Deck 15: Limited Liability Companies, Limited Liability Partnerships, and Special Forms of Business

Question 1

A limited liability company is an incorporated business entity.

Answer 1

False

Question 2

The income or losses of an LLC "flow through" to the members' individual income tax returns which avoids double taxation.

Answer 2

True

Question 3

Limited liability companies are created by federal law.

Answer 3

False

Question 4

A limited liability company cannot be abbreviated as LC.

Question 5

An LLC is not liable for injury caused by the LLC member while acting within the ordinary course of business of the LLC.

Question 6

Articles of organization are documents that evidence a member's ownership interest in an LLC.

Question 7

An operating agreement can be amended orally.

Question 8

Profits and losses from an LLC do not have to be distributed in the same proportion.

Question 9

An operating agreement is a document that states the terms for converting an existing business to an LLC.

Question 10

An LLC organized in the United States is considered a domestic LLC throughout the United States.

Question 11

Agents of an LLC are not permitted to enter into contracts on behalf of the LLC.

Question 12

An LLC can be organized in only one state.

Question 13

The Uniform Limited Liability Company Act is a model act that provides comprehensive and uniform laws for the formation, operation, and dissolution of LLCs.

Question 14

The existence of an LLC begins when the articles of organization are filed.

Question 15

An LLC is taxed at the entity level.

Question 16

LLCs are treated as artificial persons who can sue or be sued, enter into and enforce contracts.

Question 17

A member or a shareholder is the owner of an LLC.

Question 18

Distributional interest refers to a member's ownership interest in an LLC.

Question 19

An LLC cannot amend its articles of organization.

Question 20

The ULLCA is federal law and is valid across the United States.

Question 21

If a member or manager of an LLC is found to be a tortfeasor, he or she is not personally liable for the injury or death.

Question 22

Partners of LLPs are personally liable for the LLPs' debts, and obligations, and liabilities.

Question 23

In a manager-managed LLC, amending the articles of organization cannot be delegated to the managers.

Question 24

Managers of LLCs are not personally liable for the debts, obligations, and liabilities of the LLC they manage.

Question 25

A distributorship franchisee is called a subfranchisor.

Question 26

In a franchise agreement, by default, the franchisor and franchisee are separate legal entities.

Question 27

A limited liability partnership has no general partner.

Question 28

A manager does not owe a duty of loyalty to the LLC as he or she is not a member of the LLC.

Question 29

In a processing plant franchise, the franchisor licenses the franchisee to make and sell its products or services to the public from a retail outlet serving an exclusive geographical territory.

Question 30

A franchisor deals with the franchisee as an independent contractor.

Question 31

Members of LLCs are not personally liable for the LLC's debts, obligations, and liabilities.

Question 32

In an area franchise, the franchisor authorizes the franchisee to negotiate and sell franchises on behalf of the franchisor.

Question 33

The United States does not permit an LLC to be member-managed.

Question 34

In a manager-managed LLC, it is necessary that the manager is a member of that LLC.

Question 35

Licensing refers to a business arrangement that occurs when the owner of intellectual property contracts to permit another party to use the intellectual property.

Question 36

A member of a manager-managed LLC who is not a manager owes no fiduciary duty of loyalty or care to the LLC or its other members.

Question 37

The duty of care for managers and members includes the duty not to usurp the LLC's opportunities.

Question 38

A franchise is an example of a license.

Question 39

Unless otherwise states, the franchisor is liable for the torts of its franchisee.

Question 40

A franchisee is established when parties of a general partnership conduct business outside the state of their incorporation.

Question 41

A(n)________ refers to an agreement entered into among members that governs the affairs and business of the LLC and the relations among members, managers, and the LLC.

A) certificate of interest
B) articles of organization
C) operating agreement
D) agreement of conversion

Question 42

Peter, Preston, and Penny organize an LLC in the month of January. While composing the operating agreement, they forget to include the amendment clause. Six months later, the situation demands an amendment to the operating agreement. Which of the following would best apply in this scenario?

A) The operating agreement can be amended if all three members approve.
B) The operating agreement cannot be amended as it contains no amendment provision.
C) The operating agreement can be amended with the affirmative majority of all shareholders.
D) The operating agreement can be amended only 60 days after a new amendment provision is included.

Question 43

The certificate of interest acts the same as a(n)________ issued by a corporation.

A) promissory note
B) stock certificate
C) deposit note
D) initial public offer

Question 44

Philip and Deborah form an LLC. Philip contributes $50,000 capital, and Deborah contributes $75,000 capital. They do not have an agreement as to how profits are to be shared. If the LLC makes $100,000 profit in its first year, how will the profit be divided among the members?

