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
A1. A corporation is a legal entity created and recognized by federal law.
A2. Corporate profits can be subject to double taxation.
A3. A holding company is a company whose business activity consists of holding shares in
another company.
A4. A corporation cannot be held liable for the criminal acts of its employees.
A5. A corporation whose shares are not publicly traded is a partnership.
A6. A corporation formed in another country but doing business in the United States is
referred to in the United States as an alien corporation.
A7. An agreement between shareholders to restrict the transfer of a closely held
corporation’s stock is illegal.
A8. For liability purposes, some courts treat professional corporations somewhat like a
partnership.
A9. A promoter is personally liable for a preincorporation contract until the corporation
assumes liability.
A10. The articles of incorporation serve as a primary source of authority for a corporation.
A11. Each incorporator must have an interest in the corporation.
A12. Bylaws can conflict with the incorporation statute or the articles of incorporation.
A13. Courts in some states will treat an alleged corporation as if it were an actual
corporation for the purpose of determining the rights and liabilities in particular
circumstances.
A14. A corporation generally can engage in any act and enter into any contract available to
a natural person.
A15. To pierce the corporate veil means to ignore the corporate structure, exposing the
shareholders to personal liability.
A16. A court will not pierce the corporate veil of a corporation that is merely too “thinly”
capitalized.
A17. Stocks represent the borrowing of funds by firms.
A18. Common stock provides a proportionate interest in the corporation with regard to
control.
A19. Firms are obligated to return a principal amount per share to each holder of common
stock.
A20. Venture capital is capital provided to new business ventures by professional, outside
investors.
MULTIPLE CHOICE QUESTIONS
A1. Ivy and Justin want to form and do business as Kayak Adventures Corporation. A
corporation can be owned by
a. natural persons only.
b. artificial persons only.
c. artificial or natural persons.
d. neither “artificial” nor “natural” persons.
A2. Skyla and Terry want to form and do business as Unique Boutique Corporation. Most
statutes governing the formation and use of corporations are guided by
a. city or county corporate codes.
b. the Entrepreneur’s Corporate Handbook.
c. the federal Administrative Procedure Act.
d. the Revised Model Business Corporation Act.
Fact Pattern 39–1A (Questions A3–A4 apply)
Mountaintop Clearview Corporation authorizes Niles, its employee, to oversee its timber
operation. In the course of his employment, Niles disposes of the operation’s waste illegally.
Orson is a Mountaintop shareholder.
A3. Refer to Fact Pattern 39-1A. With respect to Mountaintop and Niles, liability for this
crime most likely rests with
a. neither Mountaintop nor Niles.
b. Mountaintop and Niles.
c. Mountaintop only.
d. Niles only.
A4. Refer to Fact Pattern 39-1A. Liability for Niles’s act most likely rests with Orson to
a. no extent.
b. the proportionate extent of the number of shares Orson owns.
c. the amount of Orson’s investment in the firm.
d. the full extent.
A5. Digitech is a foreign corporation, which means that Digitech
a. is an alien corporation.
b. is chartered in a foreign country.
c. may be required to obtain a certificate of authority to do business.
d. may do business only in foreign countries.
A6. Convenience Mart, Inc., is a closely held corporation. Convenience Mart is
a. eligible to make public offerings of securities.
b. exempt from filing a certificate of incorporation.
c. generally allowed to restrict the transfer of its stock.
d. taxed in the same manner as a partnership.
A7. Boutique Corporation would like to change its corporate status to avoid income taxes
at the corporate level. To qualify, the shareholders must not be
a. corporations.
b. estates.
c. individuals.
d. partnerships.
A8. Jim and Kiley are architects and members of J&K, P.C., a professional corporation. Jim
supervises Luc, an employee of the firm. As a member, Jim
a. is personally liable for any tort committed by Kiley.
b. has limited liability for any of Kiley’s acts of malpractice.
c. has no liability for any torts committed by Kiley or Luc.
d. may be personally liable for malpractice committed by Luc.
A9. To qualify as a professional corporation, Medical Clinic, P.C.,
a. must be a corporation formed by professionals.
b. must grant all shareholders voting rights.
c. must have at least thirty-five shareholders.
d. all of the choices.
A10. Sullivan and Taylor want to form a corporation to provide catering services. The first
step in the incorporation procedure is to
a. file the articles of incorporation.
b. hold the first organizational meeting.
c. secure a corporate name.
d. select a state in which to incorporate.
A11. Suki is a registered agent for Trans-state Trucking, Inc. (TTI), which incorporated in
Utah. As a registered agent, Suki
a. agreed to buy stock in TTI before it existed.
b. applied to Utah on behalf of TTI to obtain its corporate charter.
c. does business for TTI in Utah.
d. receives legal documents on behalf of TTI.
A12. Stan incorporates his scientific products business as Tech Precision Supply, Inc. This
firm could have perpetual existence in
a. a few states.
b. all states.
c. most states.
d. no states.
A13. Hailey and Ike hold the first organizational meeting of Java Kiosk Corporation.
Probably the most important function of this meeting is
a. adopting Java’s bylaws.
b. agreeing on Java’s purpose.
c. drafting Java’s articles.
d. obtaining a charter for Java.
A14. Start-Up Corporation substantially complies with all conditions precedent to incorpo-
ration. Start-Up has
a. corporate existence by estoppel.
b. de facto existence.
c. de jure existence.
d. ultra vires existence.
A15. Eager Beaver Corporation fails to hold a meeting to adopt bylaws. Under this
circumstance, Eager Beaver will still be treated as a legal corporation in those states
that recognize the common law doctrine of
a. corporation by estoppel.
b. de facto corporation.
c. de jure corporation.
d. ultra vires.
A16. Quixotic Company claims to be a corporation but it is not. Rachel signs a contract with
Quixotic that is not performed. In Rachel’s suit against Quixotic, a court will likely
recognize the firm as
a. a corporation by estoppel.
b. a de facto corporation.
c. a de jure corporation.
d. an ultra vires corporation.
A17. Wild & Scenic River Tours, Inc., is a corporation. Wild & Scenic has the implied power
to
a. issue stocks and bonds.
b. execute contracts and negotiable instruments.
c. buy and sell (or lease) property.
d. perform all acts reasonably appropriate and necessary to accomplish its
corporate purposes.
A18. Omega Corporation makes and markets digital timers, clocks, and related products.
Like other business corporations, Omega issues securities to
a. increase its market share.
b. obtain financing.
c. reduce its production costs.
d. safeguard its facilities.
A19. Mari buys 500 shares of common stock in National Livestock Traders, Inc. As a
shareholder of record, Mari owns a proportionate interest in terms of
a. control, earnings, and net assets.
b. control only.
c. earnings and net assets only.
d. neither control nor earnings and net assets.
A20. Discount Factory Outlets, Inc., issues bonds. Bonds
a. are issued by businesses only.
b. are sometimes referred to as “stock with preferences.”
c. have maturity dates.
d. require periodic interest payments from their owners.
ESSAY QUESTIONS
A1. Agents and employees of Apples Corporation and Oranges Corporation are convicted
of conspiring to violate a federal law that is punishable by a term of imprisonment and
a fine. Can the corporations be held liable for these crimes? If so, how can they be
punished?
A2. Incredible eSales Corporation is a new Internet business. How can Incredible eSales
obtain capital to finance its operations?
