Test 3 Ch. 31

To become a socially conscious organization, an enterprise typically must:

All of these choices are correct. b. only "obtain the approval of a supermajority of shareholders" and "assess and report regularly on its website about the company's societal and environmental impact". c. agree to measure its social benefits using a standard set by an objective third party. d. assess and report regularly on its website about the company's societal and environmental impact. e. obtain the approval of a supermajority of shareholders.

The Huatuco case demonstrates the danger of

An LLC is not required to execute an operating agreement, but this document can be exceedingly helpful, as Jeffrey Horning learned in the opening scenario to this chapter. The flexibility of an LLC is both the good news and the bad. Members have great choice in how to run their organization but they are also forced to live by their (careless) choices if they have a bad operating agreement or none at all, because courts are reluctant to interfere. Dr. Aibar Huatuco signed an operating agreement that made it possible for either of the two members of the LLC to prevent the dissolution of the LLC. Had he thought about the practical implications of this provision, he would have realized that this may not serve his interests, as if the two become deadlocked there is no way for either to exit the LLC.

A partnership can raise capital in which of the following ways?

Borrowing, Contributions from partners

A social enterprise must balance the interests of which of the following when making business decisions?

Communities Investors Environment Stakeholders

S corporations and close corporations were both created to

Congress created S corporations (aka "S corps") to encourage entrepreneurship by offering tax breaks. As with S corps, a goal of close corporation state statutes is to [encourage entrepreneurship] by offering special treatment, such as removing the requirement for certain formalities like formal bylaws and giving shareholders the option to include in the charter a right of first refusal over shares.

Which of the following are characteristics that apply to LLCs?

Different classes of stock permitted Nontransferable interests Flow-through tax entity Members may be corporations, partnerships or nonresident aliens

A partnership is a taxable entity, separate from the partners. T or F.

False

Alan, a dentist, and his wife Martha, an attorney, can protect their personal assets with limited liability from their business dealings by creating and operating a professional corporation together. T or F.

False

Although corporations were widely celebrated and encouraged when they were originally created centuries ago, they have been treated with growing suspicion since the stock market crash that led to the Great Depression. T or F.

False

Corporations have a distinct advantage over other forms of business organization in the area of taxation. T or F.

False

Franchise fees can be costly, but they are usually payable over a number of years, after profits are generated from the business. T or F.

False

James was a partner in a large firm. He died unexpectedly. His son, Frank, wanted to take over for his father in the partnership and was well qualified to do the work his father had done. Which statement best describes Frank's rights in the partnership if he inherits the interest?

Frank is entitled to the value in the partnership, but not to become a full partner.

Which of the following are disadvantages of a corporation?

High formation costs, Taxable entity, Strict legal formalities

What must be true for Costello and Giordano to be personally liable to Ridgaway's estate in Ridgaway v. Silk?

Ridgaway's death is attributable to Costello and Giordano's own negligence, recklessness, or tortious conduct.

Few corporations have converted to LLC's, even though it is legally possible, because

Some companies that are now corporations might prefer to be LLCs. However, the IRS would consider this change to be a sale of the corporate assets and would levy a tax on the value of these assets. For this reason, few corporations have made the change. However, switching from a partnership to an LLC or from an LLC to a corporation is not considered a sale and does not have the same adverse tax impact.

What federal agency requires that the seller of a franchise give the potential buyer Franchise Disclosure Document (FDD) and audited financial statements?

The Federal Trade Commission (FTC)

Which of the following is true of so-called social enterprises?

The most common forms are benefit corporations and low profit limited liability companies.

A corporation that registers for S corp status with the IRS is not necessarily treated as a close corporation under state law unless it complies with the state statute's particular requirements. T or F.

True

Sole proprietors are personally liable for all of the debts incurred by their business. T or F.

True

Which of the following statements regarding social enterprises is TRUE?

Unlike charities, social enterprises can sell stock to investors.

Limited liability companies offer the best of both worlds:

[a flow-through tax entity and limited liability] An LLC offers the limited liability of a corporation and the tax status of a flow-through entity. As such, it is an extremely useful form of organization often favored by entrepreneurs because it offers the best of both worlds - limited liability and lower taxes.

Jane is in debt to Jack, and is also a partner in Mother Goose, LLP. Jane may transfer to Jack

[the value of her partnership interest in Mother Goose] A partner cannot sell her share of the organization without the permission of the other partners. She can only transfer the value of her partnership interest, not the interest itself. She cannot, for example, transfer the right to participate in firm management or vote on firm matters.

The business form that offers the limited liability of a corporation and the tax status of a flow-through entity is

a limited liability company.

Which of the following would NOT be personally liable for the debts of the business?

an S corp shareholder

When a partner leaves a partnership, it is called a ____. The partnership can either _____ the departing partner and ______ or the business and ______ the partnership.

dissociation, buy out, continue in business, wind up, terminate

An organization that does not pay income tax on its profits but passes them through to its owners who pay the tax at their individual rates is called a

flow-through tax entity.

All the business forms listed below have limited liability EXCEPT the

general partnership

The Federal Trade Commission requires franchisors to

give prospective franchisees a franchise disclosure document at least 14 business days prior to the signing of a contract or payment of any money.

A corporation protects managers and _____ from ______ for the debts of the corporation and _____, but not against liability for_____ negligence, torts, or crimes.

investors, personal liability, actions of others, their own

The advantage to an S corporation is

its treatment of shareholders for income taxation purposes.

A court may pierce an LLC's veil if

members fail to provide adequate capital

Corporations have a ______existence. They are also a _____ form of business because they have stock that can be _____ easily.

perpetual, flexible, bought and sold

All of the following are characteristics of a closely held corporation EXCEPT

the shares are publicly traded.

