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242 terms

BL Study 2

STUDY
PLAY
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
Real Events Promotion Corporation licenses trademarks to Stadium Souvenirs, Inc., to use in selling caps, sweatshirts, and similar goods. This is
a. a franchise.
b. an entrepreneur.
c. a principal-agent relationship.
d. a sole proprietorship.
A
Leo buys an exclusive territory in which he is authorized to set up a plant to make Midwest Dairy, Inc., products. After receiving the formula, Leo begins making Nice Ice-brand ice cream and other Midwest prod¬ucts. This is
a. a chain-style franchise.
b. a distributorship franchise.
c. a manufacturing franchise.
d. no franchise.
C
In-Home Maid Service Company uses a Web site to provide downloadable in¬formation to prospective franchises. This online information is the equivalent of an offer that must comply with
a. the Automobile Dealers' Franchise Act of 1965.
b. the Petroleum Marketing Practices Act of 1979.
c. the Federal Trade Commission's Franchise Rule.
d. the state Franchise Disclosure Document, or FDD.
C
Echo enters into an agreement with Deep Pan Pies, Inc., to operate a franchise in Centre City. Later, Deep grants franchises to others within the city. Echo files a suit to close them. If the court rules in Echo's favor it will most likely be on the ground that
a. Deep violated the an¬titrust laws.
b. Deep violated the implied covenant of good faith and fair dealing.
c. Echo paid a franchise fee.
d. Echo was the first Deep franchisee in Centre City.
B
Dominique buys a franchise from Cheyenne Artisans, Inc. This provides Cheyenne with an outlet for the firm's goods, some of which Dominique is required to buy at an established price. In their agree¬ment, Cheyenne may also specify
a. the franchisor's non-culpability for any breach of the agreement.
b. the franchise's business organizational form.
c. the retail prices at which Dominique must resell the goods she buys.
d. none of the choices.
B
Flip Gymnastics & Karate, Inc., grants a franchise to Gibby to operate a Flip gym. Flip may require Gibby to pay the franchisor a percentage of his
a. annual sales or volume of business.
b. weekly payroll expense.
c. monthly overhead savings.
d. none of the choices.
A
Sweet Styles, Inc., a franchisor of clothing stores, wishes to standardize the pricing practices of its franchisees that have engaged in price-cutting to increase their respective shares of the market. The most pru¬dent action might be for Sweet to
a. mandate the prices at which its franchisees sell their products.
b. suggest the prices at which its franchisees sell their products.
c. require its franchisees to buy inventory exclusively from Sweet.
d. threaten its franchisees with a material breach of contract.
B
Inger is a franchisee of Honey Bear Restaurants, LLC Their contract gives Honey Bear the right to control virtually all aspects of Inger's op¬eration, including the hiring of employees. One of the employees, Joris commits a tort against Kiley, one of Inger's customers. Kiley files a suit against Honey Bear. Honey Bear is most likely
a. liable because Honey Bear exercises control over Inger's operation.
b. liable because Kiley was Honey Bear's customer.
c. not liable because Inger is responsible for the employees.
d. not liable because Kiley was Inger's customer.
A
Noah and Orin do business as Personnel Partners. In most states, for purposes of suing and being sued, Personnel Partners would be treated as
a. an aggregate of the individual partners.
b. a natural person.
c. an entity.
d. a non-existent party.
C
Desi starts up eSites, an Internet service, and leases office space in a building owned by Fred. The lease requires Desi to pay Fred a base rental of $1,250, plus 10 percent of eSites' profits, each month. The term is two years. Desi hires Gwen to work at eSites' tech support desk at an hourly wage of $12.50, plus a commis¬sion of 10 percent of the prof¬its. The term is also two years. Refer to Fact Pattern 17-1A. Desi and Fred are
a. not partners, because Fred does not have an ownership interest or manage¬ment rights in eSites.
b. not partners, because the lease includes a "base rental."
c. not partners, because the rent includes only 10 percent of the profits.
d. partners in a partnership for two years.
A
Desi starts up eSites, an Internet service, and leases office space in a building owned by Fred. The lease requires Desi to pay Fred a base rental of $1,250, plus 10 percent of eSites' profits, each month. The term is two years. Desi hires Gwen to work at eSites' tech support desk at an hourly wage of $12.50, plus a commis¬sion of 10 percent of the prof¬its. The term is also two years.
