44CORPORATE Chapter FORMATION
TRUE/FALSE
1. A corporation is an artificial person that is created by governmental action.
ANS: T
TOP: AICPA BB-Legal
MSC: AACSB Analytic
2. Debts of a corporation are not the debts of the persons running the corporation or owning shares of
stock in it.
ANS: T
TOP: AICPA BB-Legal
MSC: AACSB Analytic
3. Shareholders ordinarily cannot be sued for corporate liabilities.
ANS: T
TOP: AICPA BB-Legal
MSC: AACSB Analytic
4. A California corporation is a foreign corporation with respect to the remaining 49 states of the United
States.
ANS: T
TOP: AICPA BB-Legal
MSC: AACSB Analytic
5. The shares of a close corporation always are held by a single individual.
ANS: F
TOP: AICPA BB-Legal
MSC: AACSB Analytic
6. S corporations have the benefits of limited liability as in partnerships and are taxed as corporations.
ANS: F
TOP: AICPA BB-Legal
MSC: AACSB Analytic
7. A corporation that is formed to create a loss for tax accounting purposes is called a nonprofit corpora tion.
ANS: F
TOP: AICPA BB-Legal
MSC: AACSB Analytic
8. Most states have a general corporation code, and any persons satisfying the requirements of that code
may form a corporation.
ANS: T
TOP: AICPA BB-Legal
MSC: AACSB Analytic
9. A corporation is considered a person for purposes of the due process clause of the U.S. Constitution.
ANS: T
TOP: AICPA BB-Legal
MSC: AACSB Analytic
10. Subject to constitutional limitations, corporations may be regulated by state statutes.
ANS: T
TOP: AICPA BB-Legal
MSC: AACSB Analytic
11. For the purpose of determining the right to bring a lawsuit in federal court, a corporation is deemed to
be a citizen of the state in which it has been incorporated.
ANS: T
TOP: AICPA BB-Legal
MSC: AACSB Analytic
12. The corporate form of business continues regardless of changes in stock ownership.
ANS: T
TOP: AICPA BB-Legal
MSC: AACSB Analytic
13. A corporation may properly exist without a name.
ANS: F
TOP: AICPA BB-Legal
MSC: AACSB Analytic
14. A corporate seal is required in order for the corporation to enter into a binding contract.
ANS: F
TOP: AICPA BB-Legal
MSC: AACSB Analytic
15. Bylaws must only be approved by the board of directors; then need not be approved by the sharehold ers.
ANS: F
TOP: AICPA BB-Legal
MSC: AACSB Analytic
16. Corporations my borrow money by issuing bonds.
ANS: T
TOP: AICPA BB-Legal
MSC: AACSB Analytic
17. Treasury stock consists of those share of stock held by a bank.
ANS: F
TOP: AICPA BB-Legal
MSC: AACSB Analytic
18. An act that is beyond the scope of the powers of a corporation is called an ultra vires act.
ANS: T
TOP: AICPA BB-Legal
MSC: AACSB Analytic
19. Under the modern incorporation statutes, there are very few actions of corporations that will be con sidered ultra vires in nature.
ANS: T
TOP: AICPA BB-Legal
MSC: AACSB Analytic
20. If a corporation assumes a contract made by a promoter with knowledge that the promoter had fraudu lently induced the other party to enter into the contract, the corporation is liable to such other party for
the fraud of the promoter.
ANS: T
TOP: AICPA BB-Legal
MSC: AACSB Analytic
21. A corporation may be an incorporator of another corporation.
ANS: T
TOP: AICPA BB-Legal
MSC: AACSB Analytic
22. Under the Revised Model Business Corporation Act (RMBCA), corporate existence begins when the
articles of incorporation are filed with the secretary of state.
ANS: T
TOP: AICPA BB-Legal
MSC: AACSB Analytic
23. A de facto corporation is accorded legal recognition despite some recognized defect in its incorpora tion.
ANS: T
TOP: AICPA BB-Legal
MSC: AACSB Analytic
24. A corporation may be judicially dissolved when its management is deadlocked,and the deadlock can not be broken by the shareholders.
