Business Structure

Question 1

Which of the following forms of business generally provides all owners with limited liability, while avoiding federal taxation of income at the entity level?

• A Subchapter C corporation.
• A Subchapter S corporation.
• Partnership.
• Limited partnership.

Answer 1

A Subchapter S corporation.

If the requirements of a Subchapter S corporation are met, the corporate entity pays no federal income tax. All income is passed through to the shareholders. Although the shareholders enjoy limited liability, they do pay personal income tax on dividends received.

Question 2

Which of the following parties generally has the most management rights?

• A minority shareholder in a corporation listed on a national stock exchange.
• A limited partner in a general partnership.
• A member of a limited-liability company.
• A limited partner in a limited partnership.

Answer 2

A member of a limited-liability company.

Members of LLCs have substantial management rights, although they may choose not to exercise them.

Question 3

Tim and Sarah wish to form an accounting firm. They are not confident in their own abilities and wish to choose a form of organization that will shield them from personal liability for their own malpractice.

Which of the following would succeed for them?

• LLP
• LLC
• Both of the above.
• Neither of the above.

Answer 3

Neither of the above.

No form of business organization excuses an accountant from liability for his or her own malpractice.

Question 4

Consuelo is a limited partner who has become ensnared in various activities of her limited partnership. She is worried that her activities may cause her to be liable as a general partner. Which of the following activities may subject her to personal liability?

• Working for the partnership as a file clerk.
• Attending meetings of the partners.
• Guaranteeing a partnership loan.
• None of the above.

Answer 4

None of the above.

None of the activities listed in A, B, and C is sufficient to render Consuelo personally liable; all are consistent with her role as a limited partner.

Question 5

Which of the following statements describes the same characteristic for both an S corporation and a C corporation?

• Both corporations can have more than 100 shareholders.
• Both corporations have the disadvantage of double taxation.
• Shareholders can contribute property into a corporation without being taxed.
• Shareholders can be either citizens of the U.S. or foreign countries.

Answer 5

Shareholders can contribute property into a corporation without being taxed.

C is the best answer, because shareholder contributions are not taxable in either form.

Remember that S-Corporations cannot have foreign shareholders.

Question 6

The corporate veil is most likely to be pierced and the shareholders held personally liable if

• The corporation has elected S corporation status under the Internal Revenue Code.
• The shareholders have commingled their personal funds with those of the corporation.
• An ultra vires act has been committed.
• A partnership incorporates its business solely to limit the liability of its partners.

Answer 6

The shareholders have commingled their personal funds with those of the corporation.

The corporate veil is almost never pierced, and investors almost never lose more than their investment. Only when shareholders use a corporation for their own (usually fraudulent) personal use is there even a remote possibility that the veil will be pierced. When shareholders have heavily commingled personal funds and corporate funds, the rare exception to the rule may arise.

Remember courts will never PTV for public issuing corporations.

Question 7

Which of the following statements is correct regarding a limited liability company’s operating agreement?

• It must be filed with a central state agency.
• It must be in writing.
• It is designed to forestall and resolve disputes among the owners.
• It is necessary for a limited liability company to exist.

Answer 7

It is designed to forestall and resolve disputes among the owners.

This is the purpose of an LLC operating agreement, which is why it is a good idea that these be in writing and filed with the state (although this is not required).

Question 8

Sal wishes to form a business entity that he will own and control all by himself. Which of the following is not a good choice for him?

• Sole proprietorship.
• General partnership.
• LLC.
• Corporation.

Answer 8

General partnership.

A partnership requires at least one other person or entity to be Sal’s partner in ownership and management of the firm, so this is not a good choice.

Question 9

The partners of College Assoc., a general partnership, decide to dissolve the partnership and agree that none of the partners will continue to use the partnership name.

Under the Uniform Partnership Act, which of the following events will occur on dissolution of the partnership?

• Each partner’s existing liability will be discharged.
• Each partner’s apparent authority will continue.

Answer 9

NO

YES.

Simply deciding to dissolve a partnership does not dissolve liability. If money is owed on contracts, tort judgments, or otherwise, the partners are still responsible for them. Apparent authority does continue after partners have decided to dissolve the partnership. Notice must be given to others (by contact for those with which the partnership has actually done business and by publication for everyone else) before apparent authority stops.

Question 10

Which of the following actions may be taken by a corporation’s Board of Directors without stockholder approval?

• Purchasing substantially all of the assets of another corporation.
• Selling substantially all of the corporation’s assets.
• Dissolving the corporation.
• Amending the articles of incorporation.

Answer 10

Purchasing substantially all of the assets of another corporation.

Shareholders have the right to vote on many important corporate changes, including amendments to the articles of incorporation, dissolution, sale of all or substantially all of the corporation’s assets, and mergers & consolidations. Choices B, C, and D are all on this list. Choice A is, therefore, the correct answer. Often, one corporation can buy all or substantially all of the assets of another company without there being any large qualitative change in the life of the purchasing corporation. Therefore, when a large corporation gobbles up the assets of a smaller corporation, the shareholders of the large buyer do not have the right to vote on the transaction. There would be a much greater impact on the life of the selling corporation and its shareholders would therefore have the right to vote on the transaction.

Question 11

Carr Corp. declares a 7% stock dividend on its common stock. The dividend

• Must be registered with the SEC pursuant to the Securities Act of 1933.
• Is includable in the gross income of the recipient taxpayers in the year of receipt.
• Has no effect on Carr’s earnings and profits for federal income-tax purposes.
• Requires a vote of Carr’s stockholders.

Answer 11

Has no effect on Carr’s earnings and profits for federal income-tax purposes.

The tax on corporate profits is the same, whether the profits are reinvested in the company or distributed to shareholders in the form of dividends.

B is incorrect because stock dividends are taxable when sold, a cash dividend would be included in GI of the taxpayer in the year of receipt.

Question 12

An owner of common stock will not have any liability beyond actual investment unless the owner

• Paid less than par value for stock purchased in connection with an original issue of shares.
• Agreed to perform future services for the corporation in exchange for original-issue par-value shares.
• Purchased treasury shares for less than par value.
• Failed to pay the full amount owed on a subscription contract for no-par shares.

Answer 12

Paid less than par value for stock purchased in connection with an original issue of shares.

When stock has a par value, it must be sold for at least that par value in an original issue. If it is sold for less, it is “watered stock.”
A shareholder who buys watered stock is liable to the corporation for the difference between the price actually paid and the par value of the shares purchased.

Question 13

To which of the following rights is a holder of a public corporation’s cumulative preferred stock always entitled?

• Conversion of the preferred stock into common stock.
• Voting rights.
• Dividend carryovers from years in which dividends were not paid, to future years.
• Guaranteed dividends.

Answer 13

Dividend carryovers from years in which dividends were not paid, to future years.

Cumulative preferred stock does not guarantee payment of a dividend in any particular year.

However, if required dividends are not paid in any given year, they must be “made up” in the current year before any common shareholders receive a dividend. It is the “cumulative” portion of the description that is key here - that is what gives the right to carryover payments.

The “preferred” portion gives the preference over common shareholders.

Preferred stock brings a trade-off. A priority is given to preferred shareholders when dividends are paid, but they generally have no voting rights. Common shareholders have voting rights.

Question 14

Price owns 2,000 shares of Universal Corp.’s $10 cumulative preferred stock. During its first year of operations, cash dividends of $5 per share are declared on the preferred stock, but were never paid. In the second year, dividends on the preferred stock were neither declared, nor paid.

• If Universal is dissolved, which of the following statements is correct?
• Universal will be liable to Price as a secured creditor for $20,000.
• Price will have priority over the claims of Universal’s bond owners.
• Price will have priority over the claims of Universal’s unsecured judgment creditors.

Answer 14

Universal will be liable to Price as an unsecured creditor for $10,000.

Cumulative preferred stock gives the holder the right to payment of dividends before common shareholders are paid. It does not guarantee that dividends will be declared, but if dividends are declared, they must be paid.

Once a corporation declares dividends, the payments become corporate debt. Here, Price is owed $5 x 2,000 shares = $10,000.

He is an unsecured creditor, because this debt has not been secured by a separate agreement that creates a security interest. His debt does not have priority over judgment creditors, bond owners, or secured creditors.

Question 15

Lewis, Clark, and Beal enter into a written agreement to form a partnership. The agreement requires that the partners make the following capital contributions: Lewis, $40,000; Clark, $30,000; and Beal, $10,000.
It is also agreed that, in the event that the partnership experiences losses in excess of available capital, Beal will contribute additional capital to the extent of the losses. The partnership agreement is otherwise silent about division of profits and losses.

