Deck 20: Starting a Business: Llcs and Other Options

Question 1

To form an LLC, both a charter and an operating agreement must be filed with the secretary of state in the jurisdiction where the business will operate.

Answer 1

False

Question 2

Alan, a dentist, and his wife Martha, an attorney, can protect their personal assets with limited liability from their business dealings by creating and operating a professional corporation together.

Answer 2

False

Question 3

If partners wish to maintain having protection against personal liability, it is essential to comply with all the technicalities of a limited liability partnership statute.

Answer 3

True

Question 4

Alicia and Ted have a written agreement wherein they will share the losses of their joint business. This agreement is strong evidence they are partners.

Question 5

For those wishing to purchase a franchise, the Federal Trade Commission acts as a guardian ensuring that the business idea is sound and that the information in the Franchise Disclosure Document is accurate.

Question 6

Corporations have perpetual existence.

Question 7

Generally, a joint venture is a partnership created for one limited purpose.

Question 8

Nicholas and Holly are partners in a toymaking shop. If Rudolph obtains a judgment against Nicholas for injuring Rudolph while Nicholas was on partnership business, Rudolph must try to collect from the partnership before going after Nicholas's personal assets.

Question 9

The most common form of business ownership is the corporation.

Question 10

Brock and Heidi agree to jointly run a fundraiser for the nonprofit children's hospital. Even if they don't have a formal, written agreement, they have formed a partnership.

Question 11

Franchise fees can be costly, but they are usually payable over a number of years, after profits are generated from the business.

Question 12

Social enterprises are organizations that pledge to behave in a socially responsible manner, even as they pursue profits.

Question 13

Corporations have a distinct advantage over other forms of business organization in the area of taxation.

Question 14

Doyle contributed $10,000 when he became a general partner in the existing partnership of R & Z Heating. If Albert wins a judgment for $25,000 against R & Z on a claim that was incurred before Doyle became a partner, Doyle shares joint and several liability with his new partners for the whole obligation.

Question 15

The dissolution of a partnership means the same as its termination.

Question 16

A partnership is a taxable entity, separate from the partners.

Question 17

A limited liability company, unlike an S corporation, can have members that are corporations, partnerships, or nonresident aliens.

Question 18

To be a close corporation, the business must be small, with no more than 20 owners and no more than $500,000 in gross annual income.

Question 19

No formal steps are necessary to create a sole proprietorship.

Question 20

Limited liability is a major advantage of a partnership as compared to a corporation.

Question 21

A partnership is liable for both the negligent and intentional acts of a partner if the acts were committed within the ordinary course of the partnership's business.

Question 22

Which is true of an S corporation?

A)There can be no more than 50 shareholders.
B)There can be only one class of stock.
C)A majority of shareholders must agree the company should be an S corporation.
D)All of these are correct.

Question 23

Which of the following statements regarding social enterprises is TRUE?

A)Social enterprises are essentially nonprofit organizations.
B)To become a socially conscious organization, one-half of the shareholders must approve.
C)The focus of social enterprises is the motto "reduce, reuse, recycle."
D)Unlike charities, social enterprises can sell stock to investors.

Question 24

All the business forms listed below have limited liability EXCEPT the

A)limited liability company.
B)general partnership.
C)"S" corporation.
D)corporation.

Question 25

The Federal Trade Commission requires franchisors to

A)give prospective franchisees a franchise disclosure document at least 14 business days prior to the signing of a contract or payment of any money.
B)give prospective franchisees earnings information on the company.
C)disclose any litigation the company has ever been involved in.
D)let prospective franchisees know how many franchisees have gone out of business in the prior five years.

Question 26

An organization that does not pay income tax on its profits but passes it through to its owners who pay the tax at their individual rates is called a

A)business corporation.
B)flow-through tax entity.
C)tax-free business venture.
D)professional corporation.

Question 27

A partner always has the right, though not the power, to leave a partnership.

Question 28

Elion was a partner in a partnership. Elion's death would be considered a wrongful dissociation.

Question 29

Debra wanted to form a partnership with Lawrence. He agreed and they became co-owners in an equal partnership. This year, after expenses, the partnership had a profit of $200,000. How will the taxation of this profit be handled?

A)Since the partnership was Debra's idea, she will pay income tax on the profit on her personal tax return.
B)The business will pay half of the tax liability, and Debra and Lawrence will pay the other half.
C)Debra and Lawrence must both pay tax on the business's profit.
D)The business itself will pay the taxes on the business's profit.

