BLAW Chapter 12 (Business Organizations)
The _______________ has been adopted by most states. It governs partnerships and partnership relations. It provides "default rules" that determine the operation of partnerships when a partnership agreement is silent on a particular issue or when no formal agreement exists among the partners.
1997 UPA
Close corporations have a limited number of shareholders, usually _________ to __________, depending on state law. Shares may not be sold openly, so there is a limited market for shares. The shareholders must have an agreement that governs the affairs of the corporation, but these entities are not subject to formal rules regarding shareholder and director meetings as are required of regular corporations.
30; 50
As in the case of corporations, state laws provide the procedure to be followed in the creation of an LLC. The organizers file a document referred to as ___________________________, which is similar to a corporation's articles of incorporation and contains basic information: 1) Company name (must include "Limited Liability Company" or "LLC") 2) Address of the company or its registered agent 3) Whether the LLC is to be managed by its members or by a manager 4) Names and addresses of company members 5) Date (or event) upon which the company will be dissolved, if any 6) Whether any members are to be liable for company debts
Articles of organization
_________________ corporations: have a corporate purpose to create a material positive impact on society and the environment; are required to consider the impact of their decisions not only on shareholders but also on workers, community, and the environment; and are required to make available to the public an annual benefit report that assesses their overall social and environmental performance against a third-party standard.
Benefit
A new class of corporation that voluntarily meets high standards of purpose, accountability, and transparency is called the ______________________.
Benefit corporation
First made effective in Maryland in 2010, this corporation is now an option in about 30 states, including California and New York.
Benefit corporation
The initial ____________________, the governing committee of a corporation, is specified in the articles of incorporation or chosen by the incorporators at the first corporate meeting.
Board of directors
When a corporation is dissolved voluntarily, the ___________________ is responsible for winding up the affairs of the corporation.
Board of directors
A principle of corporate law under which a court will not challenge the business decisions of a corporate officer or director made with ordinary care and in good faith is called the _______________________
Business judgement rule
The ______________________ makes directors and managers immune from liability when problems result from honest mistakes in judgment, so long as there is a reasonable basis for the decisions.
Business judgement rule
The _______________ are the rules that regulate and govern the key structure of the corporation. The shareholders, directors, and officers of the corporation must follow these in conducting corporate activities.
Bylaws
Regular corporations, which are referred to as _______ corporations, can elect, through the Internal Revenue Service (IRS), to be classified as an _________ corporation.
C; S
After reviewing the corporation's application for completeness, the state issues a _____________________
Certificate of incorporation
The law in 20 states allows the formation of a ________________: a closely held corporation; a corporation that has stock that is not allowed to be widely held; the number of shareholders is limited and usually, unlike a publicly held corporation, the shareholders are active in oversight of the firm.
Close corporation
State governments issued a _________________, or a certificate issued by a state government recognizing the existence of a corporation as a legal entity; it is issued automatically upon filing the information required by state law and payment of a fee, to selected businesses.
Corporate charter
A _______________ consists of three major groups: the shareholders, the board of directors, and the managers.
Corporation
A _________________ is an artificial person, or legal entity, created under state law. Most large, well-known businesses—such as Coca-Cola, General Motors, and Microsoft—are these.
Corporation
Which business organization does this describe: Double taxation; profits of corporation and shareholders' shares of profits are both taxed
Corporation
Which business organization does this describe: Entity status is legal entity distinct from owners
Corporation
Which business organization does this describe: May have perpetual existence
Corporation
Which business organization does this describe: Method of creation is chartered under state statute
Corporation
Which business organization does this describe: Sale of more shares increases capital; may also borrow
Corporation
Which business organization does this describe: Shareholders elect board of directors who set policy and appoint officers to manage
Corporation
Which business organization does this describe: Shareholders liable only to the extent of paid-in capital
Corporation
Which business organization does this describe: Shares of stock can be transferred unless restricted by contract
Corporation
A shareholder, however, may become a ___________ of the corporation—for example, by supplying materials, lending money, or working for the business—and enjoys the same rights of recovery against the corporation as any other person in this position.
Creditor
The __________________ of the partnership occurs when an event takes place that precludes the partners from engaging in any new business.
Dissolution
__________________ of a corporation may be voluntary or involuntary, such as through bankruptcy, and marks the end of the corporation.
