Test Prep Test Prep Certifications BUSINESS-ENVIRONMENT-AND-CONCEPTS Questions & Answers

• Question 421:

  Unless prohibited by the organization documents, a stockholder in a publicly held corporation and the owner of a limited partnership interest both have the right to:

  A. Ownership of the business' assets.

  B. Control management of the business.

  C. Assign their interest in the business.

  D. An investment that has perpetual life.

  Correct Answer: C

  Choice "c" is correct. Both a shareholder in a publicly held corporation and the owner of a limited partnership interest have a right to assign (sell) their interest. While a shareholder is free to assign his whole ownership interest, a limited partner's assignable interest is limited to the limited partner's interest in profits and losses. Choice "a" is incorrect. Neither the stockholder of a publicly held corporation nor the owner of a limited partnership interest (or indeed, even a general partnership interest) has an ownership interest in any item of the business' assets--the assets belong to the business and not to the owners of the business. Choice "b" is incorrect. Stockholders and limited partners generally do not have the right to participate in the management of the business. Choice "d" is incorrect. A limited partnership interest dissolves upon death of the limited partner and so is not a perpetual investment.

• Question 422:

  A partnership agreement must be in writing if:

  A. Any partner contributes more than $500 in capital.

  B. The partners reside in different states.

  C. The partnership intends to own real estate.

  D. The partnership's purpose cannot be completed within one year of formation.

  Correct Answer: D

  Choice "d" is correct. Under the statute of frauds, a partnership agreement must be in writing if by its terms the agreement cannot be completed within one year. Choice "a" is incorrect. No such rule. Although the statute of frauds requires a contract for the sale of goods for $500 or more to be evidenced by a writing, a writing is not required to contribute more than $500 in capital to a partnership.

  Choice "b" is incorrect. No such rule, a far out distracter.

  Choice "c" is incorrect. While a contract to buy or sell real estate will require a writing, a partnership

  agreement to own/buy real estate need not be in writing.

• Question 423:

  A limited liability company taxed under subchapter K of the Internal Revenue Code (the partnership subchapter):

  A. Must pay federal income tax.

  B. Is generally not considered a legal entity separate and apart from its owners.

  C. Must have written articles of organization.

  D. Must provide for apportionment of liability for the company's debts.

  Correct Answer: C

  Choice "c" is correct. A limited liability company must have written articles of organization, which must be filed with the state. Choice "a" is incorrect. An LLC taxed under subchapter K of the Internal Revenue Code (the partnership subchapter) does not pay federal income tax; the members are taxed on their share of the LLC's income. Choice "b" is incorrect. Unlike a general partnership, but like a corporation and a limited partnership, an LLC is considered a legal entity separate and apart from its owners. Choice "d" is incorrect. An LLC does not have to provide for apportionment of liability for LLC debts; the members of an LLC have limited liability.

• Question 424:

  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?

  A. Certificate of Incorporation.

  B. Charter.

  C. Bylaws.

  D. Proxy statement.

  Correct Answer: C

  Choice "c" is correct. The bylaws usually contain the rules for running the corporation.

  Choices "a" and "b" are incorrect. These are possible choices, but not as good an answer as "c". A

  corporation's articles of incorporation (called a charter in a few states) must set out certain information

  relevant to formation of the corporation, but it may include any other information that it is not illegal.

  However, usually details about intracorporate power are set out in bylaws rather than in the articles or

  charter.

  Choice "d" is incorrect. A proxy statement is a request to shareholders to allow their shares to be voted by

  a specified person in a specified way. It has nothing to do with a corporate president's authority.

• Question 425:

  Which of the following is a requirement for a small business corporation to elect S corporation status?

  A. It has only one class of stock.

  B. It has at least one partnership as a shareholder.

  C. It has international ownership.

  D. It has more than 75 shareholders.

  Correct Answer: A

  Choice "a" is correct. A corporation may elect to be taxed like a partnership under Subchapter S only if it

  has only one class of stock. Choice "b" is incorrect. A corporation can elect S corporation status only if its

  shareholders are individuals, estates, or certain types of trusts.

  Choice "c" is incorrect. Foreign shareholders generally are prohibited in an S corporation.

  Choice "d" is incorrect. An S corporation can have up to 100 shareholders, but it may have fewer.

• Question 426:

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

  A. Election of officers.

  B. Removal of officers.

  C. Declaration of cash dividends.

  D. Removal of directors.

  Correct Answer: D

  Choice "d" is correct. Shareholders have the right to elect and remove directors through the voting

  process.

  Choice "a" is incorrect. Officers are selected by the directors rather than by the shareholders.

