The Legal Environment of Business, 8e (Kubasek)
Chapter 17 Law and Business Associations – II
1) The ________ is the most common form of business organization in the United States.
A) partnership
B) C corporation
C) S corporation
D) limited liability company
2) Which of the following is an incorrect statement regarding the corporate form of business
organization?
A) The dominant form of business organization in the United States is the corporation.
B) A corporation is a legal entity created by federal law.
C) A corporation raises capital by issuing stock to investors.
D) Although the corporation may have many owners, it is legally treated as a single person.
3) Which of the following best defines a corporation?
A) It is an entity created and authorized by federal law that raises capital by issuing stock to
limited partners.
B) It is an entity created and authorized by state law that raises capital by issuing stock to
investors, who own the corporation.
C) It is an entity created and authorized by federal law that raises capital by issuing stock to
investors, who own the corporation.
D) It is an entity created and authorized by state law that raises capital by issuing stock to limited
partners.
4) Which of the following is true of a corporation?
A) It is the least dominant form of business organization.
B) It can only be created by federal law.
C) It is legally treated as a single person.
D) It is legally owned by only one person.
5) The capital that a corporation raises through the sale of shares that entitle the shareholders to
certain rights of ownership is known as ________.
A) stock
B) currency
C) dividend
D) interest
6) A corporation is a legal entity created by federal law.
7) The partnership is the most common form of business organization in the United States.
8) A corporation raises capital by issuing stock to investors.
9) A corporation is legally treated as a single person.
10) A corporation formed in one country but doing business in the United States is referred to in
the United States as a(n) ________ corporation.
A) domestic
B) alien
C) foreign
D) Subchapter S
11) Trayon Industries is a public corporation established in California in 2007. It decides to
expand its base of operations and starts operating in the state of Nevada, too. In Nevada, Trayon
will be known as a(n) ________ corporation.
A) alien
B) foreign
C) domestic
D) eleemosynary
12) A corporation whose stock is not traded on the national securities exchanges but is held by a
small group of people is a ________ corporation.
A) transnational
B) multinational
C) publicly held
D) closely held
13) Which of the following statements is true of closely held corporations?
A) The stock of these corporations is traded on national securities exchanges.
B) The stock of these corporations is usually held by a small number of people.
C) The shareholders of these corporations are considered to be limited partners.
D) The shareholders of these corporations are not permitted to serve as directors.
14) A corporation whose stock is traded on at least one national securities exchange is known as
a(n) ________ corporation.
A) private
B) publicly held
C) closely held
D) eleemosynary
15) Which of the following statements is true of a multinational corporation?
A) It is declining in importance around the world because it is increasingly being replaced by
private corporations.
B) Its stock is generally traded on the securities exchanges of several nations.
C) It restricts its production to a single nation but maintains worldwide distribution sites.
D) Its managers should be citizens of the same country in which its corporate headquarters is
located.
16) Which of the following statements is true of a Subchapter S corporation?
A) It is taxed like a publicly held corporation.
B) It is organized and operated as a general partnership.
C) It is taxed like a partnership.
D) It is organized and operated as a limited liability partnership.
17) To qualify for Subchapter S treatment under the Internal Revenue Code, a domestic
corporation must have ________.
A) membership in an affiliated group of corporations
B) more than 35 shareholders
C) only one class of stock outstanding
D) at least one nonresident alien shareholder
18) Wheels Enterprises, a car manufacturer, is a closely held corporation. Profits are taxed to the
owners as ordinary income but not to the corporation as a unit. The owners have mutually agreed
that their total number will never exceed 35 and that none of the shareholders can be a non-
resident alien. In this scenario, Wheels is an example of a(n) ________ corporation.
A) professional
B) Subchapter S
C) eleemosynary
D) Subchapter C
19) Which of the following is a characteristic of a professional corporation?
A) It is organized as a public corporation but taxed as a partnership.
B) Its owners cannot take the tax advantages of deductions for health.
C) Its owners are considered limited partners rather than general partners.
D) Its owners do not enjoy limited liability for their negligence.
20) Which of the following is true of nonprofit corporations?
A) They include hospitals, educational institutions, and charities, but exclude religious groups.
B) They are always privately held corporations that are created for charitable and benevolent
purposes.
C) They are used by groups to carry out transactions and own property without individuals being
held liable.
D) In legal papers, they are referred to as Subchapter S corporations.
21) Nonprofit corporations are also called ________.
A) eleemosynary institutions
B) Subchapter C corporations
C) alien corporations
D) private corporations
22) Closely held corporations are publicly held corporations.
23) Those corporations whose stock is traded on the national securities exchanges are known as
publicly held corporations.
24) A transnational corporation does not restrict its production to a single nation.
25) To qualify for Subchapter S treatment under the Internal Revenue Code (IRC), a domestic
corporation must have more than 35 shareholders.
26) The funds for a rollover business start-up corporation come from an individual’s 401K plan.
27) List and describe the various ways to classify corporations.
28) Which of the following statements is true when creating a corporation in the United States?
A) Each of the 50 states has a general incorporation statute that stipulates the articles of
incorporation to be used in that state.