Which of the following statements is correct?

• Profits are to be divided among the partners in proportion to their relative capital contributions.
• Profits are to be divided equally among the partners.
• Losses will be allocated in a manner different from the allocation of profits, because the partners contributed different amounts of capital.
• Beal’s obligation to contribute additional capital would have an effect on the allocation of profit or loss to Beal.

Answer 15

Profits are to be divided equally among the partners.

If there is no specific agreement on the sharing of profits, then profits are divided equally among the partners. They take the same share, regardless of how much capital they put in initially or at any other time.

Question 16

Which of the following may not own shares in an S corporation?

• Individuals.
• Estates.
• Trusts.
• Corporations.

Answer 16

Corporations.

1. Number of shareholders Subchapter S corporation can have
   
   • No more than 100
2. Which types of entities cannot be shareholders
   
   • no non-individuals, exceptions apply for estates and trusts.
3. Citizenship of shareholders
   
   • no non-resident aliens
4. How much of corporation’s income can come from passive income
   
   • An S corporation’s election will also terminate if, for each of three consecutive years, (i) its passive investment income exceeds 25% of gross receipts and (ii) it has accumulated earnings and profits.

Also, S-corps cannot have more than one class of stock

Question 17

The law of joint ventures is similar to that of

1. Limited liability companies.
2. Limited partnerships.
3. General partnerships.
4. Corporations.

Answer 17

General partnerships. The law of joint ventures is very similar to partnership law with some exceptions. For example, the death of one joint venturer does not automatically dissolve the venture. However, most of the law is like that involving partnerships, such as the fiduciary duties and unlimited liability for debts.

Question 18

Which of the following statements concerning cumulative preferred stock is correct?

1. Upon the dissolution of a corporation the preferred shareholders have priority over unsecured judgment creditors.
2. Preferred stock represents a type of debt security similar to corporate debentures.
3. If dividends are not declared for any year, they become debts of the corporation for subsequent years.
4. Upon the declaration of a cash dividend on the preferred stock, preferred shareholders become unsecured creditors of the corporation.

Answer 18

Upon the declaration of a cash dividend on the preferred stock, preferred shareholders become unsecured creditors of the corporation.

Question 19

Preferred Stock

Answer 19

Preferred stock is given preferred status as to liquidations and dividends, but dividends are still discretionary.

1. Usually nonvoting stock
2. Dividend rate is generally a fixed rate
3. Cumulative preferred means that if a periodic dividend is not paid at the scheduled time, it accumulates and must be satisfied before common stock may receive a dividend
4. These arrearages are not liabilities of corporation until declared by board of directors
5. Noncumulative preferred means that if the dividend is passed, it will never be paid
6. Held to be implicitly cumulative unless different intent shown

Question 20

What business entity can be voluntarily dissolved and terminated without filing a dissolution document with the state of organization?

1. A corporation.
2. A general partnership.
3. A limited liability limited partnership.
4. A limited partnership.

Answer 20

A general partnership is a common law entity, which does not require the filing of a dissolution document with the state.

Emphasis is on Limited Liability, when this is present, a filing is required.

Question 21

Cabrillo is a limited partner in the Ferrell Limited Partnership. When Cabrillo joined the firm, she put in $10,000 as a capital contribution. During the past year, she got involved in the management of Ferrell partnership. A client, who knew of Cabrillo’s involvement in managing Ferrell, was severely injured when an employee of Ferrell negligently dropped a steel beam on the client. The client brought suit against Ferrell Limited Partnership and all of its partners. What is Cabrillo’s potential liability?

1. None because Cabrillo is a limited partner.
2. None, unless it can be shown that Cabrillo was personally supervising the employee.
3. $10,000 because Cabrillo is a limited partner.
4. Unlimited personal liability.

Answer 21

Unlimited personal liability.

Because Cabrillo got involved in the management of Ferrell Limited Partnership and the client knew this, Cabrillo does not enjoy limited liability but has personal, unlimited liability for this lawsuit.

Question 22

Acorn and Bean were general partners in a farm machinery business. Acorn contracted, on behalf of the partnership, to purchase 10 tractors from Cobb Corp. Unknown to Cobb, Acorn was not authorized by the partnership agreement to make such contracts. Bean refused to allow the partnership to accept delivery of the tractors and Cobb sought to enforce the contract. Cobb will

1. Lose because Acorn’s action was beyond the scope of Acorn’s implied authority.
2. Prevail because Acorn had implied authority to bind the partnership.
3. Prevail because Acorn has apparent authority to bind the partnership.
4. Lose because Acorn’s express authority was restricted, in writing, by the partnership agreement.

Answer 22

Prevail because Acorn has apparent authority to bind the partnership.

Implied authority is authority that can be reasonably implied from actual authority and from the conduct of the principal. In a general partnership, the general partners usually have authority to buy and sell goods, receive money, and pay debts of the partnership. In this case, Acorn did not have actual authority to buy the tractors from Cobb. Therefore, there is no implied authority which comes from actual authority. However, the partnership is a farm machinery business, in which a general partner would have apparent authority to purchase tractors since Cobb was unaware of the limitation on authority and tractors are related to the partnership business.

Question 23

The principle that protects corporate directors from personal liability for acts performed in good faith on behalf of the corporation is known as

1. The clean hands doctrine.
2. The full disclosure rule.
3. The responsible person doctrine.
4. The business judgment rule.

Answer 23

The business judgment rule. As long as a director is acting in good faith s/he will not be liable for errors of judgment unless s/he is negligent.

Question 24

Generally, officers of a corporation

1. Are selected by the shareholders.
2. Are agents and fiduciaries of the corporation, having actual and apparent authority to manage the business.
3. May be removed by the board of directors without cause only if the removal is approved by a majority vote of the shareholders.
4. May declare dividends or other distributions to shareholders as they deem appropriate.

Answer 24

Are agents and fiduciaries of the corporation, having actual and apparent authority to manage the business.

Officers:

1. Typically operate day-to-day business
2. An officer of the corporation is an agent and can bind corporation by his/her individual acts if within the scope of his/her authority
3. Officers and directors may be the same persons
4. Officers are selected by the directors for a fixed term under the bylaws
5. Officers have a fiduciary duty to corporation
6. Courts are recognizing a fiduciary duty owed by majority shareholders to minority shareholders when the majority shareholders have de facto control over the corporation

Officers, like directors, are liable for own torts, even if committed while acting for corporation

• Corporation is also liable if officer was acting within the scope of his/her authority

Question 25

A corporation purchases back several shares of its own stock and classifies them as treasury stock. Which of the following is correct?

1. The corporation is the recipient of the dividends of the treasury stock.
2. The corporation may purchase the treasury stock at below par value.
3. The corporation may vote on the treasury stock.
4. Treasury stock is considered issued and outstanding.

Answer 25

The corporation may purchase the treasury stock at below par value.

It is the original issue of the stock that normally must be sold at or above par value. Repurchases and resales normally can be accomplished without regard to par value.

Question 26

A limited partnership was formed with ten general partners and eight limited partners. In order to admit a new general partner, what approval is needed?

1. A majority of the general partners.
2. A majority of both the general partners and the limited partners.
3. All of the general partners.
4. All of the general partners and limited partners.

Answer 26

All of the general partners and limited partners.

Approval of all partners is necessary to admit a new general partner, unless there are specific provisions in the limited partnership agreement stating otherwise.

Admission of new limited partner requires written agreement of all partners unless partnership agreement provides otherwise.

Question 27

Ted Fein, a partner in the ABC Partnership, wishes to withdraw from the partnership and sell his interest to Gold. All of the other partners in ABC have agreed to admit Gold as a partner and to hold Fein harmless for the past, present, and future liabilities of ABC. A provision in the original partnership agreement states that the partnership will continue upon the death or withdrawal of one or more of the partners.
As a result of Fein’s withdrawal and Gold’s admission to the partnership, Gold

1. Is personally liable for partnership liabilities arising before and after his admission as a partner.
2. Has the right to participate in the management of ABC.
3. Acquired only the right to receive Fein’s share of the profits of ABC.
4. Must contribute cash or property to ABC in order to be admitted with the same rights as the other partners.

Answer 27

Has the right to participate in the management of ABC.

An incoming partner has the same rights as all of the existing partners. Thus, an incoming partner has the right to participate in the management of the partnership.

