B-Law Quiz 3

T/F: A sole proprietorship cannot be terminated by an express act of the principal.

False A sole proprietorship is terminated either by an express act of the principal or by operation of law in the case of the death or personal bankruptcy of the proprietor.

T/F: In every state, a limited liability company (LLC) is formed by filing the articles of incorporation with the designated public official in that state.

False In every state, a limited liability company (LLC) is formed by filing the articles of organization with the designated public official in that state, such as the secretary of state or the state's corporation bureau.

T/F: Sixteen (16) states have adopted all or substantial portions of the model act known as the Revised Model Business Corporation Act (RMBCA).

False Over half of the states have adopted all or substantial portions of the model act known as the Revised Model Business Corporation Act (RMBCA) drafted by the American Law Institute.

T/F: The easiest single-person ownership entity to form and maintain is a sole proprietorship.

True The easiest single-person ownership entity to form and maintain is a sole proprietorship. A sole proprietorship requires only a minimal fee, involves a straightforward filing requirement with the appropriate state or county government authority, and typically requires no annual filings.

T/F: Like an individual person, a corporation may file suit or be sued, or may form a contract or breach a contract.

True It is important to note that as a corporate "person," a corporation may file suit or be sued, or may form a contract or breach a contract. In this sense, a corporation is much like an individual person.

T/F: A limited liability company (LLC) is an inflexible type of business entity.

False A limited liability company (LLC) is a flexible type of business entity that offers its owners many advantages, including easy formation, flexible operation, limited legal liability of the owners, and pass-through taxation.

T/F: The most common type of corporation is a publicly held corporation.

False The most common type of corporation is a privately held corporation. Privately held corporations do not sell ownership interests through sales via a broker to the general public or to financial institutions or public investors. Privately held corporations have substantial flexibility in terms of their internal operating procedures and do not generally have to comply with rigorous corporate structures or formalities.

T/F: A sole proprietorship is not subject to corporate income taxation, and no tax return is filed on behalf of the business.

True A sole proprietorship is not subject to corporate income taxation, and no tax return is filed on behalf of the business. Rather, the principal reports business income and expenses on her own individual tax return and pays taxes on business income (or deducts business losses) based on her individual tax rate.

T/F: Capital options for sole proprietors include private loans, commercial loans, commercial lines of credit, and unsecured credit.

True Sole proprietors are limited in their options for raising money. They cannot sell ownership in their business venture and are typically left with capitalizing their operations in other ways. Capital options for sole proprietors include private loans, commercial loans, commercial lines of credit, and unsecured credit.

A corporation that transacts business in a state other than its state of incorporation is known as a(n) __________ corporation in the other state. a. foreign b. interstate c. alien d. domestic

a. foreign In the state of its incorporation, a corporation is referred to as a domestic corporation, while a corporation that transacts business in a state other than its state of incorporation is known as foreign corporation in the other state.

In a __________ limited liability company (LLC), the management structure of the entity is similar to that of a general partnership. a. member-managed b. manager-managed c. stockholder-managed d. stakeholder-managed

a. member-managed Most state limited liability statutes distinguish between a member-managed limited liability company (LLC) and a manager-managed LLC. In a 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.

The easiest single-person ownership entity to form and maintain is a __________. a. partnership b. sole-proprietors c. limited liability company d. corporation

b. sole-proprietors The easiest single-person ownership entity to form and maintain is a sole proprietorship. A sole proprietorship requires only a minimal fee, involves a straightforward filing requirement with the appropriate state or county government authority, and typically requires no annual filings.

John Anderson, an expert in lawn care, operates a sole proprietorship as "Anderson's Lawn Maintenance and Landscaping." This is known as a __________. a. copyright b. trademark c. limited liability company d. trade name

d. trade name A trade name identifies a sole proprietorship by something other than the sole proprietor's individual name. In the subject case, "Anderson's Lawn Maintenance and Landscaping" is known as a trade name.

T/F: A partnership is a fictitious legal entity that exists as an independent entity separate from its principals.

False A corporation is a fictitious legal entity that exists as an independent individual separate from its principals. Although this corporate ?person? is a legally created fiction, it is a well-established and deep-seated principal of American law.

T/F: A limited partnership is legally defined as an association of two or more people who are co-owners and co-managers of the business and who share in the profits of their ongoing business.

False A general partnership is legally defined as: (1) an association of two or more people (2) who are co-owners and co-managers of the business and (3) who share in the profits of their ongoing business.

T/F: The owners or principals of a limited liability company (LLC) are called proprietors.

False A limited liability company (LLC) is a flexible type of business entity that offers its owners many advantages, including easy formation, flexible operation, limited legal liability of the owners, and pass-through taxation. The owners or principals of a limited liability company (LLC) are called members.

T/F: The two (2) major categories of corporations are privately-owned and government-owned.

False Corporations are classified into one or more categories that reflect their overall purpose, capitalization (how they are funded), location, and structure. The two major categories are corporations that are owned exclusively by a group of private individuals (known as privately held) and corporations that sell their ownership interest via public stock exchanges (known as publicly held).

