QUESTION 1 . Larry wants to start and operate his own small family grocery store in Eaton, Ohio. Larry is not concerned about the business continuing in some form after he decides to either retire or leave the business for some other reason. He also knows that he does not intend to invest an amount than he can personally afford and he plans to carry sufficient liability insurance to cover any injuries which could occur on the property of the grocery store. Finally, Larry wants to avoid any formalities in the creation of this business. Which form of business best fits Larry's needs and desires? A. A proprietorship because not only is it easy to form and provides Larry complete control of his business, but it also protects Larry from any liability beyond his initial investment. B. A sub chapter S corporation because there are no formalities in the creation of such a corporation, and the entity is not subject to double taxation as would be the normal case with a corporation. C. A sole proprietorship because a sole proprietorship while having a limited life and unlimited personal liability is easy to create and provides Larry with total control of the business. D. A general corporation because there are no formal creation requirements, and Larry can be the sole shareholder. 2. Three young attorneys wish to open a law practice. They each were to make an initial investment of capital in the opening of the office and also wish to equally share in the profits. They want their relationship to be controlled by an agreement which they can craft to their needs. They are also interested in limiting the sale of each attorneys interest in the business to outside persons. What form of business structure would be best to meet these needs? A. A close corporation. By forming a close corporation, the attorneys canprevent the others from divesting their shares in the corporation. B. A general partnership. By forming a general partnership, the attorneys can control by agreement the relationship between them, including the divestiture of any share of the business by anyone of the partners. In addition, in a general partnership, there is generally a sharing of investment and profits. C. A limited partnership. By entering a limited partnership, at least two of the three attorneys could limit their potential personal liability. D. A professional legal corporation. By establishing a PLC, the attorneys can limit their personal liability while still achieving their other goals. 3. Three creative brothers have developed an idea for an innovative product. They have found 20 investors who support their business plan. These 20 investors however are disinterested in being involved in the day to day operations of the business, and also do not want to commit anything more than their initial investment to the project. The nature of the product which is being developed creates some potential for significant liability to the business entity. Consequently, the three creative brothers are looking for some insulation from losses in excess of their initial investment. What form of business structure best reflects the needs of the people involved here? A. A corporation. A corporation would provide the investors and the three brothers with a limitation on liability based on their initial investments. B. A general partnership. A general partnership will provide all of the parties the protection regarding liability they desire. In addition, it will avoid the double taxation which occurs in the general corporate structure. C. A sub chapter S corporation. A sub chapter S corporation will provide all of the liability protections of a corporate structure, and will also provide taxation in the form of a partnership so as to avoid double taxation. Since there are no limitations on the formation of a sub chapter S corporation it is clearly applicable here. D. A limited partnership. By forming a limited partnership, the parties would protect the 20 investors from any liability over their initial investment. This would also avoid issues of taxation related to the corporate structure. 4. Three creative brothers have developed an idea for an innovative product, They have found 20 investors who support their business plan. These 20 investors however aredisinterested in being involved in the day to day operations of the business, and also do not want to commit anything more than their initial investment to the project. The nature of the product which is being developed creates some potential for significant liability to the business entity. Consequently, the three creative brothers are looking for some insulation from losses in excess of their initial investment. The parties also wish to avoid the income of the business being taxed, and then being taxed a second time upon distribution to the investors. What form of business structure best reflects the needs of the people involved here? A. A corporation. A corporation would provide the investors and the three brothers with a limitation on liability based on their initial investments. B. A general partnership. A general partnership will provide all of the parties the protection regarding liability they desire. In addition, it will avoid the double taxation which occurs in the general corporate structure. C. A sub chapter S corporation. A sub chapter S corporation will provide all of the liability protections of a corporate structure, and will also provide taxation in the form of a partnership so as to avoid double taxation. A sub chapter S corporation will work in this situation if the parties meet the requirements and limitations of state law regarding a sub chapter S corporation. D. A limited partnership. By forming a limited partnership, the parties would protect the 20 investors from any liability over their initial investment. This would also avoid issues of taxation related to the corporate structure. 