Reg SU #16 Business Organization
Wilson and Thomas are partners. Wilson contributed $150,000 to the partnership, and Thomas contributed $50,000. Wilson does 40% of the work, and Thomas does 60%. They do not have a partnership agreement that addresses the sharing of profits and losses. By the end of the year, the partnership has earned a profit of $200,000. What is Wilson's share of the profit under the Revised Uniform Partnership Act? A. $80,000 B. $100,000 C. $120,000 D. $150,000
B. $100,000 Unless the partners agree otherwise, profits are shared equally. Furthermore, losses are shared in the same proportion as profits. Thus, Wilson's profit share is $100,000 [$200,000 × (1 partner ÷ 2 partners)].
In a general partnership, which of the following acts must be approved by all the partners? A. Dissolution of the partnership. B. Admission of a partner. C. Authorization of a partnership capital expenditure. D. Conveyance of real property owned by the partnership.
B. Admission of a partner. The right to choose associates means that no partner may be forced to accept any person as a partner. The RUPA states, "A person may become a partner only with the consent of all of the partners." When a partner transfers his or her interest to another, the purchaser or other transferee is entitled only to receive the share of profits and losses and the right to distributions allocated to the interest (s)he has acquired.
Which of the following documents would most likely contain specific rules for the management of a business corporation? A. Articles of incorporation. B. Bylaws. C. Certificate of authority. D. Shareholders' agreement.
B. Bylaws. Bylaws govern the internal structure and operation of a corporation. Initial bylaws are adopted by the incorporators or the board. They may contain any provision for managing the business and regulating the affairs of the corporate entity not in conflict with the law or the articles of incorporation.
Seymore was recently invited to become a director of Buckley Industries, Inc. If Seymore accepts and becomes a director, Seymore, along with the other directors, will not be personally liable for A. Lack of reasonable care. B. Honest errors of judgment. C. Declaration of a dividend that the directors know will impair legal capital. D. Diversion of corporate opportunities to themselves.
B. Honest errors of judgment. The directors of a corporation owe a fiduciary duty to the corporation and the shareholders. They also are expected to exercise reasonable business judgment. The law does recognize human fallibility and allows for directors to be safe from liability for honest mistakes of judgment.
Cobb, Inc., a partner in TLC Partnership, assigns its partnership interest to Bean, who is not made a partner. After the assignment, Bean may assert the rights to I. Participation in the management of TLC II. Cobb's share of TLC's partnership profits A. I only. B. II only. C. I and II. D. Neither I nor II.
B. II only. Partnership rights may be assigned without the dissolution of the partnership. The assignee is entitled only to the profits the assignor would normally receive. The assignee does not automatically become a partner and would not have the right to participate in managing the business or to inspect the books and records of the partnership. The assigning partner remains a partner with all the duties and other rights of a partner.
A limited liability partnership (LLP) A. Starts as a corporation. B. Is typically adopted by providers of professional services. C. Is ordinarily treated as a legal entity to the same extent as a corporation. D. Offers a liability shield only for professional malpractice.
B. Is typically adopted by providers of professional services. An LLP is a general partnership that has been changed to LLP status in accordance with state law. The LLP is a business structure that is often adopted by providers of professional services (e.g., attorneys, CPAs, and physicians) and family enterprises.
Leslie, Kelly, and Blair wanted to form a business. Which of the following business entities does not require the filing of organization documents with the state? A. Limited partnership. B. Joint venture. C. Limited liability company. D. Subchapter S corporation.
B. Joint venture. A joint venture is an association to accomplish a specific business purpose. It is easily formed and is often organized for a single transaction. No statute requires a filing to create a joint venture.
The XYZ Limited Partnership has two general partners: Smith and Jones. A provision in the partnership agreement allows the removal of a general partner by a majority vote of the limited partners. The limited partners vote to remove Jones as a general partner. Which of the following statements is true? A. The limited partners are now liable to third parties for partnership obligations. B. Limited partners may vote to remove a general partner without losing their status as limited partners. C. By voting to remove a general partner, the limited partners are presumed to exercise control of the business. D. Limited partners may participate in management decisions without limitation if this right is provided for in the limited partnership agreement.
B. Limited partners may vote to remove a general partner without losing their status as limited partners. A limited partner is not liable to third parties for partnership obligations if the limited partner does not take part in the control of the business. The RULPA lists several activities in which a limited partner may engage without being considered in the control of the business, among them, voting on the removal of a general partner. Excessive involvement in the management of the business may constitute taking part in the control of the business. The result is liability to those parties who have knowledge of the limited partner's participation in control or, if the limited partner is exercising the powers of a general partner, to all third parties.
