Bar Exam (Uniform) Quiz: Entity Formation

20 questions · exam conditions

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Entity FormationQuestion 1 of 20

An incorporator files articles of incorporation for a new company with the secretary of state. The articles fully comply with all statutory requirements and are accepted for filing on May 10. The articles name three initial directors. The directors, however, do not hold an organizational meeting until July 15. At that meeting, they adopt bylaws and elect officers. On June 20, before the organizational meeting was held, one of the directors entered into a contract on behalf of the corporation.

What was the legal status of the company on June 20? Select one.

It was a de jure corporation, but it lacked the power to enter into contracts until bylaws were adopted.

It was a de jure corporation with the full power to enter into contracts.

It was a de facto corporation because the organizational meeting had not yet been held.

It was not a corporation; its existence was contingent on the organizational meeting.

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Bar Exam (Uniform) Quiz

Bar Exam (Uniform) Quiz: Entity Formation

Practice Entity Formation in Bar Exam (Uniform) with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Entity Formation, giving you a quick way to practice the rules, question types, and explanations that matter most for Bar Exam (Uniform).

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

What was the legal status of the company on June 20? Select one.

It was a de jure corporation, but it lacked the power to enter into contracts until bylaws were adopted.
It was a de jure corporation with the full power to enter into contracts. (correct answer)
It was a de facto corporation because the organizational meeting had not yet been held.
It was not a corporation; its existence was contingent on the organizational meeting.

Explanation: The correct answer is B. Under the MBCA and typical state statutes, corporate existence begins when the articles of incorporation are filed by the secretary of state. At that moment, it becomes a de jure corporation with all the powers of a corporation, including the power to contract. The organizational meeting is an important internal governance step to adopt bylaws, elect officers, etc., but it is not a prerequisite for corporate existence or its legal powers once the articles are filed. Answer A is incorrect because the adoption of bylaws is not a condition precedent to the corporation's power to contract. Answer C is incorrect because the corporation's status is de jure, not de facto, due to the proper filing. Answer D is incorrect as corporate existence is not contingent on the organizational meeting.

Question 2

An attorney is preparing articles of incorporation for a client's new business under a jurisdiction that has adopted the Model Business Corporation Act (MBCA). The draft articles include the corporation's proposed name, which is distinguishable from other registered names, and the number of shares the corporation is authorized to issue. The articles also name the person who will serve as the initial CEO.

Before the articles are submitted for filing, what additional information must be included to satisfy the minimum mandatory requirements of the MBCA? Select one.

The names and addresses of the initial directors.
The name and street address of the corporation's registered agent. (correct answer)
A statement of the corporation's purpose, such as 'to engage in any lawful act or activity'.
The par value of the authorized shares of stock.

Explanation: The correct answer is B. The MBCA sets forth mandatory provisions that must be included in the articles of incorporation. These are: (1) the corporate name; (2) the number of shares the corporation is authorized to issue; (3) the street address of the corporation's initial registered office and the name of its initial registered agent at that office; and (4) the name and address of each incorporator. The draft is missing the registered agent information. Answer A is incorrect because naming the initial directors is optional under the MBCA. Answer C is incorrect because a statement of purpose is also optional; if omitted, the corporation is presumed to have the purpose of engaging in any lawful business. Answer D is incorrect because the MBCA has eliminated the concept of par value, so it is not a required element.

Question 3

A promoter signed a one-year office lease on behalf of 'a corporation to be formed.' Two weeks later, the promoter properly formed the corporation by filing articles of incorporation. The new corporation's board of directors was aware of the lease, and for the next three months, the corporation occupied the office space and paid the monthly rent to the landlord. At the end of the third month, the corporation defaulted on the lease and vacated the premises.

Is the corporation liable for the remaining nine months of the lease? Select one.

Yes, because the corporation implicitly adopted the lease by accepting its benefits. (correct answer)
No, because only the promoter is liable for pre-incorporation contracts.
No, because the corporation did not exist when the lease was signed, so the contract is void.
Yes, but only if the board passed a formal resolution to ratify the lease agreement.

