Deck 19: Forms of Business Organizations.

Question 1

If a sole proprietorship operates under a fictitious business name,then that name must be registered with the state.

Answer 1

True

Question 2

A shareholder's right of appraisal only applies to transactions that were initially subject to shareholder approval.

Answer 2

True

Question 3

Any corporation not meeting the requirements for an S corporation is automatically a C corporation.

Answer 3

True

Question 4

The main issue in CASE 19.3Burwell v.Hobby Lobby Stores,Inc.(2014)involved a question of whetherthe requirements for contraception under the Affordable Care Act (Obamacare)violated the due process rights of Hobby Lobby Stores.

Question 5

An outside director is a director who lives outside the state of incorporation.

Question 6

A creditor of a sole proprietorship may seek recovery only from business assets of the sole proprietorship,not from personal assets of the sole proprietor.

Question 7

B corporations have no duty to maximize shareholder value even when there is a change of control.

Question 8

A partnership requires a minimum amount of capital in order to be formed.

Question 9

States may not impose a higher fiduciary duty upon partners than that set forth in the Revised Uniform Partnership Act.

Question 10

A corporation that is technically defective but that is formed in good faith and exercises corporate power is known as a de jure corporation.

Question 11

C corporations are taxed as a pass-through entity.

Question 12

A partnership may acquire property in its own name.

Question 13

An S corporation cannot have more than one class of stock.

Question 14

Corporations must incorporate in the state where their headquarters are located.

Question 15

In a joint venture,the authority of one member to bind the partnership is more limited than in a general partnership.

Question 16

The term "appraisal rights" when used in regard to a corporate merger refers to the right of dissenting shareholders to have corporate property independently appraised.

Question 17

Cumulative voting allows a greater control by the management interests of a corporation.

Question 18

Federal law governs the obligations,if any,that members of a limited liability partnership owe to creditors.

Question 19

Partners owe each other a duty of care but not a duty of loyalty.

Question 20

A corporation is a private entity that can be created by a mere handshake,as long as the shareholders have completed a certificate of incorporation.

Question 21

Which of the following is true regarding the effect of the death of a partner on a general partnership?

A) Unless there is an agreement to the contrary, the partnership dissolves upon the death of a partner.
B) Unless there is an agreement to the contrary, the partnership ceases to exist 10 days after the death of any partner.
C) The remaining partners must by operation of law continue the partnership for at least one year.
D) Within 90 days the remaining partners may elect to continue the partnership.

Question 22

In CASE 19.1 Gatz Properties,LLC v.Auriga Capital Corporation (2012),Gatz Properties was the managing member of Peconic Bay,LLC,controlled by the Gatz family.After failing to dislose material offers for assets of the LLC,Gatz bought out the minority members' interests in Gatz Properties LLC for $20,89.The minority members sued,winning over $800,000 based on Gatz's breach of fiduciary duties.Gatz appealed.How did the court rule on appeal on why?

A) Affirmed, Gatz had breached its fiduciary duties to the minority members of Gatz Properties, LLC.
B) Affirmed, Gatz had breached its lease with Peconic Bay LLC.
C) Reversed,Gatz had breached its fiduciary duties to the minority members of Gatz Properties, LLC.
D) Reversed, Gatz had breached its lease with Peconic Bay LLC.

Question 23

In the case ofEstate of Countryman v.Farmers Cooperative Association discussed in the text,the plaintiffs attempted to hold a member who owned 95% of an LLC personally liable as the LLC's manager,after propane gas delivered by the LLC exploded.How did the court rule?

A) That only the LLC could be held liable.
B) That the manager was subject to personal liability along with the LLC regardless of whether it could be established that the manager participated in tortious conduct in performing his duties.
C) That only the manager, not the LLC, could be held liable.
D) The manager was not shielded from personal liability if he participated in tortious conduct while performing his duties.

Question 24

__________ is the simplest and most prevalent form of business enterprise in the U.S.

A) S corporation
B) Partnership
C) Sole proprietorship
D) Joint venture

Question 25

A member of the board who also serves as an officer is a(n)__________ director.

A) inside
B) interested
C) outside
D) employed

Question 26

In most jurisdictions,there is no quorum unless the holders of at least _____ of the outstanding shares are present in person or by proxy.

