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Question: Best friends since college, Juan, Rico, and Sue agree to be partners in
Yellow Bus Holdings. Rico quickly earns his CPA license and makes
more money than the other two friends. Rico contributes 80% of the
capital. The partners agree to split the profits equally. After three
years of no profits, Yellow Bus eventually dissolves. Yellow Bus’
liabilities are greater than its assets. The losses are paid by:
Answer: Rico, because he is the majority partner.
Juan and Sue because they contributed less of the
All of the partners in proportion to their capital
All of the partners in proportion to their profit-
sharing percentages.
Instructor Choice “d” is correct. Unless there is an agreement to the contrary,
Explanation: losses in a partnership will be shared in the same manner as profits are
shared. The facts state that the friends agreed to be partners; thus they
formed a partnership.
Choices “a”, “b”, and “c” are incorrect per the above explanation.
Points 10 of 10
2. Question: Generally, a partner who devotes his time and energy to partnership
business will:
Your Be entitled to compensation if he or she is an
Answer: equity partner.
Be entitled to compensation if the partnership
agreement is silent.
Not be entitled to compensation if the
partnership agreement is silent.
None of the above.
Instructor Choice “c” is correct. Partners are entitled to share in the profits of the
Explanation: partnership but are not entitled to compensation unless otherwise
agreed to in the partnership agreement or in the case of winding up by
the surviving partner.
Choices “a”, “b”, and “d” are incorrect per the above explanation.
Points 10 of 10
3. Question: Tom is one of the original partners in a 6-month-old general
partnership. If debts of the firm become due and the firm cannot pay
them, Tom will be:
Your Personally liable for those debts and
Liable for those debts and obligations only up to
the amount of his capital contribution.
Not required to contribute any money toward the
satisfaction of these debts and obligations.
None of the above.
Instructor Choice “a” is correct. Partners of general partnerships are jointly and
Explanation: severally liable for the debts and obligations of the partnership incurred
within the scope of partnership business.
Choices “b” and "c" are incorrect. General partners are personally
liable for all obligations of their partnership, even beyond their capital
Choice “d” is incorrect per the above explanation.
Points 10 of 10
4. Question: Bubbas, LLC has two members, Johnny and Betty Sue. Johnny
agrees to provide all of Bubbas, LLC’s capital needs. On its federal tax
return, unless an election was otherwise made, Bubbas, LLC, will be
taxed as:
Answer: A corporation.
A partnership.
A sole proprietorship.

None of the above.

Instructor Choice “b” is correct. The default treatment of LLCs for tax purposes is
Explanation: to treat them as partnerships, with the flow-through of profits and
Choice “a” is incorrect. In order to be treated as a corporation, an LLC
must make an election to be treated as such.
Choice “c” is incorrect. Only a single-member LLC would be treated as
a sole proprietorship for tax purposes.
Choice “d” is incorrect. An LLC, unless it elects otherwise, will be
treated as a partnership for federal tax purposes.
Points 10 of 10
5. Question: Trish is a promoter for Alpha Corporation. Generally, Trish is
personally liable for any pre-incorporation contract until Alpha:
Answer: Releases Trish from liability.

Ratifies the contract.

Rejects the contract.

Assumes the pre-incorporation contract by
Instructor Choice “d” is correct. In a novation, a new party (the corporation) is
Explanation: substituted for an old party (the promoter) in the contract. All parties
must agree to the novation.
Choice “a” is incorrect. The corporation does not have the power to
release Trish; the other party to the contract must agree to the release
as well.
Choice “b” is incorrect. Technically, only a principal can ratify a
contract made by an agent. Because the corporation is not in
existence when the promoter acts, the promoter cannot be acting on
the corporation’s behalf. Thus, the corporation is not the promoter’s
principal and cannot “ratify” the promoter’s contract. Instead, the
corporation is said to "adopt" a promoter's contract. In any case,
ratification/adoption does not release the promoter from liability;
instead, it merely makes the corporation liable along with the promoter.
Choice “c” is incorrect. Rejection of the contract does not affect the
promoter’s liability.
Points 10 of 10
6. Question: A registered agent for a corporation incorporated in Delaware would:

Your Agree to buy stock in a corporation before

Answer: incorporation.
Be personally liable for all pre-incorporation
Have legal documents served on it on behalf of
the corporation, if the corporation is sued.
Take the preliminary steps in organizing the
Instructor Choice “c” is correct. A registered agent is an agent for the corporation
Explanation: who would accept service of process in the event the corporation is
involved in a lawsuit.
Choice “a” is incorrect. This describes a stock subscription, and there
is no requirement that a registered agent must agree to purchase
Choice “b” is incorrect. This describes the liability of a promoter and
the registered agent need not have acted as a promoter for the
Choice “d” is incorrect. Promoters or the incorporators are responsible
for organizing the corporation.
Points 10 of 10
7. Question: In a legal action, a shareholder of Smackey, Inc. might be personally
liable for the company’s debts if:
Answer: Smackey is overcapitalized.
Smackey’s articles of incorporation allow for more
than one class of stock.
The shareholder’s personal interests are
materially commingled with Smackey’s CORRECT
All of the above.
Instructor Choice “c” is correct. Commingling shareholders’ personal assets and
Explanation: other interests with the corporation's interests is a breach of corporate
formalities designed to create and keep the corporation as a separate
legal entity. Thus, it is a ground for reaching the shareholder's
personal assets (i.e., piercing the corporate veil).
Choice “a” is incorrect. Overcapitalization is acceptable.
Undercapitalization at the time of formation may cause the shareholder
to be personally liable.
Choice “b” is incorrect. It is acceptable for most corporations to have
more than one class of stock and this does not affect shareholder
Choice “d” is incorrect as it includes choices “a” and “b”, both of which
are incorrect per the above explanations.
Points 10 of 10
8. Question: Telecom, Inc., issues bonds, which are also known as:

Answer: Collateral instruments.
Debt securities.
Equity securities.

Instructor Choice “b” is correct. Bonds are also referred to as debt securities.
Choice “a” is incorrect. A collateral instrument is a writing that
evidences a right to the payment of money and may be transferred,
such as a check, note, or draft.
Choice “c” is incorrect. Equity securities are instruments representing
an investment in a corporation, such as stock.
Choice “d” is incorrect. An indenture is an agreement or deed between
parties specifying the terms of any debt. This should not be confused
with debentures, which are certificates evidencing unsecured debt.
Points 10 of 10
9. Question: Texas Cat Chow, Inc. has only four shareholders. Each shareholder
will have the right to approve:
Answer: The hiring of an officer.

The declaration of corporate dividends.

An amendment to the corporation’s articles of
incorporation changing the duration for which CORRECT
the corporation was formed.
All of the above.
Instructor Choice “c” is correct. Shareholders have the right to vote on all
Explanation: fundamental corporate changes, including amendments to the articles
of incorporation.
Choice “a” is incorrect. The hiring of officers is a right that the directors
Choice “b” is incorrect. Directors have the sole discretion to declare
Choice “d” is incorrect as it includes “a” and “b”, both of which are
incorrect per the above explanations.
Points 10 of 10
10 Question: Patti is a director of Smackey, Inc. As a corporate director, Patti is:
Answer: A fiduciary.
An agent.

A principal.

A trustee.
Instructor Choice “a” is correct. Each director owes the corporation fiduciary
Explanation: duties and must act in the best interest of the corporation.
Choice “b” is incorrect. Absent a vote giving a director authority to act
on behalf of the corporation, a director is not an agent of the
corporation and cannot bind the corporation in contract.
Choice “c” is incorrect. A principal is the person on whose behalf an
agent acts. The corporation does not act on behalf of the directions,
and while the directors may delegate some of their power to agents of
the corporation, the agents act on behalf of the corporation (i.e., the
corporation is the principal) and not the directors.
Choice “d” is incorrect. Directors are not trustees of the corporation, as
they do not hold legal title to anything belonging to the corporation for
the benefit of another.
Points 10 of 10