Explanation: When you encounter questions about promoter liability and pre-incorporation contracts, focus on how corporations can become bound by agreements made before their formation. The key concepts are adoption and ratification—two ways a corporation can assume responsibility for promoter contracts. The corporation is liable because it implicitly adopted the lease through its conduct. Adoption occurs when a corporation accepts the benefits of a pre-incorporation contract with knowledge of its terms. Here, the board knew about the lease, and the corporation occupied the space and paid rent for three months. These actions demonstrate clear acceptance of the contract's benefits, creating corporate liability for the entire lease term, including the remaining nine months. Let's examine why the other options are incorrect. Option B is wrong because while promoters are initially liable for pre-incorporation contracts, corporations can become liable through adoption or ratification—it's not an either/or situation. Option C incorrectly suggests the contract is void due to the corporation's non-existence at signing. However, pre-incorporation contracts aren't void; they're typically binding on the promoter and can later bind the corporation through proper acceptance. Option D is incorrect because formal ratification isn't required—adoption can occur through conduct, as happened here when the corporation knowingly accepted the lease benefits. Remember this pattern: when a corporation accepts benefits from a pre-incorporation contract with knowledge of its terms, the corporation becomes liable for the entire contract, not just the portion performed. Look for factual scenarios showing the corporation's knowing acceptance of contract benefits.

Question 4

You are representing a client who, along with a partner, filed a certificate of organization to form a new LLC. The certificate was accepted by the state. The two members now need to formalize their internal governance structure. Your client prefers a structure where day-to-day business decisions are made by a single person they designate, who may or may not be one of the members, while major decisions require a member vote.

Which of the following should you advise your client to establish in the LLC's operating agreement to achieve this governance structure? Select one.

A member-managed structure with supermajority voting requirements.
A general partnership agreement to supplement the LLC filing.
A board of directors, mirroring the corporate governance model.
A manager-managed structure, naming a specific individual as the manager. (correct answer)

Explanation: When you encounter LLC governance questions, focus on the fundamental distinction between member-managed and manager-managed structures. This choice determines who has authority to bind the LLC and make operational decisions. Your client wants a hybrid structure: one designated person handling day-to-day operations, with members retaining control over major decisions. This perfectly describes a manager-managed LLC. In this structure, the operating agreement can designate a specific individual as manager (who doesn't have to be a member) to handle routine business matters, while reserving major decisions like amendments, dissolution, or significant transactions for member approval. Answer D accomplishes exactly this goal. Answer A creates a member-managed structure where all members participate in management, which contradicts your client's desire for centralized daily operations. Supermajority voting requirements don't solve the fundamental structural issue of who manages day-to-day affairs. Answer B is legally incorrect and impractical. You cannot overlay a general partnership agreement onto an LLC structure - they're different entity types with different legal frameworks and filing requirements. Answer C misapplies corporate governance concepts. LLCs don't have boards of directors - that's a corporate structure. LLCs use either member-managed or manager-managed frameworks, not corporate governance models. Remember this key distinction: member-managed means all members can bind the LLC and participate in management, while manager-managed centralizes operational authority in designated managers. When you see questions about separating daily operations from major decision-making in LLCs, manager-managed structure is typically the answer.

Question 5

Three partners in a general partnership that designs websites decide to convert their business into an LLC to gain liability protection. They continue to operate the business as before, telling clients they are now an 'LLC' and using 'LLC' on their invoices. However, their attorney, through an oversight, fails to file the certificate of organization with the state. The business subsequently breaches a contract with a new client who signed the contract after the partners began holding themselves out as an LLC.

If the new client sues the three partners personally, what is their best defense? Select one.

