chapter 31

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

1. environment 2. stakeholders 3. communities 4. investors

Which of the following are advantages of a sole proprietorship?

1. flow-through tax entity 2. low formation cost

If partners wish to maintain having protection against personal liability, it is essential to comply with all the technicalities of a limited liability partnership statute.

true

The business form that offers the limited liability of a corporation and the tax status of a flow-through entity is

a limited liability company

Corporations have perpetual existence.

true

The corporate form of business

was first known and used by the Greeks and then spread through the Romans to England

Generally, a joint venture is a partnership created for one limited purpose.

true

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

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

1. contributions from partners 2. borrowing

Alan, a dentist, and his wife Martha, an attorney, can protect their personal assets with limited liability from their business dealings by creating and operating a professional corporation together.

false

All the business forms listed below have limited liability EXCEPT the

general partnership

James was a partner in a large firm. He died unexpectedly. His son, Frank, wanted to take over for his father in the partnership and was well qualified to do the work his father had done. Which statement best describes Frank's rights in the partnership if he inherits the interest?

Frank is entitled to the value in the partnership, but not to become a full partner

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?

no, unless the partners have not complied with the LLP statutory filing requirements

The Huatuco case demonstrates the danger of

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

Which of the following are features of professional corporations?

1. strict legal formalities 2. complicated tax structure 3. limited liability 4. shareholders must be members of the same profession

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

1. the law governing LLC's is still developing and is therefore less certain 2. C corporations are easier to merge, sell, or take public 3. LLC's involve arcane tax issues

Sole proprietorships work best for small businesses because

debt is generally the only source of generating capital

A partnership is a taxable entity, separate from the partners.

false

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 franchisee to make an informed decision

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

The Federal Trade Commission requires franchisors to

give prospective franchisees a franchise disclosure document at least 14 business days prior to the signing of a contract or payment of any money

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

What federal agency requires that the seller of a franchise give the potential buyer Franchise Disclosure Document (FDD) and audited financial statements?

the Federal Trade Commission (FTC)

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

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

All of the following are characteristics of a closely held corporation EXCEPT

the shares are publicly traded

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

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 one or more for profit general partner

Which of the following statements regarding social enterprises is TRUE?

unlike charities, social enterprises can sell stock to investors

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

Limited liability companies offer the best of both worlds:

a flow-through tax entity and limited liability

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

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

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

GeorgGeorge 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.

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 would NOT be personally liable for the debts of the business?

an S corp shareholder

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

S corporations and close corporations were both created to

encourage entrepreneurship

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

Franchise fees can be costly, but they are usually payable over a number of years, after profits are generated from the business.

false

Limited liability is a major advantage of a partnership as compared to a corporation.

false

The most common form of business ownership is the corporation.

false

To be a close corporation, the business must be small, with no more than 20 owners and no more than $500,000 in gross annual income.

false

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

flow-through does not income owners their individual

If a court pierces the LLC veil it

holds LLC members liable for the debts of the company

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

1. members fail to treat the LLC like a separate organization 2. members commit fraud 3. members fail to provide adequate capital

Which of the following are characteristics that apply to LLCs?

1. members may be corporations, partnerships or nonresident aliens 2. flow-through tax entity 3. nontransferable interests 4. different classes of stock permitted

Corporations have a distinct advantage over other forms of business organization in the area of taxation.

false

The form of business ownership that is the MOST easily transferable is the

corporation

The advantage to an S corporation is

its treatment of shareholders for income taxation purposes

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

all of these choices are correct

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

1. all shareholders agree that the company should be an S corp 2. no shareholders are partnerships or corporations 3. only one class of stock 4. no more than 100 shareholders 5. shareholders are U.S. citizens or residents

Which of the following are disadvantages of a corporation?

1. high formation costs 2. strict legal formalities 3. taxable entity

Jill owns a retail business by herself and was sued by a customer who fell in the store. The customer claimed the business was negligent in caring for its floors. Which statement best describes Jill's potential liability?

Jill can only be liable to the amount she initially invested in the business

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."

A court may pierce an LLC's veil if

members fail to provide adequate capital

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

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

An organization that does not pay income tax on its profits but passes them through to its owners who pay the tax at their individual rates is called a

flow-through tax entity

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

Which of the following is an advantage of a corporation?

it offers limited liability for its shareholders

Corporations have a ________ existence. They are also a _______ form of business because they have stock that can be ________ easily.

perpetual flexible bought and sold

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

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