Chapter 14: Limited Liability Companies

An LLC is governed through its A. Certificate of organization B. Operating agreement C. By-laws D. Partnership agreement

B

_______ if an LLC is a liquidation or termination process that will close the business

Dissolution

Which of the following are required to meet the RULLCA's definition of being insolvent?

The company's total assets are less than the sum of its total liabilities The company cannot pay its debts as they become due in the ordinary course of business

LLCs and LLPs limit the personal ______ of business principals, while avoiding the double taxation found in corporations

liability

Some state's require LLPs to carry _______ _______ so that injured third parties can still recover legitimate damages

liability insurance

The RULLCA sets forth _______ nonwaivable statutory provisions related to the liability of the LLC and its members

17

An LLPs ______ agreement will spell out how the partnership is to be managed and may establish a governing committee or board of directors A. Partnership B. Operating C. Ownership D. By law

A

If LLC members have engaged in fraud or other bad conduct, a court may rely on _____ as the rationale to require members to compensate damaged parties A. Fairness B. Solvency C. Punishment D. Liability

A

LLCs may select between being taxed as a partnership or as a(n) A. Corporation B. Nonprofit C. Partnership D. Joint Venture

A

Lenders know that LLC members are protected from personal liability from the company's debts, and so may require the owners to sign personal ______ before lending the company money A. Guarantees B. Statements C. Letters D. Checks

A

Most states have what uniform statute as the model for their governance of LLCs? A. ULLCA B. UPA C. RULLCA D. UCC

A

Some states will provide partners in an LLP with limited liability only when the liability arises from another partner's A. Negligence B. Unethical behavior C. Criminal act D. Poor judgment

A

State laws that govern LLCs include provisions for both initial _____ of the LLCs and the default rules in case the owners do not set their own standards of operation A. Formation B. Direction C. Taxation D. Financing

A

The partnership against personal liability for an LLPs business debt and obligations A. Vary widely among the states B. Are the same in all states C. Only apply in cases of negligence D. Rely on the federal tax code

A

Jose and Carlos have invented a new computer, and have formed their business as an LLC. Both men are very capable engineers, but only Carlos has any business interest or experience. How should they best structure their LLC?

As a manager-managed LLC, hiring an outside manager to run the day-to-day operations As a manager-managed LLC, with Carlos as the manager

A business entity that shares characteristics of both partnerships and corporations is an LLC, or limited liability ______ A. Contractor B. Company C. Conglomerate D. Cooperative

B

A distribution by the LLC is improper when made while the LLC is: A. Solvent B. Insolvent C. Being investigated D. Advertising

B

A limited liability company (LLC) offers the limited ______ of prinicipal owners of a corporation, and the pass-through ______ of a partnership A. Partnership, duties B. Liability, taxation C. Duties, right D. Successes, failures

B

An LLC will most often raise capital for the business by taking on debt, or by A. Selling shares of stock on the open market B. Selling ownership interest in the LLC C. Leveraging the initial members contributions D. Licensing new products

B

Basic information required by the state to create an LLC typically includes the ______ of the business, its principal location, and the name of its members A. Assets B. Name C. Employees D. Liabilities

B

The ULLCA is the model statute used by most ______ to govern LLCs A. Law enforcement B. States C. Cities D. Countries

B

The liability shield of a LLP protects a partner from tort liability resulting from the actions of her partners; however, the shield may not apply if the liability results from a ______ obligation related to LLP operations A. Res ipsa loquitur B. Contract C. Negligence per se D. Negligence

B

The protections from personal liability provided by a limited liability partnership ______ the same in each state A. Are B. Are not

B

LaTonya is a member in an LLC that has applied to Big Bank for a business loan. Big Bank knows that an LLC member is not personally responsible for the debts of the company. How will Big Bank protect itself in case the LLC defaults on the loan?

Big Bank will require LaTonya to sign a personal guarantee, making her personally responsible if her company defaults on the loan

If an LLC has no operating agreement, the default source of law is that state's _______ statute A. LLP B. Partnership C. LLC D. Corporation

C

Karen and Mark are members in an unsuccessful LLC that cannot pay its bills. How does this situation impact Karen and Mark? A. Karen will have to sue Mark to obtain money to pay the debts B. If Karen was a member before Mark, she will have to pay the debts herself C. They will not have to pay the company's debts from their own money D. They will have to pay the company's debts from their own money

C

Larry, Moe, and Curly have formed the Three Stooges General Partnership. Moe is concerned that he may one day be personally liable if someone is injured and sues the business over Larry's wild antics. What should the three general partners do to prevent such personal liability? A. Take out sufficient insurance coverage that personal liability wont be a problem B. Force Larry to dissociate from the GP C. Convert the GP to an LLP

C

Managers of an LLC owe the members the _____ duties of care and loyalty A. Legal B. Company C. Fiduciary D. Equitable

C

The state laws that govern LLCs all provide for formation and for the default rules that are A. The same in all states B. Overseen by federal law C. Often different from state to state D. The same as corporate laws

C

A limited liability company (LLC) offers business owners the liability protection of a A. Partnership and the taxation of a corporation B. Corporation with the taxation of a corporation C. Limited liability partnership with the taxation of a partnership D. Corporation and the taxation of a partnership

D

A limited liability company (LLC) offers its prinicpals the same amount of liability protection afforded to principals of a(n) ______ A. Unlimited liability company (ULLC) B. Sole proprietorship C. General partnership D. Corporation