De facto LLC, because they had a good faith belief they had formed an LLC and acted accordingly.
The breach of contract was a business liability, not a personal one.
The conversion from a partnership to an LLC automatically provides liability protection.
LLC by estoppel, because the client dealt with the business as if it were an LLC. (correct answer)

Explanation: When you see a question about business formation failures, focus on doctrines that protect third parties who reasonably rely on a business's representations about its legal status. Here, the partners failed to properly form an LLC because their attorney didn't file the required certificate of organization. However, they held themselves out as an LLC to clients, including the new client who relied on this representation when entering the contract. This creates the perfect scenario for "LLC by estoppel" - a doctrine that prevents the partners from denying their LLC status when a third party reasonably relied on their representations. The client dealt with what they believed was an LLC based on the partners' own statements and documentation. Option A is incorrect because "de facto LLC" isn't a recognized legal doctrine that provides liability protection when formation requirements aren't met. Option B misses the point entirely - in a general partnership (which is what they still legally are), partners do face personal liability for business debts, so this defense fails. Option C is wrong because the conversion was never completed due to the filing failure, so no automatic protection exists. The key distinction is that estoppel protects the third party's reasonable reliance, while concepts like "de facto" entities would protect the business owners themselves. Since the client reasonably believed they were contracting with an LLC based on the partners' representations, the partners are estopped from claiming they're not an LLC. Remember: estoppel doctrines typically favor the innocent third party who relied on representations, not the party who made incomplete or false representations.

Question 6

Two entrepreneurs decided to form a corporation to operate their new software business. They properly drafted articles of incorporation that included the corporate name, the number of authorized shares, the name of the registered agent, and the agent's address. They mailed the articles with the correct filing fee to the secretary of state's office on June 1. On June 3, before receiving confirmation of filing, they signed a major software licensing agreement with a large client, signing the agreement on behalf of their new corporation. The secretary of state's office officially filed the articles on June 5. The corporation subsequently breached the licensing agreement.

The client has now sued the two entrepreneurs personally for damages arising from the breach of contract. What is the entrepreneurs' strongest defense against personal liability? Select one.

That a de jure corporation existed on June 1 when the articles were mailed.
That a de facto corporation existed on June 3, shielding them from liability.
That the client is estopped from denying the business's corporate status because it dealt with the business as a corporation. (correct answer)
That the contract was automatically adopted by the corporation on June 5 when its existence began.

Explanation: The correct answer is C. The doctrine of corporation by estoppel prevents a third party who dealt with an entity as if it were a corporation from later denying its corporate status to hold the owners personally liable. Here, the client signed an agreement with the business as a corporation, so the client is likely estopped from claiming it was not a corporation. Answer A is incorrect because corporate existence begins upon filing by the state, not upon mailing. Answer B is incorrect because the de facto corporation doctrine, which requires a good faith attempt to incorporate and some use of corporate power, is often held to protect owners only from third parties who were unaware of the corporate status, and has been abolished in many jurisdictions following the MBCA. Estoppel is the stronger and more direct defense against a party who knowingly dealt with the entity as a corporation. Answer D concerns corporate liability (adoption of pre-incorporation contracts), not the personal liability of the entrepreneurs, which is the issue raised by the question.

Question 7

Three individuals decided to form an LLC to operate a catering business. They downloaded a standard operating agreement from the internet, signed it, and opened a bank account in the name of "Gourmet Group, LLC." They immediately began catering events and depositing payments into the LLC bank account. One month later, during an event, a guest suffered severe food poisoning and sued the three individuals personally for negligence. During discovery, it was revealed that the individuals had forgotten to file the certificate of organization with the state.

What is the likely outcome regarding the personal liability of the three individuals for the guest's injuries? Select one.

They will be shielded from personal liability because they had a signed operating agreement and were acting as an LLC.
They will be shielded from personal liability under the doctrine of LLC by estoppel because they held the business out as an LLC.
They will be held personally liable because an LLC does not legally exist until a certificate of organization is filed with the state. (correct answer)
They will be held personally liable only if the guest can prove they intentionally failed to file the certificate of organization.

