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Which of the following statements about corporations is true?
 
A. A promoter files articles of incorporation with the state government to create a corporation.
B. When a corporation's liabilities exceed its assets, its creditors can reach the personal assets of the shareholders.
C. A corporation need not establish books of accounts.
D. When an employee or director commits a tort or crime while conduction corporate business, the corporation is not liable for the consequences.
   
Corporations distribute their after-tax income to their shareholders as _______.
 
A. fringe benefits
B. dividends
C. exempt securities
D. disgorgements
   
Which of the following is a feature of a corporation?
 
A. Double taxation
B. Unlimited liability
C. Definite duration
D. Prohibition of tax-deductible fringe benefits
   
Although the law of partnerships originated in the common law, all states except _____ adopted the Uniform Partnership Act.
 
A. Louisiana
B. Alabama
C. Nevada
D. Wisconsin
   
Which of the following statements is true of the formation of partnerships?
 
A. Partnership accounting systems are the least expensive of all the business forms.
B. The partnership form generally requires a number of annually recurring events such as state filings or statutorily mandated meetings of owners.
C. The vast majority of a partnership agreements are written.
D. The co-owners of a partnership must intend to join in the sharing of risks and rewards via the active conduct of business.
   
Which of the following is true of the partnership form of business?
 
A. The vast majority of partnership agreements are written.
B. An assignee of a partnership interest has the right to participate in control and enjoys the status of partner.
C. The partners are not personally liable for the partners for the partnership's obligations should it default.
D. Events in the private lives of the partners can seriously impact the business venture.
   
Which of the following is true of limited liability companies?
 
A. The management structure of a limited liability company is extremely rigid.
B. A single-member limited liability company cannot be treated as a corporation.
C. The operating agreement of a limited liability company is most likely to be in the oral form.
D. To create a limited liability company, the owners must file articles of organization with the state.
   
Which of the following statements is true of the sole proprietorship form of business organization?
 
A. Legal filings are required to establish a sole proprietorship.
B. A sole proprietorship is a separate legal entity.
C. The owner of a sole proprietorship is not personally liable for all obligations of the business.
D. A sole proprietorship is not a taxable entity.
   
Which of the following refers to a business venture that has no legal existence apart from the owner?
 
A. Corporation
B. Limited Liability company
C. Sole Proprietorship
D. Partnership
   
Which of the following statements is true of a limited liability partnership?
 
A. It is taxed like a general partnership.
B. No annual filings or fees are required.
C. To bring a limited liability partnership into existence, the owners file articles of organization with the state.
D. It is more like a limited liability company than a general partnership.
   
The legal doctrine that makes the employer liable for an employee's acts is ___________.
 
A. respondeat superior
B. res ipsa loquitur
C. piercing the corporate veil
D. caveat emptor
   
If a delivery truck negligently hits a child in the street, the company for which the driver work will be liable for the injuries under the doctrine of __________.
A. caveat emptor
B. respondeat superior
C. piercing the corporate veil
D. res ipsa loquitur
   
Carey, the owner of a corporation, uses the business checking account to pay his personal bills. He also makes business deal knowing the business
cannot pay the invoices. If he is sued by one of his creditors, which of the following courses of action is most likely to be taken by the court?
 
A. Pierce the corporate veil.
B. Apply the business judgement rule.
C. Terminate the corporation
D. Impose the Rochdale Principles.
   
Which of the following legal doctrines will the court apply if the owners of a corporation fail to maintain a formal legal separation between the
business and their personal financial affairs?
 
A. Respondeat superior
B. Piercing the Corporate Veil
C. The Business Judgement Rule
D. The Rochdale Principles
   
Which of the following acts prohibits broker voting unless specific instructions are received from the shareholder?
 
A. The Private Securities Litigation Reform Act
B. The Securities exchange Act
C. The National Securities Markets Improvement Act
D. The Dodd-Frank Act
   
The lack of regulatory uniformity among the states led Congress in 1996 to enact the ______, preempting state registration requirements for
securities traded on national markets.
 
A. Private Securities Litigation Reform Act
B. Securities Exchange Act
C. National Securities Markets Improvement Act
D. Dodd-FrankAct
   
Which of the following is true of the Securities Act of 1933?
 
