BUS LAW EXAM 4 - CORPORATIONS/LLCs

Which of the following is an accurate statement concerning subchapter S corporations? a. They are treated much as partnerships are treated for federal income tax purposes. b. They must have at least 100 shareholders. c. They pay income taxes in the same manner that ordinary corporations do. d. None of the above.

A

A limited liability company (LLC) must file what document with the Secretary of State? a. Articles of organization. b. Operating agreement. c. Profit and loss allocations of the members. d. The names of the members. e. B and D only.

A

If a limited liability company (LLC) fails to follow formalities such as keeping minutes of meetings, then: a. This failure may result in imposing personal liability on its members. b. All members will automatically lose their limited liability in all cases. c. The general partner in the LLC will lose his/her limited liability. d. AandB. e. A,BandC.

A

When a promoter enters into a contract on behalf of a corporation that is not yet formed, the corporation will become liable on the contract: a. At the time the promoter enters into the contract. b. When the corporation comes into existence. c. Once the corporation has elected its initial board of directors. d. Only if the board of directors of the corporation, once it is formed, agrees to adopt the contract. e. Only in the case of a novation.

D

Prior to the incorporation of Pyle Co. (a manufacturing business), Gomer, who was acting as a promoter for Pyle, negotiated a contract for the purchase of manufacturing equipment from Sergeant-Carter Corp. The contract was entered into on behalf of and in the name of Pyle Co. Shortly thereafter, a certificate of incorporation was issued to Pyle Co. by the Secretary of State. In view of the facts just stated, which of the following statements is accurate? a. Gomer is liable on the contract with Sergeant-Carter Corp. b. When Pyle Co. received its certificate of incorporation, it became liable on the contract with Sergeant-Carter Corp. c. The contract is void, because Pyle Co. was not in existence at the time the contract was formed. d. If Pyle Co.'s board of directors issues a suitable resolution, Gomer will be relieved from all liability on the contract.

A

Shareholders of a corporation: a. ordinarily play little role in the day-to-day management of the corporate business. b. will lose their limited liability if they engage in any management of the corporate business. c. cannot serve as officers of the corporation. d. cannot also be creditors of the corporation.

A

The authority/legal basis for the formation of limited liability companies (LLCs) comes from: a. State statutes. b. Federal statutes. c. Federal administrative regulations. d. Federal court decisions. e. State court decisions.

A

What is the basic paperwork needed/required to create a limited liability company (LLC)? a. Prepare the Articles of Organization and file them with the state. b. Members prepare and sign a Certificate of Partnership. c. Members prepare and sign bylaws. d. AandB. e. A,BandC.

A

A corporation's bylaws: a. provide the basic source from which the corporation's powers are derived. b. may supplement the articles of incorporation by more precisely defining rights and responsibilities of parties involved in the corporate structure. c. are controlling when they conflict with the articles of incorporation, in keeping with the legal principle that specific provisions control general provisions when the two appear to be in conflict. d. can be amended only by the corporation's board of directors.

B

In negotiating contracts for a corporation, the role of the promoter (or incorporator) can best be described as: a. A director for the yet to be formed corporation. b. An agent of the yet to be formed corporation. c. An officer of the yet to be formed corporation. d. An agent of the other party to the contract.

B

Sam Sham promoted Pharaoh Co. prior to its incorporation. He spent a considerable amount of time, as well as $3,500 of his own money, in promoting the corporation. Pharaoh has now been incorporated and its business is in operation. On these facts, Pharaoh is: a. obligated to reimburse Sam for his expense but is not obligated to compensate him for his time and services. b. neither obligated to reimburse Sam for his expenses nor obligated to compensate him for his time and services. c. obligated to reimburse Sam for his expenses and to compensate him according to the reasonable value of his time and services. d. obligated to compensate Sam according to the reasonable value of his time and services, but is not obligated to reimburse him for his expenses.

B

Which of the following is true about limited liability companies (LLCs)? a. At least one member must have unlimited liability. b. They can be formed without any specific steps taken by the owners. c. They can choose/elect whether to be taxed as a partnership or corporation. d. The owners are called shareholders. e. They cannot have centralized management by only a few members.