Explanation: The correct answer is C. Formation of a limited liability company (LLC) requires the filing of a certificate or articles of organization with the designated state authority. Until this filing occurs, the LLC has no legal existence, and the liability shield does not attach. The individuals are therefore operating as a general partnership by default, making them personally liable for the business's torts. Answer A is incorrect because an operating agreement, while important for governance, does not create the LLC or its liability shield. Answer B is incorrect because LLC by estoppel is a doctrine typically used to prevent a business or a third party that has dealt with the business as an LLC from denying its existence; it is generally not a defense against a tort claimant who did not previously deal with the business. Answer D is incorrect because their intent is irrelevant; the failure to file is what prevents the formation of the liability shield, regardless of whether it was intentional or negligent.

Question 8

An inventor, seeking to protect her personal assets, attempted to form a corporation online to market her new product. She paid a fee to a web-based service, which she believed had filed the necessary articles of incorporation in her state. The state in question has a statute that largely follows the Model Business Corporation Act, which has abolished the de facto corporation doctrine. Believing the corporation was formed, she conducted business for a year, holding the business out as a corporation. She later discovered the web service had never actually filed the articles. During that year, the business defaulted on a supply contract with a supplier who believed it was dealing with a corporation.

If the supplier sues the inventor personally for the contract debt, what is the legal status of the inventor's business and her resulting liability? Select one.

A de jure corporation was formed because the inventor made a good faith effort to incorporate.
A de facto corporation was formed, protecting the inventor from personal liability.
No corporation was formed, but the supplier may be estopped from denying corporate existence, thereby protecting the inventor. (correct answer)
No corporation was formed, and the inventor is personally liable because she was acting as a promoter for a non-existent corporation.

Explanation: The correct answer is C. Because no articles were ever filed, no corporation (de jure or de facto) was formed. However, the doctrine of corporation by estoppel may apply. This doctrine prevents a third party (the supplier) who deals with a business as if it were a corporation from later claiming it is not a corporation in order to hold the owners personally liable. Since the supplier believed it was dealing with a corporation, it is likely estopped from denying that status. Answer A is incorrect because a de jure corporation requires proper filing. Answer B is incorrect because the fact pattern states the jurisdiction has abolished the de facto corporation doctrine. Answer D is plausible, but corporation by estoppel provides a direct defense for the inventor against the supplier's claim, making C the best answer.

Question 9

An individual properly formed a corporation, becoming its sole shareholder and director. He was meticulous about filing the articles of incorporation but neglected all other corporate formalities. He never adopted bylaws, never held director or shareholder meetings, and paid business expenses directly from his personal bank account. A trade creditor extended a large amount of credit to the corporation, which the corporation failed to repay. The creditor has now sued the sole shareholder personally, seeking to pierce the corporate veil.

Which of the following facts is most critical to the court's decision on whether to pierce the corporate veil? Select one.

The fact that the shareholder commingled personal and corporate funds. (correct answer)
The fact that the corporation failed to adopt bylaws or hold meetings.
The fact that the corporation had only one shareholder.
The fact that the corporation was properly formed by filing articles of incorporation.

Explanation: When you encounter a piercing the corporate veil question, courts apply a two-prong test: (1) there must be such unity of interest between the corporation and individual that separate personalities no longer exist, and (2) an inequitable result would follow if the corporate form is respected. The key is identifying which factor most strongly demonstrates this "unity of interest." The commingling of personal and corporate funds (Answer A) is the most critical factor here. When a shareholder pays business expenses directly from personal accounts, it demonstrates a complete disregard for the separate legal identity of the corporation. This directly undermines the fundamental principle that corporations are distinct legal entities, showing the shareholder treats the corporation as merely an extension of himself rather than a separate business. Answer B is wrong because while failing to adopt bylaws and hold meetings shows poor corporate governance, these procedural failures alone rarely justify piercing the veil. Courts generally require more substantial evidence of abuse. Answer C is incorrect because having a single shareholder is perfectly legal and common - many legitimate corporations have sole owners who maintain proper corporate formalities. Answer D actually works against piercing since proper formation demonstrates the corporation was validly created as a separate entity. Remember this hierarchy: financial commingling and undercapitalization are typically the strongest factors for piercing the corporate veil, while procedural failures and structural characteristics (like being a close corporation) are secondary considerations. Focus on actions that blur the line between personal and corporate identity.

