Ch 31

Dr. Wong, a dentist, and his wife, an attorney, can protect their personal assets with limited liability from their business dealings by creating and operating a professional corporation together

False

To be a close corporation, the business must be small, with under 20 owners and under $500,000 in gross annual income.

False

To form an LLC, a charter and an operating agreement must be filed with the Secretary of State in the jurisdiction where the business will operate.

False

An S Corporation cannot have more than ____ shareholders. a. 100 b. 75 c. 50 d. 25

A

The corporate form of business: a. was first known and used by the Greeks and then spread through the Romans to England. b. was not known until about 1737 when Sir Francis LaRue developed the concept. c. was first allowed in the State of New York around 1811 and is considered to be an American creation. d. None of the above.

A

The term "S Corporation" comes from: a. the Internal Revenue Code. b. the FTC rules. c. the U.S. Constitution. d. state corporation law.

A

All the business forms listed below have limited liability except the: a. limited liability company. b. general partnership. c. Subchapter "S" corporation. d. corporation.

B

What federal agency requires that the seller of a franchise give the potential buyer an offering circular and audited financial statements? a. The Securities and Exchange Commission (SEC). b. The Interstate Commerce Commission (ICC). c. The Federal Trade Commission (FTC). d. The Franchise Sales Commission (FSC).

C

Which of the following would not be personally liable for the debts of the business? a. A sole proprietor. b. A partner in a general partnership. c. A general partner in a limited liability limited partnership. d. A general partner in a limited partnership.

C

Which of the following forms of organization is a compromise between starting one's own business as an entrepreneur and working for someone else as an employee? a. Limited liability company. b. Business trust. c. Close corporation. d. Franchise.

D

A limited liability company, unlike a Subchapter S corporation, can have members that are corporations, partnerships, or nonresident aliens.

True

Cooperatives may be either incorporated or unincorporated businesses.

True

Murray 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? a. Frank has a right to take over for his father in the partnership. b. Frank is entitled to the value in the partnership, but not to become a full partner. c. Frank has no rights to his father's partnership interest. d. None of the above.

B

Seventy farmers in Morgan County joined together to gain the advantages of purchasing seed and fertilizer in bulk and of obtaining better prices when distributing and selling their crops. These farmers have formed a: a. business trust. b. cooperative. c. franchise. d. joint venture.

B

The form of business ownership that is the most easily transferable is the: a. general partnership. b. corporation. c. limited liability company. d. limited partnership.

B

The importance of a Subchapter S corporation is: a. its organizational structure. b. its treatment of shareholders for income taxation purposes. c. its requirement of restrictive transfer rights of the shares. d. its small cost of formation.

B

Jill was a limited partner in a retail business that 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? a. Jill has no potential liability to the customer. b. Jill can be held personally liable to the customer since she is a partner. c. Jill can only be liable to the amount of her investment. d. Jill is personally liable, but the woman must first collect from the general partners before collecting from Jill.

C

John, his parents, and three brothers own all the stock of their family farm corporation. This corporation, which is taxed as a corporation, is probably: a. an S corporation. b. a C corporation. c. a closely held corporation. d. an LLC.

C

LLCs have become popular for all except which of the following reasons: a. management flexibility. b. tax status as a partnership. c. uniformity of law. d. limited liability.

C

Lance and Darrell have an equal partnership. This year, after expenses, the partnership had a profit of $100,000. Lance and Darrell will each pay taxes on: a. whatever they receive from the partnership. b. $50,000. c. $100,000. d. None of the above. The partnership itself will pay the taxes on the business's profit.

D

Martin, Leah, and Pablo are considering forming a business. What factors should they consider in making a choice of organization? a. Ease of creation and operation. b. Whether there is personal liability for the owners. c. How the owners will be taxed. d. All of the above.

D

Rachel and Cyndi started a retail business called Zebra Toy Company. The business is operated as a partnership. Under partnership law: a. Rachel is personally liable for any business contracts entered into by Cyndi. b. Rachel is personally liable for any business debts, regardless of whether she or Cyndi created the obligation. c. Rachel is personally liable for any negligent act committed by Cyndi in the scope of the business activity. d. All the above.

D

The advantage of a corporation over a partnership is: a. shares are easily transferable to another person. b. perpetual existence. c. it is easier to raise funds. d. All the above.

D

All of the following are characteristics of a closely held corporation EXCEPT: a. the shares are publicly traded. b. the corporation can typically operate without a board of directors. c. the shareholders usually restrict share transfer. d. minority shareholders are provided more protection than in regular corporations.

A

E. I. James is a writer with a best selling novel. He wishes to create a corporation called "James, Inc." He will be the only shareholder. Can James incorporate his business of writing? a. Yes, this would be the incorporation of a sole proprietorship. b. No, the law requires at least two people to be shareholders of a corporation. c. No, the law does not permit a person to, in effect, incorporate himself. d. Only if he forms an S Corporation.

A

Harold and Zack have pooled their money together to buy real estate but have filed no formal papers to form a business. Harold, a lawyer, handles all the legal matters and Zack, a real estate broker, finds buyers for the property they have subdivided. Harold and Zack are engaged in a: a. partnership. b. close corporation. c. limited liability company. d. business trust.

A

The Federal Trade Commission requires franchisors to: a. give prospective franchisees an offering circular at least 14 business days prior to the signing of a contract or payment of any money. b. disclose the exact amount of the initial investment required. c. disclose any litigation the company has ever been involved in d. disclose how many franchisees have gone out of business in the prior five years.

A

Charles and Ellen, an unmarried couple, run an ice cream store. The business is not incorporated and they have filed no formation papers with the state. Their business is a: a. sole proprietorship. b. partnership. c. joint venture. d. limited liability company.

B

The business form that is taxed as a partnership and gives all owners limited liability, is: a. a close corporation. b. a limited partnership. c. a limited liability company. d. a general partnership.

C

A partnership is a separate, taxable entity.

False

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

False

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

False

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

False

The Federal Trade Commission will not allow the sale of franchises that are unfair to the franchisee.

False

The most common form of business ownership is the corporation.

False

Corporations have perpetual existence

True

Filings are required to form and operate a limited liability partnership.

True

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

True

Which of the following transactions would be considered by the IRS to be a taxable sale of assets? Changing the form of business from: a. a corporation to an LLC. b. a partnership to an LLC. c. an LLC to a corporation. d. All of the above.

a