A) 25%
B) 33%
C) 50%
D) 75%

Question 27

__________ refers to a method by which courts hold shareholders individually liable for claims against a corporation.

A) Reverse liability
B) Piercing the corporate veil
C) Upholding the ethical theory
D) Unveiling

Question 28

What does the term "reverse piercing" reference in regard to a corporation and its shareholders?

A) Holding a corporation liable for debts of a shareholder
B) Holding a shareholder liable for debts of a corporation
C) Holding a corporation liable for debts of a shareholder and holding a shareholder liable for debts of a corporation
D) Holding a corporation liable for debts of a shareholder, holding a shareholder liable for debts of a corporation, and holding officers liable for debts of a corporation.

Question 29

A __________ is a public offer to all the shareholders of a corporation to buy their shares at a stated price.

A) leveraged buy out
B) tender offer
C) target bid
D) merger

Question 30

An S corporation would likely be used as the corporate form for a business intending to raise money from venture capitalists.

Question 31

Which of the following is NOT true regarding limited partnerships?

A) General partners of a limited partnership remain jointly and severally liable for partnership obligations.
B) Limited partners assume no liability for partnership debts beyond the amount of capital they contributed.
C) Limited partners are responsible for the management of the partnership.
D) Limited partnerships are often used to raise capital.

Question 32

In a __________ merger,the shares in the disappearing corporation are automatically converted into shares in the surviving corporation.

A) cash out
B) noncash
C) freeze out
D) liquidation

Question 33

The S-Corporation is the entity of choice that helps venture capitalists raise investment capital.

Question 34

If a business is operated by a partnership,LLC,or S corporation,then operating losses will be passed through to the individual partners or shareholders.

Question 35

Which of the following is true regarding taxation of losses of a C corporation?

A) The operating loss is passed on to shareholders, but the corporation itself does not realize any benefit.
B) The operating loss is recognized at the corporate level, and shareholders also receive a tax benefit.
C) The operating loss will be recognized at the corporate level, shareholders receive no tax benefit, and the corporation receives no benefit until it has operating income against which its prior losses can be deducted.
D) The operating loss is not recognized at the corporate level; and although shareholders may receive a deduction, they must wait until they receive some amount of profit from the corporation at which point they can deduct up to 10% of the losses per year.

Question 36

When directors on a board serve for a fixed term but are not elected all at once it is known as a(n)__________ board.

A) cumulative
B) staggered
C) proxy
D) inside

Question 37

A(n)__________ is created when two or more persons agree to place their money,labor,or skills in a business and to share the profits and losses.

A) sole proprietorship
B) general partnership
C) S partnership
D) C corporation

Question 38

Which of the following statements is NOT true regarding the advantages and disadvantages of a sole proprietorship?

A) A sole proprietorship can be created without formal agreements or state filings.
B) The proprietor reports income from the business on a personal tax return.
C) The proprietor alone bears liability for the losses.
D) It is usually easy for sole proprietorships to raise capital.

Question 39

The __________ theory applies to the situation in which owners of a corporation have so mingled their own affairs with those of the corporation that the corporation does not exist as a distinct entity.

A) undercapitalization
B) alter ego
C) per se
D) absolute

Question 40

In a(n)__________ a stock purchase is financed by debt.

A) cash out merger
B) freeze out acquisition
C) leveraged buyout
D) illegal purchase

Question 41

Which of the following is generally true regarding the liability of members of a limited liability partnership for malpractice?

A) Members split evenly among themselves 50% of any assessed liability for malpractice against any member with the limited liability company retaining liability for the remaining 50%.
B) Members are not liable for their own malpractice or for the malpractice of other members because recovery for malpractice may only be obtained from assets of the limited liability partnership itself.
C) Members are liable for their own malpractice but not for the malpractice of other members.
D) Members are liable for their own malpractice and also for the malpractice of other members.

Question 42

A corporation can conduct business as a(n)__________ in states other than its state of incorporation.

A) domestic corporation
B) foreign corporation
C) pass through entity
D) alien

Question 43

Which of the following requirements is not required by a corporation to qualify for S corporation status?

A) The corporation must have only one class of stock.
B) The corporation must file a timely election signed by all the shareholders to be treated as an S corporation.
C) The corporation must have no more than twenty-five shareholders.
D) The corporation must be a domestic corporation.