Incoming partners new to partnership have same rights as previous partners

1. Requires consent of all partners to admit new partner
2. Profit sharing, loss sharing, and capital contributions are by agreement between all partners

Question 28

Grant, Lang, and Harrison formed a partnership several years ago. A client sued the partnership, Grant, and Lang, but not Harrison, for a breach of contract. The partnership does not have sufficient funds to pay for this breach of contract. Which of the following is correct?

1. The client may not recover beyond what the partnership can pay because Harrison was left off the lawsuit.
2. The client may recover from the partnership but not the partners because the partnership is a legal entity.
3. In addition to the partnership, the client may recover from both Grant and Lang because they have joint liability.
4. In addition to the partnership, the client may recover from Grant and Lang because they have joint and several liability.

Answer 28

In addition to the partnership, the client may recover from Grant and Lang because they have joint and several liability.

Under the Revised Uniform Partnership Act, the partners have joint and several liability for breaches of contract as well as for torts. This allows third parties to sue them together or separately.

Question 29

Which of the following can be an advantage of a limited liability company over an S corporation?

1. Double taxation of profits is avoided.
2. Owners receive limited liability protection.
3. Appreciated property can be distributed tax-free to an owner.
4. Incentive stock options can be used to compensate owners.

Answer 29

Appreciated property can be distributed tax-free to an owner.

LLC follows partnership rules so it may distribute appreciated property tax-free. S-Corporation must recognize the gain on the appreciated property distributed to a shareholder.

Question 30

LLC - Details and Advantages

Answer 30

1. Laws for this form of business generally follow the Revised Uniform Limited Liability Company Act (RULLCA 2006)
2. LLC is not considered a corporation but a majority of states provide:
   
   • All owners (often called members) have limited liability and therefore no personal liability
   • Typically, limited liability is retained even if members fail to follow usual formalities in conducting business (advantage vs. C-Corp.)
   • LLC must be formed according to limited liability company statute of the state in which it is formed
   • LLC is separate legal entity so can sue or be sued in own name
   • The name of a LLC must include the words “limited liability company” or “limited company” or the abbreviation “L.L.C.”, “LLC”, “L.C.”, or “LC” to give notice to public
3. Member of LLC has no interest in any specific property in LLC but has interest (personal property interest) in LLC in general
   
   • Member has right to distributions according to profit and loss sharing agreed upon in operating agreement
     
     • Appreciated property can be distributed tax-free to an owner. (Advantage vs. S-Corp.)
   • Member has management interest

Question 31

If a corporation does not follow the corporate formalities such as corporate meetings with relevant minutes…

Answer 31

The corporate veil can be pierced, thus the corporate entity is disregarded and then shareholders of company obtain personal liability for corporation’s debts.

This is another important advantage of LLC because typically, limited liability is retained even if members fail to follow usual formalities in conducting business

Question 32

LLC - Member managed vs. Manager Managed

Answer 32

When LLC designated as member-managed LLC, all members have authority to bind LLC under agency law to contracts on behalf of LLC

b.When LLC designated as manager-managed LLC, only managers have authority to bind LLC to contracts for LLC

LLC is bound only to contracts that

• Either LLC has authorized under agency law, or
• Are made in the ordinary course of business

Question 33

Important S-Corporation Rules

Answer 33

• When corporation elects to be Subchapter S corporation it can avoid double taxation by not paying tax at the corporate level
  
  • Instead, the corporation income flows through to the income tax returns of the individual shareholders
  • Shareholders report the income or loss even when income not distributed to them
  • This flow-through may nevertheless be an advantage under some situations
• Rules involving the criteria needed to be met to be taxed as a Subchapter S corporation can change to one’s detriment, creating another potential disadvantage of needing to stay abreast of rule changes

1. Corporation must be incorporated in the US and have only one class of stock
2. Number of shareholders Subchapter S corporation can have is limited (no more than 100)
3. Shareholders are limited to individuals, estates, qualified trusts, and similar entities
4. Nonresident aliens cannot own shares
5. The corporation cannot have excessive amounts of passive income

Question 34

Which of the following corporate shareholder rights is enforceable by means of a derivative suit?

1. Compelling payment of properly declared dividends.
2. Enforcing access to corporate records.
3. Recovering damages to the corporation from a third party.
4. Protecting preemptive rights.

Answer 34

Recovering damages to the corporation from a third party. Shareholder sues on behalf of the corporation.

Stockholder can also sue in his/her own behalf where his/her interests have been directly injured, for example:

1. Denial of right to inspect records
2. Denial of preemptive right if provided for

Question 35

The limited liability of the shareholder of a closely held corporation will most likely be disregarded if the shareholders

1. Lend money to the corporation.
2. Are also corporate officers, directors, or employees.
3. Undercapitalized the corporation when it was formed.
4. Formed the corporation solely to limit their personal liability.

Answer 35

Undercapitalized the corporation when it was formed.

Normally the liability of shareholders of corporations is limited to their capital contribution. However, the court will “pierce the corporate veil” and hold the shareholders personally liable for the debts of the corporation if the corporate entity is being used to defraud people or to achieve other injustices. Thus, if the shareholders establish a corporation, knowing that it would have less capital than required for it to pay its debts, then the court will “pierce the corporate veil”and hold the shareholders personally liable.

Question 36

Mullin, a director of Royal Corporation, wishes to sell a plot of land to the corporation. She is willing to sell the land for the fair market value but is concerned about a potential conflict of interest as a director dealing directly with her own corporation. Which of the following is(are) the minimum steps necessary for Mullin to not have a conflict of interest as director of Royal corporation?

• I.She sells the plot of land to Royal in a fair and reasonable transaction for the corporation at the fair market value
• II.She discloses her ownership in the land to the board of directors and the board approves the transaction.
• III.She discloses her ownership in the land to the shareholders and a majority approves it.

1. I.
2. II.
3. I and III.
4. I, II, and III.

Answer 36

Only I is Sufficient!

It is sufficient that the transaction be a fair and reasonable transaction for the corporation at the fair market value. Actually, statement III by itself would also be sufficient, but this was not one of the choices.

Both of the following in and of themselves would be sufficient:

1. She sells the plot of land to Royal in a fair and reasonable transaction for the corporation at the fair market value
2. She discloses her ownership in the land to the shareholders and a majority approves it.

Question 37

Wilson and Thomas are partners. Wilson contributed $150,000 to the partnership, and Thomas contributed $50,000. Wilson does 40% of the work, and Thomas does 60%. They do not have a partnership agreement that addresses the sharing of profits and losses. By the end of the year, the partnership has earned a profit of $200,000. What is Wilson’s share of the profit under the Revised Uniform Partnership Act?

1. $80,000
2. $100,000
3. $115,000
4. $150,000

Answer 37

$100,000

RUPA provides that in the absence of a profit-sharing agreement, profits are shared equally by the partners.

Question 38

Which of the following corporate actions is subject to shareholder approval?

1. Election of officers.
2. Removal of officers.
3. Declaration of cash dividends.
4. Removal of directors.

Answer 38

Removal of directors.

Question 39

An S corporation must adhere to all of the following except having:

1. No more than 100 shareholders.
2. A nonresident alien as a shareholder.
3. An individual as a shareholder.
4. One class of stock.

Answer 39

A nonresident alien as a shareholder.

A nonresident alien may not own shares of an S corporation

When corporation elects to be Subchapter S corporation it can avoid double taxation by not paying tax at the corporate level

• Instead, the corporation income flows through to the income tax returns of the individual shareholders
• Shareholders report the income or loss even when income not distributed to them
• This flow-through may nevertheless be an advantage under some situations

Some of the rules to watch out for involve

1. Number of shareholders Subchapter S corporation can have
2. Which types of entities cannot be shareholders
3. Citizenship of shareholders
4. How much of corporation’s income can come from passive income

Question 40

Sack Company has been doing business as a partnership, but the owners decided to incorporate Sack in Delaware. Sack has branch offices in Delaware and Pennsylvania. Which of the following is correct?

1. Sack must also incorporate in Pennsylvania because it has branch offices there.
2. Sack is a foreign corporation in Pennsylvania.
3. Sack is a domestic corporation in Pennsylvania.
4. Sack is a de facto corporation in Pennsylvania.

Answer 40

Sack is a foreign corporation in Pennsylvania.

Since Sack is doing business in a state other than where it was incorporated, it is termed a foreign corporation in Pennsylvania.

