CHAPTER 19 – STARTING A BUSINESS: LLCS AND OTHER OPTIONS
TRUE/FALSE
1. Corporations have perpetual existence.
2. The most common form of business ownership is the corporation.
3. To be a close corporation, the business must be small, with no more than 20 owners and no more than
$500,000 in gross annual income.
4. Limited liability is a major advantage of a partnership as compared to a corporation.
5. Generally, a joint venture is a partnership created for one limited purpose.
6. Alan, a dentist, and his wife Martha, an attorney, can protect their personal assets with limited liability
from their business dealings by creating and operating a professional corporation together.
7. A partnership is a taxable entity, separate from the partners.
8. Corporations have a distinct advantage over other forms of business organization in the area of
taxation.
9. Franchise fees can be costly, but they are usually payable over a number of years, after profits are
generated from the business.
10. A limited liability company, unlike a Subchapter S corporation, can have members that are
corporations, partnerships, or nonresident aliens.
11. To form an LLC, a charter and an operating agreement must be filed with the Secretary of State in the
jurisdiction where the business will operate.
12. The Federal Trade Commission will not allow the sale of franchises that are unfair to the franchisee.
13. Filings are required in order to form and operate a limited liability partnership.
14. A “socially conscious organization” is a non-profit organization that pledges to use 10% of its
revenues to benefit environmental or social causes.
15. To become a “socially conscious organization,” typically three-fourths of the investors must approve,
and they must undergo a certification process.
MULTIPLE CHOICE
1. Debra and Lawrence have an equal partnership. This year, after expenses, the partnership had a profit
of $200,000. Debra and Lawrence will each pay taxes on:
a.
whatever they receive from the partnership.
b.
$50,000.
c.
$100,000.
d.
None of the above. The partnership itself will pay the taxes on the business’s profit.
2. All the business forms listed below have limited liability except the:
a.
limited liability company.
b.
general partnership.
c.
Subchapter “S” corporation.
d.
corporation.
3. Rachel and Cyndi started a retail business called Zebra Toy Company. The business is operated as a
partnership. Under partnership law:
a.
Rachel is personally liable for any business contracts entered into by Cyndi.
b.
Rachel is personally liable for any business debts, regardless of whether she or Cyndi
created the obligation.
c.
Cyndi is personally liable for any negligent act committed by Rachel in the scope of the
business activity.
d.
All the above.
4. Seventy farmers in Morgan County joined together to hire Rusty to spray their crops one time (with his
dustcropper plane). These farmers have formed a:
a.
business trust.
b.
cooperative.
c.
franchise.
d.
joint venture.
5. The Federal Trade Commission requires franchisors to:
a.
give prospective franchisees an offering circular at least 14 business days prior to the
signing of a contract or payment of any money.
b.
disclose the exact amount of the initial investment required.
c.
disclose any litigation the company has ever been involved in
d.
disclose how many franchisees have gone out of business in the prior five years.
6. The factor that most distinguishes an “S” corporation from a “C corporation” is:
a.
its organizational structure.
b.
its treatment of shareholders for income taxation purposes.
c.
its requirement of restrictive transfer rights of the shares.
d.
its small cost of formation.
7. The business form that is taxed as a partnership and gives all owners limited liability, is:
a.
a close corporation.
b.
a limited partnership.
c.
a limited liability company.
d.
a general partnership.
8. Which of the following transactions would be considered by the IRS to be a taxable sale of assets?
Changing the form of business from:
a.
a corporation to an LLC.
b.
a partnership to an LLC.
c.
an LLC to a corporation.
d.
a sole proprietorship to an LLC
9. All of the following are characteristics of a closely held corporation EXCEPT:
a.
the shares are publicly traded.
b.
the corporation can typically operate without a board of directors.
c.
the shareholders usually restrict share transfer.
d.
minority shareholders are provided more protection than in regular corporations.
10. Which of the following would not typically be personally liable for the debts of the business?
a.
A sole proprietor.
b.
A partner in a general partnership.
c.
A general partner in a limited liability limited partnership.
d.
A general partner in a limited partnership.
11. James was a partner in a large firm. He died unexpectedly. His son, Frank, wanted to take over for his
father in the partnership and was well qualified to do the work his father had done. Which statement
best describes Frank’s rights in the partnership if he inherits the interest?
a.
Frank has a right to take over for his father in the partnership.
b.
Frank is entitled to the value in the partnership, but not to become a full partner.
c.
Frank has no rights to his father’s partnership interest.
d.
Frank may become a partner only if his father’s will specified such action.
