Deck 31: Starting a Business: Llcs and Other Options

Question 1

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.

Answer 1

False

Question 2

All the business forms listed below have limited liability EXCEPT the

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

Answer 2

B

Question 3

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.

Answer 3

False

Question 4

An organization that does not pay income tax on its profits but passes it 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 5

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.

Question 6

The most common form of business ownership is the corporation.

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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 the 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 13

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 14

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

Question 15

Corporations have perpetual existence.

Question 16

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 17

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 18

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

Question 19

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 20

No formal steps are necessary to create a sole proprietorship.

Question 21

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 22

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 23

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 24

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(n)

A) S corporation.
B) professional corporation.
C) close corporation.
D) proprietorship.

Question 25

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) an S corp shareholder
D) a partner in a joint venture

Question 26

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 up 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 27

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 28

What federal agency requires that the seller of a franchise give the potential buyer a 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 29

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

Question 30

Which is true of an S corporation?

A) There can be no more than 50 shareholders.
B) There can be only one class of stock.
C) A majority of shareholders must agree the company should be an S corporation.
D) All of these are correct.

Question 31

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 32

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 33

In many ways, a limited liability company can be thought of as a cross between

A) a corporation and a franchise.
B) a joint venture and a partnership.
C) a corporation and a sole proprietorship.
D) a sole proprietorship and a social enterprise.

Question 34

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 35

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 36

A social enterprise must do all of the following EXCEPT

A) register with the state as a nonprofit organization.
B) state in its charter that it is a benefit corporation.
C) obtain approval of its charter from two-thirds of its shareholders.
D) measure its social benefit using a standard set by an objective third party.

Question 37

Which is an advantage of a sole proprietorship?

A) It can offer multiple classes of stock.
B) It is very easy to form.
C) It can attract a wide variety of shareholders.
D) It offers its owner limited liability.

Question 38

Most franchisors and franchisees are

A) partnerships.
B) sole proprietorships.
C) corporations or LLCs.
D) social enterprises.

Question 39

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

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

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) franchise.
D) limited liability company.

Question 41

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

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

What is a joint venture? Briefly explain the tax and liability implications of a joint venture.

Question 44

In order to obtain limited liability, Tom and Doris formed an LLC to operate their catering business. They sometimes deposit the proceeds from catering jobs into their personal checking accounts, and if they need to pay personal bills and are short of funds, they use 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 45

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