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A sole proprietor owns the entire business but doe not receive all of the profit.

F

In choosing a form of business organization for a new enterprise, important factors include the liability of the owner.

T

The parties to a franchise arrangement may be two corporations.

T

A sole proprietor has unlimited liability for all obligations that arise in doing business.

T

In raising capital, a sole proprietor is limited to his or her personal funds—a personal loan is not possible.

F

The laws governing franchising are primarily designed to protect franchisors from dishonest franchisees.

F

Franchisors are not required to disclose certain material facts to prospective franchisees.

F

A franchisor may retain stringent control over the training of personnel involved the operation of a franchise.

T

A franchisor can set the retail prices for the goods that a franchisee sells.

F

Most franchise agreements provide that notice of termination of a franchise is not necessary.

F

Good faith and fair dealing are important in terminating a franchise relationship.

T

For most purposes, most states treat a partnership as an aggregate of its members.

F +

Joint ownership of property does not in and of itself create a partnership.

T +

A partnership agreement can include almost any terms that the partners wish.

T 390

The majority rule controls decisions on ordinary matters connected with partnership business.

T

Property acquired by the partnership is the property of the partners individually.

F

A partner is entitled to make secret profits or put self-interest before his or her duty to the interest of the partnership.

F

In a general partnership, the acts of one partner in the ordinary course of business subjects the other partners to personal liability.

T

A partnership ends if one partner dissociates from the firm.

F

If a partnership's liabilities are greater than its assets, the partners bear the losses.

T

Leigh wants to go into the business of construction contracting. Among the reasons that would probably convince Leigh to set up his business as a sole proprietorship would be
a. its greater organizational flexibility.
b. its limited liability.
c. its perpetual existence.
d. the ease of transferring the business to other family members.

A

Kelly, the owner of Llama Farms, a sole proprietorship, wants to obtain additional busi¬ness capital but to maintain control. This can best be accomplished by
a. borrowing funds.
b. bringing in partners.
c. issuing stock.
d. selling the business.

A

Hometown Realtors, Inc., sells a franchise to Group Sales Company. Group Sales is
a. a franchisee.
b. a franchisor.
c. a partner.
d. a sole proprietor.

A

Mello Coffee Shops, Inc., sells a franchise to Noah's Arch, a café. Mello is
a. a franchisee.
b. a franchisor.
c. a partner.
d. a sole proprietor.

B

Sylvester buys a franchise from Resistance Athletic Shoes Inc. This relationship, like all other franchise relationships, is governed by
a. contract law.
b. no law.
c. the Franchise Disclosure Document, or FDD.
d. the Uniform Commercial Code.

A

Nicole is interested in buying a franchise from Oz Oysters Inc. For Nicole to make an informed decision concerning this purchase, Oz must disclose in writing or online
a. general estimates of costs and sales, but not the basis for them.
b. material facts such as the basis of projected earnings figures.
c. no information.
d. start-up requirements, but not renewal conditions.

B

Vim+Vigor Fitness Corporation uses a Web site to provide downloadable information to prospective franchises. This online information is the equivalent of an offer that must comply with
a. no law.
b. the Uniform Commercial Code.
c. the Federal Trade Commission's Franchise Rule.
d. the state Franchise Disclosure Document, or FDD.

C

Dingo Bangles Company wants to present information in "disclosure documents" via the Internet to prospective franchisees. Among other legal requirements with which Dingo must comply, prospective franchisees must
a. agree to settle any lawsuits that may arise over the documents.
b. be able to download or save all electronic documents.
c. provide e-mail addresses for Dingo to verify users' authenticity.
d. register with the Federal Trade Commission via Dingo's Web site.

B

Cluckee Chick' Corporation provides its prospective franchisees with projected earnings figures based on actual data. Cluckee Chick' must also disclose
a. the number and percentage of franchisees that achieved the figures.
b. hypothetical examples of potential earnings.
c. an answer to the entrepreneur's question, "How much will I make?"
d. none of the choices.

A
NAT: AACSB Communication

A franchise agreement between Software2 Company and Games3, Inc., is silent on a time for termination of the franchise. Software2 may
a. never terminate.
b. terminate at any time.
c. terminate on reasonable notice.
d. terminate on three days notice.

