Chapter 29: Introduction to Business Organization-Business Law
Jacob and Melissa together started a construction business in Michigan by each investing $300,000. As co-owners, they hired engineers, carpenters, and office personnel to assist them in their business. The profit from the business is to be shared equally between Jacob and Melissa. The type of business organization started by them is called a(n): a. partnership. b. joint-stock company. c. impact investment. d. sole proprietorship.
partnership. A voluntary association of two or more people who have combined their money, property, or labor and skill, or a combination of these, for the purpose of carrying on as co-owners some lawful business for profit is a partnership. Review the section "Partnership" in Chapter 29.
Assume the football team is set up as a general limited liability company (LLC) and that Lenny, Sarah, and Sam are the owners of the LLC. The articles of organization specify that it is a member-managed firm. Which of the following statements is true when it comes to management of the firm, such as the decision of whether to fire the quarterback? All of the members would have a vote on management decisions. The members would vote on a group of managers only from the members to manage the firm. The members would designate a group of only non-member managers to manage the firm. The members would designate a group of either member or non-member managers, or a combination to manage the firm.
All of the members would have a vote on management decisions. In a member-managed LLC, all of the members participate in management, and decisions are made by majority vote.
Which of the following would be an advantage of Lenny running the team as a sole-proprietorship? He would have more flexibility to run the team than with other types of business organizations. He would assume all of the profits of the team. Any taxes on profits made from the team would be reported on Lenny's personal tax return. All of these.
All of these. All of these would be advantages of owning the team as a sole proprietorship.
Suppose Lenny is the sole owner of the football team, and has never created a separate business organization for it. How is the tem owned? As a sole-proprietorship. As a partnership. As a limited liability proprietorship. As a limited liability company.
As a sole-proprietorship. The simplest form of business is a sole proprietorship. In this form, the owner is the business. Thus, anyone who does business without creating a separate business organization has a sole proprietorship.
Assume the football team is set up as a limited partnership. Lenny is the only general partner and Sarah and Sam are the only limited partners. Which of the following is incorrect? The profits from the team would pass through to the partners. If Sarah and Sam were to act in the management of the team, they would lose their limited liability. Distribution of the profit among the partners is set by statute. The company must be formed through compliance with state statutes.
Distribution of the profit among the partners is set by statute. All partners in a limited partnership are taxed on their individual tax returns for partnership profits. A limited partner can forfeit limited liability by taking part in the management of the business. In order to be a limited partnership, it must be created incompliance with state statutes.
Assume the football team is set up as a general limited liability company (LLC) and that Lenny, Sarah, and Sam are the owners of the LLC and it is a member-managed firm. Which of the following is incorrect? The profits from the team would pass through to the partners unless the LLC chooses to be taxed as a corporation. If any of the members were to act in the management of the team, they would lose their limited liability. Distribution of the profit among the partners is set by statute. The company must be formed through compliance with state statutes.
Distribution of the profit among the partners is set by statute. An LLC that wants to distribute profits to its members may prefer to be taxed as a partnership to avoid the "double taxation" that is characteristic of the corporate entity. Unless an LLC indicates that it wishes to be taxed as a corporation, the Internal Revenue Service (IRS) automatically taxes it as a partnership. In a member-managed LLC all of the members vote on management decision. The distribution of the profits is set by the operating agreement. In order to be an LLC, it must be created incompliance with state statutes.
When Sylvia and Cheryl agreed to start their furniture business, their lawyer recommended they set up an LLC instead of a partnership. They each contributed $100,000 to the business and set up an LLC with each as a member. After ten years Sylvia wanted to move out of the state, so they decided to dissolve their LLC. What is the most likelya consequence of their decision to dissolve? a. Sylvia and Cheryl will be personally responsible for all the debts of the business. b. The LLC will have to file and pay tax on any profits before dissolution. c. If both Sylvia and Cheryl agree in writing the LLC may be dissolved. d. A court will "pierce the corporate veil" of the LLC.
If both Sylvia and Cheryl agree in writing the LLC may be dissolved. An LLC can generally be dissolved with the written consent of all members and the personal assets of the members will be shielded from liabilities incurred by the LLC. The members' losses will be limited to the amount they invested in it. The LLC's profits and losses pass through the company to the members so the LLC itself will not have to pay tax. Review the section "Important Features of the LLC" in Chapter 29.
If Lenny were to own the team as a sole proprietorship, which of the following is correct? If there was a contract dispute between the team and a third party, Lenny's liability would be limited to the amount he invested in the team. It would be easy to raise capital for the team, since Lenny could sell off equitable shares of the team. If there was a tort lawsuit arising from an activity of the team, Lenny could be sued personally. If Lenny were to die, there would be continuity of the business structure.
