BUS-311 PRACTICE EXAM QUESTIONS

Lesson 1: Entrepreneurialism and Sole Proprietorships

Question
Brooke wants to create a business selling flowers. She is not interested in incorporating
the business. She just wants to run her business and pay any taxes on any profits that she
makes. What type of business can Brooke create and how does she go about doing it?

Question
Bradley starts a comic book store. He buys inventory, rents a store front, applies for all
the necessary business licenses, and obtains an Employee Identification Number from the
IRS. Other than that, he does not file any paperwork with the state. What type of business
has Bradley created? Is there anything else that he needs to file?

Lesson 2: General Partnerships

Question
Bob and Charlie are owners of BoChar, a partnership. Bob decides to go with a particular
supply company, Sammy Supplies. He enters into a contract on behalf of the partnership.
Charlie, upset that Bob made this decision, calls Sammy and informs them that BoChar
will not be doing business with them. Sammy Supplies brings a lawsuit against Bob and
Charlie for breach of contract. Who is liable here?

Lesson 3: Limited Partnerships

Question
Gerry and Lance decide to form a Limited Liability Partnership. Gerry and Lance decide
that Gerry will run the day-to-day operations. Larry wants to just gain the benefits of the
profits. They buy a store, fund their capital accounts, buy inventory, create a partnership
agreement, register their LLP with the state, and open their business. Sam comes into
their business one day and slips on a puddle left on the floor. He sues Gene and Larry for
negligence. What, if any, is the liability of both Gene and Larry? Why?

Lesson 4: LLC’s

Question
Alex, Bob, Charlie, and Dan start a limited liability company selling widgets. They file
the Articles of Organization and otherwise comply with the state’s requirements for
starting an LLC. Alex and Bob, pursuant to the Articles of Organization, search out
suppliers for their business. They decided to go with Wid-Gets, a company who will
supply them with all of the parts to assemble the widgets. They signed a four-year
contract with Wid-Gets. Unfortunately, the company that Alex, Bob, Charlie, and Dan
started did not do as well as everyone expected. After a year, the company became
insolvent. Everyone decided to shut the business down to prevent anymore losses. Wid-
Gets sues for breach of contract. What, if any, liability does Alex, Bob, Charlie, and Dan
face?

Lesson 5: Corporate Formation

McDonald’s, a publicly traded C-corporation, had a very profitable year in 2002. It

had net income of $893 million and paid $0.24 per share in dividends. Stephanie
owned 20,000 shares of McDonald’s stock that year and thus received $4,800. Who is
taxed on their income in this case?

Betty and her sister Betsy are fans of natural ice cream. To introduce others to their
passion, they want to open an ice cream parlor to sell their creations. They come to
you for advice on what type of form would be best for their budding company. One
of their potential investors is a former classmate (a Chinese citizen and resident) of
Betty’s from her MBA days at Wharton. In addition, one of Betsy’s former
classmates from Harvard Law School is the general counsel of a major food
products company. The company may have an interest in investing in the business.
Would you recommend that the sisters form an S-corporation with which to manage
their business? Explain.

Question
Sally comes to your office seeking to incorporate her business. You help her by drafting
the articles of incorporation and notarizing her signature. She also writes out a check for
the filing fees. After giving you the articles and the check, you give it to the attorney in
charge who puts it in a pile of envelopes that he intends to mail out. The attorney mailed
out the pile of envelopes, but Sally’s envelope seemed to have gotten lost and was never
mailed out. She proceeded to run her business as a corporation. About a month later,
James walks into her business and slips on a puddle by the door. They bring suit against
Sally for the accident. Sally claims she is protected from an individual suit because her
business is incorporated. James argues that the business was never properly incorporated
and, as such, Sally is personally liable. What would be Sally’s best argument regarding
her personal liability?
 The Corporate Form
Question
Al and Bob have been discussing starting a business for years. Both of them want to
create a structure whereby they will be shielded from any potential liability down the
road. Al, after watching a television show on the laws surrounding corporations, decides
that having their business incorporated is the best option. He brought this idea to Bob.
Bob did his research and agreed. However, both Al and Bob were confused about what is
required to be filed and what should be included in that filing. They came to you for
guidance. They asked you what they need to file, who they file it with, and what should
be contained in the filing? What do you advise them?

Open vs. Closed Corporation

Question
Brett and Caroline want to create a corporation. They want to be the sole shareholders
and do not want anyone to be able to buy in. What type of corporation should they create
and why?

Question
Jeff and Laurie want to start a business and incorporate it. Their biggest concern,
however, is that they will be taxed twice: once on the corporation’s profits and another
time on their profits from the corporation. They come to you seeking advice regarding
what they can do to prevent double taxation. What do you advise them and what
requirements do they need to follow?

Question
Tom is the sole shareholder of Tom’s Taxi Service, Inc. Tom hired Fred to drive one of
the taxis. One day, Fred, while driving a taxi, got into an accident (due to his negligence)
and his passenger, Sal, was injured. Sal sues for his injuries. Who can Sal name as the
defendant(s) in the lawsuit?

Lesson 6: Corporate Finance

Question
Penny Pushers, Inc., a closely held corporation, has had such success over the last couple
of years that they intend a huge overhaul and expansion of the company’s business. The
problem: they need money. Name and define two ways by which they can finance their
expansion plans.
Lesson 7: Franchises

No practice questions are available at this time.