C

Gage buys from Fishing Guide Corporation the exclusive right to sell Fishing Guide rods and reels in a certain area. Their franchise agreement requires Gage to pay certain administrative expenses. Their agreement may also require Gage to pay a percentage of the franchisor's
a. advertising costs.
b. personal expenses.
c. retirement income.
d. none of the choices.

A

Tawny buys a Super Grill franchise. Super Grill requires that its fran¬chi¬sees buy its products for every phase of their op¬erations. Be¬cause Tawny wishes to buy less expensive products, she challenges the re¬quirement. Her best argument is probably that the re¬quirement violates
a. the implied covenant of good faith and fair dealing.
b. the Federal Trade Commission's Franchise Rule.
c. the federal antitrust laws.
d. the Uniform Commercial Code.

C

Pronto Tacos LLC grants a franchise to Omar to open and operate a Pronto Tacos restaurant. Pronto will likely charge Omar
a. an initial fee or lump sum price for the franchise license.
b. a percentage of Omar's weekly payroll expense.
c. an amount of Omar's monthly overhead savings, if any.
d. none of the choices.

A

Ben, who runs a livestock breeding business, owes the Circle C Ranch $40,000. Ben agrees to pay the Circle C a percentage of his profits each month until the debt is paid. Because of this agreement, the Circle C is
a. Ben's creditor and partner.
b. Ben's creditor only.
c. Ben's partner only.
d. neither Ben's creditor nor his partner.

B

Hollister and Gladys do business as partners in Frothy Confections. For federal income tax purposes, Frothy Confections would be treated as
a. a pass-through entity.
b. a natural person.
c. a tax-paying entity.
d. a partnership by estoppel.

A

Parker and Oscar sign a partnership agreement to do business as "Parker's Plumbing" without specifying a duration. This partnership is terminable
a. at any time by either partner.
b. only after a reasonable term.
c. only if Parker dissociates from the firm.
d. only if Oscar dissociates from the firm.

A

Ryder and Sergei are partners in Timberline Gear, which sells mountain- and rock-climbing equipment. Ryder manages the business. Unless the partnership agreement states otherwise, Ryder is
a. entitled to compensation in proportion to his effect on the business.
b. entitled to compensation in proportion to his effort.
c. entitled to compensation in proportion to his capital contribution.
d. not entitled to compensation.

D +

Trina and Uri do business as Value Gems. In acting on the firm's behalf in a deal with World Diamond Exchange, Trina recklessly exceeds what Value Gems can afford to pay, causing damage to the firm. Trina is
a. liable for breach of the duty of care.
b. liable for breach of the duty of economic sense.
c. liable for breach of the duty of loyalty.
d. not liable.

A

Cody is a partner in Derivative Investment Service (DIS). Cody can inspect
a. all of DIS's books and records.
b. DIS's books and records only as the firm's management permits.
c. DIS's books and records only for a reasonable purpose.
d. DIS's books and records relating to Cody's capital contribution only.

A

Mead, Nero, and Olen do business as Pipe & Plumbing Services, a partnership. After Mead's relationship to the firm ends, Nero and Olen agree to discontinue the business. This is
a. dissociation.
b. dissolution.
c. gross negligence.
d. simple misconduct.

B

Ewa, the owner of First-Rate Bild-It, is a sole proprietor. What are the chief characteristics, advantages, and disadvantages of this form of busi¬ness organization? Ewa wants to obtain additional capital to expand First-Rate, but she does not want to lose control of the firm. As a sole proprie¬tor, what is her best option to attain these goals?

A sole proprietorship is the simplest form of business orga¬nization. In a sole proprietorship, the owner and the business are the same. Anyone who creates a business without designating a specific form for its organization is doing business as a sole proprietorship. An advan¬tage of the sole proprietorship is its greater organizational flexibility over other forms of business organization. The owner makes all of the deci¬sions and can operate the enterprise without any formalities. A signifi¬cant disadvantage of this form of organization, however, is that unlike most other forms of business organization, there are no limits on the li¬ability of the owner for the debts and obligations of the firm. Another dis¬advantage of the sole proprietorship form of doing business is indicated by Ewa's dilemma in this question. The ability of a sole proprietor to raise capital while maintaining control, and retaining the same form, is lim¬ited chiefly to borrowing funds. Bringing in partners would convert the business to a partnership. Issuing stock would require incorporating or establishing another form of business. Selling the business would sacri¬fice all control. The only way to obtain additional business capital without accumulating it through business profit is by borrowing funds.
PAGES: 380-381

