M5 Business Structures: Part 2

Question 1

MCQ-04838
Which of the following statements describes the same characteristic for both an S corporation and a C corporation?

Answer 1

Shareholders can contribute property into a corporation without being taxed

Either entity’s shareholders may contribute property to the corporations without being taxed and may contribute such property as an exchange for stock as appraised by the
directors.

Question 2

MCQ-08603
Under which of the following circumstances would a promoter be relieved of personal liability on contracts entered into while engaged in forming a corporation?

Answer 2

When the third party, the corporation, and the promoter enter into an agreement to substitute the corporation for the promoter.

The promoter is only relieved of personal liability on pre-incorporation contracts when there is a novation, which requires an agreement by all parties to substitute the corporation for the promoter.

Question 3

MCQ-03023
Which of the following facts is(are) generally included in a corporation’s articles of incorporation?
- Name of registered agent
- Number of authorized shares

Answer 3

Yes; Yes

Rule: The articles of incorporation generally must contain both the name of a registered agent upon whom process may be served and the number of shares authorized to be issued.

Question 4

MCQ-04848
Trish is a promoter for Alpha Corporation. Generally, Trish is personally liable for any pre-incorporation contract until Alpha:

Answer 4

Assumes the pre-incorporation contract by novation.

In a novation, a new party (the corporation) is substituted for an old party (the promoter) in the contract. All parties must agree to the novation.

Question 5

MCQ-04849
A registered agent for a corporation incorporated in Delaware would:

Answer 5

Have legal documents served on it on behalf of the corporation, if the corporation is sued.

A registered agent is an agent for the corporation who would accept service of process in the event the corporation is involved in a lawsuit.

Question 6

MCQ-06545
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 pre-incorporation debts?

Answer 6

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

Davis acted as a promoter (a person who procures capital and other
commitments for a corporation to be formed). Promoters are personally liable for contracts that they enter into on behalf of the corporation to be formed. They remain liable on the contracts even after the corporation is formed unless the parties enter into a novation (i.e., an agreement among the
parties to substitute the corporation for the promoter).

Question 7

MCQ-03083
The corporate veil is most likely to be pierced and the shareholders held personally liable if:

Answer 7

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

Generally, a corporation is treated as an entity distinct from its shareholders and shareholders are not liable for the corporation’s debts. However, where the shareholders do not
treat the corporation as a distinct entity, such as where they commingle their personal funds with the corporation’s funds, courts are likely to ignore the corporate form as well.

Question 8

Q-05809
Which of the following circumstances may permit the piercing of the corporate veil of a closely held corporation and thus may cause its shareholders to be held personally liable?

I. The corporation is thinly capitalized at the time of formation.
II. The corporation borrows money from a shareholder without giving the shareholder a security interest in corporate assets.

Answer 8

I only

I is a correct statement. The corporate veil of limited liability may be pierced and the personal assets of the shareholders may be reached to satisfy corporate obligations if the
corporation was inadequately (thinly) capitalized at the time of its formation. II, however, is incorrect. A corporation borrowing money from a shareholder and not giving the shareholder security is not a ground for piercing the corporate veil.

Question 9

MCQ-04801
Which of the following documents would most likely contain specific rules for the management of a business corporation?

Answer 9

Bylaws

The bylaws are adopted by the incorporators or directors, are not required to be filed, and generally will contain rules desired regarding the operation of the corporation.

Question 10

MCQ-05599
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?

Answer 10

Bylaws

The bylaws usually contain the rules for running the corporation.

Question 11

MCQ-04850
In a legal action, a shareholder of Smackey, Inc. might be personally liable for the company’s debts if:

Answer 11

The shareholder’s personal interests are materially commingled with Smackey’s interests.

Commingling shareholders’ personal assets and other interests with the corporation’s interests is a breach of corporate formalities designed to create and keep the
corporation as a separate legal entity. Thus, it is a ground for reaching the shareholder’s personal assets (i.e., piercing the corporate veil).

Question 12

MCQ-03130
Which of the following securities are corporate debt securities?
- Convertible bonds
- Debenture bonds
- Warrants

Answer 12

Yes; Yes; No

Rules: Bonds are debt securities. Thus, convertible bonds and debenture bonds are debt securities. A warrant is a contractual right to purchase stock, which constitutes a share of corporate equity.

