Book 1 - Chapter 28

Multiple Choice
1.	b	Stockholders (owners) do not act by law on behalf of each other or the corporation.
2.	c	The ultimate authority belongs to the stockholders who elect the board of directors and vote on corporate issues as specified in the bylaws. However, it may be difficult for stockholders to organize in order to obtain a required majority on a specific issue.
3.	d	The incorporator files the application and articles of incorporation, and the state authorities grant the charter.
4.	d
5.	a
6.	a	The board of directors protects the stockholders by supervising the management and setting policy.
7.	c
8.	b	A stock underwriter is a company that pays a corporation for a new issue of stock (thereby guaranteeing the proceeds) and markets the stock to the public. An investment bank is an underwriter but may also provide a range of other consulting services. Often, stock brokerage companies also offer investment banking services.
9.	d	Stock sold on a stock exchange is available to the general public.
10.	b

Discussion Questions

1.	A person (or business) called the incorporator files an application with the proper authorities of a selected state. The application includes the articles of incorporation, which designates a company name, requests an authorized number of shares, and must disclose detailed information about the potential owners and the company. If the state approves the application, it grants a charter to the mpany. The charter creates the corporation as a legal entity and authorizes a specified number of shares. After the charter is received, the initial directors as specified in the articles of incorporation approve the bylaws, approve the issuance of stock, and designate the officers of the corporation. The stock is then issued.
2.	A corporation has the following features that are different than a proprietorship or partnership:
	• The corporation is a separate legal person that enters into contracts, pays its own tax, and is responsible for its own debts.
	• Ownership of a corporation is divided into units that are shares of stock. A corporation is owned by owning shares of the stock. The owners are called stockholders.
	• Stockholders have limited liability, meaning they are not personally responsible for corporate liabilities. The maximum loss for a stockholder is the amount of money invested.
	• Shares of stock are freely negotiable. Approval from other stockholders is not required to transfer ownership of stock.
	• There is no mutual agency. Stockholders cannot act on behalf of other stockholders or on behalf of the company unless they are company employees.
	• Because a corporation is a separate legal entity, a stockholder (owner) can also be an employee of the company, unlike a proprietorship or partnership.
	• Corporate income is taxed twice.
	Advantages: The ability to sell shares of a company as negotiable shares of stock to obtain money from investors is a significant advantage of a corporation. Also very advantageous are limited liability, no mutual agency, and continuous life. Also an owner can simultaneously be a stockholder, corporate officer, and employee of the corporation.

Learning Goal 28

SOLUTIONS

Learning Goal 28: Describe the Corporate Entity

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