Dissolution
_________________: the imposition of two taxes on the same property or income during the same period; especially the taxation of corporate profits that are then subject to taxation again when remainder of profits are paid as income (dividends) to the shareholders.
Double taxation
Compared to partnerships and proprietorships, the corporate form of organization presents entrepreneurs with a disadvantage—________________ of profits—and an advantage—___________________
Double taxation; limited liability
Although there are many federal and state regulations, most cases of conflict between franchisors and franchisees involve litigation over violations of the terms of the agreement. We see an example in the ________________ case, which also notes many common terms in franchise agreements.
Dunkin' Donuts
A business's _________________ refers to its ability to continue to operate in the event of the death, retirement, or other incapacity of an owner of the business. The ability of a business to continue under such circumstances can depend on the form of business organization.
Duration
Once elected, directors serve terms specified in the articles, although the shareholders can remove a director from office for cause (generally for a breach of ______________, a legal obligation that is owed to another and that must be satisfied; an obligation for which somebody else has a corresponding right, or misconduct)
Duty
As long as limited partners maintain their investor position, they are not liable for debts owed by the limited partnership (sometimes called limited liability partnerships), as noted in the ___________________ case.
Eagles Landing
A __________________ relationship requires that each partner act in good faith for the benefit of the partnership. The partners must place their personal interests beneath those of the partnership.
Fiduciary
A partnership is a relationship based on extraordinary trust and loyalty. Partners owe a _____________________ to one another.
Fiduciary duty
Directors are subject to a ________________________, which stands for the principle that directors and officers of a corporation in making all decisions in their capacities as corporate fiduciaries, must act without personal economic conflict. The duty of loyalty can be breached either by making a self-interested transaction or taking a corporate opportunity.
Fiduciary duty of loyalty
Directors are subject to a _________________________. This requires that directors place the interests of the corporation before their own interests
Fiduciary duty of loyalty
About a third of retail sales in the United States take place in ________________ operations.
Franchise
Generally, a __________________ exists whenever a franchisee, in return for payment of a franchise fee, is granted the right to sell goods or services by a franchisor according to a marketing plan.
Franchise
The _____________________ sets forth the rights and obligations of the franchisor and franchisee
Franchise agreement
In a partnership, the partners or, more accurately, _____________________, share control over the business's operations and profits.
General partners
A ________________________ is defined as an association of two or more persons to carry out a single business enterprise for profit; also as a common undertaking in which two or more combine their property, money, efforts, skill or knowledge (43 NW2d at 136).
Joint venture
There are many forms of partnerships, including _____________________
Joint ventures
What case is related to partnerships being fiduciary relationships, ones that require that each partner act in good faith for the benefit of the partnership?
Latta v. Kilbourn
Unlike a proprietorship, the corporation is a ________________ with rights and responsibilities separate from the owners.
Legal entity
A ____________ partner is a partner in a limited partnership whose liability for partnership debts is limited to the amount of his contribution to the partnership.
Limited
___________________ allows persons to invest in a business without placing all of their personal wealth at risk. It can also allow investors to be passive about the internal management of the business.
Limited liability
_____________________: the fact that shareholders of a corporation are not liable for the debts of the corporation beyond the amount of money they have invested in the corporation.
Limited liability
______________________ means that if the sums owed are so large that the organization must go into bankruptcy, the owners—the shareholders or members—could lose their investments in the company but cannot be held personally liable.
Limited liability
A _____________________ is a business organization that is treated like a corporation for liability purposes but like a partnership for federal tax purposes. The profits are taxed only once as LLC owners' income. This form of organization has become very popular.
Limited liability company
Which business organization does this describe: Capital limited to what members contribute; may also borrow
Limited liability company
Which business organization does this describe: Company dissolves after fixed time or a specific event
Limited liability company
Which business organization does this describe: Members liable to the extent of paid-in capital
Limited liability company
Which business organization does this describe: Method of creation is created under statute by agreement of members
Limited liability company
Which business organization does this describe: Operating agreement specifies management control
Limited liability company
Which business organization does this describe: If IRS conditions are met, profits taxed to each of member's share
Limited liability company.
Which business organization does this describe: Other members must consent to transfers
Limited liability corporation
Like a general partnership, a __________________ is a business organization made up of two or more persons (partners) who have agreed to carry on a business for a profit. Unlike in a general partnership, however, not all partners have the right to participate in the management of the enterprise, and not all are liable for partnership debts.
