The Law of Corporations and Other Business Organizations

Chapter Review Answers

. What are four characteristics of a corporation
that distinguish it from the sole proprietorship
and the partnership?

2. If a corporation defaults on its debts, may
the creditors typically look to the shareholders
for payment?

Under what circumstances might the
shareholders become personally liable for
the debts of the corporation?

3. Suppose that John’s Appliance, Inc. is a
corporation formed by John Miller. John
Miller is the only owner and employee of
John’s Appliance, Inc., an appliance repair
service business. John Miller has formed
the corporation to shelter his personal assets.
He has put title to the repair truck
(which he often uses for his own personal
enjoyment), all of his equipment and tools,
and his workshop in his own name, although
he leases these items back to the
corporation. What are some of the potential
problems with this arrangement?

What can John Miller do to decrease the
risk that the corporate veil of John’s Appliances,
Inc. could be pierced in the event of
a lawsuit?

4. Dave Breen and Sue Martin would like to
start a business involving themselves and
D&S Equipment, Inc., a corporation that
holds certain of their assets. Could they
form a regular business corporation with
Dave Breen, Sue Martin, and D&S Equipment,
Inc. being the shareholders?

Could they form an S Corporation?

5. Who elects the directors of a corporation?

Who elects the officers?

Could an individual be a shareholder, director,
and officer all at the same time?

6. Could a group of attorneys and physicians
form a single professional corporation?

Why or why not?

7. Are all corporations incorporated as nonprofit
corporations automatically exempt
from paying income tax?

8. Explain the general differences between a
regular business corporation and an S Corporation.

9. What are some of the practical differences
between regular business corporations and
statutory close corporations?

10. Suppose that Anna and Grace want to start
a business to market a new food product
they have invented. Limited liability is important
to them because of the potential
product liability problems associated with
manufacturing and selling food products.
Initially, Anna and Grace will be the only
investors, and they may not see a profit in
their business for a few years. What types
of business organizations are available to
Anna and Grace?

What type of organization would you suggest?
Why?