Irwin was the manager of Highlights Grill, a sports bar and restaurant. Irwin opened a bank account in Highlights's name, signing the account signature card as "owner." Jody, who was often at Highlights and had free access to its office, told others that she was "an owner" and "a partner." She also opened a bank account in Highlights's name, and signed the account signature card as "owner." Irwin told Kelton, the owner of Natural Cheeses, Inc., that Jody was a member of a partnership that owned Highlights. On this basis, Natural Cheeses delivered its goods to Highlights on credit. In fact, Highlights was owned by a corporation. When the unpaid account totaled more than $10,000, Natural Cheeses filed a suit against Jody to collect. On what basis might Jody be liable for the debt?

The theory under which Jody would most likely be liable for Highlights's debt to Natural Cheeses is partnership by estoppel. The first requirement of this theory is a representa¬tion, by a nonpartner or by another with the nonpartner's consent, that the nonpartner is a partner. The second requirement is reliance on that representation. In this case, Natural Cheeses could prove both elements. Both Irwin and Jody made representations with respect to Jody's status in relation to Highlights—they both signed bank cards as "owner," Jody was often at Highlights and had free access to its office, Jody told others that she was a "partner" in the business, which is what Irwin also told Kelton. As for the reliance element, Natural Cheeses extended credit to Highlights only because Natural Cheeses believed that Highlights was owned by a partnership.
TYPE

Limited liability companies (LLCs) are governed by a federal LLC statute.

F

The owners of a limited liability company enjoy limited liability.

T 403

A limited liability company can sue or be sued, enter into contracts, and hold title to property.

T 403

A limited liability company is a citizen of every state in which it does business.

F

The members of a limited liability company (LLC) are personally liable for the wrongful acts or omissions of the LLC.

F 405

For federal income tax purposes, one-member limited liability companies are automatically taxed as sole proprietorships.

T

Most states apply their limited liability company (LLC) statutes to an LLC formed in another state.

F 407

If there is no limited liability company (LLC) agreement covering a topic under dispute, the state LLC statute will govern the outcome.

T

A limited liability company must be managed by its members.

F

Most limited liability company statutes specify how members' voting rights must be apportioned.

F

A member of a limited liability company (LLC) has the power and the right to dissociate from the LLC at any time.

F

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.

T

When a limited liability company is dissolved, any member who did not wrongfully dissociate may participate in the winding up process.

T

State law governs the formation of a limited partnership.

T +

A limited liability partnership may exempt its partners from personal liability for any partnership obligation.

T

In a limited partnership, a general partner has full responsibility for the partnership and for all its debts.

T

In a limited partnership, limited partners have essentially the same right as general partners to participate in management.

F 412 TYEP:

In a limited partnership, a general partner's dissociation from the firm may lead to dissolution.

T

Some states have passed laws prohibiting the withdrawal of general partners from a limited partnership.

T

In a limited liability limited partnership, the liability of a general part¬ner is the same as the liability of a limited partner.

T 414

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 person.
d. a partnership.

D +

China Bank is a foreign entity—a firm owned and operated by investors in a foreign country. With respect to an LLC 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.

B

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 limited partner who manages a limited partnership.
b. an owner of a sole proprietorship.
c. a general partner of a limited partnership.
d. a shareholder of a corporation.

D +

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.

C

Lars is considering forms of business organization for his auto repair firm. Like most states, Lars's state requires that to form a limited liabil¬ity 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.

C

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.

B

Farm2Fork, LLC, is a limited liability company. Rather than dis¬tribute 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 person.

A +

Homer's Remodeling, LLC, is a limited liability company. Among the mem¬bers, 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. franchise law.

B +

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.

C

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.

B +

Rick and Sandy are limited partners in Terrific Profit Enterprises, a limited part¬ner¬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.

D

Genetic Innovations, LP, is a limited partnership. The partners sign an agreement purporting to state how the firm's profits and losses are to be di¬vided. The profits and losses of the firm will be divided
a. according to the agreement.
b. equally, despite the agreement.
c. in proportion to capital contributions, despite the agreement.
d. in proportion to each partner's participation in the firm's manage¬ment, despite the agreement.

A

Dunn and Etta are limited partners in Fancee Fashion Stores, a limited partner¬ship. In terms of the firm's books, Dunn and Etta are entitled to
a. access in proportion to their participation in managing the firm.
b. access to the books directly related to their capital contributions.
c. no access.
d. total access.

