Exam 3
LLCs were originally created by the Wyoming legislature in
1977
An enterprise may not be a Subchapter S corporation if it owns more than __________ of the stock of a subsidiary corporation.
80%
Suppose that Graham is the managing member of Mercury Running, LLC (Mercury), and signs a three-year lease agreement with a landlord on behalf of Mercury. One year into the lease, Mercury has a downturn in business, is forced to breach the lease, and moves out hoping to convert to an online business model. Which of the following is true regarding liability for the remainder of the lease? A) The landlord's rights are against Mercury Running, LLC (Mercury) only. B) The landlord's rights are against Graham only. C) The landlord's rights are against both Mercury and Graham. D) The landlord has no rights against either Mercury or Graham, since he is obligated by state statute to release the property for the remainder of the lease term at the lease rate he charged under the existing lease agreement; as a result, the landlord has no damages.
A) The landlord's rights are against Mercury Running, LLC (Mercury) only.
Which of the following is true regarding operating agreements? A) They frequently govern limited liability companies (LLCs). B) They are entirely different from partnership agreements. C) They do not typically address the internal rules for the actual operation of the LLC. D) They do not afford LLC members flexibility in terms of the rights and responsibilities of each member.
A) They frequently govern limited liability companies (LLCs).
With regard to taxation of partnerships, A) a partnership must file an information return. B) a partnership files a state partnership tax return and pays taxes on its income but no federal filing is required. C) a partnership files a federal and state partnership tax return and pays taxes on itsincome. D) partnerships have no tax-filing responsibilities.
A) a partnership must file an information return.
Boris, Carina, and Theo have decided to go into business as a limited partnership importing and selling exotic spices. Boris and Carina will manage the business, and Theo will have no role in the day-to-day operations. Boris and Carina have each invested $500,000, and Theo has contributed the building and land that the business will be operated from. Alina, a customer, contracts a rare disease from a contaminated spice sold by the company and sues. Alina is awarded a judgment for $5 million. After she exhausts the assets of the partnership, having the property and building sold, and seizing all other property, $3 million remains unpaid.
Boris and Carina each owe $3 million jointly and severally, so Alina may sue one or both of them; Theo has no additional liability.
Which of the following statements is incorrect? A) A corporation can be sued without the principals being sued. B) A corporation may form a contract in its own name without the principals guaranteeing the contract. C) A corporation may not incur obligations separate from those of its principals. D) A corporation may file suit in its own name without the principals filing suit.
C) A corporation may not incur obligations separate from those of its principals.
Which of the following is true regarding the taxation of a limited liability partnership (LLP)? A) An LLP is not subject to taxation. B) A limited liability partnership (LLP) is not treated as a pass-through entity. C) All income or losses of the LLP are reported on the partners' individual tax returns. D) An LLP is not required to file an information return with federal and state tax authorities.
C) All income or losses of the LLP are reported on the partners' individual tax returns.
Which statement below is correct about a sole proprietorship? A) It can have multiple owners. B) It is created by filing bylaws. C) It has low start-up costs and minimal filing. D) It faces double taxation.
C) It has low start-up costs and minimal filing.
Josh is a sole proprietor of an ice cream shop. Regina, a customer, slips and fall on some melted mint chocolate chip ice cream on the floor and breaks her leg. Regina files suit and wins a judgment of $50,000. Josh does not have any insurance and the total value of the assets of the ice cream shop is $10,000. Which statement below is correct? A) Josh will not be required to pay anything because he does not have insurance. B) Josh will have to pay $10,000 and then set up a payment plan to pay off the balance. C) Josh will have to use his own personal assets to pay the remainder of the judgment. D) Josh will only have to give Regina the money from the assets of the business,$10,000
C) Josh will have to use his own personal assets to pay the remainder of the judgment.
Which group of a corporation is responsible for running the day to day matters of the corporation? A) Board members B) Shareholders C) Officers D) Principals
C) Officers
All of the following are methods that a sole proprietorship can raise money except: A) Private loans. B) Commercial loans. C) Sell ownership in the business. D) Line of credit
C) Sell ownership in the business.
Which of the following is true about a sole proprietorship? A) It is subject to corporate income tax. B) Sole proprietorships face double taxation. C) The owner reports income and expenses on the owner's own tax return. D) The owner must file a tax return on behalf of the business
C) The owner reports income and expenses on the owner's own tax return.