Lesson 8: Corporate Management

Question
Sam is the CEO of Widgets, Inc., a publicly traded corporation. After the most recent
meeting, Sam learns that Widgets will be entering into their biggest contract—a contract
to supply the federal government with all of their Widgets. Sam tells Wilson, his friend,
that the stock is expected to triple in the next two days and that Wilson should buy
several shares of stock. Wilson agrees and buys stock. It tripled and Wilson sells it
making a huge profit. The sale of his shares made the stock price plummet. Wilson splits
his profits with Sam. Did Sam do anything wrong? What did he do wrong? Did he breach
any duties to the corporation?

Question
Samuel, a member on the Board of Directors of Frogs, Frolics, and Frollies, Inc., recently
invested some of the company’s money in the development of a new technology to
manufacture computer hard drives at a cheaper and faster rate. He did this after
consulting with the Board. No one in the company had any experience with hard drives or
even computers for that matter. They just knew that technology yielded a lot of money to
a lot of people. Because no one knew how to market this technology and because they
had no experience with using this technology, Frogs, Frolics, and Frollies lost millions of
dollars. The shareholders sue Samuel and the Board of Directors claiming that they are
personally liable. Samuel and the Board assert the Business Judgment Rule. Would
Samuel and the Board avoid liability on the Business Judgment Rule or would the
shareholders prevail? Why?

Dividends

Question
Jaxsons, Inc. recently created a line of ice cream that has produced international fame.
Because of the success of this line of ice cream, the Board of Jaxsons decides to
separately incorporate the line of ice cream into a separate company. Because of the
profits and loyalties that they have to their shareholders, Jaxsons distributes shares of the
newly incorporated company to all of its shareholders. What is this distribution called?
How could the shareholders make profit on these new stocks?
 The Fiduciary Duty of Care

Frank is a director of Ex, Inc., which owns a Major League Baseball team called the
San Juan Expos. Recently, Ex, Inc. has been looking to move the Expos to the
mainland U.S. It just so happens that Frank owns a baseball stadium in Charlotte,
N.C. Frank convinces the board to have Ex buy the stadium for $200 million. Later,
the shareholders bring an action against Frank and the other directors on the
board, claiming that the deal was unfair to the corporation. What will Frank need to
show to prevail in the lawsuit?

Oscar and his partner Tony own a computer consulting firm, Website, Inc. One of
their clients (Fred) owns a very profitable company that does medical billing for
doctors and hospitals in seven states. After 20 years in the business, Fred is ready to
retire and he is looking for someone to take over his business. Fred thinks Website
would make a good successor company and approaches Oscar about buying the
business. Oscar feels he can successfully run the business, given his technology
background; therefore, he buys it for himself. Does Oscar’s conduct violate any
corporate rules? Explain.

Norman is a director of “Drive Me Crazy Co.,” a cab company. Because he doesn’t

want to spend a lot of company money, he hires a cab driver as Chief Executive
Officer, who has no experience in managing anything. Norman figures that if you
can drive a cab, you can probably manage the company. Derek, a shareholder,
thinks that this is a lousy idea and asks you if Norman’s conduct can be challenged
on any basis. Can it?

Lesson 9: Mergers and Acquisitions

Burger Queen is a fast food chain with franchises all over the state of Fredonia. One
day, Vic sues Burger Queen for $100 million because he bit into a rock with a
million-year-old mosquito fossil preserved in it while lunching at a Burger Queen
one not-so-fine day. As jurors in Fredonia are known to be particularly finicky,
Burger Queen knows that it is in trouble. Knowing its competition's predicament,
MacRonalds, another fast food chain, decides to buy out Burger Queen. Instead of
buying out the name 'Burger Queen,' MacRonalds buys out all of the Burger Queen
franchises and the contracts of all of its employees and converts all of the franchise
stores into MacRonalds franchises. After the transaction, Vic brings his lawsuit
against MacRonalds. Is MacRonalds liable to pay for Vic's judgment, if any?
Question
Big Corp. is looking to acquire Little Corp. Because it would be cheaper to borrow
money, Big Corp. decides that it will finance the transaction through a loan. Big Corp.,
after completing the deal, has accumulated a debt of $1 million. What is the debt that Big
Corp. has known as? What is the amount of money that Big Corp. has to pay each month
to cover the loan called?

Lesson 10: Securities

Cook The Books, Inc. is preparing its initial public offering. In its prospectus that it
prepares for the SEC, Cook The Books writes “It is anticipated that our business
will increase at least three-fold over the next year because we have such great
employees and such a great idea; although we certainly cannot guarantee this.” Do
you think the SEC might have an objection to this statement? Explain.

Question
Sosa, Inc. is contemplating going public and is preparing for its initial public offering
(“IPO”). It knows that one of the first requirements of an IPO is disclosure. What is
disclosure and name at least 3 things that must be disclosed to investors during the
offering process.

Securities markets and the SEC

Question
Jason just learned from his friend, John, that Flowers Corp. is being acquired by Plants
Corp. This will result in the stock rising over 300%. John works for Flowers Corp. Jason
buys stock in Flowers Corp. and makes a significant amount of money. What is this
called? Is this allowed? If not, what prohibits this transaction?

Question
James, a director and shareholder of Plants and Accessories, Corp. (“PAC”), found out
some wonderful information regarding the company. In fact, this information will likely
cause the company’s shares to increase dramatically. James is excited because he is
hoping to sell some shares to get some extra money for renovations to his house. He
comes to you. He wants to avoid any allegations of insider trading. What advice do you
give to him?
Lesson 11: Employment Law

No practice questions are available at this time.

Lesson 12: Employment Discrimination

No practice questions are available at this time.