Deck 39: Limited Liability Companies and Limited Liability Partnerships

Question 1

An LLC is taxed at the entity level.

Answer 1

False

Question 2

An LLC can generally be operated for any lawful purpose except certain regulated industries and certain professions.

Answer 2

True

Question 3

Limited liability companies are authorized by federal law.

Answer 3

False

Question 4

The name of an LLC must indicate in some fashion that it is an LLC.

Question 5

An LLC can be formed in the state even though it can conduct business in all other states.

Question 6

An LLC is liable for any loss or injury caused to anyone as a result of a wrongful act or omission by a member or manager,but not by an agent or an employee of the LLC who commits the wrongful act while acting within the ordinary course of business of the LLC.

Question 7

Managers of LLCs are personally liable for the debts,obligations,and liabilities of the LLC they manage.

Question 8

The LLC is a separate legal entity distinct from its members.

Question 9

The Uniform Limited Liability Company Act only covers problems that arise in the formation of a limited liability company.

Question 10

If a member or a manager of an LLC negligently causes injury or death to another person,he or she is personally liable to the injured person or the heirs of a deceased person.

Question 11

An LLC may not be organized by only one member such as a sole proprietor.

Question 12

A member's capital contribution to an LLC may be in the form of a patent.

Question 13

A member who personally guarantees an obligation of an LLC will experience a personal loss only up to his or her capital contribution.

Question 14

A general partnership may not convert to an LLC.

Question 15

An LLC is an at-will LLC unless it is designated as a term LLC.

Question 16

An LLC may own and transfer personal property.

Question 17

Most LLCs elect to be taxed as a corporation.

Question 18

The owners of LLCs are called shareholders.

Question 19

Losses from an LLC have to be distributed in the same proportion.

Question 20

Members may draft an agreement whereby the profits of an LLC are not to be shared equally.

Question 21

If a member disassociates him or herself from an at-will LLC,the LLC must only purchase the disassociating member's distributional interest on the expiration of the specified term of the LLC.

Question 22

An LLC may only be member-managed.

Question 23

A party may usurp an LLC's business opportunity,as this will not breach the duty of loyalty owed to the LLC.

Question 24

At the conclusion of a term LLC's term,a majority vote by the members to continue operating will result in the creation of a new term LLC.

Question 25

Where a disassociating member of an LLC is entitled to payment for her interest,she is entitled to fair market value even if the operating agreement provides otherwise.

Question 26

Where a member's disassociation from an LLC is not wrongful,the LLC must purchase the member's distributional interest.

Question 27

A member has the power to withdraw from a term LLC prior to the time specified.

Question 28

A non-manager member of an LLC is entitled to remuneration for services performed for the LLC including the winding up of the business of the LLC.

Question 29

The authority for the formation of LLCs comes from:

A) state statutes
B) federal statutes
C) federal administrative regulations
D) federal court decisions
E) state court decisions

Question 30

Non-manager members in a manager-managed LLC can bind the LLC to contracts.

Question 31

In a member-managed LLC,all members have agency authority to bind the LLC to contracts.

Question 32

If a member-manager commits an ordinarily negligent act,he or she is not liable to the LLC.

Question 33

Which of the following is true about limited liability companies?

A) At least one member must have unlimited liability.
B) They can be formed without any specific steps taken by the owners.
C) In most cases,they can choose whether to be taxed as a partnership or corporation.
D) The owners are called shareholders.
E) They cannot have centralized management by only a few members.

Question 34

Accountants,lawyers,and doctors are among the professionals allowed to create a limited liability partnership.

Question 35

In a member-managed LLC,any matter relating to the LLC's business is decided by a majority vote of the members.

Question 36

Constructive notice is not sufficient when a member disassociates him or herself from the LLC.

Question 37

In order for an LLP to conduct business in a state other than the one it is organized in,it must register as a foreign LLP in any state in which it wants to conduct business.

Question 38

After dissolution and winding up,an LLC may terminate its existence.

Question 39

A member's distributional interest in an LLC is personal property.

Question 40

Members who are not managers of a manager-managed LLC still have rights to manage the LLC regardless of the operating agreement.

