The Legal Environment of Business and Online Commerce, 7e (Cheeseman)
Chapter 15 Limited Liability Companies, Limited Liability Partnerships, and Special
Forms of Business
1) A limited liability company is an incorporated business entity.
2) Limited liability companies are created by federal law.
3) LLCs are treated as artificial persons who can sue or be sued, enter into and enforce contracts.
4) A member or a shareholder is the owner of an LLC.
5) The Uniform Limited Liability Company Act is a model act that provides comprehensive and
uniform laws for the formation, operation, and dissolution of LLCs.
6) The ULLCA is federal law and is valid across the United States.
7) An LLC is taxed at the entity level.
8) The income or losses of an LLC “flow through” to the members’ individual income tax returns
which avoids double taxation.
9) An LLC can be organized in only one state.
10) A limited liability company cannot be abbreviated as LC.
11) The existence of an LLC begins when the articles of organization are filed.
12) An LLC cannot amend its articles of organization.
13) An LLC organized in the United States is considered a domestic LLC throughout the United
States.
14) Articles of organization are documents that evidence a member’s ownership interest in an
LLC.
15) An operating agreement is a document that states the terms for converting an existing
business to an LLC.
16) An operating agreement can be amended orally.
17) Profits and losses from an LLC do not have to be distributed in the same proportion.
18) Distributional interest refers to a member’s ownership interest in an LLC.
19) Agents of an LLC are not permitted to enter into contracts on behalf of the LLC.
20) An LLC is not liable for injury caused by the LLC member while acting within the ordinary
course of business of the LLC.
21) Members of LLCs are not personally liable for the LLC’s debts, obligations, and liabilities.
22) Managers of LLCs are not personally liable for the debts, obligations, and liabilities of the
LLC they manage.
23) If a member or manager of an LLC is found to be a tortfeasor, he or she is not personally
liable for the injury or death.
24) The United States does not permit an LLC to be member-managed.
25) In a manager-managed LLC, it is necessary that the manager is a member of that LLC.
26) In a manager-managed LLC, amending the articles of organization cannot be delegated to the
managers.
27) A manager does not owe a duty of loyalty to the LLC as he or she is not a member of the
LLC.
28) The duty of care for managers and members includes the duty not to usurp the LLC’s
opportunities.
29) A member of a manager-managed LLC who is not a manager owes no fiduciary duty of
loyalty or care to the LLC or its other members.
30) A limited liability partnership has no general partner.
31) Partners of LLPs are personally liable for the LLPs’ debts, and obligations, and liabilities.
32) A franchisee is established when parties of a general partnership conduct business outside the
state of their incorporation.
33) In a processing plant franchise, the franchisor licenses the franchisee to make and sell its
products or services to the public from a retail outlet serving an exclusive geographical territory.
34) In an area franchise, the franchisor authorizes the franchisee to negotiate and sell franchises
on behalf of the franchisor.
35) A distributorship franchisee is called a subfranchisor.
36) In a franchise agreement, by default, the franchisor and franchisee are separate legal entities.
37) A franchisor deals with the franchisee as an independent contractor.
38) Unless otherwise states, the franchisor is liable for the torts of its franchisee.
39) Licensing refers to a business arrangement that occurs when the owner of intellectual
property contracts to permit another party to use the intellectual property.
40) A franchise is an example of a license.
41) An LLC is a(n) ________.
A) unincorporated business entity
B) incorporated business entity
C) cooperative entity
D) proprietorship
42) Which of the following is true of an LLC?
A) An LLC is a creature of federal law.
B) An LLC is regarded a separate legal entity.
C) An LLC cannot hold title to property.
D) The owners of LLC are called general partners or specific partners.
43) The ________ is a model act that provides comprehensive and uniform laws for the
formation, operation, and dissolution of LLCs.
A) Williams Act
B) Securities Exchange Act
C) ULLCA
D) ULPA
44) The owner of an LLC is called ________.
A) general partner
B) limited partner
C) proprietor
D) member
45) Which of the following is true of the ULLCA?
A) It provides comprehensive laws for the formation of corporations.
B) It provides uniform laws for the dissolution of LLCs.
C) It is a state law that is uniform across the United States.
D) It governs the operation of proprietorships and LLPs.
46) Which of the following is true of LLC taxation?
A) An LLC is taxed as a corporation in all general cases.
B) Income or losses of an LLC do not flow through to the members’ individual income tax
returns.
C) Members of an LLC are subject to double taxation.
D) An LLC is not taxed at the entity level.
47) Which of the following is true of an LLC formation?
A) Doctors and lawyers cannot operate practices as LLCs.
B) An LLC has to be organized in every state that it operates.
C) “LC” cannot be used to denote an LLC.
D) An LLC is a creation of federal law.
48) In states where an LLC may be organized by only one member, ________ can obtain the
benefit of the limited liability shield of an LLC.