A) Philip gets $30,000 and Deborah gets $70,000.
B) Philip gets $50,000 and Deborah gets $50,000.
C) Philip gets $25,000 and Deborah gets $75,000.
D) Philip gets $35,000 and Deborah gets $65,000.

Question 45

An LLC that was organized in Alabama and operating in Texas with no operations outside the U.S. is considered a ________ in Texas.

A) foreign limited liability company
B) limited liability partnership
C) domestic limited liability company
D) general partnership

Question 46

A(n)________ refers to a document that evidences a member's ownership interest in an LLC.

A) certificate of interest
B) articles of organization
C) operating agreement
D) agreement of conversion

Question 47

An LLC is a ________ in the state in which it is organized.

A) sole proprietorship
B) domestic LLC
C) term LLC
D) general partnership

Question 48

Gerard and Tony organize an LLC by investing $55,000 and $45,000 respectively. The operating agreement states that profits are to be shared in the ratio of 55:45 between Gerard and Tony and makes no mention of sharing losses. The LLC incurs a loss of $100,000 in its first year. How is this loss shared?

A) Both Gerard and Tony have to pay $50,000 each.
B) Gerard pays $55,000 while Tony pays $45,000.
C) Gerard pays $45,000 while Tony pays $55,000.
D) Gerard and Tony are not liable for the losses of the LLC.

Question 49

The ________ is a model act that provides comprehensive and uniform laws for the formation, operation, and dissolution of LLCs.

A) Williams Act
B) Securities Exchange Act
C) ULLCA
D) ULPA

Question 50

Sam Muller and Toby Richardson organize an LLC in the state of Delaware. In the articles of organization, they specify the duration of the LLC as "25 years from the date of filing the articles of organization." Which of the following true in this context?

A) The LLC is invalid, as it does not specify a date of termination.
B) The LLC may be dissolved at will any time after 25 years from the date of filing the articles of organization.
C) Muller and Richardson have organized a valid term LLC.
D) Muller and Richardson have organized an at-will LLC.

Question 51

________ refer to the formal documents that must be filed at the secretary of state's office of the state of organization of an LLC to form the LLC.

A) Operating agreements
B) Certificates of interest
C) Articles of organization
D) Articles of amendment

Question 52

An LLC is a(n)________.

A) unincorporated business entity
B) incorporated business entity
C) cooperative entity
D) proprietorship

Question 53

Which of the following is true of an LLC formation?

A) Doctors and lawyers cannot operate practices as LLCs.
B) An LLC has to be organized in every state that it operates.
C) "LC" cannot be used to denote an LLC.
D) An LLC is a creation of federal law.

Question 54

Which of the following is true of the ULLCA?

A) It provides comprehensive laws for the formation of corporations.
B) It provides uniform laws for the dissolution of LLCs.
C) It is a state law that is uniform across the United States.
D) It governs the operation of proprietorships and LLPs.

Question 55

Which of the following is true of an LLC?

A) An LLC is a creature of federal law.
B) An LLC is regarded a separate legal entity.
C) An LLC cannot hold title to property.
D) The owners of LLC are called general partners or specific partners.

Question 56

In states where an LLC may be organized by only one member, ________ can obtain the benefit of the limited liability shield of an LLC.

A) corporations
B) sole proprietors
C) LLPs
D) general partnerships

Question 57

The owner of an LLC is called ________.

A) general partner
B) limited partner
C) proprietor
D) member

Question 58

In which of the following cases does the conversion of an existing business to an LLC take effect?

A) when the articles of organization are filed with the secretary of state
B) when the members enter into an agreement of conversion
C) when an operating agreement is finalized by members
D) when the first certificate of interest is issued

Question 59

Which of the following is true of LLC taxation?

A) An LLC is taxed as a corporation in all general cases.
B) Income or losses of an LLC do not flow through to the members' individual income tax returns.
C) Members of an LLC are subject to double taxation.
D) An LLC is not taxed at the entity level.

Question 60

Which of the following best defines the term distributional interest?

A) the ratio in which profit is distributed among members of an LLC
B) the process of distributing profits or losses according the capital investment of the member
C) the constitution of management of the LLC based on the extent of each member's financial investment
D) a member's ownership interest in an LLC that entitles the member to receive distributions of money and property from the LLC

Question 61

John, Nathan, and Julio form JNJ, LLC with equal capital investment each. On his way to a business meeting with clients of JNJ, Nathan accidentally injures Jessica in a car accident. Which of the following is true in this scenario?

A) Jessica can claim damages from JNJ, LLC as she was injured in the ordinary course of business.
B) Jessica can only claim damages from Nathan and not from JNJ, LLC.
C) Jessica can choose to claim damages from any one of the three.
D) John, Nathan, and Julio have equal personal liability to Jessica's injuries.