Question 13

MCQ-03139
Johns owns 400 shares of Abco Corp. cumulative preferred stock. In the absence of any specific contrary provisions in Abco’s articles of incorporation, which of the following statements is correct?

Answer 13

If Abco declares a cash dividend on its preferred stock, Johns becomes an unsecured creditor of Abco.

Once a dividend is declared, a shareholder becomes an unsecured creditor of the corporation for the amount of the unpaid dividend.

Question 14

MCQ-02967
Which of the following statements best describes an advantage of the corporate form of doing business?

Answer 14

The operation of the business may continue indefinitely.

Corporate existence may be perpetual, which is an advantage of the corporate form of doing business.

Question 15

MCQ-03999
Peters owned 500 shares of common stock in Kidsmart, Inc. Accordingly, Peters had the right to:

Answer 15

Vote for the election and removal of the board of directors.

Shareholders have the right to vote to elect (typically annually) or remove directors. They also have the right to vote on whether to approve fundamental changes to the corporation, such as dissolution.

Question 16

MCQ-05583
Which of the following corporate actions is subject to shareholder approval?

Answer 16

Removal of directors

Shareholders have the right to elect and remove directors through the voting process.

Question 17

MCQ-04816
Which of the following decreases stockholder equity?

Answer 17

Distributions to owners.

Distributions to owners, typically in the form of dividends, will serve to reduce stockholders’ equity.

Question 18

MCQ-04851
Telecom, Inc., issues bonds, which are also known as:

Answer 18

Debt securities.

Bonds are also referred to as debt securities.

Question 19

MCQ-03284
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 were declared on the preferred stock but were never 00paid. 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?

Answer 19

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

After a dividend is declared but not paid on cumulative preferred stock, the unpaid dividend ranks with other “unsecured” debts.

Question 20

MCQ-05710
Under the Revised Model Business Corporation Act, which of the following dividends is not defined as a distribution?

Answer 20

Stock Dividends

Technically, dividends paid in stock are not a distribution. Stock
dividends are dividends in the corporation’s own authorized but unissued shares. No assets are distributed. The stockholder’s wealth and percentage of ownership are not increased. A stock dividend has no affect on earnings and profits for federal income tax purposes

Question 21

MCQ-11108
Which of the following statements is correct regarding a shareholder’s right to inspect corporate books and records? The right…

Answer 21

Requires that the demand to inspect be for a proper purpose.

A shareholder in a corporation can inspect its books upon five days’ notice if the shareholder offers a proper purpose (one relating to the shareholder’s position as a shareholder).

Question 22

MCQ-03225
To which of the following rights is a stockholder of a public corporation entitled?

Answer 22

The right to a reasonable inspection of corporate records

Stockholders have a right to inspect certain corporate records.

Question 23

MCQ-05555
Which of the following statements is correct regarding the declaration of a stock dividend by a corporation having only one class of par value stock?

Answer 23

A stock dividend is a corporation’s ratable distribution of additional shares of stock to its stockholders.

Stock dividends are dividends in the corporation’s own authorized but unissued shares given to existing shareholders on account of their shares

Question 24

MCQ-03286
A stockholder’s right to inspect books and records of a corporation will be properly denied if the stockholder:

Answer 24

Wants to use corporate stockholder records for a personal business.

In general, a shareholder has a right to inspect the books and records of a corporation for purposes reasonably related to his or her status as a shareholder. This right will be properly denied where the purpose is not reasonably related to their status as a shareholder.

Question 25

MCQ-06546
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?

Answer 25

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

The Revised Model Business Corporation Act (RMBCA) provides that any shareholder may inspect a corporation’s books and records on five days notice for a proper purpose, and this right may not be limited or abolished by the articles or bylaws. Thus, Ace may inspect on five
days notice.

Question 26

MCQ-06546
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?

Answer 26

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

The Revised Model Business Corporation Act (RMBCA) provides that any shareholder may inspect a corporation’s books and records on five days notice for a proper purpose, and this right may not be limited or abolished by the articles or bylaws. Thus, Ace may inspect on five days notice.

Question 27

MCQ-03160
For what purpose will a stockholder of a publicly held corporation be permitted to file a stockholders’ derivative suit in the name of the corporation?

Answer 27

To recover damages from corporate management for an ultra vires management act.

