LSB 3213 - Exam 3
Which of the following is true regarding the management and operation of a limited liability partnership (LLP)?
Although not required by statute, limited liability partnerships will frequently have a partnership agreement that sets out their management and operational structure.
Partnership at Will
A partnership in which the partners agree to continue their association indefinitely.
Implied Partnership
A partnership in which the partners are silent about thier partnership status, yet the law considers them partners by virtue of their actions.
Term Partnership
A partnership in which the partners set a specific future date or event for when the partnership will be disolved.
Express Partnership
A partnership in which the principals are agree orally or in writing to form an ongoing business relationship.
Takeaway Concepts: 19
A partnership is a pass through enity, which means that the partnership entity pays no level of corporate tax.
Business Judgment Rule (BJR)
A principle that protects corporate officers and directors from laibility when they have made an unwise decision that results in a loss to the corporation but they have acted in good faith, had no private financial self-interest and used diligence to acquire the best info related to the decision.
Winding Up
After dissolution the process of paying the debts of the partnership and liquidating and/or distributing the remaining assets.
Which of the following is true regarding the taxation of a limited liability partnership (LLP)?
All income or losses of the LLP are reported on the partners' individual tax returns.
Takeaway Concepts: 6
Capital: Proprietor uses personal assets, private loans, or a commercial loan.
Takeaway Concepts: 21
Important default partnership rights include the right to: Share profits and losses equality, partnership property, co-manage the business, indemnity, vote and be informed
Takeaway Concepts: 26
Important partnership agreement provisions include: Capital contributions, Property provision, profits and lossess, salary, management rights and buy sell agreement.
Takeaway Concepts: 48
In a manager-managed LLC, a named manager (or managers) generally has the dayb to day operational responsibilities, while the nonmanaging members are typically investors with little input on the course of business taken by the enity except for major decisions.
Takeaway Concepts: 47
In a member-managed LLC, the management structure of the entity is simialr to that of a general partnership,w ith all the members having the authority to bind the business.
Default Rules
Rules that apply when partners have not expressly agreed how to regulate their internal relations with each other.
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
Corporate Veil
The liability protection shareholders, directors, and officers of a corporation have from personal liability in case the corporation runs up large debts or suffers some liability
In most cases, what controls the amount and methods of capitalizing the limited liability company (LLC)?
The operating agreement
Shareholders
The owners of a corporation; act principally through electing and removing directors and approving or withholding approval of major corporate decisions.
Takeaway Concepts: 40
The owners of an LLC are called members
Which of the following is true regarding the taxation of a sole proprietorship?
The principal reports business income and expenses on her own individual tax return.
Which of the following is true regarding termination of a sole proprietorship?
The proprietor's ownership interest in a sole proprietorship cannot pass to her heirs through a gift or an estate.
Dissociation
The term used in RUPA when a partner no longer wishes to be a princi0pal and chooses to leave the partnership
Withdrawal
The term used in the RULPA when a partner no longer wishes to be a principal and chooses to leave the partnership.
Takeaway Concepts: 57
The two major categories of corporations are those that are owned exclusively by a group of private individuals (known as privately held) and those that sell their ownership interest via public stock exchnages (know as publicly held)
Which of the following is true regarding operating agreements?
They frequently govern limited liability companies (LLCs).
Limited liability partnerships (LLPs) are formed when a general partnership files __________ with the appropriate public official.
a statement of qualification
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
Certificate of limited partnership
a form filed with the state by a general partner to create a limited partnership.
Takeaway Concepts: 31
General partners manage the business and are permitted to bind the partnership.
Revised Uniform Limited Partnership (RULPA)
A model partnership statute that governs limited partnerships
Uniform Partnership Act (UPA)
A model partnership statute that is the RUPA's predecessor.
privately held corporation
A corporation that does not sell ownership interests through sales via a broker to the general public or to financial insitutions or investors.
Takeaway Concepts: 51
A cour may impose personal libaility if it finds that fairness demands that the LLC members should compensate any damaged party when the entity is without resources to cover the full amount.
Duty of Care
A fiduciary duty owed to shareholders by officers and directors; requires that the fiduciaries exercise the degree of skill, diligence, and care that a reasonably prudent person would exercise under the same circumstances, acting in good faith and in a manner that is reasonably calculated to advance the best interests of the corporation.
Duty of Loyalty
A fiduciary duty owed to shareholders by officers, directors, and controlling shareholders; requires that the fiduciaries put the corporation's interests ahead of their own and do not engage in self-dealing or conflicts of interests.
Limited Liability Company (LLC)
A form of business entity that offers liability protection for its principles, flexible operation and pass-through taxation.
Takeaway Concepts: 10
A general partnership is legally defined as: (1) an association of two or more people (2) who are co-owners and co-managers of the business and (3) who share in the profits of their ongoing business.