Question 41

Which of the following is true about the capital contributions of members to an LLC?

A) Capital contributions must be made in the form of cash.
B) An unfulfilled promise to make a capital contribution is generally unenforceable.
C) Members are required to make equal contributions in order to maintain their limited liability.
D) A promise by a member to contribute services is excused if the member is unable to perform the particular services promised.
E) A member who promised to make a capital contribution is not discharged from the promise if the member dies without having made the contribution.

Question 42

When an LLC desires to do business in another state,it must obtain a(n):

A) out-of-state business permit
B) certificate of authority
C) foreign agent authorization
D) articles of organization exemption
E) authorization to extend business out of state

Question 43

Which types of businesses can be converted to an LLC?

A) general partnerships only
B) general partnerships and limited partnerships only
C) corporations only
D) corporations and limited partnerships only
E) corporations,general partnerships,and limited partnerships

Question 44

For which of the following actions is an LLC responsible for damages if the action occurred within the ordinary course of the business of the LLC?

A) members and managers only
B) managers and agents only
C) managers,agents,and employees only
D) agents and employees only
E) members,managers,agents,and employees

Question 45

Which of the following is not required to be set forth in an LLC's articles of organization?

A) the name and address of the LLC's agent for service of process
B) the name and address of each organizer
C) the process by which managers of the LLC are designated
D) whether the LLC is a term LLC
E) whether one or more of the members will be personally liable for the debts and obligations of the LLC

Question 46

Which of the following is true about selection of a name under which to operate an LLC?

A) The name must indicate that the company is an LLC.
B) The LLC can use trademarked names so long as the trademark is not being used by another LLC.
C) A name cannot be reserved until the LLC has come into existence.
D) A non-trademarked name that is similar to a name used by another business may not be used.
E) A and D only

Question 47

Which of the following for an LLC is equivalent to a stock certificate for a corporation?

A) certificate of authority
B) certificate of interest
C) certificate of control
D) certificate of shares

Question 48

A limited liability company with more than one member is taxed as a partnership:

A) in all circumstances
B) only if at least four of six listed attributes are present in the limited liability company
C) only if no more than four of six listed attributes are present in the limited liability company
D) only if all six listed attributes are present
E) if the limited liability company has not elected to be taxed as a corporation

Question 49

Which of the following is true about the ability of a member of an LLC to bind a member-managed LLC to a contract?

A) Members of the LLC have authority to bind the LLC,and this authority cannot be taken away.
B) Members of the LLC have authority to bind the LLC to contracts only if this authority is granted in the operating agreement.
C) Members of the LLC have authority to bind the LLC,and if this authority is restricted by agreement,then it will terminate any risk of the member binding the LLC to a contract.
D) Members of the LLC have authority to bind the LLC,and if this authority is restricted by agreement,there remains a risk that the member retains apparent authority to bind the LLC unless appropriate steps are taken.

Question 50

Based on management method,LLCs can be classified as either:

A) member-managed or manager managed
B) member-managed or professionally managed
C) generally managed or micromanaged
D) manager-managed or at-will-managed
E) member-managed or term-managed

Question 51

Based on duration,all LLCs can be classified as either:

A) short-term or long-term
B) fixed-length or variable-length
C) term or at-will
D) determined-length or undetermined-length
E) self-determined or statute-determined

Question 52

Which of the following is a reason to form a limited liability company rather than an S corporation?

A) There is no limit on the number of owners of a limited liability company,whereas the number of shareholders of an S corporation is limited.
B) All owners of a limited liability company have limited liability,but not all owners of an S corporation have limited liability.
C) A limited liability company can be formed without formalities such as filing papers with the state,whereas an S corporation requires papers to be filed with the state.
D) A limited liability company acts as a flow-through entity for income tax purposes,but an S corporation does not.

Question 53

In general,for what purpose(s)can an LLC be formed?

A) only to practice a profession,such as accountancy or medicine
B) only for the stated purposes in the Uniform Limited Liability Company Act
C) only for the purposes that the Internal Revenue Service has recognized as valid LLC purposes
D) for any lawful purpose

Question 54

If an LLC fails to follow formalities such as keeping minutes of meetings,then which of the following is true?

