Ch 15 Limited Liability Companies, Limited Liability Partnerships, and Special Forms of Business
Jasmin, Shou-Yi, and Vanessa form an LLC, and each contributes $25,000 in capital. The LLC operates for a period of time, during which it borrows money from banks and purchases goods on credit from suppliers. After some time, the LLC experiences financial difficulties and goes out of business. If the LLC fails with $500,000 in debts, which of the following is an accurate statement regarding the liability of Jasmin, Shou-Yi, and Vanessa?
) Each will lose her capital contribution of $25,000, but will not be personally liable for the rest of the unpaid debts of the LLC.
What is a distributional interest? Explain the terms of its transfer.
A member's ownership interest in an LLC is called a distributional interest. A member's distributional interest in an LLC is personal property and may be transferred in whole or in part. Unless otherwise provided in the operating agreement, a transfer of an interest in an LLC does not entitle the transferee to become a member of the LLC or to exercise any right of a member. A transfer entitles the transferee to receive only distributions from the LLC to which the transferor would have been entitled. A transferee of a distributional interest becomes a member of the LLC if it is so provided in the operating agreement or if all the other members of the LLC consent.
Which of the following is true of the management of an LLC?
A nonmember can become a manager of an LLC.
What are the steps a prospective franchisee must take in order to acquire a franchise? What properties are generally licensed by franchisors?
A prospective franchisee must apply to the franchisor for a franchise. The franchise application often includes detailed information about the applicant's previous employment, financial and educational history, credit status, and so on. If an applicant is approved, the parties enter into a franchise agreement that sets forth the terms and conditions of the franchise. Franchise agreements do not usually have much room for negotiation. A franchisor's ability to maintain the public's perception of the quality of the goods and services associated with its trade name, trademarks, and service marks is the essence of its success. Most franchisors license the use of their trade names, trademarks, and service marks to their franchisees. Franchisors are often owners of trade secrets, including product formulas, business plans and models, and other ideas. Franchisors license and disclose many of their trade secrets to franchisees.
Which of the following is true of LLC taxation?
An LLC is not taxed at the entity level.
Which of the following is true of an LLC?
An LLC is regarded as a separate legal entity.
________ refer to the formal documents that must be filed at the secretary of state's office of the state of organization of an LLP to form the LLP.
Articles of LLP
________ refer to the formal documents that must be filed at the secretary of state's office of the state of organization of an LLC to form the LLC.
Articles of organization
Which of the following is an instance of an area franchise?
Burger King wants to start operating in Mexico and hires a Mexican subfranchisor to sell the franchise on behalf of Burger King.
Which of the following is true of an LLC formation?
Doctors and lawyers can operate practices as LLCs.
Which of the following is true of a member-managed LLC?
Each member has equal rights in the management of the business of the LLC.
Which of the following is true of the liabilities of a franchisor and a franchisee?
Franchisees are only liable on their own contracts.
Explain the extent of liability of a franchisor and a franchisee with an example.
If a franchise is properly organized and operated, the franchisor and franchisee are separate legal entities. Therefore, the franchisor deals with the franchisee as an independent contractor. Franchisees are liable on their own contracts and are liable for their own torts (e.g., negligence). Franchisors are liable for their own contracts and torts. Generally, neither party is liable for the contracts or torts of the other. Example-Suppose that McDonald's Corporation, a fast-food restaurant franchisor, grants a restaurant franchise to Tina Corporation. Tina Corporation opens the franchise restaurant. One day, a customer at the franchise spills a chocolate shake on the floor. The employees at the franchise fail to clean up the spilled shake, and one hour later, another customer slips on the spilled shake and suffers severe injuries. The injured customer can recover damages from the franchisee, Tina Corporation, because it was negligent. It cannot recover damages from the franchisor, McDonald's Corporation.
Distinguish between a member-managed and a manager-managed LLC. Mention the exceptional actions that cannot be delegated to managers.