A. It guarantees the economic merits of any investment opportunity.
B. It prohibits full disclosure of all material facts about the investment opportunity to offers before they invest.
C. It forbids any interstate offering of a new security until a registration statement has been filed with and approved by the Securities and Exchange Commission
D. The Securities and Exchange Commission has repealed the 1933 Act prescribed relationship between solicitation or sales of a security and the registration process.
   
According to the 1933 Act, during the ______ period, no sales are permitted by a limited amount of solicitation is allowed.
 
A. shelf registration
B. waiting
C. profiling
D. posteffective
   
Which of the following presents the company's assets, liabilities, and equity in a registration statement?
 
A. Income statement
B. Balance sheet
C. Statement of cash flows
D. Supplemental information
   
Identify the correct statement about the Securities Act of 1933.
 
A. It allows interstate offering of a new security until a registration statement has been filed with and approved by the Securities and Exchange Commission.
B. It ensures partial disclosure of material facts about the investment opportunity to offerees.
C. It does not guarantee the economic merits of any investment opportunity.
D. It gives the Securities and Exchange Commission the power to suspend trading if it suspects price manipulation.
   
Which of the following statements is true of the Securities Act of 1934?
 
A. It allows interstate offering of a new security until a registration statement has been filed with and approved by the SEC
B. It ensures partial disclosure of material facts about the investment opportunity to offerees.
C. It guarantees the economic merits of any investment opportunity.
D. It gives the SEC the power to suspend trading if it suspects price manipulation.
   
Under the 1933 Act, a draft prospectus is included with the filed registration statement. This is known as a ________ prospectus.
 
A. greenmail
B. red herring
C. crown jewel
D. blue sky
   
The principal defense against a Section 11 claim is ____.
 
A. proxy access
B. disgorgement
C. due diligence
D. broker voting
   
The owners of a corporation are called stockholders.
 
True
   
A partnership offers limited liability to its owners.
 
False
   
Sole proprietorships are mutual agencies.
 
False
   
In a limited liability company, the owners are referred to as interest holders.
 
False
   
In a limited partnership, the limited partners manage the business and are personally liable for all loses.
 
False
   
A shareholder derivative suit is brought by a minority shareholder, but any recovery inures to the corporation.
 
True
   
Corporations are artificial persons created under the law of a state.
 
True
   
In general, the creditors of a corporation cannot reach the personal assets of the shareholders to satisfy the corporation's obligations.
 
True
   
Closely held corporations face the loss of limited liability through application of the doctrine known as piercing the corporate veil.
 
True
   
Corporations incur the disadvantage of double taxation.
 
True
   
An S corporation pays double tax on its income.
 
False
   
Common stockholders share all three property rights associated with stock ownership in proportion to their holdings.
 
True
   
In the context of the capital structure of corporations, equity capital
has a short-term horizon.
 
False
   
Equity holders' claims are always satisfied before creditors' claims.
 
False
   
Although shareholders are the owners of the corporation, control rests with the board.
 
True
   
The Securities Act of 1933 seeks to ensure full disclosure of all material facts about the investment opportunity
to offers before they invest.
 
True
   
Online trading services provide professional guidance to investors.
 
False
   
Blue sky laws are primarily applicable to solely intrastate offerings.
 
True
   
Where mergers or direct acquisitions fail, a takeover can be attempted.
 
True
   
Whether a given venture's legal characteristics mandate or favor a specific form.
 
Circumstances favoring a specific business form
   
A corporation with relatively few shareholders, the stock of which has no readily available public market.
 
Closely held corporation
   
a rule that immunizes corporate management from liability for actions that result in corporate losses or damages if the
actions are undertaken in good faith and are within both the power of the corporation and the authority of management to make.
 
Business judgment rule
   
Filed by corporate shareholder when corporate directors fail to sue in situation where corporation has been harmed by
individual/another corporation
 
Shareholder derivative suit
   
pay for or reimburse
 
Indemnify
   
Taxed once (to shareholders on their personal returns). Made for smaller companies so limited to 100 individual shareholders,
and an entire family is treated as one shareholder, and only one class of stock is permitted.
They represent about 55 percent of all corporations.
 
S Corporations
   
a partnership that limits partner's risk of losing their personal assests to only their own acts and omissions and the the
acts and omissions of people under their supervision
 
Limited Liability Partnership
   
form of partnership where one or more partners are not active in the daily running of the business, and whose liability
for the partnership's debt is restricted to the amount invested in the business
 
Limited Partnership
   
Includes instruments like stocks and bonds as well as investment contracts.
 