Question 44

A shareholder who cannot be present at a meeting can vote by __________,that is,by a written authorization for another person to vote on his or her behalf.

A) proxy
B) allowance
C) record
D) nomination

Question 45

A(n)__________ is a public offer to all the __________ of a(n)__________ corporation to buy their shares at a stated price,usally __________ than the market price.

A) tender offer, shareholders, target, higher
B) leveraged buyout, shareholders, target, higher
C) tender offer, directors, acquiring, below
D) tender offer, shareholders, target, below

Question 46

Sarah Smith works as a laser technician for a local dermatology center consisting of physicians operating under a partnership agreement.Sarah purchased supplies through the mail from a medical supply facility totaling $5,000.She signed the contract agreeing to pay for the supplies in her name,Sarah Smith.A few weeks later the dermatologists became embroiled in a bitter dispute regarding profits and terminated the partnership.Unfortunately,the partners were not aware of the debt owed to the medical supply facility; and the bill remained unpaid.Sarah received a bill from the supply company for $5,000.Is she liable to the medical supply company,and why or why not?

A) No, because she was only employed as a technician.
B) No, because the medical supply facility should have asked for proper identification.
C) Yes, because she signed in her own name.
D) Yes, but only because the partnership terminated.

Question 47

In CASE 19.2Holmes v.Lerner(1999),Lerner (a wealthy entrepreneur)talked to Holmes about setting up a cosmetics business called Urban Decay.Holmes received assurances from Lerner about finances and setting up the business.Later Lerner negotiated a separate deal for Urban Decay without including Holmes,and drafted articles of incorporation which gave Holmes only a one percent interest in Urban Decay.Holmes sued,insisting that even though they had no written agreement,she should have been a full and equal partner.How did the court rule and why??

A) The court held for Lerner as a full and equal partner, because the oral and written expressions and discussion of profits was a prerequisite to form a partnership.
B) The court held for Lerner, there was insufficient evidence of intentions to form a partnership.
C) The court held for Holmes as a full and equal partner, because the oral and written expressions and discussion of profits was a prerequisite to form a partnership.
D) The court held for Holmes, because under state law, she automatically became a limited partner.

Question 48

When a third party,based on all of its transactions with the enterprise,acts as if it were doing business with a corporation,the third party is prevented from claiming that the enterprise is not a corporation because a(n)__________ has been formed.

A) partnership by estoppel
B) corporation de facto
C) corporation de jure
D) corporation by estoppel

Question 49

Fact Pattern 19-1
Joan decides to enter into a franchise agreement with XYZ Burgers to sell their burgers in her town. The franchise agreement did not prohibit XYZ Burgers from granting other franchises in the area, but that did not concern Joan because she thought XYZ Burgers would treat her fairly. She did not bother to read the franchise papers, contracts, and disclosures she was provided. Joan's business went very well for the six months. Then, however, another XYZ Burgers franchise opened just down the street from Joan's restaurant. She was very upset and called XYZ Burgers to complain. The CEO brushed off her concerns and told her that there was enough business for everyone. Joan, however, is interested in suing XYZ Burgers.
Refer to Fact Pattern 19-1.What is the position of the Federal Trade Commission regarding a franchisor selling a franchise very near to an existing franchise?

A) That the practice is illegal.
B) That the practice is illegal unless the first franchisee provides specific permission for the sale to the second franchisee.
C) That the practice is legal and that no disclosures are required.
D) That the practice is legal but that certain disclosures must be made to the first franchisee when that agreement is made.

Question 50

Which of the following involves settling accounts and liquidating assets of a partnership for the purpose of making distributions and ending the partnership?

A) Debt resolution
B) Bypassing formalities
C) Termination
D) Winding-up

Question 51

Which of the following statements is not true regarding the characteristics of a corporation?

A) A corporation is a legal entity distinct from its owners.
B) A corporation is owned by shareholders.
C) The corporation itself is responsible for its liabilities.
D) The board of directors implements the decisions of the officers.

Question 52

Which of the following is true regarding incorporation?

A) A corporation must be incorporated in the state in which it has its principal place of business.
B) Laws regarding incorporation and the rights and duties of corporations are uniform from state to state.
C) Since the mid-1930's, Delaware has been considered the preeminent state for incorporation.
D) Incorporation may be done pursuant to common law as well as statute.