Question 10

You are representing a client who is forming a limited liability company (LLC) with two partners. The client and her partners have properly filed a certificate of organization with the secretary of state. However, they have not yet drafted or signed an operating agreement. One of the partners contributed 70% of the initial capital, while your client and the other partner each contributed 15%. The business is profitable in its first year, and a dispute arises over how to distribute the profits.

In the absence of an operating agreement, how will profits and losses likely be allocated under the default rules of most LLC statutes? Select one.

In proportion to the members' capital contributions.
Equally among the members, regardless of their capital contributions. (correct answer)
At the discretion of the member who made the largest capital contribution.
The profits cannot be distributed until a formal operating agreement is adopted.

Explanation: The correct answer is B. Most LLC acts, including the Uniform Limited Liability Company Act (ULLCA), provide default rules that apply when an operating agreement is silent or nonexistent. A key default rule is that profits and losses are allocated equally among the members, not in proportion to capital contributions. Answer A reflects the default rule for general partnerships in some jurisdictions, but not typically for LLCs. Answer C is incorrect as no single member has unilateral discretion over distributions absent a provision in an operating agreement. Answer D is incorrect because the absence of an operating agreement does not prevent the LLC from functioning or distributing profits; it simply triggers the application of statutory default rules.

Question 11

A client formed a corporation named 'Tech Solutions Inc.' five years ago. The articles of incorporation stated the corporate purpose was 'to develop and sell computer software.' The corporation has now decided to expand its business into manufacturing computer hardware. The board of directors approved the expansion and entered into a large contract to purchase a hardware manufacturing facility. A shareholder has sued, claiming the contract is invalid because it is outside the corporation's stated purpose in its articles.

What is the likely outcome of the shareholder's lawsuit to invalidate the contract? Select one.

The lawsuit will succeed, because corporate acts beyond the scope of the purpose clause in the articles are void.
The lawsuit will succeed, but only if the shareholder can prove the corporation will lose money on the hardware venture.
The lawsuit will fail, because the purpose clause 'to develop and sell computer software' is broad enough to include hardware manufacturing.
The lawsuit will fail, because under modern statutes, an ultra vires act cannot be used to invalidate a contract with a third party. (correct answer)

Explanation: When you encounter a question about corporate actions that exceed the stated purpose in the articles of incorporation, you're dealing with the doctrine of "ultra vires" acts. Historically, corporations could only engage in activities specifically authorized by their charter, but modern corporate law has significantly reformed this area. Under contemporary corporate statutes, including the Model Business Corporation Act adopted by most states, ultra vires acts cannot be used to invalidate contracts between the corporation and third parties. This rule protects innocent third parties who rely on the corporation's apparent authority to enter contracts. The hardware manufacturer here had no reason to investigate whether Tech Solutions' purchase exceeded its corporate purpose, and the law protects their legitimate expectations. Answer choice A reflects outdated law - the traditional rule that ultra vires acts were automatically void has been largely abolished. Choice B incorrectly suggests that profitability determines validity; ultra vires challenges aren't about business wisdom but about corporate authority. Choice C attempts to interpret the purpose clause broadly, but even if the clause were narrow, it wouldn't matter under modern statutes. The correct answer is D because modern corporate law prioritizes third-party protection over strict adherence to corporate purposes. While shareholders might still challenge ultra vires acts internally through derivative suits, they cannot void executed contracts with outside parties. Remember this key distinction: ultra vires doctrine still exists internally within corporations, but it cannot be used as a sword against third parties who contract with the corporation in good faith.

