Chapter 34
Corporate Formation
and Financing
N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows.
N A question new to this edition of the Test Bank.
+ A question modified from the previous edition of the Test Bank.
= A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
1. A corporation is an artificial being.
2. State laws regarding corporations are uniform.
3. A corporation does not possess the same right of access to the courts as
natural persons.
4. A corporate director is an “owner” of the corporation.
5. The day-to-day business of a corporation is managed by officers employed by
the board of directors.
6. One of the key advantages of the corporate form is the unlimited liability of its
owners.
7. When a corporation earns profits, it must pass them on to shareholders in the
form of dividends.
8. The state can suspend the entity’s corporate status until the taxes are paid or
even dissolve the corporation for failing to pay taxes.
9. An alien corporation is a corporation formed in another country.
10. The U.S. Postal Service is a public corporation.
11. A corporation cannot be formed without a profit-making purpose.
12. A foreign corporation normally does not need a certificate of authority to sell
goods or services via the Internet or by mail.
13. A publicly held corporation is any corporation whose shares are publicly traded
in a securities market.
14. The Revised Model Business Corporation Act gives a close corporation less
flexibility in determining its rules of operation.
15. A corporation whose shares are held by relatively few persons is a close
corporation.
16. If a corporation has S corporation status, it can avoid the imposition of income
taxes at the corporate level.
17. A close corporation can operate as an S corporation.
18. A partnership cannot be a shareholder in an S corporation.
19. Selecting the state in which to incorporate is an important step in the
incorporation procedure.
20. A corporate name must include the word Corporation, Incorporated, Company,
or Limited, or abbreviations of these terms.
21. The purpose of a corporation may be specified in its articles of incorporation.
22. A corporation has perpetual existence in most states unless the articles of
incorporation state otherwise.
23. Bylaws are the internal rules of management for a corporation.
24. The articles of incorporation serve as a primary source of authority for the
corporation’s future organization and business functions.
25. The registered agent is the person who can receive legal punishment (such as
fines and imprisonment) on behalf of the corporation.
26. A de jure corporation is one that is not properly formed.
27. A business that holds itself out as being a corporation may not be able to deny
corporate status, even if it makes no attempt to incorporate.
28. A state constitution may resolve a conflict among documents involving a
corporation.
29. Express powers of a corporation can be found in the articles of incorporation.
30. A corporation has an implied power to extend credit to those with whom it has a
legal or contractual relationship.
31. In the absence of express constitutional, statutory, or other provisions, the
corporation has no implied powers.
32. A court will pierce the corporate veil of a corporation that is formed to evade an
existing legal obligation.
6 UNIT FIVE: BUSINESS ORGANIZATIONS
33. Bonds represent the borrowing of funds by firms.
34. The date when the principal of a bond is returned to the investor is called the
maturity date.
35. Any person who buys preferred stock has priority over a holder of common
stock to payment on the corporation’s dissolution.
MULTIPLE CHOICE QUESTIONS
1. Skyla and Terry want to form and do business as Unique Boutique Corporation.
Its existence depends generally on
a. city or county corporate codes.
b. the Entrepreneur’s Corporate Handbook.
c. the federal Administrative Procedure Act.
d. state law.
2. Pola and Quincey want to form and do business as River Tours Corporation. A
corporation can consist of
a. no natural persons.
b. one natural person but not more.
c. one or more natural persons.
d. only more than one natural person.
3. Inez and Jason are the shareholders and directors of Kleen Kustodial
Corporation. Lily and Moe are Kleen’s officers. As in other corporations, the
responsibility for the overall management of Kleen rests with
a. the board of directors.
b. the officers.
c. the owners.
d. the shareholders.
4. George is the founder of Excellent Exotics Corporation. Wilson is a shareholder
and director and Bill is an officer. The daily business operations of Excellent
Exotics are overseen by
a. Bill.
b. Wilson.
c. George.
d. George and Wilson.
5. Erin is a shareholder in African Adventures. As a shareholder, Erin
a. owns shares of stock in African Adventures.
b. is the founder of African Adventures.
c. has no say in the election of African Adventure’s board of directors.
d. is liable for all the debts of African Adventures.
6. Finn and Glenda want to form and do business as Hobby Crafts Corporation. A
corporation is
a. a natural person.
b. a tangible thing.
c. an artificial legal person.
d. a visible radiance.