Limited partnership
The corporation's board of directors hires _________________ to run the business.
Managers
An LLC usually is formed by two or more ______________, owners of the enterprise have this title rather than shareholder as in the case of a corporation; they report income or losses from the LLC on their personal tax returns., but in many states, it is possible to form an LLC with just one
Members
An LLC usually is formed by two or more members, but in many states, it is possible to form an LLC with just one member. The members have a _____________________ in the company, somewhat like owning stock in a corporation or being a limited partner in a limited partnership.
Membership interest
The term "______________" means that there is a difference in laws between two jurisdictions that can be used to someone's advantage by creating a legal entity or locating a transaction in one jurisdiction rather than another. For example, Latin Americans deposit tens of millions of dollars in tax-free accounts in U.S. banks each year.
Offshore
Members of an LLC sign an _____________________. Similar to the bylaws of a corporation, the agreement provides rules about the operation of the company and the relationships of the members. It establishes the company's method of management, allocation of profits and losses among members, restrictions on the transfer of membership interests, and the process to be followed in dissolving the company. State statutes provide default provisions to cover issues not stated in the agreement.
Operating agreement
A _______________________ is defined as an association of two or more persons to carry on a business for a profit.
Partnership
Which business organization does this describe: Capital limited to what partners contribute or can borrow
Partnership
Which business organization does this describe: Ended by agreement or by death or withdrawal of a partner
Partnership
Which business organization does this describe: Generally, sale of partnership interest terminates partnership
Partnership
Which business organization does this describe: Method of creation is created by agreement of parties; statutes may apply
Partnership
Which business organization does this describe: Partners have equal control unless otherwise agreed; limited partners have no management rights
Partnership
Which business organization does this describe: Profits taxed to each owner's share
Partnership
Which business organization does this describe: Unlimited liability except for limited partner in a limited partnership
Partnership
Which business organizations does this describe: Entity status is separate from owners for some purposes
Partnership; Limited liability company
Unless its articles of incorporation provide for a specified period of duration, a corporation has the potential of _____________________. The death or retirement of a shareholder does not bring about the termination of the corporation. In most corporations, the death of a shareholder has no impact on the operations of the business.
Perpetual existence
Legally, the board is the_______________ of a corporation; that is, on behalf of the corporation, it sets corporate policy and decides corporate business, such as the sale of assets, entrance into new product lines, major financing decisions, and appointment of corporate officers.
Principal
In a_______________, the liability of the members of the group, such as the doctors, can be limited to what is invested in the entity. Therefore, each physician is not personally liable for the debts of all the others, which could arise from a costly malpractice judgment against one doctor in the group. A doctor who loses a malpractice case does not have limited liability because she is still personally liable for her negligence, but other members of the practice are protected because this corporation cannot be used to attribute the negligent doctor's liability to others.
Professional corporation
_________________: in most states, a category of corporations that may be used by those providing a personal service that require a license, such as physicians, dentists, architects, and accountants. The primary reason to adopt this status is for tax benefits
Professional corporation
Many professional businesses, such as groups of doctors in practice together, used to be partnerships. However, all states have enacted statutes to allow _____________________ to be formed by licensed professionals.
Professional corporations
As a ______________________, a person may simply do business without formality in enterprises that do not require a government license or permit, although states require business names to be registered if a fictitious business name is used.
Proprietor
Most shareholders give third parties their ______________, a written authorization to cast their vote so that they do not have to attend the meeting.
Proxy
Notice of shareholder meetings must be provided in advance, and a _______________, the minimum number of members of a body, such as a board of directors or shareholders of a company, necessary to conduct the business of that group—usually more than half of the total shares—must be represented at the meeting.
Quorum
Profits and losses must be allocated to the shareholders who pay income taxes. The ________ corporation does not pay taxes, so it is like a partnership for tax purposes.
S
Regular corporations, which are referred to as C corporations, can elect, through the Internal Revenue Service (IRS), to be classified as an _____________ corporation: such corporations may have only one class of stock and may not have more than 100 shareholders. Only natural persons who are U.S. citizens or legal residents may be shareholders, not other corporations or partnerships.
S
The profits of corporations are taxed at the corporate level unless there is an ___________ corporation election.
S
The __________________ own the corporation.