Which of the following parties generally has the most management rights? A. Minority shareholder in a corporation listed on a national stock exchange. B. Member of a limited liability company. C. Limited partner in a limited partnership. D. Limited partner in a general partnership.
B. Member of a limited liability company. In a member-managed LLC, all members have a right to participate, and most business matters are decided by the majority. In a manager-managed LLC, each manager has equal rights, but managers are selected or removed by a majority vote of the members. An LLC is deemed to be member-managed unless the articles of organization state otherwise.
The owners of a limited liability company are known as which of the following? A. Partners. B. Members. C. Stockholders. D. Shareholders.
B. Members. An LLC combines the limited liability of the corporation with the tax advantages of the general partnership. Like a corporation, a limited partnership, and an LLP, an LLC is a legal entity separate from its owner-investors (called members) that can be created only under state law.
A shareholder's fundamental right to inspect books and records of a corporation will be properly denied if the purpose of the inspection is to A. Commence a shareholder's derivative suit. B. Obtain shareholder names for a retail mailing list. C. Solicit shareholders to vote for a change in the board of directors. D. Investigate possible management misconduct.
B. Obtain shareholder names for a retail mailing list. The fundamental right of a shareholder to inspect the corporation's books and records may be exercised only in good faith for a proper purpose. A proper purpose concerns the shareholder's interest in the corporation, not his/her personal interests, and is not contrary to the corporation's interests. Obtaining a shareholder mailing list is not in itself improper unless it is to further the shareholder's personal interests.
May Phillips was the principal promoter of the Waterloo Corporation, a corporation that was to have been incorporated not later than July 31. Phillips obtained written subscriptions for a total of $1.4 million of common stock from 17 individuals. She hired herself as the chief executive officer of Waterloo at $200,000 for 5 years and leased three floors of office space from Downtown Office Space, Inc. The contract with Downtown was made in the name of the corporation. Phillips had indicated orally that the corporation would be coming into existence shortly. The corporation did not come into existence, through no fault of Phillips. Which of the following is true? A. The subscribers have a recognized right to sue for and recover damages. B. Phillips is personally liable on the lease with Downtown. C. Phillips has the right to recover the fair value of her services rendered to the proposed corporation. D. The subscribers were not bound by their subscriptions until the corporation came into existence.
B. Phillips is personally liable on the lease with Downtown. A promoter is personally liable on contracts entered into on behalf of nonexistent corporations, unless such liability is excluded or performance is conditioned on adoption by the corporation. Thus, Phillips is personally liable on the lease.
Hughes and Brody start a business as a close corporation. Hughes owns 51 of the 100 shares of stock issued by the firm and Brody owns 49. One year later, the corporation decides to sell another 200 shares. Which of the following types of rights would give Hughes and Brody a preference over other purchasers to buy shares to maintain control of the firm? A. Shareholder derivative rights. B. Preemptive rights. C. Cumulative voting rights. D. Inspection rights.
B. Preemptive rights. Preemptive rights are important to owners of a close corporation. They are options to subscribe to a new issuance in proportion to the shareholder's current interest. Thus, they limit dilution of equity.
A parent corporation owned more than 90% of each class of the outstanding stock issued by a subsidiary corporation and decided to merge that subsidiary into itself. Under the Revised Model Business Corporation Act, which of the following actions must be taken? A. The subsidiary corporation's board of directors must pass a merger resolution. B. The subsidiary corporation's dissenting shareholders must be given an appraisal remedy. C. The parent corporation's shareholders must approve the merger. D. The parent corporation's shareholders must be given dissenters' rights.
B. The subsidiary corporation's dissenting shareholders must be given an appraisal remedy. An ordinary merger is a fundamental corporate change requiring shareholder approval. In a short-form merger, a corporation that owns 90% or more of the issued and outstanding shares of a subsidiary may merge with the subsidiary without shareholder approval. Under the RMBCA, the subsidiary's dissenting shareholders must be allowed an appraisal remedy, requiring the parent company to pay cash for the fair value of their stock.
The apparent authority of a partner to bind the partnership in dealing with third parties A. Will be effectively limited by a formal resolution of the partners of which third parties are unaware. B. Will be effectively limited by the filing of a statement of partnership authority. C. Would permit a partner to submit a claim against the partnership to arbitration. D. Must be derived from the express powers and purposes contained in the partnership agreement.
B. Will be effectively limited by the filing of a statement of partnership authority. Each partner in a general partnership is an agent of the partnership. The partners may not limit partnership liability to third parties by agreement among the partners alone. But apparent authority is effectively limited to the extent a third party knows of limitations imposed on a partner's authority. The RUPA provides for filing of a statement of authority that may give notice of limitations on the authority of a partner.
