1
Chapter 31
Other Organizational Forms
for Small Businesses
TRUE/FALSE QUESTIONS
B1. The law governing limited liability companies is uniform.
B2. Members of limited liability companies are shielded from personal liability in
many situations.
B3. The alter-ego theory can be applied to a corporation, but not a limited liability
company.
B4. Limited liability companies are entities apart from their owners.
B5. A limited liability company can be taxed as a partnership.
2 TEST BANK B—UNIT SIX: BUSINESS ORGANIZATIONS
B6. Limited liability companies are treated as citizens of every state of which their
members are citizens.
B7. A limited liability company can be held liable for any loss or injury caused by
the wrongful acts or omissions of its members.
B8. Unless a limited liability company indicates otherwise, the Internal Revenue
Service automatically taxes it as a partnership.
B9. For federal income tax purposes, one-member limited liability companies are
not taxed.
B10. Most states apply to a foreign limited liability company (an LLC formed in
another state) the law of the state where the LLC was formed.
B11. A limited liability company must be managed by nonmembers.
B12. Limited liability company operating agreements typically contain provisions
relating to management.
CHAPTER 31: OTHER ORGANIZATIONAL FORMS FOR SMALL BUSINESSES 3
B13. If a limited liability company (LLC) agreement does not cover a topic, the state
LLC statute will govern.
B14. A member of a limited liability company (LLC) has the power and the right to
dissociate from the LLC at any time.
B15. Generally, a dissociated member of a limited liability company (LLC) has the
right to buy his or her interest in the LLC from the other members.
B16. If a member’s dissociation from a limited liability company is rightful, normally
the dissociated member has the right to force the LLC to dissolve.
B17. Most courts apply the same principles to joint ventures as they apply to
partnerships.
B18. A joint stock company is generally treated as a partnership.
B19. The law considers all new, single-owner businesses to be sole proprietorships
unless the owner affirmatively adopts some other form.
ANSWER: T PAGES: Section 5
4 TEST BANK B—UNIT SIX: BUSINESS ORGANIZATIONS
B20. Limited personal liability obviates the need to obtain for insurance for significant
business liability risks.
MULTIPLE CHOICE QUESTIONS
B1. Coco is considering forms of business organization for her concessions business—
Coco’s Cakes. Most states require that a limited liability company have
a. no minimum number of members.
b. at least one member.
c. at least two members.
d. at least three members, including one general partner.
B2. Bee Hive Honey, LLC’s members include Chad, Dolores, and others. For
purposes of suing and being sued, Bee Hive Honey is
a. an aggregate of Chad, Dolores, and the other members.
b. a natural person in the members’ “family.”
c. a legal entity apart from the owners.
d. a non-participating third party.
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B3. Otto is considering forms of business organization for Pro Tree Service, his
landscaping firm. Like most states, Otto’s state requires that to form a limited
liability company, he must file with a central state agency
a. articles of certification.
b. articles of formation.
c. articles of organization.
d. no specific documents.
B4. Custom Auto Body & Detailing, LLC, is a limited liability company. Unless indi–
cated otherwise on the Custom Auto’s federal tax form, the firm will be taxed as
a. a cooperative.
b. a corporation.
c. a joint venture.
d. a partnership.
B5. Business Enterprise Company agrees to sell a commercial office building and
parking garage to City Investments, Inc., which assigns the rights to the realty to
Downtown Properties, LLC. Downtown Properties does not yet exist, but once it is
created and comes into existence, the contract on novation will most likely be
a. quasi.
b. voidable.
c. void.
d. enforceable.
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B6. Location! Realty, LLC, is a limited liability company. Like other LLCs, for federal
jurisdictional purposes, Location! Realty is most likely a citizen of
a. all states.
b. every state in which its members are citizens.
c. no state.
d. only the state in which it was formed.
B7. Qatar Global Investments is a foreign entity—a firm owned and operated by
investors in a foreign country. With respect to a limited liability company in the
United States, Qatar Global can
a. act as a creditor, but cannot otherwise invest or participate.
b. become a member.
c. not become a member, but can participate in its operations.
d. not become a member or otherwise participate in its operations.