Question 30

All of the following are characteristics of a closely held corporation EXCEPT

A)the shares are publicly traded.
B)the corporation can typically operate without a board of directors.
C)the shareholders usually restrict share transfer.
D)minority shareholders are provided more protection than in regular corporations.

Question 31

Jeremiah was a partner in a partnership, but he quit unexpectedly when he got his feelings hurt over an internal decision. Dissociation has occurred.

Question 32

The form of business ownership that is the MOST easily transferable is the

A)general partnership.
B)corporation.
C)close corporation.
D)sole proprietorship.

Question 33

Without the approval of the other partners, a partner cannot sell his or her share.

Question 34

A partnership can only be held liable for the partners' authorized acts.

Question 35

A court may pierce an LLC's veil if

A)members fail to provide adequate capital.
B)members treat the LLC like a separate organization.
C)members keep their assets and the assets of the LLC separate.
D)the LLC has too many members.

Question 36

Lily is involved in the winding up of her partnership. Lily is NOT entitled to compensation for her work since she is a partner.

Question 37

Which of the following would NOT be personally liable for the debts of the business?

A)a sole proprietor
B)a partner in a general partnership
C)an S corp shareholder
D)a partner in a joint venture

Question 38

Which is an advantage of a sole proprietorship?

A)It can offer multiple classes of stock.
B)It is very easy to form.
C)It can attract a wide variety of shareholders.
D)It offers its owner limited liability.

Question 39

Jill owns a retail business by herself and was sued by a customer who fell in the store. The customer claimed the business was negligent in caring for its floors. Which statement best describes Jill's potential liability?

A)Jill has no potential liability to the customer.
B)Jill can be held personally liable to the customer since she is the owner.
C)Jill can only be liable up to the amount she initially invested in the business.
D)Jill cannot be held personally responsible; the woman's insurance must pay for the claim.

Question 40

In many ways, a limited liability company can be thought of as a cross between

A)a corporation and a franchise.
B)a joint venture and a partnership.
C)a corporation and a sole proprietorship.
D)a sole proprietorship and a social enterprise.

Question 41

Charles and Ellen, an unmarried couple, run an ice cream store. The business is not incorporated, and they have filed no formation papers with the state. Their business is a

A)sole proprietorship.
B)partnership.
C)franchise.
D)limited liability company.

Question 42

The phrase "piercing the company veil" applies to which type of organization?

A)a close corporation
B)a general partnership
C)a limited liability company
D)an S corporation

Question 43

Daniel, his parents, and three brothers own all the stock of their family farm corporation, and each person takes an active role in managing the enterprise. This corporation, which is taxed as a corporation, is most likely a(n)

A)S corporation.
B)professional corporation.
C)close corporation.
D)proprietorship.

Question 44

Gary and Herman are partners in a lawn mower repair business in Ohio. While Gary is on vacation, visiting his sister in Georgia, his sister's neighbor has trouble with her mower and Gary fixes it for her. She insists on paying him. Gary

A)may keep the payment since he did the work while he was on vacation.
B)must turn the money over to the partnership because he earned it doing the kind of work that the partnership does.
C)may not accept the money because it would create a conflict of interest.
D)may not accept the money because it would mean he was taking a business opportunity away from the partnership.

Question 45

All of the following conditions must exist for partnership by estoppel to exist EXCEPT

A)one partner agrees not to share in the profits of the enterprise.
B)participants tell other people they are partners even though they are not.
C)a third party believes and relies upon the assertion that participants are partners.
D)a third party suffers harm because he or she believed a partnership existed.

Question 46

In determining if a partnership exists, the courts will consider all of the following factors EXCEPT

A)management of the business.
B)actions of the persons involved.
C)the nature of the business.
D)profit.

Question 47

Most franchisors and franchisees are

A)partnerships.
B)sole proprietorships.
C)corporations or LLCs.
D)social enterprises.

Question 48

Which of the following forms of organization is a compromise between starting one's own business as an entrepreneur and working for someone else as an employee?

A)limited liability company
B)sole proprietorship
C)close corporation
D)franchise

Question 49

Art and Alma made capital contributions of 60% and 40% respectively to their newly formed partnership, AA & Associates. They did not have a written partnership agreement. At the end of the first year, the partnership made a profit of which Alma now claims half. However, Art maintains he should receive 60%. Who is correct?

A)Art, since the UPA presumes that profits and losses are divided in proportion to capital contribution.
B)Art, since it would only be fair.
C)Alma, because she works in the business.
D)Alma, as the UPA provides that profits are split equally unless the partners agree otherwise.

Question 50

At what stage are the partnership debts paid and the proceeds distributed to the partners?

A)during dissolution
B)during winding up
C)during termination
D)during dissociation

Question 51

Which of the following events occurs first with respect to the ending of a partnership?