A) This failure will not result in imposing personal liability on any member.
B) All members will lose their limited liability.
C) The managers of a manager-managed LLC and all members of a member-managed LLC will lose limited liability.
D) Only the managers of a manager-managed LLC will lose limited liability.
E) Only the party or parties responsible for the failure will lose limited liability.

Question 55

Which of the following is not true about limited liability companies under the Uniform Limited Liability Company Act?

A) Limited liability companies can be formed with only one member.
B) Limited liability companies can only be taxed as partnerships.
C) A limited liability company must use the words "limited liability company" in its name or use "LLC" or "LC."
D) In order to form a limited liability company,articles of organization must be filed with the state.

Question 56

If a member of an LLC executes a personal guarantee for the debt of an LLC,which of the following is true?

A) The personal guarantee would be unenforceable because it would circumvent the limited liability of the member.
B) The personal guarantee would result in personal liability of the member for any obligation of the LLC.
C) Because of the member's apparent authority,the personal guarantee would create liability for all other members if the LLC is a member-managed LLC.
D) The member will have personal liability according to the terms of the guarantee,but would not be personally liable for any other obligations of the LLC.

Question 57

Which of the following is true about managers of a manager-managed LLC?

A) All manager decisions must be approved by a majority vote of the members of the LLC.
B) Decisions must be made by unanimous consent of the managers.
C) The managers have the power to amend the operating agreement.
D) Admitting new members can be done by the managers.
E) Each manager has an equal right in the management of the company's business.

Question 58

The terms to describe an LLC from another state,and another nation,respectively,are:

A) foreign; alien
B) alien; offshore
C) foreign; offshore
D) interstate; foreign
E) interstate; offshore

Question 59

An LLC must file what document with the secretary of state?

A) articles of organization
B) operating agreement
C) profit and loss allocations of the members
D) the names of the members
E) B and D only

Question 60

Which of the following is true about operating agreements for LLCs?

A) All LLCs must have them,but they need not be filed.
B) They must be in writing in order to be enforceable.
C) All LLCs must have one,and they must be filed with the articles of organization.
D) Member-managed LLCs must have one,but they are not required for manager-managed LLCs.
E) They are not required,but are recommended.

Question 61

Dan,Fran,and Stan want to establish and operate a mountain bike sales and rental shop.Dan and Fran will be actively involved in the management of the business,but Stan is investing most of the money.The three of them do not want to form a corporation,but want to use a form of business,if possible,that will give limited liability to each of them.Which of the following is true?

A) Because Dan and Fran will be actively managing the business,there is no form of business other than a corporation that will give them limited liability.
B) They could form a limited liability company and this would give limited liability to each of the three owners.
C) They could form a limited liability company and each have limited liability,but if they formed either a limited partnership or limited liability partnership,there would be at least one partner with unlimited liability.
D) They could each have limited liability in a properly formed limited partnership,limited liability partnership,or limited liability company.

Question 62

When choosing the form of business organization that a business will use,what additional factors should be considered if the business will be doing substantial business with entities in other nations?

Question 63

Thelma and Louise form an LLC for the purpose of operating road trip tours of the American southwest.In the articles of organization,they state,"the term of this limited liability company shall last until our travel company has operated 20 successful tours,at which point the term of this company shall end." Thelma and Louise have formed:

A) a term LLC because it has a set ending date
B) a term LLC because all LLCs are set to terminate,even though many are set to terminate far in the future
C) a term LLC because the event that terminates the LLC is reasonably able to be accomplished as of the time that the LLC is formed
D) an at-will LLC because there is no specified time for the termination of the LLC
E) an at-will LLC because any mention of an uncertain event in connection with the duration of an LLC causes the LLC to be at-will

Question 64

Who has the right to manage an LLC?

A) all members in all LLCs
B) all members in member-managed LLCs and only managers in manager-managed LLCs
C) the members making the five largest capital contributions,and the managers,if any
D) the organizers of the LLC and the managers,if any

Question 65

Norm,Cliff and Sam form a limited liability company.Norm contributes $20,000,Cliff $30,000 and Sam $50,000.The operating agreement does not state how profits and losses are to be apportioned.The company makes a $60,000 profit during the year.Under the ULLCA,how will profits be divided?

