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Exam 16: Corporations

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Question 1

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A corporation formed for the purpose of maintaining a charitable operation is called a:

A) nonprofit corporation.
B) Subchapter S corporation.
C) public corporation.
D) closely held corporation.

E) B) and D)
F) A) and B)

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Question 2

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What is meant by the expression "double taxation" of corporations?

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In corporations, other than Subchapter S corporations, income derived by the corporation is taxed at the corporate level. After the net income is distributed as dividends to shareholders, the dividends are taxed as income again. Therefore, taxation has been levied twice on the same money.

Question 3

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In Smith v. Van Gorkom, the court had to determine whether the business judgment rule protected board members who permitted the sale of a significant amount of stock by the retiring chairman of the board at an undervalued price, devaluing the company. The court stated each of the following except:

Eight businesswomen have formed a privately held corporation. Their stock certificates and the stock register of the corporation are public documents.

Bonds Inc., is incorporated in the state of Florida. In Florida, Bonds would be characterized as:

Corporations may be created by written agreement between the principals, and no strict or formal filing is required as long as the agreement is written.

Debentures are unsecured promises to pay back money with interest at a certain date and are backed by the strength of the general credit of the corporation.

Shareholders are the owners of the corporation and, in part, act principally through electing and removing officers.

Artisan Tools Inc., manufactures and sells quality hand tools to commercial and consumer users. Due to an excellent marketing campaign, the business is growing quickly. After careful consideration the board decides that a new factory needs to be built to accommodate current and future business. This factory will cost millions of dollars. In order to fund this project, the board has decided to issue and sell bonds and debentures. What is the difference between a bond and a debenture, and why might they be more advantageous than simply obtaining a commercial bank loan to finance the factory?

In a minority of the states, the articles of incorporation are called the ________.

Joe and Josephine have started a plumbing business and have incorporated. They invest nothing into the corporation, and the corporation has minimal assets. One day Josephine negligently damages a main pipe in a customer's home, causing the basement to flood and resulting in $20,000 in damages. The homeowner's only remedy is to sue the corporation, but the corporation has no funding and only minimal assets. Thus the homeowner must bear the loss because Joe and Josephine are shielded from liability due to the corporate protections the business entity affords them.

A corporate bond issued in the amount of $500,000 is called a ________ bond.

Shareholders generally have the power and right to do each of the following except:

A new start-up corporation has gone to a bank for a commercial loan. Recognizing the start-up status of the business and the limited assets the corporation currently possesses, the bank, to protect its interests, may require that either collateral be pledged or a personal guarantee be signed by shareholders but may not require both.

Once a corporation is recognized as existing by the state, the corporation automatically becomes liable for all contracts that a promoter had entered into on behalf of the corporation.

The Revised Model Business Corporation Act provides that a self-dealing transaction is not a breach of the duty of loyalty if a majority of disinterested parties approve the transaction after disclosure of the conflict.

Creation and internal governance of corporations is governed by:

A corporation is considered formed the moment the articles of incorporation are filed by the principals.

Delaware is a popular state for many corporations to incorporate in. Each of the following is a Delaware incorporation advantage except:

Saul was elected to the board of trustees of Round Way Corp. four years ago. He makes sure everyone knows he's a board member and always brings it up at parties. Unfortunately, he cares more about the prestige than doing a good job, so he hasn't attended board meetings or meetings of committees to which he's been assigned. If the insiders at Round Way enter into a series of bad business deals causing financial loss to the corporation: