BUL ch 28

Limited Liability Companies

*offers limited liability of a corp & the tax adv of a partnership* -state law -filed w/ state agency -include LLC in name

A general partnership cannot exist unless a certificate of partnership is filed appropriately in a state.

F

In a sole proprietorship, the owner and the business are entirely separate.

F

The sharing of profits from joint ownership of property is usually enough to create a partnership.

F

Unless a partnership agreement specifies otherwise, profits are shared in the same ratio as capital contributions.

F

A limited partnership has at least: a. one general partner and two limited partners. b. one general partner and one limited partner. c. two general partners and one limited partner. d. one general partner and one limited liability partner.

b. one general partner and one limited partner.

A writing is always necessary to form a partnership.

F

Lora and Bradford start a manufacturing business together without an express written agreement. One of their customers, Jake, is injured by one of their products and files a lawsuit. In determining whether Lora and Bradford are partners, which of the following facts will a court not consider to be an indication that a partnership exists? a. Lora and Bradford have equal rights in managing the business. b. Lora and Bradford share the profits or losses of the business. c. Lora and Bradford jointly own the business. d. Lora and Bradford consult outsiders on business strategy.

d. Lora and Bradford consult outsiders on business strategy.

Dina is a partner in Eastman Technical Group. Dina's dissociation from the partnership will cause the automatic termination of the firm's legal existence. the immediate maturity of all partnership debts. the partnership's buyout of Dina's interest in the firm. the temporary suspension of all partnership business.

the partnership's buyout of Dina's interest in the firm.

Jay is a limited partner in Kappa Sales, a limited partnership. Jay is liable for the firm's debts in no way. in proportion to the total number of partners in the firm. to the extent of his capital contribution. to the full extent of the debts.

to the extent of his capital contribution.

limited partnerships

*at least 1 general partners & 1 or more limited partners* -must be written -filed w/ state office

partnerships

*b/n 2 or more persons to carry on a business for profit* -express or implied -agency law

joint & several liability

*doctrine under which plaintiff may sue the partners togethers or individually* -partner may be held liable even if he did not participate or know

dissolution

*formal termination of partnership* -acts of partners (date or completing an obj) -op of law (unlawful event)-90 days can change nature of business & continue -judicial decree: impractical, loss, fraud

fiduciary relationship

*founded on trust & loyalty* -good faith for the best interest of the partnership -duty of loyalty -duty of care: (acts both a principal & agent)

Limited Liability Partnerships

*limits a partner's liability for other partner's malpractice* -state statutes -filed w/ state agency -include LLP in name -pass-through entity for tax purposes, limits personal liability of the partners -allows professionals to avoid personal liability for the malpractice of other partners, but a partner is still liable for his own negligence

sole proprietorship

*owner is the business* -w/o creating a sep business org -small -employ few -modest profits -not likely to expand significantly

general partner

*partner responsible for the partnership's management & debts*

limited partner

*partner who contributes capital to the partnership but does not participate in daily ops* -no liability for debt beyond amount of capital contributed -unless participates in management act.

partnership by estoppel

*partnership liability imposed by a court on nonpartners* -partners who are not partners hold them out as partners and make reps on 3rd parties who rely on that misrep

dissociation

*severance of the relationship b/n a partner & a partnership* -any time giving notice -actions by others, specified event -can expel a partner by unanimous vote -court may expel for wrongful conduct -entitles the partner to have his interest purchased by partnership -only duty of care continues w/ respect to events that occurred before dissocation (unless winding up occurs)

winding up

*stage of dissolution in which the firm collects & distributes assets & discharges liabilities*

disadv of a sole proprietorship

-burden of all liabilities -opp to raise capital limited to personal funds & funds of those who are willing to make loans -lacks continuity (death- dissolved) -transferred to family members ->new sole prop created

partnership characteristics

-independent entity -sue or be sued -collect judgments -all acg procedures performed in name of entity -partnership property can be held in name of the partnership rather than in name of individuals

rights of partners

-management rights: 1 vote regardless of interest -majority rule: ordinary matters -unanimous consent is req to make basic changes in the nature of agreement -sharing partnership profits & losses: = -compensation -inspection of partnership books: right to complete info -partner's interest in firm: termination-proportionate share of profits & losses -death: heirs get the value -partnership property: may use or posses property only on behalf of the partnership -not a co-owner, no interest -creditors cannot force sale of prop (can ask court)

partnership by agreement

-oral, written (statute of frauds), implied -*articles of partnership: written agreement that sets forth partner rights & obligations*

adv of a sole proprietorship

-owner receives all profits -easier & less costly to start -free to make any decision -pays only income taxes on profits

partnership formation (general)