7. Ruby Red Corporation is incorporated in South Carolina. In that state, Ruby
Red is
a. a domestic corporation.
b. a foreign corporation.
c. an alien corporation.
d. a non-entity.
8. Painless Dental Equipment Company is incorporated in Colorado. In Wyoming,
Painless is
a. a domestic corporation.
b. a foreign corporation.
c. an alien corporation.
d. a non-entity.
9. Wiley incorporates his business as Wiley Wire Corporation in Texas. He and
his group of shareholders intend to make a profit from their sales of fencing
wire. Wiley Wire Corporation is
a. a nonprofit corporation.
b. not a corporation.
c. an alien corporation.
d. a private corporation.
10. A firm named Scientific Discovery Corporation (SDC) makes an attempt to
incorporate for a purpose other than making a profit. SDC is
a. a foreign corporation.
b. an alien corporation.
c. a nonprofit corporation.
d. not a corporation.
11. Bay City Merchants Corporation has six shareholders, four of whom are
members of the same family. All of Bay City’s shareholders agree in writing to
operate without shareholders’ meetings. Under the Revised Model Business
Corporation Act, this most likely warrants
a. no penalties or sanctions.
b. the imposition of a fine on Bay City.
c. the imprisonment of Bay City’s shareholders.
d. the piercing of Bay City’s corporate veil.
12. The shares of Home Mortgage Corporation are publicly traded in securities
markets. Home Mortgage Corporation is
a. a close corporation.
b. a privately held corporation.
c. a public corporation.
d. a publicly held corporation.
13. Smalltown, Alabama is incorporated by the government. Smalltown is
a. a foreign corporation.
b. a public corporation.
c. a private corporation.
d. an alien corporation.
14. Miracle Mobile Devices, Inc., is a private, for-profit corporation that (1) was
formed for the purpose of manufacturing and distributing a newly patented
tablet, (2) is owned by five shareholders, (3) is subject to double taxation, and
(4) has made no public offering of its shares. Miracle is
a. an S corporation.
b. a close corporation.
c. a nonprofit corporation.
d. a professional corporation.
15. Boutique Corporation would like to change its corporate status to that of an S
corporation to avoid income taxes at the corporate level. To qualify, the
shareholders must not be
a. corporations.
b. estates.
c. individuals.
d. partnerships.
16. Yellowbox, a DVD rental company, would like to change its corporate status to
that of an S corporation to avoid income taxes at the corporate level. To qualify,
Yellowbox must
a. be located in the United States.
b. have more than one hundred shareholders.
c. be a non-profit corporation.
d. have more than one class of stock.
17. Hudson and Ilka want to market a new line of kayaks and related gear under
the brand name Journeys as a corporation—Journeys Inc. To avoid income
taxes at the corporate level, they should form
a. a C corporation.
b. a close corporation.
c. an S corporation.
d. a private corporation.
18. The abbreviation “P.A.” in the name “Conrad & Drake, Accountants, P.A.”
means that this organization is
a. a private association.
b. a professional association.
c. a public association.
d. a publicly administered corporation.
19. Breads & Brews, Inc., files its articles of incorporation with the appropriate
government agency. Least likely to appear in the articles is the name of
a. each of the corporation’s incorporators.
b. each of the corporation’s shareholders.
c. the corporation.
d. the corporation’s initial registered agent.
20. Myron and Norah would like to form Originals, Inc., to do business in the art
market. Generally, the articles of incorporation for a corporation do not include
a. the corporate name.
b. the nature and purpose of the corporation.
c. the capital structure of the corporation.
d. the minutes of the first organizational meeting.
21. Stan incorporates his scientific products business as Tech Supply, Inc. Unless
the articles of incorporation state otherwise, Tech Supply most likely has
a. a finite, yet-to–be-determined existence.
b. a one-year, nonrenewable existence.
c. a one-year, renewable existence.
d. perpetual existence.
22. Like the bylaws of other corporations, the bylaws of Retail Sales, Inc.,
a. establish the operating name of the corporation.
b. establish the value and classes of corporate stock.
c. were adopted at its first organizational meeting.
d. were submitted for approval to the public official in charge.