Takeaway Concepts: 39
A limited liability company (LLC) is a form of business entity that offers liability protection for its principals, flexible operation and pass-through taxtion.
Takeaway Concepts: 27
A limited partnership has at least one general partner (managing principal) and at least one limited partner (investing principal).
Family Limited partnership
A limited partnership that is used for estate planning for families of considerable wealth.
Revised Uniform PArtnership Act (RUPA)
A model partnership statute drafted and poccasionally revised by the national conference of commissioners on Uniform State Laws. Approximately 40 states have adopted all or substantial portions of the RUPA.
Takeaway Concepts: 46
An LLC frequently is governed by an agreement of its members in the form of an operating agreeemnt. Which establishes via contact many of the internal rules for the actual operation of the business.
Takeaway Concepts: 43
An LLC is formed by filing the articles of organization with the designated public official in that state
Which of the following is true regarding taxation of a limited liability company?
An attractive advantage of the LLC model is the various tax treatment alternatives available to LLC members.
Pass through entity
An entity such as a partnership that pays no level of corporate tax.
Takeaway Concepts: 18
An important rule under the RUPA that distinguishes general partnerships from other types of business associations is that all partners face joint and several liability for contract and tort related obligations.
Partnership Agreement
Contract between partners that is meant to superced the default partnership rules.
Takeaway Concepts: 56
Corporations are classified into one or more categories that reflect their overall purpose, capitalization (how they are funded) location and structure.
Takeaway Concepts: 55
Corporations are created through a state law filing, and formation is governed through state statutes often modeled on the RMBCA
An individual planning to conduct a sole proprietorship under a trade name will also file a __________ certificate with a local or state office.
DBA (Doing Business As)
Takeaway Concepts: 9
Designation: John Doe d/b/a Doe Consulting Services.
Who is responsible for oversight and management of the corporation's course of direction?
Directors
Takeaway Concepts: 54
Dissociation from an LLC occurs Process in which an individual memeber of an LLC exercises the right to withdraw from the partnership.
Takeaway Concepts: 53
Dissolution of an LLC is in the ocntext of an LLC, a liquidation process triggered by an event that is specified in the operating agreement (such as the death of a key member) or by the decision of the majority of memebrship interests (or the percentage called for in the operating agreement) to dissolve the company.
Succesor Liability
Doctrine that allows a creditor to seek recovery from the purchaser of assets even when the purchaser did not expressly assume such liabilities as part of the purchase.
Statement of Qualification
Document filed to convert a general partnership to a limited liability partnership.
Articles of Organization
Document filed to create an LLC; in most states, requires only basic information such as the name of the entity, the location of its principal place of business, and the names of its members. Also called certificate of organization.
Operating Agreement
Document that governs an LLC; sets out the structure and internal rules for operation of the entity.
Takeaway Concepts: 2
Each form of entity has its attendant advantages, drawbacks and legal consequences for the owners of the business (known as principals)
Uniform Limited Liability Company Act (ULLCA)
Early vision of a model law adopted by most states related to the formation and organization of limited liability companies.
Takeaway Concepts: 3
Entities are not set in stone. Prinicipals may decide to change the entity as the business evolves.
Limited PArtnership
Entity that exists by virtue of a state statute that recognizes one or more partners as managing the business while other partners participate only in terms of contributing capital or property.
Which of the following is a specific dissociation event according to the Revised Uniform Partnership Act (RUPA)?
Expulsion by the unanimous vote of the other partners
A limited liability company (LLC) is an inflexible type of business entity.
False
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
A sole proprietorship cannot be terminated by an express act of the principal.
False
In every state, a limited liability company (LLC) is formed by filing the articles of incorporation with the designated public official in that state.
False
Sixteen (16) states have adopted all or substantial portions of the model act known as the Revised Model Business Corporation Act (RMBCA).
False
The owners or principals of a limited liability company (LLC) are called proprietors.
False
The two (2) major categories of corporations are privately-owned and government-owned.
False
Line of Credit
Form of commercial loan that allows the borrower to draw against a predetermined credit limit, as needed, instead of receiving the full loan amount at one time.
Takeaway Concepts: 4
Formation: Low Start-up costs and minimal filing. One person entity
Takeaway Concepts: 40
In a rightful dissociation, the withdrawing partner is no longer liable for postdissociation liabilities of the partnership. IN a wrongful dissociation (i.e., one that violates the partnership agreement), the withdrawing partner is liable for any damages the withdrawal caused.
Takeaway Concepts: 20
In the absence of a partnership agreement, the RUPA or UPA spell out the rights among the partners.
Takeaway Concepts: 28
In the absence of an agreement, the Revised Uniform Limited Partnership Act (RULPA) governs a limited partnership.