Question 12

Before the articles are submitted for filing, what additional information must be included to satisfy the minimum mandatory requirements of the MBCA? Select one.

The names and addresses of the initial directors.
The name and street address of the corporation's registered agent. (correct answer)
A statement of the corporation's purpose, such as 'to engage in any lawful act or activity'.
The par value of the authorized shares of stock.

Question 13

A corporation was properly formed and has been operating for five years. Its articles of incorporation state that 'any sale of corporate real estate requires a supermajority vote of 80% of the shareholders.' The corporate bylaws, which were adopted a year after incorporation, state that 'the sale of corporate real estate requires a simple majority vote of the board of directors.' The board of directors, by a simple majority vote, approved the sale of a significant corporate property to a third party. A minority shareholder who opposed the sale has filed a lawsuit to enjoin it.

Is the shareholder likely to succeed in enjoining the sale? Select one.

No, because the bylaws govern internal corporate affairs and therefore control over the articles.
No, because the board of directors has the inherent authority to manage the corporation's business and assets.
Yes, because the provision in the articles of incorporation controls over the conflicting provision in the bylaws. (correct answer)
Yes, because the sale of a significant corporate asset always requires shareholder approval regardless of what the corporate documents state.

Explanation: The correct answer is C. The articles of incorporation are the foundational, publicly filed document of a corporation. In the hierarchy of corporate governance documents, the articles of incorporation control over the bylaws. If a provision in the bylaws conflicts with a provision in the articles, the articles prevail. Therefore, the 80% shareholder approval requirement is valid and must be followed. Answer A is incorrect because the articles control over the bylaws. Answer B is incorrect because while the board generally manages the business, its authority can be limited by the articles of incorporation. Answer D is incorrect because while the sale of 'all or substantially all' of a corporation's assets requires shareholder approval, the sale of a 'significant' but not 'substantially all' asset does not automatically require it unless specified in the articles, as was done here.

Question 14

Is the shareholder likely to succeed in enjoining the sale? Select one.

No, because the bylaws govern internal corporate affairs and therefore control over the articles.
No, because the board of directors has the inherent authority to manage the corporation's business and assets.
Yes, because the provision in the articles of incorporation controls over the conflicting provision in the bylaws. (correct answer)
Yes, because the sale of a significant corporate asset always requires shareholder approval regardless of what the corporate documents state.

Question 15

What is the likely outcome of the shareholder's lawsuit to invalidate the contract? Select one.

The lawsuit will succeed, because corporate acts beyond the scope of the purpose clause in the articles are void.
The lawsuit will succeed, but only if the shareholder can prove the corporation will lose money on the hardware venture.
The lawsuit will fail, because the purpose clause 'to develop and sell computer software' is broad enough to include hardware manufacturing.
The lawsuit will fail, because under modern statutes, an ultra vires act cannot be used to invalidate a contract with a third party. (correct answer)

Question 16

In the absence of an operating agreement, how will profits and losses likely be allocated under the default rules of most LLC statutes? Select one.

In proportion to the members' capital contributions.
Equally among the members, regardless of their capital contributions. (correct answer)
At the discretion of the member who made the largest capital contribution.
The profits cannot be distributed until a formal operating agreement is adopted.

Question 17

Which of the following facts is most critical to the court's decision on whether to pierce the corporate veil? Select one.

The fact that the shareholder commingled personal and corporate funds. (correct answer)
The fact that the corporation failed to adopt bylaws or hold meetings.
The fact that the corporation had only one shareholder.
The fact that the corporation was properly formed by filing articles of incorporation.

Question 18

Which of the following should you advise your client to establish in the LLC's operating agreement to achieve this governance structure? Select one.

A member-managed structure with supermajority voting requirements.
A general partnership agreement to supplement the LLC filing.
A board of directors, mirroring the corporate governance model.
A manager-managed structure, naming a specific individual as the manager. (correct answer)

Question 19

Two founders of a technology startup decided to incorporate their business. Their attorney prepared articles of incorporation. Due to a clerical error in the attorney's office, the articles listed the number of authorized shares as 1,000 instead of the intended 1,000,000. The articles were filed and the corporation was formed. A year later, the founders want to issue 200,000 shares to a new investor.

