Deck 14: Limited Liability Partnerships, limited Liability Companies, and Other Business Arrangements

Question 1

LLCs are not permitted to capitalize by selling equity ownership in the LLC itself.

Answer 1

False
Explanation: LLCs may sell equity ownership interests in itself in order to raise capital.

Question 2

Restrictions and protections contained in a franchise agreement are called _______.

Answer 2

Restrictive Covenants

Question 3

LLCs are frequently governed by agreement of the parties called an LLC agreement or _______.

Answer 3

Operating Agreement

Question 4

Owners in an LLC are called _______.

Question 5

Corporate tax structures result in ________ taxation.

Question 6

An LLC member with ownership sufficient to decide or veto internal operational matters is called a ________ member.

Question 7

When a member of an LLC dies,the business entity automatically ceases to exist.

Question 8

Partners in an LLP may choose to have LLP income taxed as a corporation.

Question 9

The IRS has classified the LLC as a type of corporation for tax purposes.

Question 10

The management structure of a member-managed LLC is similar to that of a general partnership.

Question 11

Some states do not require a written management agreement regarding LLCs.

Question 12

The business entity in a franchise arrangement that has the record of success and allows others to operate a business using their trade mark and products is called the _______.

Question 13

The Certificate of Organization may restrict members of an LLC to only those possessing a professional license in a named field.

Question 14

The procedure for collecting additional capital contributions from partners as necessary is called _______.

Question 15

The name of an LLC must contain a designator such as "Company","Limited","Limited Liability Company" or "LLC".

Question 16

LLCs may choose to be taxed as a pass through entity or may elect to be taxed as a corporation.

Question 17

LLPs may choose to be taxed like a corporation or choose pass-through taxation treatment.

Question 18

Business Trusts are also known as ________ trusts.

Question 19

________ are those who start up an LLC initially.

Question 20

LLC laws define dissolution of an LLC as a ________ process.

Question 21

Financial information provided to a prospective franchisee must be audited.

Question 22

When completing the certificate of organization,the organizers of an LLC are not required to disclose how the business is to be managed.

Question 23

About half of the states provide the same level of protection to general partners in an LLP as is provided to a limited partner in a limited partnership.

Question 24

A corporation may be a principal of an LLC.

Question 25

LLC members are always required to complete a Certificate of Membership Interest evidencing the individual member's interest the business entity.

Question 26

Both managing members and controlling members owe a fiduciary duty to other members.

Question 27

Every state in the U.S.recognizes the existence of LLCs.

Question 28

States may require that LLPs carry liability insurance to protect clients and customers as a condition of LLP formation.

Question 29

LLCs are required to name a member as its registered agent and may not use a commercial registered office provider.

Question 30

Jones LLC and Smith LLC both have ten members and five managing members.Both entities go into dissolution.The procedures for dissolution including preferences of members in terms of who is paid first and so on will be identical for both companies.

Question 31

The operating agreement of the LLC often controls the amount and methods of capitalizing the business.

Question 32

The Uniform Limited Liability Company Act preempts all state laws in order to maintain consistence throughout the U.S.business community.

Question 33

Some states recognize LLCs but do not permit partnership taxation at the state level.

Question 34

Requiring a franchisee to purchase all franchise related materials and supplies,trademarked and otherwise,from the franchisor violates the Small Business Franchise Act.

Question 35

In an LLC,the members may act as agents of the LLC but they will not be personally liable to third parties who successfully sue the LLC.

Question 36

All states require LLPs to have a written partnership agreement.

Question 37

Trish is a partner in an LLP and the partnership is having a cash flow problem.To alleviate the problem the partnership has initiated a capital call for each partner to contribute an additional $25,000 to the business.If Trish cannot come up with the necessary funds,she may be forced to sell her interest in the partnership.

Question 38

LLCs are pass-through entities for tax purposes,however; LLPs are taxed at the entity level without tax liability passing to partners other than their personal salary income if any.

Question 39

The organizers of an LLC who sign the certificate of organization are required to be residents of the state that the LLC is being formed in.

Question 40

Many states have eased filing requirements to create an LLC from requiring extensive amounts of information to now requiring minimal information similar to that required in a corporate filing.

Question 41

The first LLP legislation was enacted in:

A) New York.
B) Texas.
C) Florida.
D) Iowa

Question 42

LLPs are often currently used to protect family businesses as a way to:

A) resolve management disputes.
B) resolve capitalization disputes.
C) resolve issues regarding transition from one generation to another.
D) resolve issues of family fiduciary duties and rights to represent and bind the business

Question 43

Voting rights of LLC principals are governed by:

A) state law where the LLC is filed.
B) the Uniform Limited Liability Company Act.
C) IRS regulations.
D) the operating agreement

Question 44

The origins of LLPs were rooted in protection of:

A) private service firm partnerships.
B) private service firm sole proprietorships.
C) professional service firm partnerships.
D) professional service firm sole proprietorships

Question 45

Formation of an LLC requires the filing of:

A) Statement of Qualification.
B) Certificate of Formation:LLC.
C) Record of Business Creation.
D) Articles of Organization

Question 46

Franchisors are regulated by the:

A) National Labor Relations Board.
B) Federal Trade Commission.
C) state law where the franchise is located.
D) state law where the franchisor is located

Question 47

Typically,day to day decision making in an LLC is performed by:

A) the individual principal who filed the initial paperwork to form the business.
B) its board of directors.
C) the top 10% principal investors.
D) its managing members

Question 48

LLCs share characteristics in common with each of the following except:

A) general partnerships.
B) limited partnerships.
C) corporations.
D) sole proprietorships

Question 49

Several people have decided to go into business as an LLC.To cover all contingencies,specifying what will constitute an act of dissociation and specifying the procedures upon dissolution would be included in the:

A) certificate of organization.
B) operating agreement.
C) Uniform Limited Liability Company Act.
D) common law because the members may not negotiate these rights

Question 50

Franchisors must provide written disclosures about the franchise at least ________ before contracts or letters of intent are signed or any monetary investment takes place.

A) 10 days
B) 20 days
C) 30 days
D) 45 days

Question 51

Federal regulations regarding franchises are primarily designed to:

A) ensure full disclosure of all information relating to a franchise company prior to a franchise investment.
B) ensure the federal tax guidelines are met.
C) ensure that the public is protected from fraud or other injuries.
D) ensure that the franchisee has the requisite knowledge to manage a business and be sure the franchisee is not entering a business relationship they are not equipped to financially handle

Question 52

An LLC:

A) offers principals the same liability coverage as principals in corporations with taxation at the business entity level.
B) offers principals the same liability coverage as principals in corporations with pass through taxation.
C) offers principals the same liability coverage as general partners in a partnership with taxation at the business entity level.
D) offers principals the same liability coverage as limited partners in a partnership with pass through taxation

Question 53

Carlos is a member of an LLC along with three others.After one year,despite their best efforts,the business closes and the bank which extended them a loan sues for repayment.The bank may:

A) sue Carlos for only 25% their loss under rules pertaining to LLCs.
B) sue Carlos for the entire amount because Carlos is jointly and severally liable for the loss.
C) sue Carlos only if he is a managing member.
D) sue the LLC but may not sue Carlos

Question 54

In 1997,the IRS:

A) made LLCs more attractive by eliminating strict operating requirements to qualify as a partnership for tax purposes.
B) made LLCs more attractive by changing the tax structure making LLCs more profitable to operate.
C) made LLCs less attractive by increasing and redefining operating requirements to properly identify LLCs and weed out companies misfiling for tax break purposes.
D) made LLCs less attractive by eliminating taxation at the business level making the LLC similar to the partnership for tax purposes

Question 55

LLCs were originally created by the:

A) New York legislature.
B) California legislature.
C) Wyoming legislature.
D) Delaware legislature

Question 56

Which of the following requires the most disclosures and is the most lengthy and complex to create?

A) an LLC
B) an LLP
C) a limited partnership
D) franchise

Question 57

Personal financial contributions may be required by previous agreement with regard to:

A) LLCs.
B) LLPs.
C) business trusts.
D) franchisors

Question 58

LLPs were created to:

A) limit taxation burdens existing in LLCs.
B) ease the costs and filing requirements present with LLCs.
C) provide limited protections for general partners increasing protections offered by LLCs.
D) increase the duration of the business entity permitted under LLC statutes

Question 59

LLPs are formed with the filing of a ________ with the proper public official.

A) Statement of Qualification
B) Certificate of Formation:LLP
C) Record of Business Creation
D) Articles of Organization

Question 60

Burt has gone to a commercial bank to negotiate a loan for the LLC in which he is a member.He tells you that he is authorized to act on behalf of and to bind the company.What is the best way for you to verify whether Burt does in fact have the authority he claims?

A) get him to sign a written statement
B) call another member of the LLC for confirmation
C) check the articles of organization
D) nothing need be done because all LLC members have the right to bind the company as do general partners

Question 61

Explain the following statement from the text."A franchise should be thought of as a method of conducting business ....rather than a business entity".

Question 62

Which of the following would not generally be formed as an LLP?

A) three frat brothers opening a bar
B) two attorneys operating a law firm
C) four licensed physical therapists running a clinic
D) twenty CPAs running an accounting firm

Question 63

The Small Business Franchise Act provided franchisees each of the following protections except:

A) the right to limited liability should the franchise fail as long as good faith, care and loyalty can be proven.
B) a required 30 day period for the franchisee to cure contract defaults.
C) freedom to work outside of the franchise as long as the franchisee does not work in competition with the franchise.
D) the right to purchase materials from vendors cheaper than the franchisor as long as the quality is comparable

Question 64

Angela has just graduated and is ready to go on with her life.She loves good food and loves to party so she decides to combine her two loves and open a restaurant/bar.Although she has a lump sum of money she doesn't have management experience or management knowledge since she was a French major in school.When she approaches landlords to find a suitable place for her business they see that she is likely to not be successful on her own so they won't deal with her.What might she do to best accomplish her goal of restaurant/bar ownership?