Shareholders
The selection of the board of directors is the responsibility of the ________________________.
Shareholders
When a corporation is dissolved voluntarily, the board of directors is responsible for winding up the affairs of the corporation. After the corporation's affairs have been completed, the assets are liquidated. The proceeds of the liquidation are first used to satisfy creditors, and any remainder goes to the __________________.
Shareholders
_____________________ elect the board of directors and vote only on matters that change the corporation's structure or existence (such as a merger with another firm or an amendment to the corporation's articles of incorporation).
Shareholders
Upon dissolution, the corporation may not take on any new business. A voluntary dissolution involves approval of the _______________ and the ___________________
Shareholders; board of directors
A person doing business for herself is a ______________________.
Sole proprietor
A person doing business for herself is a sole proprietor; the business organization is a _____________________________.
Sole proprietorship
In a _________________________, legally and practically, the owner is the business; capital comes from the owner's own resources or is borrowed with the owner as debtor.
Sole proprietorship
Perhaps the two greatest disadvantages of the ______________________ are the fact that limited alternatives exist for raising capital and the owner is personally liable for all business debts.
Sole proprietorship
Which business organization does this describe: Because the profits of the business are taxed to the owner personally, a tax return in the business's name is not required so long as records of income and expenses are kept. The operational and record-keeping formalities of the business are at the owner's discretion as long as various taxing and state licensing authorities are satisfied.
Sole proprietorship
Which business organization does this describe: Entity status is not separate from owner
Sole proprietorship
Which business organization does this describe: Capital limited to what owner can raise or borrow
Sole proprietorship
Which business organization does this describe: Control determined by owner
Sole proprietorship
Which business organization does this describe: Duration is same as the owner
Sole proprietorship
Which business organization does this describe: May be sold at any time; new one formed
Sole proprietorship
Which business organization does this describe: Method of creation is owner begins business operations
Sole proprietorship
Which business organization does this describe: Profits taxed to owner as individual
Sole proprietorship
Which business organization does this describe: owner personally liable for debts
Sole proprietorship
_____________________ is the oldest and simplest form of business organization.
Sole proprietorship
There are over 30 million businesses in the United States. _____________________—which may include consultants, dry cleaners, and restaurants—account for the majority, but ___________________ pay far more in total taxes.
Sole proprietorships; corporations
As the Delaware high court explained, a director's decision should be "based entirely on the corporate merits of the transaction and ... not be influenced by personal or extraneous considerations" (634 A.2d at 362). In many corporations, it is common for shareholders to be both directors and managers, giving them multiple roles to play. The kind of conflict that can arise is discussed in the __________________ case.
Storetrax
In the ____________ case, the Maryland high court held that a director did not breach his fiduciary duty by suing his own company board to fulfill a contractual obligation.
Storetrax
The election of deciding whether to go from a C corporation to an S corporation is taken primarily for __________ considerations.
Tax
A complete termination comes about only after the partnership has been dissolved and its affairs have been wound up. True or false?
True
A corporation does not have the privilege against self-incrimination under the Fifth Amendment. True or false?
True
A corporation has the right of access to the courts as an entity that may sue and be sued. Corporations are entitled to many constitutional protections, including free speech, equal protection under the law, and protections against unreasonable searches and seizures. True or false?
True
A corporation is recognized under federal and state law as a "person." True or false?
True
A franchise exists when a franchisee pays a fee and is granted the right to sell a franchisor's goods or services. Marketing is associated with the franchisor's trade name or trademark. The relationship is defined by a franchise agreement that sets forth the rights and duties associated with the use of the franchise marks or names, the use of the franchise operating manual, designated territory of operation, royalty payments, advertising commitment, and termination. True or false?
True
A key feature of the corporation is the separation of ownership (the shareholders) and control (management and the board of directors). Members of other groups, such as employees, may be referred to as stakeholders, but they are generally not part of the basic legal structure of the entity. True or false?
True
A limited liability company (LLC) provides limited liability for its members (investors) and is taxed as a partnership. Members are thus taxed on the income, rather than being subject to the double taxation of a corporation and its shareholders. A LLC usually restricts how member interests may be transferred. True or false?
True
A limited liability company is dissolved and its affairs are wound up usually because of the occurrence of an event specified in the articles of the organization to bring about the dissolution of the company or by the consent of all the members. True or false?