A) corporations
B) sole proprietors
C) LLPs
D) general partnerships
49) ________ refer to the formal documents that must be filed at the secretary of state’s office of
the state of organization of an LLC to form the LLC.
A) Operating agreements
B) Certificates of interest
C) Articles of organization
D) Articles of amendment
50) An LLC is a ________ in the state in which it is organized.
A) sole proprietorship
B) domestic LLC
C) term LLC
D) general partnership
51) An LLC that was organized in Alabama and operating in Texas with no operations outside
the U.S. is considered a ________ in Texas.
A) foreign limited liability company
B) limited liability partnership
C) domestic limited liability company
D) general partnership
52) Sam Muller and Toby Richardson organize an LLC in the state of Delaware. In the articles of
organization, they specify the duration of the LLC as “25 years from the date of filing the articles
of organization.” Which of the following true in this context?
A) The LLC is invalid, as it does not specify a date of termination.
B) The LLC may be dissolved at will any time after 25 years from the date of filing the articles
of organization.
C) Muller and Richardson have organized a valid term LLC.
D) Muller and Richardson have organized an at-will LLC.
53) A(n) ________ refers to a document that evidences a member’s ownership interest in an
LLC.
A) certificate of interest
B) articles of organization
C) operating agreement
D) agreement of conversion
54) The certificate of interest acts the same as a(n) ________ issued by a corporation.
A) promissory note
B) stock certificate
C) deposit note
D) initial public offer
55) A(n) ________ refers to an agreement entered into among members that governs the affairs
and business of the LLC and the relations among members, managers, and the LLC.
A) certificate of interest
B) articles of organization
C) operating agreement
D) agreement of conversion
56) Peter, Preston, and Penny organize an LLC in the month of January. While composing the
operating agreement, they forget to include the amendment clause. Six months later, the situation
demands an amendment to the operating agreement. Which of the following would best apply in
this scenario?
A) The operating agreement can be amended if all three members approve.
B) The operating agreement cannot be amended as it contains no amendment provision.
C) The operating agreement can be amended with the affirmative majority of all shareholders.
D) The operating agreement can be amended only 60 days after a new amendment provision is
included.
57) In which of the following cases does the conversion of an existing business to an LLC take
effect?
A) when the articles of organization are filed with the secretary of state
B) when the members enter into an agreement of conversion
C) when an operating agreement is finalized by members
D) when the first certificate of interest is issued
58) Philip and Deborah form an LLC. Philip contributes $50,000 capital, and Deborah
contributes $75,000 capital. They do not have an agreement as to how profits are to be shared. If
the LLC makes $100,000 profit in its first year, how will the profit be divided among the
members?
A) Philip gets $30,000 and Deborah gets $70,000.
B) Philip gets $50,000 and Deborah gets $50,000.
C) Philip gets $25,000 and Deborah gets $75,000.
D) Philip gets $35,000 and Deborah gets $65,000.
59) Gerard and Tony organize an LLC by investing $55,000 and $45,000 respectively. The
operating agreement states that profits are to be shared in the ratio of 55:45 between Gerard and
Tony and makes no mention of sharing losses. The LLC incurs a loss of $100,000 in its first
year. How is this loss shared?
A) Both Gerard and Tony have to pay $50,000 each.
B) Gerard pays $55,000 while Tony pays $45,000.
C) Gerard pays $45,000 while Tony pays $55,000.
D) Gerard and Tony are not liable for the losses of the LLC.
60) Which of the following best defines the term distributional interest?
A) the ratio in which profit is distributed among members of an LLC
B) the process of distributing profits or losses according the capital investment of the member
C) the constitution of management of the LLC based on the extent of each member’s financial
investment
D) a member’s ownership interest in an LLC that entitles the member to receive distributions of
money and property from the LLC
61) A member’s ownership interest in an LLC is called a ________.
A) certificate of interest
B) distributional interest
C) collateral interest
D) creditor’s interest
62) A member’s distributional interest in an LLC is ________ and may be transferred in whole or
in part.
A) a vote
B) a proxy
C) personal property
D) an authority in management
63) John, Nathan, and Julio form JNJ, LLC with equal capital investment each. On his way to a
business meeting with clients of JNJ, Nathan accidentally injures Jessica in a car accident. Which
of the following is true in this scenario?
A) Jessica can claim damages from JNJ, LLC as she was injured in the ordinary course of
business.
B) Jessica can only claim damages from Nathan and not from JNJ, LLC.
C) Jessica can choose to claim damages from any one of the three.
D) John, Nathan, and Julio have equal personal liability to Jessica’s injuries.
64) Members of an LLC have ________ liability.
A) limited
B) unlimited personal
C) unlimited capital
D) strict
65) Which of the following is true of liabilities of LLCs?
A) Members of the LLC are liable to the extent of their capital contribution.
B) Managers of LLCs are personally liable for the debts, obligations, and liabilities of the LLC.
C) LLCs are not liable for any loss or injury caused by their employees.
D) LLCs are not liable for losses caused due to negligence of their managers during the ordinary
course of business.