Security
   
an employer is vicariously liable for the behavior of an employee working within his or her scope of employment
 
Respondeat superior
   
An action in which a court disregards the corporate entity and holds the shareholders personally liable for corporate debts and obligations. Usually has two elements: (1) misuse of the corporate form and (2) an unjust result if limited liability is allowed to stand.
 
Piercing the Corporate Veil
   
Forces a shareholder to offer his or her stock to the corporation or other shareholders before selling it to a third party.
 
Buy-sell agreement
   
Taxes paid by corporations on income and by shareholders on dividends.
 
Double taxation
   
All dividends not paid in any a prior year.
 
Preferred stock arrearage
   
Partnerships are mutual agencies. Every partner is an agent of the partnership with capacity to bind the partnership
when acting within the scope of partnership's business. Knowledge held by either partner is deemed held by the partnership.
 
Mutual agencies
   
act ordering common ownership interests, profit and loss sharing, and shared management responsibilities in a partnership
 
Uniform Partnership Act
   
Precisely specifies the terms of the relationship. They may be oral or written, but most are oral.
 
Partnership Agreement
   
Involves pre-arranging with shareholders a tender offer triggered right to buy or to redeem a significant amount of stock at very
corporation-unfavorable prices. (Dissipates the cash or cash related assets.)
 
Poison pill
   
Severance pay packages that may have negotiated to protect themselves in the event of a takeover.
 
Golden parachutes
   
Preempted state registration requirements for securities traded on national markets.
 
National Securities Markets Improvement Act
   
State securities regulations. They are less important now and are primarily applicable to solely intrastate offerings.
 
Blue Sky Laws
   
Entitles the assignee only to the distrubution rights of the assigning partner (assignor). The assignee has no right to participate
in control and does not have the status of a partner.
 
Assignment
   
Seeks (1) to ensure full disclosure of all material facts about the investment opportunity to offerees before they invest, and (2) to
eliminate fraudulent conduct in the markets.
 
Securities Act of 1933
   
Must be filed with SEC before any interstate offering of a new security occurs. This has two parts: the prospectus and the supplemental information.
 
Registration Statement
   
The major component and is delivered to offerees to satisfy the requirement for preinvestment disclosure. It has three main sections:
(1) one is general info about the company and industry, business plan, etc. (2) contains risk assessment of the business model, local
operating conditions (political instability) and (3) audited financial statements.
 
Prospectus
   
Part of the registration statement which isn't distributed to offerees, describes such matters as how much it is costing
to float the IPO
and what major contracts exist with unions, suppliers, or customers.
 
Supplemental Information
   
During this period, no solicitation or sales are permitted. This is before the registration statement has been filed.
 
Prefiling Period
   
After the registration statement has been filed but hasn't been approved, no sales are permitted but a limited
amount of solicitation is allowed.
 
Waiting Period
   
After SEC approves registration statement. Solicitations are permitted and sales may be made if the
offerees have first received the final prospectus.
 
Post effective Period
   
Allows companies to issue securities in portions over a two year period under a single registration statement.
This allows issuers to float the securities when market conditions are most favorable, without having to place the
entire issue shortly after the registration statement becomes effective.
 
Shelf registrations
   
SEC can impose civil penalties up to $750,000 for individuals and $15 million for corporations. In insider trading, may
impose penalty up to 300 percent of profit gained or loss avoided by such trading.
 
Government Enforcement
   
Both 1933 and 1934 Acts contain criminal sanctions for fraud: fines up to $25 million and imprisonment of up to 20 years.
Usually civil penalties are given since in a criminal case the jury must rule guilty beyond a reasonable doubt.
 
Criminal Enforcement
   
Can be used when mergers or direct acquisitions fail
 
Tender offers
   
The person seeking to acquire control can do this by nominating an alternative slate of directors and then soliciting
shareholders for their annual proxies in preference to returning proxies to current management.
 
Proxy fight
   
When management is all going to get fired. Management then has a dilemma that they're supposed to protect the
best interests of the shareholders which may be the tender offer.
 