D

An LLC is created by what state-required filing? A. Operating agreement B. Limited liability agreement C. Articles of incorporation D. Articles of organization

D

An LLC operating agreement often includes provisions for the ______, or withdrawal, of a member A. Liability B. Termination C. Dissolution D. Dissociation

D

If LLC members have engaged in fraud or other bad conduct, a court may rely on ______ as the rationale to require members to compensate damaged parties A. Solvency B. Punishment C. Liability D. Fairness

D

LLC members can make strategic decisions about what happens when a member withdraws. Such plans should be included in the _______ agreement A. Omnibus B. Subrogation C. Settlement D. Operating

D

Management responsibilities and plans for dissolution are included in an LLC's A. By-laws B. Management agreement C. Articles of organization D. Operating agreement

D

Owners of an LLC owe each other the fiduciary duties of care and ______ A. Integrity B. Honor C. Professionalism D. Loyalty

D

The LLC ______ agreement usually controls the amount and methods of capitalizing the business A. Debt B. Ownership C. Taxation D. Operating

D

The LLC _______ agreement usually controls the amount and methods of capitalizing the business A. Ownership B. Taxation C. Debt D. Operating

D

The business form that provides some liability protection for partners in a general partnership is a: A. Corporation (Inc) B. Limited Liability Company (LLC) C. Limited Partnership (LP) D. Limited Liability Partnership (LLP)

D

_______ occurs when a member decided to withdraw from the LLC

Dissociation

________ of an LLC is a liquidation or termination process that will close the business

Dissolution

The "LL" in both LLC and LLP stands for

Limited liability

LLCs may be taxed as:

Pass-through entities Corporations

The following are traditional ways an LLP are capitalized

Sale of equity Debt

An LLP typically acquires capital for operations by:

Selling more ownership interests Taking on debt from private lenders Taking on debt from commercial lenders

LLC members who wish to set terms for how and when members may dissociate from the LLC

Should include those terms in the LLC's operating agreement

The dissolution or liquidation of an LLC is most likely to occur:

When a majority of the members vote to end the business At the end of the fiscal year, after all taxes are paid

If the partnership makes a capital ______ , existing partners are required to make additional contributions to the partnership

call

If a state's LLP protections for LLP partners apply only to liability arising from another partner's negligence, each partner will still be personally liable for the business's debts and breach of ______

contract

______ occurs when a member decided to withdraw from the LLC

dissociation

An LLC operating agreement will often include provisions for day-to-day operations, as well as what will happen on the ______ or end of the LLC

dissolution

A court may require LLC members to personally meet the obligations of the business in the interests of ________

fairness

Debt and the sale of equity ownership are the primary ways an LLC is _______

funded

Partners in a ______ partnership may wish to convert to an LLP in order to avoid the potential liability they could otherwise incur for each other's mistakes, or for the partnership debts

general

Before lending an LLC money, a lender may require the owners to provide a personal _____ so that the owner will still be liable for the company's debt

guarantee

An ______ distribution is a distribution of money made when the LLC is insolvent

improper

If an LLC has total assets less than the sum of its liabilities and it cannot pay its debts in the ordinary course of business, the LLC is considered ______ under the RULLCA

insolvent

Because states do not want to leave parties with legitimate claims against an LLP without any option for recovery, many states require LLPs to carry liability _________

insurance

Which of the following is (are) true about the RULLCA:

it confirms that the operating agreement can include specific penalties for member noncompliance it identifies matters that can't be waived by the operating agreement related to LLC and member liability

Some states require LLPs to carry ________ ________ so that injured third parties can still recover legitimate damages

liability insurance

Two options for the management of an LLC are to be _______-managed or ________-managed

member, manager

Basic information required by the state to create an LLC typically includes the name of both the business and its _______, as well as its principal location

members

Instead of providing partners in an LLP with complete personal protection from all business debts and obligations, some states only provide personal protection from another partner's _______

negligence

The members of an LLC agree on how to operate the business in a(n) _______ agreement

operating

An LLC is created by filing articles of ____ with the state

organization

The LLC is a hybrid business entity that shares characteristics of both _____ and corporations

partnership

The ______ agreement of an LLP normally controls the amount and methods of capitalizing the business

partnership

If the partners in an LLP wish to be managed by a governing board or executive committee, this would be provided for in the ______ ________

partnership agreement

LLPs obtain capital through debt or through selling ______ ______ for ownership in the LLP itself

partnership equity

A limited liability ______ (LLP) provides general partners protection from LLP debts and other liabilities

partnerships

The abbreviation LLP denotes a limited liability _______

partnerships

LLCs may be taxed as either a(n) ________-________ entity, as a partnership would be, or as a corporation

pass-through

LLPs are taxed in the same way general partnerships are, as _______ _______ entities

pass-through

The "limited" in LLC refers to the idea that LLC members are protected from _______ liability for any business debt or liability if the venture fails

personal

A general partnership that wishes to become an LLP must file a statement of _____ with the appropriate government office

qualification

A limited liability partnership (LLP) is formed by the filing of a statement of ______ with the appropriate state office.

qualification

LLCs typically obtain capital through:

selling ownership/membership in the LLC debt via commercial lenders debt via private lenders

The protections provided by an LLP may include business debts, liabilities, and negligence of another partner, all depending on _______ law

state

If an LLC has no operating agreement, it will be governed by the default rules set out by the state's LLC ______

statutes

LLCs and LLPs were created to allow business principals to avoid double ______ while still providing limited liability

taxation