5 . Larry has opened his grocery store in Eaton, Ohio. He is operating in a relatively profitable fashion. However, on November 10, 1999, a young woman enters his store and slips and falls on a large puddle of water which has existed on the floor for some period of time. Larry knows the puddle was there because he has a leaking refrigeration unit, but has taken no steps to assure that the puddle is kept under control. AS a result of her fall, the young lady is significantly injured and successful sues Larry for 1.5 million dollars. Larry has insurance coverage in the amount of 1 million dollars. Upon receiving the payment of 1 million dollars from the insurance company, the young woman seeks to attach Larry's personal property. His vehicle and his home to satisfy the remainder of the judgment. Can she do this? A. Yes. The owners of all business entities are personally responsible for injuries suffered by patrons on their business premises. Therefore, Larry is responsible to this young woman for all of her injuries and is personally liable for any amount in excess of the insurance. B. Yes. As a sole proprietor, Larry has unlimited liability. Unlimited liabilitymeans that you are responsible not only for the investment that you have in the business, but you are also personally responsible for all liabilities of the business. This is a distinct disadvantage of the proprietorship form of business. C. Yes. While Larry is a sole proprietorship and is subject to unlimited liability, that liability does not extend to his personal property. He is only liable to the extent of the value of the business, and his personal assets cannot be attacked. D. No. As a sole proprietor Larry has limited liability and is only subject to damage to the extent of his initial investment. 6. Two doctors enter a general partnership in the practice of medicine. They are quite successful and over the years produce significant income. One of the doctors is involved in some outside business activities. As a result of those activities he suffers some financial losses. Is this doctor able to offset these financial losses from other business enterprises against the income which he receives as the result of his involvement in the partnership? A. General partnerships are not a person for the purposes of taxation. Consequently, all of the income of a partnership is passed on to the individual partners. Consequently, any other deductible losses which a partner may incur can be deducted from this income. B. Yes. No matter the form of a business structure, an investor in that structure can always deduct his personal losses from the profits of his share of the business. C. No. The partnership entity is a person unto itself and is taxed based on its income. The individual doctor would only be able to deduct his other losses from any dividends he received from the partnership. D. No. Because the doctor is an employee of the partnership, he cannot deduct other business losses from his employment salary as a result of the partnership. 7. Three family members create a close corporation. Each family member holds 333 1/3 shares of the total 1000 shares of the corporation. One of the family members unexpectedly dies. What impact does this have on the close corporation? A. The close corporation is dissolved automatically as a matter of law because of the death of one of the shareholders. This is true becausecorporations have a limited life and a change in owners destroys the existing business entity. B. The shares of stock are redistributed in accordance with the close corporation agreement of the parties and the corporation continues in existence. This is true because corporations have unlimited life and the death of a shareholder does not destroy the business entity. C. The corporation must dissolve. Because the corporation is a close corporation, the other shareholders have no right to the stock at hand, and are obliged to dissolve the corporation and begin a new business entity. siteisblondD. The close corporation continues to exist as a business entity, but it is unable to perform any business function because of the missing owner of 113 of the shares. 8. Three accountants begin an accounting business together. They decide to incorporate their business as a professional corporation, and operate under the corporate laws of the state where they are located. At the end of the first year, after paying the salaries of their other employees, and paying each of themselves a salary as employees of the corporation, the three accountants have income above their expenditures in the beagirl amount of $100,000.00. How would you advise them to handle this excess income? A. They should simply allow the corporation to make the $100,000.00 and then distribute it as dividends to themselves as shareholders. B. They should show the money as income to the corporation and use it for investment in future years. C. They should distribute the income as bonus' to either themselves as employees or all employees in order to avoid double taxation on the money because of the corporate structure. torigho nigall D. They should give the IRS all of the money. 9. An existing corporation is preparing to dissolve its assets and distribute the money from such dissolution. After paying all of its outstanding creditors, the corporation has 1 million dollars left from the dissolution of its operation. Remaining to be paid are ten bond holders who have bonds that are presently worth $10,000.00 each, and 50 share holders who hold a total of 500 shares for which each of them paid $2,000.00 per share. How is the money distributed? 5A. The money is distributed equally between the bondholders and shareholders because they have equal footing as to the corporation. B. The money is distributed on a pro-rated basis to the bondholders and the shareholders based on the percentage value of their present holdings versus the entire 1 million dollars in assets to be distributed. C. The shareholders are paid first at the rate of $2,000.00 per share and the bondholders are left unpaid. D. The bondholders are paid first, and the remaining 9 hundred thousand dollars is divided on a per share basis among the shareholders because the bondholders are creditors to the corporation and the shareholders are owners. Consequently, the bondholders are entitled to be paid before the shareholders divide any remaining assets. 