True
A limited partnership has at least one general partner and one or more limited partners. True or false?
True
A partnership may begin with an oral agreement between two or more persons to do business as partners or begin by an implied agreement that may be inferred from the conduct of the partners as they do business together. True or false?
True
A shareholder's obligation to creditors is limited to the shareholder's capital contributions—the amount paid to buy stock. True or false?
True
A sole proprietorship terminates with the death or incapacity of the owner. Similarly, at common law, a partnership is dissolved by the death, retirement, or other incapacity of a partner, but it is not necessarily terminated. True or false?
True
About half of the states use some form of the Uniform Limited Partnership Act or the Revised Uniform Limited Partnership Act (both are generally referred to as the ULPA). True or false?
True
Although death, bankruptcy, retirement, resignation, or expulsion of any member terminates the membership of a member, similar to a partnership, the LLC itself can continue if all remaining members give their consent. In this way, although the company continues to exist, the relationship of the members has changed, which satisfies the IRS regulations regarding continuity of life and the application of partnership taxation rules. The ability of the members to consent to the continuation of the LLC must be set out in the articles of organization. True or false?
True
As a rule, a franchisee operates as an independent business, usually as a corporation or LLC, subject to the standards specified by the franchisor. True or false?
True
Because it is expensive and disruptive for partnerships to be terminated and re-formed because of the withdrawal, death, or bankruptcy of one partner, many agreements have provisions to allow the partnership to continue despite such events. For example, the partnership may purchase life insurance on the partners, with the proceeds to be used to buy back the interests of a deceased partner from her estate, and thus, the partnership need not cease to exist. True or false?
True
California was the first state to regulate franchises. It requires franchisors to register with the state and to provide prospective franchisees with a prospectus disclosure document before selling any franchises. A dozen states have enacted similar laws. True or false?
True
Corporations are created under state law and are recognized as legal entities. They have their own legal life, which is potentially perpetual. They are responsible for their own debts and tort liabilities. Shareholders, as investors in corporations, are liable only to the amount they invest in the corporation. True or false?
True
Courts can, however, "pierce the corporate veil" of limited liability organizations and hold the owners personally liable under some circumstances. That is, the court disregards the corporate entity by finding that the entity is a sham and that the owner(s) actually operate the business as a proprietorship or partnership. The court can then impose liability on shareholders in instances of fraud, undercapitalization, or failure to follow corporate formalities. True or false?
True
Creditors cannot assert that the owners must draw on their personal assets to pay the debts of the limited liability organization. In the case of a general partnership or proprietorship, the owners can face unlimited personal liability. True or false?
True
Dissolution can come about in several ways. Change in the composition of the partners results in a new partnership and dissolution of the old one. Thus, the withdrawal, bankruptcy, or death of a partner causes the partnership to be dissolved. True or false?
True
Events that affect a general partner and would bring about the dissolution of a general partnership could also dissolve a limited partnership. However, whereas the bankruptcy of a general partner dissolves an LP, the bankruptcy of a limited partner usually does not. True or false?
True
Except in the case of major decisions that require consent of all partners—such as decisions to change the nature of the partnership's business, to admit new partners, or to sell the business—a majority vote is presumed to be controlling under the UPA. In most large partnerships, the partners often delegate most management responsibilities to one person or group, often referred to as the managing partner or partners. True or false?
True
Franchise agreements are usually explicit about events that bring about the franchise's termination. Some have a fixed expiration time, such as 20 years. Typical provisions give the franchisor the right to terminate upon the occurrence of events, ranging from the bankruptcy of a franchisee to the failure of a franchisee to submit to inspection by the franchisor. True or false?
True
Franchises may be separated into three basic categories: (1) product distributorships, such as a car dealership, in which the franchisee has the right to sell the product of the parent company; (2) trademark or trade-name licensing, in which the franchisee has a license to market the company's brands, such as a local Coca-Cola bottler; and (3) business format franchising, in which the franchisee follows the business model set out by the parent company, such as McDonald's, which also lends its trademark. True or false?
True
General partnerships are composed of two or more people, general partners, who agree to carry on a business for profit. Partnerships may be structured in almost any way desired by the partners. When an agreement does not specify what happens in some instance, such as death of a partner, the law of partnership, codified in the Uniform Partnership Act, determines the result. In general, partners share in the managerial control, debts, tort liability, and profits of the business. They are taxed personally on partnership profits. True or false?