D

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.

B

Refer to Fact Pattern 18-1B. 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.

A

Refer to Fact Pattern 18-1B. 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.

D

Refer to Fact Pattern 18-1B. 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.

D

Connie, Drew, and Ellen are the general partners of Foreign Auto Repair, a lim¬ited partner¬ship. Connie dies. The partnership can
a. continue only after a distribution of its assets.
b. continue only as a general partnership.
c. continue only if Drew and Ellen consent.
d. not continue because Connie's death dissolves the firm.

C

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.

D

Bret is a general partner in Capitol Realty, LLLP, a limited liability lim¬ited partnership, which cannot pay its debts. Bret is personally li¬able 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.

C

Jack and Keri want to form Local Motion, LLC, a limited li¬ability company, to offer metro delivery and transport services. With respect to the management of Local Motion, what are the members' options?

The members of a limited liability company (LLC) can appoint a group that does not include any of the LLC's members to run the firm. In that case, it would be a manager-managed LLC. A group may be appointed to include only members, in which case the firm would be a member-managed LLC. In fact, un¬less the members agree otherwise, all members are considered to participate in the management of the firm. Another choice is to designate members and nonmembers.
PAGES: 407-408

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 be¬lieves that he could do a better job than Steve at managing, but he abstains from becoming actively in¬volved. Why might he choose to keep away from management activities?

There is no law that expressly bars the partic¬i¬pation of limited partners in the management of a limited partner¬ship. Limited partners are, however, nor¬mally exempt from personal liabil¬ity for part¬ner¬ship debts, torts, breaches of contract, and breaches of trust. This ex¬emption rests pri¬marily on the limited partner's not participat¬ing in the man¬agement of the partner¬ship. Thus, it is the threat of personal liabil¬ity that de¬ters their participa¬tion.

When a corporation earns profits, it must distribute them to shareholders.

F

A corporation is referred to as a domestic corporation by its home state.

T

A publicly held corporation is a private corporation.

T

An S corporation is treated the same as a regular corporation for tax purposes

F

The first step in the incorporation process is to select a state in which to operate.

T

The primary document needed to incorporate a business is the articles of incorporation.

T

A new corporation's name can be deceptively similar to, but not the same, as the name of an existing corporation doing business within the state.

F

Implied powers of a corporation are expressed in state statutes.

F

Express powers of a corporation are found in its articles of incorporation.

T

When the corporate privilege is abused for personal benefit, the courts will require the owners to assume personal liability.

T

Many states permit a corporate board to have fewer than three directors.

T +

In most states, one individual cannot be both an officer and a director.

F

The board of directors normally can remove a corporate officer at any time with or without cause.

T

A director or officer is not liable to the corporation for a bad business decision.

T

Directors are entitled to use confidential corporate information for their personal advantage.

F

A director does not need to disclose any conflict of interest before voting on a proposed transaction.

F

Shareholders must approve fundamental changes affecting the corpora¬tion before the changes can be implemented.

T

A shareholder's right to inspect corporate books and records is unlimited.

F

Before shareholders can bring a derivative suit, they must submit a written demand to the corporation, asking the board of directors to take action.

T

In certain instances of fraud, a court may "pierce the corporate veil" to hold the shareholders individually liable.

T

Felicity and Gideon want to form and do business as Home Healthcare Corporation. A corporation is
a. a natural being.
b. a tangible thing.
c. an artificial person.
d. a visible radiance.

C

Gelato Ice, Inc., is incorporated in the state of New Jersey and is doing busi¬ness in the state of New York. In New York, Gelato is properly re¬ferred to as
a. a domestic corporation.
b. a foreign corporation.
c. an alien corporation.
d. a de jure corporation.

B

The shares of Capital Corporation are publicly traded in securities mar¬kets. Capital Corporation is
a. a private corporation.
b. a privately held corporation.
c. a public corporation.
d. a publicly held corporation.

D

Bertram, Claudia, and Dynah form Eat Local, Inc., a closely held corpo¬ration, and agree to restrict the transfer of its stock to anyone else. A reasonable purpose for a stock transfer re¬striction in a closely held cor¬poration, like the agreement between Bertram, Claudia, and Dynah, is
a. a desire to limit the participation of outsiders in the firm.
b. a goal to restrain insiders from taking advantage of their position.
c. an attempt to restrain the free flow of commerce among investors.
d. a wish to restrict the transfer of the shareholders' physical assets.

