Business Law with UCC Applications, 15e (Sukys)

Chapter 26 The Corporate Entity

1) In the new Classic Case, Burwell v. Hobby Lobby, the Supreme Court concludes that the term person in the statute is meant to protect corporate "persons" only because the real protection flows to the people behind that corporate veil.

2) The entire corporate, capitalist state is based on the faith and trust that investors have no liability for their investments.

3) The Fourteenth Amendment grants due process rights to corporate shareholders and stakeholders only.

4) Limited liability means that shareholders can be held personally liable for the debts of the corporation, but will not lose their capital investment.

5) A corporation is a domestic corporation in the state where its principal office is located, but it is an alien corporation in all other states.

6) An electric company would be an example of a S-Corporation.

7) Dividends are the net profits, or surplus, set aside for the shareholders.

8) Outstanding shares of stock of the Cattleman Corp. are held by seven shareholders, four from the Tate family, and 3 from the Anchustegui family. The Cattleman Corp. cannot be designated a close corporation because the shareholders are not from the same family.

9) A limited liability company is a business arrangement that permits an individual to lease the right to use a parent entity's business operation, intellectual property, goods, and services under a fee arrangement provided to the parent.

10) If only a minor requirement of incorporation has been left unsatisfied, the court will allow any shareholder to directly sue and challenge the de facto corporation's existence.

11) Janet is the promoter of a corporation called Time Inc., which is in the process of being formed. Janet rents office space in Time's name which is a de jure corporation. Time is bound by Janet's contract.

12) Undercapitalization will be considered convincing evidence that the corporate owners intended to use the corporate façade to escape liability.

13) The main issue in the William Stewart v. R. A. Eberts, Company, Inc. case, detailed in A New Classic Case, was whether the corporate veil should be pierced and hold the shareholders owners liable for ignoring the terms of a contract that had been made several years earlier.

14) The issuing and selling of shares of stock to raise capital is known as debt financing.

Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

15) A joint venture is an IRS-created taxable entity that allows limited liability for its owners.

16) If NEWCo. was not properly incorporated, but the owners believed they had a valid corporation, NEWCo may qualify as a corporation by estoppel.

17) A promoter can escape personal liability on a preformation contract by having the corporation and the third party execute an adoption.

18) The operating agreement is the written application prepared by the incorporators asking the state for permission to incorporate.

19) Preferred stock typically does not have the right to payment of dividends on the dissolution of the corporation.

20) No par value is the value placed on the shares of stock at incorporation by the Secretary of Commerce.

21) The four fundamental legal principles that are designed to protect the corporate structure are

(1) corporate status as an entity, (2) corporate constitutional rights, (3) corporate citizenship and

(4):

A) anticipatory repudiation.

B) unconscionable contract.

C) mutual recession.

D) limited liability.

22) Kay, an 80% shareholder of Big Corp., dies leaving her stock to her nephew, Carl. Big Corp. will be:

A) unaffected.

B) reorganized.

C) dissolved and then reconstituted.

D) dissolved.

23) The Panon Corporation is incorporated in Tennessee, but its corporate headquarters is in Massachusetts. As a result, the Panon Corporation is:

A) considered a citizen of only Massachusetts.

B) considered a citizen of only Tennessee.

C) not considered a citizen of either Massachusetts or Tennessee.

D) considered a citizen of both Massachusetts and Tennessee.

24) Nodest Co., a Delaware corporation, wants to do business in California. Since Nodest is a foreign corporation, it:

A) does not need to take any particular action.

B) must incorporate in California.

C) must obtain a certificate of authority from California.

D) must obtain certificates of authority from both California and Delaware.

Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

25) A(n) ________ is a corporation where the outstanding shares of stock and managerial control are held by fewer than ________ shareholders.

A) S corporation; 25

B) close corporation; 50

C) alien corporation; 50

D) shell corporation; 100

26) A limited liability company is best thought of as a cross between a partnership and a:

A) sole proprietorship.

B) governmental institution.

C) limited partnership.

D) corporation.

27) Jan signs the articles of incorporation for a corporation being formed, and Tom wants to locate possible investors in the new corporation. Jan is a(n):

A) incorporator.

B) promoter.

C) registered agent.

D) shareholder.

28) In terms of the steps in the incorporation process, which of the following occurs after the charter is issued?

A) A statutory agent is appointed.

B) The organizational meeting is held.

C) Filing fees are paid.

D) Promoters do preliminary work.

29) Henry, a promoter, signs a five-year lease agreement for office space for Ajax Corp., which has not yet been formed. After formation, Ajax moves into the office space, pays rent and occupies it for six months, but then finds a cheaper location and moves out. Which party is liable on the lease?

A) Henry

B) Ajax

C) No one, since it was a tenancy at will

D) Both Henry and Ajax

30) A promoter can escape liability by having the corporation and the third party create a(n):

A) novation.

B) estoppel.

C) operating agreement.

D) certificate of organization.

Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

31) Liz, a promoter, hired an office support staff for a corporation that had not yet been incorporated. If there is a novation clause in a subsequent contract with the corporation and the staff, which of these is correct?

A) The corporation will not be bound by any of Liz's contracts.

B) The office support staff will work without pay until the corporation becomes incorporated.

C) Liz will escape potential liability under the novation contract entered into.

