Question 1

Dan,Fran,and Stan want to establish and operate a mountain bike sales and rental shop.Dan and Fran will be actively involved in the management of the business,but Stan is investing most of the money.The three of them do not want to form a corporation,but want to use a form of business,if possible,that will give limited liability to each of them.Which of the following is true?

Accepted Answer

They could form a limited liability company and this would give limited liability to each of the three owners. A limited liability company (LLC) is a hybrid business entity that combines elements of a corporation and a partnership. It provides its owners with limited liability like a corporation, but without the double taxation. As long as the LLC is properly formed and run, each member's personal assets are protected from the company's liabilities. Thus, Dan, Fran, and Stan could each have limited liability in an LLC.

Question 2

When choosing the form of business organization that a business will use,what additional factors should be considered if the business will be doing substantial business with entities in other nations?

Accepted Answer

The answer of When choosing the form of business organization...

Question 3

Thelma and Louise form an LLC for the purpose of operating road trip tours of the American southwest.In the articles of organization,they state,"the term of this limited liability company shall last until our travel company has operated 20 successful tours,at which point the term of this company shall end." Thelma and Louise have formed:

Accepted Answer

The answer of Thelma and Louise form an LLC for...

Question 4

Who has the right to manage an LLC?

Accepted Answer

In a member-managed LLC, all members have the right to manage the LLC. In a manager-managed LLC, only managers have the right to manage the LLC, and the members have limited management rights. Therefore, option B is the correct answer.

Question 5

Norm,Cliff and Sam form a limited liability company.Norm contributes $20,000,Cliff $30,000 and Sam $50,000.The operating agreement does not state how profits and losses are to be apportioned.The company makes a $60,000 profit during the year.Under the ULLCA,how will profits be divided?

Accepted Answer

Under the ULLCA, if the operating agreement does not specify how profits are to be divided, profits are divided equally among the members, regardless of their capital contributions.

Question 6

Absent an agreement,which of the following is correct about a non-manager member's right to compensation for services provided to an LLC?

Accepted Answer

The answer of Absent an agreement,which of the following is...

Question 7

John is in the planning stages of forming a business with several others.John has heard that an LLC would provide the best of both worlds,that is,partnership taxation and limited liability.But John has also heard that one must very carefully structure an LLC or the Internal Revenue Service might deny partnership taxation.Lastly,John needs to review his overall tax situation because he thinks that corporate taxation might actually be better for his particular situation.Which of the following is true?

Accepted Answer

An LLC can choose its tax classification with the IRS, either as a partnership or a corporation, and this choice applies to the entity as a whole, not individually to each owner.

Question 8

Upon the expiration of the term of a term LLC,the LLC can be continued:

Accepted Answer

Upon the expiration of the term of a term LLC, the LLC can be continued either as a term LLC by a unanimous vote of the members or as an at-will LLC by a majority vote of the members. Since both options are possible, the best choice is D, which includes both options. A majority vote of the members is sufficient to continue the LLC as an at-will LLC, which has no fixed term, whereas a unanimous vote of the members is required to continue the LLC as a term LLC with another fixed term.

Question 9

A member's ownership interest in an LLC is called a(n):

Accepted Answer

In an LLC, a member's ownership interest is called a distributional interest. It represents the member's right to receive distributions of profits and losses from the LLC. A dividend is a distribution of profits to shareholders in a corporation. A capital account is a record of a member's contributions and distributions in an LLC. A derivative interest is not a term used in relation to LLC ownership interests.

Question 10

Lynda is a member of a manager-managed LLC but is not a manager.However,Lynda has considerable expertise in the business of the LLC.Lynda assisted the managers for the first couple of years of the LLC's existence without any difficulties.During the third year,Lynda began to challenge some of the decisions made by the managers who had begun to shut Lynda out of most decisions.Lynda demands that as a member of the LLC she be allowed to participate in its management and that she be compensated for the services she is providing.In this case:

Accepted Answer

The answer of Lynda is a member of a manager-managed...

Question 11

If a member properly disassociates herself from an LLC,the member is entitled to receive:

Accepted Answer

When a member properly disassociates from an LLC, they are entitled to receive fair market value for their distributional interest. This is typically determined by an appraisal or negotiation between the member and the LLC. The other options listed are not accurate representations of what the disassociating member is entitled to receive.