A)termination
B)winding up
C)dissolution
D)distribution of proceeds

Question 52

Which statement about the financial rights of partners is accurate?

A)All partnership property belongs to the individual partners.
B)Partners share profits equally unless they agree otherwise.
C)Partners share losses equally.
D)All of these are correct.

Question 53

The corporate form of business

A)was first known and used by the Greeks and then spread through the Romans to England.
B)was not known until the advent of the Industrial Revolution.
C)was first allowed in the State of New York around 1811 and is considered to be an American creation.
D)is a relatively new concept developed shortly after the Great Depression.

Question 54

Harold and Zack have pooled their money together to buy real estate but have filed no formal papers to form a business. Harold, a lawyer, handles all the legal matters and Zack, a real estate broker, finds buyers for the property they have subdivided. Harold and Zack are engaged in a

A)partnership.
B)close corporation.
C)limited liability company.
D)professional corporation.

Question 55

What federal agency requires that the seller of a franchise give the potential buyer a Franchise Disclosure Document (FDD)and audited financial statements?

A)the Securities and Exchange Commission (SEC)
B)the Interstate Commerce Commission (ICC)
C)the Federal Trade Commission (FTC)
D)the Franchise Sales Commission (FSC)

Question 56

Kayla and Marshall formed a partnership. Marshall incurred a debt in the ordinary course of the partnership business. If the debt is not paid, the creditor may sue

A)only Marshall.
B)only the partnership.
C)the partnership and the partners together, or in separate lawsuits, or in any combination.
D)only Marshall and the partnership in a lawsuit together or the creditor loses any right to sue the partnership.

Question 57

When a partner leaves the partnership, whether it be voluntary or by expulsion, death or bankruptcy, it is called

A)dissociation.
B)termination.
C)detachment.
D)separation.

Question 58

The term "S Corporation" comes from

A)the Internal Revenue Code.
B)the FTC rules.
C)the Securities and Exchange Commission.
D)state corporation law.

Question 59

A social enterprise must do all of the following EXCEPT

A)register with the state as a nonprofit organization.
B)state in its charter that it is a benefit corporation.
C)obtain approval of its charter from two-thirds of its shareholders.
D)measure its social benefit using a standard set by an objective third party.

Question 60

What constitutes a social enterprise's "triple bottom line"?

A)employees, customers, and profits
B)assets, liabilities , and revenue
C)social concerns, shareholders, and sales
D)people, planet, and profits

Question 61

What is a joint venture? Briefly explain the tax and liability implications of a joint venture.

Question 62

Jack and Jill were living together. Jack wanted to start a small retail store, but did not have good credit. Jill, whose credit was excellent, signed loan agreements with Jack so he could borrow the money to start the business. Jack used business cards that stated he was the "owner" of the business. He and Jill filed separate tax returns. Jack stated he was self-employed and claimed the business was a sole proprietorship. The money that was earned from the store was placed into a joint checking account owned and used by Jack and Jill. When there were significant decisions to be made about the business, such as deciding to franchise the business, the decision was made jointly by Jack and Jill. ​
Five years after the business was started, Jill left Jack. She claimed she was entitled to one-half the business's profits since she and Jack were partners. Jack disagreed and claimed they never had a partnership. Discuss Jill's claim.

Question 63

Andy wants to start his own business. He has decided to rent space in a "strip mall" and open a pet shop. Additionally, he will provide dog grooming services. He figures he can do almost everything himself, though he will need to hire a part-time employee on an "as needed" basis. His friend, Lacy, has agreed to work when needed.
​
Andy is considering operating his business as a sole proprietorship. What are the primary legal advantages and disadvantages to this form of business ownership for Andy's pet shop?

Question 64

Trudy wishes to buy a national franchise. What information is the seller legally required to provide before she buys the franchise?

Question 65

Andy, Becky, and Charlie formed a partnership. Their business was to create Web pages for students. They would take a person's academic and career information and make an attractive Web page. Andy supplied the computer and technical advice. Becky was the business manager. Charlie did the bulk of the marketing. Charlie and Becky became irritated with Andy, as it seemed they did more work than he did. Charlie and Becky decided to end their partnership with Andy. During the winding-up process, how are the assets of the partnership paid out?

Question 66

In order to obtain limited liability, Tom and Doris formed an LLC to operate their catering business. They sometimes deposit the proceeds from catering jobs into their personal checking accounts, and if they need to pay personal bills and are short of funds, they use the business account. If creditors of the business cannot get payment for their invoices, is there anything a court can do to help the creditors?