Hostile takeover
   
the practice of purchasing enough shares in a firm to threaten a takeover and thereby forcing the owners to buy
those shares back
at a premium in order to stay in business
 
Greenmail
   
Management can resist by launching its own tender offer.
 
Go Private
   
Involves arranging a stand-by agreement with a friendly third party to purchase critical corporate assets at a reasonable price
should a tender offer be launched, know that the third party will, by lease or otherwise, continue to make these assets
available to the corporation on friendly terms should the tender offer fail and management keep its job. (Dilutes value of the stock)
 
Crown jewel
   
A specialized type of bank that buys the shares from the company preparing an IPO and sells them to investors
 
Underwriter
   
Acts as the issuer's sales agent, never taking title to the securities and earning its profit from sales commissions.
 
Best efforts underwriter
   
Is not a taxable entity. All revenues and expenses appear on the personal tax return of the proprietor.
 
Sole proprietorship
   
To create an LLC, the owners called members file articles of organization with the state. Their equity is called members'
interests and an operating agreement will be drafted which sets forth information similar to corporate bylaws. Can be
taxed like a partnership or corporation and management structure is very flexible. Are similar to corporations with limited
liability but to partnerships regarding transferability of ownership interests and access to equity capital.
 
Limited Liability Companies (LLC)
   
A term in the lending contract that makes the debt immediately payable should the condition specified not be satisfied.
 
Debt covenants
   
Only about 8 percent of all businesses are partnerships
 
General partnership
   
Purchases the securities at a discount, intending to profit by reselling them. Institutional investors and dealers typically
purchase IPOs - the former for reinvestment, the latter for resale to retail investors.
 
Firm-commitment underwriter
   
Do not require registration with the SEC. Most common are issued by governments, charities, educational institutions,
and financial institutions like banks and insurance companies.
 
Exempt securities and transactions
   
Created the SEC. A company's securities are subject to this act if (1) it is engaged in interstate commerce and (2) it
has both more than $10 million in assets and more than 500 shareholders. Gives the SEC the power to suspend trading
in any security "when it serves the public interest and will protect investors".
 
Securities Exchange Act of 1934
   
Repeatedly and unnecessarily engaging in trades to generate commissions.
 
Churning
   
Must be filed annually. Which includes information very similar to that found in an IPO registration statement,
including audited financial statements.
 
Form 10-K
   
Must be filed quarterly. Contains year to date info and unaudited interim financial reports
 
Form 10-Q
   
Required whenever a material event occurs, such as change in control, major asset acquisitions and dispositions,
bankruptcy, change in auditor and resignation of directors.
 
Form 8-K
   
profits made by insider buying and selling corporation's stock within six months.
 
Short-Swing Profits
   
Significantly restricts fraud actions for civil damages. Security price dropping won't be enough, concrete
evidence is needed. Complaint must now be filed with state with facts that constitute the alleged violation.
 
Private Securities Litigation Reform Act (1995)
   
Requires that legal actions related to covered securities (those traded in national market) be tried only in federal court under federal law.
 
Securities Litigation Uniform Standards Act (1998)
   
Small fee, mandatory elements are: corporation's name, the person designated to receive certain communications
from the state (like subpoenas), and a description of the shares the corporation is permitted to use. Discretionary
content like voting rules may also appear in the articles.
 
Articles of incorporation
   
First corporate meeting at which the issuance of stock will be authorized in exchange for contributions of capital, property, or services.
 
Organizational meeting
   
Contain key policies and procedures, such as how meeting quorums will be determined and the percentage of
shareholders that must approve major corporate actions like mergers.
 
Bylaws
   
Those on the board of directors who are also senior executives.
 
Inside directors
   
Those on the board of directors who are not employed by the company.
 
Outside directors
   
A person who acts on behalf of another (beneficiary) and is required to do so with great integrity.
 
Fiduciary
   
Requires a fiduciary to act in the best interests of a beneficiary. This prohibits directors from authorizing the corporation to
lease real estate from the board chairman unless the rental terms are consistent with the market.
 
Duty of loyalty
   
Requires that they act in good faith toward the corporation and in the manner a reasonably prudent person would
employ under the same circumstances.
 
Duty of due care
   
The costs related to bringing a business form into existence and maintaining that existence.
 
Nontax costs
   
What events, including those impacting the business owners, end the business form's existence.
 
Duration of existence