Types of Corporations

1. Domestic corporation is one which operates and does business within the state in which it was incorporated
2. Foreign corporation is one doing business in any state except one in which it was incorporated
   
   • Foreign corporations, if “doing business” in a given state, are not exempt from many requirements and details that domestic corporations must meet
     
     1. Corporation is doing business in that state if transactions are continuous rather than isolated transactions
   • Foreign corporations file documentation similar to that for incorporation

Question 41

Which of the following documents would most likely contain specific rules for the management of a business corporation?

1. Articles of incorporation.
2. Bylaws.
3. Certificate of authority.
4. Shareholders’ agreement.

Answer 41

Bylaws are requirements adopted by the board of directors to guide management in performing its duties.

Question 42

Which of the following partners of a limited liability partnership (LLP) may avoid personal liability when a partner commits a negligent act?

1. All the partners.
2. The supervisor of the negligent partner.
3. All the partners other than the negligent partner.
4. All the partners other than the supervisor of, and the negligent partner.

Answer 42

All the partners other than the supervisor of, and the negligent partner.

Partners are fully liable only for their own negligent acts and for wrongful acts of those they supervise or have control over.

Question 43

Which of the following would be grounds for the judicial dissolution of a corporation on the petition of a shareholder?

1. Refusal of the board of directors to declare a dividend.
2. Waste of corporate assets by the board of directors.
3. Loss operations of the corporation for three years.
4. Failure by the corporation to file its annual report with the state.

Answer 43

Waste of corporate assets by the board of directors.

A judicial dissolution may be brought by a shareholder in the event that there has been a waste of the corporate assets by the board of directors. The following reasons would also constitute proper grounds for judicial dissolution:

• Directors are deadlocked in the management of the corporate affairs.
• Acts of the directors are illegal or oppressive.
• Shareholders are deadlocked and have not been able to elect directors for two consecutive annual meetings.

Question 44

Which of the following is considered a corporate equity security?

• A shareholder’s preemptive right.
• A shareholder’s appraisal right.
• A callable bond.
• A share of callable preferred stock.

Answer 44

A share of callable preferred stock.

Stock, whether preferred or common, whether callable or not, is still an ownership interest.

Question 45

Hart and Ruck formed a limited partnership in which Hart was a general partner and Ruck was a limited partner. A certificate of limited partnership was filed with the secretary of state. Which of the following is correct under the Revised Uniform Limited Partnership Act?

1. Both Hart’s and Ruck’s names must appear on the certificate of limited partnership unless a waiver is granted.
2. Ruck’s name need not appear on the certificate of limited partnership as long as his name appears in the partnership name.
3. Only Hart’s name must appear on the certificate of limited partnership.
4. The certificate of limited partnership requires that at least one of Hart’s or Ruck’s name appears on it.

Answer 45

Only Hart’s name must appear on the certificate of limited partnership.

The certificate of limited partnership requires the names of the general partners, but not the limited partners.

Question 46

Mint, an accountant, is in a professional corporation. Mint is concerned about potential liability in this form of business organization. For which of the following is Mint liable personally?

• I.Liability due to Mint’s negligence in the performance of an audit.
• II.Liability for a debt of the professional corporation.

1. I only.
2. II only.
3. Both I and II.
4. Neither I nor II.

Answer 46

I only.

State laws allow professionals to receive most of the benefits of incorporating by allowing them to form professional corporations. The professionals have limited liability for corporate debts but retain liability for their professional acts such as negligence by Mint in the audit.

Question 47

Leslie, Kelly and Blair wanted to form a business. Which of the following business entities does not require the filing of organization documents with the state?

1. Limited partnership.
2. Joint venture.
3. Limited liability company.
4. Subchapter S corporation.

Answer 47

Joint ventures, like partnerships, are not required to file organization documents with the state.

JV = An association of two or more persons (or entities) organized to carry out a single business undertaking (or series of related undertakings) for profit.

• Generally, corporations may engage in joint ventures

Law of joint ventures is similar to that of partnerships with some exceptions

• Each joint venturer is not necessarily an agent of other joint venturers—limited power to bind others
• Death of joint venturer does not automatically dissolve joint venture
• Joint venture is interpreted as special form of partnership

Question 48

What is the doctrine under which a corporation is made liable for the torts of its employees, committed within the scope of their employment?

1. Respondeat superior.
2. Ultra vires.
3. Estoppel.
4. Ratification.

Answer 48

Respondeat superior.

The doctrine of respondeat superior provides that an employer is responsible for the torts committed by employees in the normal scope of duties.

• ultra vires acts are acts that are beyond the scope of corporate powers
• estoppel prevents a party to a contract from being harmed if there is an expectation that the other party to the contract was contracting consistent with his or her powers.
• ratification involves acceptance of the terms of an agreement.

Question 49

Under the Revised Model Business Corporation Act, which of the following dividends is not defined as a distribution?

1. Cash dividends.
2. Property dividends.
3. Liquidating dividends.
4. Stock dividends.

Answer 49

Stock dividends.

Question 50

Green and Fenmore formed a partnership. Green decided to use her own computer to perform work for the partnership. Which of the following is correct?

1. The computer is presumed to be partnership property because she is using it for partnership business.
2. The computer is not presumed to be partnership property because she paid for it.
3. The computer is not presumed to be partnership property because Green owned it.
4. The computer is not partnership property because a partnership cannot legally hold title.

Answer 50

The computer is not presumed to be partnership property because Green owned it.

A partner can use property she owns in the partnership without it automatically becoming partnership property.

Question 51

Following the formation of a corporation, which of the following terms best describes the process by which the promoter is released from, and the corporation is made liable for, preincorporation contractual obligations?

1. Assignment.
2. Novation.
3. Delegation.
4. Accord and satisfaction.

Answer 51

Novation is the process of substituting one party to a contract for another.

Promoters are persons who form corporations and arrange capitalization to begin corporations.

• Promoter handles issuing of the prospectus, promoting stock subscriptions, and drawing up charter
• Promoter has a fiduciary relationship with corporation, and is not permitted to act against interests of corporation
• Promoter is not an agent of the corporation, because the corporation is still not in existence

Note - Accord and Satisfaction is an agreement to accept less than what is legally due.

Question 52

Which of the following is not considered an advantage of the corporation over the partnership?

1. Perpetual existence of corporation.
2. The corporation owners have limited liability.
3. The corporation results in individuals owning the corporation paying less taxes than those owning a partnership.
4. It is typically easier to raise large amounts of capital in the corporation versus the partnership.

Answer 52

The corporation results in individuals owning the corporation paying less taxes than those owning a partnership.

Corporations have double taxation which can be avoided in some cases. Typically, the corporation is taxed first and the dividends given to the owners are taxed a second time. Although the partnership does typically file a tax return, this is for information purposes to see that the partners are taxed on their share.

Question 53

Donaldson reached the mandatory retirement age as a partner of the Malcomb and Black partnership. Edwards was chosen by the remaining partners to succeed Donaldson. The remaining partners agreed to assume all of Donaldson’s partnership liability and released Donaldson from such liability. Additionally, Edwards expressly assumed full liability for Donaldson’s partnership liability incurred prior to retirement. Which of the following is correct?

1. Edward’s assumption of Donaldson’s liability was a matter of form since as an incoming partner he was liable as a matter of law.
2. Firm creditors are not precluded from asserting rights against Donaldson for debts incurred while she was a partner, the agreements of Donaldson and the remaining partners notwithstanding.
3. Donaldson has no continuing potential liability to firm creditors as a result of the agreements contained in the retirement plan.
4. Since Donaldson obtained a release from firm debts she has no liability for debts incurred while she was a partner.

Answer 53

Firm creditors are not precluded from asserting rights against Donaldson for debts incurred while she was a partner, the agreements of Donaldson and the remaining partners notwithstanding.

a retiring partner is liable to creditors for existing debts of the partnership, but not for those incurred after retirement, as long as creditors had notice of the retirement before extending the credit. Partners may agree not to hold a retiring partner liable among themselves, but they cannot prevent him from being held personally liable by third parties. Therefore, when Donaldson leaves the partnership, she is still individually liable on all past contracts and obligations, unless existing creditors agree to release her and look to the new incoming partner, Edwards (a novation).

Question 54

Which of the following disqualifies an entity from an S corporation election?

1. Seventy-seven individual shareholders (including four married couples).
2. An estate shareholder.
3. A 501(c)(3) exempt organization shareholder.
4. A nonresident alien shareholder.

Answer 54

A nonresident alien shareholder.