-partnership by agreement -partnership by estoppel

adv of LLC

-profits pass through the LLC & taxes are paid personally by the owners (members) -corps, partnerships, foreign inv can be LLC members -no limit to # of members: can participate fully in management -managers dont need to be members -liability of members- amount invested -members can decide how to op business through *operating agreement (LLC management agreement)*

priorities in the distribution of partnership's assets

1. payment of debts (to partner or nonpartner creditors) 2. return of capital contributions & distribution of profits to partners

elements of a traditional partnership (ordinary or general)

1. sharing of profits & losses 2. joint ownership 3. = right in management -property doesnt = partnership -sharing of income & profits doesnt = partnership (has to be both profits and losses)

Ava and Bud start CapCo as a limited liability company. They can participate in the firm's management only to the extent that they assume personal liability for the firm's debts. only to the extent of the amount that they invest in the firm. to any extent. to no extent.

?to any extent.

To obtain a contract with Dick, Cindy misrepresents that she is a partner with Karl. Karl overhears Cindy's misrepresentation but says nothing to Dick. Cindy breaches the contract. Who is liable to Dick? Cindy only. Karl only. Cindy and Karl. None of the above.

Cindy and Karl.

Greg, Kim, and Pete are partners in Northern Mines. Greg sells the ore extracted from the mines to Yukon Resources, Inc. Greg must account for the funds that he receives from Yukon for the ore to Yukon. Northern Mines. the state in which Northern Mines is located. none of the above.

Northern Mines.

A limited liability company offers the limited liability of a corporation and the tax advantages of a partnership.

T

A partnership is an association of two or more persons to carry on, as co-owners, a business for profit.

T

In a limited partnership, the liability of a limited partner is limited to the amount of capital he or she invests in the partnership.

T

Unless a partnership agreement specifies otherwise, each partner has one vote in management matters.

T

Dave and Paul agree to go into business together. They do not formally declare that their business has a specific form of organization. Dave and Paul's business is a proprietorship. a partnership. a limited liability company. none of the above.

a partnership.

Taylor Rental Center rents pumps and sandblasting equipment that is used on ships. Taylor received a telephone call from a person asking to rent equipment for use on the M/V Courtney D, a ship that was owned by Paramount Petroleum Corporation. When Taylor received the call, he asked for a phone number that he could call to verify that the caller had authorization to rent the equipment. When he called the number, the phone was answered by a person who said, "Paramount." That person then told Taylor to send the bills to Paramount's Houston post office box. Taylor checked the identification of the people who picked up the equipment to verify that they had been sent by Paramount. Soon after, a second rental request was made by a captain claiming to represent Paramount Steamship Company, Ltd. The same equipment was again to be used on the Courtney D, and Taylor was told to send the bills to the same address as for the first rental. Taylor assumed the calls were from the same firm, but they were not. When the bills went unpaid, Taylor discovered that Paramount Steamship Company had gone out of business. Taylor then filed a lawsuit against Paramount Petroleum seeking payment on the theory of partnership by estoppel. The court most likely held that a partnership by estoppel: a. existed, because Taylor reasonably assumed that two companies that shared a name, a phone, and a post office box were partners. b. did not exist, because it had been dissolved by Paramount Steamship's bankruptcy. c. existed, because Paramount's agents had bound their principal. d. did not exist, because Paramount Petroleum was a corporation.

a. existed, because Taylor reasonably assumed that two companies that shared a name, a phone, and a post office box were partners.

In order to form a valid limited partnership (LP), the partnership must: a. file a certificate of limited partnership. b. file articles of organization. c. file an amended partnership agreement. d. have two general partners and three limited partners.

a. file a certificate of limited partnership.

The process of collecting, liquidating, and distributing partnership assets is known as: a. winding up. b. dissolution. c. dissociation. d. termination.

a. winding up.