Takeaway Concepts: 12
In the absence of an agrement, the Revised Unifrom Partnership Act (RUPA) is likely to govern a general partnership.
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
Officers
Individuals appointed by the board of directors to carry out the director's set course of direction through management of the day-to-day operations of the business
Directors
Individuals responsible for oversight and management of the corporation's course of direction.
Manager-managed LLC
LLC management structure in which the members name a manager (or managers) who generally has the day-to-day operational responsibilities while the nonmanaging members are typically investors with little input on the course of business taken by the entity except for major decisions.
Member-managed LLC
LLC management structure similar to that of a general partnership, with all the members having the authority to bind the business
Which of the following is true regarding the limited liability company (LLC)?
LLC members are insulated from personal liability for any business debt or liability (contract or tort) if the venture fails.
Takeaway Concepts: 49
LLC memebrs are insulated from personal liability for any business debt or liability.
Takeaway Concepts: 45
LLCs are captalized primarily through debt via private lenders or commercial lenders or through the sale of equity ownership in the LLC itself.
Takeaway Concepts: 52
LLCs enjoy flexible tax treatment; they can be treated as pass-through entities or in the laternative, the memebrs of an LLC may elect to be taxed as a corporation
Takeaway Concepts: 37
LLPs are treated as pass through entities. They are not subject to tax' any income is taxed only when it is distributed to its partners.
Takeaway Concepts: 38
LLps are capitalized in the same way as a partnership; through debt via private or commercial lenders or by a sale of partnerhsp equity for ownership in the LLP itself. Personal Financial contributions of partners may be required in partnership agreement.
Takeaway Concepts: 5
Liability of Principal: All debts and liabilities of the business are the personal liabilities of the sole proprietor. All of the proprietor's assets are at risk to satisfy bsuiness debts and liabilities.
Takeaway Concepts: 50
Limited liability does not apply when the suin party has obtained a personal guarantee from the member of members of the LLC.
Takeaway Concepts: 43
Limited partners are subject to restrictions on withdrawal.
Takeaway Concepts: 30
Limited partners enjoy limited ability, whereas general partners face unlimited liability.
Takeaway Concepts: 32
Limited partners may not participate in daily management of the business, do not have auhtority to bind the partnership and remain primarily investors.
Takeaway Concepts: 8
Management and Control: One-person entity.
Takeaway Concepts: 16
Many well-known companies started informally as partnerships.
Revised Model Business Corporation Act (RMBCA)
Model act drafted by the American Law Institute and adopted by over half of the states as a template for compiling their own statutes governing corporations.
Revised Uniform Limited Liability Company Act (RULLCA)
Model law adopted by 19 states and the district of columbia related to the ofrmation and organization of limited liability companies.
Commercial Loan
Money loaned by a commercial source (e.g.; a bank) whereby the debtor agrees to pay back the loan over a certain period of time at a certain rate.
Private Loans
Money loaned by a private source (e.g., an individual) whereby the debtor agrees to pay back the loan over a certain period of time at a certain rate.
Takeaway Concepts: 33
Most states recognize limited liability partnerships through their partnership statutes
Trade Name
Name used by a sole proprietor for a business instead of the proprietor's actual name.
Takeaway Concepts: 11
No formal document or government filing is necessary to form a general partnership.
Business Corporation Law
Often the title for a specific state law that covers such matters as the structure of the corporation, oversight of the activity of the corporation's managers, rights of the principals in the case of the sale of assets or ownership interests, annual reporting requirements, and other issues that affect the internal rules of the business venture.
Sole Proprietorship
One-person business entity with minimal filing requirements.
Principals
Owners of a business entity
Takeaway Concepts: 44
PArtnerships may also be dissolved upn reaching the agreed upon term, by court order or by unanimous consent of the parties.
Takeaway Concepts: 17
Partnership and agency law also governs the relationship between the partnership, partners and outside third parties.
Takeaway Concepts: 22
Partnership duties include the duty of loyalty, care and good faith.
Dissociation
Process in which an individual memeber of an LLC exercises the right to withdraw from the partnership.
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
Suppose James "Snoopy" Stevenson ("Snoopy") plans to open a private investigative agency and enters into a one-year lease agreement for office space, signing on behalf of the soon-to-be-formed Out-of-Sight Investigations, Inc. One month later, Snoopy's financing falls through and he abandons the idea of incorporating his business. Which of the following is true regarding Snoopy's liability for the remaining eleven (11) months of the lease agreement?
Snoopy is a promoter, and he is therefore personally liable for the remainder of the lease.
Takeaway Concepts: 36
Some states provide liability shields for LLP partners only when the liability arises from some negligence by another partner but not for other types of liabilites such as those resulting from a breach of contract.