A

Frida and Gregor want to market a new line of fishing gear. To avoid in¬come taxes at the corporate level, they should form
a. a C corporation.
b. a close corporation.
c. an S corporation.
d. a private corporation.

C
AICPA Risk Analysis

The abbreviation "P.A." in the name "Painless Dental, P.A." means that this organization is
a. a private association.
b. a professional association.
c. a public association.
d. a publicly administered corporation.

B

Caffeine Café, Inc., files its articles of incorporation with the appropriate government agency. Least likely to appear in the articles is the name of
a. each of the corporation's incorporators.
b. each of the corporation's shareholders.
c. the corporation.
d. the corporation's initial registered agent.

B

Like the bylaws of other corporations, the bylaws of Farmland Equipment, Inc.,
a. establish the operating name of the corporation.
b. establish the value and classes of corporate stock.
c. were adopted at its first organizational meeting.
d. were submitted for approval to the public official in charge.

C

Rapid Pest Control itself out to others as being a corporation but makes no attempt to incorporate. Ponce signs a contract with Rapid Pest Control that is not performed. Ponce files a suit against the firm. The court will likely hold that Rapid Pest Control is
a. a corporation by estoppel.
b. an alien corporation.
c. an S corporation.
d. ultra vires.

A

Niki owns O.K. Oil Corporation. Niki uses O.K.'s funds to pay her per¬sonal expenses, creates Pure Fuel Corporation to engage in the same business as O.K., transfers O.K.'s assets to Pure Fuel, and petitions O.K. into bankruptcy. This most likely warrants
a. a bonus to Niki for financial maneuvers.
b. a discharge for O.K. in bankruptcy.
c. a pierce of O.K.'s corporate veil.
d. a review of Pure Fuel's articles of incorporation.

C

Sophie and Tiny incorporate their beverage-container business as U-Twist Products, Inc. The first board of directors may be appointed by the firm's
a. board of directors.
b. incorporators.
c. officers.
d. shareholders.

B

Whit is a director of Vids Corporation. With respect to policymaking de¬cisions necessary to the management of corporate affairs, Whit and the other Vids directors have responsibility for
a. all of the decisions.
b. only the decisions referred to them by the shareholders.
c. only the decisions referred to them by the officers.
d. none of the decisions.

A

Raul is chairman of the board of Swif-Vac Corporation. Pinky, a con¬sumer, is injured while using a Swif-Vac product. Pinky sues Swif-Vac, and Raul individu¬ally. Swif-Vac may pay Raul's legal fees under
a. the director's right to certification.
b. the director's right to compensation.
c. the director's right to indemnification.
d. no circumstances.

C

Viola is a director of Water Pure Corporation. With respect to Water Pure, Viola's most important right is the right of
a. compensation.
b. indemnification.
c. participation.
d. certification.

C

Sylvia is an officer of Triad Hotel Company. As an officer, with respect to the corporation, Sylvia is
a. a fiduciary.
b. a forum.
c. a proxy.
d. a quorum.

A

Rocco is a director of Spa Lids & Tubs, Inc. Under the standard of due care owed by di¬rectors of a corporation, Rocco's decisions must be
a. unwavering and unquestionable.
b. arguable and defensible.
c. informed and reasonable.
d. perfect and unassailable.

C

Genna is a director of Fab Stuff Corporation. Without informing Fab, Genna starts up Evertrendy, Inc., to compete with Fab. Genna is li¬able for breach of
a. no duty or rule
b. the business judgment rule.
c. the duty of loyalty.
d. the right of participation.

C

Naomi and Ogden are shareholders of MediCare Residences, Inc. As shareholders, they must approve
a. conducting a merger.
b. deciding to pursue new business opportunities.
c. terminating a managerial employee.
d. negotiating a contract between management and labor.

A

Zero Sum Games Corporation has forty-three shareholders. The mini¬mum number that must be present at a meeting for a shareholders' vote is
a. all of the shareholders.
b. a quorum.
c. a proxy.
d. three of the shareholders.

B

Orin is a shareholder of Pinkwater Corporation. In some states, Orin might in¬cur personal liability for Pinkwater obligations if he
a. accepts a dividend knowing that it was paid from retained earn¬ings.
b. buys stock for less than its fair-market value.
c. fails to fulfill his fiduciary duty to the majority shareholders.
d. sells his shares.