T/F: Under the Revised Uniform Partnership Act (RUPA), all partners face joint-and-several liability for contract and tort-related obligations.

True An important rule under the Revised Uniform Partnership Act (RUPA) that distinguishes general partnerships from other types of business associations is that all partners face joint-and-several liability for contract and tort-related obligations. This means that general partners' personal assets are at risk both together (jointly) and separately (severally) for all debts and liabilities of the partnership, regardless of the source of the debt or liability.

T/F: Under the default rules of partnership law, if a partner within the ordinary course of business incurs a payment or liability made on behalf of the partnership, the partnership must reimburse that partner for the expense.

True If a partner within the ordinary course of business incurs a payment or liability made on behalf of the partnership, the partnership must reimburse that partner for the expense. A partnership agreement may define limits to this reimbursement, for example, by placing a dollar limit or specifying what authority a partner has to act within the ordinary course of business.

T/F: The Uniform Limited Liability Company Act (ULLCA) is a model statute designed to promote uniformity among various state limited liability company (LLC) laws.

True The Uniform Limited Liability Company Act (ULLCA) is a model statute designed to promote uniformity among various state limited liability company (LLC) laws; however, in practice LLC statutes can vary considerably from state to state.

In the context of business entities, __________ is a generic word for individuals who are entitled to the profits of a business based on their percentage of ownership. a. agent b. incidental beneficiary c. intended beneficiary d. principal

d. principal Each form of business entity has its attendant advantages, drawbacks, and legal consequences for the owners, known as principals, of the business. In the context of business entities, principal is a generic word for individuals who are entitled to the profits of a business based on their percentage of ownership.

Dissolution does not actually end the partnership, but instead triggers the process of __________. a. cooling down b. Chapter 11 bankruptcy c. Chapter 7 bankruptcy d. winding up

d. winding up Dissolution does not actually end the partnership, but instead triggers the process of winding up. Only after windup is complete is the partnership officially considered terminated. Windup is the period of time necessary to settle the affairs of the partnership and includes activities such as discharging the partnership's liabilities, settling and closing the partnership's business, marshaling the assets of the partnership, and distributing any net proceeds to the partners.

In terms of factors to consider in choosing a business entity, issues such as how and by whom the business venture will be operated, whether the principals will be involved in the day-to-day operations of the business, what duties the principals owe to the business and each other, how profits and losses will be split, and whether the remaining principals may continue to operate the business if a principal decides to leave the organization are related to the __________ factor. a. management and operation b. formation c. capitalization d. liability

a. management and operation In choosing a business entity, principals should consider at least the following factors: 1) formation; 2) liability; 3) capitalization; 4) taxation of income; and 5) management and operation. Issues such as how and by whom the business venture will be operated, whether the principals will be involved in the day-to-day operations of the business, what duties the principals owe to the business and each other, how profits and losses will be split, and whether the remaining principals may continue to operate the business if a principal decides to leave the organization are related to the management and operation factor.

Suppose that Dexter and Benjamin form OBX Leisure Pursuits, Inc. by filing articles of incorporation. They decide to split the profits equally and, wishing to save the expense of hiring an attorney, do not keep up with the corporate formalities after the articles are filed. Which of the following is true regarding the potential liability of Dexter and Benjamin if a lawsuit is filed against OBX Leisure Pursuits, Inc.? a. They cannot be personally liable, since they filed articles of incorporation, and since the "corporate veil" is effective upon filing the articles. b. They have potentially exposed their personal assets if OBX Leisure Pursuits, Inc. does not have sufficient assets to satisfy a judgement against the company. c. They are personally liable even if OBX Leisure Pursuits, Inc. is technically solvent in the "balance sheet" sense, as they are the sole owners of the company. d. They cannot be personally liable, since the lawsuit was filed against OBX Leisure Pursuits, Inc., and they are not listed as defendants.

b. They have potentially exposed their personal assets if OBX Leisure Pursuits, Inc. does not have sufficient assets to satisfy a judgement against the company.

T/F: In the context of business entities, agent is a generic word for individuals who are entitled to the profits of a business based on their percentage of ownership.

False Each form of business entity has its attendant advantages, drawbacks, and legal consequences for the owners, known as principals, of the business. In the context of business entities, principal is a generic word for individuals who are entitled to the profits of a business based on their percentage of ownership.

T/F: A partner is liable to other partners and to the partnership if she makes a business decision that results in harm due to an ordinary mistake of judgment.

False Partners must exercise due care in handling the affairs of the partnership and treat business affairs with diligence. Specifically, Section 404(c) of the Revised Uniform Partnership Act (RUPA) states that a partner must "refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law." Under this standard, partners are not liable if they make a business decision that results in harm due to an ordinary mistake of judgment.

T/F: Like most business entities, general partnerships are created by filing a form with the state.