1. Corporation must be incorporated in the US and have only one class of stock
2. Number of shareholders Subchapter S corporation can have is limited
3. Shareholders are limited to individuals, estates, qualified trusts, and similar entities
4. Nonresident aliens cannot own shares
5. The corporation cannot have excessive amounts of passive income

Question 55

Which of the following statements generally is correct regarding a general partner in a general partnership as compared to a general partner in a limited partnership?

1. A general partner in a general partnership has greater rights and powers than a general partner in a limited partnership.
2. A general partner in a general partnership has greater liability than a general partner in a limited partnership.
3. A general partner in a general partnership and a general partner in a limited partnership have the same rights and powers.
4. A general partner in a general partnership has rights and powers provided by articles of partnership, while a general partner in a limited partnership has rights and powers provided by statute.

Answer 55

A general partner in a general partnership and a general partner in a limited partnership have the same rights and powers.

Rights of partners in limited partnership

General partners manage partnership

Limited partners invest

• Limited partner who substantially manages partnership like general partner obtains liability like general partner to third parties who believed s/he was general partner
• Limited partner allowed to do following without risking loss of limited liability

1. Acting as an agent or employee of limited partnership
2. Consulting with and advising general partner or limited partnership about partnership business
3. Approving or disapproving amendments to limited partnership agreement
4. Voting on dissolution or winding up of limited partnership
5. Voting on loans of limited partnership
6. Voting on change in nature of business
7. Voting on removal of a general partner
8. Bringing derivative lawsuit on behalf of limited partnership
9. Being surety for limited partnership

Profits or losses are shared as agreed upon in certificate agreement

• Losses and any liability are limited to capital contributions for limited partners
• If no agreement on profit and losses exists, then shared based on percentages of capital contributions

Question 56

Unless otherwise provided for, the assignment of a partnership interest will result in the

1. Dissolution of the partnership.
2. Assignee obtaining the right to receive the share of the profits to which the assignor would have otherwise been entitled.
3. Assignee succeeding to the assignor’s rights to participate in the management of the partnership.
4. Vesting of the assignor’s right to inspect the partnership books in the assignee.

Answer 56

Assignee obtaining the right to receive the share of the profits to which the assignor would have otherwise been entitled.

Unless otherwise stipulated in the partnership agreement, an individual partner’s interest in the partnership is freely assignable without the consent of the other partners. However, upon the assignment, the assignee merely obtains the right to receive the assigning partner’s share of the profits and return of capital contribution.

Question 57

Under the Revised Model Business Corporation Act, which of the following items of information should be included in a corporation’s Articles of Incorporation (charter)?

1. Name and address of each preincorporation subscriber.
2. Number of shares authorized.
3. Name and address of the corporation’s promoter.
4. Election of either C corporation or S corporation status.

Answer 57

Number of shares authorized.

Articles of Incorporation (charter) are filed with the state and contain

1. Proposed name of corporation
2. Purpose of corporation
3. Powers of corporation
4. Name of registered agent of corporation
5. Name of incorporators
6. Number of authorized shares of stock, types of stock, and whether stock has par value, stated value, or neither

Incorporators may be promoters as well.

Question 58

On February 1, Hoffman made an offer to subscribe to 100 shares of $10 par value common stock of Pack Corporation stock for $70 per share. On March 1, Pack Corporation agreed to the subscription offer. Under the stock subscription contract, Hoffman paid $2,000 immediately and agreed to pay $1,000 by April 15 with the remainder due on June 1. On May 15, Pack Corporation was forced into bankruptcy and the creditors are seeking payment from Hoffman. Which of the following is correct concerning the amount the creditors can require Hoffman pay?

1. None because although he has not paid the full subscription price, he fulfilled his contract fully up until the date of the bankruptcy.
2. None because he has paid in more than the $10 par value for 100 shares of stock.
3. None because Hoffman is not yet a shareholder until he fully pays for the stock.
4. $4,000 because this is the amount Hoffman still owes the corporation under the subscription agreement.

Answer 58

$4,000 because this is the amount Hoffman still owes the corporation under the subscription agreement.

Once both Hoffman and Pack agreed to the subscription agreement, Hoffman became liable to the corporation for the full subscription price. The creditors can be paid with this money.

Stock subscriptions are contracts to purchase a given number of shares in an existing corporation or one to be organized

1. Subscription to stock is a written offer to buy and is not binding until accepted by the corporation
2. Under the Model Business Corporation Act, stock subscriptions are irrevocable for 6 months
3. Once accepted, the subscriber becomes liable

• For the purchase, and
• As a corporate shareholder

Question 59

A major characteristic of the corporation is its recognition as a separate legal entity. As such it is capable of withstanding attacks upon its valid existence by various parties who would wish to disregard its existence or “pierce the corporate veil” for their own purposes. The corporation will normally be able to successfully resist such attempts except when

1. The corporation was created with tax savings in mind.
2. The corporation was created in order to insulate the assets of its owners from personal liability.
3. The corporation being attacked is a wholly owned subsidiary of its parent corporation.
4. The creation of and transfer of property to the corporation amounts to a fraud upon creditors.

Answer 59

The creation of and transfer of property to the corporation amounts to a fraud upon creditors.

A corporation is recognized as a separate legal entity except when the creation of or transfer of property to the corporation is used to perpetrate a fraud upon creditors. In these situations, the courts may disregard the entity and “pierce the corporate veil,” leaving the shareholders with unlimited liability for corporate obligations.

Piercing the corporate veil—courts disregard corporate entity and hold stockholders personally liable. Rarely happens but may occur if:

1. Corporation used to perpetrate fraud (e.g., forming an undercapitalized corporation)
2. Owners/officers do not treat corporation as separate entity
3. Shareholders commingle assets, bank accounts, financial records with those of corporation
4. Corporate formalities not adhered to

Question 60

Davis, an inventor, developed a new product but lacked money to get the product to the marketplace. Before creating a corporation to raise capital, Davis leased office space and equipment, entered into contracts with third parties, and identified investors. Who has liability for preincorporation debts?

1. Davis is liable until the corporation assumed the debts in novation.
2. Davis is liable until the articles of incorporation were filed.
3. If this corporation is never formed, Davis is not liable.
4. If this corporation is never formed, the unpaid third parties must write off the debt because no corporate entity existed at the time the debt was incurred.

Answer 60

Davis is liable until the corporation assumed the debts in novation.

The agreements made by the promoters are not binding on the future corporation until adopted after the corporation comes into existence.

Normally promoter is personally liable on contract. Adoption by corporation does not relieve promoter; novation is required to relieve promoter. The other party must agree to substituting the corporation

Question 61

Which of the following statements concerning treasury stock is correct?

1. Cash dividends paid on treasury stock are transferred to stated capital.
2. A corporation may not purchase its own stock unless specifically authorized by its Articles of Incorporation.
3. A duly appointed trustee may vote treasury stock at a properly called shareholders’ meeting.
4. Treasury stock may be resold at a price less than par value.

Answer 61

Treasury stock may be resold at a price less than par value.

1. Are not votable and do not receive dividends
2. Corporation does not recognize gain or loss on transactions with its own stock
3. Must be purchased out of unreserved or unrestricted earned surplus as defined below and as permitted by state law
   
   1. If Articles of Incorporation so permit or if majority of voting shareholders permit, unrestricted capital surplus may also be used
4. May be distributed as part of stock dividend
5. May be resold without regard to par value
6. Can be resold without regard to preemptive rights
7. No purchase of treasury stock may be made if it renders corporation insolvent

Question 62

West owns 5,000 shares of $7 cumulative preferred stock of Sky Corp. During the first year of operations, cash dividends of $7 per share were declared on Sky’s preferred stock but were never paid. In the second year of operations, dividends on Sky’s preferred stock were neither declared nor paid. If Sky is dissolved, which of the following statements is correct?

1. West will have priority over the claims of Sky’s debenture bond owners.
2. West will have priority over the claims of Sky’s unsecured judgment creditors.
3. Sky will be liable to West as an unsecured creditor for $35,000.
4. Sky will be liable to West as an unsecured creditor for $70,000.

Answer 62

Sky will be liable to West as an unsecured creditor for $35,000.

Upon declaration, a cash dividend on preferred stock becomes a legal debt of the corporation, and the preferred shareholders become unsecured creditors of the corporation. However, any dividends not paid in any year concerning cumulative preferred stock are not a liability of the corporation until they are declared. Therefore, Sky will be liable to West as an unsecured creditor for $35,000 which is the amount of the declared dividends.

Question 63

Which of the following is not necessary to create an express partnership?