B

Starr Cardio, Inc., is a small business. Ted, Uma, and eleven other mem¬bers of the Starr family own all of its stock. Currently, Starr's income is taxed at the corporate level and, after being distributed to the family members, at the shareholder level. Can Starr retain its corporate status but oth¬er¬wise avoid this double taxation? If so, how?

Starr can re-form as an S corporation to avoid this dou¬ble income-taxation. S corporations were created specifi¬cally to permit small businesses to avoid this sort of taxa¬tion. Any small business that meets certain re¬quire¬ments can qualify. The requirements are (1) the firm must be a domestic corporation, (2) the firm must not be a member of an affili¬ated group of corporations, (3) the firm must have less than a cer¬tain number of share¬holders, (4) the shareholders must be individu¬als, es¬tates, or qualified trusts (or corporations in some cases), (5) there can be only one class of stock, and (6) no shareholder can be a nonresi¬dent alien. Based on the facts presented in this question, it would appear that Starr would qualify.

Mitch is a director and officer of Numero Uno, Inc. Mitch makes a mar¬ket¬ing decision that results in a dramatic decrease in profits for Numero Uno and its shareholders. The shareholders accuse Mitch of breaching his fiduci¬ary duty to the corporation. What is Mitch's best defense against this ac¬cu¬sation? Later, a resolution comes before the Numero Uno board to compete with One-of-a-Kind Corporation. Mitch is a direc¬tor and shareholder of One-of-a-Kind. What is Mitch's responsibility in this situation?

The best defense in this context is the business judgment rule. As long as a director or officer does what is necessary to be in¬formed, and acts in good faith, in what he or she considers to be the best interests of the corporation, and with the care that an ordinarily pru¬dent person would use in similar circum¬stances, he or she is not liable simply because a decision has a negative re¬sult. As for the resolution in¬volving a different corporation, a director cannot support a busi¬ness that competes di¬rectly with a cor¬poration on the board of which the di¬rector sits. The di¬rector's fiduciary duty requires him to fully dis¬close the con¬flict of inter¬est. Most likely, the di¬rector in these circum¬stances will have to resign from one of the boards.

The simplest form of business is a sole proprietorship.

T

A franchise contract may use only one type of business organiza¬tion—the sole proprietorship.

F

A franchise is a contractual arrangement.

T

A sole proprietorship lacks continuity on the death of the proprietor.

T

In a sole proprietorship, the proprietor shares the burden of any losses or liabilities incurred by the business enterprise with the government.

F

Laws governing franchising are designed in part to prevent franchisors from terminating franchises without good cause.

T

Some states require franchisors to provide presale disclosures to pro¬spective franchisees.

T

Typically, the franchisee determines the territory to be served by the franchise.

F

A franchisor can require a franchisee to purchase certain supplies from the franchisor at an established price.

T

The duration of a franchise is a matter to be determined between the parties.

T

Normally, a franchisee receives a windfall on the termination of a franchise.

F

Good faith and fair dealing are not important in terminating a franchise relationship.

F

Withdrawal from a partnership for a term prematurely does not consti¬tute a breach of the partnership agreement.

F

In a general partnership, all partners have equal rights in managing the partnership.

T

A partner owes to the partnership and the other partners a duty of loyalty.

T

A partner who pursues his or her own interests automatically violates the partner's fiduciary duties to the partnership.

F

In a general partnership, the partners are personally liable for the debts of the partnership.

T

A partner always has the power and the right to dissociate from the partnership.

F

On a partner's dissociation, his or her duty of loyalty to the partnership ends.

T

Any event that makes its unlawful for a partnership to continue its business will result in dissolution.

T

Hermione starts up, and assumes the financial risk of, Graphic Ads, a new enterprise. Hermione is
a. a franchisee.
b. a franchisor.
c. an agent.
d. a sole proprietor.

D

Carl sells Direct Marketing Enterprises, a sole proprietorship, to Eve. This is a transfer of
a. a license.
b. a trade name.
c. the formula to make a product.
d. the ownership of the business.

D

Jody owns KuppaJava Kiosks, a sole proprietorship. Jody's liability is
a. limited by state statute and varies from state to state.
b. limited to the extent of capital expenditures.
c. limited to the extent of his or her original investment.
d. unlimited.

D

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