Chapter 27: The Law of Corporations
1. The major advantage of the corporate form over the partnership form is in the way the corporate form is
taxed.
2. The biggest disadvantage of a corporation is the inability to transfer ownership rights in it.
3. In general, a corporation can be formed for any lawful purpose.
4. The majority shareholder of a corporation can act for the corporation and bind it by contract.
5. A corporation that files for bankruptcy must be dissolved.
6. As a corporation is a legal entity separate and distinct from its owners and managers, it may continue
indefinitely with new owners, managers, and employees and thereby enjoy perpetual life.
7. A corporation cannot acquire and hold stock in other corporations.
8. A corporation can make its own reasonable rules and regulations for the internal management of its affairs.
9. In a merger of corporations, the two corporations cease to exist and a new corporation is formed.
10. The directors have a fiduciary duty to the corporation.
11. A corporation doing business in one state but chartered in another state is called
A. an alien corporation.
B. a domestic corporation.
12. Corporations established for a governmental purpose are legally termed
C. public service corporations.
D. profit-making corporations.
13. Electric, gas, and water companies are examples of
A. private corporations.
B. public corporations.
14. The application for incorporation filed with a state government is termed the
C. bylaws.
D. stock certificate.
15. The basic type of stock carrying the right to one vote per share owned is termed
C. participating stock
D. none of these.
16. The directors of a corporation
A. make or ratify contracts for the corporation.
B. appoint and set the salaries of the top officers of the company.
17. When two corporations cease to exist and a new corporation is formed, it is called
C. franchising.
D. none of these.
18. A corporation has the power
A. of perpetual succession.
B. to make its own bylaws.
19. Shareholders do not have the right to
C. transfer shares.
D. all of these.
20. The right to increase the capital stock of the corporation
C. is the preemptive right.
D. none of these.
21. Under extreme conditions, courts will disregard the corporation’s limited liability protection and make the
stockholders _______________ in a practice called “piercing the corporate veil.”
A. go to jail
B. declare bankruptcy
22. Mazher invested $10,000 and purchased 200 shares of stock in Trans Pacific Exporting, Inc. His 200 shares
of stock do not entitle him to vote in the corporation’s affairs, but he is guaranteed to receive $10 per share each
year of the distribution of the corporation’s profits. Mazher is a
A. promoter.
B. director.
23. Henry and Madelyn own and operate a small court-reporting school and have often considered incorporating
their business. Which of the following is a disadvantage of a corporation?
A. It can continue to function after their deaths.
B. Ownership interests are easily transferred.
24. Melvin and Larry individually each owned two restaurants in Oklahoma City. The two decided to form a
corporation, Southern Restaurant Management Group, Inc., to collectively manage their combined four
restaurants. Although the four restaurants are in Oklahoma, Melvin and Larry incorporated outside the United
States in the Cayman Islands. Their new corporation is termed a(n)
A. public corporation.
B. foreign corporation.
25. Which of the following is not one of the steps in the incorporation process?
A. promotion of the business idea and the corporate form for it
B. filing the articles of incorporation with the state government
26. Which of the following is not a corporate director’s responsibility or duty?
A. to appoint and set the salaries of top corporate officers
B. to owe a fiduciary allegiance to the corporation
27. Which of the following is an advantage of the corporate form?
C. costly and troublesome to organize
D. subject to extensive regulation of stocks and bonds
28. Typically corporate shareholders have limited liability and limited risk. Under which of the following
circumstances might the courts hold shareholders personally responsible for corporate debts?
C. if the corporation declared bankruptcy
D. In all of the above situations the courts would hold the shareholders personally liable for the corporation’s
debts.
29. Dexter and Desiree would like to organize a ballet company whose purpose would be ballet education and
charitable performances in their community. If their revenues from this corporation exceed its expenses, these
revenues will not be distributed to the corporate owners. If Dexter and Desiree follow through with their plans,
what specific type of corporation will they organize?
C. public corporation
D. public service corporation
30. The articles of incorporation are signed by individuals who are legally termed
A. founders.
B. promoters.
31. Enterprises in the form of ____________________ have the most sales, capital, employees, and property
holdings in this country.
32. Businesses obtain the authority to exist in the corporate form by complying with one of the
____________________ incorporation statutes.
33. A(n) ____________________ corporation is a private corporation that is owned by just a small number of
shareholders.
34. A public service corporation is also called a public ____________________.
35. A certificate of incorporation is more commonly called a corporate ____________________.
36. Stock may or many not have a(n) ____________________, which is the dollar amount printed on the face
of the stock certificate.
37. ____________________ is the process whereby all of the business assets are sold and the proceeds used to
pay off the creditors of the corporation with any remainder being returned to the shareholders.
38. A shareholder that does not wish to attend meetings and to vote in person ordinarily has the right to vote by
____________________.
39. Having a(n) ____________________ means owning less than 50 percent of the voting shares of a
corporation.
40. The stockholder’s right to purchase additional shares of a new stock issue so as to maintain her or his
percentage of ownership interest in the corporation is termed the ____________________.
41. Compare the advantages of the corporate from with its disadvantages.
The corporation has advantages that are essential for large-scale enterprises. These include perpetual life,
42. Beth, Wendy, and Pam individually produce a variety of arts and crafts in their homes. In order to increase
production, profitability, and visibility of their products, they have decided to incorporate. What must they
determine prior to incorporation? What kind of information will they need to provide to their state in order to
obtain a corporate charter?
Answers will vary. Beth, Wendy, and Pam will need to decide on the purpose(s) of their corporation as well as