False Unlike most business entities, general partnerships are not created by filing a form with the state. Instead, the law recognizes that two or more individuals form a general partnership if they have demonstrated an intent to carry on as co-owners of a business for profit.

Which of the following is a specific dissociation event according to the Revised Uniform Partnership Act (RUPA)? a. Expulsion by the unanimous vote of the other partners b. Expulsion by a supra-majority (greater than 75 percent vote) of the other partners c. Expulsion by a super-majority (66 and 2/3rds percent or greater vote) of the other partners d. Expulsion by a majority (greater than 50 percent vote) of the other partners

a. Expulsion by the unanimous vote of the other partners The Revised Uniform Partnership Act (RUPA) recognizes as a specific dissociation event expulsion of a partner by the unanimous vote of the other partners.

In terms of factors to consider in choosing a business entity, issues such as how easy the business is to start and maintain, whether there must be more than one principal, what annual filings or fees are required, and what formalities need to be followed are related to the __________ factor. a. formation b. capitalization c. liability d. taxation of income

a. Formation In choosing a business entity, principals should consider at least the following factors: 1) formation; 2) liability; 3) capitalization; 4) taxation of income; and 5) management and operation. Issues such as how easy the business is to start and maintain, whether there must be more than one principal, what annual filings or fees are required, and what formalities need to be followed are related to the formation factor.

Which of the following is a main advantage of pass-through taxation? a. The ability of the business to distribute earnings to its owners without incurring double-level taxation. b. The ability of a business to distribute earnings to its owners while simultaneously incurring double-level taxation. c. The ability of a business to incur double-level taxation without distributing earnings to its owners. d. The ability of a business to distribute earnings to its owners while incurring no tax liability for either the business or its owners.

a. The ability of the business to distribute earnings to its owners without incurring double-level taxation. One major advantage of pass-through taxation is the ability of the business to distribute earnings to its owners without incurring double-level taxation—without having a tax imposed on both the entity and its members.

Suppose that Graham is the managing member of Mercury Running, LLC (Mercury), and signs a three-year lease agreement with a landlord on behalf of Mercury. One year into the lease, Mercury has a downturn in business, is forced to breach the lease, and moves out hoping to convert to an online business model. Which of the following is true regarding liability for the remainder of the lease? a. The landlord's rights are against Mercury Running, LLC (Mercury) only. b. The landlord's rights are against Graham only. c. The landlord's rights are against both Mercury and Graham. d. The landlord has no rights against either Mercury or Graham, since he is obligated by state statute to release the property for the remainder of the lease term at the lease rate he charged under the existing lease agreement; as a result, the landlord has no damages.

a. The landlord's rights are against Mercury Running, LLC (Mercury) only. Perhaps the most important feature of a limited liability company (LLC) is the limited liability of its members. LLC members are insulated from personal liability for any business debt or liability (contract or tort) if the venture fails. In the subject case, because the landlord's rights are against Mercury Running, LLC only, the landlord may not obtain a judgment against Graham or collect back rent or other damages from Graham's personal assets.

Which of the following is true regarding termination of a sole proprietorship? a. The proprietor's ownership interest in a sole proprietorship cannot pass to her heirs through a gift or an estate. b. The personal bankruptcy of the proprietor does not terminate the sole proprietorship. c. A sole proprietorship cannot be terminated by an express act of the principal. d. A sole proprietorship does not terminate when the proprietor dies.

a. The proprietor's ownership interest in a sole proprietorship cannot pass to her heirs through a gift or an estate. A sole proprietorship is terminated either by an express act of the principal or by operation of law in the case of the death or personal bankruptcy of the proprietor. Although a sole proprietor may sell the assets of her business to another party, the proprietor's ownership interest in a sole proprietorship cannot pass to her heirs through a gift or an estate.

Which of the following is true regarding operating agreements? a. They frequently govern limited liability companies (LLCs). b. They do not afford LLC members flexibility in terms of the rights and responsibilities of each member. c. They do not typically address the internal rules for the actual operation of the LLC. d. They are entirely different from partnership agreements.

a. They frequently govern limited liability companies (LLCs). Limited liability companies (LLCs) are governed by an agreement of its members in the form of an operating agreement. Operating agreements, similar to partnership agreements, cover many of the internal rules for the actual operation of the business. One of the primary benefits of an LLC is that it affords its members a great deal of flexibility in terms of the rights and responsibilities of each member.

How are limited liability partnerships (LLPs) capitalized? a. Through private lenders, through commercial lenders, or by a sale of partnership equity for ownership in the limited liability partnership (LLP) itself b. Only by a sale of partnership equity for ownership in the limited liability partnership (LLP) itself c. Through private lenders, but not through commercial lenders d. Through commercial lenders, but not through private lenders

a. Through private lenders, through commercial lenders, or by a sale of partnership equity for ownership in the limited liability partnership (LLP) itself Limited liability partnerships (LLPs) are capitalized in the same way as a partnership; through debt via private or commercial lenders or by a sale of partnership equity for ownership in the LLP itself.