Diego, Mariana, and Edward are partners in East Side Bakery. Diego and Mariana do most of the baking, while Edward handles the business side, doing the accounting and advertising and ordering supplies. One day Mariana is behind the counter when her friend Alycia comes in and begins to tell Mariana about her new business, Belkan Kitchen Supply. Alycia explains to Mariana that they have many unique molds and frosting tips for cakes, and Mariana is impressed with the brochure Alycia gives her. She puts Diego behind the counter and invites Alycia to the office in the back, where the two make an agreement for East Side to buy $5,000 in supplies from Belkan. Two weeks later, when the supplies arrive, Edward is in the bakery and refuses to accept them. He says he will not pay for the supplies, nor is he required to, as Mariana was merely doing a personal favor for her friend and was not acting in the interests of the bakery. Which of the following is true? a. Because Edward is the managing partner of the business, Mariana's deal with Belkan is not binding. b. Mariana is an agent of the bakery and therefore her agreement to buy the supplies from Belkan must be honored. c. If Belkan sues East Side for the price of the supplies, Mariana will be solely liable as she personally ordered them. d. Mariana breached her fiduciary duty of loyalty to the partnership by buying the supplies simply to help her friend.

b. Mariana is an agent of the bakery and therefore her agreement to buy the supplies from Belkan must be honored. general partnership: principles of agency law apply Mariana is an agent of bakery and has the power to act on behalf of Diego and Edward in any business transaction w/in scope of the agreement. Her agreement is therefore binding.

Arthur and Shanin organize their medical practice as a limited liability partnership. Arthur is sued for malpractice. Because of their business organization: a. Shanin is also personally liable for Arthur's malpractice. b. Shanin is not personally liable for Arthur's malpractice. c. if the person who sues Arthur is unsuccessful, the person may then sue Shanin for damages. d. neither Arthur nor Shanin are personally liable for the malpractice.

b. Shanin is not personally liable for Arthur's malpractice.

A general partnership is generally formed by: a. filing paperwork with the Internal Revenue Service. b. an agreement between the parties. c. one party's decision to pursue the partnership. d. filing paperwork with the Secretary of State.

b. an agreement between the parties.

Cecilia convinced Marian to start a business with her in a partnership rather than a sole proprietorship. The disadvantage of a sole proprietorship that Cecilia wants to avoid is: a. receiving all the profits. b. bearing the burden of all losses. c. undertaking limited liabilities. d. being taxed as a limited liability corporation.

b. bearing the burden of all losses.

Cameron ran a restaurant with his partners, Susan and Derek. Cameron offered bribes to the health inspectors who came to the restaurant in order to ensure that it passed each inspection. Cameron breached his duty of: a. agency. b. care. c. interest. d. loyalty.

b. care.

Susan learns that her partner Cameron has been bribing health inspectors who come to inspect their restaurant. She is worried that this may lead to the closing of the restaurant and consults with their other partner, Derek. Susan and Derek vote to expel Cameron from the partnership. This is: a. dissolution. b. dissociation. c. their power of agency. d. winding up.

b. dissociation.

One of the great benefits of LLCs, which helps promote investment, is the fact that: a. LLC articles of organization are privately filed, protecting the identities of investors. b. foreign investors are allowed to become LLC members. c. investors must be accredited investors to participate. d. members are registered with the SEC.

b. foreign investors are allowed to become LLC members.

Collette is a sole proprietor of a small quilting shop. She has considered changing her business structure, but she cannot find an alternative structure that would give her the main advantage she enjoys as a sole owner. That one major advantage is that she: a. receives dividends. b. receives all the profits. c. is taxed as a corporation. d. assumes very limited risk.

b. receives all the profits.

Which of the following is not an advantage of a sole proprietorship? a. It offers more flexibility than a partnership or corporation. b. It is easier and less costly to start than any other kind of business. c. It provides limited liability. d. The proprietor has the right to receive all of the profits.

c. It provides limited liability.

Two companies formed a limited partnership for the purpose of promoting an exhibition boxing match between Lyle Alzado (a professional football player) and Muhammad Ali. Combat Promotions was the only general partner, and Robinson & Co. was the only limited partner. Combat Promotions, which was formed specifically for this undertaking, negotiated and signed all of the contracts pertaining to the match. Robinson's contribution was a $250,000 letter of credit to ensure Ali's compensation. Alzado signed a personal guarantee in which he promised to pay Robinson if the proceeds of the match were less than $250,000. In preparation for the match and at Alzado's request, Robinson's president participated in interviews and a promotional rally. Robinson sponsored parties and allowed its local office to be used as a ticket sales outlet. The proceeds of the match fell short of the $250,000, and Robinson brought a lawsuit against Alzado on his guaranty. Alzado claimed that because Robinson had taken an active role in controlling and managing the limited partnership, it should be held liable as if it were a general partner. The court most likely held that: a. Robinson had reasonably relied on Alzado's representations that participating in publicity before the event would not violate limited partnership law. b. Robinson's actions, while minimal, subjected it to the liability of a general partner. c. Robinson's actions did not constitute the type of participation necessary to attach liability to a limited partner. d. Robinson's participation in the publicity for the event caused the financial losses.

