Ch.41 History And Nature Of Corporations Test Bank Docx

Business Law, 17e (Langvardt)

Chapter 41 History and Nature of Corporations

1) A corporation is a legal entity independent of its owners.

2) It is possible to create a corporation without a government's permission.

3) The directors and officers of a corporation need to be its shareholders.

4) During the early period of American history, the state governments issued special charters that created corporations.

5) Government-owned corporations are created primarily to allow their owners to have limited liability.

6) The purpose behind the Model Business Corporation Act is to exploit the maximum potential of workers in a corporation.

7) Not-for-profit corporations have members instead of shareholders and none of their surplus revenue may be distributed to their members.

8) Incorporating a business involves following state law.

9) A state's courts may exercise jurisdiction over a foreign corporation that has contacts in the state.

10) A foreign corporation is one that conducts its business in a state where it is not incorporated.

11) There is a similar set of legal rules that applies to both foreign and alien corporations.

12) The mere presence of a Nevada corporation's vacant property in California is sufficient to subject the corporation to taxes in California.

13) Greater contacts are needed to subject a corporation to property taxation in a state than are needed to subject it to state income and sales taxation.

14) A foreign corporation must incorporate in each state in which it does intrastate business.

15) The U.S. Constitution gives the federal government the power to regulate business activity that occurs across state lines.

16) Doing intrastate business without filing with the appropriate state office will likely subject a foreign business to a fine.

17) A corporation with one person who is the only shareholder, officer, and director will have its corporate veil pierced, making that person personally liable for all the obligations of the dominated corporation.

18) Transfers of corporate assets to shareholders for less than fair market value is called "looting."

19) In order to pierce the corporate veil, a creditor needs to show that each shareholder does not actively participate in the management of the corporation.

20) A corporation with a reasonable debt-to-equity ratio will not have its corporate veil pierced on the grounds of thin capitalization.

21) The corporate form of business has facilitated the rapid growth of development by allowing businesses to attain economies of scale compared to other forms of businesses by:

A) giving businesses a greater capacity to raise capital.

B) imposing unlimited management responsibilities on the owners.

C) maximizing the owners' liabilities.

D) granting the persons who control a corporation limited flexibility in operating it.

22) Which of the following is correct about the history of corporations?

A) In the late 18th century, general incorporation statutes emerged in the United States.

B) From the 18th century onward, France started giving privileges of incorporation to mercantile ventures.

C) Early American corporations received special privileges from state legislatures.

D) In England, the corporate form was used extensively after the 16th century.

23) What was the name of the document given to early American corporations by state legislatures that permitted them to operate as a corporation?

A) Certificate of Corporation

B) Organization Agreement

C) Special Charter

D) Domestic Treaty

24) Mary Lee James, a certified public accountant in Edgewater, Florida, wishes to incorporate. According to the corporate law requirements, she needs to incorporate under the:

A) common corporation law.

B) professional corporation acts.

C) special professional charter.

D) general incorporation law.

25) Under the general incorporation law, the minimum number of owners a business needs to be incorporated as a for-profit corporation is:

A) 10.

B) 5.

C) 1.

D) 20.

26) Which of the following legal provisions treats a corporation as a person?

A) Corporation law

B) The law of contract

C) The Constitution of the United States

D) The law of torts

27) Which of the following is true about an S corporation?

A) It is taxed at both the corporate and shareholder levels.

B) It may only have 500 or fewer shareholders.

C) An S corporation election requires the consent of a majority of its shareholders.

D) Shareholders of an S corporation may be only individuals or trusts.

28) Which of the following corporation classes' profits are taxed only at the shareholder level?

A) An S corporation

B) For-profit corporation

C) Not-for-profit corporation

D) Publicly held corporation

29) Which of the following classes of corporation may not distribute surplus revenue from its operations to its members?

A) An S corporation

B) For-profit corporation

C) Not-for-profit corporation

D) Publicly held corporation

30) A Subchapter S corporation is typically treated like a ________ for federal income tax purposes.

A) for-profit corporation

B) partnership

C) publicly held corporation

D) not-for-profit corporation

31) The controlling shareholders are the only managers of the business in which class of corporation?