D) Liz and the corporation will be held equally liable under all contracts entered into.

32) Which of the following is the official authorization of a corporation to do business in a state?

A) Articles of incorporation

B) Certificate of incorporation

C) Articles of organization

D) Certificate of authority

33) Grant wants to know the date of the annual shareholders meeting of Big Co. Which document will contain this information?

A) Articles of corporation

B) Articles of organization

C) Bylaws or regulations

D) Operating agreement

34) ________ refer(s) to the written application to the state for permission to form a limited liability company.

A) Novation

B) Estoppel

C) Operating agreement

D) Articles of organization

35) Janice requires information about the voting rights of members of Titan, LLC. Which document will contain this information?

A) Articles of incorporation

B) Articles of organization

C) Bylaws

D) Operating agreement

36) A(n) ________ is one that has been formed properly by incorporators who followed all of the steps outlined by the state incorporation statute.

A) corporation by estoppel

B) de facto corporation

C) de jure corporation

D) alien corporation

Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

37) The status of a de facto corporation can be directly challenged by:

A) private citizens.

B) the state government.

C) both private citizens and the state government.

D) neither private citizens nor the state government.

38) Alan sells merchandise on credit to ABC Co. ABC fails to pay for the merchandise. Alan later discovers that ABC is not a corporation, but a partnership consisting of Alice, Betty, and Charles. Which legal doctrine might shield Alice, Betty, and Charles from personal liability?

A) De facto corporation

B) De jure corporation

C) Corporation by estoppel

D) Piercing the corporate veil

39) Vivian, owner of Titan Corp., uses Titan Corp. as a way to order merchandise for her personal benefit and fails to pay for the merchandise. Creditors who have shipped merchandise to Titan want to sue Vivian personally. Which of the following legal doctrines would allow a personal suit against Vivian?

A) Corporation by estoppel

B) Piercing the corporate veil

C) De facto corporation

D) De jure corporation

40) Patricia holds 150 shares of common stock in a large corporation. Patricia:

A) is guaranteed the rights to some of the profits of the corporation.

B) is most likely entitled to two votes for each share of stock she holds.

C) will not be included in the distribution of capital upon dissolution of the corporation.

D) risks whatever money she invested in the 150 shares of common stock.

41) ABC Co. owns land that is in the path of a new proposed interstate highway. ABC does not want to surrender this land. Discuss what rights ABC or the shareholders of ABC have to challenge this proposed taking.

42) Global Corp. is incorporated in Mexico and wants to do business in Ohio. Discuss the legal status of Global in relationship to Ohio and what Global must do to qualify to do business in Ohio.

43) Jon, a promoter, is concerned about being personally liable on preincorporation contracts he signs on behalf of corporations that have not yet been formed. Discuss what Jon may lawfully do to avoid this liability.

Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

44) Clothe You Inc. was incorporated as a nonprofit organization that gave away secondhand clothes to homeless persons. In order to pay overhead and administration costs, Clothe You Inc. also sold the secondhand clothes to any interested individuals who did not qualify as homeless. One year after its formation, Clothe Me Inc. was incorporated in the same state. Clothe Me Inc. was a consignment shop that sold its secondhand clothes cheaply. Clothe Me Inc. ran an aggressive print advertising campaign, marketing its clothes "to everyone, for every reason, for practically no cost." After this campaign, Clothe You Inc. discovered that people, especially homeless individuals, were confusing the two organizations. What legal action, if any, can be taken by Clothe You Inc.?

45) A&B, a general partnership, wants to become "A&B, LLC." "A&B Co." is already in use by another business, and the state agency refuses to allow the new corporation to use the name "A&B." Discuss how A&B should proceed.

46) In creating ABZ Inc., Newman and Zimmer followed all the steps in the incorporation process as authorized in their state's incorporation statute except for the appointment of a statutory agent. They were never informed of the oversight and proceeded under the assumption that they were properly incorporated. Several years later, a customer was injured by one of their products. The customer's lawyer told Newman and Zimmer that they were individually liable because ABZ Inc. was not properly incorporated. Was the lawyer correct? Explain.

47) Tom and Jim from JT Co. plan to engage in the building construction business. They obtain contracts in the name of JT Co., but fail to keep separate bank accounts for JT Co. funds, placing JT Co. money in their personal bank accounts. In addition, much of the JT Co. equipment is titled in the name of Tom and Jim. JT Co. breaches a construction contract with Titan Co. Discuss if Tom and Jim might have personal liability for this breach of contract.

48) Big Co. creates a wholly owned subsidiary, Small Co. Small Co. sells poor quality merchandise on credit to consumers at unlawful rates of interest and violates the warranty agreements made with consumers. Discuss if Big Co. may be held liable for the actions of Small Co.

49) Zeno Corp. has issued common stock and noncumulative preferred stock. The board of directors of Zeno has not paid a dividend in 10 years. Discuss the rights of shareholders to demand a dividend payment and the ability of the noncumulative preferred shareholders to collect back dividends for the years in which no dividend was paid.

50) Wong and Burton owned several hundred shares of preferred stock in Classic, Inc. For three years, neither were paid dividends. In the fourth year, Classic paid dividends to both shareholders. Wong also received payment for dividends from the preceding three years. Burton did not receive any dividends from those years. Identify the type of stock owned by each shareholder.

Copyright 2020 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.