Refer to Fact Pattern 17-1A. Desi and Gwen are
a. not partners, because Gwen does not have an ownership interest or manage¬ment rights in eSites.
b. not partners, because the pay includes an hourly wage.
c. not partners, because the pay includes only 10 percent of the profits.
d. partners in a partnership for two years.
A
Savannah and Rex agree while talking on the phone to form a partner¬ship to deal in sales of natural gas. Their partnership agreement is le¬gally binding
a. only if a copy of the agreement is filed in the appropriate state office.
b. only if the agreement is reduced to writing.
c. only if the parties exchange valid consideration.
d. without more.
B +
Corbin, a partner in Doctors Medical Clinic, applies for a loan with Evermore Bank allegedly on Doctors' behalf but without the authoriza¬tion of the other partners. Evermore knows that Corbin is not authorized to take out the loan. Corbin defaults on the loan. Liability for its unpaid amount is imposed on
a. Corbin and Doctors, jointly.
b. Corbin only.
c. Doctors only.
d. Evermore only.
B +
Luann and Mace are partners in Networx, a computer peripherals firm. Refer to Fact Pattern 17-2A. Luann signs a contract with Oleo Chips, a retail component supplier, apparently on Networx's behalf. The contract is binding on
a. Luann, Mace, and Networx.
b. Luann only.
c. Networx only.
d. Oleo only.
A
Luann and Mace are partners in Networx, a computer peripherals firm. Refer to Fact Pattern 17-2A. Mace dissociates from Networx. Luann signs a con¬tract with Physik Drives, a wholesale component supplier, apparently on Networx's behalf. Physik does not know of Mace's dissociation. The contract is binding on
a. Luann, Mace, and Networx.
b. Luann only.
c. Networx only.
d. Physik only.
A
Hud and Iggy form Jerry-Bilt Construction to enter into a contract to build one bridge. Under their partnership agreement, Jerry-Bilt is to dissolve when the bridge is built. Iggy signs a contract for the firm to build a second bridge. Jerry-Bilt
a. dissolves as soon as the first bridge is built.
b. dissolves as soon as the second bridge is built.
c. dissolves immediately on Iggy's signing of the second contract.
d. does not dissolve.
A
Jim and Kyle are partners in J&K Sales, which exports technical equip¬ment under a three-year partnership agreement. The U.S. gov¬ernment declares that the equipment can no longer be ex¬ported. J&K
a. dissolves as soon as the stated term expires.
b. dissolves as soon as the partners agree to dissolve it.
c. dissolves immediately unless the partners change its business.
d. does not dissolve.
C
A limited liability company can be taxed as a partnership.
T
Limited liability companies (LLCs) are governed by state LLC statutes.
T
A limited liability company (LLC) formed in one state but doing business in another state is referred to in the second state as a foreign LLC.
T
A limited liability company is not a citizen of any state.
F
A limited liability company as an entity is not liable for the wrongful acts or omissions of its members.
F
The liability of the members of a limited liability company is limited to the amount of their investments.
T
A limited liability company that has only one member cannot be taxed.
F
In many states, an operating agreement is not required for a limited liability company to exist.
T
A limited liability company must be managed by non-member managers.
F
Normally, a dissociated member of an limited liability company (LLC) has the right to force the LLC to dissolve.
F
When a member dissociates form a limited liability company, the member's duty of loyalty continues.
F
A limited liability partnership allows its partners to avoid personal liability for the malpractice of other partners.
T
In a limited partnership, a limited partner has full responsibility for the partnership and for all its debts.
F
A limited partner who gives a general partner ad¬vice on matters relating to the management of the partnership cannot be liable as a general partner.
F
Only a limited partnership's limited partners have a fiduciary obligation to the other partners.
F
In a limited partnership, with the exception of the right to participate in management, limited partners have essentially the same rights as general partners.
T
Some states have passed laws prohibiting the withdrawal of limited partners from a limited partnership.
T
An assignment of the interest of a limited partner dissolves a limited partnership.
F
A general partner has the power to dissociate from a limited partnership regardless of what the partnership agreement specifies.