A) For-profit corporation

B) Close corporation

C) Not-for-profit corporation

D) Publicly held corporation

32) The maximum number of shareholders that are allowed in a Subchapter S corporation is:

A) 50.

B) 75.

C) 100.

D) 500.

33) Which of the following statements is true of not-for-profit corporations?

A) They provide services to their members.

B) They must distribute all of their surplus revenues to their shareholders.

C) They must distribute all of their excess revenues to charities.

D) They issue stocks only to their owners.

34) Which class of corporation has members rather than shareholders?

A) S corporation

B) For-profit corporation

C) Publicly held corporation

D) Not-for-profit corporation

35) The Model Business Corporation Act (MBCA) was prepared and authorized by the:

A) federal government.

B) state governments, acting together.

C) state governments, acting separately.

D) American Bar Association's Committee on Corporate Laws.

36) The law of piercing the corporate veil is an example of a ________ law protecting the creditors of corporations.

A) commerce

B) common

C) constitutional

D) statutory

37) Most of the common law of corporations deals with:

A) creditor and shareholder rights.

B) incorporation of not-for-profit organizations.

C) promoter and manager rights.

D) incorporation of sole proprietorships.

38) Not-for-profit corporations are regulated primarily by the:

A) states.

B) federal court.

C) federal government.

D) Supreme Court.

39) Nearly all for-profit corporations are incorporated under what laws?

A) Government owned incorporation law

B) General incorporation law

C) State LLC law

D) State Nonprofit law

40) Toywood Inc., headquartered in Vermont, specializes in manufacturing non-toxic wooden toys in its two mechanized units in Vermont and New Hampshire. Its flagship store is located in Philadelphia, Pennsylvania. It will be considered a(n) ________ corporation in Pennsylvania.

A) domestic

B) alien

C) domicile

D) foreign

41) A state may impose its laws on a foreign corporation if such imposition does not violate the Constitution of the United States, notably the Due Process Clause of the Fourteenth Amendment and the Commerce Clause. The leading case in this area is the ________ case.

A) International Shoe

B) Katris v. Carroll

C) Ryan v. Cerullo

D) World-Wide Volkswagen Corp. v. Woodson

42) Under the ________ Clause, the power to regulate interstate trade is given to the federal government.

A) Due Process

B) Corporate

C) Commerce

D) Doing Business

43) According to the Supreme Court of the United States, a foreign corporation may be brought into a state's court in connection with its activities within the state, provided that the state does not violate the corporation's due process rights under the Fourteenth Amendment of the Constitution and its rights under the:

A) Foreign Business Clause.

B) Domestic Business Clause.

C) Commerce Clause.

D) Doing Business Clause.

44) A state law regulating the activities of a foreign corporation does not unduly burden interstate commerce if:

A) the law serves both the state's and the foreign corporation's legitimate interest.

B) the foreign corporation has chosen the least burdensome means of promoting that interest.

C) the legitimate state interest outweighs the statute's burden on interstate commerce.

D) a foreign corporation enters interstate commerce to do intrastate business in a state.

45) Most of the states have passed ________ to permit their courts to exercise jurisdiction under the decision of the International Shoe case.

A) international statutes

B) amendments to the state constitution

C) amended commerce laws

D) long-arm statutes

46) What is the number of events considered sufficient under the minimum contacts test to confer jurisdiction on a state's courts?

A) 10

B) 20

C) 1

D) 5

47) Outland Corporation is incorporated in Wyoming, where it has its executive office. It has a manufacturing plant in Utah, and a warehouse in New Mexico, where most of its sales are made. Outland is subject to taxation in:

A) Wyoming, Utah, and New Mexico.

B) Wyoming and Utah only.

C) Wyoming and New Mexico only.

D) New Mexico only.

48) In which of the following situations will a business incorporated in Ohio be required to qualify to do business in Kentucky?

A) The business maintains a stock of goods in Kentucky from which it sells to customers in Kentucky.

B) The business owns a building in Kentucky, which it holds for investment.

C) The business sends a sales agent to Kentucky to solicit orders from customers in Kentucky, while orders are brought back to and accepted in Ohio.

D) The business sells its goods to customers in Kentucky through independent distributors located in Kentucky.

49) Which of the following documents is required for a foreign corporation to do intrastate business in a state?