A) Norm will receive $12,000,Cliff $18,000,and Sam $30,000.
B) Norm will receive $20,000,Cliff $20,000,and Sam $20,000.
C) Norm will receive $18,000,Cliff $12,000,and Sam $30,000.
D) Norm will receive $15,000,Cliff $15,000,and Sam $30,000.

Question 66

Absent an agreement,which of the following is correct about a non-manager member's right to compensation for services provided to an LLC?

A) The member is entitled to compensation for any services rendered on behalf of the LLC.
B) The member is entitled to compensation for any services that benefit the LLC.
C) The member is not entitled to compensation for any services provided for the LLC.
D) The member is entitled to compensation for services of winding up the business of the LLC,but not for any other services.
E) The member is entitled to compensation for services so long as the LLC earns a profit in the year the service was provided by the member.

Question 67

John is in the planning stages of forming a business with several others.John has heard that an LLC would provide the best of both worlds,that is,partnership taxation and limited liability.But John has also heard that one must very carefully structure an LLC or the Internal Revenue Service might deny partnership taxation.Lastly,John needs to review his overall tax situation because he thinks that corporate taxation might actually be better for his particular situation.Which of the following is true?

A) Unless structured with the precisely correct provisions and characteristics,an LLC risks a determination by the Internal Revenue Service that it will be taxed in a manner different than the owners intended.
B) The Internal Revenue Service now taxes all LLCs as partnerships.
C) The LLC can choose whether it wants to be taxed as a partnership or corporation,but once this determination is made,it will apply to all owners of the LLC.
D) Each of the owners of the LLC can choose partnership or corporate tax treatment of their income from the LLC,thus John will be free to choose corporate treatment even if all the other owners choose to be taxed as owning an interest in a partnership.
E) The Internal Revenue Service will determine the tax treatment,but this will be done separately for each owner based on that owner's tax situation,thus it might determine partnership taxation for some members and corporate taxation for other owners.

Question 68

Upon the expiration of the term of a term LLC,the LLC can be continued:

A) as a term LLC by a majority vote of the members
B) as a term LLC by a unanimous vote of the members
C) as an at-will LLC by a majority vote of the members
D) B or C only
E) A,B,or C

Question 69

A member's ownership interest in an LLC is called a(n):

A) dividend
B) capital account
C) distributional interest
D) derivative interest

Question 70

Lynda is a member of a manager-managed LLC but is not a manager.However,Lynda has considerable expertise in the business of the LLC.Lynda assisted the managers for the first couple of years of the LLC's existence without any difficulties.During the third year,Lynda began to challenge some of the decisions made by the managers who had begun to shut Lynda out of most decisions.Lynda demands that as a member of the LLC she be allowed to participate in its management and that she be compensated for the services she is providing.In this case:

A) Lynda cannot demand a continued management role,but is entitled to compensation for the services already delivered.
B) Lynda will be allowed to participate in management and is entitled to compensation.
C) Lynda will be allowed to participate,but is not entitled to any compensation.
D) Lynda is not entitled to participate in management,nor is she entitled to compensation.

Question 71

If a member properly disassociates herself from an LLC,the member is entitled to receive:

A) no payment because the disassociation is voluntary
B) fair market value for the distributional interest
C) the highest amount that a remaining current member is willing to pay for the interest
D) the amount negotiated with a willing purchaser of the interest
E) the amount originally invested by the member

Question 72

Barry,Harry,and Larry form an LLC.Barry contributes $100,000 in capital and the other two contribute $50,000 each.This LLC was structured as a manager-managed LLC with Harry designated as the manager.In reality,during the first year the three members actively took part in the management of the LLC.In fact,of the total time spent by the members managing the business,60 percent of the time was spent by Larry,with Barry and Harry each contributing 20 percent of the time.The LLC was unexpectedly profitable in the first year and the members are in dispute over the allocation of profits.There are no provisions in their operating agreement covering profit allocations.Which of the following is true?