When parties intend to create a partnership that will be recognized under the Revised Uniform Partnership Act, they must agree to I. Conduct a Business for Profit ( Y or N) II. Share Gross Receipts from a Business ( Y or N) A. Yes Yes B. Yes No C. No Yes D. No No
B. Yes No A partnership is an association of two or more persons conducting a business, which they co-own, for profit. Thus, partners must objectively intend that their business make a profit, even if no profit is earned. Each of the parties must be a co-owner. They share profits and losses of the venture and management authority (unless they agree otherwise).
Which of the following statements is true with respect to the general structure of a corporation? A. The corporation is treated as a legal person with rights and obligations jointly shared with its owners and managers. B. Shareholders establish corporate policies and elect or appoint corporate officers. C. A corporation is governed by shareholders who elect a board of directors and approve fundamental changes in its structure. D. The board of directors is responsible for carrying out the corporate policies in the day-to-day management of the organizations.
C. A corporation is governed by shareholders who elect a board of directors and approve fundamental changes in its structure A corporation is an entity formed under state law that is treated as a legal person with rights and obligations separate from its owners. Shareholders hold the voting power of a corporation. This power gives them the ability to elect a board of directors and to approve fundamental changes in the corporate structure. Thus, the shareholders have the power to govern the corporation.
Under modern statutes, the two general prerequisites to the declaration of a dividend are I. Corporate solvency. II. A resolution by the directors to declare a dividend. A. I only. B. II only. C. Both I and II. D. Neither I nor II.
C. Both I and II. The board has discretion to determine the time and amount of dividends and other distributions. However, two general prerequisites are used to determine whether the board is likely to distribute dividends. Those prerequisites are corporate profitability or solvency and a resolution by the directors to declare a dividend.
Chuck Borris invested $250,000 for a limited partnership share in Kong-Foo, a company that distributes antique furniture. Which of the following statements is correct? A. Chuck has unlimited personal liability for the debts of the partnership. B. Chuck may participate in management of Kong-Foo without losing his limited liability. C. Chuck's liability for partnership debts is limited to $250,000. D. Chuck is not liable for any amount owed to creditors if he does not contribute services to the partnership.
C. Chuck's liability for partnership debts is limited to $250,000. A limited partner's liability for the partnership's debt is limited to his or her investment. However, a limited partner may have full personal liability in some circumstances, e.g., if (s)he knowingly permits his or her name to be used as part of the limited partnership's name and is held out as a participant in management.
Which of the following is necessary content of the limited partnership certificate? I. The name of the limited partnership II. The address of its office III. The latest date upon which the limited partnership is to dissolve A. I and II. B. I and III. C. I, II, and III. D. None of the answers are correct.
C. I, II, and III. The limited partnership certificate must be signed by all general partners and contain the following: (1) the name of the limited partnership, (2) the address of its office, (3) the name and address of its agent for service of process, (4) the name and business address of each general partner, (5) the latest date upon which the limited partnership is to dissolve, and (6) any other matters the general partners determine to include.
Which of the following is a true statement about an LLC's operating agreement? A. It is legally required. B. It must be in writing. C. It may address matters such as profit sharing, voting rights, and dissolution. D. All of the answers are correct.
C. It may address matters such as profit sharing, voting rights, and dissolution. An LLC's operating agreement, which is not legally required and may be oral, may address such matters as (1) management arrangements, (2) voting rights, (3) member meetings, (4) profit sharing, (5) transfer of members' interests, and (6) circumstances causing dissolution.
Which of the following statements is true regarding the apparent authority of a partner to bind the partnership in dealings with third parties? Under the RUPA, the apparent authority A. Must be derived from the express powers and purposes contained in the partnership agreement. B. Will be effectively limited by a formal resolution of the partners of which third parties are unaware. C. May allow a partner to bind the partnership to representations made in connection with the sale of goods. D. Would permit a partner to submit a claim against the partnership to arbitration.
C. May allow a partner to bind the partnership to representations made in connection with the sale of goods. The RUPA provides that the act of a partner for the apparent purpose of carrying on the partnership business or business of the kind carried on by the partnership binds the partnership unless the person with whom (s)he is dealing knows the acting partner lacks actual authority, for example, because of the partnership's filing of a statement of authority. Courts interpret this language as establishing the apparent authority of partners to take actions that are usual for partnerships. These actions include buying and selling goods and making representations in connection with the sale. The apparent authority of a general partner is substantial.