  Choice "b" is incorrect. Because officers are selected by the directors, generally they may be removed only

  by the directors.

  Choice "c" is incorrect. Dividends generally can be declared only by the directors; shareholders usually do

  not have any right to declare or vote on a distribution.

• Question 427:

  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?

  A. A stock dividend is prohibited in such a corporation.

  B. A stock dividend increases a stockholder's proportionate share of corporate ownership.

  C. A stock dividend causes a decrease in the assets of the corporation.

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

  Correct Answer: D

  Choice "d" is correct. Stock dividends are dividends in the corporation's own authorized but unissued shares given to existing shareholders on account of their shares. Choice "a" is incorrect. Despite the fact that a stock dividend in a corporation with only one class of par value stock does not change a shareholder's proportional ownership or affect capitalization of the corporation, nothing prohibits a corporation--even a corporation with only one class of par value stock--from declaring a stock dividend. Choice "b" is incorrect. With a stock dividend, when there is only one class of stock, each shareholder receives a proportionate amount of stock, resulting in each shareholder owning the same percentage of the corporation after the dividend is issued as he or she owned before the dividend was issued. Choice "c" is incorrect. When a stock dividend is issued in a corporation's own stock, no assets are distributed and the solvency of the corporation remains the same.

• Question 428:

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

  A. An independent appraiser must render to the board of directors a fairness opinion on the contract.

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

  C. The shareholders must review and ratify the contract.

  D. The director must resign from the board of directors.

  Correct Answer: B

  Choice "b" is clearly the best answer here, 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. Choice "a" is incorrect. A transaction with an interested director will be upheld if it is fair, but it is not necessary to hire an independent appraiser to prove fairness. Choice "c" is incorrect. One method of approving a contract with an interested director is to disclose all of the material facts to the shareholders and seek their approval. Merely allowing the shareholders to review the contract is not sufficient. Choice "d" is incorrect. To ensure the validity of a contract between a corporation and a director of the corporation, it is not necessary for the director to resign from the board (i.e., a director is not required to resign because of a conflict of interest). The corporation can approve the conflict if it is disclosed and the director does not participate in the approval process.

• Question 429:

  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?

  A. A leveraged buyout of assets.

  B. An acquisition of stock for debt securities.

  C. A cash tender offer.

  D. A merger.

  Correct Answer: D

  Choice "d" is correct. A merger involves one corporation joining with another corporation. The surviving corporation has all of the rights and liabilities of the merged corporation. Thus, the acquiring corporation automatically becomes liable for all obligations of the acquired corporation. Choice "a" is incorrect. A leveraged buyout is a strategy involving the acquisition of another corporation using a significant amount of borrowed money (bonds or loans). Often, the assets of the corporation being acquired are used as collateral for the loans (in addition to the assets of the acquiring corporation). The acquiring corporation does not automatically become liable for all (or any) obligations of the acquired corporation if it merely acquires another corporation's assets. Choice "b" is incorrect. An acquisition of stock for debt securities does not make the acquiring corporation liable for the obligations of the acquired corporation. The acquiring corporation has simply purchased stock. In an acquisition of stock for debt securities, the acquired corporation becomes a subsidiary of the acquiring corporation and the acquired corporation remains a separate entity liable for its own obligations. Choice "c" is incorrect. A cash tender offer is an offer to purchase a corporation's stock directly from its shareholders at a specified price for a specified period of time. In a cash tender offer, the acquiring corporation does not automatically become liable for all obligations of the acquired corporation. In fact, if there is only an offer, there is no transaction at all.

• Question 430:

  In which type of business organization are income taxes always required to be paid by the entity on profits earned as well as by the owners upon distribution thereof?

  A. General partnership.

  B. Limited liability company.

  C. Subchapter C corporation.

  D. Subchapter S corporation.

  Correct Answer: C

  Choice "c" is correct. A Subchapter C corporation is taxed as an entity for income tax purposes. Additionally, distributions made to stockholders are treated as taxable income to the stockholders. [Note that this type of corporation is more often called a C corporation instead of a Subchapter C corporation.] Choice "a" is incorrect. A general partnership is not taxed as a separate entity for income tax purposes. Choice "b" is incorrect. An LLC is not taxed as a separate entity for income tax purposes unless the LLC specifically elects to be taxed like a corporation. [Of course, the word "always" in the question takes care of that.] Choice "d" is incorrect. A Subchapter S corporation is taxed as a partnership. Thus, it is not taxed as a separate entity for income tax purposes. [Note that this type of corporation is more often called an S corporation instead of a Subchapter S corporation.]