Which of the following is true regarding venture capital and venture capital firms? a. Venture capital firms and their principals usually insist on substantial control over the corporation via its board of directors and even its officers. b. Venture capital is funding provided by a group of professional investors for use in a well-established, longstanding business enterprise. c. A venture capital firm is frequently focused on multiple industries in order to diversify its risk. d. Venture capitalists are usually long-terms investors.

a. Venture capital firms and their principals usually insist on substantial control over the corporation via its board of directors and even its officers. Venture capital is funding provided by a group of professional investors for use in a developing business. These firms are frequently focused on one industry. Venture capital firms and their principals usually insist on substantial control over the corporation via its board of directors and even its officers. Venture capitalists are not thought of as long-term investors. They usually require an "exit strategy" whereby the venture capital firm exits the corporation with a substantial return.

In a __________ limited liability company (LLC), a named manager (or managers) generally has the day-to-day operational responsibilities, while the non-managing members typically are investors with little input on the course of business taken by the entity except for major decisions (such as a merger). a. manager-managed b. stockholder-managed c. member-managed d. stakeholder-managed

a. manager-managed Most state limited liability statutes distinguish between a member-managed limited liability company (LLC) and a manager-managed LLC. In a manager-managed limited liability company (LLC), a named manager (or managers) generally has the day-to-day operational responsibilities, while the non-managing members typically are 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, non-managing members generally do not have the authority to act on behalf of the business venture.

A partner who is not in a position to make a capital contribution may be forced to __________. a. sell his interest in the partnership b. contribute additional services to the partnership c. become a limited partner d. become a limited partner or contribute additional services to the partnership

a. sell his interest in the partnership The partnership agreement of the limited liability partnership (LLP) often controls the amount and methods of capitalizing the business and the procedures for collecting additional contributions from partners as necessary, a process known as a capital call. Partners who are not in a position to make a capital call contribution may be forced to sell their interest in the partnership.

Articles of organization are also called __________. a. the certificate of organization b. articles of incorporation c. the certificate of incorporation d. articles of partnership

a. the certificate of organization In every state, a limited liability company (LLC) is formed by filing the articles of organization (also called the certificate of organization) with the designated public official in that state, such as the secretary of state or the state's corporation bureau.

Which of the following is true regarding the taxation of a limited liability partnership (LLP)? a. An LLP is not subject to taxation. b. All income or losses of the LLP are reported on the partners' individual tax returns. c. An LLP is not required to file an information return with federal and state tax authorities. d. A limited liability partnership (LLP) is not treated as a pass-through entity.

b. All income or losses of the LLP are reported on the partners' individual tax returns. Limited liability partnerships (LLPs) are treated as pass-through entities. They are not subject to tax; any income is taxed only when it is distributed to its partners. Because it is not a taxable entity, an LLP files an information return that informs federal and state tax authorities of the profits and losses of the LLP. All income or losses are reported on the partners' individual tax returns.

Which document sets in motion the incorporation process? a. Articles of organization b. Articles of incorporation c. Articles of incorporation d. Certificate of corporate authenticity

b. Articles of incorporation Principals that wish to form a corporation do so by filing a document with the state authority that sets out the corporation's name, purpose, number of shares issued, and address of the corporation's headquarters. This document, known as the articles of incorporation, sets in motion the incorporation process.

Suppose James "Snoopy" Stevenson ("Snoopy") plans to open a private investigative agency and enters into a one-year lease agreement for office space, signing on behalf of the soon-to-be-formed Out-of-Sight Investigations, Inc. One month later, Snoopy's financing falls through and he abandons the idea of incorporating his business. Which of the following is true regarding Snoopy's liability for the remaining eleven (11) months of the lease agreement? a. Snooper is a proxy, and he is therefore personally liable for the remainder of the lease. b. Snoopy is a promoter, and he is therefore personally liable for the remainder of the lease. c. Snoopy is a promoter, and since he is acting merely in an agency capacity, he is not liable for the remainder of the lease. d. Snoopy is a proxy, and since he is acting merely in an agency capacity, he is not liable for the remainder of the lease.

b. Snoopy is a promoter, and he is therefore personally liable for the remainder of the lease. The Revised Model Business Corporation Act (RMBCA) provides that anyone purporting to act on behalf of a corporation, knowing incorporation has not yet occurred, is jointly and severally liable for all liabilities created by the acts. In the subject case, James "Snoopy" Stevenson is a promoter, and he is personally liable for the remainder of the lease.

Which of the following is a main advantage of pass-through taxation? a. The ability of investors to assume the losses that are typically generated by a company with no debt. b. The ability of investors to assume the tax deductions and losses that are typically generated by an emerging company or a company with significant up-front debt. c. The ability of investors to assume the tax deductions that are typically generated by an emerging company with no debt. d. The ability of investors to assume the tax deductions, but not the losses, of a company with significant up-front debt.

b. The ability of investors to assume the tax deductions and losses that are typically generated by an emerging company or a company with significant up-front debt. One major advantage of pass-through taxation is the ability of investors to assume the tax deductions and losses that are typically generated by an emerging company or a company with significant up-front debt.