Question 65

Business trusts are run by:

A) members.
B) managers.
C) directors.
D) trustees

Question 66

What was the effect of the creation of the LLC on those seeking to open a new business?

Question 67

Which of the following is not true regarding a business trust?

A) when a business trust is entered into, no public filing is required
B) business trusts do not have officers or directors
C) business trusts are nonstatutory business arrangements
D) business trust beneficiaries are issued stock as evidence of their ownership rights in trust assets

Question 68

John,Paul Mark and Luke have been operating an LLC and according to the operating agreement,the term of the LLC is set to expire in the near future.What options do the four partners have?

Question 69

Clark and Kent are attorneys and have formed an LLP.They take on various debts and obligations to operate the firm including an installment contract to purchase computers and copy machines for the office.The LLP law in their state provides for liability protection for innocent partners should another partner cause liability through a tortious act.Clark is sued by Lois for civil assault and battery after Clark improperly touches her during an office meeting to discuss her divorce in which Clark is representing her.The amount of her judgment exceeds the assets of the LLP and the LLP dissolves.What is Clark and Kent's liability for the judgment and other firm debts?

Question 70

Stop Now LLP manufactures brake linings and sells their product to repair and maintenance shops for use as replacements for worn brakes.When Stop Now approaches Coastal Garage,they offer a very good price for their products.Coastal is a nationwide company and the order would be very large.The management at Coastal is very interested in dealing with Stop Now but is concerned with the LLP's limited liability protections for Stop Now's partners.What could Coastal due to protect themselves from the LLP's limited liability protections?

Question 71

What is meant by the term "capital call"? Under what circumstances might it occur and how does it affect partners?

Question 72

With regard to disclosures required by franchisors to prospective franchisees,which of the following is an incorrect statement?

A) franchisors must provide evidence of the franchisor's financial stability
B) franchisors must provide background information related to the franchisor's board of directors and officers
C) franchisors must provide terms of ownership of intellectual property involved in the franchise agreement
D) franchisors must provide evidence that the disclosure statements provided have been approved by the Federal Trade Commission

Question 73

In Servro Industries,Inc.v.Pizzillo,Pizzillo was a franchisee who signed an agreement with the franchisor Servpro,not to work for a competing company within 25 miles of his territory for a period of two years after the franchise terminates.Within the two year period after the termination of the franchise Pizzillo's wife opened a similar company which Pizzillo started to work for.Servpro sued to stop him from competing and the court said:

A) the noncompetition clause could be enforced because Pizzillo was soliciting customers and acting to harm Servpro breaching fiduciary duties imposed by the contract even after termination.
B) twenty five miles was an unreasonable distance that deprived Pizzillo's right to work and could not be enforced.
C) since the company was owned by his wife, Pizzillo was not competing with Servpro.
D) fiduciary and contractual duties cannot survive the termination of a franchise agreement and become unenforceable upon termination of the contract

Question 74

If an LLP does not have a partnership agreement,the courts will look to the ________ to resolve internal management disputes.

A) Revised Limited Liability Partnership Act or Limited Liability Partnership Act if the RLLPA is not adopted
B) Revised Limited Liability Company Act or Limited Liability Company Act if the RLLCA is not adopted
C) Revised Uniform Partnership Act or Uniform Partnership Act if the RUPA is not adopted
D) common law

Question 75

Which of the following is not a true business entity?

A) an LLC
B) an LLP
C) a franchise
D) a sole proprietorship

Question 76

Explain the similarities and differences,if any,with regard to tax treatment of LLCs and LLPs.

Question 77

Name some of the usual terms and conditions that a typical franchise agreement would address.

Question 78

When an LLP is formed,who files the initial paperwork?

A) an individual representing two or more persons desiring to start a new business
B) the principal in a sole proprietorship already in operation
C) a limited partnership already in operation
D) a general partnership already in operation

Question 79

In Lieberman v.Wyoming.com,LLC,Lieberman dissociated from the LLC and demanded cash for his share of the company.The remaining members voted to continue the company and the operating agreement discussed distribution in the cases of dissolution but not simple dissociation.The court decided that:

A) fundamental common law rules of fairness should apply and Lieberman was due a fair share to be decided by independent business analysts.
B) Lieberman had rightfully dissociated from the company but since the operating agreement was silent as to distribution should the company continue, he forfeited all rights upon dissociation and should receive nothing.
C) if the operating agreement is silent as to an issue, the Uniform Limited Liability Company Act will control and in this case Lieberman gets his initial investment back but nothing above that.
D) Lieberman had rightfully dissociated from the company but since the operating agreement was silent as to distribution and state LLC law was also silent regarding the issue, Lieberman gets no distribution for dissociation but retains his interest in the company until dissolution occurs

Question 80

How do member-managed and manager-managed LLC management structures differ?