True
Generally, a partnership is the association of two or more persons to carry on as co-owners of a business for profit. The mere fact that the parties called themselves partners and referred to their business relation as a partnership will not necessarily make them partners, nor their business a partnership. Furthermore, an attempt to form a partnership can fail for numerous reasons. True or false?
True
If a partner is allowed to sell or assign his interest in a partnership, the partnership can continue, but the new owner of the interest does not automatically become a partner. The person is entitled to receive the share of profits the partner would have received, but she does not gain the right to participate in the management of the partnership without permission of other partners. This protects the existing partners from outsiders not originally a part of the entity to appear and begin participating with full partnership rights. Because partners have such broad powers with respect to the operation of the business, the law does not want to make someone a partner with others unless there is mutual agreement. True or false?
True
If more than a quarter of gross receipts to the corporation are from passive (investment) income, the IRS can revert the company to regular C corporation status. This is a very popular form for smaller businesses. True or false?
True
In a limited partnership, partners must execute a written agreement, called a certificate of limited partnership, and file it with the appropriate state official, usually the Secretary of State. True or false?
True
In addition to tax considerations, the other key factor in the choice of business form is limited liability, which investors in corporations, limited partnerships, and limited liability companies have, but proprietors and general partners do not have. Transfer of ownership interests is easiest in corporations with publicly traded stock. In other organizations, the value of interests is often not known, and often restrictions are placed on transfers. A corporation may have perpetual existence as a legal entity. In practice, other organizations can exist for a long time under contracts that control what happens in case of death or retirement of an investor or partner. True or false?
True
In business format franchising, the franchisor provides the franchisee with everything needed to begin the business, including how the franchisee operates the business according to set procedures. True or false?
True
In general, a corporation's articles of incorporation, along with an application, must be filed with the appropriate state office (usually the Secretary of State), along with payment of a fee. True or false?
True
In most states, the owners of a PC can comprise only the professionals involved in the firm itself, that is, the doctors whose practices are tied together to some extent. Stock cannot be sold to outside investors. The tax treatment of PCs is complicated, but tax considerations are another reason many professionals choose this form of organization. True or false?
True
In re 1545 Ocean Avenue, LLC is a case in which the members of an LLC did not contemplate how things could go wrong, how disputes could be resolved, and when a termination could be triggered. True or false?
True
In response, federal and some state regulations require franchisors to register franchises and to disclose relevant information necessary to help franchisees make informed investment decisions. True or false?
True
In some states, franchisors must give the franchisees reasonable time to correct problems. In addition, several states have laws that restrict a franchisor's ability to terminate a franchise unless there is good cause. Upon termination, the franchisee loses the right to the franchisor's trade name. True or false?
True
In the Morrissey case, the court pierced the veil so the corporate form of business organization could not be used to avoid obligations. True or false?
True
In the United States, small businesses are looked on with favor and are exempted from compliance with some laws; in Japan, they are discriminated against by government policy and are considered less desirable places to work. True or false?
True
In the final dispersal of the assets of the limited partnership, creditors' rights precede partners' rights. The limited partners receive their share of the profits and their capital contributions before general partners receive anything, unless the LP agreement holds otherwise. True or false?
True
In the late 1800s, liberal general incorporation statutes began to be enacted in the United States. Those statutes established a simple procedure for incorporating a business and conferred no special privilege. Incorporation is now easily available to businesses regardless of their field of operation, size, or political influence. True or false?
True
Key elements that might be included in a business format franchise are shown in Exhibit 12.3. They include, among other things, the rights and limits associated with the use of the franchise trademarks or trade names, the use of the franchise operating manual, the location and designated territory of operation, fee and royalty payments, the advertising commitment, and termination procedures. True or false?
True
Key factors that influence the choice of business organization include the potential liabilities imposed on the owners, the ability to transfer ownership interests, the ability of the business organization to continue in the event of the death or withdrawal of one or more of the owners, the capital requirements of the business, and the tax rate applicable to the business organization selected. True or false?
True
Limited partners are investors who may not participate in managing the business. Although they have the right to see the partnership books and to participate in the dissolution of the business, limited partners are not liable for the debts or torts of the LP beyond their capital contributions. True or false?
True
Limited partners lose their limited liability and become general partners if they take an active role in managing the business. True or false?