What must the corporation do before it can legally issue 200,000 shares to the investor? Select one.

The board of directors must pass a resolution increasing the number of authorized shares.
The shareholders must vote to amend the bylaws to increase the number of authorized shares.
The corporation must create a new class of stock through a shareholder agreement.
The corporation must file amended articles of incorporation with the state to increase the number of authorized shares. (correct answer)

Explanation: When you encounter corporate law questions about share issuance, focus on the distinction between authorized shares (the maximum number the corporation can issue) versus issued shares (what's actually been distributed). This question tests your understanding of what constrains a corporation's ability to issue stock. The corporation currently has only 1,000 authorized shares but wants to issue 200,000 shares. Since authorized shares represent the legal ceiling for issuance, the corporation cannot issue more shares than authorized without first increasing that limit. The number of authorized shares is specified in the articles of incorporation, which is the foundational corporate document filed with the state. To change this fundamental corporate characteristic, the corporation must file amended articles of incorporation with the state after obtaining proper shareholder approval. Answer choice A is incorrect because while board resolutions are needed for many corporate actions, directors alone cannot authorize more shares than permitted by the articles of incorporation. Answer choice B misidentifies the governing document—bylaws typically address internal procedures and governance, not fundamental corporate structure like authorized shares. Answer choice C is wrong because creating a new class of stock doesn't solve the authorized share limitation, and shareholder agreements are contracts between shareholders rather than official corporate documents that affect authorization limits. Remember this key distinction: authorized shares are set in the articles of incorporation (filed with the state), while internal corporate decisions are typically governed by bylaws. When fundamental corporate structure needs changing, you'll likely need to amend the articles.

Question 20

An individual formed a corporation in a jurisdiction that has adopted the Model Business Corporation Act. The articles of incorporation authorize the issuance of 10,000 shares of common stock. At the organizational meeting, the initial directors adopted bylaws, which included a provision stating: 'The corporation shall be authorized to issue up to 50,000 shares of common stock.' A month later, the board approved the issuance of 25,000 shares of stock to a new investor.

Is the issuance of the 25,000 shares a valid corporate act? Select one.

No, because a corporation cannot issue more shares than are authorized in its articles of incorporation. (correct answer)
Yes, because the board of directors has the authority to approve the issuance of stock.
Yes, because the bylaws were adopted after the articles and therefore properly amended the authorization.
No, because a stock issuance of that magnitude requires direct approval from the existing shareholders.

Explanation: When you encounter corporate law questions about stock issuance, focus on the hierarchy of corporate documents and which provisions control when there's a conflict. Under the Model Business Corporation Act, the articles of incorporation serve as the foundational document that establishes the corporation's basic structure and powers. The articles set the maximum number of shares the corporation is authorized to issue, and this authorization cannot be exceeded without formally amending the articles through the proper statutory procedure, which typically requires both board and shareholder approval. Here, the articles authorize only 10,000 shares, making the 25,000-share issuance invalid regardless of what the bylaws say. Answer A correctly identifies this fundamental limitation—corporations simply cannot issue more shares than authorized in their articles. Answer B is wrong because while the board does have authority to approve stock issuances, this authority is limited to shares that are actually authorized. The board cannot exceed the articles' constraints. Answer C reflects a common misconception about the corporate hierarchy. Bylaws cannot override or amend the articles of incorporation simply by being adopted later. The articles are superior to bylaws in the corporate document hierarchy, and amendments to articles require specific statutory procedures. Answer D is incorrect because the problem isn't about shareholder approval requirements for large issuances—it's about exceeding the fundamental authorization limit set in the articles. Remember: Articles of incorporation set the ceiling for authorized shares, and this limit is absolute. Bylaws cannot expand what the articles restrict, regardless of when they're adopted.