Jeff files the articles of incorporation to start BluSky Inc. What will be the next step? A) The shareholders will create the bylaws. B) The court will declare the corporate existence. C) The principals will hold an organizational meeting to resolve any pending issues. D) Sell shares of stocks on the New York Stock Exchange
C) The principals will hold an organizational meeting to resolve any pending issues.
In a general partnership A) profits and losses must be split equally among the partners. B) profits must be split equally, but losses may be split unequally based on the partnership agreement. C) profits and losses may be unequally split based on the partnership agreement. D) an unequal split of profits may be agreed to based on the partnership agreement, but losses must be split equally.
C) profits and losses may be unequally split based on the partnership agreement.
Regarding limited partners: A) they must obtain a court order to withdraw because of their limited liability and its effect on the remaining partners and third parties dealing with the business. B) if the partnership agreement is silent as to notice required prior to termination, 90days' written notice is required before the limited partner may withdraw. C) they may not withdraw before the time that the partners have agreed the partnership will terminate. D) they may withdraw from the partnership at any time, but they forfeit their investment if they withdraw early.
C) they may not withdraw before the time that the partners have agreed the partnership will terminate.
Which of the following is true regarding the limited liability company (LLC)? A) Although the limited liability company (LLC) itself is insulated from organizational liability for any business debt or liability (contract or tort), LLC members themselves are personally liable for such obligations. B) Although LLC members are insulated from personal liability for business debts if the venture fails, they are personally responsible for any contract or tort liabilities arising from the business. C) Although LLC members are insulated from personal liability for contract or tort liabilities arising from the business, they are personally responsible for business debts if the venture fails. D) LLC members are insulated from personal liability for any business debt or liability (contract or tort) if the venture fails.
D) LLC members are insulated from personal liability for any business debt or liability (contract or tort) if the venture fails.
Which of the following is true regarding capitalization of the limited liability company? A) Like a corporation, a limited liability company issues shares B) LLCs are capitalized exclusively through debt via private lenders or commercial lenders C) LLCs are capitalized exclusively through the sale of equity ownership in the LLC itself D) LLCs are capitalized primarily through debt via private lenders or commercial lenders or through the sale of equity ownership in the LLC itself.
D) LLCs are capitalized primarily through debt via private lenders or commercial lenders or through the sale of equity ownership in the LLC itself.
Which of the following is not a characteristic of an LLC? A) May elect to be taxed as a corporation. B) Usually capitalized via debt. C) Its members are not personally liable for any business debt or liability. D) Only its managing members owe a fiduciary duty to other members.
D) Only its managing members owe a fiduciary duty to other members.
Which of the following is true regarding funding a sole proprietorship? A) Sole proprietorships are not limited in their options for raising money. B) Sole proprietorships can sell ownership shares in their business venture C) State law prohibits sole proprietors from using their personal financial resources as a source of operating capital D) Private loans come from family members and friends and are paid back according to their individual agreement.
D) Private loans come from family members and friends and are paid back according to their individual agreement.
Which of the following is a main advantage of pass-through taxation? A) The ability of investors to assume the tax deductions that are typically generated by an emerging company with no debt. B) The ability of investors to assume the losses that are typically generated by a company with no debt. C) The ability of investors to assume the tax deductions, but not the losses, of a company with significant up-front debt. D) The ability of investors to assume the tax deductions and losses that are typically generated by an emerging company or a company with significant up-front debt.
D) The ability of investors to assume the tax deductions and losses that are typically generated by an emerging company or a company with significant up-front debt.
Which of the following is a main advantage of pass-through taxation? A) The ability of a business to distribute earnings to its owners while simultaneously incurring double-level taxation. B) The ability of a business to distribute earnings to its owners while incurring no tax liability for either the business or its owners. C) The ability of a business to incur double-level taxation without distributing earnings to its owners. D) The ability of the business to distribute earnings to its owners without incurring double-level taxation.
D) The ability of the business to distribute earnings to its owners without incurring double-level taxation.
Which of the following is true regarding termination of a sole proprietorship? A) A sole proprietorship cannot be terminated by an express act of the principal. B) A sole proprietorship does not terminate when the proprietor dies. C) The personal bankruptcy of the proprietor does not terminate the sole proprietorship. D) The proprietor's ownership interest in a sole proprietorship cannot pass to her heirs through a gift or an estate.
D) The proprietor's ownership interest in a sole proprietorship cannot pass to her heirs through a gift or an estate.