Generally, shareholders, directors, and officers of a corporation are insulated from personal liability in case the corporation runs up large debts or suffers some liability. What is the term for this liability protection? a. An entrepreneurial "immunity necklace" b. The corporate veil c. The corporate shield d. An entrepreneurial "get-out-of-jail-free card"

b. The corporate veil Perhaps the most attractive feature of a corporation is its limited liability for the personal assets of its owners and, with certain exceptions, for its officers and directors. Generally, shareholders, directors, and officers of a corporation are insulated from personal liability in case the corporation runs up large debts or suffers some liability. This liability protection is often referred to as the corporate veil.

A __________ agreement allows the remaining partners to purchase the partnership interest of a __________ partner. a. rescission; dissenting b. buy-sell; withdrawing c. buy-sell; dissenting d. rescission; withdrawing

b. buy-sell; withdrawing A buy-sell agreement allows the remaining partners to purchase the partnership interest of a withdrawing partner. This provision helps ensure the continuity of the partnership business and can avoid legal disputes if a valuation methodology is provided.

Upon a dissociation from a limited liability company (LLC), the remaining members may __________. a. choose to continue the LLC, but they may not initiate dissolution of it b. choose to either continue the LLC or initiate dissolution of it c. not initiate dissolution of the LLC d. not continue the LLC

b. choose to either continue the LLC or initiate dissolution of it Dissociation occurs when an individual member of a limited liability company (LLC) decides to exercise the right to withdraw from the organization. Upon a dissociation, the remaining members may decide to either continue the LLC or trigger dissolution.

A partner's __________ contribution represents the initial __________ investment into the partnership made by each partner. a. interest; capital b. equity; capital c. interest; guaranteed d. equity; guarantee

b. equity; capital A partner's capital contribution represents the initial equity investment into the partnership made by each partner. By law, this amount must be returned to each partner when the partnership assets are liquidated.

A DBA name is sometimes known as a __________ name. a. limited liability company b. fictitious c. factual d. corporate

b. fictitious An individual planning to conduce a sole proprietorship under a trade name rather than her individual name (for example, "Gates IT Consulting" rather than "Joan Gates") will also file a "doing business as," or DBA certificate, with a local or state office. A DBA name is sometimes known as a fictitious name.

To form a limited partnership, the __________ partner files __________ with the __________ government authority. a. limited; articles of organization; state b. general; a certificate of limited partnership; state c. limited; articles of organization; federal d. general; a certificate of limited partnership; federal

b. general; a certificate of limited partnership; state To form a limited partnership, the general partner files a certificate of limited partnership with the state government authority (usually the secretary of state's office). Generally, the certificate is fairly straightforward and requires routine information such as the name, address, and capital contribution of each partner.

A privately held corporation may find that its expansion plans require even more capital than can be raised using private investors. In that case, the corporation may convert itself from __________ to __________ by engaging in an __________. a. publicly held; privately held; ELO b. privately held; publicly held; IPO c. privately held; publicly held; PLO d. publicly held; privately held; COO

b. privately held; publicly held; IPO Privately held corporations may find that their expansion plans require even more capital than can be raised using private investors. In that case, some companies opt to proceed down a very complex and time-consuming process of converting the corporation from privately held to publicly held by engaging in an initial public offering (IPO). At that point, the corporation may raise equity by selling its shares to the general public and to financial institutions.

Which of the following is true regarding taxation of a limited liability company? a. LLC members cannot elect for the LLC to be taxed as a corporation. b. Limited liability companies (LLCs) are not favorable business entities in terms of taxation. c. An attractive advantage of the LLC model is the various tax treatment alternatives available to LLC members. d. A LLC cannot be treated as a pass-through entity.

c. An attractive advantage of the LLC model is the various tax treatment alternatives available to LLC members. An attractive advantage of the limited liability company (LLC) model is the various tax treatment alternatives available to members of the LLC. Although many LLCs are treated as pass-through entities, LLC members instead may elect to be taxed as a corporation if they consider the corporate tax structure to be more favorable.

An individual planning to conduct a sole proprietorship under a trade name will also file a __________ certificate with a local or state office. a. FTC b. UCC c. DBA d. FCC

c. DBA An individual planning to conduct a sole proprietorship under a trade name rather than her individual name (for example, "Gates IT Consulting" rather than "Joan Gates") will also file a "doing business as," or DBA certificate with a local or state office.

Who is responsible for oversight and management of the corporation's course of direction? a. Stakeholders b. Shareholders c. Directors d. Officers

c. Directors Fundamentally, corporations are structured around an allocation of power based on three categories: (1) shareholders; (2) directors; and (3) officers. Directors are responsible for oversight and management of the corporation's course of direction.