C

The articles of incorporation must include: a. the name of each person who will serve as an initial director of the corporation. b. a statement of the number of shares of stock that the corporation has authority to issue. c. a statement of the par value of the shares of stock to be issued by the corporation. d. each of the above.

B

Corporate stock may not be sold (or issued) for: a. Money. b. Labor done. c. Services to be rendered to the corporation in the future. d. Debts cancelled. e. Tangible property actually received by the corporation.

C

In the modern corporation, the board of directors makes most of the day-to- day management decisions.

F

A principal advantage, to shareholders, of the corporate form of business is that the money they have invested in the corporation is not at risk of being lost because of the claims of creditors of the corporation.

F

A promoter will remain liable on a contract made by him on behalf of a proposed corporation only if the corporation is never formed.

F

Courts will allow the "piercing of the corporate veil": a. whenever there is a parent-subsidiary relationship between two corporations b. whenever the parent corporation dominates its wholly-owned subsidiary corporation. c. whenever a corporation has only one shareholder. d. whenever a parent corporation's domination of its wholly-owned subsidiary was for an improper purpose.

D

Assuming there is no agreement or restrictions on the issue of shares/stock in a corporation, in order to transfer shares owned by a shareholder, the shareholder must obtain the approval of: a. The board of directors, regardless of whether the transfer is made by sale or gift. b. The board of directors if the transfer is by sale, no one if the transfer is to be made by gift. c. The other shareholders, regardless of whether the transfer is made by sale or gift. d. The other shareholders, but only if the shareholder is selling more than 50 percent of the outstanding shares. e. Neither the board of directors nor the other shareholders.

E

Unlike shareholders of a publicly held corporation, shareholders of a close corporation do not have limited liability for corporate debts.

F

A shareholder may be held personally liable to the corporation's creditor if the corporation and the shareholder have depleted corporate assets by engaging in less-than-arm's length transactions with each other.

T

Although publicly held corporations and close (i.e., privately held) corporations are generally treated alike under the various states' corporation laws, some states give close corporations greater latitude and flexibility in regulating their internal affairs than is given to publicly held corporations.

T

Corporate directors may cause corporate funds to be contributed to charity regardless of whether the shareholders have voted to make such a contribution.

T

Even though corporations are artificial legal entities rather than natural persons, they obtain the benefit of the due process guarantees given by the U.S. Constitution.

T

Which of the following is a reason to form a limited liability company (LLC) rather than an S corporation? a. There is no limit on the number of owners of a limited liability company whereas the number of shareholders of an S corporation is limited. b. All owners of a limited liability company have limited liability, but not all owners of an S corporation have limited liability. c. A limited liability company can be formed without formalities such as filing papers with the state, whereas an S corporation requires papers to be filed with the state. d. A limited liability company automatically acts as a flow-through entity for income tax purposes, but an S corporation does not.

A

Austin Tatious is a director of Blowhard, Inc. Needing additional office space, Blowhard sought to purchase a new corporate headquarters. Tatious owned a suitable building that he had purchased for $900,000 several years earlier. The six directors other than Tatious voted to purchase the property after Tatious informed them of what he had paid for the property. The sale was then completed at a price of $1.4 million, the fair market value of the property as of the time of the sale. A Blowhard shareholder later brought a derivative suit against Tatious in an effort to recover, for the benefit of the corporation, the profit made by Tatious on the sale of the building. Is Tatious liable to the corporation for the profit he made? a. Yes, because he violated his duty not to engage in self-dealing. b. Yes, because his actions amounted to usurpation (i.e., taking advantage) of a corporate opportunity. c. No, because he made a full disclosure to a disinterested board, which approved a transaction that was fair to Blowhard. d. No, because the other director's approval of a transaction conclusively releases the self-dealing director from liability to the corporation.