A) Domicile certificate

B) Certificate of authority

C) Commerce certificate

D) Tax returns certificate

50) Which of the following activities is classified as doing business for the purpose of intrastate business qualification?

A) Owning or using real estate for general corporate purposes.

B) Soliciting orders by mail that require acceptance outside the state.

C) Selling products or services through independent contractors.

D) Conducting an isolated transaction that is completed within 30 days.

51) Since the level of doing business that constitutes intrastate business for qualification purposes has been difficult to define, the Model Business Corporation Act lists several activities that do not require qualification. One such activity is:

A) owning or using real estate for general corporate purposes.

B) soliciting orders by mail that require acceptance outside the state.

C) entering into contracts relating to local business or sales.

D) maintaining a stock of goods within a state from which to fill orders.

52) QT, Inc. is incorporated in Alabama, has offices in Nebraska, has a manufacturing plant in Delaware, and conducts most of its sales from Virginia. Regulation of its internal affairs will be exercised only by:

A) Alabama.

B) Nebraska.

C) Delaware.

D) Virginia.

53) Ala Foreign Corporation is incorporated in Alabama. However, it is running 90 percent of its operations from Indiana. Such a type of corporation is called a(n):

A) government-owned corporation.

B) foreign corporation.

C) alien corporation.

D) pseudo-foreign corporation.

54) Nearly all corporations whose veils are pierced are:

A) close corporations.

B) government-owned corporations.

C) publicly held corporations.

D) nonprofit corporations.

55) Forming a business with a high debt-to-equity ratio is an example of:

A) circumventing a statute.

B) thin capitalization.

C) creditor domination.

D) looting.

56) Katie Kuric is the only shareholder, director, and officer of two corporations, Multimedia Corporation and Kuric Network Television Corporation (KNT). Multimedia produces television shows and movies. KNT broadcasts television programming on cable. KNT purchases much of its TV programs and movies from Multimedia. KNT often pays Multimedia for the TV shows and movies more than a year after payment is due, without being required to pay interest or a late payment penalty. What risk is Katie taking by allowing KNT to pay Multimedia late?

A) None, because KNT and Multimedia are separate and distinct legal entities.

B) None, because only Multimedia is harmed by this arrangement, and Katie owns both corporations.

C) KNT's veil will be pierced because KNT is evading an obligation with Multimedia.

D) KNT's veil will be pierced because Multimedia's creditors are being defrauded.

57) To prove domination, it is ________ to show that there is only one shareholder.

A) neither sufficient nor necessary

B) sufficient

C) both necessary and sufficient

D) necessary

58) Jim created a shoe-manufacturing corporation by contributing $1,000. He stayed as the sole shareholder and director of the corporation. To inject further capital into the corporation, he loaned the corporation $100,000 and secured the loan in exchange for all the corporation's assets. Five years into operations, the corporation has still failed to make profits and consequently filed for bankruptcy. Who has been defrauded?

A) Ordinary shareholders

B) Preferred shareholders

C) Nonshareholder-creditors

D) Board of directors

59) Big Corporation (BC) was dominated by its president, Mr. Vincent. He used his dominance for an improper purpose—defrauding lenders to the corporation. As a result, a court can:

A) impose criminal penalties on him.

B) make him personally liable on the debts to those lenders.

C) terminate the corporate charter of BC.

D) compel him to resign.

60) Anderson incorporated his new company, Pearl, Inc., in the business of manufacturing rubber. After some years, he opened his own subsidiary rubber manufacturing company. The new subsidiary company is a success. Meanwhile, the workers of Pearl, Inc. claimed that payment of bonus is due and they are demanding the same from the subsidiary company. In this case, are both Pearl, Inc. and its subsidiary liable?

A) Yes, they are liable because it is provided under corporation law.

B) Yes, they are liable because both are the same entity in the eyes of the law.

C) No, they are not liable because it is not a subsidiary of Pearl, Inc.

D) No, they are not liable because a subsidiary is not liable for parent's debts as provided under the law.

61) Wheelies is an auto parts retailer. It operates a retail megastore in a city where the city ordinance prohibits retailers from being open on consecutive Sundays. The management of Wheelies realizes that their maximum sales happen on Sundays. They create a wholly-owned subsidiary, CarBasics, and start leasing the megastore building and its inventory to CarBasics every alternate Sunday. Who is liable for violating the city ordinance?