A) The members will divide all profits equally.
B) The members will divide all profits in accordance with their capital contributions.
C) The members are each entitled to an allocation based on the value of the services that each provided,with the residual allocated equally.
D) Harry,but not Barry or Larry,is entitled to an allocation based on the value of his services provided,with the residual allocated equally.
E) Larry,but not Barry or Harry,is entitled to an allocation based on the value of his services provided,with the residual allocated equally.

Question 73

Of the following,who owes a fiduciary duty of loyalty to an LLC?

A) all members of all LLCs
B) members of member-managed LLCs and managers of manager-managed LLCs
C) managers of manager-managed LLCs,but no other members of any LLCs
D) all members of manager-managed LLCs,but no one in member-managed LLCs

Question 74

Mary was an architect and was one of four members who joined an LLC that was going to develop a large new residential subdivision over the next several years.Mary agreed that as part of her contribution of capital she would contribute $100,000 and would provide 300 hours of time working on the architectural design of homes to be built by the LLC.Unfortunately,as Mary was out enjoying a walk one day,a driver in a sport utility vehicle was talking on a cell phone and struck Mary,killing her.When she was killed,Mary had paid $60,000 of her cash contribution and had already provided 240 hours of the design services.In these circumstances:

A) Mary's death discharges any unperformed obligation to contribute capital in the form of services,but her estate would be obligated for the unpaid $40,000.
B) Mary's death discharges any obligation to contribute capital in either cash or services.
C) Mary's death discharges neither obligation. Her estate will be obligated to pay the $40,000 and the fair value of the unperformed architectural services.
D) Mary's death would normally discharge neither of the obligations,but because the architectural services were based on Mary's particular skill and judgment,her estate is liable only for the unpaid cash contribution.
E) Mary's death discharges neither obligation,but her estate is liable only if payment of the amounts does not create an undue hardship for any beneficiary of her estate.

Question 75

Two CPA firms,one having 70 partners,and one having 40 partners,are planning to form a new CPA firm.They want to use a form of business organization that will give each of the 110 owners of the new firm limited liability.What are the available options to meet this goal?

A) a limited liability partnership or a limited liability company
B) a limited liability partnership,a limited liability company,or an S corporation
C) a limited liability partnership,a limited liability company,or a limited partnership
D) a limited liability partnership,a limited partnership,or an S corporation

Question 76

Eric is a member of a manager-managed LLC but is not a manager.This LLC invests in real estate and manages it as rental property in a college town.Eric has made several recommendations to the managers regarding property that he considers to be a good buy.Eric,however,seldom performed even the slightest investigation of the property before recommending it to the managing members.Eric also purchased a couple of rental properties on his own account,taking very careful and sneaky steps to ensure that the other members of the LLC did not learn of these purchases.Which duties has Eric violated?

A) loyalty
B) loyalty and care
C) loyalty,care,and good faith and fair dealing
D) good faith and fair dealing
E) none of these

Question 77

Arthur,Betty,Charlie,Diane and Edward created a limited liability company.Arthur contributed $40,000,and each of the others contributed $10,000 to the capital.The group must vote on making a business decision.Arthur and Betty vote to take the action,while the others vote against it.Who wins?

A) Arthur and Betty win because the accumulated capital of the duo is greater than the other members.
B) Arthur and Betty win,because Arthur has seniority,having contributed more than any other member of the group.
C) Charlie,Diane and Edward win because they constitute a majority.
D) Neither group wins,because the vote has to be unanimous.

Question 78

After disassociating from an LLC,a member retains apparent authority to bind the LLC:

A) for 2 years to any party
B) for 2 years to any party except those who know of the disassociation or who have received notice of it
C) for a reasonable time to any party
D) for a reasonable time to any party except those who have actual notice of the disassociation
E) for 1 year to all parties

Question 79

Under the Uniform Limited Liability Company Act,the withdrawal of a member from an LLC is known as:

A) disaffirmance
B) voiding the interest
C) disassociation
D) dissolution

Question 80

The non-manager members of a manager-managed LLC owe which fiduciary duties to the LLC?

A) loyalty
B) loyalty and due care
C) good faith and fair dealing
D) due care as well as good faith and fair dealing
E) none of the above