C

Average Corp.'s directors left all management and policy decision to the discretion or the corporation's officers. The directors held annual meetings, but made no detailed inquiries into operation or performance of the corporate business. Average suffered heavy losses for three successive years, until it was discovered that the officers in charge of daily management of the business had been diverting substantial portions of corporate assets for their own personal use. Will the directors face liability to the corporation for losses experienced by the corporation? a. No, because the directors' lack of familiarity with the operation of the corporation meant they had no reason to believe the officers were engaged in improper activities; therefore, the directors did not possess the level of knowledge necessary to make them liable for losses experienced by the corporation. b. No, because nothing in the facts indicates that any director had personal involvement in the impermissible diversion of corporate assets for personal gain; therefore, no director possessed the requisite intent to harm the corporation. c. Yes, if their approach to management amounted to a failure to act as ordinarily prudent directors would have acted under the same or similar circumstances, and if the exercise of due care by the directors would have resulted in an earlier discovery of the officer's improper actions. d. Yes, because the doctrine of respondeat superior imposes liability on corporate directors for the wrongful and injurious acts committed by corporate officers and employees in connection with their corporate duties.

C

Dividends may only be paid out of which of the following? a. Common stock proceeds. b. Preferred stock proceeds. c. Retained earnings. d. Preemptive right proceeds.

C

Hoping to gain an edge in the highly competitive electric razor market, the directors of Cutting Edge Corp. (CEC) voted to have CEC develop and market a revolutionary type of electric razor sold by CEC for years as its flagship product. Before so voting, the CEC directors studied past price and sales data, future projections in those regards, and considerable technical information concerning the new type of razor. In addition, they consulted economists and various financial experts. The new razor was a commercial flop. CEC lost many millions of dollars as a result. Although it eventually went back to producing the type of razor it formerly produced and thereby regained some customers that had been lost along the way, CEC's market position was badly, and probably permanently, weakened. A group of disenchanted CEC shareholders has now sued the directors in an attempt to hold them liable to CEC for the consequences just mentioned. Will the directors be held liable? a. Yes, because directors' fiduciary duties make them liable for the consequences of management decisions that cause severe damage to the corporation. b. Yes, because shareholders have a right to a determination of whether directors have acted in the best interests of the corporation. c. No, because the business judgment rule insulates the directors from liability here, despite the harm their decision caused the corporation to experience. d. No, because directors will not be held liable for the negative consequences of their management decisions unless they intended to cause the corporation harm.

C

Nimrod served as a promoter concerning Flaky Industries, Inc. prior to its incorporation. During the pre-incorporation period, Nimrod purchased manufacturing equipment in contemplation of selling it to the corporation once it was formed. After Flaky was properly incorporated, Nimrod sold it the equipment for $90,000. He did not tell the Flaky directors that the equipment had cost him only $50,000. In light of the facts, which of the following statements is accurate? a. Once Flaky came into existence, Nimrod's fiduciary duty to the corporation ceased and he became entitled to receive the highest price he could command for the equipment without disclosing his actual costs. b. Because Flaky was already incorporated before Nimrod's sizable profit came to light, Flaky cannot bring an action against him to recover monetary compensation. c. Nimrod's continuing fiduciary duty to the corporation was violated when he failed to make a full disclosure concerning what he had paid for the equipment; therefore, Flaky may rescind (i.e., cancel) the purchase or recover Nimrod's profit. d. The secret profit received by Nimrod amounts to "watered shares", meaning that he is liable to each Flaky shareholder in the amount by which his secret profit reduced the value of that shareholder's investment in the corporation.

C

Of the following statements concerning shares of stock issued by a corporation, which is inaccurate? a. The par value of a share stock is not necessarily equal to the fair market value of the share stock b. A corporation must not issue shares of stock for an amount less than par value. c. A corporation is barred by law from issuing shares of stock for an amount greater than par value. d. None of the above.

C

Rover Corporation is a regular corporation that has not elected S corporation status. In 2000, Rover earns $100,000 in net income; that same year, 2000, Rove declares and distributes $50,000 in dividends to its shareholders and it pays these dividends out of its retained earnings (i.e., the money left over from the $100,000 after it pays corporate income tax to the government). Which of the following best describes the tax consequences to Rover and its shareholders? a. The shareholders are taxed on $100,000 in 2000; Rover is not subject to tax. b. Rover is taxed on $100,000 in 2000; the shareholders are not subject to tax. c. Rover is taxed on $100,000 in 2000; the shareholders are taxed on the $50,000 in dividends in 2000. d. Rover is taxed on $100,000 in 2000; and under federal income tax rules the shareholders are taxed on the $50,000 in dividends in 2003, three years later. e. Neither Rover nor its shareholders are subject to tax.