True
Limited partnerships are governed by state law. They must have at least one general partner. The limited partners are investors who may not share in managerial control of the business. Their liability is limited to the amount they invest, unless they try to exercise managerial control and become general partners, who are fully liable. True or false?
True
Many attorneys, doctors, accountants, and retail stores are organized as partnerships. A "person" who is a partner in a partnership may be another partnership, a corporation, or some other entity. True or false?
True
Most states have agencies, usually in the state attorney general's office, that have the authority to investigate franchise fraud, among other bad business practices. If regulators suspect fraud, they can institute a civil lawsuit seeking damages, injunctions, and fines. Some franchisees are given extra protection by special state laws. Auto dealers and gas stations, for example, often have extra rights beyond those of most franchise owners. True or false?
True
Naturally, the initial franchise fee or up-front payment is specified. Once the business is operating, the franchisor may require a royalty payment—generally a percentage of annual sales or net revenue. The franchisor may also require payments for advertising. The advertising fees depend on whether the franchisor does local or national advertising on behalf of its franchises. To protect the trade name, franchise agreements may prohibit franchisees from engaging in advertising or promotional programs not approved by the franchisor. True or false?
True
Notice of termination must be given to the franchisee. True or false?
True
Offshore jurisdictions win business by offering choices of business entities. These range from simple "international business companies" offered by the British Virgin Islands, favored by Asian investors for their low cost and relative anonymity, to the sophisticated mutual funds and insurance laws in jurisdictions such as Bermuda and Cayman that enable companies to create entities with features not readily available in their home countries. True or false?
True
Partners who make large contributions to a partnership are not likely to agree to equal votes for all partners and thus bargain for an agreement that distributes votes on another basis. Partners are free to agree to whatever control mechanism they wish to adopt. True or false?
True
Partnership law originated in the common law but was codified in the Uniform Partnership Act (1914) and, more recently, in the Uniform Partnership Act (UPA; 1997, amended in 2013). True or false?
True
Real estate and oil well investments are often set up as limited partnerships. In addition to the terms listed above, the parties to the LP agreement may agree to bind themselves in ways not required by the certificate. True or false?
True
Regardless of who runs a partnership, the partners have a duty to one another to disclose all financial aspects of the business and to be completely honest, regardless of personal differences. True or false?
True
Shareholders vote to elect the board of directors and must vote on major issues such as selling the corporation. The board of directors is the principal of a corporation. It has responsibility for determining how the company is to be operated and for hiring and instructing the management. Managers are agents of the board and respond to the board's instructions. True or false?
True
Sole proprietorships automatically come into existence whenever people begin to do business for themselves. Legally, the sole proprietor is the business, responsible for business's debts and torts, liable for its taxes, and in control of its operation and its transfer. True or false?
True
State law now provides that, for many purposes, a partnership may be treated as an independent, legal entity. Thus, a partnership may sue or be sued and collect judgments in its own name. True or false?
True
Successful franchises have two characteristics in common: a trademark that conveys authenticity and exclusivity, and a uniform product or service. True or false?
True
The Franchise Rule's disclosure document must provide the following information: Names, addresses, and telephone numbers of other franchisees An audited financial statement of the franchisor and its financial history The background and experience of the business's key executives The responsibilities that the franchisor and the franchisee will have to each other once the contract is signed The number of franchisees and how many have gone out of business Evidence to support claims of likely earnings True or false?
True
The LLC agreement may give each member an equal voice in management regardless of ownership percentage. More typically, the agreement provides that members may hire a manager to run the LLC. The manager need not be a member. The right to set management policy can be delegated to a group of members. True or false?
True
The business of the LP continues to operate while it is winding up, but it may not enter into any new commitments. True or false?
True
The company must say LLC in its name so the public is on notice of its status. Under the statutes, no member or manager is personally liable for the debts of an LLC. However, members may agree by contract to be personally liable for the company's debts. True or false?
True
The courts understand that hindsight is better than foresight, so the business judgment rule protects directors against suits by shareholders claiming that the directors missed profit opportunities that they should have taken. However, if directors fail to let shareholders profit from opportunities, by, for example, taking advantage of opportunities for themselves that should have gone to the company, then liability may be imposed. True or false?