1. Execution of a written partnership agreement.
2. Agreement to share ownership of the partnership.
3. Intention to conduct a business for profit.
4. Intention to create a relationship recognized as a partnership.

Answer 63

Execution of a written partnership agreement.

A partnership is an association of two or more persons to carry on a business as co-owners for profit. A partnership is formed by an agreement which can be express, implied, or apparent. The partnership that is formed by express agreement need not be in writing; rather, it may be formed orally. Thus, execution of a written partnership agreement is not necessary to create an express partnership. A written partnership agreement is not required unless the agreement falls within the Statute of Frauds.

Question 64

Which of the following is(are) correct concerning a partnership?

• I.An important characteristic is profit sharing which needs to be equal among the partners.
• II.An important characteristic is the right of each general partner to participate in the management of the partnership.

1. I only.
2. II only.
3. Both I and II.
4. Neither I nor II.

Answer 64

II only.

Under partnership law, each general partner does have the equal right to participate in the management of the partnership, although some of the partners may give it over to another partner (the managing partner).

Partnership agreement may specify how profits and losses are shared.

Question 65

Food Corp. owned a restaurant called The Ambers. The corporation president, T.J. Jones, hired a contractor to make repairs at the restaurant, signing the contract, “T.J. Jones for The Ambers.” Two invoices for the restaurant repairs were paid by Food Corp. with corporate checks. Upon presenting the final invoice, the contractor was told that it would not be paid. The contractor sued Food Corp. Which of the following statements is correct regarding the liability of Food Corp.?

1. It is not liable because Jones is liable.
2. It is not liable because the corporation was an undisclosed principal.
3. It is liable because Jones is not liable.
4. It is liable because Jones had authority to make the contract.

Answer 65

It is liable because Jones had authority to make the contract.

Jones, as an officer of the corporation, has authority to make binding contracts for the corporation.

Question 66

Hughes and Brody start a business as a closely-held corporation. Hughes owns 51 of the 100 shares of stock issued by the firm and Brody owns 49. One year later, the corporation decides to sell another 200 shares. Which of the following types of rights would give Hughes and Brody a preference over other purchasers to buy shares to maintain control of the firm?

1. Shareholder derivative rights.
2. Preemptive rights.
3. Cumulative voting rights.
4. Inspection rights.

Answer 66

Preemptive rights.

The term “preemptive rights” refers to the preference that existing owners have when new shares of stock are issued by a corporation.

Question 67

Which of the following forms of business generally provides all owners with limited liability while avoiding federal taxation of income at the entity level?

1. Subchapter C corporation.
2. Subchapter S corporation.
3. Partnership.
4. Limited partnership.

Answer 67

Subchapter S corporation.

Question 68

Which of the following is an advantage of forming a limited liability company (LLC) as opposed to a partnership?

1. The entity may avoid taxation.
2. The entity may have any number of owners.
3. The owner may participate in management while limiting personal liability.
4. The entity may make disproportionate allocations and distributions to members.

Answer 68

The owner may participate in management while limiting personal liability.

An LLC is generally treated as a partnership for federal income tax purposes. However, an LLC provides limited liability for each and every owner even though they participate in management. In contrast, a partner who participates in the management of a partnership would be considered a general partner and would have unlimited liability. Creditors can reach the personal assets of a general partner to satisfy partnership debts, including a malpractice judgment against the partnership even though the partner was not personally involved in the malpractice.

Question 69

Which of the following decreases stockholder equity?

1. Investments by owners.
2. Distribution to owners.
3. Issuance of stock.
4. Acquisition of assets in a cash transaction.

Answer 69

Distribution to owners.

Question 70

If no provisions are made in the partnership agreement, a general partnership allocates profits and losses based on the

1. Value of actual contributions made by each partner.
2. Number of partners.
3. Number of hours each partner worked in the partnership during the year.
4. Number of years each partner belonged to the partnership.

Answer 70

Number of partners.

Profits and losses are shared equally unless the agreement states otherwise.

Question 71

What term is used to describe a partnership without a specified duration?

1. A perpetual partnership.
2. A partnership by estoppel.
3. An indefinite partnership.
4. A partnership at will.

Answer 71

A partnership at will is one without a specific duration.

Question 72

Which of the following statements describes the same characteristics for both an S corporation and a C corporation?

1. Both corporations can have more than 100 shareholders.
2. Both corporations have the disadvantage of double taxation.
3. Shareholders can contribute property into a corporation without being taxed.
4. Shareholders can be either citizens of the United States or foreign countries.

Answer 72

Shareholders can contribute property into a corporation without being taxed.

In both types of structure shareholders can contribute property into the corporation without being taxed.

Question 73

Jones, Smith, and Bay wanted to form a company called JSB Co. but were unsure about which type of entity would be most beneficial based on their concerns. They all desired the opportunity to make tax-free contributions and distributions where appropriate. They wanted earnings to accumulate tax-free. They did not want to be subject to personal holding tax and did not want double taxation of income. Bay was going to be the only individual giving management advice to the company and wanted to be a member of JSB through his current company, Channel, Inc. Which of the following would be themost appropriate business structure to meet all of their concerns?

1. Proprietorship.
2. S corporation.
3. C corporation.
4. Limited liability partnership.

Answer 73

Limited liability partnership.

Formation of LLP

• Must file articles of LLP with Secretary of State
• Statutes of all jurisdictions require firm’s name to include phrase of limited liability partnership or registered limited liability partnership or initials LLP or RLLP to notify public
• Majority of states require only majority, not unanimous, approval of partners to become LLP
• Generally, laws of state in which the LLP is formed govern affairs of the LLP in all other states
• The LLP often works well for professionals who want to do business as professionals in a partnership but still pass through tax benefits while limiting personal liability of the partners
• Most states allow an easy transition from conventional partnership into limited liability partnership
• Most common law and statutory law from partnership law applies to LLP

Question 74

Reilly has agreed to purchase some stock of Jansen Corporation. Which of the following types of consideration or value is(are) sufficient to purchase this stock?

• I.Services already performed by Reilly.
• II.Services promised by Reilly to be performed at a later date.
• III.Negotiable promissory note to pay cash.

1. I only.
2. I and II only.
3. I and III only.
4. I, II and III.

Answer 74

I, II and III.

All three items are sufficient consideration under The Revised Model Business Corporations Act.

Valid consideration or value for shares can be any benefit to corporation including:

1. cash,
2. property,
3. services performed,
4. intangible property,
5. promissory notes,
6. other securities, or
7. services contracted to be performed in the future

Question 75

During the current year Jay Walker was hit by a reckless driver and sustained serious injuries. Walker sued the driver and received the following payments during the year:

• Damages for personal physical injury$80,000
• Punitive damages100,000

The amount to be included in Walker’s gross income for the current year should be

1. $0
2. $80,000
3. $100,000
4. $180,000

Answer 75

$100,000

If an action has its origin in a personal physical injury, then all resulting damages (other than punitive damages) can be excluded from gross income.

Question 76

Which form of business entity has the following attributes?

• I.Limited liability for all its owners.
• II.Can permit all its owners to participate in management and control of the entity.
• III.Absent an agreement to the contrary, is dissolved on the death, withdrawal, or bankruptcy of an owner.

1. A limited partnership.
2. A limited liability company.
3. A general partnership.
4. A corporation.

Answer 76

A limited liability company.

A limited liability company can permit all of the owners to participate in management, limit the liability of all owners, and absent an agreement to the contrary will be dissolved on the death, withdrawal, or bankruptcy of an owner.

Question 77

Under the Revised Model Business Corporation Act, following what type of corporate acquisition does the acquiring corporation automatically become liable for all obligations of the acquired corporation?

1. A leveraged buyout of assets.
2. An acquisition of stock for debt securities.
3. A cash tender offer.
4. A merger.

Answer 77

A merger.

Substantial Change in Corporate Structure

1. Merger

• Union of two corporations where one is absorbed by other
  
  • Surviving corporation issues its own shares (common and/or preferred) to shareholders of original corporations

1. Consolidation

Requirements to Accomplish Merger or Consolidation:

• Boards of both corporations must prepare and submit plan to shareholders of both corporations
• Approval of board of directors of both companies
• Shareholders of both corporations must be given copy or summary of merger plan
• Majority vote of shareholders of each corporation
• Surviving corporation gets all assets and liabilities of merging corporations
• Dissatisfied shareholders of subsidiary may dissent and assert appraisal rights, thereby receiving the FMV of their stock

1. Dissolution

Question 78

Able and Baker are two corporations, the shares of which are publicly traded. Baker plans to merge into Able. Which of the following is a requirement of the merger?

