Deck 14: Limited Liability Companies and Limited Liability Partnerships

Question 1

LLC laws define dissolution of an LLC as a process.

Answer 1

liquidation

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

Owners in an LLC are called .

Question 8

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

Question 9

The process when an individual member of an LLC exercises the right to withdraw from the partnership is called .

Question 10

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

Question 11

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

Question 12

In cases where a partner has engaged in some or the LLP acts to shield only the personal assets of other partners.

Question 13

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

Question 14

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

Question 15

Corporate tax structures result in taxation.

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

When completing the certificate of organization,the organizers of an LLC are not required to disclose how the business is to be managed.

Question 24

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

Question 25

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 26

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 27

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

Question 28

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 29

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 30

The designation "Smith Group,LLC" is a valid designation for an LLC.

Question 31

A corporation may be a principal of an LLC.

Question 32

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

Question 33

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

Question 34

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

Question 35

Legal fees for LLCs and LLPs are usually based on number of members and complexity of the organization.

Question 36

An operating agreement for an LLC can set out only the structure of the entity.

Question 37

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

Question 38

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 39

A personal guarantee is a pledge from LLP members of personal assets to guarantee payment obligations of the business venture.

Question 40

An LLC can last until a specified term expires.

Question 41

LLCs were originally created by the
A) New York legislature.

A) Wyoming legislature.
B) California legislature.
D) Delaware legislature.

Question 42

Formation of an LLC requires the filing of
A) a record of business creation.

A) a statement of qualification.
B) a certificate of formation.
D) articles of organization.

Question 43

Though they may elect a different structure,for tax purposes,LLCs are typically treated as
A) corporate tax entities.

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

Question 44

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

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

Question 45

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 46

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 47

Typically,day-to-day decision making in a manager-managed 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 48

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 49

LLPs are formed with the filing of with the proper public official.
A) a record of business creation

A) a statement of qualification
B) a certificate of formation: LLP
D) articles of organization

Question 50

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 51

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 52

The ability to distribute earnings without incurring double-level taxation is an advantage of a
A) member-managed LLC.

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

Question 53

The first LLP legislation was enacted in

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

Question 54

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 55

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 56

Currently,LLPs are often 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 57

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 58

Which of the following is not a characteristic of an LLC?

A) May elect to be taxed as a corporation.
B) Usually capitalized via debt.
C) Its members are not personally liable for any business debt or liability.
D) Only its managing members owe a fiduciary duty to other members.

Question 59

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.

A) member-managed LLC.
B) pass-through entity.
D) manager-managed LLC.

Question 60

With regard to taxation,LLPs are treated as
A) nonprofit organizations.

A) pass-through entities.
B) corporations.
D) hybrid entities.

Question 61

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 62

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 was not entitled to distribution for dissociation but would retain his interest in the company until dissolution occurs.

Question 63

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

Question 64

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

Question 65

Although many LLCs are treated as pass-through entities,an LLC's members may elect to be taxed as a
A) limited liability partnership.

A) sole proprietorship.
B) general partnership.
D) corporation.

Question 66

In an LLP,any income is taxed
A) at the level of the entity.

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

Question 67

If an LLP does not have a partnership agreement,which of the following will courts look to in order 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 68

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 69

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 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

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 72

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

Question 73

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 74

How may an LLC be terminated?

Question 75

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

Question 76

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

Question 77

Explain how LLCs are capitalized.

Question 78

The amount and methods of capitalizing an LLC are often controlled by the
A) articles of organization.

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

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.