c. Robinson's actions did not constitute the type of participation necessary to attach liability to a limited partner. robinson did not exert any control over finances, hiring, and firing, stadium rental, contracts w/ opening acts, or ticket tallying, the court held that robinson was not responsible as a general partner. The fact that Robinson participated in publicity events at the request of the general partner did not mean that it forfeited its limited partner status

Which of the following is not an advantage of an LLC? a. It provides flexibility in terms of management and encourages foreign investors. b. It offers limited liability. c. The state statutes are uniform. d. There is flexibility with regard to taxation.

c. The state statutes are uniform.

One of the duties of a general partner is to refrain from competing with the firm. This is a(n): a. duty of care. b. management right. c. duty of loyalty. d. agency power.

c. duty of loyalty.

The simplest form of business is a: a. partnership. b. joint venture. c. sole proprietorship. d. corporation.

c. sole proprietorship.

Jean is a limited partner in a limited partnership that owns a chain of beauty salons. The managing partner is having trouble finding qualified people to run the operation. Jean would like to undertake some management responsibilities temporarily to ease the pressure until a suitable replacement can be found. If Jean does so, she: a. will become an accredited investor. b. will become a major partner. c. can forfeit her right of access to partnership books and other information. d. can forfeit her limited liability and become subject to personal liability for all partnership obligations.

d. can forfeit her limited liability and become subject to personal liability for all partnership obligations.

Bob wants to form an entity that has the advantages of pass-through taxation, flexibility in operation, and limited liability. He should form a: a. general partnership. b. sole proprietorship. c. corporation. d. limited liability company.

d. limited liability company.

A limited liability company (LLC) combines the tax characteristics of a: a. corporation with the liability of a partnership. b. partnership with the liability of a partnership. c. corporation with the liability of shareholders. d. partnership with the liability of a corporation.

d. partnership with the liability of a corporation.

Pressler wants to be his own boss and is considering starting a new business. He has to decide which form of business organization to adopt and will most likely consider all of the following except: a. the various types of liability to which owners are subject. b. tax issues. c. the cost of starting the business. d. publicity and public relations.

d. publicity and public relations.

Chaz and Howard organize a limited liability company (LLC) for their carpet cleaning business. Though their main office is in Ohio, they also plan to open satellite offices to serve portions of Kentucky and Indiana. Chaz and Howard should expect: a. that there is a limit to the business members who may operate in Kentucky and Indiana. b. that because their main office is in Ohio, the statutes of Ohio will apply to their work in Kentucky and Indiana. c. to find the treatment of the company to be consist across each state. d. that the business will be treated differently in each state.

d. that the business will be treated differently in each state.

partnership tax treatment

federal income tax: treated as an aggregate (combo) *pass-through entity*: *no tax liability, entity's income is passed through to the owners* -responsible for filing an info return w/ IRS

Greg is a general partner and Lee and Carol are limited partners in GLC Associates, a limited partnership. Lee and Carol have fewer managerial powers than Greg. cannot sue on behalf of the firm if Greg refuses to do so. are personally liable for the debts of the firm, unlike Greg. risk nothing if they participate in the management of the partnership.

have fewer managerial powers than Greg. ?

Dr. Jones and Dr. Smith are partners in a medical clinic. Jones manages the clinic, which is organized as a limited liability partnership. A court holds Smith liable in a malpractice suit. Jones is not liable. liable only to the extent of her share of that year's profits. liable only to the extent of her investment in the firm. liable beyond her investment in the firm, because she manages the clinic.

not liable.

Mark owns M Carpets, a home-furnishings store. He hires Lois as a salesperson, agreeing to pay her $8.50 per hour plus 10 percent of her sales. Mark and Lois are partners, because Lois receives a share of the store's profits. partners, because Lois is responsible for some of the store's sales. not partners, because Lois does not have an ownership interest or management right in the store. not partners, because Lois does not receive an equal share of the store's profits.

not partners, because Lois does not have an ownership interest or management right in the store.

disadv of LLC

state statutes arent uniform, if op in more than 1 state -> may not receive consistent treatment -generally does according to state the LLC was formed