A sole proprietorship is a(n) ___ business owned by _____ person. It is the ____ common form of business.

unincorporated, one, most

A general partnership is a(n) ____association of ____ owner/co-owners who carry on a business ______. Each owner is a ____.

unincorporated, two or more, for profit, general partner

The corporate form of business

was first known and used by the Greeks and then spread through the Romans to England.

Limited liability is a major advantage of a partnership as compared to a corporation. T or F.

False

The most common form of business ownership is the corporation. T or F.

False

To be a close corporation, the business must be small, with no more than 20 owners and no more than $500,000 in gross annual income. T or F.

False

Franchises are appealing to franchisees because they allows them to

In theory, buying a franchise combines the best of all worlds - a franchisee gets to be her own boss and she acquires an established business with all the kinks worked out. In addition, the franchisor helps get the business up and running quickly, offers ongoing training and support and invests money in keeping the brand relevant and successful. Franchisees can also help each other by acting collectively to bargain for better prices. On the other hand, franchisees sometimes complain that franchisor control is too tight and that franchisors' focus on maintaining consistent standards stifles innovation.

In National Franchisee Association v. Burger King Corporation, the court held that Burger King Corporation

In this case, Burger King franchisees brought suit against Burger King Corporation (BKG), the franchisor, alleging that the BKC's requirement that they sell certain products below cost either (1) was not permitted under the franchise agreement or (2) was a violation of the requirement to act in good faith under the franchise agreement. The court found against the franchisees because (1) the agreement explicitly gave BKC the authority to set prices and (2) "[t] here are a variety of legitimate reasons why a firm selling multiple products may choose to set the price of a single product below cost," such as building customer loyalty, luring customers in to buy other products with a higher profit margin, or directing customers away from competitors.

Which of the following is an advantage of a corporation?

It offers limited liability for its shareholders

Jill owns a retail business by herself and was sued by a customer who fell in the store. The customer claimed the business was negligent in caring for its floors. Which statement best describes Jill's potential liability?

Jill can only be liable to the amount she initially invested in the business.

Why do venture capitalists sometimes prefer to invest in C corporations over LLCs?

LLC's involve arcane tax issues The law governing LLC's is still developing and is therefore less certain C corporations are easier to merge, sell, or take public

Which of the following are features of professional corporations?

Limited liability, Strict legal formalities, Shareholders must be members of the same profession, Complicated tax structure

Which of the following are advantages of a sole proprietorship?

Low formation costs, Flow-through tax entity

Under which of the following circumstances will a court hold LLC members personally liable for the liabilities of the LLC?

Members fail to treat the LLC like a separate organization Members fail to provide adequate capital Members commit fraud

Most states require sole proprietors to register

No formal steps are necessary to create a sole proprietorship, although states generally require sole proprietors to register their [business name if it is different from their own.] If Linda is operating a business named ExSciTe, for example, Linda, would file a "d/b/a" or "doing business as" certificate for ExSciTe.

Which of the following must be true for a company to qualify as an S corp?

No more than 100 shareholders Shareholders are U.S. citizens or residents Only one class of stock All shareholders agree that the company should be an S corp No shareholders are partnerships or corporations

The Federal Trade Commission (FTC) requires franchisors to provide the Franchise Disclosure Document (FDD) to franchisees prior to signing a franchise agreement

The purpose of the FDD is to ensure that the franchisor discloses all relevant facts. It is not a guarantee of quality because the FTC does not investigate to make sure that the information is accurate or the business idea sound. After the fact, if the FTC discovers the franchisor has violated the rules, it may sue on the franchisee's behalf. (The franchisee does not have the right to bring suit personally against someone who violates FTC franchise rules, but it may be able to sue under state law.)

A joint venture is not its own legal entity. Rather, its participants retain their own separate identities and simply partner for a limited purpose, such as a specific project. T or F.

True

A limited liability company may go public, but once it does so it loses its status as a flow-through tax entity. T or F.

True

Corporations have perpetual existence. T or F.

True

General partners have equal management rights in the partnership unless they agree otherwise. T or F.

True

Generally, a joint venture is a partnership created for one limited purpose. T or F.

True

If partners wish to maintain having protection against personal liability, it is essential to comply with all the technicalities of a limited liability partnership statute. T or F.

True

In the past professional corporations were the only business formation other than general partnerships available to professionals, such as lawyers and accountants. T or F.

True

Operating agreements are not required but can be extremely helpful for LLCs. T or F.

True

Sole proprietorships work best for small businesses because

[debt is generally the only source of generating capital.] The owner of a sole proprietorship has limited options for financing her business. Debt is generally her only source of working capital because she has no stock or memberships to sell. For this reason, sole proprietorships work best for small businesses without large capital needs.

If a court pierces the LLC veil it

[hold LLC members liable for the debts of the company] Limited liability is one of the great advantages of an LLC. However, if members abuse their rights, a court may remove their limited liability. This process is called piercing the company veil. A court may pierce an LLC's veil if members: (1) fail to observe formalities, (2) commingle assets, (3) fail to provide adequate capital (in extreme cases), and (4) commit fraud.

The form of business ownership that is the MOST easily transferable is the

corporation.

A _____ tax entity ______ pay _____ tax on its profits, but passes them through to its _____, who pay tax at ______ rates.

flow-through, does not, income, owners, their individual

A close corporation has a small number of ______whose stock is not ______ and who play an active role in _______. A close corporation is entitled to special treatment under _____.

shareholders, publicly traded, management, state law