In a member-managed LLC, each member has equal rights in the management of the business of the LLC, regardless of the size of his or her capital contribution. Any matter relating to the business of the LLC is decided by a majority vote of the members. In a manager-managed LLC, the members and nonmembers who are designated managers control the management of the LLC. The members who are not managers have no rights to manage the LLC unless otherwise provided in the operating agreement. In a manager-managed LLC, each manager has equal rights in the management and conduct of the company's business. Any matter related to the business of the LLC may be exclusively decided by the managers by a majority vote of the managers. Certain actions cannot be delegated to managers but must be voted on by all members of the LLC. These include (a) amending the articles of organization, (b) amending the operating agreement, (c) admitting new members, (d) consenting to dissolve the LLC, (e) consenting to merge the LLC with another entity, and (f) selling, leasing, or disposing of all or substantially all of the LLC's property.
5) Which of the following is true of the ULLCA?
It provides uniform laws for the dissolution of LLCs.
John, Nathan, and Julio form JNJ, LLC, with equal capital investment each. On his way to a business meeting with clients of JNJ, Nathan accidentally injures Jessica in a car accident. Which of the following is true in this scenario?
Jessica can claim damages from JNJ, LLC, as she was injured in the ordinary course of business.
A(n) ________ is a special form of partnership in which all partners are limited partners, and there are no general partners.
LLP
________ is a business arrangement that occurs when the owner of intellectual property contracts to permit another party to use the intellectual property.
Licensing
Mary, Harold, Harvey, and William form an LLC by contributing $20,000, $50,000, $55,000, and $150,000, respectively. The LLC is designated to be member-managed. When a decision is put to vote, Mary, Harvey, and Harold vote "yes," whereas William votes "no." Which of the following is true in this context?
Mary, Harvey, and Harold's decision prevails due to simple majority.
Which of the following is true of liabilities of LLCs?
Members of the LLC are liable to the extent of their capital contribution.
Sam Muller and Toby Richardson form an LLC in the state of Delaware. In the articles of organization, they specify the duration of the LLC as 25 years from the date of filing the articles of organization. Which of the following is true in this context?
Muller and Richardson have formed a term LLC.
Philip and Deborah form an LLC. Philip contributes $50,000 capital and Deborah contributes $75,000 capital. They do not have an agreement as to how profits are to be shared. If the LLC makes $100,000 profit in its first year, how will the profit be divided among the members?
Philip gets $50,000 and Deborah gets $50,000.
Which of the following is true of a franchise?
The franchisor and franchisee are established as separate legal entities.
Peter, Preston, and Penny organize an LLC in January. While composing the operating agreement, they forget to include an amendment clause. Six months later, the situation demands an amendment to the operating agreement. Which of the following would best apply in this scenario?
The operating agreement can be amended if all three members approve.
The ________ is a model act that provides comprehensive and uniform laws for the formation, operation, and dissolution of LLCs.
ULLCA
Ubiquitous Enterprises is a franchisee of the HotPan chain of restaurants. One afternoon Linda, an employee of Ubiquitous Enterprises, is mopping the floor. Gary, a customer who enters the restaurant, is talking on his cell phone and does not notice Linda mopping the floor. He slips on the wet floor while walking to the counter and is injured. Which of the following statements is accurate regarding liability for Gary's injury?
Ubiquitous Enterprises is liable for not having its own "Caution" sign.
Explain the process that exempts members of an LLC from double taxation.
Under the Internal Revenue Code and regulations adopted by the Internal Revenue Service (IRS) for federal income tax purposes, an LLC is taxed as a partnership unless it elects to be taxed as a corporation. Thus, an LLC is not taxed at the entity level, but its income or losses flow through to the members' individual income tax returns. This avoids double taxation.
