1
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. The corporation is a creature of the common law.
B2. One of the key advantages of the corporate form is the unlimited liability of its
owners.
B3. The state can suspend the entity’s corporate status until the taxes are paid or
even dissolve the corporation for failing to pay taxes.
B4. When a corporation earns profits, it must pass them on to shareholders in the
form of dividends.
2 TEST BANK B—UNIT EIGHT: BUSINESS ORGANIZATIONS
B5. A foreign corporation normally does not need a certificate of authority to sell
goods or services via the Internet or by mail.
B6. A publicly held corporation is any corporation whose shares are publicly traded
in a securities market.
B7. The Revised Model Business Corporation Act gives a close corporation less
flexibility in determining its rules of operation.
B8. If a corporation has S corporation status, it can avoid the imposition of income
taxes at the corporate level.
B9. The articles of incorporation serve as a primary source of authority for the
corporation’s future organization and business functions.
B10. The registered agent is the person who can receive legal punishment (such as
fines and imprisonment) on behalf of the corporation.
B11. A corporation has perpetual existence unless the articles of incorporation state
otherwise.
CHAPTER 39: CORPORATE FORMATION AND FINANCING 3
B12. There are no important consequences if the procedures for incorporation are
not followed precisely.
B13. In the absence of express constitutional, statutory, or other provisions, the
corporation has no implied powers.
B14. In corporate law, acts of a corporation that are beyond its express or implied
powers are de facto or de jure acts.
B15. A court will pierce the corporate veil of a corporation that is formed to evade an
existing legal obligation.
B16. The alter-ego theory is applied when a corporation is so dominated and
controlled by an individual or group that the separate identities of the person (or
the group) and the corporation are no longer distinct.
B17. Bonds represent the borrowing of funds by firms.
B18. Voting rights in a corporation apply only to the election of the firm’s board of
directors.
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B19. Preferred stock is an equity security with preferences.
B20. Preferred stock is included among the liabilities of a business because it is
equity.
MULTIPLE CHOICE QUESTIONS
B1. Neci and Olwen want to form and do business as a corporation—Pastries &
Pies Inc. 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. Demario and Evander want to form and do business as a corporation—Farm-2-
Fork Restaurant Inc. A corporation is
a. a natural being.
b. a tangible thing.
c. an artificial person.
d. ultra vires.
B3. Dollars & Sense, Inc., is incorporated in the state of New Jersey and is doing
business in the state of New York. In New York, Dollars & Sense is properly
referred to as
a. a domestic corporation.
b. a foreign corporation.
c. an alien corporation.
CHAPTER 39: CORPORATE FORMATION AND FINANCING 5
d. a public corporation.
B4. 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.
B5. Orel incorporates his business as Posts & Wire Corporation in Texas. He and
his group of shareholders intend to make a profit from their sales of fencing
materials. Posts & Wire is
a. a nonprofit corporation.
b. not a corporation.
c. an alien corporation.
d. a private corporation.
B6. 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.
B7. Miracle Mobile Devices, Inc., is a private, for-profit corporation that (1) was
formed for the purpose of manufacturing and distributing a newly patented
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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.
B8. Boutique Bodega 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.
B9. 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.
B10. 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.
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B11. Bread & 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.
B12. Like the bylaws of other corporations, the bylaws of Equipment Leasing, 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.
B13. Equestrian Stables Corporation’s articles 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.
B14. Deepwater Dredging & Excavation holds itself out to others as being a
corporation but makes no attempt to incorporate. Estuary Marina signs a
contract with Deepwater that is not performed. Estuary Marina files a suit
against the firm. The court will likely hold that Deepwater is
a. a corporation by estoppel.
b. an alien corporation.
c. an S corporation.
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d. ultra vires.
B15. Tech Personnel, Inc., is a corporation. Tech Personnel’s implied powers enable
it to
a. none of the choices.
b. depart significantly from traditional corporate formalities.
c. bind the corporation to an action that will greatly affect its purpose.
d. borrow funds and lend funds.
B16. Memphis Music Makers Inc.’s stated purpose is to sell musical instruments. If
chief executive officer Neal contracts with Open Season Firearms in Memphis
Music’s name to sell a shotgun, he has likely committed
a. an ultra vires act.
b. a de facto act.
c. a de jure act.
d. a legal act.
B17. Rhys owns Solar Fuel Corporation. Rhys uses Solar Fuel’s funds to pay his
personal expenses, creates Thermal Power Corporation to engage in the same
business as Solar Fuel, transfers Solar Fuel’s assets to Thermal Power, and
petitions Solar Fuel into bankruptcy. This most likely warrants
a. a bonus to Rhys for financial maneuvers.
b. a discharge for Solar Fuel in bankruptcy.
c. a pierce of the corporate veil.
d. a review of Thermal Power’s articles of incorporation.
B18. Urban Commerce, Inc., issues bonds, which are also known as
CHAPTER 39: CORPORATE FORMATION AND FINANCING 9
a. cumulative investments.
b. fixed-income securities.
c. equity securities.
d. preferred stock.
B19. 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.
B20. 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
B1. Fitness Workout, Inc., is a small business. Siblings Grady and Heidi, and nine
other members of their family, own all of its stock. Currently, the firm’s income
is taxed at the corporate level and, after being distributed to the family
members, at the shareholder level. Can Fitness Workout retain its corporate
status but otherwise avoid this double taxation? If so, how?
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B2. 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?