Question 53

Fact Pattern 19-1
Joan decides to enter into a franchise agreement with XYZ Burgers to sell their burgers in her town. The franchise agreement did not prohibit XYZ Burgers from granting other franchises in the area, but that did not concern Joan because she thought XYZ Burgers would treat her fairly. She did not bother to read the franchise papers, contracts, and disclosures she was provided. Joan's business went very well for the six months. Then, however, another XYZ Burgers franchise opened just down the street from Joan's restaurant. She was very upset and called XYZ Burgers to complain. The CEO brushed off her concerns and told her that there was enough business for everyone. Joan, however, is interested in suing XYZ Burgers.
Refer to Fact Pattern 19-1.Which of the following is the term used when a franchisor sells a franchisee an outlet in a certain location,and then a few months later,sells another outlet a few blocks away to someone else?

A) Encroachment
B) Fair trace
C) False competition
D) Crowding

Question 54

A(n)__________ is a for-profit corporation that uses the power of business to solve social and environmental problems.

A) C corporation
B) S corporation
C) B corporation
D) Benevolent Recognized Group

Question 55

Which of the following is false regarding decision making in a partnership?

A) Each partner's assets are vulnerable to the poor business decisions of the fellow partners.
B) A partnership is prohibited from placing managerial control of the business in one partner.
C) Unless the partners expressly agree otherwise, partnership law requires unanimous agreement of all partners on all but the most ordinary matters.
D) If the partners in an informal partnership cannot agree on a decision, they may disband the partnership, distribute its assets, and terminate it.

Question 56

If incorporators cannot show substantial compliance with statutes regarding incorporation but can show that they were unaware of any defect and acted in good faith,a court may treat the entity as a(n):

A) de jure corporation.
B) real corporation.
C) de facto corporation.
D) equitable corporation.

Question 57

In __________ voting,a shareholder can cast one vote for each share the shareholder owns for each nominee whereas in __________ voting,a shareholder may cast all of his or her votes for one nominee or allocate them among the nominees as the shareholder sees fit.

A) cumulative; straight
B) absolute; cumulative
C) straight; cumulative
D) straight; absolute

Question 58

Which of the following refers to a merger in which some shareholders are required to surrender their shares in the disappearing corporation for cash?

A) Illegal merger
B) Termination merger
C) Surrender consolidation
D) Freeze-out merger

Question 59

__________ of a general partnership occurs when all the affairs are wound up and the partners' authority to act for the partnership is completely extinguished.

A) Dissolution
B) Termination
C) Winding up
D) Staged end

Question 60

The __________ set forth the steps that must be taken to establish a corporation in a state.

A) Uniform Federal Rules
B) corporate statutes of each state
C) corporate bylaws
D) corporate charter requirements

Question 61

Mike owns a small but successful coffee house.He decides to incorporate.Considering only tax benefits,should Mike form a C corporation or a subchapter S corporation and why? Discuss taxation under both forms.

Question 62

Explain requirements for formation of an S corporation.

Question 63

Set forth four of the shareholder proposals that must be included in proxy materials according to the Securities and Exchange Commission.

Question 64

Fact Pattern 19-2
Maxine and Vince verbally agree to form a dog grooming partnership called "XYZ Grooming." They file nothing with the state. Maxine puts up 80% of the capital needed for the partnership, and Vince supplies 20%. Maxine assumed that Vince would do extra work to account for the small amount of capital contributed by him, but that did not occur. Maxine found herself grooming more than 90% of the animals on her own. Maxine told Vince that he was only entitled to 10% of the profits because he was only doing 10% of the work. Vince disagreed, and a heated argument occurred. Not surprisingly, Maxine and Vince decided to end the partnership. While winding up affairs, Maxine discovered that Vince paid an excessive amount for some dog shampoo. She thought he bought it from a certain supplier just so he could flirt with the receptionist there. She told him that paying for the shampoo was entirely his responsibility because she had not agreed to the purchase. Maxine and Vince also became aware of a lawsuit filed by the owner of a Welsh Pembroke Corgi complaining that the dog developed a skin rash following bathing by Vince in the expensive shampoo he had purchased, and that the owner lost money because the dog could not be entered into shows. Maxine told Vince that the litigation was entirely his responsibility and that she disavowed any liability to the plaintiff.
Refer to Fact Pattern 19-2.Is Maxine,XYZ Grooming,or Vince responsible for payment of the shampoo purchased by Vince?