F
In a limited liability limited partnership, the liability of a general partner is limited to the amount of capital he or she has invested in the partnership.
T
Sustainable Café LLC is a limited liability company. Like any other LLC, unless Sustainable Café chooses otherwise, the firm will be taxed as
a. a corporation.
b. a person.
c. a partnership.
d. a sole proprietorship.
C
Esteban and Florian want to form a limited liability company (LLC) to manage their business, Gordian Nuts. LLC statutes have been adopted in
a. all states.
b. no states.
c. less than one-fifth of the states.
d. only Wyoming and Florida.
A
Bee Hive Honey, LLC's members include Chad. For purposes of suing and being sued, Bee Hive Honey is
a. an aggregate of Chad 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
Greta is a member of Hovercraft LLC. As a member, Greta is
a. a manager or officer, but not an owner.
b. an investor, but not a manager, officer, or owner.
c. an owner.
d. a participant, but not an investor, manager, officer, or owner.
C
Coco is considering forms of business organization for her concessions business—Coco's Cupcakes. Most states require that a limited liability company have at least
a. no minimum number of members.
b. at least one member.
c. at least two members.
d. at least three members, including at least one general partner.
B +
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.
B
Vijay is a member of Watchit, LLC, a limited liability company. Vijay is li¬able for Watchit's debts
a. in proportion to the total number of members.
b. to the extent of his capital contribution.
c. to the extent that the other members do not pay the debts.
d. to the full extent.
B
Lui is considering forms of business organization for a chain of Magic Trix novelty stores. One advantage of the limited liability company form, with respect to tax options, is its
a. flexibility.
b. lack of accountability.
c. limited liability.
d. rigidity.
A
CPA Accounting, LLC, is a limited liability company. If the law in CPA's state is like the law in most states, unless the members have agreed other¬wise, participants in the firm's management will be considered to include
a. all members.
b. no member.
c. one member.
d. two members, including at least one general partner.
A
Among its members, a dispute arises that the operating agreement does not cover. The dispute is gov¬erned by
a. the applicable state LLC statute.
b. the federal Uniform LLC Law.
c. the principles of partnership law.
d. the state corporation statute.
A
Cecilia's Day Spa, LLC, is a member-managed limited liability company. If the law in Cecilia's state is like the law in most states, unless the members have agreed otherwise, voting rights are apportioned according to
a. capital contributions.
b. participation in management.
c. the number of members.
d. transactions with the firm.
A +
Flip is a member of Great States Trucking LLC. Flip's relationship to Great States ends, but the firm continues to do business. This is
a. dissociation.
b. dissolution.
c. winding up.
d. wrongful.
A
Vasili is considering forms of business organization for Vasili's Designs, an ar¬chitectural firm. An advantage of a limited liability partnership is that partners may be able to avoid personal liability for
a. any partnership obligation.
b. only other partners' wrongdoing.
c. only partnership obligations that exceed capital contributions.
d. only partnership obligations that fall within capital contributions.
A
Jack and Kyra are partners in Law Firm, LLP, a limited liability partnership. Jack supervises Kyra, who negligently fails to appear in court on behalf of Milo, a client. Liability to Milo rests with
a. Jack and Kyra.
b. Jack only.
c. Kyra only.
d. neither Jack nor Kyra.
A
Fern and Gray want to form a limited partnership to manage two restaurants: Café Latte and Deli Delite. In most states, a limited partnership will be created when
a. a certificate of limited partnership is filed.
b. a partnership agreement is executed.
c. the business for which the firm is formed actually opens its doors.
d. the partners make their capital contributions.
A
Maury, Neil, and Ogden want to form a limited partnership to manage their Picture This photo studio. Their firm must have
a. at least one general partner and one limited partner.
b. at least two general partners.
c. at least two limited partners.
d. no general partners.
A
Lucy is a limited partner in Metro Contractors, a limited partnership, which cannot pay its debts. Lucy 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 her capital contribution.
d. to the full extent.
C
Venture Capital, LP, is a limited partnership. Its limited partners include more than 150 sophisticated investors and investment professionals. A Venture limited partner loses his or her limited liability if he or she
a. acts as the firm's manager.
b. does not participate in the firm's management.
c. invests in Unified Fund, one of Venture's competitors.
d. votes on the firm's sale or dissolution.