True
The directors act, usually by majority vote, to exert top-level managerial authority. Directors are under a duty of care to make decisions on behalf of the corporation as a reasonably prudent person in the conduct of personal business affairs. True or false?
True
The existence of a partnership is not a question of the ... terminology the parties use to describe their relationship.... It is the intent to do the things which constitute a partnership that determines whether individuals are partners, regardless if it is their purpose to create or avoid the relationship." True or false?
True
The extent of managerial control and the compensation enjoyed by managers are matters of contract and agency law between the board and the managers. True or false?
True
The franchise agreement grants the franchisee the right to use the franchisor's name and identifying trademarks and trade dress. The franchisee normally must undergo training and is given the use of the franchisor's confidential operating manual. The franchisor likely specifies requirements regarding record keeping, advertising, hours of operation, hiring and training practices, and other details. True or false?
True
The franchise agreement may impose limits on the territorial rights of the franchisee and the franchisor. For example, the franchisor may not be allowed to operate additional outlets in the territory, unless the franchisee does not live up to certain performance standards. The franchisee may be limited to operating only one unit within the territory. True or false?
True
The franchise agreement states which party has the responsibility to select the site and to construct the facility. Major issues in many franchise contracts include whether the franchisor can open new stores in the area and whether the franchisee gets the first chance to buy any new units in an area. True or false?
True
The managers prefer to be paid more, receive more benefits, have beautiful offices, hold meetings at resorts, and so on. The owners would like the managers to be more frugal. In many instances, special provisions of the bylaws may address such conflicts. For example, there may be a compensation committee made up of non-executive directors to review top management salaries and a similar audit committee to check for evidence of misuse of company funds. True or false?
True
The most prominent forms of business organization are the sole proprietorship, partnership, limited partnership, corporation, and limited liability company. True or false?
True
The owner of a sole proprietorship is, in essence, the business. A decision to sell the business ends the proprietorship and begins the creation of a new one. Selling proprietorships, partnerships, and other small businesses can be expensive (relative to the value of the business) because such businesses can be hard to price. Often, specialists are required to help determine the market value of the business. True or false?
True
The proprietor generally owns the business property and is responsible for the control, liabilities, and management of the business. True or false?
True
The shareholders own the corporation. Evidence of ownership is in the number of shares issued to various parties, which is now an electronic record rather than physical stock certificates. Shareholders have a limited right to inspect the corporation's books and records. True or false?
True
The termination of a corporation, like the termination of a partnership, is conducted in two parts: the dissolution phase and the winding-up phase. True or false?
True
The transferability of ownership interests refers to the ability of an owner in a business venture to sell or pass that interest to others. The ability of owners to transfer ownership interests differs among the various forms of business organizations. True or false?
True
There are important nontax reasons to use offshore jurisdictions as well. Many jurisdictions are successful because they offer convenient sources of high-quality professional services and solid legal systems. Appeals from Cayman courts go to Britain's Privy Council, one of the most respected business courts in the world. True or false?
True
To avoid liquidation, partners usually agree in advance to a continuation agreement. The same is true of LLCs. More common are problems that arise from disputes among partners or members. What is their right to exit if they are unhappy, and how are they compensated for their portion of the entity? If that is not spelled out in the agreement, the court looks to the default rules in state law. Most parties prefer to plan for such possibilities rather than rely on default rules through costly litigation. True or false?
True
Under certain circumstances, however, courts may exercise their equitable power to "pierce the corporate veil," thereby requiring shareholders to answer for the corporation's liability. True or false?
True
Unless otherwise specified in the partnership agreement, which can allocate control any way the partners agree, the presumption is that each partner has an equal voice in partnership management. True or false?
True
Unless stated to the contrary on the stock certificate or in the bylaws, shareholders are not restricted from selling or giving their stock to someone else. True or false?
True
Unlike a corporation, an LLC is technically not allowed "perpetual" life. Although death, bankruptcy, retirement, resignation, or expulsion of any member terminates the membership of a member, similar to a partnership, the LLC itself can continue if all remaining members give their consent. True or false?
True
The _________________ of partnership affairs involves completing any unfinished business and then collecting and distributing partnerships assets.
Winding up
Partnerships may be informal, and some come about by oral agreement; but courts prefer to follow documentary evidence of a partnership to make sure the parties have followed the requirements of state law, as the ________________ case discusses.
Zhou
What case is related to forming partnerships?
Zhou v. Bickley