What occurs when an individual member of a limited liability company (LLC) decides to exercise the right to withdraw from the organization? a. Renunciation b. Abandonment c. Dissociation d. Dissolution

c. Dissociation Limited liability company (LLC) laws define dissolution of an LLC as a liquidation process triggered by an event that is specified in the operating agreement or by the decision of the majority of the members (or the percentage called for in the operating agreement) to dissolve the company. By contrast, dissociation occurs when an individual member of a limited liability company (LLC) decides to exercise the right to withdraw from the organization.

When a partner no longer wishes to be a principal in the partnership, she may choose to leave the partnership. What term does the Revised Uniform Partnership Act (RUPA) use to describe this act of separation? a. Renunciation b. Withdrawal c. Dissociation d. Avoidance

c. Dissociation When a partner no longer wishes to be a principal in the partnership, she may choose to leave the partnership. The Revised Uniform Partnership Act (RUPA) uses the term dissociation to describe this act of separation.

What are the factors a court will consider in deciding whether to pierce the corporate veil? a. Whether the corporation is publicly or privately held, the identities and qualifications of corporate officers, the nature of the claim, and evidence of fraud or wrongdoing b. The identities and qualifications of corporate officers, the identities and qualifications of the members of the board of directors, evidence of fraud or wrongdoing, and failing to follow corporate formalities c. Inadequate capitalization, the nature of the claim, evidence of fraud or wrongdoing, and failing to follow corporate formalities d. Whether the corporation is publicly or privately held, the nature of the claim, evidence of fraud or wrongdoing, and failing to follow corporate formalities

c. Inadequate capitalization, the nature of the claim, evidence of fraud or wrongdoing, and failing to follow corporate formalities Most courts use the following four (4) factors in considering whether to pierce a corporation's protective veil: (1) inadequate capitalization; (2) the nature of the claim; (3) evidence of fraud or wrongdoing; and (4) failing to follow corporate formalities. Generally, courts are reluctant to discard the corporate entity.

What occurs when an officer, director, or controlling shareholder has some personal financial stake in a transaction that the corporation is engaged in and the officer, director, or shareholder helps to influence the advancement of the transaction? a. Self-effacement b. Self-absorption c. Self-dealing d. Self-aggrandizement

c. Self-dealing The duty of loyalty is primarily focused on providing protection to shareholders when a transaction occurs in which there is a possibility of self-dealing. Self-dealing occurs when an officer, director, or controlling shareholder has come personal financial stake in a transaction that the corporation is engaged in and the officer, director, or shareholder helps to influence the advancement of the transaction.

Who are the owners of the corporation? a. Officers b. Stakeholders c. Shareholders d. Directors

c. Shareholders Fundamentally, corporations are structured around an allocation of power based on three categories: (1) shareholders; (2) directors; and (3) officers. Shareholders are the owners of the corporation and act principally through electing and removing directors and approving or withholding approval of major corporate decisions.

From the principal's perspective, what is the chief disadvantage to the sole proprietorship as a business entity? a. Double-taxation of business profits (first, at the sole proprietorship tax rate, and second, at the individual income tax rate of the principal) b. The legal requirements for protecting the sole proprietorship's intellectual property rights (for example, obtaining the right of exclusivity to a trademark from the United States Patent and Trademark Office) c. The unlimited personal liability of the principal for unpaid debts and liabilities of the business d. The legal requirements for starting up a sole proprietorship (for example, obtaining a certificate of sole proprietorship from the secretary of state's office)

c. The unlimited personal liability of the principal for unpaid debts and liabilities of the business The chief drawback to the sole proprietorship as a form of business entity is a complete lack of protection of the principal's personal assets for unpaid debts and liabilities of the business. All debts and liabilities of the business are also personal debts and liabilities of the principal.

The parties in a franchise are typically bound to each other via __________. a. the Uniform Commercial Code (UCC) b. federal statute c. a franchise agreement d. state statute

c. a franchise agreement The parties in a franchise are typically bound to each other via a franchise agreement. The franchise agreement covers terms that govern the relationship between franchisor and franchisee, including (but not limited to) the duration of the agreement, franchise fees, territorial rights, and commitments from the franchisor for training, ongoing management support, and advertising.

Limited liability partnerships (LLPs) are formed when a general partnership files __________ with the appropriate public official. a. articles of incorporation d. articles of organization c. a statement of qualification d. a certificate of limited partnership

c. a statement of qualification Limited liability partnerships (LLPs) are formed when a general partnership files a statement of qualification with the appropriate public official. The statement includes the name and street address, an affirmative statement electing to become a limited liability partnership, an effective date, and the signature of at least two of the partners.

What is the process for collecting additional contributions from partners as necessary called? a. A buy-sell agreement b. A proxy solicitation c. A fiduciary commitment d. A capital call

d. A capital call The partnership agreement of the limited liability partnership (LLP) often controls the amount and methods of capitalizing the business and the procedures for collecting additional contributions from partners as necessary, a process known as a capital call.