A derivative action is an action by a stockholder in the name of the corporation to recover damages or to seek some other remedy on behalf of the corporation when the corporation
does not enforce its own rights. Such actions are often brought when the directors or officers have breached their duty to the corporation and have refused to sue themselves. An ultra vires act is an act outside of a director’s or an officer’s scope of authority and thus is a breach of duty to the corporation.

Question 28

MCQ-03248
A stockholder’s right to inspect books and records of a corporation will be properly denied if the purpose of the inspection is to:

Answer 28

Obtain stockholder names for a retail mailing list.

In general, a shareholder has a right to inspect the books and records of a corporation for purposes related to the stockholder’s interest in the corporation. This right will be
denied where the purpose is not reasonably related to their status as a shareholder. Obtaining stockholder names to create a retail mailing list is a personal purpose.

Question 29

MCQ-05810
The principle that protects corporate directors from personal liability for acts performed in good faith on behalf of the corporation is known as:

Answer 29

The business judgment rule.

If a director acts in good faith and in a manner the director believes is in the best interest of the corporation, and the director exercises the care that a reasonably prudent person
would exercise in a similar position, the director is protected against liability for decisions the director makes that turn out poorly for the corporation. This is commonly known as the business judgment rule.

Question 30

MCQ-04803
Which of the following parties is liable to repay an illegal distribution to a corporation?

Answer 30

A shareholder knowing of the illegality of the distribution and the corporation is insolvent.

Illegal dividends from an insolvent company must be repaid to the corporation for the benefit of the creditors. A shareholder who knowingly accepts an illegal dividend is liable to return it.

Question 31

MCQ-05827
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?

Answer 31

Pre-emptive rights.

The right to purchase new issuances of additional stock in order to maintain current proportional ownership is known as a pre-emptive right.

Question 32

MCQ-03219
Under the Revised Model Business Corporation Act, a corporate director is authorized to:

Answer 32

Rely on information provided by the appropriate corporate officer.

Under the Revised Model Business Corporation Act, a director is authorized to rely on information provided by the appropriate officer. The officers are selected by the board of
directors to run the day-to-day affairs of the corporation, and thus will often have more direct access to information. Directors can also rely on information supplied to them by professionals such as attorneys and CPAs hired by the corporation.

Question 33

MCQ-03235
Under the Revised Model Business Corporation Act, which of the following statements is correct regarding corporate officers of a public corporation?

Answer 33

A corporation may be authorized to indemnify its officers for liability incurred in a suit by stockholders.

A corporation may indemnify its officers for liabilities incurred in a suit by stockholders, especially if the officer prevails.

Question 34

MCQ-03244
Davis, a director of Active Corp., is entitled to:

Answer 34

Rely on information provided by a corporate officer.

As a director of the corporation Davis may rely on information provided to him/her by a corporate officer. A corporate director is under no obligation to verify information given
to him by management (corporate officers).

Question 35

MCQ-03247
Knox, president of Quick Corp., contracted with Tine Office Supplies, Inc. to supply Quick’s stationery on customary terms and at a cost less than that charged by any other supplier. Knox later informed Quick’s board of directors that Knox was a majority stockholder in Tine. Quick’s contract with Tine is:

Answer 35

Valid because the contract is fair to Quick.

If a corporation enters into a contract and a director has a conflict of interest in the transaction, the contract is voidable unless the director makes full disclosure of all of the facts to
the disinterested directors or the shareholders, who then approve the transaction, or the director can prove that the transaction was fair to the corporation. The stationery purchase was fair to Quick, since it was purchased at a below-market price. Thus, the contract is valid.

Question 36

MCQ-05313
Which of the following actions is required to ensure the validity of a contract between a corporation and a director of the corporation?

Answer 36

The director must disclose the interest to the independent members of the board and refrain from voting.

Although it is not completely correct. Directors owe their
corporation a duty of loyalty and must act solely in the best interests of the corporation. If a corporation enters into a contract and a director has a conflict of interest in the transaction, the contract is voidable unless the director makes full disclosure of all of the facts to the disinterested
directors or the shareholders who then approve the transaction, or the transaction is fair. Thus, disclosing the interest to the independent members and refraining from voting is one way to ensure the validity of a contract between a director and his or her corporation, but it technically is not
required as disclosure to and approval by the shareholders also ensures validity, as does making sure the transaction is fair to the corporation. Nevertheless, the other choices are clearly incorrect - making this the best choice.

