Deck 18: Starting a Business: Llcs and Other Options

Question 1

The Federal Trade Commission will not allow the sale of franchises that are unfair to the franchisee.

Answer 1

False

Question 2

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.

Answer 2

A

Question 3

Drake and Holly agree to jointly run the hospital's fundraiser.Even if they don't have a formal,written agreement,they have formed a partnership.

Answer 3

False

Question 4

Lee and Jan are debating whether to use an LLC or corporate form for a new business.Major advantages of an LLC over a corporation include the tax status of an LLC,the fact that an LLC is easier and less expensive to set up than a corporation,and the fact that venture capitalists generally prefer to invest in LLCs over corporations.

Question 5

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

Question 6

The case of Apcar v.Gaus illustrates that it is essential to comply with all the technicalities of a limited liability partnership statute.

Question 7

State laws regulate corporations,but federal statutes determine their tax status.

Question 8

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

Question 9

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

Question 10

Lance and Darrell have an equal partnership.This year,after expenses,the partnership had a profit of $100,000.Lance and Darrell will each pay taxes on:

A) whatever they receive from the partnership.
B) $50,000.
C) $100,000.
D) None of the above. The partnership itself will pay the taxes on the business's profit.

Question 11

A partnership is not a separate,taxable entity.

Question 12

Businesses often operate in the legal form of a business trust.

Question 13

Lawrence,Pablo,and Shanna,who plan to start a business:

A) should consider taxes, potential liability, ease and cost of formation, and transferability of interests when they select a form of organization.
B) will be affected by business law which attempts to balance the rights, obligations, and liabilities of the entrepreneurs, managers, investors, and customers.
C) will be subject to a form of organization the law automatically selects by default if they do not select the form of organization themselves.
D) All of the above.

Question 14

The advantage of a corporation over a partnership is:

A) shares are easily transferable to another person.
B) perpetual existence.
C) it is easier to raise funds.
D) All the above.

Question 15

No filings are required by a limited partnership.

Question 16

The most common form of business ownership is the sole proprietorship.

Question 17

LLCs offer limited liability for their members and are regulated by the Uniform Limited Liability Company Act,enacted by all of the states.

Question 18

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

Question 19

The corporate form of business was:

A) first known and used by the Greeks and then spread through the Romans to England.
B) not known or conceived of until about 1737 by Sir Francis LaRue.
C) first allowed in the State of New York around 1811 and is considered to be an American creation.
D) None of the above.

Question 20

Cooperatives may be either incorporated or unincorporated businesses.

Question 21

The process of paying all debts of a partnership and distributing the remaining proceeds to the partners at the end of a partnership is called:

A) termination.
B) dissociation.
C) winding up.
D) distribution.

Question 22

John,his parents,and three brothers own all the stock of their family farm corporation.This corporation,which is taxed as a corporation,is probably:

A) an S corporation.
B) a C corporation.
C) a close corporation.
D) an LLC.

Question 23

Susan and Brenda started a retail business called Eagle's Nest Hobbies.The business is operated as a partnership.Under partnership law,Susan is personally liable for any:

A) business contracts entered into by Brenda.
B) business debts, regardless of whether she or Brenda created the obligation.
C) negligent act committed by Brenda in the scope of the business activity.
D) All the above.

Question 24

Which of the following is considered by the IRS to be a sale of assets,subject to a tax on the value of the assets?

A) Change from the corporate form to an LLC.
B) Change from an LLC to a corporation.
C) Change from a partnership to an LLC.
D) All of the above.
E) None of the above.

Question 25

An S Corporation cannot have more than ____ shareholders.

A) 25
B) 50
C) 75
D) 100

Question 26

Seventy farmers in Morgan County joined together to gain the advantages of purchasing seed and fertilizer in bulk and of obtaining better prices when distributing and selling their crops.These farmers have formed a:

A) business trust.
B) cooperative.
C) franchise.
D) joint venture.