Which statement is accurate about Delaware as it relates to taxation treatment of out of state corporations that incorporate in Delaware? A) They face no taxes. B) Delaware does not allow double taxation of corporations. C) They face very favorable tax treatment. D) Unless they sell products and services in Delaware, they may not benefit at all from Delaware tax treatment.
D) Unless they sell products and services in Delaware, they may not benefit at all from Delaware tax treatment.
A limited partnership requires: A) at least two general partners. B) at least two limited partners. C) a written limited partnership agreement. D) at least one general and one limited partner
D) at least one general and one limited partner
An individual planning to conduct a sole proprietorship under a trade name will also file a __________ certificate with a local or state office
DBA
Gwendolyn Melvin wishes to start a children's sports store called, "Just Let 'Em Play!" asa sole proprietor. What form must she file so that she can use another name than her own?
DBA Certificate
Who is responsible for oversight and management of the corporation's course of direction?
Directors
Frank wants to leave his partnership and wants to stop being a principal. What is this process called?
Dissociation
Linda, Nancy, and Pam started an LLC two years ago. Nancy wishes to now leave the LLC. This process is called
Dissociation
What occurs when an individual member of a limited liability company (LLC) decides to exercise the right to withdraw from the organization?
Dissociation
Owners of nonvoting stock who receive a share of the corporate profits have received what is called a
Dividend
T/F: A limited partnership is legally defined as an association of two or more people who are co-owners and co-managers of the business and who share in the profits of their ongoing business.
False
T/F: Like most business entities, general partnerships are created by filing a form with the state.
False
What are the factors a court will consider in deciding whether to pierce the corporate veil?
Inadequate capitalization, the nature of the claim, evidence of fraud or wrongdoing, and failing to follow corporate formalities
Chaplan Corporation is a privately held corporation that wishes to offer ownership interests to the general public and commercial investors in order to generate more capital. This process is called
Initial Public Offerings
What is an advantage of Subchapter S corporation that a standard corporation does not have?
It does not face double taxation
Cyndy is a sole proprietor of a day care. She wishes to build a new playground and also purchase new toys. She plans on doing this in stages and therefore wants a loan where she can draw against a predetermined amount as she needs it rather than getting a lump sum loan. Which type of loan would you recommend for Cyndy?
Line of Credit
LLC laws define dissolution of an LLC as a _______ process.
Liquidation
Franco and Jesse are operating as a general partnership. A question has arisen that is not covered under their partnership agreement nor addressed by the Revised Uniform Partnership Act. What will the courts do to resolve the situation?
Look to common law
The expiration date of a corporate bond is also called its __________.
Maturity Date
Bob is an owner in an LLC which makes him a __________.
Member
Who manages the day-to-day operations of the corporation?
Officers
Evan wishes to start an LLC that will do business in Florida, Vermont and Alaska. In which state(s) must he file the articles of organization?
Only one of the three states
LLCs are frequently governed by an agreement of the parties called an LLC agreement or
Operating agreement
The person who is entitled to the profits of a business based on the percentage of ownerships is:
Principal
Matt and Mindy wish to incorporate their business but want to limit who can buy ownership interests in their business. Which type of corporation would you suggest?
Privately held corporation
What is the name of an individual who begins to carry out a business venture's activities before actually filing the articles of incorporation?
Promoter
After the ULLCA was created, some states have started to adopt an act that modifies it called
Revised Uniform Limited Liability Company Act
Who are the owners of the corporation?
Shareholders
Raul wants a simple method to start-up a small marketing company. The marketing firm has relatively low revenue and expenses. Which type of business entity would you suggest?
Sole proprietorship
Which federal regulatory authority oversees the regulation of franchisors?
The Federal Trade Commission (FTC)
Generally, shareholders, directors, and officers of a corporation are insulated from personal liability in case the corporation runs up large debts or suffers some liability. What is the term for this liability protection?
The corporate veil
In most cases, what controls the amount and methods of capitalizing the limited liability company (LLC)?
The operating agreement
How may a corporation be funded?
Through debt or through the selling of equity
Toby was elected to the board of trustees of the Chi-Town Corporation (CTC) four years ago. He loves to brag about his position as a board member, but he cares more about the prestige than doing a good job. As a member of the board at CTC, Toby serves on several committees. However, although the board and all of the committees meet on a regular basis, Toby has never attended any of these meetings and doesn't participate in any board decisions. If the insiders at CTC enter into a series of bad business deals that cause CTC to suffer a financial loss, what is Toby's potential liability?