23. Olinka is a registered agent for Pads, Pods & Phones, Inc., which incorporated
in California. As a registered agent, Olinka
a. agreed to buy stock in Pads, Pods & Phones before it existed.
b. applied to California on behalf of Pads, Pods & Phones to obtain its
corporate charter.
c. represents Pads, Pods & Phones as a marketing agent.
d. receives legal documents on behalf of Pads, Pods & Phones.
24. Custom Business Applications Corporation substantially complies with all
conditions precedent to incorporation. Custom Business is most likely
a. a corporation by estoppel.
b. a de facto corporation.
c. a de jure corporation.
d. ultra vires.
25. The articles of Equestrian Stables Inc. list an incorrect address for its
incorporator. Under this circumstance, Equestrian Stables is most likely
a. a corporation by estoppel.
b. a de facto corporation.
c. a de jure corporation.
d. ultra vires.
26. Wings2Go Corporation fails to hold an organizational meeting. In this
circumstance, at common law Wings2Go is most likely
a. a corporation by estoppel.
b. a de facto corporation.
c. a de jure corporation.
d. ultra vires.
27. When a conflict arises among the documents that involve Express Flights
Corporation, the first priority for resolving the conflict is given to
a. resolutions of the board of directors.
b. Express Flights’s bylaws.
c. state statues.
d. the U.S. Constitution.
28. Memphis Music Makers Incorporated has a stated purpose to sell musical
instruments. If chief executive officer Tabitha contracts with Frenzied Firearms
in Memphis Music Makers’s name to sell a shotgun, she has likely committed
a. an ultra vires act.
b. a de facto act.
c. a de jure act.
d. a legal act.
29. Luke is an owner of Lucky Luke’s Corporation. Luke uses the corporate entity
of Lucky Luke’s to perpetuate fraud. In this case, a court is likely to expose
Luke to personal liability by
a. piercing the corporate veil.
b. issuing a de facto judgment.
c. issuing a de jure judgment.
d. issuing a ultra vires judgment.
30. O.K. Oil holds itself out to others as being a corporation but makes no attempt
to incorporate. In this circumstance, O.K. is most likely
a. a corporation by estoppel.
b. a de facto corporation.
c. a de jure corporation.
d. ultra vires.
31. Perfect Tone Phones, Inc. is a corporation. Perfect Tone’s implied powers
enable it to
a. amend the articles of incorporation.
b. bring a derivative suit.
c. declare dividends.
d. borrow funds, extend credit, and make charitable contributions.
32. Urban Commerce, Inc., issues bonds, which are also known as
a. cumulative investments.
b. fixed-income securities.
c. equity securities.
d. preferred stock.
33. Lyla is a common shareholder in Norman’s Nutty Nuts Corporation. As a
common shareholder, Lyla is
a. guaranteed regular payments of dividends.
b. not guaranteed any payments of dividends.
c. not given any voting rights.
d. liable for all of Norman’s Nutty Nuts’s debts.
34. Blair and Chanel are holders of common stock in Discount Retail Stores, Inc.
Like other holders of common stock, they have a residual position in the overall
financial structure of Discount Retail, because they
a. are guaranteed to receive more than the amount of their investment.
b. are the last to receive returns for their investment.
c. have priority to the firm’s assets if it becomes insolvent.
d. reside in the state of the firm’s incorporation.
35. Qiara is a holder of preferred stock in Rio Grande Irrigation & Development,
Inc. Qiara has priority over holders of Rio common stock as to
a. nothing.
b. payments of dividends.
c. the date on which Rio must repurchase the shares.
d. upward changes in the market price of the shares.
ESSAY QUESTIONS
1. Starr Cardio, Inc., is a small business. Ted, Uma, and eleven other members of
the Starr family own all of its stock. Currently, Starr’s income is taxed at the
corporate level and, after being distributed to the family members, at the
shareholder level. Can Starr retain its corporate status but otherwise avoid this
double taxation? If so, how?
2. Dennis is a promoter for the soon-to–be-incorporated firm of eBroadcast Sports,
Inc. Dennis signs a contract with Fitz & Geraldo, Accountants, to render their
services before eBroadcast Sports is incorporated and for one year after the in–
corporation. eBroadcast Sports is incorporated. Three months later, after Fitz &
Geraldo has continued performing under the contract, the eBroadcast Sports
board of directors tells the accountants that it is canceling their contract. Fitz &
Geraldo files a suit against Dennis and eBroadcast Sports, alleging breach of
contract. Will Fitz & Geraldo prevail?