Deck 15: Limited Liability Companies and Limited Liability Partnerships

Question 1

Corporate tax structures result in ________ taxation.

Answer 1

double

Question 2

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

Answer 2

True
Explanation: The member-managed LLC is similar to a general partnership because every member has a say in management and each may bind the company.

Question 3

Owners in an LLC are called _______.

Answer 3

members

Question 4

Some states provide liability shields for LLP partners only when the liability arises from some __________ by another partner.

Question 5

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

Question 6

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

Question 7

________ are those who start up an LLC initially.

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

The certificate of organization may restrict membership in an LLC to only those possessing a professional license in a named field.

Question 15

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

Question 16

Limited liability partnerships are formed when a general partnership files a ___________.

Question 17

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

Question 18

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

Question 19

In an LLP, generally all partners have liability protection for _______ and liabilities of the partnership.

Question 20

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

Question 21

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

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

Every state in the United States recognizes the existence of LLCs.

Question 24

LLC members are always required to complete a certificate of membership interest, evidencing the individual member's interest in the business entity.

Question 25

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 26

An LLC can last until a specified term expires.

Question 27

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 28

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

Question 29

LLPs may be capitalized through debt from private or commercial lenders.

Question 30

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

Question 31

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 32

Jones LLC and Smith LLC both have 10 members and 5 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 33

All states require that LLPs have a written partnership agreement.

Question 34

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

Question 35

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

Question 36

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

Question 37

An LLC is required to name a member as its registered agent and may not use a commercial registered office provider.

Question 38

A corporation may be a principal of an LLC.

Question 39

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 40

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

Question 41

LLPs were created to:

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

Question 42

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

A) a statement of qualification
B) a certificate of formation: LLP
C) a record of business creation
D) articles of organization

Question 43

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

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

Question 44

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 percent of the principal investors.
D) its managing members.

Question 45

Several people have decided to go into business as an LLC. To cover all contingencies, they want to specify what constitutes an act of dissociation and outline the procedures upon dissolution. This information would be included in:

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

Question 46

The ability to distribute earnings without incurring double-level taxation is an advantage of a:

A) pass-through entity.
B) corporate tax structure.
C) member-managed LLC.
D) manager-managed LLC.

Question 47

With regard to taxation, LLPs are treated as:

A) pass-through entities.
B) corporations.
C) nonprofit organizations.
D) hybrid entities.

Question 48

The first LLP legislation was enacted in:

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

Question 49

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

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

Question 50

Formation of an LLC requires the filing of:

A) a statement of qualification.
B) a certificate of formation.
C) a record of business creation.
D) articles of organization.

Question 51

Though they may elect a different structure, for tax purposes LLCs are typically treated as:

A) nonprofit organizations.
B) hybrid entities.
C) corporate tax entities.
D) pass-through entities.

Question 52

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

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

Question 53

Burt has gone to a commercial bank to negotiate a loan for the LLC in which he is a member. He tells the bank that he is authorized to act on behalf of and to bind the company. What is the best way for the bank 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 54

Voting rights of LLC principals are governed by:

A) the laws of the state in which the LLC is filed.
B) the Uniform Limited Liability Company Act.
C) IRS regulations.
D) the operating agreement.

Question 55

The ability to flow through to the investors the tax deductions and losses that are typically generated by an emerging company or a company with significant up-front debt is an advantage of a:

A) corporate tax structure.
B) pass-through entity.
C) member-managed LLC.
D) manager-managed LLC.

Question 56

An LLC offers principals the same liability coverage as that of:

A) principals in corporations with taxation at the business entity level.
B) principals in corporations with pass-through taxation.
C) general partners in a partnership with taxation at the business entity level.
D) limited partners in a partnership with pass-through taxation.

Question 57

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 58

LLCs were originally created by the:

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

Question 59

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

A) sue Carlos for only 25 percent of its 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 60

In 1997, the IRS made LLCs:

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

Question 61

What is the purpose of an operating agreement, and what benefits does it afford an LLC?

Question 62

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

Question 63

Although many LLCs are treated as pass-through entities, an LLC's members may elect to be taxed as a:

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

Question 64

How may LLCs be ended?

Question 65

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

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

Question 66

Because it is not a taxable entity, an LLP:

A) files an information tax return.
B) does not need to file a tax return.
C) needs to file only a federal tax return.
D) needs to file only a state and local tax return.

Question 67

The amount and methods of capitalizing an LLC are often controlled by the:

A) articles of organization.
B) certificate of organization.
C) statement of qualification.
D) operating agreement.

Question 68

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

Question 69

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 70

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 71

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 72

Stop Now LLP manufactures brake linings and sells its product to repair and maintenance shops for use as replacements for worn brakes. Stop Now approaches Coastal Garage and offers Coastal a very good price on the brake linings. 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 do to protect itself from the LLP's limited liability protections?

Question 73

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

Question 74

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 case 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) because the operating agreement was silent on the issue, the Uniform Limited Liability Company Act controlled and Lieberman should get 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 should get no distribution for dissociation but would retain his interest in the company until dissolution occurs.

Question 75

Explain how LLCs are capitalized.

Question 76

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

Question 77

In an LLP, any income is taxed:

A) when distributed to shareholders.
B) at the end of the fiscal year.
C) at the level of the entity.
D) only when distributed to its partners.

Question 78

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 he 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 79

All income and losses of an LLP are reported:

A) on the entity's return.
B) to the IRS and state and local tax authorities.
C) on the partners' individual returns.
D) annually.