Toby will be liable because his inattention will likely be considered negligence and a breach of his fiduciary duty of care.
Reid Sterling owns a sole proprietorship called Dunkle Distributing. Dunkle Distributing is a:
Trade Name
John Anderson, an expert in lawn care, operates a sole proprietorship as "Anderson's Lawn Maintenance and Landscaping." This is known as a __________.
Trade name
T/F: Under the Revised Uniform Partnership Act (RUPA), all partners face joint-and-several liability for contract and tort-related obligations.
True
T/F: Under the default rules of partnership law, if a partner within the ordinary course of business incurs a payment or liability made on behalf of the partnership, the partnership must reimburse that partner for the expense.
True
Formation of an LLC requires the filing of
articles of organization
The __________ rule protects __________ from liability for decisions that may have been unwise but did not breach the duty of care.
business judgment; officers and directors
In terms of factors to consider in choosing a business entity, issues such as how the business will fund its operations and whether the principal(s) may sell ownership rights in the business to raise money are related to the __________ factor.
capitalization
Upon a dissociation from a limited liability company (LLC), the remaining members may __________.
choose to either continue the LLC or initiate dissolution of it
Limited partnerships are required to file a(n) __________ return with the IRS each year.
information
A __________ partnership is an entity that exists by virtue of a __________ statute that recognizes one or more partners as managing the business while other partners participate only in terms of contributing capital or property.
limited; state
In a __________ limited liability company (LLC), a named manager (or managers) generally has the day-to-day operational responsibilities, while the non-managing members typically are investors with little input on the course of business taken by the entity except for major decisions (such as a merger).
manager-managed
An owner of an LLC is called a __________.
member
In the context of business entities, __________ is a generic word for individuals who are entitled to the profits of a business based on their percentage of ownership.
principal
An LLC offers principals the same liability coverage as that of
principals in corporations with pass-through taxation
A privately held corporation may find that its expansion plans require even more capital than can be raised using private investors. In that case, the corporation may convert itself from __________ to __________ by engaging in an __________.
privately held; publicly held; IPO
What occurs when an officer, director, or controlling shareholder has some personal financial stake in a transaction that the corporation is engaged in and the officer, director, or shareholder helps to influence the advancement of the transaction?
self-dealing
Articles of organization are also called __________.
the certificate of organization
Several people have decided to go into business as an LLC. To cover all contingencies, they want to specify what constitutes an act of dissociation and outline the procedures upon dissolution. This information would be included in
the operating agreement
How are limited liability partnerships (LLPs) capitalized?
through private lenders, through commercial lenders, or by a sale of partnership equity for ownership in the limited liability partnership (LLP) itself
Dissolution does not actually end the partnership, but instead triggers the process of __________.
winding up
Redrock GP has decided to go out of business. Selling the partnership assets and making payments to creditors will occur during the __________ phase of the closing of a partnership.
winding-up
Suppose that Dexter and Benjamin form OBX Leisure Pursuits, Inc. by filing articles of incorporation. They decide to split the profits equally and, wishing to save the expense of hiring an attorney, do not keep up with the corporate formalities after the articles are filed. Which of the following is true regarding the potential liability of Dexter and Benjamin if a lawsuit is filed against OBX Leisure Pursuits, Inc.? A) They cannot be personally liable, since they filed articles of incorporation, and since the "corporate veil" is effective upon filing the articles. B)They cannot be personally liable, since the lawsuit was filed against OBX Leisure Pursuits, Inc., and they are not listed as defendants. C)They have potentially exposed their personal assets if OBX Leisure Pursuits, Inc. does not have sufficient assets to satisfy a judgement against the company.
C)They have potentially exposed their personal assets if OBX Leisure Pursuits, Inc. does not have sufficient assets to satisfy a judgement against the company.
Which of the following is true regarding the management and operation of a limited liability partnership (LLP)? A) A limited liability partnership (LLP) is required by state statute to have a partnership agreement that sets out its management and operational structure. B) A limited liability partnership (LLP) is required by federal statute to have a partnership agreement that sets out its management and operational structure. C) A limited liability partnership (LLP) is required by both the Uniform Partnership Act (UPA) and the Revised Uniform Partnership Act (RUPA) to have a partnership agreement that sets out its management and operational structure. D) Although not required by statute, limited liability partnerships will frequently have a partnership agreement that sets out their management and operational structure.