Question 37

MCQ-03113
Absent a specific provision in its articles of incorporation, a corporation’s board of directors has the unilateral power to do all of the following, except:

Answer 37

Amend the articles of incorporation.

Amendment of the articles of incorporation, albeit proposed by the directors, cannot usually be effected without the affirmative vote of the shareholders.

Question 38

MCQ-03163
Which of the following actions may be taken by a corporation’s board of directors without stockholder
approval?

Answer 38

Purchasing substantially all of the assets of another corporation.

Purchasing substantially all the assets of another corporation does not require approval of the buyer’s stockholders. Such a transaction would be relatively insignificant if a large corporation purchased substantially all the assets of a much smaller corporation.

Question 39

MCQ-05818
What business entity can be voluntarily dissolved and terminated only by filing a dissolution document with the state of organization?

Answer 39

A corporation

Voluntary dissolution of a corporation requires the filing of articles of dissolution with the state.

Question 40

MCQ-03158
Under the Revised Model Business Corporation Act, a dissenting stockholder’s appraisal right generally applies to which of the following corporate actions?

• Short-form Consolidations
• Mergers

Answer 40

Yes; Yes

Rule: Shareholders who are dissatisfied with the terms of a merger, consolidation or sale of assets are permitted to compel the corporation to buy their shares at fair market value. This is known as the right of appraisal or the dissenting right.

Rule: A short-form merger is when a parent mergers a 90% or more owned subsidiary into the parent. In this case, only the shareholders of the subsidiary have dissenting rights.

Question 41

MCQ-03292
Under the Revised Model Business Corporation Act, which of the following actions by a corporation would entitle a stockholder to dissent from the action and obtain payment of the fair value of his/her shares?

I. An amendment to the articles of incorporation that materially and adversely affects rights in respect of a dissenter’s shares because it alters or abolishes a preferential right of the shares.
II. Consummation of a plan of share exchange to which the corporation is a party as the corporation whose shares will be acquired, if the stockholder is entitled to vote on the plan.

Answer 41

Both I and II

Rule: Shareholders who vote against a share exchange are entitled to payment for fair value of their shares.

Rule: Preferred shareholders who dissent to having their preferential rights altered or abolished have dissenters’ rights to be paid the fair value of their shares.

Question 42

MCQ-03231
A parent corporation owned more than 90% of each class of the outstanding stock issued by a subsidiary corporation and decided to merge that subsidiary into itself. Under the Revised Model Business Corporation Act, which of the following actions must be taken?

Answer 42

The subsidiary corporation’s dissenting stockholders must be given an appraisal remedy.

In a short form merger (one between a parent and a subsidiary 90% of which is owned by the parent), the subsidiary’s shareholders have a right to dissent and take advantage of
the appraisal remedy.

Question 43

MCQ-03027
Which of the following statements is a general requirement for the merger of two corporations?

Answer 43

The stockholders of both corporations must be given due notice of a special meeting, including a copy or summary of the merger plan.

Both corporations must give shareholders notice and a summary of the merger plan.

Question 44

MCQ-03288
Generally, a merger of two corporations requires:

Answer 44

That a special meeting be held and that notice and copy of the merger plan be given to all stockholders of both corporations.

The merger of two corporations requires that a special meeting be held and that notice and copy of the merger plan be given to all stockholders of both companies. A merger
generally requires the approval of both the directors and stockholders.

Question 45

MCQ-03049
Under the Revised Model Business Corporation Act, a merger of two public corporations usually requires all of the following, except:

Answer 45

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

A merger can be effected by giving some parties cash or property; not everyone need receive voting shares.

Question 46

MCQ-02999
Case Corp. is incorporated in State A. Under the Revised Model Business Corporation Act, which of the following activities engaged in by Case requires that Case obtain a certificate of authority to do business in State B?

Answer 46

Maintaining an office in State B to conduct intrastate business.

A domestic corporation is one created under the laws of a given state. A foreign corporation is a corporation created under the laws of another state. A foreign corporation must
obtain a certificate of authority from each state in which it does intrastate business. Maintaining an office in State B is a clear indication that Case was “doing business” in State B.