Chapter 32: Nature of a Corporation

Unlike other corporations, a(n) _____ corporation files only an information tax return. a. Subchapter S b. subscription c. stock d. ultra vires

a. Subchapter S Many close corporations that meet the federal requirements, including a limitation on the number of stockholders, choose to be designated Subchapter S corporations for federal income tax purposes. Unlike other corporations, a Subchapter S corporation files only an information tax return. It does not pay corporate income tax. Review the section "Classification by Purpose" in Chapter 32.

Stephen and Davis, two architects, start their own firm in Florida. The firm does not pay corporate income tax. It makes a profit of $100,000 in the second year after formation. Stephen and Davis report this profit as income on their personal income tax returns. This firm is an example of a(n): a. Subchapter S corporation. b. subscription corporation. c. ultra vires corporation. d. quasi corporation.

a. Subchapter S corporation. Stephen and Davis have a Subchapter S corporation. Unlike other corporations, a Subchapter S corporation files only an information tax return. It does not pay corporate income tax. The owners report the profit of the corporation as income on their personal income tax returns. Review the section "Classification by Purpose" in Chapter 32.

Tangent Technologies, a software entity in South Carolina was formed after the completion of the required registration process. The main aim of Tangent was to earn money and make profits. Once Tangent was formed, it issued stock to a very small number of people. Tangent Technologies is an example of a(n): a. close corporation. b. quasi corporation. c. ultra vires corporation. d. implied corporation

a. close corporation. Tangent Technologies is an example of a close corporation. A profit corporation that has a very small number of people who own stock in it is called a close or a closely held corporation. Because of the small number of stockholders, they normally expect to be (and are) active in the management of the business. Review the section "Classification by Purpose" in Chapter 32.

Which of the following written documents constitutes a contract between the corporation and the state? a. Representatives of incorporation b. Articles of incorporation c. Memorandum of incorporation d. Abstract of incorporation

b. Articles of incorporation The articles of incorporation constitute a contract between the corporation and the state. So long as the corporation complies with the terms of the contract, the state cannot alter the articles in any material way without obtaining the consent of the stockholders. Review the section "Articles of Incorporation" in Chapter 32.

Rules promulgated by a corporation to govern it and determine its future conduct are called: a. subscriptions. b. bylaws. c. regulations. d. certificates.

b. bylaws. The rules and regulations that govern a corporation and determine its future conduct are called bylaws. The corporation's board of directors adopts them. They must conform to law and not be contrary to public policy. Review the section "Powers of a Corporation" in Chapter 32.

Public corporations are created by the state primarily for the purpose of: a. assisting the registration of alien corporations. b. facilitating the administration of governmental functions. c. administering the articles of incorporation of the not-for-profit organizations. d. organizing the issuance of stock by a newly formed not-for-profit organization.

b. facilitating the administration of governmental functions. A public corporation is one formed to carry out some governmental function. They are created by the state primarily for the purpose of facilitating the administration of governmental functions.Review the section "Classification by Purpose" in Chapter 32.

Carl started an interior designing firm called Creators, Inc. The company received its initial charter in California. However, it was registered in and did business in Texas and New York. This company is an example of a(n): a. quasi-corporation. b. foreign corporation. c. alien corporation. d. ultra vires corporation.

b. foreign corporation. A corporation incorporated in another state is called a foreign corporation. The corporation can operate as a foreign corporation in any other state it chooses as long as it complies with the registration or other requirements of the other state. Review the section "Classification by State of Incorporation" in Chapter 32.

Ace Automotive Company is a well-established sports car manufacturing company located in Texas. The man behind the formation of this company was Robin. He had the incorporation papers for the company prepared and also sold the company's stock to its first owners. It is evident that Robin was the _____ of Ace Automotive Company. a. partner b. promoter c. chairman d. volunteer

b. promoter A lot of preliminary work must be done before a corporation comes into existence. A person who acts as a promoter usually takes the initial steps of forming the corporation. Review the section "Formation of a Corporation" in Chapter 32.

Certificates called _____ represent ownership in a stock corporation. a. promoter stock b. shares of stock c. quasi shares of stock d. subscriptions of stock

b. shares of stock A profit corporation is one organized to run a business and earn money. In terms of number and importance, stock corporations organized for profit constitute the chief type. Certificates called shares of stock represent ownership in a stock corporation. Review the section "Classification by Purpose" in Chapter 32.

Before Atlantic Wholesale Corp. was actually incorporated, Quinton Stafford, who was organizing the corporation, obtained written contracts from five individuals agreeing to purchase stock in Atlantic. These written contracts are called: a. incorporation agreements. b. subscription agreements. c. promotion agreements. d. implied contracts.

b. subscription agreements. When a new corporation is about to be formed, written agreements to buy its stock will generally be made in advance of the actual incorporation. Such agreements are called subscription agreements and are merely offers to buy. Review the section "Issuance of Stock" in Chapter 32.

