471
Chapter 38
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
B1. A limited liability company can be taxed as a corporation.
B2. Limited liability companies (LLCs) are governed by a federal LLC statute.
B3. The owners of a limited liability company enjoy limited liability.
B4. A limited liability company can sue or be sued, enter into contracts, and hold title to
property.
472 TEST BANK B—UNIT EIGHT: BUSINESS ORGANIZATIONS
B5. A limited liability company is a citizen of every state in which it does business.
B6. The members of a limited liability company (LLC) are personally liable for the wrongful
acts or omissions of the LLC.
B7. The alter-ego doctrine can be applied to a limited liability company.
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
automatically taxed as sole proprietorships.
B10. Most states apply their limited liability company (LLC) statutes to an LLC formed in
another state.
B11. If there is no limited liability company (LLC) agreement covering a topic under dispute,
the state LLC statute will govern the outcome.
CHAPTER 38: LIMITED LIABILITY COMPANIES & SPECIAL BUSINESS FORMS 473
B12. A limited liability company must be managed by its members.
B13. Most limited liability company statutes specify how members’ voting rights must be
apportioned.
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
have his or her interest in the LLC bought out by the other members.
B16. When a limited liability company is dissolved, any member who did not wrongfully
dissociate may participate in the winding up process.
B17. Most courts apply the same principles to joint ventures as they apply to corporations.
B18. Joint venturers have the authority to enter into contracts for the business that will
bind the joint venture.
474 TEST BANK B—UNIT EIGHT: BUSINESS ORGANIZATIONS
B19. A joint stock company is a hybrid of a partnership and a corporation.
B20. A cooperative must be incorporated.
MULTIPLE CHOICE QUESTIONS
B1. Jessica’s Jumpin’ Jelly Beans, LLC, is a limited liability company. Unless indicated
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.
B2. China Bank 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, China Bank
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.
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B3. 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 participant in a joint venture.
b. an owner of a sole proprietorship.
c. a partner of a partnership.
d. a shareholder of a corporation.
B4. High Pointe LLC’s members include Irvin. For purposes of holding title to property,
High Pointe is
a. an aggregate of Irvin 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.
B5. Lars is considering forms of business organization for his auto repair firm. Like most
states, Lars’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.
476 TEST BANK B—UNIT EIGHT: BUSINESS ORGANIZATIONS
B6. Might-E Mart LLC was formed in New Jersey. Might–E Mart’s members are Oscar, who
is a citizen of New Jersey, and Peri, who is a citizen of New York. For federal diversity
jurisdictional purposes, Might-E is a citizen of
a. all states.
b. New Jersey and New York.
c. New Jersey only.
d. no state.
B7. 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.
B8. 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.
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B9. Kris is a member of Laboratory Services, LLC, a limited liability company. Kris 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.
B10. 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.
B11. Fibreboard Construction, Inc., and Gated Community Corporation form a joint
venture. A joint venture is usually formed for
a. an implied duration of not more than six months.
b. a single activity or transaction.
c. a stated duration of not more than one year.
d. a perpetual existence.
B12. 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.
478 TEST BANK B—UNIT EIGHT: BUSINESS ORGANIZATIONS
B13. 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.
B14. 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 organization is
a. a business trust.
b. a joint stock company.
c. a joint venture.
d. a syndicate.
B15. Loni, Michel, and Nita are investors in Oceanic Exploration, a business trust. A
business trust is managed by its
a. directors and officers.
b. general partners.
c. managing members.
d. trustees.
B16. As the trustee of a business trust, Dwight 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.
CHAPTER 38: LIMITED LIABILITY COMPANIES & SPECIAL BUSINESS FORMS 479
B17. Evelyn 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.
B18. 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 marketplace.
B19. Big Valu Grocery Stores is an unincorporated cooperative. Big Valu and other
unincorporated cooperatives are often treated like
a. business trusts.
b. corporations.
c. joint stock companies.
d. partnerships.
B20. Consumers in Bayside 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.
480 TEST BANK B—UNIT EIGHT: BUSINESS ORGANIZATIONS
ESSAY QUESTIONS
B1. Capital Investment Corporation and Durable Goods, Inc., form a business trust. Excel
Company and Finest Corporation form a joint stock company. Growing Acres
Corporation and Hybrid Farms, Inc., form an incorporated cooperative. What features
do these combinations of business organization have in common?
B2. 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?