Chapter 27: Corporations and Franchising 171

Chapter 27: Corporations and Franchising 171

CHAPTER 27

Corporations and Franchising

KEY POINTS IN THE CHAPTER

· A corporation is created under state law by the filing of articles of incorporation, resulting in the issuance of a charter.

· A corporation is a legal entity, owned by its stockholders. It may hold title to property in its own name, and sue or be sued in its own name.

· Corporations are classified as either public or private, and profit or non-profit.

· Stockholders elect the directors, vote on major issues, and share in corporate profits. Directors establish general corporate policies, hire officers, and declare dividends. Officers handle day-to-day operations.

· Officers and directors are liable to the corporation for negligence and intentional torts. They may be liable to third parties for fraud.

· Corporate existence ends when its term expires (unless it has perpetual existence), when the state revokes its charter, when there is a merger or consolidation, or when the stockholders agree to terminate.

· The corporate form has advantages and disadvantages. The advantages are continuity, ease of transferring ownership using corporate stock, and limited liability of stockholders. Disadvantages include the expense involved in organizing, operating, and terminating; taxation at both the corporate and stockholder levels, and extensive state and federal regulation.

· Franchising is a common type of business arrangement involving the purchase of business know-how, management skills, and a name and/or logo well known to the public. Both state and federal governments regulate the registration and sale of franchises.

CASE PROBLEMS

Read the case problems below. For each problem, answer yes or no, and then explain your answer in the space provided.

1. The directors of the Brennan Corporation were negligent in handling the corporation’s business, and the company lost money. The stockholders then voted to dissolve the corporation. Did the common stockholders have first claim against the assets?

______

2. The Rogers Corporation was organized to manufacture electronic equipment. The board of directors voted (a) to borrow $1,000,000 to expand the company and (b) to go into the plumbing business. Neither actions were authorized by the charter and bylaws. Were the stockholders able to invalidate both of these actions?

______

3. Segal and Finch owned a pizza shop. Business was good and they decided to expand. What would be the advantages of expanding by franchising their business?

______

4. Jones, President of Allen Corp., sold products to Rondo Corp. that Jones knew were defective. Can Rondo hold Jones liable for fraud?

______

MATCHING QUESTIONS

Use the following terms to identify the phrases below. On the line next to each phrase, write the letter of the term that is most closely related to it.

1. _____ The written permission given by stockholders to someone else to “vote their share” for them
2. _____ A type of stock entitled to receive dividends provided that profits are earned
3. _____ The joining of two corporations, with one surviving
4. _____ Stock having a prior right to receive a dividend
5. _____ Exceeding the powers of the corporation
6. _____ The application for permission to incorporate
7. _____ A person having an interest in a corporation
8. _____ The group that sets corporate policy
9. _____ A document showing part ownership of a corporation
10. _____ The part of corporate profits paid to a stockholder
11. _____ A public offer to stockholders to purchase their shares
12. _____ Trading in corporate securities by those with special knowledge / a. Board of directors
b. Preferred stock
c. Dividend
d. Proxy
e. Ultra vires
f. Common stock
g. Stock certificate
h. Stockholder
i. Merger
j. Articles of incorporation
k. Tender offer
l. Insider trading

MULTIPLE-CHOICE QUESTIONS

Circle the letter of the best answer.

1. To organize a private corporation, permission first is required from

a. the courts.

b. the state government.

c. a judge.

d. the federal government.

2. A corporation that is organized in one state and does business there is known in that state as a

a. local corporation.

b. foreign corporation.

c. regional corporation.

d. domestic corporation.

3. The first formal step in incorporating a corporation is drafting and filing the

a. articles of incorporation.

b. company bylaws.

c. stock certificates.

d. minutes of incorporation.

4. The number, type, and nature of stocks issued by a corporation are known collectively as its

a. liquidity factor.

b. stock composition.

c. capitalization.

d. no-par factor.

5. Corporate stock that has a prior claim to dividends over all other classes of stock is called

a. cumulative stock.

b. participating stock.

c. no-par stock.

d. preferred stock.

6. General policy for a corporation is determined by the

a. stockholders.

b. legislature.

c. directors.

d. New York Stock Exchange.

7. Officers of a corporation are hired by

a. the directors.

b. the stockholders.

c. the state.

d. other officers.

8. Most corporations are incorporated for a(n)

a. term of ten years.

b. term of one hundred years.

c. indefinite term.

d. term of seventy-five years.

9. When two corporations join together and a new one is formed, the result is called a(n)

a. merger.

b. joint venture.

c. amalgamation.

d. consolidation.

10. All of the following terminate corporate existence except

a. the end of the corporate term.

b. stockholder agreement.

c. revocation of the corporate charter.

d. a change in ownership.

11. When one corporation buys another corporation, the purchase is called a(n)

a. consolidation.

b. merger.

c. amalgamation.

d. proxy.

12. A corporation organized to operate a state hospital is an example of a

a. public corporation.

b. nonprofit corporation.

c. common stock corporation.

d. municipal corporation.

13. If a corporation organized to build homes began selling used cars instead, the action would be considered

a. sua sponte.

b. de bonis non.

c. ultra vires.

d. inter vivos.

14. In Ohio, an Idaho corporation that does business in Ohio is called a(n)

a. domestic corporation.

b. foreign corporation.

c. public corporation.

d. common stock corporation.

15. Directors of a corporation are elected by the

a. stockholders.

b. state.

c. officers.

d. federal government.

16. A stockholder’s written authorization allowing another person to cast her or his vote is called

a. ultra vires.

b. a stock certificate.

c. a pre-emptive right.

d. a proxy.

17. Nonprofit corporations can be organized to

a. provide charitable services.

b. earn money.

c. operate without a charter.

d. issue stock.

18. The board of directors of a corporation usually is elected for a period of

a. one year.

b. two years.

c. five years.

d. ten years.

19. Two types of private corporations are

a. stock and nonstock.

b. profit and nonprofit.

c. limited and general.

d. common and preferred.

20. All stockholders in a corporation have the right to

a. receive dividends.

b. vote on corporate matters.

c. sell their stock.

d. all of the above.

SHORT-ANSWER QUESTIONS

Read the following paragraph, and then answer the questions in the space provided.

Salerno and Peterson are organizing a corporation in Indiana to manufacture and market solar heating panels. They have chosen the name Icarus, Inc., even though there already is a company in Indiana named Icarus, Ltd., which manufactures sunglasses. They plan to issue 200,000 shares of common stock in the corporation. In drawing up the bylaws, Salerno wants to include a provision that in the event of his death, the corporation will be dissolved.

1. Will Salerno and Peterson be allowed to use the name Icarus, Inc.? Why or why not?

______

2. What are the advantages of organizing this company as a corporation rather than as a partnership?

______

3. Can Salerno insist that the corporation be dissolved in the event of his death?

______

4. Like most corporations, this company will be subject to double taxation. Explain double taxation.

______

5. One year, the corporation failed to pay a dividend. Does Cortillo have a claim against the corporation?

______

6. Describe the ways in which this corporation can be dissolved.

______

7. If Icarus, Ltd., decides to sell its products using distributors who take them on consignment, would this business arrangement be considered a franchise?

______