Question 27

The importance of a Subchapter S corporation is its:

A) organizational structure.
B) treatment of shareholders for income taxation purposes.
C) requirement of restrictive transfer rights of the shares.
D) small cost of formation.

Question 28

In the case of Marsh v.Gentry,the court held:

A) Gentry had the right to purchase the property without disclosing his identity to Marsh because of the special rules for auction sales.
B) state statutory law gave Marsh the absolute right to know Gentry was the purchaser.
C) Gentry acted properly because he was following "accepted business practice. "
D) Gentry acted properly because Marsh had consented to a sale of the property.

Question 29

To create an LLC:

A) organizers must have a charter and an operating agreement.
B) standard forms for start-up documents are well established, widely available, and effective.
C) a lengthy, detailed charter must be filed with the county clerk in the jurisdiction in which the LLC is being formed.
D) the use of customized forms, although more expensive than using standard forms, is recommended since the law related to LLCs is so unsettled.

Question 30

Murray was a partner in a large firm.He died unexpectedly.His son,Frank,wanted to take over for his father in the partnership and was well qualified to do the work his father had done.Which statement best describes Frank's rights in the partnership if he inherits the interest?

A) Frank has a right to take over for his father in the partnership.
B) Frank is entitled to the value of his father's interest in the partnership, but not to become a full partner.
C) Frank has no rights to his father's partnership interest.
D) None of the above.

Question 31

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) Business trust.
C) Close corporation.
D) Franchise.

Question 32

The term "S Corporation" comes from:

A) the Internal Revenue Code.
B) the FTC rules.
C) the U. S. Constitution.
D) state corporation law.

Question 33

Miranda was a limited partner in a retail business that was sued by a customer who fell in the store.The customer claimed the business was negligent in caring for its floors.Miranda:

A) has no potential liability to the customer.
B) can be held personally liable to the customer since she is a partner.
C) can only be held liable to the amount of her investment.
D) is personally liable, but the customer must first collect from the general partners before collecting from Miranda.

Question 34

The Federal Trade Commission requires franchisors to:

A) give prospective franchisees an offering circular at least 14 business days prior to the signing of a contract or payment of any money.
B) disclose the exact amount of the initial investment required.
C) disclose any litigation in which the company has ever been involved.
D) disclose how many franchisees have gone out of business in the prior five years.

Question 35

A limited liability partnership:

A) is a type of limited partnership permitted in all states.
B) is made up of partners who are not liable for the debts of the partnership, although they are liable for the own misdeeds.
C) must file a statement of qualification with state officials, but need not file annual reports.
D) is a taxable entity and survives the dissociation of a member.
E) All of the above.

Question 36

The business form that is taxed as a partnership and gives all owners limited liability,is a:

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

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) A general partner in a limited liability limited partnership.
D) A general partner in a limited partnership.

Question 38

Harold and Zack have pooled their money 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) professional corporation.
C) limited liability company.
D) business trust.

Question 39

Guy and Peggy bought a racehorse together,agreeing to share all expenses and split profits equally.There was no agreement as to the duration of the partnership.After two racing seasons,Peggy decided she was tired of the business and left the partnership.Is Guy correct in claiming Peggy's leaving was wrongful?

A) Yes, Peggy was legally required to secure Guy's permission before leaving the partnership.
B) Yes, Peggy had a legal duty to stay in the partnership unless she had a better reason for leaving, such as impossibility of continuation.
C) Yes, Peggy had a legal duty to stay in the partnership until a new partner could be found.
D) No, in a partnership at will, a partner has the right to leave the partnership at any time.

Question 40

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) joint venture.
D) limited liability company.

Question 41

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

Question 42

What is a limited liability company? Explain the advantages and disadvantages of this type of business ownership.

Question 43

Briefly discuss the limitations on a corporation electing Subchapter "S" status

Question 44

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

Question 45

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?