A) Neither Wheelies nor CarBasics

B) Wheelies only

C) CarBasics only

D) Both Wheelies and CarBasics

62) A pastor of a church (a nonprofit corporation) believes that his salary is too small to cover his meager expenses. When repeated requests to superiors do not lead to a salary increase, he starts supplementing his salary with church donations. What risk is he running?

A) None, because the pastor and the church are separate and distinct legal entities.

B) None, because the pastor's meager salary justifies this action.

C) The veil between the pastor and the church will be pierced because the pastor's act is immoral.

D) The veil between the pastor and the church will be pierced because the pastor's act is defrauding church members.

63) Mr. Blue has invested in SuperMart, Inc. Mr. Blue purchased $5,000 worth of shares or 3% equity in the company. Shortly after investing, SuperMart, Inc. is found guilty of various civil wrongs and a judgment is entered in against the company for 3.1 million dollars. How much liability will Mr. Blue have?

A) $5,000 will be the limit of his liability

B) $93,000 or 3% of the value of the judgment

C) $0 Since Mr. Blue was not a managing officer

D) $100,000 which is statutory minimum for investor liability

64) What is the term for when a shareholder causes a corporation to act to the benefit of an individual shareholder?

A) Estoppel

B) Domination

C) Submission

D) Incorporation

65) Famous British trading companies were the forerunners of the modern corporation and primarily sought corporate status because the government granted them:

A) full dominion over natural resources.

B) taxation powers.

C) monopolies and governmental powers.

D) immunity from civil and criminal liability.

66) When general incorporation statutes first emerged in the United States, they permitted incorporation only for limited purposes that:

A) benefited the public.

B) protected the public.

C) created revenue.

D) generated more taxes.

67) A(n) ________ is elected by shareholders to manage a corporation.

A) board of directors

B) CEO

C) trustee

D) officer

68) Shareholders have ________ liability.

A) strict

B) limited

C) absolute

D) vicarious

69) Which of the following describes when a corporation pays income tax on its profits, and when the corporation distributes the after-tax profits as dividends, the shareholders may tax on the dividends?

A) Shareholder taxation

B) International double taxation

C) Federal income taxation

D) Double taxation

70) Which class of corporation issues stock to its stakeholders and invests in the corporation with the expectation that it will make a return on its investment?

A) S corporation

B) Not-for-profit corporation

C) Publicly held corporation

D) For-profit corporation

71) All states require lawyers who wish to incorporate to incorporate under:

A) general incorporation law.

B) professional corporation acts.

C) special professional charter.

D) common corporate law.

72) ________ have shares generally available to the public and tend to be managed by professional managers who own small percentages of the corporation.

A) All for-profit corporations

B) Publicly held corporations

C) S corporations

D) Close corporations.

73) An S corporation election requires the consent of ________ of its shareholders.

A) none

B) all

C) the majority

D) two-thirds

74) Incorporation of a nonprofit corporation under state law requires delivering its ________ to the secretary of state.

A) articles of incorporation

B) bylaws

C) meeting minutes

D) certificate of nonprofit

75) A corporation that is incorporated in one state and doing business in another state is called a(n):

A) alien corporation

B) domestic corporation

C) international corporation

D) foreign corporation

76) A corporation that is incorporated in one country that is doing business in another country is called a(n):

A) international; corporation

B) domestic corporation

C) foreign corporation

D) alien corporation

77) In the International Shoe case, the United States Supreme Court held that a foreign corporation must have certain "minimum contacts" with the state such that asserting jurisdiction over the corporation does not offend "traditional notions of fair play and substantial justice." Which of the following did the Court use to justify its holding?

A) Public policy

B) Benefit theory

C) Corporate responsibility

D) Exchange theory

78) Which of the following is not a consideration when determining whether a state law regulating the activities of a foreign corporation places an undue burden on interstate commerce?

A) Whether the law serves a legitimate state interest.

B) Whether the state has chosen the least burdensome means.

C) Whether the state's law is the most economical solution to the problem.

D) Whether the state's reasoning outweighs the statute's burden on interstate commerce.

79) Which of the following state tax scenarios violates the commerce clause?