10. A group of six gentlemen are considering the creation of a corporation. In preparing for the operation of the corporation, one of these gentlemen goes out and discusses deals with potential clients. As a result of these discussions, he enters several contracts on behalf of the corporation in the process being created. After its incorporation, the corporation ultimately fails, and several of the contracts entered prior to its incorporation by the one individual are left unresolved. The parties injured by the corporations breach of these contracts seeks redress individually from the person who signed on behalf of the corporation. Can they be successful? A. Yes. The individual who signed the papers in a pre-incorporation is a promoter and has personal liability for those contracts. B. Yes. All of the people who were involved in forming the corporation remain responsible for all the contracts of the corporation whether entered into before incorporation or after corporation. C. No. Because of the concept of limited liability none of the investors are responsible for corporate debts and liabilities over and above their original investment. D. Yes. All of the people seeking incorporation of the entity are responsible personally for all pre-incorporation debts whether they have signed on a contract for the same or not. 11. Corporation X is located in a state that requires the chair holder to be able to cumulatively vote their shares. The minority shareholder of the corporation holds ten shares which he can vote. The two majority shareholders hold a total of 90 shareswhich they always vote together. By using cumulative voting to its best advantage, how many members of the board of directors can the minority shareholder ensure will be elected if they are voting for ten directors? A. None. Because he can only vote ten shares, he will be defeated 90 to 10 on every board of director seat for which he votes. B. Five. Under the terms of cumulative voting, the minority shareholders are guaranteed a representation of one-half on the board of directors. C. One. By exercising cumulative voting, the minority can use all 100 of his cumulative votes (10 votes for 10 directors) to vote for one particularly director. By doing this, he ensures that he will defeat the 90 votes that all of the other board of director candidates will receive and will elect one member of the board. D. One. Under the terms of cumulative voting minority shareholders are guaranteed a representation on the board of directors which is equal to the percentage of the shares of stock which they own. 12. Bob is a member of the board of directors of Corporation X. A tender offer is made to Corporation X by Corporation Y to purchase all of the assets and the goodwill of Corporation X. The result of the purchase would combine Corporation Y superior marketing skills with the excellent distribution capacity of Corporation X thereby creating a stronger and better corporation. However, if this occurs it is most likely that Bob will lose his position as a member of the board of directors because of the merged boards. Should Bob vote in favor of or against the merger? A. Bob is obliged to vote in favor of the merger because he has a duty of loyalty of the corporation as a member of the corporation and cannot violate this fiduciary duty. B. Bob should vote in favor of the merger because not only is it good for Corporation X in the long run, but it will probably provide some personal spring board for him at a later time. C. Bob must weigh his personal involvement and the good of the company against one another and determine what is the appropriate course for him to take in regard to this.woot D. Bob should vote against the merger because it would be personally devastating to him.13. Carol is a shareholder in the X corporation. She is dissatisfied with the direction the corporation has been taking and is particularly concerned about certain policies of the company which she feels are detrimental to the environment. She wishes to take action in this regard. What can she do? A. As a shareholder, Carol has the right to participate in the day to day activities of the corporation and can demand that the board of directors and officers of the corporation vary the policies so as to be more reflective of her personal opinions. B. As a shareholder, Carol can demand a seat on the board of directors so her voice can be heard and she can help direct the policy making decisions of the corporation. C. As a shareholder, Carol can demand that the officers of the corporation be fired and replaced with officers who are more concerned about her environmental issues. D. As a shareholder, Carol has no right to participate in the day to day business corporation. Her recourse here is to campaign for the election of board of director members who will be more sensitive to the issues that she has raised. However, she has no immediate ability to change the policy or day to day operation of the corporation. 14. In January 1995, when Gene became the President and CEO of X Corporation, the corporation was doing quite well and making a great deal of money. Upon Gene's recommendation, the board of directors decided to diversify the product line of X corporation. As a result, the stock of X corporation went from $10.00 a share in January, 1995, when Gene became president, to an all-time low of $1.45 on December 31,1999. A group of shareholders seeked to sue Gene arguing that he has driven the company into the ground and his decision making has cost them the value of their stock. Can they succeed? A. Yes. Because Gene owes a fiduciary duty to the company and the shareholders, he is personally responsible for the economic downturns of the corporate entity. In as much as his decisions are those which resulted in the damage to the corporation, he is liable to the stockholders. B. Yes. As President and CEO of X Corporation Gene takes on a personal responsibility for the liability of the corporation. This strict liability requires that he be responsible for the damage suffered by the shareholders.C. No. Gene's decisions are protected by the business judgment rule. The decisions Gene made and the recommendations that he made were within his managerial authority and in compliance with his fiduciary duties. Gene was acting within the powers of the corporation and there was a reasonable basis for the decision. For those reasons, Gene has no liability to the shareholders. D. No. Neither a member of the board of directors nor an officer of a corporation is ever liable to the shareholders for damage suffered as a result of their decision making. Under the business judgment rule, neither officers or directors can be held liable under any circumstance for economic downturn