ANS: T
TOP: AICPA BB-Legal
MSC: AACSB Analytic
25. If two firms consolidate, the new corporation usually succeeds to the rights of its component parts.
ANS: T
TOP: AICPA BB-Legal
MSC: AACSB Analytic
26. A holder of a single share of stock who objects to a merger has the power to stop the merger.
ANS: F
TOP: AICPA BB-Legal
MSC: AACSB Analytic
27. A conglomerate is a relationship and not a form of corporation.
ANS: T
TOP: AICPA BB-Legal
MSC: AACSB Analytic
28. A merger, but never a consolidation, is subject to antitrust law.
ANS: F
TOP: AICPA BB-Legal
MSC: AACSB Analytic
29. A merger requires the sale of all assets.
ANS: F
TOP: AICPA BB-Legal
MSC: AACSB Analytic
30. In a merger, the surviving corporation has all the rights and property of the corporation with which it
merged, but none of the debts and liabilities.
ANS: F
TOP: AICPA BB-Legal
MSC: AACSB Analytic
MULTIPLE CHOICE
1. A public corporation is a corporation:
a. whose stock is bought and sold on national stock exchanges.
b. that holds exhibitions open to the public.
c. established for governmental purposes and to exercise the powers of government.
d. formed to conduct free educational lectures that anyone may attend.
ANS: C
TOP: AICPA BB-Legal
MSC: AACSB Analytic
2. A corporation that does business in the state in which it was created is called a(n):
a. domestic corporation.
b. foreign corporation.
c. alien corporation.
d. home corporation.
ANS: A
TOP: AICPA BB-Legal
MSC: AACSB Analytic
3. For the purpose of lawsuits in federal courts, a Delaware corporation that is owned by residents of
Minnesota and has its principal place of business in Ohio is deemed to be a citizen of:
a. Delaware and Minnesota.
b. Minnesota and Ohio.
c. Delaware and Ohio.
d. Delaware only.
ANS: C
TOP: AICPA BB-Legal
MSC: AACSB Analytic
4. A corporation must have:
a. a name.
b. a physical location for an office.
c. a corporate seal.
d. treasury stock.
ANS: A
TOP: AICPA BB-Legal
MSC: AACSB Analytic
5. Perpetual succession with respect to a corporation means that the corporate:
a. charter states that the corporation is to last indefinitely.
b. charter states that the corporation shall last for a stated number of years.
c. charter states that the corporation shall last for a stated number of years, with a right to ex tend the corporate existence indefinitely.
d. existence is not affected by changes in stock ownership regardless of whether the charter
states that the corporation is to exist indefinitely or for a limited period of time.
ANS: D
TOP: AICPA BB-Legal
MSC: AACSB Analytic
6. The rules and regulations used to govern the affairs of the corporation are called:
a. articles.
b. corporate management agreements.
c. bylaws.
d. None of the above.
ANS: C
TOP: AICPA BB-Legal
MSC: AACSB Analytic
7. What is not a correct statement concerning promoters?
a. They generally are active before the corporation is formed.
b. They are agents of the corporation.
c. They are fiduciaries with respect to the corporation and its shareholders.
d. They are liable for any torts that they commit while promoting the corporation.
ANS: AICPA B
TOP: BB-Legal
MSC: AACSB Analytic
8. What is not a correct statement concerning the incorporation process?
a. Each application is reviewed by the legislature.
b. It is essentially a matter of filing the correct papers and fees with the designated govern ment official.
c. Most applications are rejected.
d. The incorporators must prove to be of good moral character.
ANS: B
TOP: AICPA BB-Legal
MSC: AACSB Analytic
9. Under recent statutes, the articles of incorporation must contain all of the following except the:
a. name of the corporation.
b. name and address of each incorporator.
c. purpose for which the corporation is organized.
d. number of shares the corporation is authorized to issue.
ANS: C
TOP: AICPA BB-Legal
MSC: AACSB Analytic
10. The Revised Model Business Corporation Act:
a. has eliminated the need for a certificate of incorporation.
b. has made obtaining a certificate of incorporation more difficult.
c. has made obtaining a certificate of incorporation easier.
d. has eliminated the need for articles of incorporation.
ANS: A
TOP: AICPA BB-Legal
MSC: AACSB Analytic
11. Where a corporation is properly formed, it is called a:
a. foreign corporation.
b. corporation de facto.
c. corporation de jure.
d. corporation by estoppel.
ANS: C
TOP: AICPA BB-Legal
MSC: AACSB Analytic
12. Under the Revised Model Business Corporation Act, the secretary of state may force the corporation to
give up its:
a. charter.
b. corporate seal.
c. bonds.
d. name.
ANS: A
TOP: AICPA BB-Legal
MSC: AACSB Analytic
13. After a corporation is dissolved, a contract made by an officer of the dissolved corporation:
a. can be enforced against shareholders.
b. is voidable at the discretion of the board of directors.
c. cannot be enforced against the other party to the contract.
d. remains in effect until a new corporation is formed.