Which of the following is true regarding the management and operation of a limited liability partnership (LLP)? a. A limited liability partnership (LLP) is required by federal statute to have a partnership agreement that sets out its management and operational structure. b. A limited liability partnership (LLP) is required by both the Uniform Partnership Act (UPA) and the Revised Uniform Partnership Act (RUPA) to have a partnership agreement that sets out its management and operational structure. c. A limited liability partnership (LLP) is required by both the Uniform Partnership Act (UPA) and the Revised Uniform Partnership Act (RUPA) to have a partnership agreement that sets out its management and operational structure. d. Although not required by statute, limited liability partnerships will frequently have a partnership agreement that sets out their management and operational structure.

d. Although not required by statute, limited liability partnerships will frequently have a partnership agreement that sets out their management and operational structure. Although not required by statute, limited liability partnerships will frequently have a partnership agreement that sets out their management and operational structure. In most states, the default agreement is the governing Revised Uniform Partnership Act (RUPA) or Uniform Partnership Act (UPA) provision.

Suppose that the First National Bank of Missouri (First National) loans $20,000 to Alex Harris (Harris) to operate his sole proprietorship, doing business as Alex Harris Catering Services. The loan is for five (5) years at the current market interest rate of 6.75 percent, and First National has already disbursed the entire loan amount to Harris in one lump sum. What type of loan is this? a. Private b. A proxy agreement c. A line of credit b. Commercial

d. Commercial Sole proprietors may raise money through commercial loans. A commercial loan is a more formal (compared to a private loan) transaction involving a commercial lender (for example, a bank) that lends money to the proprietor for business purposes at the market rate of interest over a fixed, relatively short period (5-10 years).

Which of the following is true regarding the limited liability company (LLC)? a. Although the limited liability company (LLC) itself is insulated from organizational liability for any business debt or liability (contract or tort), LLC members themselves are personally liable for such obligations. b. Although LLC members are insulated from personal liability for business debts if the venture fails, they are personally responsible for any contract or tort liabilities arising from the business. c. Although LLC members are insulated from personal liability for contract or tort liabilities arising from the business, they are personally responsible for business debts if the venture fails. d. LLC members are insulated from personal liability for any business debt or liability (contract or tort) if the venture fails.

d. LLC members are insulated from personal liability for any business debt or liability (contract or tort) if the venture fails. Perhaps the most important feature of a limited liability company (LLC) is the limited liability of its members. LLC members are insulated from personal liability for any business debt or liability (contract or tort) if the venture fails.

Which of the following is true regarding capitalization of the limited liability company? a. Like a corporation, a limited liability company (LLC) issues shares. b. LLCs are capitalized exclusively through debt via private lenders or commercial lenders. c. LLCs are capitalized exclusively through the sale of equity ownership in the LLC itself. d. LLCs are capitalized primarily through debt via private lenders or commercial lenders or through the sale of equity ownership in the LLC itself.

d. LLCs are capitalized primarily through debt via private lenders or commercial lenders or through the sale of equity ownership in the LLC itself. Unlike a corporation, a limited liability company (LLC) does not issue shares. Instead, LLCs are capitalized primarily through debt via private lenders or commercial lenders or through the sale of equity ownership in the LLC itself.

Who manages the day-to-day operations of the corporation? a. Shareholders b. Directors c. Stakeholders d. Officers

d. Officers Fundamentally, corporations are structured around an allocation of power based on three categories: (1) shareholders; (2) directors; and (3) officers. Officers manage the day-to-day operations of the business.

Which of the following is true regarding funding a sole proprietorship? a. Sole proprietorships are not limited in their options for raising money. b. Sole proprietorships can sell ownership shares (i.e., stock) in their business venture. c. State law prohibits sole proprietors from using their personal financial resources as a source of operating capital. d. Private loans come from family members and friends and are paid back according to their individual agreement.

d. Private loans come from family members and friends and are paid back according to their individual agreement. Sole proprietorships are limited in their options for raising money. They cannot sell ownership in their business venture and are typically left with capitalizing their operations in other ways. First, the proprietor's personal resources may provide at least a portion of operating capital. Proprietors may also finance their business through debt. Private loans are typically through individuals who negotiate such items as interest rate directly with the proprietor. These loans come from family members and friends and are paid back according to their individual agreement.

What is the name of an individual who begins to carry out a business venture's activities before actually filing the articles of incorporation? a. Proxy b. Third-party beneficiary c. Incidental beneficiary d. Promoter

d. Promoter In most cases, an individual or group of individuals begins to carry out a business venture's activities before actually filing the articles of incorporation. These activities may include arranging for necessary capital through a loan, recruiting personnel, leasing property, and arranging to have the business incorporated. The individual who performs these activities is known as a promoter.

Which federal regulatory authority oversees the regulation of franchisors? a. The Consumer Financial Protection Bureau (CFPB) b. The Interstate Commerce Commission (ICC) c. The Uniform Commerce Commission (UCC) d. The Federal Trade Commission (FTC)

d. The Federal Trade Commission (FTC) The Federal Trade Commission (FTC) is the federal regulatory authority that oversees the regulation of franchisors. The FTC regulations are primarily designed to ensure full disclosure of all information relating to a franchise company prior to a franchisee investment.