A) The tax is slightly related to the services provided by the state.

B) The tax is applied to an activity with a substantial connection with the taxing state.

C) The tax is fairly apportioned.

D) The tax does not discriminate against interstate commerce.

80) In the case in the text, Drake Manufacturing Company, Inc. v. Polyflow, Inc., why did the court find in favor of the defendant?

A) The plaintiff's actions in Pennsylvania constituted "doing business" and it failed to timely obtain a certificate of authority.

B) Although the plaintiff's actions did not constitute "doing business" its use of the certificate of authority during post-trial proceedings was erroneous.

C) The lower court abused its discretion when it found in favor of the defendant because its activities in the state did not make it liable in that state.

D) The plaintiff was not properly incorporated in any state.

81) The failure of a foreign nonprofit corporation to qualify to do intrastate business in a state prevents it from:

A) advertising in that state.

B) using any state-related grants or programs.

C) collecting taxes from its sales.

D) using the state's courts to bring lawsuits.

82) Courts will sometimes ignore the separateness of a corporation and its shareholders by piercing the corporate veil in order to:

A) promote justice and to prevent inequity.

B) prevent equity only.

C) promote justice only.

D) set examples for other corporations.

83) In Supply Chain Assocs., LLC v. ACT Elecs., Inc., the case in the text, which of the following was not a factor the court considered when it determined that the corporate veil should not be pierced?

A) Although Sun Act was a controlling shareholder of ACT, it did not own all of its stock.

B) Sun Act acted fraudulently in its business with ACT.

C) Sun Act supplied ACT with some operating funds.

D) Separate corporate boundaries were maintained.

84) Why can a parent corporation cause its subsidiary to transact with it in a manner that benefits the parent but harms the subsidiary?

A) The parent corporation has commingled its assets with the subsidiary.

B) The parent owns a majority of the subsidiary's shares.

C) The parent is liable for its obligations and the subsidiaries.

D) The parent elects the directors of its subsidiary and therefore, can control the management of a subsidiary.

85) When shareholder-managers pay themselves excessively high salaries or have the corporation pay their personal credit card bills, this is an example of:

A) circumventing a statute.

B) looting.

C) creditor domination.

D) thin capitalization.

86) Rement Corporation is incorporated under the laws of New Jersey. Rement maintains a sales agent in New York City, who makes contracts in New York City. Can New York impose an income tax on Rement's profits from its New York sales at the same rate it taxes income from domestic New York corporations?

87) The National Collegiate Athletic Association Inc., (NCAA) is incorporated in Indiana. The NCAA accredits college athletic programs and sanctions and regulates athletic competitions among its member colleges. The NCAA selects New Orleans, Louisiana as the site of its men's college basketball 1999 Final Four, with Tulane University as the host school. To assist Tulane's hosting of the Final Four, NCAA officials make several trips to New Orleans in the course of one year. For nine days immediately and during the Final Four, NCAA officials are in New Orleans. Altogether, NCAA officials spend 23 days in New Orleans. Is the NCAA required to qualify to do business in Louisiana?

88) Tennessee-Alabama Fireworks Company (TAF) is incorporated in Tennessee. It maintains year-round retail stores in Tennessee and Alabama. It also sells fireworks to individual consumers at a gas station parking lot in Indiana for a period of 20 days before the Fourth of July. Must TAF qualify to do business in Indiana?

89) Harold and Dorothy own all of the shares of Ace Corporation. Robert, Ace's landlord, sued Ace for unpaid rent. Robert received a $10,000 judgment against Ace. When Robert tried to collect on the judgment, he discovered that Ace Corporation had no assets. He then discovered that Harold and Dorothy no longer operate Ace Corporation. They now operate Optimus Corporation as its only shareholders. Harold and Dorothy had no assets in their names. However, upon further investigation, Robert discovered that Optimus had numerous assets. He reviewed the financial documentation, discovering that Optimus pays for Harold and Dorothy's mortgage, medical bills, and grocery bills. Can a court pierce the corporate veil? Discuss.

90) Fantase Corporation has a union contract. To avoid the contract, the shareholders plan to form a new corporation. They also elect to transfer their business interest to the new corporation. Is the new corporation liable to the employees for the union contract?