The owner of cumulative preferred stock has the right to A. Convert preferred stock into common stock. B. A residual share in dividends after a fixed dividend has been paid to both common and preferred shareholders. C. The carryover of fixed dividends to subsequent periods from years in which they were not paid. D. Receive the par value of their shares but not unpaid dividends before common shareholders receive anything in liquidation.
C. The carryover of fixed dividends to subsequent periods from years in which they were not paid. Normally, a preferred shareholder is entitled to a fixed dividend that must be paid before dividends are received by the common shareholders. If the preferred stock is cumulative, any dividends not paid in preceding years are carried over and must be paid before the common shareholders may receive anything. Under case law, preferred stock dividends are impliedly cumulative unless stated otherwise, but the RMBCA suggests that whether stock is cumulative or noncumulative should be included in the articles.
Bryan Corporation decided to purchase a plant site. Bill Shephard, a newly elected director, has owned a desirable site for many years. He purchased the property for $60,000, and its present fair value is $100,000. What would be the result if Shephard offered the property to Bryan for $100,000 in an arm's-length transaction with full disclosure at a meeting of the seven directors of the corporation? A. The sale would be proper only upon requisite approval by the appropriate number of directors and at no more than Shephard's cost, thus precluding his profiting from the sale to the corporation. B. The sale would be void under the self-dealing rule. C. The sale would be proper and Shephard would not have to account to the corporation for his profit if the sale was approved by a disinterested majority of the directors. D. The sale would not be proper, if sold for the present fair value of the property, without the approval of all of the directors in these circumstances.
C. The sale would be proper and Shephard would not have to account to the corporation for his profit if the sale was approved by a disinterested majority of the directors. The fiduciary duty of directors to the corporation does not prohibit them from dealing with the corporation. The view has been that the director must disclose the contract and refrain from voting. Under the RMBCA, conflicting interest transactions between directors and corporations are not voidable and do not otherwise result in sanctions even if the interested director votes for the contract. If the interested director discloses the interest and the decision is by a majority of the disinterested directors, no secret profit exists and no breach of fiduciary duty occurs.
Acorn Corp. wants to acquire the entire business of Trend Corp. Which of the following methods of business combination will best satisfy Acorn's objectives without requiring the approval of the shareholders of either corporation? A. A merger of Trend into Acorn, whereby Trend shareholders receive cash or Acorn shares. B. A sale of all the assets of Trend, outside the regular course of business, to Acorn, for cash. C. An acquisition of all the shares of Trend through a compulsory share exchange for Acorn shares. D. A cash tender offer, whereby Acorn acquires at least 90% of Trend's shares, followed by a short-form merger of Trend into Acorn.
D. A cash tender offer, whereby Acorn acquires at least 90% of Trend's shares, followed by a short-form merger of Trend into Acorn. A merger, consolidation, or purchase of substantially all of a corporation's assets requires approval of the board of directors of the corporation whose shares or assets are acquired. An acquiring corporation may bypass shareholder approval by using a short-form merger. No shareholder approval is required if a corporation that owns at least 90% of a subsidiary merges with the subsidiary using a short-form merger.
Which of the following statements is correct regarding the declaration of a stock dividend by a corporation having only one class of par value stock? A. A stock dividend has the same legal and practical significance as a stock split. B. A stock dividend increases a stockholder's proportionate share of corporate ownership. C. A stock dividend causes a decrease in the assets of the corporation. D. A stock dividend is a corporation's ratable distribution of additional shares of stock to its stockholders.
D. A stock dividend is a corporation's ratable distribution of additional shares of stock to its stockholders. A stock dividend is payable in the stock of the dividend-paying corporation. New stock generally is issued for this purpose. A shareholder's equity in the corporation is not increased because a stock dividend does not increase the recipient's proportional ownership.
Marshall formed a limited partnership for the purpose of engaging in the export-import business. Marshall obtained additional working capital from Franklin and Lee by selling them each a limited partnership interest. Under these circumstances, the limited partnership A. Will usually be treated as a taxable entity for federal income tax purposes. B. Will lose its status as a limited partnership if it has more than one general partner. C. Can limit the liability of all partners. D. Can exist as such only if it is formed under the authority of a state statute.
D. Can exist as such only if it is formed under the authority of a state statute. The limited partnership is not available as a form of business organization under the common law. An organization purporting to be a limited partnership but formed in a state with no statutory authority for such a form of business organization will very likely be treated as a general partnership.
