Chapter 33
Limited Liability Companies
and Special Business Forms
N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows.
N A question new to this edition of the Test Bank.
+ A question modified from the previous edition of the Test Bank.
= A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
1. A limited liability company is operated in compliance with state law.
2. Future members of a limited liability company (LLC) may enter into contracts on
the entity’s behalf before the LLC is formed.
3. A limited liability company (LLC) formed in one state but doing business in
another state is referred to in the second state as a foreign LLC.
4. A limited liability company is not a citizen of any state.
5. A limited liability company can be taxed as a partnership.
6. A limited liability company can be taxed as a corporation.
7. A limited liability company is a citizen of every state in which it does business.
8. The alter-ego doctrine can be applied to a limited liability company.
9. The members of a limited liability company enjoy limited liability.
10. State limited liability company statutes are uniform.
11. Foreign investors are not allowed to become limited liability company members.
12. If there is no limited liability company (LLC) agreement covering a topic under
dispute, the state LLC statute will govern the outcome.
13. In many states, an operating agreement is not required for a limited liability
company to exist.
14. A limited liability company must be managed by non-member managers.
15. A limited liability company must be managed by its members.
16. Most limited liability company statutes have no provisions regarding members’
meetings.
17. Some states provide that in the absence of an agreement to the contrary each
member of a limited liability company has one vote.
18. A member of a limited liability company (LLC) has the power and the right to
dissociate from the LLC at any time.
19. Generally, a dissociated member of a limited liability company (LLC) has the
right to have his or her interest in the LLC bought out by the other members.
20. When a member dissociates form a limited liability company, the member’s
duty of loyalty continues.
4 UNIT FIVE: BUSINESS ORGANIZATIONS
21. When a limited liability company is dissolved, any member who did not
wrongfully dissociate may participate in the winding up process.
22. A joint venture resembles a partnership but is taxed like a corporation.
23. A joint venturer can be held personally liable for the venture’s debts.
24. Most courts apply the same principles to joint ventures as they apply to
corporations.
25. Joint venturers have the authority to enter into contracts for the business that
will bind the joint venture.
26. A syndicate may exist in the form of a partnership but not a corporation.
27. A group of individuals getting together to finance a particular project may form a
syndicate.
28. A joint stock company is a hybrid of a partnership and a corporation.
29. A syndicate may be organized as a corporation but not as a partnership.
30. Like a corporation, the ownership of a joint stock company is represented by
shares of stock.
31. A business trust resembles a corporation.
32. A cooperative must be incorporated.
33. The beneficiaries of a business trust are personally liable for its obligations.
34. The owners of an unincorporated cooperative have joint liability for its
obligations.
6 UNIT FIVE: BUSINESS ORGANIZATIONS
35. A business trust is created by a written trust agreement.
MULTIPLE CHOICE QUESTIONS
1. Fay is a member of Garden Groves LLC. Like other members of limited liability
companies, Fay’s liability for Garden Groves’s obligations resembles the liability
of
a. a member of a joint venture.
b. an owner of a sole proprietorship.
c. a partner of a partnership.
d. a shareholder of a corporation.
2. Dani is considering forms of business organization for her financial advisory
firm. Like most states, Dani’s state requires that to form a limited liability
company, she must file with a central state agency
a. articles of certification.
b. articles of formation.
c. articles of organization.
d. no specific documents.
3. Greta is a member of Hovercraft LLC. As a member, Greta is
a. a manager or officer, but not an owner.
b. an investor, but not a manager, officer, or owner.
c. an owner.
d. a participant, but not an investor, manager, officer, or owner.
4. Coco is considering forms of business organization for her concessions
business—Coco’s Cupcakes. Most states require that a limited liability
company have at least
a. no minimum number of members.
b. at least one member.
c. at least two members.
d. at least three members, including at least one general partner.
5. Mit-E Mart LLC was formed in New Jersey. Mit–E Mart’s members are Odel,
who is a citizen of New Jersey, and Pola, who is a citizen of New York. For
federal diversity jurisdictional purposes, Mit-E is a citizen of
a. all states.
b. New Jersey and New York.
c. New Jersey only.
d. no state.
6. 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.
7. Farm2Fork, LLC, is a limited liability company. Rather than distribute its profits
to its members, Energy wants to reinvest the profits in its business. For this
reason, Energy may prefer to be taxed as
a. a corporation.
b. a partnership.
c. a sole proprietorship.
d. a business trust.
8. Jeri and Knute are members of Lighthouse Tours LLC, a limited liability
company. With respect to Lighthouse Tours’s liability, as members, Jeri and
Knute are shielded from
a. all liability.
b. no liability.
c. personal liability.
d. “alter ego” liability.
9. Jordana is a member of Klondike Coffee, LLC, a limited liability company.
Jordana is liable for Klondike’s debts
a. in proportion to the total number of members.
b. to the extent of his capital contribution.
c. to the extent that the other members do not pay the debts.
d. to the full extent.
10. Jessica’s Jumpin’ Jelly Beans, LLC, is a limited liability company. Unless indi–
cated otherwise on Jessica’s federal tax form, the firm will be taxed as
a. a cooperative.
b. a corporation.
c. a joint venture.
d. a partnership.
11. 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.
12. 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.