12. Jill was a limited partner in a retail business that was sued by a customer who fell in the store. The
customer claimed the business was negligent in caring for its floors. Which statement best describes
Jill’s potential liability?
a.
Jill has no potential liability to the customer.
b.
Jill can be held personally liable to the customer since she is a partner.
c.
Jill can only be liable to the amount of her investment.
d.
Jill is personally liable, but the woman must first collect from the general partners before
collecting from Jill.
13. The form of business ownership that is the most easily transferable is the:
a.
general partnership.
b.
corporation.
c.
limited liability company.
d.
limited partnership.
14. The corporate form of business:
a.
was first known and used by the Greeks and then spread through the Romans to England.
b.
was not known until about 1737 when Sir Francis LaRue developed the concept.
c.
was first allowed in the State of New York around 1811 and is considered to be an
American creation.
d.
None of the above.
15. The advantage of a corporation over a partnership is:
a.
shares are easily transferable to another person.
b.
perpetual existence.
c.
it is easier to raise funds.
d.
All the above.
16. What federal agency requires that the seller of a franchise give the potential buyer an offering circular
and audited financial statements?
a.
The Securities and Exchange Commission (SEC).
b.
The Interstate Commerce Commission (ICC).
c.
The Federal Trade Commission (FTC).
d.
The Franchise Sales Commission (FSC).
17. Which of the following forms of organization is a compromise between starting one’s own business as
an entrepreneur and working for someone else as an employee?
a.
Limited liability company.
b.
Business trust.
c.
Close corporation.
d.
Franchise.
18. Harold and Zack have pooled their money together to buy real estate but have filed no formal papers to
form a business. Harold, a lawyer, handles all the legal matters and Zack, a real estate broker, finds
buyers for the property they have subdivided. Harold and Zack are engaged in a:
a.
partnership.
b.
close corporation.
c.
joint venture.
d.
business trust.
19. LLCs have become popular for all except which of the following reasons:
a.
management flexibility.
b.
tax status as a partnership.
c.
uniformity of law.
d.
limited liability.
20. Charles and Ellen, an unmarried couple, run an ice cream store. The business is not incorporated and
they have filed no formation papers with the state. Their business is a:
a.
sole proprietorship.
b.
partnership.
c.
joint venture.
d.
limited liability company.
21. E. I. James is a writer with a best selling novel. He wishes to create a corporation called “James, Inc.”
He will be the only shareholder. Can James incorporate his business of writing?
a.
Yes, this would be the incorporation of a sole proprietorship.
b.
No, the law requires at least two people to be shareholders of a corporation.
c.
No, the law does not permit a person to, in effect, incorporate himself.
d.
Only if he forms an S Corporation.
22. Daniel, his parents, and three brothers own all the stock of their family farm corporation. This
corporation, which is taxed as a corporation, is probably:
a.
an S corporation.
b.
a C corporation.
c.
a closely held corporation.
d.
an LLC.
23. An S Corporation cannot have more than ____ shareholders.
a.
100
b.
75
c.
50
d.
25
24. The term “S Corporation” comes from:
a.
the Internal Revenue Code.
b.
the FTC rules.
c.
the U.S. Constitution.
d.
state corporation law.
25. Martin, Leah, and Pablo are considering forming a business. What factors should they consider in
making a choice of organization?
a.
Ease of creation and operation.
b.
Whether there is personal liability for the owners.
c.
How the owners will be taxed.
d.
All of the above.
ESSAY
1. Trudy wishes to buy a national franchise. What information is the seller legally required to provide
before she buys the franchise?
2. What is a limited liability company? Explain the advantages and disadvantages of this type of business
ownership?
3. Compare and contrast the following forms of business organization: sole proprietorship, general
partnership, limited partnership, limited liability company, and corporation as to ease of formation,
liability of owners, management, and tax implications.
ANS:
4. Andy wants to start his own business. He has decided to rent space in a “strip mall” and open a pet
shop. Additionally, he will provide dog grooming services. He figures he can do almost everything
himself, though he will need to hire a part-time employee on an “as needed” basis. His friend, Lacy,
has agreed to work when needed.
Andy is considering operating his business as a sole proprietorship. What are the primary legal
advantages and disadvantages to this form of business ownership for Andy’s pet shop?
5. Briefly discuss the limitations on a corporation electing “S corporation” status.
6. In order to obtain limited liability, Tom and Doris formed an LLC to operate their catering business.
They sometimes deposited the proceeds from catering jobs into their personal checking accounts and if
they needed to pay personal bills and were short of funds, they used the business account. If creditors
of the business cannot get payment for their invoices, is there anything a court can do to help the
creditors?