A) The partnership is liable and Vince is liable in the event there are insufficient partnership assets, but Maxine is not liable on the debt.
B) The partnership is liable, and so are both Vince and Maxine if insufficient partnership funds exist to pay the debt.
C) Vince is liable on the debt, but neither Maxine nor XYZ Grooming is liable.
D) Since the winding-up process has begun, neither Maxine, Vince, nor XYZ Grooming is liable.

Question 65

Define a joint venture and list the elements necessary for a finding of a joint venture.

Question 66

Fact Pattern 19-2
Maxine and Vince verbally agree to form a dog grooming partnership called "XYZ Grooming." They file nothing with the state. Maxine puts up 80% of the capital needed for the partnership, and Vince supplies 20%. Maxine assumed that Vince would do extra work to account for the small amount of capital contributed by him, but that did not occur. Maxine found herself grooming more than 90% of the animals on her own. Maxine told Vince that he was only entitled to 10% of the profits because he was only doing 10% of the work. Vince disagreed, and a heated argument occurred. Not surprisingly, Maxine and Vince decided to end the partnership. While winding up affairs, Maxine discovered that Vince paid an excessive amount for some dog shampoo. She thought he bought it from a certain supplier just so he could flirt with the receptionist there. She told him that paying for the shampoo was entirely his responsibility because she had not agreed to the purchase. Maxine and Vince also became aware of a lawsuit filed by the owner of a Welsh Pembroke Corgi complaining that the dog developed a skin rash following bathing by Vince in the expensive shampoo he had purchased, and that the owner lost money because the dog could not be entered into shows. Maxine told Vince that the litigation was entirely his responsibility and that she disavowed any liability to the plaintiff.
Refer to Fact Pattern 19-2.Which of the following is true regarding Vince's entitlement,if any,to share in profits of the business?

A) Because he was not doing his share of the work, he was not entitled to any profits.
B) He was entitled to 10% of the profits.
C) He was entitled to 20% of the profits.
D) He was entitled to 50% of the profits.

Question 67

Define class voting.Why would a group of investors be interested in a guarantee of class voting?

Question 68

In what five categories does the Franchise Rule require a franchisor to make material disclosures to prospective franchisees?

Question 69

Fact Pattern 19-2
Maxine and Vince verbally agree to form a dog grooming partnership called "XYZ Grooming." They file nothing with the state. Maxine puts up 80% of the capital needed for the partnership, and Vince supplies 20%. Maxine assumed that Vince would do extra work to account for the small amount of capital contributed by him, but that did not occur. Maxine found herself grooming more than 90% of the animals on her own. Maxine told Vince that he was only entitled to 10% of the profits because he was only doing 10% of the work. Vince disagreed, and a heated argument occurred. Not surprisingly, Maxine and Vince decided to end the partnership. While winding up affairs, Maxine discovered that Vince paid an excessive amount for some dog shampoo. She thought he bought it from a certain supplier just so he could flirt with the receptionist there. She told him that paying for the shampoo was entirely his responsibility because she had not agreed to the purchase. Maxine and Vince also became aware of a lawsuit filed by the owner of a Welsh Pembroke Corgi complaining that the dog developed a skin rash following bathing by Vince in the expensive shampoo he had purchased, and that the owner lost money because the dog could not be entered into shows. Maxine told Vince that the litigation was entirely his responsibility and that she disavowed any liability to the plaintiff.
Refer to Fact Pattern 19-2.Which of the following is true regarding liability on the lawsuit brought by the Corgi owner?

A) The partnership is liable and Vince is liable in the event there are insufficient partnership assets to pay any judgment, but Maxine would not be liable on any judgment.
B) The partnership is liable, and so are both Vince and Maxine if insufficient partnership funds exist to pay any judgment.
C) Vince is liable on any judgment, but neither Maxine nor XYZ Grooming would be liable.
D) Since the winding-up process has begun, neither Maxine, Vince, nor XYZ Grooming would be liable on any judgment obtained.