ANS: C
TOP: AICPA BB-Legal
MSC: AACSB Analytic
14. ____ of a corporation may occur when management is deadlocked and the deadlock cannot be broken
by the shareholders.
a. Bankruptcy
b. Consolidation
c. Reinstatement
d. Judicial dissolution
ANS: D
TOP: AICPA BB-Legal
MSC: AACSB Analytic
15. If there is a consolidation of corporations A, B, and C:
a. corporations B and C are absorbed by corporation A, and corporation A continues to exist.
b. all corporations continue in existence.
c. all corporations continue in existence, but corporation A owns all the stock of corporations
B and C.
d. corporations A, B, and C cease to exist and a new corporation takes their place.
ANS: D
TOP: AICPA BB-Legal
MSC: AACSB Analytic
16. When two corporations merge:
a. their separate existences cease, and a new corporation is formed.
b. one of the corporations absorbs the other.
c. the liabilities of the two merging corporations are eliminated.
d. a new charter is needed.
ANS: B
TOP: AICPA BB-Legal
MSC: AACSB Analytic
17. In a merger situation, what is the right of a dissenting shareholder?
a. to block the merger until satisfied regarding its terms
b. to have its shares appraised and purchased by the corporation
c. to enforce a consolidation instead of a merger
d. to arbitrarily set the price of its shares
ANS: B
TOP: AICPA BB-Legal
MSC: AACSB Analytic
18. If a wire manufacturing company owned a mill to produce the metal used in making the wire, this rela tionship between the companies would be best described as:
a. a conglomerate.
b. a holding company.
c. an integrated industry.
d. both b and c.
ANS: C
TOP: AICPA BB-Legal
MSC: AACSB Analytic
19. An enterprise that conducts business following a merger or consolidation succeeds to:
a. all of the rights of the predecessor.
b. all of the property of the predecessor.
c. all of the debts and liabilities of the predecessor.
d. all of the above.
ANS: D
TOP: AICPA BB-Legal
MSC: AACSB Analytic
20. A successor enterprise is not subject to the contract obligations of the former business if:
a. one corporation is absorbed by another through merger.
b. a corporation merely purchases the assets of another business.
c. two or more corporations consolidate.
d. none of the above.
ANS: B
TOP: AICPA BB-Legal
MSC: AACSB Analytic
CASE
1. The Miller family, who operates a musical instrument manufacturing concern, has decided to incorpor ate. They would like to become a corporation and obtain limited liability. However, taxation at the cor porate level would be very costly for them. Mary Miller would rather be taxed as a partnership, if pos sible. Mark Miller, the eldest of the Miller family, is worried about the additional paperwork and meet ings that a corporate form surely would bring. Sue Miller does not want a large board of directors to be
formed. Sue fears that the board would somehow detract from the family goals and orientation that the
business always has enjoyed. Is there a corporate form that would please all of the Millers?
ANS:
Yes. When a small family company decides to incorporate, the form chosen often is that of a close cor poration. In a close corporation, the shares are held by one share-holder or a closely knit group of
shareholders. The stock would not be publicly traded. Statutes are quite liberal toward the formation of
close corporations. The board of directors could consist of one individual, and the requirement of
formal meetings would be eliminated. A close corporation also could seek the status of an "S corpora tion." In an S corporation, the business would be afforded limited liability and yet would be taxed as a
partnership. The combination of a close and S corporation form would satisfy the needs and concerns
of the Miller family.
TOP: AICPA BB-Legal
MSC: AACSB Reflective Thinking | AACSB Analytic
2. Osvaldo was attempting to promote a corporation to be named Xavier, Inc. In that capacity, Osvaldo
signed a lease in the name of Xavier and ordered furniture in the name of Xavier. The corporation was,
in fact, formed and the board of directors, knowing of the actions of Osvaldo, moved into the space
that Osvaldo had contracted for. The furniture was, however, immediately sent back as inappropriate.
The corporation did not meet with success, and the rent was not paid. Osvaldo was sued for the unpaid
rent and for breach of contract concerning the furniture. The corporation was sued on the same
grounds. Decide all cases.
ANS:
Osvaldo is liable in both situations because a promoter is personally liable for contracts made on be half of the corporation before its existence, unless the agreement or the circumstances clearly indicate
that the promoter should not be liable. The corporation, Xavier, is liable only on the space rental be cause the actions of the board of directors clearly show that they adopted the contract. There is no liab ility for the furniture because that contract was expressly rejected.
TOP: AICPA BB-Legal
MSC: AACSB Reflective Thinking | AACSB Analytic