13. Homer’s Remodeling, LLC, is a limited liability company. Among the members,
a dispute arises that their operating agreement does not cover. No statute
applies. The dispute is governed by the principles of
a. corporate law.
b. partnership law.
c. sole proprietorship law.
d. joint venture law.
14. CPA Accounting, LLC, is a limited liability company. If the law in CPA’s state is
like the law in most states, unless the members have agreed otherwise,
participants in the firm’s management will be considered to include
a. all members.
b. no member.
c. one member.
d. two members, including at least one general partner.
15. Kristal is a member of Laboratory CSI Services, LLC, a limited liability
company. Kristal can participate in the firm’s management
a. only to the extent that she assumes liability for the firm’s debts.
b. only to the extent of her investment in the firm.
c. to any extent.
d. to no extent.
16. Kirby is a manager of Jumpstart Fitness LLC, a limited liability company.
Jumpstart is formed in a state that imposes fiduciary duties on LLC managers.
Kirby owes these duties to
a. Jumpstart’s members.
b. Jumpstart’s suppliers.
c. Jumpstart’s customers.
d. none of the choices.
17. Simone is a manager of Rolling Hills Resort LLC, a limited liability company.
Rolling Hills is formed in a state that does not explicitly create fiduciary duties
for LLC managers but does require the exercise of good business judgment.
Unless a court rules otherwise, Simone owes fiduciary duties to
a. Rolling Hills’s members.
b. Rolling Hills’s suppliers.
c. Rolling Hills’s customers.
d. none of the choices.
18. Cecilia’s Day Spa, LLC, is a member-managed limited liability company. If the
law in Cecilia’s state is like the law in most states, unless the members have
agreed otherwise, voting rights are apportioned according to
a. capital contributions.
b. participation in management.
c. the number of members.
d. transactions with the firm.
19. Flip is a member of Great States Trucking LLC. Flip’s relationship to Great
States ends, but the firm continues to do business. This is
a. dissociation.
b. dissolution.
c. winding up.
d. wrongful.
20. Chocolate Sundry LLC’s members and managers are Devlin, Effie, and Flavia.
After Devlin’s relationship to the firm ends, Effie and Flavia agree to discontinue
the business. This is
a. illegal.
b. optional.
c. required.
d. wrongful.
21. Build-Rite Construction Corporation and Deals-R-Us, Inc., combine their efforts
to build an office and retail complex. Their form of business organization is
a. a business trust.
b. a joint stock company.
c. a joint venture.
d. a syndicate.
22. 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.
23. Shae’s Café and Tommy’s Grill form a joint venture. Shae 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.
24. Peyton, Qiana, and River form a syndicate to buy a professional basketball
franchise. This syndicate could be set up as
a. a joint venture.
b. a corporation.
c. a sole proprietorship.
d. a limited liability company.
25. Exotic Stuff Company and First Pier, Inc., form a business organization to
engage in importing and exporting. Its property is held in the names of the
members and its shareholders have personal liability. This business or–
ganization is
a. a business trust.
b. a joint stock company.
c. a joint venture.
d. a syndicate.
26. Owen, Paula, Quinn, and Rita combine to finance the building of Super Stores,
a shopping mall. Their selected form of business organization is an investment
group, or
a. a business trust.
b. a joint stock company.
c. a joint venture.
d. a syndicate.
27. National Capital Corporation and International Investments, Inc., form a joint
stock company. The ownership of a joint stock company is represented by
a. partnership certificates.
b. shares of stock.
c. title documents.
d. trust certificates.
28. Neverend Music Company and Monotonous Metronome Corporation form a
joint stock company. A joint stock company can be formed for, at the most,
a. an implied duration of not more than six months.
b. a perpetual existence.
c. a single activity or transaction.
d. a stated duration of not more than one year.
29. Jin, Karlo, and other consumers form Metro Purchasing 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 market.
30. As the trustee of a business trust, Dwight is required to
a. manage the trust and distribute its profits.
b. assume liability for the trust’s debts.
c. draft a written trust agreement.
d. none of the choices.
31. As the beneficiary of a business trust, Kevin’s liability for trust debts and
obligations is
16 UNIT FIVE: BUSINESS ORGANIZATIONS
a. limited to his capital investment in the trust.
b. limited to his personal assets.
c. nothing.
d. unlimited.
32. Consumers in Delta City form a business organization to provide, without profit,
an economic service to its members. This is
a. a business trust.
b. a cooperative.
c. a corporation.
d. a joint stock company.
33. 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.
34. Big Valu Grocery Stores is an unincorporated cooperative. Big Valu and other
unincorporated cooperatives are generally treated like
a. business trusts.
b. corporations.
c. joint stock companies.
d. partnerships.
35. Buyers Club is an incorporated cooperative. Like other incorporated coop–
eratives, Buyers Club distributes profits to its owners on the basis of
a. the amount of capital they contribute.
b. the degree to which they participate in management.
c. their transactions with the cooperative.
d. the requirements of the state in which it was incorporated.
ESSAY QUESTIONS
1. Petra, Queenie, and Randall want to form Sales-to-Infinity, LLC (limited liability
company). What should they provide in their operating agreement? If they fail to
include some important operating details, what determines these details?
2. Jade, Kelly, and Lila organize a nonprofit business—JKL Markets, Inc.—to buy
groceries from wholesalers and sell them to consumers who buy a membership
in JKL. 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 JKL
Markets? Is it significant that JKL is incorporated?
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