Question 12

Barry,Harry,and Larry form an LLC.Barry contributes $100,000 in capital and the other two contribute $50,000 each.This LLC was structured as a manager-managed LLC with Harry designated as the manager.In reality,during the first year the three members actively took part in the management of the LLC.In fact,of the total time spent by the members managing the business,60 percent of the time was spent by Larry,with Barry and Harry each contributing 20 percent of the time.The LLC was unexpectedly profitable in the first year and the members are in dispute over the allocation of profits.There are no provisions in their operating agreement covering profit allocations.Which of the following is true?

Accepted Answer

The answer of Barry,Harry,and Larry form an LLC.Barry contributes $100,000...

Question 13

Of the following,who owes a fiduciary duty of loyalty to an LLC?

Accepted Answer

According to the default rule in most states, in a member-managed LLC, all members owe a fiduciary duty of loyalty to the LLC, while in a manager-managed LLC, only the managers owe this duty. Therefore, members of member-managed LLCs and managers of manager-managed LLCs owe a fiduciary duty of loyalty to their respective LLCs. Choice A and D are incorrect because they include all members of all LLCs or all members of manager-managed LLCs, respectively. Choice C is incorrect because it excludes members of member-managed LLCs.

Question 14

Mary was an architect and was one of four members who joined an LLC that was going to develop a large new residential subdivision over the next several years.Mary agreed that as part of her contribution of capital she would contribute $100,000 and would provide 300 hours of time working on the architectural design of homes to be built by the LLC.Unfortunately,as Mary was out enjoying a walk one day,a driver in a sport utility vehicle was talking on a cell phone and struck Mary,killing her.When she was killed,Mary had paid $60,000 of her cash contribution and had already provided 240 hours of the design services.In these circumstances:

Accepted Answer

The answer of Mary was an architect and was one...

Question 15

Two CPA firms,one having 70 partners,and one having 40 partners,are planning to form a new CPA firm.They want to use a form of business organization that will give each of the 110 owners of the new firm limited liability.What are the available options to meet this goal?

Accepted Answer

A limited liability partnership (LLP) or a limited liability company (LLC) are both forms of business organization that provide limited liability to its owners. An S corporation is not an option because it has restrictions on the number of shareholders and the types of shareholders allowed. A limited partnership is also not an option because it requires at least one general partner who has unlimited liability. Therefore, the best choice(s) for the new CPA firm are limited liability partnership or limited liability company.

Question 16

Eric is a member of a manager-managed LLC but is not a manager.This LLC invests in real estate and manages it as rental property in a college town.Eric has made several recommendations to the managers regarding property that he considers to be a good buy.Eric,however,seldom performed even the slightest investigation of the property before recommending it to the managing members.Eric also purchased a couple of rental properties on his own account,taking very careful and sneaky steps to ensure that the other members of the LLC did not learn of these purchases.Which duties has Eric violated?

Accepted Answer

The answer of Eric is a member of a manager-managed...

Question 17

Arthur,Betty,Charlie,Diane and Edward created a limited liability company.Arthur contributed $40,000,and each of the others contributed $10,000 to the capital.The group must vote on making a business decision.Arthur and Betty vote to take the action,while the others vote against it.Who wins?

Accepted Answer

In a limited liability company, decisions are usually made based on the majority vote. In this case, Charlie, Diane and Edward constitute a majority with three votes against two. The amount contributed by each member does not determine the outcome of the vote. Therefore, choice A and B are incorrect. Unanimous voting is not required in a limited liability company, so choice D is also incorrect.

Question 18

After disassociating from an LLC,a member retains apparent authority to bind the LLC:

Accepted Answer

A member retains apparent authority for 2 years to any party except those who know of the disassociation or who have received notice of it, as per the Uniform Limited Liability Company Act (ULLCA).

Question 19

Under the Uniform Limited Liability Company Act,the withdrawal of a member from an LLC is known as:

Accepted Answer

According to the Uniform Limited Liability Company Act, the withdrawal of a member from an LLC is known as disassociation. Disaffirmance refers to a contract being invalidated, voiding the interest is not a specific term used in LLC law, and dissolution refers to the entire entity coming to an end.

Question 20

The non-manager members of a manager-managed LLC owe which fiduciary duties to the LLC?

Accepted Answer

Non-manager members of a manager-managed LLC typically do not owe fiduciary duties to the LLC, as these duties are generally the responsibility of the managers.

Quiz 39: Limited Liability Companies and Limited Liability Partnerships