In most cases, what controls the amount and methods of capitalizing the limited liability company (LLC)? a. The articles of incorporation b. The partnership agreement c. The articles of organization d. The operating agreement

d. The operating agreement Unlike a corporation, a limited liability company (LLC) does not issue shares. Instead, LLCs are capitalized primarily through debt via private lenders or commercial lenders or through the sale of equity ownership in the LLC itself. In most cases, the operating agreement of the LLC controls the amount and methods of capitalizing the business.

Which of the following is true regarding the taxation of a sole proprietorship? a. A sole proprietorship is subject to corporate income taxation. b. The sole proprietor must file a tax return on behalf of the business. c. The principal must pay taxes on sole proprietorship income based on her own individual tax rate; however, she may not personally deduct sole proprietorship losses. d. The principal reports business income and expenses on her own individual tax return.

d. The principal reports business income and expenses on her own individual tax return. A sole proprietorship is not subject to corporate income taxation, and no tax return is filed on behalf of the business. Rather, the principal reports business income and expenses on her own individual tax return and pays taxes on business income (or deducts business losses) based on her own individual tax rate.

How may a corporation be funded? a. Through debt, through the selling of equity, and through government regulation b. Through debt only c. Through the selling of equity only d. Through debt or through the selling of equity

d. Through debt or through the selling of equity Corporations have perhaps the widest range of options when considering how to finance their operations. They may be funded through debt or through the selling of equity (ownership interests) in a variety of forms.

When a partner no longer wishes to be a principal in the partnership, she may choose to leave the partnership. What term does the Revised Uniform Limited Partnership Act (RULPA) use to describe this act of separation? a. Rescission b. Dissociation c. Revocation d. Withdrawal

d. Withdrawal When a partner no longer wishes to be a principal in the partnership, she may choose to leave the partnership. The Revised Uniform Limited Partnership Act (RULPA) uses the term withdrawal to describe this act of separation.

The __________ rule protects __________ from liability for decisions that may have been unwise but did not breach the duty of care. a. parol evidence; directors, but not officers b. substantial performance; officers and directors c. conscious parallelism; officers, but not directors d. business judgment; officers and directors

d. business judgment; officers and directors The business judgment rule protects officers and directors from liability for decisions that may have been unwise but did not breach the duty of care. This rule insulates directors from liability when, based on reasonable information at the time, the transaction or course of action turns out badly from the standpoint of the corporation. Directors and officers often seek the protection of this rule when an individual shareholder or group of shareholders files a lawsuit against them.

In terms of factors to consider in choosing a business entity, issues such as how the business will fund its operations and whether the principal(s) may sell ownership rights in the business to raise money are related to the __________ factor. a. formation b. liability c. management and operation d. capitalization

d. capitalization In choosing a business entity, principals should consider at least the following factors: 1) formation; 2) liability; 3) capitalization; 4) taxation of income; and 5) management and operation. Issues such as how the business will fund its operations and whether the principal(s) may sell ownership rights in the business to raise money are related to the capitalization factor.

Javier no longer wishes to be a principal in his general partnership, so he chooses to leave it. Alexia no longer wishes to be a principal in her limited partnership, so she chooses to leave it. Under the Revised Uniform Partnership Act (RUPA), Javier's act of separation is called __________, while under the Revised Uniform Limited Partnership Act (RULPA), Alexia's act of separation is called __________. a. renunciation; rescission b. rescission; renunciation c. withdrawal; dissociation d. dissociation; withdrawal

d. dissociation; withdrawal When a partner no longer wishes to be a principal in the partnership, she or he may choose to leave the partnership. The Revised Uniform Partnership Act (RUPA) uses the term dissociation to describe this act of separation, while the Revised Uniform Limited Partnership Act (RULPA) uses the term withdrawal. Javier has dissociated from his general partnership, while Alexia has withdrawn from her limited partnership.

Limited liability company (LLC) laws define __________ of an LLC as a __________ process triggered by an event that is specified in the __________ or by the decision of the majority of the members to dissolve the company. a. dissociation; liquidation; articles of organization b. dissociation; non-liquidation; articles of organization c. dissolution; non-liquidation; operating agreement d. dissolution; liquidation; operating agreement

d. dissolution; liquidation; operating agreement Limited liability company (LLC) laws define dissolution of an LLC as a liquidation process triggered by an event that is specified in the operating agreement or by the decision of the majority of the members (or the percentage called for in the operating agreement to dissolve the company.

A __________ partnership is an entity that exists by virtue of a __________ statute that recognizes one or more partners as managing the business while other partners participate only in terms of contributing capital or property. a. general; federal b. limited; federal c. general; state d. limited; state

d. limited; state A limited partnership is an entity that exists by virtue of a state statute that recognizes one or more partners as managing the business while other partners participate only in terms of contributing capital or property. A limited partnership has at least one general partner (managing principal) and at least one limited partner (investing principal).