Business Law - Chapter 31

A sole proprietorship is a(n) _____________________ business owned by _____ person. It is the ______________ common form of business.

unincorporated one most

A general partnership is a(n) __________ association of __________ owner/co-owners who carry on a business ___________. Each owner is a ____________.

unincorporated two or more for profit general partner

A __________ tax entity __________ pay __________ tax on its profits, but passes them through to its _________, who pay tax at ________ rates.

flow-through does not income owners their individual

A corporation protects managers and _____________ from _________ for the debts of the corporation and ____________, but not against liability for __________ negligence, torts, or crimes.

investors personal liability actions of others their own

If a court pierces the LLC veil it _____________.

holds LLC members liable for the debts of the company

A social enterprise must balance the interests of which of the following when making business decisions?

- Investors - Environment - Stakeholders - Communities

A partnership can raise capital in which of the following ways?

- Contributions from partners - Borrowing

Which of the following are advantages of a sole proprietorship?

- Flow-through tax entity - Low formation costs

Which of the following are characteristics that apply to LLCs?

- Flow-through tax entity - Members may be corporations, partnerships or nonresident aliens - Different classes of stock permitted - Nontransferable interests

Which of the following are features of professional corporations?

- Limited liability - Complicated tax structure - Strict legal formalities - Shareholders must be members of the same profession

Under which of the following circumstances will a court hold LLC members personally liable for the liabilities of the LLC?

- Members fail to treat the LLC like a separate organization - Members fail to provide adequate capital - Members commit fraud

Which of the following must be true for a company to qualify as an S corp?

- Only one class of stock - No shareholders are partnerships or corporations - Shareholders are U.S. citizens or residents - All shareholders agree that the company should be an S corp - No more than 100 shareholders

Which of the following are disadvantages of a corporation?

- Strict legal formalities - Taxable entity - High formation costs

Why do venture capitalists sometimes prefer to invest in C corporations over LLCs?

- The law governing LLC's is still developing and is therefore less certain - LLC's involve arcane tax issues - C corporations are easier to merge, sell, or take public

To become a socially conscious organization, an enterprise typically must:

- agree to measure its social benefits using a standard set by an objective third party. - obtain the approval of a supermajority of shareholders. - only "obtain the approval of a supermajority of shareholders" and "assess and report regularly on its website about the company's societal and environmental impact". - assess and report regularly on its website about the company's societal and environmental impact.

Clean Earth, Inc. is a Delaware benefit corporation that produces cleaning products using 100 percent recycled, organic, and sustainably produced materials. Several years ago, it became a socially conscious organization and has fulfilled all of the reporting requirements since then. Clean Earth executives have decided to purchase its paper product supplies (such as napkins and toilet paper) from a new supplier, who plants two trees for every tree it uses. Since this supplier charges five times more than Clean Earth's previous supplier, profits from Clean Earth's paper products are expected to be cut in half. If a Clean Earth shareholder challenges the decision as being unfair to shareholders how will a court likely rule?

Against the shareholders, if it finds that Clean Earth has acted in a "responsible and sustainable manner."

Two general contractor firms, Atlantic Builders and North West Mechanical, form a joint venture for the purposes of completing a large construction job. They are collaborating on all phases of the project. An Atlantic Builders' employee operating a crane accidentally drops a steal beam onto a car parked near the construction site. Who is liable for the damage to the car?

Atlantic Builders and North West Mechanical are both liable.

Russell and Rachel have designed a new type of cell phone that they believe will revolutionize the market. They would like to start a company to produce, market, and sell the phone, and they know that they will need a considerable amount of up-front capital investment to develop a prototype and later to create inventory to sell. What is the best form of business for Russell and Rachel?

Corporation

Although corporations were widely celebrated and encouraged when they were originally created centuries ago, they have been treated with growing suspicion since the stock market crash that led to the Great Depression.

False

George and Susan open a dry cleaning business together, but do not execute any documents or perform any formalities other than obtaining a "d/b/a" certificate for their business name: "G & S Clean". One day, when George is out for lunch, Susan burns a large hole in a customer's fur coat while cleaning it. Who is liable for the cost of the coat?

G & S Clean is liable and both Susan and George are personally liable.

Alan and Ivan opened a kosher delicatessen, Main Court, which failed after barely a year in business. One supplier sued for overdue bills. Alan and Ivan will be liable to the supplier if Main Court was which of the following types of organizations?