B8. Arnie is a member of Bowling & Billiards, LLC, a limited liability company. Arnie
can participate in the firm’s management
a. only to the extent that he assumes liability for the firm’s debts.
b. only to the extent of his investment in the firm.
c. to any extent.
d. to no extent.
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B9. StartUp Investors, LLC, is a limited liability company without a written operating
agreement. Among the members, a dispute arises concerning the division of
profits. Under most LLC statutes, the profits will be
a. distributed according to the members’ proportionate shares of ownership
in the firm.
b. divided equally among the members.
c. forfeited to the state.
d. reinvested in the business until the dispute is resolved.
B10. Dairy Products, Inc., and Eden Farms Corporation form a joint venture to make
and test-market Frosty Ice Cream. A joint venture is usually formed for
a. an implied duration of not more than six months.
b. a single transaction or project.
c. a stated duration of not more than one year.
d. a perpetual existence.
B11. Rafaela Art Gallery and Sequoia Exhibitions form a joint venture. When a dispute
arises, Rafaela files a suit against Sequoia. The court is most likely to apply the
same principles to this joint venture as it applies to
a. business trusts.
b. cooperatives.
c. corporations.
d. partnerships.
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B12. Oni’s Adventure Travel and Paquito’s Wild River Tours form a joint venture. Oni
can participate in the venture’s management
a. only to the extent that she assumes liability for the venture’s debts.
b. only to the extent of her investment in the venture.
c. to any extent.
d. to no extent.
B13. Lauren, Marcella, and Norell form a syndicate to buy a professional soccer
franchise. This syndicate could be set up as
a. a joint venture.
b. a corporation.
c. a sole proprietorship.
d. a limited liability company.
B14. Transworld Import Company and USA Export, Inc., form a business organiza-
tion to engage in importing and exporting. Its property is held in the names of
the members and its shareholders have personal liability. This organization is
a. a business trust.
b. a joint stock company.
c. a joint venture.
d. a syndicate.
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B15. As the beneficiary of a business trust, Kevin’s liability for trust debts and
obligations is
a. limited to his capital investment in the trust.
b. limited to his personal assets.
c. nothing.
d. unlimited.
B16. Dreem Land Corporation and EZ Investments Company transfer their property
to Financial Managers, Inc., which manages the property and distributes the
profits to Dreem and EZ. This form of a business organization is
a. a business trust.
b. a joint stock company.
c. a joint venture.
d. a syndicate.
B17. Gabriella is a beneficiary of a business trust. As a beneficiary, she is required
to
a. distribute the trust’s profits.
b. assume responsibility for the trust’s debts.
c. draft a written trust agreement.
d. none of the choices.
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B18. As the trustee of a business trust, Bertoldi is required to
a. distribute the trust’s profits.
b. assume responsibility for the trust’s debts.
c. draft a written trust agreement.
d. none of the choices.
B19. Kalin, Liza, and other consumers form MuniMart Cooperative. This form of
business organization makes it possible for these individuals to
a. avoid personal liability for the acts of the cooperative.
b. obtain an exemption from state laws governing corporations.
c. pay no taxes on their business income.
d. pool their resources to gain an advantage in the marketplace.
B20. Medical Professionals Supply Source is an unincorporated cooperative.
Unincorporated cooperatives are often treated like
a. business trusts.
b. corporations.
c. joint stock companies.
d. partnerships.
ESSAY QUESTIONS
B1. Commerce & Trade Corporation and Distance Shipping & Transport, Inc., form
a business trust. eCharge Auto Company and Fleet Electric Corporation form a
joint stock company. Green AgriCorp and Harvest Farms, Inc., form an in–
corporated cooperative. What features do these combinations of business
organization have in common?
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B2. Nichelle, Owen, and Porter organize a nonprofit business—Quality Markets,
Inc.—to buy groceries from wholesalers and sell them to consumers who buy a
membership in Quality Markets. Because the firm is a nonprofit entity, it is able
to sell the groceries for less than a commercial grocer could. What form of
business organization is Quality Markets? Is it significant that Quality Markets
is incorporated?