1. The IRS must approve the merger.
2. The common stockholders of Baker must receive common stock of Able.
3. The creditors of Baker must approve the merger.
4. The boards of directors of both Able and Baker must approve the merger.

Answer 78

The boards of directors of both Able and Baker must approve the merger.

The merger of two corporations requires the approval from the boards of directors of both merging corporations. Also, normally a majority of the shareholders of each corporation must approve the merger.

Question 79

Which of the following is a correct statement concerning a partner’s power to bind the partnership?

1. A partner has no authority to bind the partnership after dissolution.
2. A partner cannot bind the partnership based upon apparent authority when the other party to the contract knows that the partner lacks actual authority.
3. A partner has no authority in carrying on the regular business of the partnership to convey real property held in the partnership name.
4. A partner, acting outside the scope of the partner’s apparent authority, but with the express authority to act, cannot bind the partnership unless the third party knows of the express authority.

Answer 79

A partner cannot bind the partnership based upon apparent authority when the other party to the contract knows that the partner lacks actual authority.

When the third party knows that the partner with whom he deals lacks actual authority, there can be no apparent authority. With such knowledge, the third party can no longer reasonably believe that the partner has authority to represent the partnership.

Question 80

Some parties owe a fiduciary duty either to other parties in the corporation or to the corporation itself. Which of the statements is not correct?

1. Directors of the corporation owe a fiduciary duty to the corporation.
2. Officers of the corporation owe a fiduciary duty to the corporation.
3. Minority shareholders owe a fiduciary duty to the corporation.
4. Majority shareholders can owe a fiduciary duty to the minority shareholders.

Answer 80

Minority shareholders owe a fiduciary duty to the corporation.

Minority shareholders, in general, do not owe a fiduciary duty to the corporation since they are simply investors. If a shareholder is also a director or officer, s/he does owe a fiduciary duty in that capacity, but not as a minority shareholder.

Question 81

Under the Revised Uniform Partnership Act, which of the following have the right to inspect partnership books and records?

1. Employees.
2. Former partners.
3. Inactive partners.
4. Transferees of partners’ interests.

Answer 81

Inactive partners.

All partners have the right to inspect partnership books and records.

Question 82

Barton Corporation and Clagg Corporation have decided to combine their separate companies pursuant to the provisions of their state corporation laws. After much discussion and negotiation, they decided that a consolidation was the appropriate procedure to be followed. Which of the following is an incorrect statement with respect to the contemplated statutory consolidation?

1. A statutory consolidation pursuant to state law is recognized by the Internal Revenue Code as a type of tax-free reorganization.
2. The larger of the two corporations will emerge as the surviving corporation.
3. Creditors of Barton and Clagg will have their claims protected despite the consolidation.
4. The shareholders of both Barton and Clagg must approve the plan of consolidation.

Answer 82

The larger of the two corporations will emerge as the surviving corporation.

A consolidation is the unifying of two or more corporations into one new corporation, extinguishing both existing corporations.

Question 83

In the absence of a specific provision in a general partnership agreement, partnership losses will be allocated

1. Equally among the partners irrespective of the allocation of partnership profits.
2. In the same manner as partnership profits.
3. In proportion to the partners’ capital contributions.
4. In proportion to the partners’ capital contributions and outstanding loan balances.

Answer 83

In the same manner as partnership profits.

If a partnership agreement is silent regarding the allocation of partnership losses, then losses are allocated in the same manner as partnership profits.

Question 84

Under which of the following circumstances is a shareholder who receives an illegal dividend not obligated to repay the dividend?

1. The shareholder was not aware the dividend was improper and the corporation was solvent at the time of payment
2. The shareholder was not aware the dividend was improper and the corporation was insolvent at the time of payment.
3. The shareholder was aware the dividend was improper and the corporation was solvent at the time of payment.
4. The shareholder was aware the dividend was improper and the corporation was insolvent at the time of payment.

Answer 84

The shareholder was not aware the dividend was improper and the corporation was solvent at the time of payment

a shareholder is not required to repay a dividend if he or she did not know the payment was improper and the corporation was solvent at the time of repayment.

Question 85

Smith was an officer of CCC Corp. As an officer, the business judgment rule applied to Smith in which of the following ways?

1. Because Smith is not a director, the rule does not apply.
2. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally not liable to CCC for damages caused.
3. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, but CCC may elect to reimburse Smith for any damages Smith paid.
4. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, and CCC is prohibited from reimbursing Smith for any damages Smith paid.

Answer 85

If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally not liable to CCC for damages caused.

if a corporate officer makes a judgment in good faith, he or she is not liable for a mistake.

Question 86

Abbey brought in two friends, Burton and Chase, to mass produce and sell posters of Europe throughout the United States. They started the business in Miami where Burton and Chase each put in an initial capital contribution of $160,000 each. Abbey put in $10,000. They are not looking for any outside capital because they have ways to obtain any additional capital they may need. They each will manage the business. Which form of business organization should they form?

1. A limited partnership with Burton and Chase as the limited partners to protect their larger investments.
2. A limited partnership with all three being protected as limited partners.
3. A general partnership.
4. A corporation.

Answer 86

A general partnership.

Since Abbey, Burton, and Chase are forming a business from their own capital, they do not need the advantage of selling stock in a corporation. They would use the simpler partnership form of business. Note that there are no special liability problems either that would have suggested a corporate form.

Question 87

Which of the following statements best states the purpose of cumulative voting?

1. To assure the continuance of incumbent directors.
2. To allow minority shareholders to gain representation on the board of directors.
3. To allow for the election of one-third of the board of directors each year.
4. To assure that a majority of shares voted elects the entire board of directors.

Answer 87

To allow minority shareholders to gain representation on the board of directors.

Cumulative voting gives the shareholder one vote for each share owned times the number of directors being elected. This gives minority shareholders an opportunity to get some representation on the board by voting all shares for one or two directors.

Question 88

A partner’s interest in specific partnership property is

• Assignable to the partner’s individual creditors
• Subject to attachment by the partner’s individual creditors

Answer 88

NO to BOTH.

Specific partnership property is property owned as tenants in partnership with other partners. All partners have equal rights to the property and can possess or use the partnership property for partnership purposes. Partnership property is not assignable to a partner’s individual creditors; therefore, the first statement is incorrect. Partnership property can only be assigned if all partners agree, or if the property is assigned for the apparent purpose of carrying on the business. Partnership property is not subject to attachment by the partner’s individual creditors; therefore, the second statement is incorrect. Partnership property is generally only subject to attachment by a claim on the entire partnership.

Question 89

Fil and Breed are 50% partners in F&B Cars, a used-car dealership. F&B maintains an average used-car inventory worth $150,000. On January 5, National Bank obtained a $30,000 judgment against Fil and Fil’s child on a loan that Fil had cosigned and on which Fil’s child had defaulted. National sued F&B to be allowed to attach $30,000 worth of cars as part of Fil’s interest in F&B’s inventory. Will National prevail in its suit?

1. No, because the judgment was not against the partnership.
2. No, because attachment of the cars would dissolve the partnership by operation of law.
3. Yes, because National had a valid judgment against Fil.
4. Yes, because Fil’s interest in the partnership inventory is an asset owned by Fil.

Answer 89

No, because the judgment was not against the partnership.

A partnership is a separate legal entity apart from its owners.

Question 90

Eaton is the sole owner of a construction company. Eaton is concerned about personal liability. Which of the following entities will best allow Eaton to limit personal liability?

1. Sole proprietorship.
2. C corporation.
3. General partnership.
4. Limited partnership.

Answer 90

C corporation.

A C corporation provides for limited liability, can have a sole owner, and the owner can act as management.

Question 91

Golden Enterprises, Inc. entered into a contract with Hidalgo Corporation for the sale of its mineral holdings. The transaction proved to be ultra vires. Which of the following parties, for the reason stated, may properly assert the ultra vires doctrine?

1. Golden enterprises to avoid performance.
2. A shareholder of Golden Enterprises to enjoin the sale.
3. Hidalgo Corporation to avoid performance.
4. Golden Enterprises to rescind the consummated sale.

Answer 91

A shareholder of Golden Enterprises to enjoin the sale.

An ultra vires doctrine applies when a corporation enters a contract outside the scope of its express or implied authority granted by its Articles of Incorporation. Since the state or shareholder has the right to object to an ultra vires act, a competitor could not object. A shareholder can institute a derivative action against directors and officers to recover damages for such acts.