Eller, Fort, and Owens do business as Venture Associates, a general partnership. Trent Corp. brought a breach of contract suit against Venture and Eller individually. Trent won the suit and filed a judgment against both Venture and Eller. Venture then entered bankruptcy. Under the RUPA, Trent will generally be able to collect the judgment in full from A. Partnership assets but not partner personal assets. B. The personal assets of Eller, Fort, and Owens. C. Eller's personal assets only after partnership assets are exhausted. D. Eller's personal assets.
D. Eller's personal assets. The RUPA provides that partners are jointly and severally liable for all obligations of the partnership, including those arising out of a contract. The keys to the question are that (1) Trent sued both the partnership and one partner, (2) that partner can be held individually liable for the entire amount of a partnership obligation (joint and several liability), and (3) only parties who are judgment debtors can be held liable. Because Trent won the lawsuit against Venture and Eller, either Venture or Eller or both are liable for the judgment amount. In this scenario, the partnership is in bankruptcy. A plaintiff with a judgment against a defendant in bankruptcy typically collects very little, if any, of the judgment. The judgment against the partnership will be subordinated to the claims of secured creditors and creditors with priority. As a result, Trent will likely seek to recover the full judgment from Eller's personal assets, given that Eller was a co-defendant in the lawsuit. Furthermore, because Venture is in bankruptcy, the RUPA provides that Trent need not seek a writ of execution against (compel collection of the judgment amount from) Venture before proceeding against Eller's personal assets.
Ms. Wall is a limited partner of the Amalgamated Limited Partnership. She is insolvent, and her debts exceed her assets by $28,000. Goldsmith, one of Wall's largest creditors, is resorting to legal process to obtain the payment of Wall's debt to him. Goldsmith has obtained a charging order against Wall's limited partnership interest for the unsatisfied amount of the debt. As a result of Goldsmith's action, which of the following will happen? A. The partnership will be dissolved. B. Wall's partnership interest must be redeemed with partnership property. C. Goldsmith automatically becomes a substituted limited partner. D. Goldsmith becomes in effect an assignee of Wall's partnership interest.
D. Goldsmith becomes in effect an assignee of Wall's partnership interest. A charging order is a court order that has the effect of an involuntary assignment of the limited partner's interest to the judgment-creditor (or an independent third party called a receiver). The limited partner's interest may be temporarily assigned until the profits distributed pay off the debt, or it may be permanently assigned using its fair value to pay off the debt.
Food Corp. owned a restaurant called The Ambers. The corporation's president, T.J. Jones, hired a contractor to make repairs at the restaurant, signing the contract, "T.J. Jones for The Ambers." Two invoices for restaurant repairs were paid by Food Corp. with corporate checks. Upon presenting the final invoice, the contractor was told that it would not be paid. The contractor sued Food Corp. Which of the following statements is correct regarding the liability of Food Corp.? A. It is not liable because Jones is liable. B. It is not liable because the corporation was an undisclosed principal. C. It is liable because Jones is not liable. D. It is liable because Jones had authority to make the contract.
D. It is liable because Jones had authority to make the contract. The officers are agents of the corporation. They have express authority conferred by the bylaws or the board. They have implied authority to do things that are reasonably necessary to accomplish their express duties. Courts have held that official titles confer limited inherent authority on officers. The president supervises and controls all the business and affairs of the corporation, subject to the discretion of the board. Traditionally, the president had no inherent authority. But the trend is that (s)he can bind the corporation in the ordinary course of its business. Thus, Food Corp. cannot escape liability on the grounds that Jones had no authority.
General partnerships and LLPs vary in terms of A. Termination. B. Capitalization. C. Taxation. D. Liability.
D. Liability. Although partners in general partnerships are each personally liable for the entire partnership, partners in an LLP are shielded from personal liability for any partnership obligation incurred while the partnership was an LLP.
Case Corp. is incorporated in State A. Under the Revised Model Business Corporation Act, which of the following activities engaged in by Case requires that Case obtain a certificate of authority to do business in State B? A. Maintaining bank accounts in State B. B. Collecting corporate debts in State B. C. Hiring employees who are residents of State B. D. Maintaining an office in State B to conduct intrastate business.
D. Maintaining an office in State B to conduct intrastate business. A state may exercise authority over a foreign corporation if the corporation has at least minimum contacts with the state. The minimum contacts consist of activities that (1) are not isolated and (2) either are purposefully directed toward the state or place a product in the stream of interstate commerce with an expectation or intent that it will be used in the state. Maintaining an office in State B to conduct intrastate business creates minimum contacts with State B under this test.
