Question 1

Financial information provided to a prospective franchisee must be audited.

Accepted Answer

Financial information provided to a prospective franchisee must be audited to insure the accuracy of the information.

Question 2

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

Accepted Answer

The organizers may choose on the certificate of organization whether to disclose information regarding management of the LLC.

Question 3

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.

Accepted Answer

Since 1996 states have enacted laws providing increased protections to general partners in an LLP.

Question 4

A corporation may be a principal of an LLC.

Accepted Answer

Corporate entities may be principals in an LLC.

Question 5

LLC members are always required to complete a Certificate of Membership Interest evidencing the individual member's interest the business entity.

Accepted Answer

The organizers may choose on the certificate of organization whether to require disclosure or not require disclosure of member's membership interests.

Question 6

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

Accepted Answer

Just as in other business entity forms, members of an LLC, particularly management and controlling members, owe duties of care and loyalty to each other although the application of these duties vary by state.

Question 7

Every state in the U.S.recognizes the existence of LLCs.

Accepted Answer

Although state laws vary regarding procedural and default rules for LLC compliance, all states recognize LLCs.

Question 8

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

Accepted Answer

To protect injured clients and customers, some states require liability insurance so injured individuals may still recover for an LLP partner's wrongdoing.

Question 9

LLCs are required to name a member as its registered agent and may not use a commercial registered office provider.

Accepted Answer

An LLC may opt to use a commercial registered office provider for a fee.

Question 10

Jones LLC and Smith LLC both have ten members and five 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.

Accepted Answer

The certain procedures for dissolution are governed by the operating agreement and may vary from company to company.

Question 11

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

Accepted Answer

One component of an operating agreement is to determine how the members will raise capital and the amount that will be raised.

Question 12

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

Accepted Answer

As a uniform law, states are free to adopt or not adopt the Act or any parts. States vary regarding what has and has not been adopted.

Question 13

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

Accepted Answer

State laws vary and some states will not recognize partnership taxation.

Question 14

Requiring a franchisee to purchase all franchise related materials and supplies,trademarked and otherwise,from the franchisor violates the Small Business Franchise Act.

Accepted Answer

The SBDF allows a franchisee to purchase nontrademarked items from nonfranchisor sources to get the lowest price as long as quality is comparable.

Question 15

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.

Accepted Answer

LLC status gives the members liability protection in the absence of fraud or intentional acts which cause liability.

Question 16

All states require LLPs to have a written partnership agreement.

Accepted Answer

Written partnership agreements for LLPs are not required by every state.

Question 17

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.

Accepted Answer

If a capital call is legitimately made, a partner that cannot raise the call's required funds may be forced to sell their interest in the company.

Question 18

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.

Accepted Answer

Both LLCs and LLPs are pass-through entities for tax purposes.

Question 19

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

Accepted Answer

The organizers may be from different states as long as an instate residential agent and office are named.

Question 20

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

Accepted Answer

The trend is to require only basic information needed to identify the principals and business.

Quiz 14: Limited Liability Partnerships, limited Liability Companies, and Other Business Arrangements