Chapter 39
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
B1. A corporation is recognized as a “person.”
B2. Normally, corporate shareholders are personally liable for the obligations of the
corporation.
B3. A corporation is liable for the torts committed by its officers within the course and
scope of their employment.
B4. When a corporation earns profits, it must distribute them to shareholders.
B5. A corporation is referred to as a domestic corporation by its home state.
B6. A publicly held corporation is a private corporation.
B7. An S corporation is treated the same as a regular corporation for tax purposes
B8. The first step in the incorporation process is to select a state in which to operate.
B9. The primary document needed to incorporate a business is the articles of
incorporation.
B10. A new corporation’s name can be deceptively similar to, but not the same, as the
name of an existing corporation doing business within the state.
B11. A corporation has perpetual existence regardless of what the articles of incorporation
state.
B12. In some states, the courts will treat a corporation as a legal corporation despite a
defect in its formation.
B13. Implied powers of a corporation are expressed in state statutes.
B14. Express powers of a corporation are found in its articles of incorporation.
B15. A court will not pierce the corporate veil of a corporation that is formed merely to
evade an existing legal obligation.
B16. When the corporate privilege is abused for personal benefit, the courts will require
the owners to assume personal liability.
B17. Bonds represent the purchase of ownership in a business firm.
B18. Common stock provides a proportionate interest in the corporation with regard to net
assets.
B19. Preferred shares normally have a fixed maturity date on which the firm must pay
them off.
B20. Usually, a private equity firm buys an entire corporation and may later reorganize it as
a publicly held corporation.
MULTIPLE CHOICE QUESTIONS
B1. Finn and Glenda want to form and do business as Hobby Crafts Corporation. A
corporation is a legal entity created and recognized by
a. a central federal administrative agency.
b. a city or county clerk’s office.
c. an artificial legal person.
d. state law.
B2. Inez and Jason are the shareholders and directors of Kleen Kustodial Corporation. Lily
and Moe are Kleen’s officers. As with 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.
B3. Felicity and Gideon want to form and do business as Home Healthcare Corporation. A
corporation is
a. a natural being.
b. a tangible thing.
c. an artificial person.
d. a visible radiance.
B4. Gelato Ice, Inc., is incorporated in the state of New Jersey and is doing business in the
state of New York. In New York, Gelato is properly referred to as
a. a domestic corporation.
b. a foreign corporation.
c. an alien corporation.
d. a de jure corporation.
B5. The shares of Capital Corporation are publicly traded in securities markets. Capital
Corporation is
a. a private corporation.
b. a privately held corporation.
c. a public corporation.
d. a publicly held corporation.
B6. 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.
B7. Ruby Red Corporation has six shareholders, four of whom are members of the same
family. All of Ruby’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 Ruby.
c. the imprisonment of Ruby’s shareholders.
d. the piercing of Ruby’s corporate veil.
B8. Miracle Vacuum, Inc., is a private, for-profit corporation that (1) was formed for the
purpose of manufacturing and distributing a newly patented appliance, (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 closely held corporation.
c. a nonprofit corporation.
d. a professional corporation.
Fact Pattern 39-1B (Questions B9–B10 apply)
Bertram, Claudia, and Dynah form Eat Local, Inc., a closely held corporation, and agree to
restrict the transfer of its stock to anyone else. The agreement provides that if one of the
shareholders dies, his or her shares of stock in Eat Local will be divided to maintain the
proportionate control of the survivors.
B9. Refer to Fact Pattern 39-1B. A reasonable purpose for a stock transfer restriction in a
closely held corporation, like the agreement between Bertram, Claudia, and Dynah, is
a. a desire to limit the participation of outsiders in the firm.
b. a goal to restrain insiders from taking advantage of their position.
c. an attempt to restrain the free flow of commerce among investors.
d. a wish to restrict the transfer of the shareholders’ physical assets.
B10. Refer to Fact Pattern 39-1B. Later, Bertram dies. With respect to the stock transfer
restriction agreement, Bertram’s death most likely
a. triggers the division provision.
b. invalidates the entire agreement.
c. voids the division provision only.
d. violates the entire agreement.
B11. Frida and Gregor want to market a new line of fishing gear. To avoid income taxes at
the corporate level, they should form
a. a C corporation.
b. a closely held corporation.
c. an S corporation.
d. a private corporation.
B12. The abbreviation “P.A.” in the name “Painless Dental, P.A.” means that this
organization is
a. a private association.
b. a professional association.
c. a public association.
d. a publicly administered corporation.
B13. Caffeine Café, 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.
B14. Like the bylaws of other corporations, the bylaws of Farmland Equipment, 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.
B15. Stable Hydraulics Corporation’s articles list an incorrect address for its incorporator.
Under this circumstance, Stable is most likely
a. a corporation by estoppel.
b. a de facto corporation.
c. a de jure corporation.
d. ultra vires.
B16. Rapid Pest Control itself out to others as being a corporation but makes no attempt to
incorporate. Ponce signs a contract with Rapid Pest Control that is not performed.
Ponce files a suit against the firm. The court will likely hold that Rapid Pest Control is
a. a corporation by estoppel.
b. an alien corporation.
c. an S corporation.
d. ultra vires.
B17. Niki owns O.K. Oil Corporation. Niki uses O.K.’s funds to pay her personal expenses,
creates Pure Fuel Corporation to engage in the same business as O.K., transfers O.K.’s
assets to Pure Fuel, and petitions O.K. into bankruptcy. This most likely warrants
a. a bonus to Niki for financial maneuvers.
b. a discharge for O.K. in bankruptcy.
c. a pierce of the corporate veil.
d. a review of Pure Fuel’s articles of incorporation.
B18. Financial Innovations, Inc., issues bonds, which are also known as
a. cumulative investments.
b. debt securities.
c. equity securities.
d. preferred stock.
B19. Dag and Elke are holders of common stock in Fragrances, Inc. (FI). Like other holders
of common stock, they have a residual position in the overall financial structure of FI,
because they
a. are guaranteed to receive more than the amount of their investment.
b. are the last to receive payment for their investment.
c. have priority to FI’s assets if FI becomes insolvent.
d. reside in the state of FI’s incorporation.
B20. Lita is a holder of preferred stock in Mighty Clean Detergents, Inc. Lita has priority
over holders of Mighty common stock as to
a. nothing.
b. payments of dividends.
c. the date on which Mighty must repurchase the shares.
d. upward changes in the market price of the shares.
ESSAY QUESTIONS
B1. 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?
B2. Dan is a promoter for the soon-to–be-incorporated firm of E-Business, Inc. Dan signs a
contract with Smith & Jones, Accountants, to render their services before E-Business is
incorporated and for one year after the incorporation. E-Business is incorporated.
Three months later, after Smith & Jones has continued performing under the contract,
the E-Business board of directors tells the accountants that it is canceling their con–
tract. Smith & Jones files a suit against Dan and E-Business, alleging breach of
contract. Will Smith & Jones prevail?
