Deck 31: Starting a Business: LLCs and Other Options

Question 1

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.

Answer 1

A

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

All the business forms listed below have limited liability EXCEPT the

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

Question 5

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

Question 6

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.

Question 7

The most common form of business ownership is the corporation.

Question 8

Corporations have perpetual existence.

Question 9

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 10

No formal steps are necessary to create a sole proprietorship.

Question 11

An organization that does not pay income tax on its profits but passes them 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 12

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

Question 13

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 14

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

Question 15

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

Question 16

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.

Question 17

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.

Question 18

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 19

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 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 20

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

Question 21

An S Corporation cannot have more than ____ shareholders.

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

Question 22

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 23

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 24

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 25

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

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

Question 26

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 27

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 assests and the assets of the LLC separate.
D)the LLC has too many members.

Question 28

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 29

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 30

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 31

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 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 32

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 33

James 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 in the partnership, but not to become a full partner.
C)Frank has no rights to his father's partnership interest.
D)Frank cannot be a full-fledged partner, but he can vote on firm matters.

Question 34

Which of the following would NOTbe 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 35

The business form that offers the limited liability of a corporation and the tax status of a flow-through entity is

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

Question 36

The advantage to an S corporation is

A)its offering of multiple classes of stock.
B)its treatment of shareholders for income taxation purposes.
C)its ability to attract an unlimited number of shareholders.
D)its ability to have partnerships and corporations invest as shareholders.

Question 37

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 38

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)an S corporation.
B)a professional corporation.
C)a close corporation.
D)a proprietorship.

Question 39

What federal agency requires that the seller of a franchise give the potential buyer 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 40

Which of the following is an advantage of a corporation?

A)It is easy to form a corporation.
B)It requires little expense to form a corporation.
C)It offers limited liability for its shareholders.
D)It is a flow-through tax entity.

Question 41

In order to obtain limited liability,Tom and Doris formed an LLC to operate their catering business.They sometimes deposited the proceeds from catering jobs into their personal checking accounts and if they needed to pay personal bills and were short of funds,they used 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 42

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 43

Briefly discuss the the major restrictions placed on an "S" corporation.

Question 44

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

Question 45

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