Question 92

A consolidation of two corporations usually requires all of the following except

1. Approval by the board of directors of each corporation.
2. Receipt of voting stock by all stockholders of the original corporations.
3. Provision for an appraisal buyout of dissenting stockholders.
4. An affirmative vote by the holders of a majority of each corporation’s voting shares.

Answer 92

Receipt of voting stock by all stockholders of the original corporations.

Receipt of voting stock by all stockholders of the original corporations is not a requirement for consolidation.

Question 93

What is the most likely effect if a court pierces the corporate veil?

1. The corporation’s shareholders can be assigned liability for the corporation’s debts.
2. The corporation can be held liable for acts of the directors.
3. The corporation can lose its tax-exempt status.
4. The corporation can be held liable for acts of nonofficer employees of the corporation.

Answer 93

The corporation’s shareholders can be assigned liability for the corporation’s debts.

Question 94

The president of a company has signed a $10 million contract with a construction company to build a new corporate office. Which of the following corporate documents sets forth the scope of authority under which this transaction is governed?

1. Certificate of Incorporation.
2. Charter.
3. Bylaws.
4. Proxy statement.

Answer 94

Bylaws.

the bylaws set forth the authority of corporate officers.

Question 95

A stockholder’s right to inspect books and records of a corporation will be properly denied if the purpose of the inspection is to

1. Commence a stockholder’s derivative suit.
2. Obtain stockholder names for a retail mailing list.
3. Solicit stockholders to vote for a change in the board of directors.
4. Investigate possible management misconduct.

Answer 95

Obtain stockholder names for a retail mailing list.

The shareholder’s right may be denied if the corporation can show that the shareholder’s motive is for an unwarranted purpose, for a purpose hostile to the corporation (to engage in competing business), or to satisfy idle curiosity. Obtaining a stockholder list for its commercial value (a retail mailing list) is considered an unwarranted purpose that is not related to the shareholder’s corporate interest.

Question 96

A general partner of a partnership

1. Can by virtue of his acts, impose tort liability upon the other partners.
2. Has no implied authority if the partnership agreement is contained in a formal and detailed signed writing.
3. Can have his apparent authority effectively negated by the express limitations in the partnership agreement.
4. Cannot be sued individually for a tort he has committed in carrying on partnership business until the partnership has sued and a judgment returned unsatisfied.

Answer 96

Can by virtue of his acts, impose tort liability upon the other partners.

Partners are jointly and severally liable for all debts of partnership including torts committed by a copartner while carrying on partnership business.

Question 97

Flynn and Bleeker formed a partnership under the Revised Uniform Limited Partnership Act (RULPA). Flynn is the general partner and puts in a capital contribution of $40,000. Bleeker is the limited partner and puts in a capital contribution of $60,000. They do not discuss a profit-sharing plan. During the first year, the partnership earns $50,000 in profit. How do they split the profits between Flynn and Bleeker respectively?

1. $20,000 and $30,000 respectively.
2. $25,000 to each.
3. $50,000 and $0 respectively.
4. None of the above.

Answer 97

$20,000 and $30,000 respectively.

Under RULPA, if the partners fail to agree upon a profit-sharing plan, the profits are split in the proportion of their capital contributions, that is 40% for Flynn and 60% for Bleeker.

Profits or losses are shared as agreed upon in certificate agreement

1. Losses and any liability are limited to capital contributions for limited partners
2. If no agreement on profit and losses, then shared based on percentages of capital contributions

Note how this differs from a general partnership in which losses and profits are shared equally unless agreed otherwise.

Question 98

Toby invested $25,000 in a limited partnership with Connor and Blair. Toby was a general partner in the limited partnership. The partnership failed to pay Kelly $45,000 for services on behalf of the partnership. Which of the following statements is generally correct regarding Toby’s liability under the Revised Uniform Limited Partnership Act?

1. Toby was liable for $25,000 because this was a limited partnership.
2. Toby was liable for zero because this was a partnership debt, not a personal debt.
3. Toby was liable for $45,000 because Toby was a general partner.
4. Toby was liable for $15,000 because this was a limited partnership.

Answer 98

Toby was liable for $45,000 because Toby was a general partner.

Since Toby is a general partner, he is personally liable for the debts of the partnership.

Question 99

Frey Corp. has 1,000 shares of issued and outstanding common stock. Frey’s articles of incorporation permit a stockholder who owns 5% or more of the outstanding stock or who has owned the stock for longer than six months to inspect Frey’s books and records. Ace, who has owned 25 shares of Frey stock for four months, wants to inspect the books and records. Under the Revised Model Business Corporation Act, which of the following statements is correct regarding Ace’s right to inspect the books and records?

1. Ace must wait two months before being allowed to inspect the books and records.
2. Ace must purchase an additional 25 shares of Frey stock before being allowed to inspect the books and records.
3. Ace may, after giving five days’ written notice, inspect the books and records to determine the value of Frey stock.
4. Ace may, after giving five days’ written notice, inspect the books and records to provide a list of Frey stockholders to Ace’s broker.

Answer 99

Ace may, after giving five days’ written notice, inspect the books and records to determine the value of Frey stock.

Under the Revised Model Business Corporation Act a stockholder has the right to inspect the books and records with 5 days’ notice.

Question 100

Phillips was the principal promoter of the Waterloo Corporation, a corporation which was to have been incorporated not later than July 31. Among the many things to be accomplished prior to incorporation were the obtaining of capital, the hiring of key executives and the securing of adequate office space. In this connection, Phillips obtained written subscriptions for $1.4 million of common stock from 17 individuals. He hired himself as the chief executive officer of Waterloo at $200,000 for 5 years and leased three floors of office space from Downtown Office Space, Inc. The contract with Downtown was made in the name of the corporation. Phillips had indicated orally that the corporation would be coming into existence shortly. The corporation did not come into existence through no fault of Phillips. Which of the following is correct?

1. The subscribers have a recognized right to sue for and recover damages.
2. Phillips is personally liable on the lease with Downtown.
3. Phillips has the right to recover the fair value of his services rendered to the proposed corporation.
4. The subscribers were not bound by their subscriptions until the corporation came into existence.

Answer 100

Phillips is personally liable on the lease with Downtown.

A corporation is not liable on preincorporation contracts entered into on behalf of the corporation by the promoter unless and until the corporation approves and thereby adopts the contract of the promoter upon coming into corporate existence. However, the promoter is personally bound on these contracts. Even if the corporation adopts the contract, the promoter remains personally liable unless a novation occurs (i.e., third party agrees to look to corporation for satisfaction of the contract). However, if the promoter had clearly specified that he was contracting “in the name of the proposed corporation and not individually,” the third party must rely solely on the credit of the proposed corporation and has no claim against the promoter individually.

Question 101

Stearn was one of the promoters of Lehman Company which was not yet incorporated. On January 2, Stearn made a contract with Stanley Corporation to have Stanley provide 6,000 electrical parts for Lehman Company at fixed prices beginning on July 15 and lasting for 5 more months. Stanley was not told and was unaware that Lehman Company had not been formed. On April 10, Lehman Company was formed under the relevant statutes. On July 15, Stanley delivered 1,000 of the 6,000 parts as agreed and Lehman accepted them. On August 15, when Stanley tried to deliver another batch, Lehman refused, saying that the prices of other suppliers had dropped. Which of the following is correct?

1. Lehman is in breach of this contract since its agent, Stearn, made this contract with Stanley.
2. Lehman cannot be liable on this contract for any of the 6,000 parts because Lehman never orally or in writing adopted the contract.
3. Stanley may not enforce any of the contract with Lehman Company.
4. Stearn is personally liable on this contract.

Answer 101

Stearn is personally liable on this contract.

A promoter is personally liable on preincorporation contracts because the promoter cannot be an agent when the principal is not yet in existence. This is true even if the corporation is later formed and adopts the contract. Exceptions to this rule are when a novation occurs or when parties agree in advance to not hold the promoter liable. Neither of these happened in this fact pattern.

Question 102

Generally, Articles of Incorporation must contain all of the following except the

1. Names of the incorporators.
2. Name of the corporation.
3. Number of shares authorized.
4. Names of initial officers and their terms of office.

Answer 102

Names of initial officers and their terms of office.

The Articles of Incorporation are not required to contain the names of initial officers and their terms of office. This is true because the initial officers are not elected until the first board of directors’ meeting which cannot be held until after the Articles of Incorporation have been filed.