Takeaway Concepts: 13
States that have not yet adopted the RUPA operate under the RUPA's predessor, the Uniform PArtnership Act (UPA)
Takeaway Concepts: 7
Taxes: All income taxes of the business are paid at the proprietor's individual tax rate and reported on th eproprietor's individual income tax return. Miscellaneous state and local taxes to operate business.
Takeaway Concepts: 41
The RULPA plays a less significant role in a limited partnership context because so many limited partnerships operate under detailed agreements.
Takeaway Concepts: 39
The RUPA lists a variety of events of dissociation that are termed rightful dissociations, including voluntary seperation, expulsion, incapacity and death
Takeaway Concepts: 15
The RUPA outlines certain certain agency principles, including fiduciary duties that the partners owe each other and the partnership.
Takeaway Concepts: 42
The ULLCA and the RULLCA are model statutes designed to promote uniformity among various state LLC laws
Which of the following is a main advantage of pass-through taxation?
The ability of the business to distribute earnings to its owners without incurring double-level taxation.
Takeaway Concepts: 44
The articles of organization must contain such information as the name of the entity, the location of its principal place of business and the names of its owners.
Collateral
The assets a borrower has pledged to secure a loan
Takeaway Concepts: 1
The best choice of business entity is driven primarily by the risk, tax, and operational objectives of the owners and the type of business operations contemplated.
articles of incorporation
The document filed with a state authority that sets in motion the incorporation process; includes the corporation's name and purpose, the number of shares issued, and the address of the corporation's headquarters.
Fiduciary duties
The duties of loyalty, care and good faith imposed on partners to ensure they are acting in the partnerships's best interests.
Takeaway Concepts: 34
The general idea behind an LLP is that all aprtners have liability protection for debts and liabiites of the partnership; however, some states impose conditions on these limits.
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.?
They have potentially exposed their personal assets if OBX Leisure Pursuits, Inc. does not have sufficient assets to satisfy a judgement against the company.
How may a corporation be funded?
Through debt or through the selling of equity
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
Takeaway Concepts: 25
To avoid the default rules, partners may agree to enter into a partnership agreement that will govern their relations with one another.
Takeaway Concepts: 29
To form a limited partnership, the general partner files a certificate of limited partnership witht he state government authority.
Takeaway Concepts: 41
Today, all 50 states recognizes LLCs
Takeaway Concepts: 23
Together these duties are referred to as fiduciary duties
A sole proprietorship is not subject to corporate income taxation, and no tax return is filed on behalf of the business.
True
Capital options for sole proprietors include private loans, commercial loans, commercial lines of credit, and unsecured credit.
True
Some states have begun to adopt statutes based on the Revised Uniform Limited Liability Company Act (RULLCA).
True
The Uniform Limited Liability Company Act (ULLCA) is a model statute designed to promote uniformity among various state limited liability company (LLC) laws.
True
The easiest single-person ownership entity to form and maintain is a sole proprietorship.
True
Takeaway Concepts: 42
Under the RULPA, a genral aprtner may withdraw at any time without causing dissolution.
Takeaway Concepts: 14
Under the RUPA "a partnership is an entity distinct from its partners," wjereas under the UPA it is not.
Takeaway Concepts: 24
Under the RUPA a partnership agreement may not completely elimnate the fiduciary duties.
Takeaway Concepts: 35
When a partner has engaged in some misconduct or torious conduct (such as negligence) the LLP acts to shield only the personal assets of other partners.
Joint and Several Liability
When general partner's [ersonal assets are at risk both together (jointly) and seperately (severally) for all debts and liabilities of the partnership, regardless of the source of the debt or liability.
pierce the corporate veil
When the court discards the corporate veil and holds some or all of the shareholders personally liable because fairness demands doing so in certain cases of inadequate capitalization, fraud and failure to follow corporate formalities.
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
Corporation
a fictitious legal entity that exists as an independent person separate from its principals.
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
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
A DBA name is sometimes known as a __________ name.
fictitious
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
Dissolution
in the ocntext of an LLC, a liquidation process triggered by an event that is specified in the operating agreement (such as the death of a key member) or by the decision of the majority of memebrship interests (or the percentage called for in the operating agreement) to dissolve the company.
In terms of factors to consider in choosing a business entity, issues such as how and by whom the business venture will be operated, whether the principals will be involved in the day-to-day operations of the business, what duties the principals owe to the business and each other, how profits and losses will be split, and whether the remaining principals may continue to operate the business if a principal decides to leave the organization are related to the __________ factor.
management and operation
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
In a __________ limited liability company (LLC), the management structure of the entity is similar to that of a general partnership.
member-managed
Personal Guarantee
pledge from LLC members of personal assets to guarantee payment obligations of the business venture
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
A privately held corporation may find that is 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
The easiest single-person ownership entity to form and maintain is a __________.
sole proprietorship
Articles of organization are also called __________.
the certificate of organization
