Business Law Test 2 Ch. 14

What is meant by the phrase liability of a business organization as compared to the liability of the owners?

the factor of liability is used to describe the degree of personal responsibility an owner has for the debts of the organization. unlimited liability means an owner is personally obligated to satisfy the debts of an organization. Limited liability means an owner is not obligated beyond the amount that owner invested in the organization

Although it is technically a corporation, the S corporation has attributes of which business organization when considering the taxation factor?

the government allow S-corporations to be treated as a partnership

What is the advantage of a limited liability company (LLC) compared to the S corporation?

the primary advantage of an LLC is that there is no limit to the number of members in an LLC, the owners have more flexibility than with the S corporation and dont have struggle with complexity of limited partnerships LLC has members not shareholders

What is the implication of this treatment if the S corporation has a profitable year but does not distribute dividends to its shareholders?

the shareholders may have to pay taxes on income they did not receive

What are three traditional business organizations and the four hybrid forms?

the three traditional organizations are the sole proprietorship, the general partnership, and the corporation. The hybrid forms include the limited partnership, the S corporation, the limited liability company, and the limited liability partnership.

Terry is the senior partner in an accounting firm. one of terry partners performs an audit. the audited firm sues terry, as the senior partner, for alleged errors in the audit. if terry is found liable, can terry sue to collect a pro rata share of this liability from the other persons? why or why not?

yes partners are jointly and severally liable for the debts of the partnership

Laura and gary have formed a limited partnership, with Gary agreeing to be the general partner. this partnership has purchased supplies from Sam. Sam has received a promissory note signed on behalf of the partnership as payment. If the partnership is unable to pay this note, can sam hold gary personally liable explain?

yes. limited partnerships are the same as partnerships except there are limited partners who are not liable of debt and cannot control the operations. gary is known as the general partner and he is liable. therefore sam can recover from gary.

The production process can be very dangerous, and a large tort judgment against the business is foreseeable, what business is preferred?

a corporation, S corporation, or LLC, company would allow all shareholders to enjoy a limited liability

Sales will be nationwide, what form of business is preferred?

a partnership, because a partnership would not have to qualify to do business in all fifty states.

Why would a business institute a proxy?

a proxy is an agent appointed by a shareholder for the purpose of voting the shares, it is used in publicly held corporations to disallow minority shareholders to vote on who directs the business

Why does dissolution of a business organization not necessarily impact that organizations business activities?

all business owners should take into consideration the relationship between ownership of a business organization and the business being conducted. Sometimes the owners participation in the business is not essential for success. under such circumstances, business activity may not be adversely impacted by a change in the legal existence of a business organization

What is dissolution?

any change in the ownership of an organization that changes the legal existence of the organization.

Why is taxation an important element to consider when selecting the appropriate organization for your business activities?

anyone investing in a business organization needs to understand how the organization is or is not taxed and what this means to the likelihood of profits or losses being distributed to the owners.

How does the word continuity relate to an organization and its owners?

continuity refers to stability and durability of the business and the owners who own it.

What is the difference between a corporation, domestic corporation and foreign corporation?

corporation- is an artificial, intangible entity created under the authority of a states law. domestic corporation- is what a corporation is known in the star in which it is incorporated foreign corporation- what the corporation is known as in all other state besides the one it is in.

What suit can be filed if the majority owner in a closely held corporation is acting illegally or oppresses the rights of minority shareholders?

derivative suit- brought up to collect damages or to prove good faith in questionable action

Other factors of a partnership include:

each partner has an equal voice in the firms affairs. there can be minority partners too. all partners in a general partnership have unlimited liability. partnerships are not a taxable entity. partners can be companies

The furniture manufacturing process requires more capital than Albert or Barbara can raise together. However, they wish to maintain control of the business, which type is preferred?

either a limited partnership or a corporation. limited partnership, would make Albert and Barbara the general partners and other investors would be limited. in a corporation the other investors should be sold a non voting class of stock.

Why should business owners take time to discuss the control each will exert over the organizations activities?

failure to agree on who has what degree of control can result in managerial deadlock thereby causing the business activities to be interrupted or cease. everyones job and control level should be specified by management

How is a sole proprietorship formed?

it has one owner, it is the easiest and least expensive business organization to create, in essence the proprietor obtains whatever business licenses necessary to begin operations

Barbara is a furniture expert, but she has no funds. Albert knows nothing about such production, but he is willing to contribute all the money, what business organization is recommended?

limited partnership. unlimited liability could be restricted to barbara as general partner. meanwhile, albert is protected by the limited liability of a limited partner

What are the limitations of a sole proprietorship?

main limitation is there can only be one owner. other aspects: ownership may not be transferred. business activity is dependent on the owners willingness to work. sole proprietor has total control of business goals and operation. sole proprietor is personally obligated for the debt of the proprietorship. sole proprietorship is not a taxed organization. (a kid mowing the lawn is a basic example)

Describe five techniques that a corporation might use to avoid the double taxation of corporate profits?

methods of avoiding double taxation of profit which are distributed as didvidends include 1- payment of reasonable salaries 2- use of reasonable expense accounts 3-the capital structure of the corporation can include loans 4- the accumulation of earnings 5- the election under subchapter S of the internal revenue code

Who controls the closely held corporation?

most likely the shareholders, since these owners are likely to be the directors and officers

How many shareholders can an S- corporation have?

no more than 75, each of whom must elect to have the corporate income allocated to the shareholders annually in computing their income for tax purposes, whether actually paid or not

What is a an agreement between two or more persons (people or organizations) to share a common interest in a commercial endeavor to share profits and losses?

partnership- the key two a partnership are the three elements in its definiton

What is a variation of an LLC and who uses it?

LLP limited liability partnership. this often used by professionals, such as doctors, lawyers and accountants.

What is the difference between closely and publicly held companies?

Closely held applies to organizations that have a relatively small number of owners. (family owned and operated) publicly held is used to describe organizations that have hundreds, if not thousands of owners.

Relative to other factors in the chapter what is and how important is creation?

Creation usually relates to the legal steps necessary and cost of forming a business. Typically this cost is not of major importance unless the businesspeople have very little money to begin a business.