C

A corporation: a. must be organized for the purposes of making a profit. b. does not obtain constitutional protection against unreasonable searches and seizures because it is not considered a person under the U.S Constitution. c. must use shareholders as its officers and directors. d. is a legal entity separate from those who own the corporation even if the corporate ownership consists of a single shareholder.

D

In which of the following forms of business organization can the entity and owner(s) avoid the problem of double taxation? a. C corporation. b. S corporation. c. Limited liability company. d. B and C only. e. A,BandC.

D

Jim acted as a promoter for Tammy Co. prior to its incorporation. He negotiated a contract with Plaster, Inc. Under the contract, which Jim signed in the name of Tammy Co., Plaster was to supply Tammy with essential ingredients and substances that Tammy would use in its makeup manufacturing operation. At the initial board of directors meeting following the incorporation of Tammy, the Tammy board adopted the contract Jim had negotiated with Plaster. After Plaster had performed its contract obligation but before Tammy paid what was called for by the contract, Tammy became insolvent and unable to make payment. Plaster is now looking to Jim for payment. Is Jim liable to Plaster? a. No, because once Tammy Co. was actually incorporated, any liability he may have had on the contract was discharged. b. Yes, because he committed fraud by entering into a contract on behalf of a nonexistent party. c. No, because Tammy Co.'s adoption of the contract had the effect of releasing him from liability on the contract. d. Yes, because nothing in the facts indicates that Plaster has released Jim from liability on the contract.

D

Margaret is one of the 11 directors of Specific General, Inc. Although they had not so informed the board of directors, top officers of Specific General were giving serious consideration to obligating the company on a long-term contract that would involve the expenditure of millions of dollars of company funds. Margaret learned of the officers' intentions through a reliable source. Because she opposed the plan, she sought to examine Specific General's books and records in order to gain information that would support her position. The officers refused her inspection request because the request did not come from the full board. May Margaret obtain a court order requiring the corporation and its officers to produce the books and records for her examination? a. No, because individual directors have no authority to act on their own. b. No, because individual directors are not agents of the corporation. c. Yes, because each individual director has managerial authority with regard to the corporation. d. Yes, because the books and records contain information essential to the performance of her duties.

D

Which of the following is true about operating agreements for limited liability companies (LLCs)? a. All LLCs must have one (an operating agreement), but they need not be filed with the state. b. They must be in writing in order to be enforceable. c. All LLCs must have one, and they must be filed with the state along with the articles of organization. d. They are not required, but are highly recommended (i.e., prudent members of an LLC should prepare and sign, but are not required to prepare and sign, an operating agreement).

D

Jan, Dan and Stan have developed a new type of skateboard and are discussing forming a business to manufacture and sell this product. They realize that the use of this skateboard can result in injuries, and that at least a few users will likely suffer injuries. Jan, Dan and Stan all would prefer that the business be taxed as a partnership. Which of the following entities can they choose to obtain limited liability for all of the owners (i.e., themselves) and at the same time be taxed like a partnership? a. Limited partnership and general partnership. b. Limited liability company and C corporation. c. Limited partnership and S corporation. d. Sole proprietorship and limited partnership. e. Limited liability company and S corporation.

E

The owners of a limited liability company (LLC) are called: a. Shareholders. b. Limited shareholders. c. Limited liability partners. d. Liability company proprietors. e. Members.

E

As a general rule, the owners of a corporation's common shares do not possess voting rights with regard to the election of corporate directors.

F

Because the federal government has control over interstate commerce, a business in interstate commerce and organized under the corporate form must become incorporated pursuant to federal incorporation statutes.

F

One result of pressures and proposals for changes in corporate governance is that corporate boards of directors tend to have more inside directors, and hence fewer independent outside directors, than they once had.

F

Directors may forfeit the protection of the business judgment rule if their decision to oppose a tender offer (from an outside firm/individual for the purchase of the corporation) resulted from an inability on the part of the directors to separate their own interests in remaining directors from the best interests of the corporation.

T

In some states , those who make wholly defective and ineffective attempts to incorporate a business (e.g., such as failing to prepare and file articles of incorporation, or, failing to create and adopt corporate bylaws) may be treated as partners with unlimited liability for the obligations of the business.

T