Question 67

Village Bank believed that Spencer and Nadia were partners in an e-business. Spencer and Nadia were not partners. Spencer owned the business as a sole proprietor. Nadia, however, was a close friend of Spencer. When Spencer visited Village Bank in an effort to obtain a $10,000 loan, Nadia went with him. During the conversation with the banker, Spencer referred to Nadia as "my partner." Village Bank made the business loan believing that Spencer and Nadia were partners. Spencer defaulted on the loan. Village Bank claims that both Spencer and Nadia are liable on the loan. Will Nadia be liable on the loan?

Question 68

Judy believed that Ray and Don were partners in an automotive repair business. Ray and Don were not partners. Ray owned the business as a sole proprietor. Ray, however, allowed Don, his unemployed brother-in-law, to be around the business. When Judy was having her car repaired, Ray said, "My partner here, Don, will give you a ride to work this morning so you can leave your car here. He will give you a ride back here after work, and your car will be done." Judy allowed Don to drive her to work. While riding with Don, he accidentally ran a stop light and caused an accident. Judy was hurt and claims that both Don and Ray are liable to her. Is she right?

A)Yes. This illustrates a partnership by estoppel.
B)No. Don was not a partner in the business.
C)No. Don was a dissociated partner.
D)No. There was no intent to have a partnership.

Question 69

Compare and contrast the following forms of business organization as to ease of formation, liability of owners, management, and tax implications: sole proprietorship, general partnership, limited liability company, and corporation.

Question 70

Max, Jenny, and Craig are partners. They have purchased an elegant Victorian home and converted it into an office for their partnership. Craig decides to use the partnership's office to host some evening parties. Craig has a sideline business of arranging expensive gatherings and charging each person a handsome price to attend these "elite" parties. When Max and Jenny find out what Craig is doing, they demand that he pay them for the use of the property. How much money, if any, is Craig required to pay the partnership?

A)Nothing. He is free to use partnership property for his own uses.
B)Nothing, but he will be removed from the partnership for violating his fiduciary duty.
C)He must turn over any profits he earned from this activity.
D)He must pay the fair market value for the use of the house.

Question 71

Lori and Dan own a small restaurant as partners. Dan works several hours a day cooking, waiting on tables, doing the books, and so forth. Dan believes he is entitled to be paid at least a standard wage for all his work since, at the present time, the part-time kitchen helpers earn more than he does! Lori claims Dan is not entitled to anything other than one-half the net profits. Is Lori right?

A)Yes. The UPA states a partner may not collect a "wage" from the partnership business under any circumstances.
B)Yes, if there is no agreement between Lori and Dan allowing for either of them to be paid wages for work done at the restaurant.
C)No. Dan may collect only minimum wage, as required by federal law.
D)No. Dan may collect a fair wage for the work he has performed.

Question 72

Randy, Joan, and Arnie are partners. Their agreement did not address dissociation nor how long the partnership would last. Randy decided to leave the partnership. What happens when Randy serves notice he intends to withdraw?

A)The partnership can either buy him out and continue in business or wind up the business and terminate the partnership.
B)The partnership automatically terminates.
C)The partnership winds down.
D)The partnership estoppes.

Question 73

Astrid and Razi formed a partnership in which they agreed to share profits 60 percent to Astrid and 40 percent to Razi. Losses will be shared

A)equally, unless otherwise agreed.
B)60 percent to Astrid and 40 percent to Razi, unless otherwise agreed.
C)according to their capital contributions to the partnership.
D)in whatever proportion provides the greatest tax advantage for the partners that year.

Question 74

Ending a partnership involves which of the following three steps?

A)dissolution, winding up, and termination
B)dissociation, winding down, and consummation
C)failure, dividing up, and paying off
D)dissociation, agreement, and dissolution

Question 75

Ramiro is dissociated from the partnership he helped form ten years ago. If his partners want to continue the business, what must they do? Does it make any difference if the dissociation violates the partnership agreement?

Question 76

Dennis and Claudia were partners who operated a retail store. They agreed to end the partnership. Dennis agreed to stay at the store and oversee the going-out-of-business sale. Claudia agreed to deal with the accountants and other matters not directly related to the hands-on operation of running the store. Claudia received notice that the store's liability policy would expire on July 1. She decided not to renew the policy and let it lapse. The going-out-of-business sale would not be completed until August 1. In July, a customer slipped and fell in the store. When Dennis learned that Claudia had allowed the liability policy to lapse, he was very upset and claimed he should not be liable for the customer's injury. Is Dennis liable to the customer? Explain.

Question 77

Identify and briefly discuss the management rights and duties of a partner.