If there was a tort lawsuit arising from an activity of the team, Lenny could be sued personally. In a sole-proprietorship, Creditors can pursue the owner's personal assets to satisfy any business debts. A disadvantage to a sole-proprietorship is that capitalization of the business is limited to the owner's funds and funds from any loans that he or she can obtain for the business. The sole proprietorship has the disadvantage of lacking continuity after the death of the proprietor. When the owner dies, so does the business—it is automatically dissolved.
Joe, who owned a gym in Washington, had made an initial investment of $150,000. He employed a number of people and mademoney for the first two years. However, the business started declining after he relocated to a different neighborhood. Joe ran up a debt of $500,000. What might happen if his creditors seek to foreclose on the debt? a. Joe's financial risk is limited to the extent of his investment in the business. b. Joe's personal assets can be taken by the creditors to repay the debt. c. Joe's employees are liable to contribute a percentage of their earnings toward paying the debt. d. The creditors cannot force the payment of the debt for five years.
Joe's personal assets can be taken by the creditors to repay the debt. Joe's personal assets can be taken by the creditors to pay the debts. The most significant disadvantage of the sole proprietorship form of business is the unlimited liability of the owner for the debts of the business. Unlimited liability means that business debts are payable from personal, as well as business, assets. If the business does not have enough assets to pay business debts, business creditors may also recover from the proprietor's personal assets. Review the section "Sole Proprietorship" in Chapter 29.
Assume the football team is set up as a limited partnership Lenny is the only general partner and Sarah and Sam are the only limited partners. The team is sued for negligence because an individual who turned to see the quarterback running naked crashed her car. Which of the following is true? The only one with liability is the company itself. Lenny has liability limited to his investment in the firm and Sarah and Sam have unlimited liability. Lenny has unlimited liability and Sarah and Sam have liability limited to their investment in the firm. Lenny, Sarah and Sam all have unlimited liability.
Lenny has unlimited liability and Sarah and Sam have liability limited to their investment in the firm. A general partner assumes management responsibility for the partnership and has full responsibility for the partnership and for all its debts. A limited partner contributes cash or other property and owns an interest in the firm but is not involved in management responsibilities and is not personally liable for partnership debts beyond the amount of his or her investment.
Which of the following is an example of a trading partnership? a. Ben and Harry's law firm in Texas b. Mike and Rose's supermarket in Kentucky c. Peter and Amy's veterinary hospital in California d. Jason and Julie's accounting firm in Tennessee
Mike and Rose's supermarket in Kentucky A trading partnership is one engaged in buying and selling merchandise. A nontrading partnership is one devoted to providing services, such as accounting, medicine, law, and similar professional services. Review the section "Trading and Nontrading Partnerships" in Chapter 29.
Assume that the football team is set up as limited partnership. Lenny is the only general partner and Sarah and Sam are the only limited partners. Who would make the decision about whether or not to fire the quarterback? Only Lenny. Only Sarah and Sam. Lenny, Sarah and Sam would vote on it. The board of directors of the team.
Only Lenny. The general partners are to manage a limited partnership. As passive investors, limited partners have no say in management of the firm. A limited partnership does not have a board of directors.
Patrick and Philip graduated from one of the most prestigious law schools in the country. They worked for two years in a small law firm before deciding to establish their own firm. They rented anofficein the city and began practicing together. They shared expenses and profits equally. Patrick's father, John, acted as their agent in renting the office and hiring clerical staff. Which of the following is most likely? a. Patrick and Philip's firm is an example of a nontrading partnership b. Patrick and Philip are not liable for the firm's debts. c. If Patrick or Philip dies, John will become a partner. d. Either Patrick or Philip can borrow money in the name of the firm.
Patrick and Philip's firm is an example of a nontrading partnership Patrick and Philip's firm is a nontrading partnership. Such a partnership is devoted to providing services, such as accounting, medicine, law, and similar professional services. The distinction matters because the members of a nontrading partnership usually have considerably less apparent authority than the partners in a trading partnership. For example, one partner in a nontrading partnership cannot borrow money in the name of the firm and bind the firm. Review the section "Trading and Nontrading Partnerships" in Chapter 29.
Assume the football team is set up as a general limited liability company (LLC) and that Lenny, Sarah, and Sam are the owners of the LLC. The team is sued for negligence because an individual who turned to see the quarterback running naked crashed her car. Which of the following is true? The LLC may have liability, but not the individual owners. The individual owners may have liability, but not the LLC itself. The LLC may have liability as well as the owners individually, but the owners' individual liability is limited to twice their investment in the company. The LLC may have liability as well as the owners individually, and the owners' liability unlimited.
