea and her friends Josef and Danny,all U.S.citizens,want to open a nail salon.They would all like to avoid personal liability for debts of the business and/or wrongful acts of each other.They would also like to minimize taxation.Thea is in favor of a corporation and asks if there is any problem with that form of business.Josef and Danny say that they are concerned about double taxation with a corporation and that they are in favor of a partnership,even if personal liability is a concern.Thea said that she was concerned about the deductibility of losses if the corporate form was chosen.She did some research and suggested an S corporation to Josef and Danny which she claimed would avoid the problem of double taxation.
Regarding the concerns of Josef and Danny about double taxation and Thea's suggestion regarding an S corporation,which of the following is true?

A)Thea is correct in that double taxation may be avoided through the use of an S corporation,but this can be negated through taxation of dividends at the higher corporate rate regardless of the tax rate of the shareholder.
B)Josef and Danny are incorrect,and an S corporation is not needed for any double taxation issue because with both a general corporation and an S corporation,tax effects would be the same with the corporation being taxed on earnings and shareholders being taxed again on dividends.
C)Thea's suggestion will not solve the issue of double taxation because with both a regular corporation and with an S corporation,the corporation is taxed on income and shareholders are taxed again on dividends they receive.
D)Thea is correct that double taxation may be avoided through the use of an S corporation,but this may be negated by the fact that S corporations are taxed at a rate double that of general corporations.
E)Thea is correct that S corporation shareholders report their income from the corporation only once,as personal income.

Question 72

Which of the following is another name for debt securities?

A)Stocks
B)Equity securities
C)Certificates of deposit
D)Bonds
E)Preferred debt

Question 73

The friends who agreed to buy stock are known by what term?

A)Novators
B)Subscribers
C)Promoters
D)Acceptors
E)Subscriptioners

Question 74

Owners of which of the following types of stock enjoy preferences with respect to assets and dividends?

A)Complex
B)Common
C)Acknowledged
D)Simple
E)Preferred

Question 75

If the incorporator or promoters make an error or omission during the incorporation process,courts may rule that the organization is not a corporation,in which case the organization may be ruled a[n] ________ corporation.

A)Defective
B)Illegal
C)Uncertified
D)Expelled
E)Defunct

Question 76

A court may hold that a defective corporation is a[n] ________ in order to prevent it from claiming it is not a corporate entity in order to escape liability to a third party.

A)Corporation by reservation
B)De facto corporation
C)Inactive corporation
D)Corporation by estoppel
E)De jure corporation

Question 77

Owners of which of the following types of stock own a portion of a corporation but do not enjoy any preferences?

A)Preferred
B)Complex
C)Common
D)Acknowledged
E)Simple

Question 78

Which of the following types of securities represent ownership in a corporation?

A)Debt
B)Finance
C)Equity
D)Formal
E)Certified

Question 79

Is there an impediment to the business qualifying as an S Corporation,based on the information available?

A)Yes,because a business must operate as a general corporation for at least two years before converting to an S corporation.
B)Yes,because a business must operate as a partnership for at least two years before converting to an S corporation.
C)No.
D)Yes,because there must be at least 100 shareholders involved.
E)Yes,because at least one-third of the shareholders in an S corporation must be corporations.

Question 80

[Horse Tracks] Min-ji,Marcus,and Penelope decided to form a corporation called Horse Tracks to raise horses.They all began the incorporation process by arranging for necessary capital and financing.They raised capital from their friends by making deals whereby their friends would purchase stock in the new corporation.After the corporation was formed,a problem arose with a contract for feed that Min-ji,Marcus,and Penelope had entered into while organizing the corporation.Callie,the seller of the feed,claimed that she had not been fully paid and threatened to sue the corporation.The contract Min-ji,Marcus,and Penelope had with Callie did not reference liability after the new corporation came into legal existence.Min-ji,Marcus,and Penelope asked for a novation,but were uncertain as to whether that would occur.
Min-ji,Marcus,and Penelope would be identified by what term in their arranging for necessary capital and financing for the corporation?

A)Promoters
B)Subscriptioners
C)Novators
D)Subscribers
E)Acceptors