CHAPTER 14 Limited Liability Companies and Limited Liability Partnerships

limited liability company (LLC)

A multiperson form of business entity that offers liability protection for its principals along with various tax options.

A sole proprietorship can be passed to the proprietor's heirs through a gift or an estate. True or False

False

General partnerships are created by filing a form with a government agency. True or False

False

The Revised Uniform Limited Partnership Act (RULPA) formally requires a partnership agreement to govern a limited partnership. True or False

False

The Revised Uniform Partnership Act (RUPA) uses the term "withdrawal" to describe the act of separation whereby a partner no longer wishes to be a principal in a partnership. True or False

False

When a partner dissociates herself (rightfully or wrongfully) from a general partnership, the partnership must automatically dissolve, even if the remaining partners wish to continue. True or False

False

According to the Revised Uniform Partnership Act (RUPA), when a partner exercises a rightful dissociation, the partner A) is no longer liable for debts incurred by the partnership. B) has to support the partnership for 6 months after the dissociation. C) is no longer liable for predissociation liability. D) owes a fiduciary duty to the partnership.

A

Which of the following statements accurately differentiates between a general partnership and a limited partnership? A) In a general partnership, the partners are permitted to bind the partnership; in a limited partnership, the limited partners do not have the authority to bind the partnership. B) A general partnership is usually funded through debt; a limited partnership is funded by the sale of ownership rights through public markets. C) In a general partnership, the partners are investors in a business but do not manage it; in a limited partnership, all the partners jointly own and manage their business. D) A general partnership pays corporate taxes; a limited partnership is only responsible for filing an information return with taxing authorities.

A

Which of the following statements is NOT true about the capitalization of general partnerships? A) They may sell ownership rights through public markets. B) They can be funded through borrowing money from a private individual third party. C) They may sell a percentage of ownership rights in the partnership. D) They can be funded through borrowing money from principals.

A

Declaratory Judgment

A binding court judgment that establishes the rights and other legal relations of the parties without providing for enforcement

articles of organization (also called certificate of organization)

A form filed to create a LLC in most states requires only basic information such as the name of the entity, the location of its principal place of business, and the names of its members.

Which of the following constitutes a partnership at will? A) Diane and Ralph agree that their partnership will continue until a building project is completed. B) Diane and Ralph's partnership agreement does not address when the partnership will terminate. C) Diane and Ralph agree that their partnership will terminate on January 1, 2020. D) Diane and Ralph agree to be partners for a period of three (3) years.

B

A franchise agreement would likely address a number of terms regarding the relationship between franchisee and franchisor except A) the duration of the agreement (how long the agreement will be in effect). B) royalties or other payments from the franchisee to the franchisor. C) the geographic area to be served by the franchise. D) commitments from the franchisee to train the franchisor in reporting and business operations.

D

General partners' personal assets are at risk for the full amount of the debts and liabilities of their partnership A) jointly and severally, only if they own more than 50 percent of interest in the partnership. B) jointly, if they all own the same percentage of interest in the partnership. C) severally, according to the percentage of their ownership interest in the partnership. D) jointly and severally, regardless of their percentage of ownership interest in the partnership.

D

The Federal Trade Commission regulations relating to franchises are designed primarily to do which of the following? A) Provide criteria for selection of franchisees. B) Create a basic framework for the operation of a franchise. C) Protect the franchisor in the event that the franchisee's business is not successful. D) Provide full disclosure of relevant information relating to the franchise prior to the franchisee's investment.

D

Which of the following is a drawback of a sole proprietorship? A) It involves a complex filing requirement with the appropriate state government authority, and it requires repeated annual filings. B) It is subject to corporate income taxation. C) It is difficult to form and maintain. D) It is characterized by a lack of protection of the principal's personal assets for unpaid debts and liabilities of the business.

D

Which of the following statements is true of a sole proprietorship? A) It is restricted by law in terms of the number of employees it can hire. B) It has unlimited options for raising money. C) It is not characterized by personal debts and liabilities. D) It is not subject to corporate income taxation.

D

Which of the following statements is true of general partnerships? A) They protect their partners' personal assets. B) They are governed by the Revised Uniform Limited Partnership Act (RULPA). C) They do not allow their partners to share in the profits of their ongoing business operation. D) They can operate without written agreements.

D

management agreement.

LLC statutes typically assume that the members will agree on the specifics of managing the venture

operating agreement

LLCs are frequently governed by agreement of the parties. Operating agreements, similar to partnership agreements, cover many of the internal rules for the actual operation of the entity.

A limited partnership may legally exist with one general partner and one limited partner. True or False

True

In choosing a business entity, principals of the business should consider the extent to which they are personally liable for debt and other contract or tort liabilities of the business entity itself. True or False

True

The easiest form of business for an individual to establish and maintain is a sole proprietorship. True or False

True

member-managed LLC

the management structure of the entity is similar to that of a general partnership, with all the members having the authority to bind the business

manager-managed LLC

a named manager (or managers) generally has the day-to-day operational responsibilities, while the nonmanaging members are typically investors with little input on the course of business taken by the entity except for major decisions (such as a merger). In a manager-managed LLC, nonmanaging members generally do not have the authority to act on behalf of the business venture.

capital call

collecting additional contributions from partners as necessary There are some cases in which the partnership has the right to "call" for more money contributions from each partner in order to keep the partnership afloat.

improper distribution

defined as any distribution of money made when the LLC is insolvent. Under the RULLCA, an LLC is insolvent if (1) the LLC "would not be able to pay its debts as they become due in the ordinary course of the company's activities and affairs; and (2) the company's total assets are less than the sum of its total liabilities.

personal guarantee

members pledge personal assets to guarantee payment obligations of the business venture.

dissolution

(of an LLC) is a liquidation process triggered by an event that is specified in the operating agreement (such as the death of a key member) or by the decision of the majority of membership interests (or the percentage called for in the operating agreement) to dissolve the company

In a limited partnership, a limited partner's personal liability, like a general partner's personal liability, extends to all the partnerships' debts and liabilities. True or False

False

Tom and Ralph drafted a partnership agreement, but did not sign it. In their day-to-day business dealings they demonstrate a clear intent to carry on as co-owners of a business for profit. Because they have not yet signed the partnership agreement, they cannot be considered general partners. True or False

False

limited liability partnership (LLP)

Form of business entity that provides the same level of liability protection to a general partner in an LLP as is provided to a limited partner in a limited partnership form of entity.

statement of qualification

Limited liability partnerships are formed when a general partnership files a statement of qualification with the appropriate public official.

Dissociation

Process in which an individual member of an LLC exercises the right to withdraw from the partnership.