The LLC may have liability, but not the individual owners. A key advantage of the LLC is that the liability of members is limited to the amount of their investments. Although the LLC as an entity can be held liable for any loss or injury caused by the wrongful acts or omissions of its members, the members themselves generally are not personally liable.
Assume the football team is set up as a general limited liability company (LLC) and that Lenny, Sarah, and Sam are the owners of the LLC. Which of the following statements is true? The LLC is always taxed like a partnership. The LLC is always taxed like a corporation. The LLC can choose to be taxed like a corporation or like a partnership. Neither the LLC nor its members pay tax on profits earned by it.
The LLC can choose to be taxed like a corporation or like a partnership. An LLC that has two or more members can choose to be taxed as either a partnership or a corporation. For federal income tax purposes, one-member LLCs are automatically taxed as sole proprietorships unless they indicate that they wish to be taxed as corporations.
Assume the football team is set up as a general limited liability company (LLC) and that Lenny, Sarah, and Sam are the owners of the LLC. The articles of organization specify that it is a manager-managed firm. Which of the following statements is true when it comes to management of the firm, such as the decision of whether to fire the quarterback? All of the members would have a vote on management decisions. The members would vote on a group of managers only from the members to manage the firm. The members would designate a group of only non-member managers to manage the firm. The members would designate a group of either member or non-member managers, or a combination to manage the firm.
The members would designate a group of either member or non-member managers, or a combination to manage the firm. In a manager-managed LLC, the members designate a group of persons to manage the firm. The management group may consist of only members, both members and nonmembers, or only nonmembers.
Assume the football team is set up as a general partnership and that Lenny, Sarah, and Sam are all general partners in the team. The team is sued for negligence because an individual who turned to see the quarterback running naked crashed her car. Which of the following is true? The partnership may be sued, but not the individual partners. The individual partners may be sued, but not the partnership itself. The partnership may be sued as well as the partners, but the partners' liability is limited to their investment in the firm. The partnership may be sued as well as the partners, and the partners' liability unlimited.
The partnership may be sued as well as the partners, and the partners' liability unlimited. Tort liability for a partnership extends to the partnership itself and to the individual partners. The liability of the individual partners is joint and several and unlimited.
_____ liability means that business debts are payable by the owner from personal, as well as business, assets. a. Secret b. Watered c. Nominal d. Unlimited
Unlimited Unlimited liability means that business debts are payable from personal, as well as business, assets. The most significant disadvantage of the sole proprietorship form of business is the unlimited liability of the owner for the debts of the business. Review the section "Sole Proprietorship" in Chapter 29.
Would it be easy to cut the quarterback from the team, if Lenny owned the team as a sole-proprietorship? No, since he would own a fiduciary duty to the shareholders of the business. No, since he might need approval from the board of directors of the business. No, since he would have to have a vote of the other owners of the team. Yes, it would be entirely his decision.
Yes, it would be entirely his decision. In a sole-proprietorship, the owner is the business, and there are no shareholders to the business. A sole proprietorship does not have a board of directors. The owner is the business, and there are owners that would need to vote on business decisions.
One of the important benefits of the limited liability company form of business organization is: a. avoidance of double taxation. b. mixing personal and business affairs. c. creation under federal statute. d. piercing the corporate veil.
avoidance of double taxation. Since an LLC is created under state statutes, the federal government has not established a tax classification for it. The LLC can elect to be taxed as a partnership so that the LLC's profits pass through the company to the members. This allows members to avoid the double taxation that a corporation incurs. Review the section "Important Features of the LLC" in Chapter 29.
A partner who is unknown to the public as a partner and takes no part in the management of the business is referred to as a _____ partner. a. secret b. dormant c. general d. nominal
dormant A dormant partner usually combines the characteristics of both the secret and silent partner by concealing the fact of the partnership from the public and taking no active part in the management of the business. Review the section "Dormant Partner" in Chapter 29.
A _____ partnership forms when two or more people voluntarily contract to pool their capital and skill to conduct some business undertaking for profit. a. silent b. secret c. nominal d. general
general An ordinary or general partnership forms when two or more people voluntarily contract to pool their capital and skill to conduct some business undertaking for profit. An ordinary partnership results in no limitations on a partner's rights, duties, or liabilities. Review the section "Ordinary or General Partnerships" in Chapter 29.