Rashean and Lance formed a corporation, Iron Manufacturing, Inc., that manufactured lawn mower parts. State law permitted corporations to buy and sell real estate. Rashean wanted to develop an industrial park in excess land Iron owned. What kind of power does Iron have to develop industrial parks? a. Incidental b. Implied c. Express d. Quasi

c. Express The statute or code under which a corporation is formed, and, to a lesser degree, the corporation's articles of incorporation, determine its express powers. Since state law allowed Iron to buy and sell real estate its power to do so was express power. Review the section "Powers of a Corporation" in Chapter 32.

What normally happens when a corporation enters into an ultra vires contract? a. The contract is not binding on the corporation. b. The attorney general will get a court to order revocation of the corporation's charter c. The contract is not binding on anyone. d. A stockholder may sue for damages from directors who have caused loss to the corporation.

d. A stockholder may sue for damages from directors who have caused loss to the corporation. As between the parties to an ultra vires contract, the contract generally binds them. However, a stockholder may bring an action to prevent the corporation from entering into such a contract or to recover damages from the directors or officers who have caused loss to the corporation by such contracts. Review the section "Ultra Vires Contracts" in Chapter 32.

Harry, along with his friend David, founded Art of Learning, a not-for-profit corporation, in Delaware. The purpose ofthe corporation is to provide special education for children with developmental disabilities. Art of Learning does not run a business, but is funded from contributions and state grants. Which of the following statements is most likely true for this type of corporation? a. Art of learning cannot sue and be sued as a corporation. b. Art of learningcannotbuy or sell property as a corporation. c. Art of learning distributes income to members, officers, or directors. d. Art of learning usually does not issue stock.

d. Art of learning usually does not issue stock. Because a not-for-profit corporation is not organized for profit,it does not distribute income or profits to members, officers, or directors, and it usually does not issue stock. As a legal entity like any other corporation, it can sue and be sued as a corporation and buy and sell property. Review the section "Classification by Purpose" in Chapter 32.

Stephen and Dennis were in the process of starting a software company in Texas. When the company was going through the required registration process for incorporation, Ethan and Jonathan signed a written agreement with the corporation to buy stock in advance of the incorporation. Ethan agreed to buy 15% of the company's stock and Jonathan agreed to buy 10% of the stock. Which of the following is most likely? a. The agreement alone is sufficient for Ethan and Jonathan to become shareholders. b. The written agreement made by Ethan and Jonathan is a binding contract which cannot be revoked. c. The software company can accept Ethan and Jonathan's subscription even before the state issues its charter. d. Ethan's and Jonathan's offer to buy can be withdrawn any time prior to acceptance by the software company

d. Ethan's and Jonathan's offer to buy can be withdrawn any time prior to acceptance by the software company. When a new corporation is about to be formed, written agreements to buy its stock will generally be made in advance of the actual incorporation. However, these subscription agreements constitute merely offers to buy and in most jurisdictions, they may be revoked any time prior to acceptance.The corporation cannot accept the subscription until the state issues its charter.A subscriber does not become a shareholder merely by signing the agreement. Review the section "Issuance of Stock" in Chapter 32.

Seaside Condominium Corporation owned a high rise condominium building on the Atlantic coast. The ocean front windows and sliding doors suffered severe leaking during rainstorms. The bylaws of Seaside stated that maintenance of windows and sliding doors was the responsibility of the unit owners. In spite of this, the condominium board contracted with Keystone Construction to repair all the ocean front windows and doors and levy a special assessment on all unit owners to pay for the repairs. Hester Ramirez, Desi Warford and Amir Nash owned condominium units that were not on the ocean side and objected to paying their share of the assessment. What would you recommend they do? a. Have the sheriff arrest the members of Seaside's board b. Inform Keystone that the contract with Seaside was not binding c. Ask the state attorney general to revoke Seaside's articles of incorporation d. File suit against Seaside's board claiming the board's action is ultra vires

d. File suit against Seaside's board claiming the board's action is ultra vires Any contract entered into by a corporation that goes beyond its powers is called an ultra vires contract. As between the parties to the contract, the corporation and the third person, the contract generally binds them. However, a stockholder may bring an action to recover damages from the directors who have caused loss to the corporation by such contracts. In extreme cases the state attorney general may get a court order revoking the articles of incorporation for frequent or serious improper acts. Review the section "ultra vires Contracts" in Chapter 32.

A corporation is a(n) _____ corporation in the state where it received its initial charter. a. alien b. quasi c. subscription d. domestic

d. domestic Corporations may be classified depending on where they were incorporated. A corporation is a domestic corporation in the state where it received its initial charter. Review the section "Classification by State of Incorporation" in Chapter 32.

National School Board Association has powers similar to those of a public corporation such as the right to sue and be sued; the power to own, buy, and sell property; and the power to sign contracts as an entity. National School Board Association is an example of a(n): a. alien public corporation. b. estranged public corporation. c. ultra vires public corporation. d. quasi-public corporation.

d. quasi-public corporation. Some public bodies, such as school boards, boards of county commissioners, and similar bodies, are not true public corporations but have many similar powers. Such powers include the right to sue and be sued; the power to own, buy, and sell property; and the power to sign other contracts as an entity. These bodies are called quasi-public corporations. Review the section "Classification by Purpose" in Chapter 32.