General partners have a fiduciary relationship with each other. Accordingly, a general partner A. May engage in a business that competes with the partnership if it is operated with his or her own resources. B. May take advantage of a business opportunity within the scope of the partnership enterprise if the partnership agreement will terminate before the benefit will be received. C. Must exercise a degree of care and skill as a professional. D. May not earn a secret profit in dealings with the partnership or partners.
D. May not earn a secret profit in dealings with the partnership or partners. A general partner is an agent of the partnership and the other partners and thus owes fiduciary duties of loyalty and due care. A partner also has an obligation of good faith and fair dealing. In dealings with the partnership or other partners, a partner may not earn a secret profit. (S)he must account to the partnership and hold as trustee for it any benefit derived in the conduct or winding up of the partnership business or from use of partnership property (including appropriation of a partnership opportunity).
Bonanza Real Estate Ventures was formed under a state's version of the Revised Uniform Limited Partnership Act. It has three general partners and 1,100 limited partners. The limited partnership interests were offered to the general public at $5,000 per interest. Julie Kay purchased a limited-partnership interest. As such, she A. Cannot assign her limited-partnership interest to another person without the consent of the general partners. B. Is entitled to interest on her capital contribution. C. Is a fiduciary vis-a-vis the limited partnership and its partners. D. Must include her share of partnership profits in her taxable income even if she withdraws nothing.
D. Must include her share of partnership profits in her taxable income even if she withdraws nothing. Partnerships are tax-reporting rather than tax paying entities. The taxable profits of the enterprise pass through to the partners. Accordingly, a limited partner must include his or her share of the partnership profits in taxable income even though no distribution has been received.
Which of the following statements regarding a limited partner is(are) usually true? I. The limited partner is subject to personal liability for partnership debts. II. The limited partner has the right to take part in the control of the partnership. A. I and II. B. I only. C. II only. D. Neither I nor II.
D. Neither I nor II. A limited partner's liability for partnership obligations is limited to his or her capital contribution to the business, whereas a general partner has unlimited personal liability for partnership debts. The limited partner also is restricted in the right to control the partnership. (S)he is not allowed to participate in the day-to-day management of the partnership business
Which of the following is a false statement about the taxation of an LLC? A. Members may elect to be taxed as partners. B. Members may elect to be taxed as a corporation. C. It may be advantageous for an LLC to be taxed as a corporation. D. Single-member LLCs must be taxed as corporations.
D. Single-member LLCs must be taxed as corporations. Members may elect to be taxed as partners, and single-member LLCs may be taxed as sole proprietorships. Furthermore, taxation as a corporation is an option and may be advantageous if reinvestment in the LLC is desired and corporate rates are lower than personal rates.
The essential difference between a stock dividend and a stock split is that a A. Stock split will increase the amount of equity. B. Stock split will increase a shareholder's percentage of ownership. C. Stock dividend must be paid in the same class of stock as held by the shareholder. D. Stock dividend of newly issued shares will result in a decrease in retained earnings.
D. Stock dividend of newly issued shares will result in a decrease in retained earnings. A stock dividend is an issuance of additional shares of the company's stock proportionate to current holdings. Total equity is unaffected because it is merely represented by a greater number of shares. Generally accepted accounting principles require a transfer from retained earnings to contributed capital of the fair value of the shares distributed as a stock dividend. A stock split differs in that par value rather than retained earnings is reduced, and the number of authorized shares is increased.
Which of the following statements best describes the effect of the assignment of an interest in a general partnership? A. The assignee becomes a partner. B. The assignee is responsible for a proportionate share of past and future partnership debts. C. The assignment automatically dissolves the partnership. D. The assignment transfers the assignor's interest in partnership profits and losses and the right to distributions.
D. The assignment transfers the assignor's interest in partnership profits and losses and the right to distributions. A partner's transferable interest in the partnership consists of the partner's share of profits and losses and the right to distributions. It may be assigned without the dissolution of the partnership. The assignee does not automatically become a partner or have the right to participate in managing the business or to inspect the books and records of the partnership.
Under the Revised Model Business Corporation Act (RMBCA), which of the following must be contained in a corporation's articles of incorporation? A. Quorum voting requirements. B. Names of shareholders. C. Provisions for issuance of par and no-par shares. D. The number of shares the corporation is authorized to issue.
D. The number of shares the corporation is authorized to issue. Under the RMBCA, the number of shares the corporation is authorized to issue must be contained in the articles of incorporation.
Which of the following acts is most likely to cause a court to pierce the corporate veil? A. Failure to designate a registered agent in the articles of incorporation (Charter). B. Retention of excess capital. C. Failure to conduct a significant portion of business in the chartering state. D. Using corporate assets for the owner's personal purposes.