B) Incorporation is a federal matter and requires the recording of articles of incorporation with
the U.S. Secretary of State.
C) Corporations cannot be created without the enactment of a local ordinance in the city or
county where the corporate headquarters is to be located.
D) Corporations are created by private agreement and do not require the filing of any documents
with a government official.
29) Which of the following usually occurs at a corporation’s first board meeting?
A) The articles of incorporation are filed.
B) Bylaws are enacted.
C) The face value of the stock to be issued is decided.
D) A certificate of incorporation is issued.
30) Which court is considered the most influential court in the United States with regard to
corporate governance and the chief arbiter of conflicts between corporations?
A) the New York State Supreme Court
B) the Supreme Court of California
C) the Supreme Court of Illinois
D) the Delaware Supreme Court
31) Each of the fifty states has a general incorporation statute that stipulates the articles of
incorporation to be used in that state.
32) The Uniform Corporation Code (UCC) sets forth the process for incorporation in each of the
fifty states.
33) Explain how corporations are incorporated in the United States.
34) An unsecured long-term corporate loan is called a ________.
A) bond
B) note
C) debenture
D) share
35) A long-term corporate loan secured by a lien on corporate assets is called a ________.
A) bond
B) note
C) debenture
D) share
36) Which of the following is a difference between a note and a bond?
A) A note is a form of equity financing, whereas a bond is a form of debt financing.
B) A note is a form of debt financing, whereas a bond is a form of equity financing.
C) A note is a long-term loan, whereas a bond is a short-term loan.
D) A note is a short-term loan, whereas a bond is a long-term loan.
37) In order to be issued, the number of shares of stock must be ________.
A) authorized in the corporation’s articles of incorporation
B) purchased by the directors of the corporation
C) registered under the incorporation statute of Delaware
D) approved by the U.S. Secretary of Treasury
38) Which class of stock entitles its owner to vote for a corporation’s board of directors, receive
dividends, and participate in the net assets upon liquidation of the corporation?
A) preferred stock
B) privileged stock
C) common stock
D) convertible stock
39) Which class of stock entitles its owner to special options relating either to dividends or to the
distribution of assets?
A) preferred stock
B) privileged stock
C) common stock
D) limited stock
40) Nick and Jamie own stock in Chromex Industries, a watch manufacturer. In 2015, Nick
received dividend at the rate of 2 percent, whereas Jamie received dividend at the rate of 0.5
percent. In this scenario, which type of stock did Nick own?
A) cumulative preferred
B) common
C) convertible
D) participating preferred
41) Owners of ________ stock do not lose their rights to a dividend in a year in which no
dividends are declared.
A) cumulative preferred
B) participating preferred
C) convertible
D) common
42) Owners of ________ receive either the par value of their stock or a specified monetary
amount before the common shareholders share pro rata in the remainder of the assets.
A) cumulative preferred stock
B) common stock
C) convertible stock
D) liquidation preferred stock
43) Allison holds stock in CTC Drugs, a leading pharmaceutical company. In 2015, Allison
traded her stock for another type of stock that granted her the right to vote and the right to
participate in income through dividends. Which class of stock did Allison own initially?
A) cumulative preferred stock
B) participating preferred stock
C) convertible stock
D) common stock
44) Which of the following is the difference between a stock warrant and a stock option?
A) A stock warrant can be freely traded, whereas a stock option cannot be traded.
B) A stock warrant can only be issued to employees, whereas a stock option can be issued to
anyone.
C) A stock warrant authorizes its holder to purchase a stated number of shares at a stated price,
whereas a stock option allows its holder to purchase any number of shares at any price.
D) Shares bought through a stock warrant can be bought back by the company issuing the shares,
whereas shares bought through a stock option cannot be bought back.
45) The nominal or face value of a stock or bond is called the ________.
A) stated capital value
B) share price
C) stock price
D) par value
46) The good-faith rule presumes that ________.
A) corporate officers, directors, and agents will not take personal advantage of an opportunity
that, in all fairness, should have belonged to the corporation
B) buyback programs prevent stock options and the new shares resulting from the exercise of
options from diluting stock prices and earnings per share
C) officers and directors will exercise their duties in a manner they reasonably believe to be in
the best interests of the corporation
D) the valuation of the property or services given as consideration for the stock is fair as long as
it is honestly made
47) Notes are long-term loans secured by a lien or mortgage on corporate assets.
48) Dividend payments made to owners under equity financing are tax deductible, whereas
interest payments on debt securities are not.
49) All shares authorized by the corporation’s articles of incorporation must be issued and sold to
shareholders immediately.
50) Although employees are granted the rights to purchase shares at a stated price, these rights
cannot be traded.
51) Buyback programs are used to prevent stock options and the new shares resulting from the
exercise of options from diluting stock prices and earnings per share.
52) If a corporation issues shares for less than the stated value, it remains liable to the
shareholder for the difference between the stated value and the amount of consideration actually
paid.
53) List and describe the various types of bonds.
54) What is preferred stock? What are its various categories?
55) What is par value? Can a corporation legally issue no-par stock?