General Partnership

What must be true for Costello and Giordano to be personally liable to Ridgaway's estate in Ridgaway v. Silk?

Ridgaway's death is attributable to Costello and Giordano's own negligence, recklessness, or tortious conduct.

Which of the following is true of so-called social enterprises?

The most common forms are benefit corporations and low profit limited liability companies

A corporation that registers for S corp status with the IRS is not necessarily treated as a close corporation under state law unless it complies with the state statute's particular requirements.

True

A joint venture is not its own legal entity. Rather, its participants retain their own separate identities and simply partner for a limited purpose, such as a specific project.

True

A limited liability company may go public, but once it does so it loses its status as a flow-through tax entity.

True

General partners have equal management rights in the partnership unless they agree otherwise.

True

In the past professional corporations were the only business formation other than general partnerships available to professionals, such as lawyers and accountants.

True

Operating agreements are not required but can be extremely helpful for LLCs.

True

Sole proprietors are personally liable for all of the debts incurred by their business.

True

Wanda, Derek, and Mitchell formed B. Flowers, LLP three years ago. A year ago, Derek and Mitchell decided that the company was ready to open a new location and had B. Flowers take out a loan from a bank for the extra capital needed to expand. The new location has not performed well, and B. Flowers is unable to pay the remaining $50,000 owed to the bank. Is Wanda liable to the bank for the debt?

Wilma (and each of the members) pays taxes on their $1 million share ($5 million divided by 5) of profits.

Wilma is one of five equal members of Polar, LLC. This year, Polar generates $5 million in profits. The company reinvests $4 million into the company, leaving $1 million to be divided equally among the members. How are federal income taxes paid on Polar's profits?

Wilma (and each of the members) pays taxes on their $1 million share ($5 million divided by 5) of profits.

Fitness World is a corporation with 75 shareholders that are individuals who all hold common stock. At an annual meeting, the shareholders unanimously voted that Fitness World should register as an S corporation with the IRS so that the shareholders may enjoy the flow-through tax benefits. Is Fitness World eligible to register as an S corp.??

Yes, if all of the shareholders are U.S. citizens or residents.

Mack is the local owner of a restaurant franchise. Though the national chain is known for its hotdogs, Mack wants to sell vegetarian burritos. Must Mack get permission from the franchisor?

Yes, if the franchise agreement demands it.

In order to obtain limited liability, Tom and Doris properly formed a limited liability company (LLC) to operate their catering business. They sometimes deposited the proceeds from catering jobs into their personal checking accounts and if they needed to pay personal bills and were short of funds, they used the business account. If creditors of the business cannot get payment for their invoices, will a court order Tom and Doris to pay the creditors using their personal assets?

Yes, the court can pierce the veil of an LLC because Tom and Doris commingled assets.

Limited liability companies offer the best of both worlds:

a flow-through tax entity and limited liability

The Huatuco case demonstrates the danger of _____________.

adopting an operating agreement without thinking through the practical consequences of each provision.

Sole proprietorships work best for small businesses because __________________

debt is generally the only source of generating capital.

In National Franchisee Association v. Burger King Corporation, the court held that Burger King Corporation

did not act in bad faith because there may well be a legitimate business reason to sell products below cost

When a partner leaves a partnership, it is called a _____________. The partnership can either _______________ the departing partner and _____________________ or _____________ the business and __________________ the partnership.

dissociation buy out continue in business wind up terminate

Few corporations have converted to LLC's, even though it is legally possible, because _________________.

the IRS would treat the change as a sale of corporate assets and tax the assets accordingly.

S corporations and close corporations were both created to _____________.

encourage entrepreneurship

Franchises are appealing to franchisees because they allows them to

own their own business while also receiving the benefit of an established brand and support structure.

Corporations have a _________ existence. They are also a __________ form of business because they have stock that can be ___________ easily.

perpetual flexible bought and sold

A close corporation has a small number of ____________ whose stock is not _______ and who play an active role in _________. A close corporation is entitled to special treatment under ___________.

shareholders publicly traded management state law

Jane is in debt to Jack, and is also a partner in Mother Goose, LLP. Jane may transfer to Jack __________________.

the value of her partnership interest in Mother Goose.

Most states require sole proprietors to register _________________________

their business name if it is different from their own.

The Federal Trade Commission (FTC) requires franchisors to provide the Franchise Disclosure Document (FDD) to franchisees prior to signing a franchise agreement

to allow the franchise to make an informed decision