D. Using corporate assets for the owner's personal purposes. Typically, the corporate veil is pierced when a court finds that the corporation is merely the alter ego of a shareholder, for example, when (1) it is undercapitalized, (2) the assets of the corporation and the shareholders are commingled, (3) corporate formalities are ignored, or (4) the corporation is established for a sham purpose.
All of the following are legal rights of shareholders in U.S. publicly traded companies except the right to A. Vote on major mergers and acquisitions. B. Receive dividends if declared. C. Vote on charter and bylaw changes. D. Vote on major management changes.
D. Vote on major management changes. A corporation is owned by shareholders who elect a board of directors to manage the company. The board of directors then hires managers to supervise operations. Shareholders do not vote on major management changes because the powers of the board include selection and removal of officers and the setting of management compensation. Shareholders do have the right to vote on fundamental corporate changes, e.g., mergers and acquisitions, any changes in the corporate charter (the articles of incorporation) and bylaws, and dissolution.
Locke and Vorst were general partners in a kitchen equipment business. On behalf of the partnership, Locke contracted to purchase 15 stoves from Gage. Unknown to Gage, Locke was not authorized by the partnership agreement to make such contracts. Vorst refused to allow the partnership to accept delivery of the stoves, and Gage sought to enforce the contract. Gage will A. Lose, because Locke's action was not authorized by the partnership agreement. B. Lose, because Locke was not an agent of the partnership. C. Win, because Locke had express authority to bind the partnership. D. Win, because Locke had apparent authority to bind the partnership.
D. Win, because Locke had apparent authority to bind the partnership. A general partner is an agent of the partnership. Agents may have express, implied, and apparent authority. Apparent authority is authority that a reasonable third person believes the agent to have. Contracting for delivery of stoves is within the scope of ordinary business of a partnership in a kitchen equipment business. It is therefore within the scope of a general partner's apparent authority. Limitations imposed on an agent by the principal are ineffective as to third persons who have relied on the agent's apparent authority. But the principal may file a statement of authority that gives constructive notice of any limitations on the authority of a partner.
Wind, who has been a partner in the PLW general partnership for 4 years, decides to withdraw from the partnership despite a written partnership agreement that states, "No partner may withdraw for a period of 5 years." Under the Revised Uniform Partnership Act (RUPA), what is the result of Wind's withdrawal? A. Wind's withdrawal causes a dissolution of the partnership by operation of law. B. Wind's withdrawal has no bearing on the continued operation of the partnership by the remaining partners. C. Wind's withdrawal is not effective until Wind obtains a court-ordered decree of dissolution. D. Wind's withdrawal causes dissociation from the partnership despite being in violation of the partnership agreement.
D. Wind's withdrawal causes dissociation from the partnership despite being in violation of the partnership agreement. Under the RUPA, a partnership is considered an entity substantially separate from its partners. A partner has the power (if not the right) to dissociate at any time. However, if the partner wrongfully dissociates from the partnership, (s)he is liable for any resulting damages to the other partners. After dissociation, the business either continues after purchase of the dissociated partner's interest or dissolution begins.
Gillie, Taft, and Dall are partners in an architectural firm. The partnership agreement is silent about the payment of salaries and the division of profits and losses. Gillie works full-time in the firm, and Raft and Dall each work half time. Taft invested $100,000 in the firm, and Gillie and Dall invested $25,000 each. Dall is responsible for bringing in 50% of the business, and Gillie and Taft 25% each. How should profits of $120,000 for the year be divided? b. Gillie ($60,000)/ Taft ($30,000)/ Dall ($30,000) b. Gillie ($40,000)/ Taft ($40,000)/ Dall ($40,000) b. Gillie ($30,000)/ Taft ($60,000)/ Dall ($30,000) b. Gillie ($30,000)/ Taft ($30,000)/ Dall ($60,000)
b. Gillie ($40,000)/ Taft ($40,000)/ Dall ($40,000) Partners are not entitled to compensation for their actions, skill, and time applied on behalf of the partnership, except when such an arrangement is explicitly provided for in the partnership agreement. The partnership agreement is silent on this point, so salaries are not paid to the partners. Profits and losses may be divided among the partners according to any formula stated in the partnership agreement. Without a contrary agreement, partners share equally in the profits. Thus, each partner will receive $40,000.
The assignee of a partnership interest (limited or general) may become a limited partner if A. All partners agree. B. The limited partner becomes subject to a charging order. C. The assignee-limited partner becomes subject to all liabilities of the assignor. D. All of the answers are correct.