A business relationship in which the parties exercise mutual control for a single transaction and are jointly and severally liable is a: a. joint-stock company. b. joint venture. c. joint partnership. d. limited liability partnership.
joint venture. A business relationship in which two or more people combine their labor or property for a single undertaking and share profits and losses equally or as otherwise agreed is a joint venture. It exists for a single transaction although its completion may take several years.
Michelle and Katie had enjoyed helping a lot of their friends decorate their homes and were considered very talented at it. They decided to make some money doing what they enjoyed, so they set up a home decorating business together that allowed them the limited liability afforded shareholders of a corporation. They both owned the business and shared the management of it calling themselves "members." The business they set up is called a(n): a. limited liability company. b. general partnership. c. joint proprietorship. d. joint venture.
limited liability company. A limited liability company or LLC is a type of business organization that combines the management features of a partnership with the limited liability afforded to shareholders of a corporation. The owners of an LLC are called members. Review the section "Limited Liability Companies" in Chapter 29.
When known to the public as a partner, a silent partner is called a: a. sleeping partner. b. general partner. c. nominal partner. d. limited partner.
limited partner. A silent partner is one who, although possibly known to the public as a partner, takes no active part in the management of the business. When known to the public as a partner this type of partner is frequently referred to as a limited partner. Review the section "Silent Partner" in Chapter 29.
Thinking they can make a substantial profit, Miles and Marshall decided to engage in a business making baseball bats. They each put $20,000 into the business and decided to operate the business together with each getting an equal share of the profits. However, Miles was much wealthier than Marshall and he did not want to risk all his assets in the operation of the business. Their agreement followed state law and set a cap on the amount of money Miles risked in the business. This is an example of a(n): a. nontrading partnership b. joint partnership c. general partnership d. limited partnership
limited partnership A partnership in which one or more partners have their liability for the firm's debts limited to the amount of their investment is a limited partnership. All states permit limited partnerships by following the law prescribing the conditions under which it can operate.
Assume the football team is set up as a general limited liability company (LLC) and that Lenny, Sarah, and Sam are the owners of the LLC. Lenny, Sarah and Sam are properly referred to as: members. partners. shareholders. limited partners.
members. The owners of an LLC are referred to as members.
Peter started a restaurant by himself called Tasty Bites in Tennessee. He made a profit of $50,000 in the first year of its operation and $80,000 in the second year. He has been successfully running the company for the past five years. Peter is called the _____ of Tasty Bites in the given scenario. a. franchisor b. partner c. agent d. proprietor
proprietor Peter is called the proprietor of Tasty Bites. A sole proprietorship is a business owned and carried on by one person called the proprietor. To start a sole proprietorship, an individual need only begin doing business. Review the section "Sole Proprietorship" in Chapter 29.
Adam, Andre, and Alexandra start a software company called Opulence Systems Inc., in Pennsylvania. Alexandra administers the online promotional campaigns for the company's products and also handles the accounting for the firm. However, she hides the fact that she is one of the partners from the public. Alexandra is called the _____ partner of Opulence Systems Inc. a. nominal b. secret c. silent d. dormant
secret An active partner who attempts to conceal that fact from the public is a secret partner. Such a partner tries to escape the unlimited liability of a general partner but at the same time takes an active part in the management of the business. Review the section "Secret Partner" in Chapter 29.
A _____ is a business owned and carried on by one person. a. sole proprietorship b. corporation c. limited liability proprietorship d. cooperative
sole proprietorship A sole proprietorship is a business owned and carried on by one person called the proprietor. A sole proprietorship, the simplest and most common form of business, has a nature different from other businesses. Review the section "Sole Proprietorship" in Chapter 29.
Walter rented a commercial space in Vermont for $20,000 a month. He started his own fashion boutique in the rented space. Walter initially hired two assistants to help him run the business. He made a huge profit within three years and purchased the rented commercial space. The kind of business started by Walter is called a: a. co-operative. b. trust company. c. sole proprietorship. d. sole franchise.
sole proprietorship. The kind of business started by Walter is called sole proprietorship. A sole proprietorship is a business owned and run by one person with any number of employees and agents. A sole proprietorship is the simplest and most common form of business. Review the section "Sole Proprietorship" in Chapter 29.
A _____ partnership is one engaged in buying and selling merchandise. a. limited b. nominal c. trading d. dormant
trading A trading partnership is one engaged in buying and selling merchandise. A nontrading partnership is one devoted to providing services, such as accounting, medicine, law, and similar professional services. Review the section "Trading and Nontrading Partnerships" in Chapter 29.