D) Although not required by statute, limited liability partnerships will frequently have a partnership agreement that sets out their management and operational structure.
Which of the following is true regarding taxation of a limited liability company? A) Limited liability companies (LLCs) are not favorable business entities in terms of taxation. B) A LLC cannot be treated as a pass-through entity. C) LLC members cannot elect for the LLC to be taxed as a corporation. D) An attractive advantage of the LLC model is the various tax treatment alternatives available to LLC members.
D) An attractive advantage of the LLC model is the various tax treatment alternatives available to LLC members.
Stefan has opened a sole proprietorship bicycle shop. The business shows a net income of $100,000. Stefan took a salary of $40,000. The remaining money is left in the bank A) At tax time, the business pays taxes on $100,000, and Stefan pays taxes on $40,000. B) At tax time, the business pays taxes on $140,000. C) At tax time, the business pays taxes on $70,000, and Stefan pays taxes on $70,000. D) At tax time, Stefan pays taxes on $140,000.
D) At tax time, Stefan pays taxes on $140,000.
Which of the following is a specific dissociation event according to the Revised Uniform Partnership Act (RUPA)? A) Expulsion by a majority (greater than 50 percent vote) of the other partners B) Expulsion by a super-majority (66 and 2/3rds percent or greater vote) of the other partners C) Expulsion by a supra-majority (greater than 75 percent vote) of the other partners D) Expulsion by the unanimous vote of the other partners
D) Expulsion by the unanimous vote of the other partners
Suppose that the First National Bank of Missouri loans $20,000 to Alex Harris to operate his sole proprietorship, doing business as Alex Harris Catering Services. The loan is for 5 years at the current market interest rate of 6.75%, and First National has already disbursed the entire loan amount to Harris in one lump sum. What type of loan is this?
Commercial
Which of the following statements is incorrect? A) A corporation may file suit in its own name without the principals filing suit. B) A corporation may form a contract in its own name without the principals guaranteeing the contract C) A corporation can be sued without the principals being sued. D) A corporation may not incur obligations separate from those of its principals
D) A corporation may not incur obligations separate from those of its principals
When a partner no longer wishes to be a principal in the partnership, she may choose to leave the partnership. What term does the Revised Uniform Limited Partnership Act (RULPA) use to describe this act of separation?
Withdrawal
LLCs were originally created by the
Wyoming legislature
Robert Hill Corp. (RHC) is incorporated in the state of Delaware. If it transacts business in Iowa, RHC would be characterized in Iowa as
a foreign corporation
The parties in a franchise are typically bound to each other via __________.
a franchise agreement
An owner of a corporation is called
a shareholder
Limited liability partnerships (LLPs) are formed when a general partnership files __________ with the appropriate public official.
a statement of qualification
The process when an individual member of an LLC exercises the right to withdraw from the partnership is called __________.
dissociation
Javier no longer wishes to be a principal in his general partnership, so he chooses to leave it. Alexia no longer wishes to be a principal in her limited partnership, so she chooses to leave it. Under the Revised Uniform Partnership Act (RUPA), Javier's act of separation is called __________, while under the Revised Uniform Limited Partnership Act (RULPA), Alexia's act of separation is called __________.
dissociation; withdrawal
Limited liability company (LLC) laws define __________ of an LLC as a __________ process triggered by an event that is specified in the __________ or by the decision of the majority of the members to dissolve the company.
dissolution; liquidation; operating agreement
A partner's __________ contribution represents the initial __________ investment into the partnership made by each partner.
equity; capital
A DBA name is sometimes known as a __________ name.
fictitious
The duty of a partner to act in the best interests of the partnership is called __________duty.
fiduciary
A corporation that transacts business in a state other than its state of incorporation is known as a(n) __________ corporation in the other state.
foreign
In terms of factors to consider in choosing a business entity, issues such as how easy the business is to start and maintain, whether there must be more than one principal, what annual filings or fees are required, and what formalities need to be followed are related to the _________ factor.
formation
To form a limited partnership, the __________ partner files __________ with the __________ government authority.
general; a certificate of limited partnership; state
The Revised Uniform Limited Liability Company Act (RULLC) imposes personal liability in cases where authorized members consent to a(n) __________, defined as any distribution of money made when the limited liability company (LLC) is __________.
improper distribution; insolvent
