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Question 1
A shareholder who subscribes to par-value stock before the formation of a corporation:
Correct While shareholders generally enjoy limited liability, an instance in which they may face suit is when they have failed to pay the full value of the stock they are issued in an initial issuance. Thus, when a shareholder subscribes (buys into) a stock issuance, she is liable for the full face (i.e. par) value of the stock and must pay that amount or be liable for any underpayment. The amount of the difference between the stock's par value and the amount the shareholder paid is known as 'water' and represents the shareholders liability if the firm sues to recover the difference.
Incorrect! While shareholders generally enjoy limited liability, an instance in which they may face suit is when they have failed to pay the full value of the stock they are issued in an initial issuance. Thus, when a shareholder subscribes (buys into) a stock issuance, she is liable for the full face (i.e. par) value of the stock and must pay that amount or be liable for any underpayment. The amount of the difference between the stock's par value and the amount the shareholder paid is known as 'water' and represents the shareholders liability if the firm sues to recover the difference.
Correct
Incorrect!
Correct
Incorrect!
Correct
Incorrect!
Question 2
A shareholder might incur personal liability for corporate obligations if he or she:
Correct
Incorrect!
Correct This is another example of the 'watered stock' problem. While answer C looks tempting, it is not correct. Retained earnings are exactly what the corporation is supposed to pay dividends out of. However, if receiving a dividend, whether out of retained earnings or otherwise, results in the corporation facing insolvency, then the shareholders who knew of the pending insolvency will be held liable for the amount of the dividend.
Incorrect! This is another example of the 'watered stock' problem. While answer C looks tempting, it is not correct. Retained earnings are exactly what the corporation is supposed to pay dividends out of. However, if receiving a dividend, whether out of retained earnings or otherwise, results in the corporation facing insolvency, then the shareholders who knew of the pending insolvency will be held liable for the amount of the dividend.
Correct
Incorrect!
Correct
Incorrect!
Question 3
Which of the following shareholders might be liable for back wages to employees of a close corporation that has gone bankrupt?
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Incorrect!
Correct In a close corporation, it is not unheard of for a court to hold the top ten largest shareholders of a company personally liable for back wages owed to employees. There is no particular evidence indicating why ten is an appropriate number. However, in most close corporations, it is not uncommon that the top ten shareholders would represent the vast bulk of the company's outstanding shares.
Incorrect! In a close corporation, it is not unheard of for a court to hold the top ten largest shareholders of a company personally liable for back wages owed to employees. There is no particular evidence indicating why ten is an appropriate number. However, in most close corporations, it is not uncommon that the top ten shareholders would represent the vast bulk of the company's outstanding shares.
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Incorrect!
Correct
Incorrect!
Question 4
A court may justify the determination that the top ten shareholders are liable for the employees' wages because:
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Incorrect!
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Incorrect!
Correct Answers A, B, and D are all accurate as to the reasons why a court may want to hold the top ten corporate shareholders responsible. However, justifying such an act of the court, is based on the fact that the top ten shareholders were so close to the company, and had such a financial stake in its interest that they are implied to have knowledge of any and all of the company's obligations, and are therefore responsible for those debts.
Incorrect! Answers A, B, and D are all accurate as to the reasons why a court may want to hold the top ten corporate shareholders responsible. However, justifying such an act of the court, is based on the fact that the top ten shareholders were so close to the company, and had such a financial stake in its interest that they are implied to have knowledge of any and all of the company's obligations, and are therefore responsible for those debts.
Correct
Incorrect!