Intrepid Creations is a product design institute that provides educational courses in package design. It manages to acquire the right to use simulation software from Marco Software for a payment of $2,000 a year. There is no clause of expiration on this arrangement and the right to access the software is renewed annually. Which of the following business arrangements does the aforementioned scenario indicate?
a licensing arrangement
Which of the following best defines the term distributional interest
a member's ownership interest in an LLC that entitles the member to receive distributions of money and property from the LLC
Explain the four basic types of franchises.
a) Distributorship franchise. In a distributorship franchise, the franchisor manufactures a product and licenses a retail dealer to distribute a product to the public. b) Processing plant franchise. In a processing plant franchise, the franchisor provides a secret formula or the like to the franchisee. The franchisee then manufactures the product at its own location and distributes it to retail dealers. c) Chain-style franchise. In a chain-style franchise, the franchisor licenses the franchisee to make and sell its products or services to the public from a retail outlet serving an exclusive geographical territory. The product is made or the service is provided by the franchise. Most fast-food franchises use this form. d) Area franchise. In an area franchise, the franchisor authorizes the franchisee to negotiate and sell franchises on behalf of the franchisor. The area franchisee is called a subfranchisor. An area franchise is granted for a certain designated geographical area, such as a state, a region, or another agreed-upon area.
Which of the following actions requires all members in a manager-managed LLC to vote?
admitting new members
In a(n) ________ franchise, the franchisor authorizes the franchisee to negotiate and sell franchises on behalf of the franchisor.
area
A(n) ________ refers to a document that evidences a member's ownership interest in an LLC.
certificate of interest
In a(n) ________ franchise, the franchisor licenses the franchisee to make and sell its products or services to the public from a retail outlet serving an exclusive geographical territory.
chain-style
Rio-Werner Corporation owns Rio's Sandwiches, a fast-food restaurant in New Jersey. It wants to operate in five cities on the west coast by means of franchisees that make and sell all menu items from Rio's Sandwiches. Which of the following franchises would best suit the Rio-Werner Corporation's franchise plan?
chain-style
A member's ownership interest in an LLC is called a ________.
distributional interest
In a(n) ________ franchise, the franchisor manufactures a product and licenses a retail dealer to sell the product to the public.
distributorship
An LLC is a ________ in the state in which it is organized.
domestic LLC
The ________ is a duty owed by a member of an LLC to not act adversely to the interests of the LLC.
duty of loyalty
An LLC that was organized in Alabama and is operating in Texas with no operations outside the United States is considered a ________ in Texas.
foreign limited liability company
A(n) ________ is established when one party licenses another party to use the first party's trade name, trademarks, commercial symbols, patents, copyrights, and other property in the distribution and selling of goods and services.
franchise
A ________ is an arrangement in which two or more business entities combine their resources to pursue a single project or transaction.
joint venture
The party to whom a license is granted is known as the ________.
licensee
The party who grants a license is known as the ________.
licensor
YouKnow Inc. is a corporation that creates educational resources. It grants Middlewest Public School the right to use its online encyclopedias for three years in return for a fee. In this arrangement, YouKnow Inc. is the ________.
licensor
Members of an LLC have ________ liability.
limited
Which of the following methods is used to appoint a manager of a manager-managed LLC?
majority vote of the members
4) The owner of an LLC is called a ________.
member
A(n) ________ refers to an agreement among members that governs the affairs and business of the LLC and the relations among members, managers, and the LLC.
operating agreement
A member's distributional interest in an LLC is ________ and may be transferred in whole or in part.
personal property
In which of the following types of franchises does a franchisor provide a secret formula or process to the franchisee?
processing plant franchise
Limonelle Corporation owns the secret formula for a popular beverage brand, Limonelle. The corporation operates through franchises in over 50 countries. It uses a secret formula to prepare the drink concentrate that is dispatched to the franchises world over. These franchises then prepare and bottle the beverage for distribution. Which type of franchise has Limonelle adopted?
processing plant franchise
In states where an LLC may be organized by only one member, ________ can obtain the benefit of the limited liability shield of an LLC.
sole proprietors
The certificate of interest acts the same as a(n) ________ issued by a corporation.
stock certificate
The area franchisee is also called a ________.
subfranchisor
Which of the following documents sets forth the terms and conditions of a franchise?
the franchise agreement
A ________ is a person who intentionally or unintentionally causes injury or death to another person.
tortfeasor
An LLC is a(n) ________.
unincorporated business entity
In which of the following cases does the conversion of an existing business to an LLC take effect?
when the articles of organization are filed with the secretary of state
