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Chapter 18
Limited Liability 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 a citizen of every state of which their members are
citizens.
2. Members of limited liability companies are shielded from personal liability in
many situations.
3. The alter-ego theory can be applied to a corporation, but not a limited liability
company.
2 TEST BANK—UNIT FOUR: THE BUSINESS ENVIRONMENT
4. Limited liability companies are entities apart from their owners.
5. A limited liability company can be taxed as a partnership.
6. The law governing limited liability companies is uniform.
7. A limited liability company can be held liable for any loss or injury caused by
the wrongful acts or omissions of its members.
8. For federal income tax purposes, one-member limited liability companies are
not taxed.
9. Most states apply to a limited liability company (LLC) formed in another state
the law of the state where the LLC was formed.
10. Limited liability company operating agreements typically contain provisions
relating to management.
11. A limited liability company must be managed by nonmembers.
12. If a limited liability company (LLC) agreement does not cover a topic, the state
LLC statute will govern.
13. A member of a limited liability company (LLC) has the power and the right to
dissociate from the LLC at any time.
14. 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.
15. 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.
16. A limited liability partnership may exempt its partners from personal liability for
any partnership obligation.
17. In a limited partnership, a limited partner has full responsibility for the
partnership and for all its debts.
18. In a limited partnership, a general partner’s dissociation from the firm normally
will lead to dissolution unless all partners agree to continue the business.
4 TEST BANK—UNIT FOUR: THE BUSINESS ENVIRONMENT
19. A limited partnership cannot be dissolved by court decree.
20. A limited liability limited partnership is a type of limited partnership.
MULTIPLE CHOICE QUESTIONS
1. 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.
2. 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.
3. 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.
CHAPTER 18: LIMITED LIABILITY BUSINESS FORMS 5
b. articles of formation.
c. articles of organization.
d. no specific documents.
4. 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.
5. 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.
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. 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.
8. 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.
9. 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.
10. Round-Up Ranch and Smith & Jones, Accountants, are limited liability
partnerships (LLPs). The major features of an LLP are that it limits the personal
liability of the partners and
a. it allows the partnership to continue as a pass-through tax entity.
b. LLP statutes do not vary from state to state.
c. it can only do business in the state in which it was formed.
d. only a few states have enacted LLP statutes.
11. Hillside Vineyards is a family limited liability partnership. All of the partners
must be
a. natural persons only.
b. natural persons or persons acting as fiduciaries for natural persons.
c. persons acting as fiduciaries for natural persons only.
d. related.
12. Nazih and Ovidia are limited partners in Physicians Medical Center, a limited
partnership. In terms of the firm’s books and information regarding partnership
business, Nazih and Ovidia are entitled to
a. access in proportion to their participation in management of the firm.
b. access to the parts that directly relate to their capital contributions.
c. no access.
d. complete access.
13. Nikki and Orlando are limited partners in Port City Exports, a limited partner-
ship. To avoid personal liability for partnership obligations, they must not
a. acquire an interest in the firm.
b. contribute property to the firm.
c. engage in activities independent of the firm’s business.
d. participate in the firm’s management.
14. Commercial Credit & Finance is a limited partnership. Derry, Eleni, and Frey
are the general partners. Derry dies. The partnership can
a. continue only after a distribution of its assets.
b. continue only as a general partnership.
c. continue only if Eleni and Frey consent.
d. not continue because Derry’s death dissolves the firm.
15. Buckley is a general partner in Cut-Rate Shipping, LLLP, a limited liability lim-
ited partnership, which cannot pay its debts. Buckley is personally liable for the
debts
a. in proportion to the number of partners in the firm.
b. to no extent.
c. to the extent of his capital contribution.
d. to the full extent.
16. Gizelle, Haya, and Ivy do business as Janitorial Services, Limited Partnership.
After Gizelle’s relationship to the firm ends, Haya and Ivy agree not to continue
the business. This is
a. dissociation.
b. dissolution.
c. gross negligence.
d. simple misconduct.
Fact Pattern 18-1 (Questions 17–19 apply)
Brad is a general partner, and Carlos and Dora are limited partners, in Eastside
Physicians, a medical clinic and limited partnership.
17. Refer to Fact Pattern 18-1. Carlos’s assignment of his interest in Eastside to
Good Credit Corporation results in
a. nothing with respect to Eastside’s existence.
b. the maturity of Eastside’s debts.
c. the suspension of Eastside’s business.
d. the termination of Eastside’s legal existence.
18. Refer to Fact Pattern 18-1. Brad’s dissociation from the firm results in
a. nothing with respect to Eastside’s existence.
b. the maturity of Eastside’s debts.
c. the suspension of Eastside’s business.
d. the termination of Eastside’s legal existence.
19. Refer to Fact Pattern 18-1. Eastside is dissolved and its assets are collected,
liquidated, and distributed. This results in
a. nothing with respect to Eastside’s existence.
b. the maturity of Eastside’s debts.
c. the suspension of Eastside’s business.
d. the termination of Eastside’s legal existence.
20. Hugh is a limited partner and Ida is a general partner in HI Volume, a limited
partnership. Joy is one of HI Volume’s creditors. On HI Volume’s dissolution,
the party whose rights have the first priority to the firm’s assets is
a. Hugh and Ida.
b. Hugh only.
c. Ida only.
d. Joy only.
ESSAY QUESTIONS
1. Jack and Keri want to form Local Motion, LLC, a limited liability company, to
offer metro delivery and transport services. With respect to the management of
Local Motion, what are the members’ options?
2. Ron is a limited partner, and Steve is a general partner of Total Financial
Management, a limited partnership. Steve manages the firm. Ron has some
expertise in the area and believes that he could do a better job than Steve at
managing, but he abstains from becoming actively involved. Why might he
choose to keep away from management activities?