A. All partners agree. The assignee of a partnership interest may become a limited partner if all partners agree or if the partnership agreement gives the assignor the right to confer limited partner status on the assignee. If limited status is conferred on the assignee, the assignee-limited partner is subject to the known liabilities of the assignor.
Stanley is a well-known retired movie personality who purchased a limited partnership interest in Terrific Movie Productions upon its initial syndication. Which of the following is true? A. If Stanley permits his name to be used in connection with the business and is held out as a participant in the management of the venture, he will be liable as a general partner. B. The sale of these limited partnership interests is not subject to SEC registration. C. This limited partnership may be formed with the same informality as a general partnership. D. The general partners are prohibited from also owning limited partnership interests.
A. If Stanley permits his name to be used in connection with the business and is held out as a participant in the management of the venture, he will be liable as a general partner. A limited partner who permits his/her name to be used in the name of the partnership or in connection with the business will be liable to creditors who give credit without actual knowledge that (s)he is not a general partner. Such a limited partner will forfeit his/her limited liability because the use of his/her name may have led unsuspecting creditors to believe that (s)he was a general partner with unlimited liability.
Fil and Breed are 50% partners in F&B Cars, a used-car dealership. F&B maintains an average used-car inventory worth $150,000. On January 5, National Bank obtained a $30,000 judgment against Fil and Fil's child on a loan that Fil had cosigned and on which Fil's child had defaulted. National sued F&B to be allowed to attach $30,000 worth of cars as part of Fil's interest in F&B's inventory. Will National prevail in its suit? A. No, because the judgment was not against the partnership. B. No, because attachment of the cars would dissolve the partnership by operation of law. C. Yes, because National had a valid judgment against Fil. D. Yes, because Fil's interest in the partnership inventory is an asset owned by Fil.
A. No, because the judgment was not against the partnership. National will not prevail. Fil was not acting as a partner, that is, carrying on in the ordinary course (1) the partnership business or (2) business of the kind carried on by the partnership. Thus, when Fil cosigned the loan, National was not reasonably induced to rely on Fil's apparent authority as a partner-agent of the partnership. Fil therefore did not bind the partnership to the loan agreement. Furthermore, the partnership was not a party to the suit that resulted in a judgment against the partner and the child, and National had no basis for recovery from the partnership. Its remedy as a judgment creditor is against Fil but not specific partnership property. Fil has no interest in specific partnership property that is transferable or can be attached. Instead, the judgment creditor may attach the partner's transferable interest in the partnership by securing a charging order from a proper court. A charging order is a lien on the transferable interest. The court may order foreclosure of the interest at any time. After the order, the debtor partner's interest is sold at a judicial sale. Before the sale, the debtor, the other partners, or the partnership itself may redeem the interest by paying the debt.
Which of the following actions may be taken by a corporation's board of directors without shareholder approval? A. Purchasing substantially all of the assets of another corporation. B. Selling substantially all of the corporation's assets not in the regular course of business. C. Dissolving the corporation. D. Amending the articles of incorporation.
A. Purchasing substantially all of the assets of another corporation. The board of directors directly controls a corporation by establishing overall corporate policy and overseeing its implementation. In exercising their powers, directors must maintain high standards of care and loyalty but need not obtain shareholder approval except for fundamental corporate changes. Purchasing substantially all of the assets (or stock) of another corporation is a policy decision properly made by the directors, not a fundamental change. It does not require shareholder approval in the absence of a bylaw or special provision in the articles of incorporation.
What is the doctrine under which a corporation is made liable for the torts of its employees, committed within the scope of their employment? A. Respondeat superior. B. Ultra vires. C. Estoppel. D. Ratification.
A. Respondeat superior. Respondeat superior, or "let the master answer," is the doctrine that is the basis for a principal's liability for an agent's torts (civil wrongs not arising from a breach of contract, e.g., negligence). For this doctrine to apply, the wrongs must be committed within the scope of the agency.
Under the Revised Model Business Corporation Act, the appraisal right of a dissenting shareholder of an acquiree entity generally applies to which of the following corporate actions? Compulsory Share Exchanges Short-Form Mergers A. Yes Yes B. Yes No C. No Yes D. No No
A. Yes Yes In a compulsory share exchange, the acquirer obtains the shares of the acquiree in a transaction that is binding if approved by (1) the respective boards and (2) a majority of the acquiree's shareholders. The dissenting shareholders of the acquiree then have an appraisal right. In a short-form merger, a parent that owns a statutory percentage (90% under the RMBCA) of a subsidiary may merge the two entities without approval by the shareholders of either entity. The dissenting shareholders of the merged entity (subsidiary) but not the parent then have an appraisal right.