Question 62

In which of the following types of franchise does a franchisor provide a secret formula or process to the franchisee?

A) chain-style franchise
B) area franchise
C) distributorship franchise
D) processing plant franchise

Question 63

In a(n)________ franchise, the franchisor manufactures a product and licenses a retail dealer to sell the product to the public.

A) processing plant
B) area
C) distributorship
D) chain-style

Question 64

Which of the following is true of a member-managed LLC?

A) Each member has equal rights in the management of the business of the LLC.
B) The member with the highest capital contribution becomes the de facto manager of the LLC.
C) Any matter relating to the business of the LLC is decided by a unanimous vote of the members.
D) Shareholders are not allowed to decide matters relating to the business of the LLC.

Question 65

A(n)________ is established when one party licenses another party to use the first party's trade name, trademarks, commercial symbols, patents, copyrights, and other property in the distribution and selling of goods and services.

A) proprietorship
B) franchise
C) implicit contract
D) general partnership

Question 66

Members of an LLC have ________ liability.

A) limited
B) unlimited personal
C) unlimited capital
D) strict

Question 67

Which of the following is true of liabilities of LLCs?

A) Members of the LLC are liable to the extent of their capital contribution.
B) Managers of LLCs are personally liable for the debts, obligations, and liabilities of the LLC.
C) LLCs are not liable for any loss or injury caused by their employees.
D) LLCs are not liable for losses caused due to negligence of their managers during the ordinary course of business.

Question 68

Which of the following is true of the management of an LLC?

A) Members cannot become managers of an LLC.
B) A manager-managed LLC shares management powers between members and managers.
C) A nonmember can become a manager of an LLC.
D) An LLC can be both member-managed and manager-managed simultaneously.

Question 69

________ refers to the formal documents that must be filed at the secretary of state's office of the state of organization of an LLP to form the LLP.

A) Articles of LLP
B) Agreements of conversion
C) Articles of organization of LLP
D) Articles of amendment of LLC

Question 70

Which of the following actions requires voting of all members in a manager-managed LLC?

A) issuing a certificate of interest
B) admitting new members
C) converting an existing business into an LLC
D) expanding operations in another country

Question 71

Limonelle Corporation owns the secret formula for a popular beverage brand Limonelle. The corporation operates through franchises in over 50 countries. It uses a secret formula to prepare the drink concentrate which is dispatched to the franchises world over. These franchises then prepare and bottle the beverage for distribution. Which of these types of franchises has Limonelle adopted?

A) chain-style franchise
B) processing plant franchise
C) distributorship franchise
D) area franchise

Question 72

A ________ is a person who intentionally or unintentionally causes injury or death to another person.

A) protagonist
B) supplanter
C) reversionist
D) tortfeasor

Question 73

A member's ownership interest in an LLC is called a ________.

A) certificate of interest
B) distributional interest
C) collateral interest
D) creditor's interest

Question 74

In a ________ franchise, the franchisor licenses the franchisee to make and sell its products or services to the public from a retail outlet serving an exclusive geographical territory.

A) chain-style
B) area
C) distributorship
D) processing plant

Question 75

Mary, Harold, Harvey, and William form an LLC by contributing $20,000, $50,000, $55,000, and $150,000 respectively. The LLC is designated to be member-managed. When a decision is put to vote, Mary, Harvey, and Harold vote "yes," whereas William votes "no". Which of the following is true in this context?

A) William's decision prevails as he has invested the maximum capital.
B) No conclusion can be derived as the vote is not unanimous.
C) Mary, Harvey, Harold's decision prevails due to simple majority.
D) The decision is put to vote among employees of the company.

Question 76

________ is a duty owed by a member of an LLC to not act adversely to the interests of the LLC.

A) Duty of discharge
B) Duty of restitution
C) Duty of loyalty
D) Duty of resolution

Question 77

Which of the following methods are used to appoint a manager of a manager-managed LLC?

A) appointed by the secretary of state
B) vote of majority of the members
C) unanimous vote of members
D) unanimous vote of shareholders

Question 78

A member's distributional interest in an LLC is ________ and may be transferred in whole or in part.

A) a vote
B) a proxy
C) personal property
D) an authority in management

Question 79

Which of the following is true of a franchise?

A) The franchisor and franchisee are established as separate legal entities.
B) A franchisee does not need a license to use the franchisor's trademark.
C) The franchisee does not have access to the franchisor's knowledge.
D) A franchise is considered as a joint venture.

Question 80

A(n)________ is a special form of partnership in which all partners are limited partners, and there are no general partners.

A) domestic LLC
B) proprietorship
C) LLC
D) LLP