A +
Stu is a limited partner and Tia is a general partner in S&T, a limited part¬nership. Between Stu and Tia, on S&T's dissolution its assets will first be distributed to pay
a. either partner's unpaid distribution of partnership assets.
b. returns on either partner's contribution.
c. Stu.
d. Tia.
A
Energy Unlimited, LP, is a limited partnership to which its partners, in¬cluding Fink, have contributed capital. Energy's creditors include Graves Engineering, Inc. On Energy's dissolution, its assets will be distributed to pay
a. Fink and Graves proportionately.
b. Fink first.
c. Graves first.
d. neither Fink nor Graves.
C
A corporation is a legal entity created and recognized by federal law.
F
Corporate profits can be subject to double taxation.
T
A holding company is a company whose business activity consists of holding shares in another company.
T
A corporation cannot be held liable for the criminal acts of its employees.
F
A corporation formed in another country but doing business in the United States is referred to in the United States as an alien corporation.
T
An agreement between shareholders to restrict the transfer of a closely held corporation's stock is illegal.
F
For liability purposes, some courts treat professional corporations somewhat like a partnership.
T
The articles of incorporation serve as a primary source of authority for a corporation.
T
Each incorporator must have an interest in the corporation.
F
To pierce the corporate veil means to ignore the corporate structure, exposing the shareholders to personal liability.
T
Shareholders are the ultimate authority in every corporation.
F
Many qualifications are required for directors.
F
Directors have a right to participate in all board of directors' meetings.
T
Officers hire the directors and other executive employees.
F
Directors are not obligated to refrain from self-dealing.
F
A director must make a full disclosure of any potential conflict of interest that might arise in any corporate transaction.
T
Shareholders' meetings need not occur at any certain interval.
F
Every shareholder is entitled to examine specified corporate records.
T
When a third party harms a corporation, only the shareholders can bring a suit in the corporation's name against that party.
F
Shareholders are personally liable for the debts of a corporation.
F
Ivy and Justin want to form and do business as Kayak Adventures Corporation. A corporation can be owned by
a. natural persons only.
b. artificial persons only.
c. artificial or natural persons.
d. neither "artificial" nor "natural" persons.
C
Skyla and Terry want to form and do business as Unbound Games Corporation. Most statutes governing the formation and use of corporations are guided by
a. city or county corporate codes.
b. the Entrepreneur's Corporate Handbook.
c. the federal Administrative Procedure Act.
d. the Revised Model Business Corporation Act.
D
Mountaintop Clearview Corporation authorizes Niles, its employee, to oversee its timber operation. In the course of his employment, Niles disposes of the operation's waste illegally. Orson is a Mountaintop shareholder. Liability for this crime most likely rests with Orson to
a. no extent.
b. the proportionate extent of the number of shares Orson owns.
c. the amount of Orson's investment in the firm.
d. the full extent.
C
Boutique Corporation would like to change its corporate status to avoid in¬come taxes at the corporate level. To qualify, the shareholders must not be
a. corporations.
b. estates.
c. individuals.
d. partnerships.
D
Convenience Mart, Inc., is a closely held corporation. Convenience Mart is
a. eligible to make public offerings of securities.
b. exempt from filing a certificate of incorporation.
c. generally allowed to restrict the transfer of its stock.
d. taxed in the same manner as a partnership.
C
Sullivan and Taylor want to form a corporation to provide catering services. The first step in the incorporation procedure is to
a. file the articles of incorporation.
b. hold the first organizational meeting.
c. secure a corporate name.
d. select a state in which to incorporate.
D
Hailey and Ike hold the first organizational meeting of Java Drive-In Corporation. Probably the most important function of this meeting is
a. adopting Java's bylaws.
b. agreeing on Java's purpose.
c. drafting Java's articles.
d. obtaining a charter for Java.
A
Start-Up Corporation substantially complies with all conditions prece¬dent to incorpo¬ration. Start-Up has
a. corporate existence by estoppel.
b. de facto existence.
c. de jure existence.
d. ultra vires existence.
C
Wild & Scenic River Tours, Inc., is a corporation. Wild & Scenic has the implied power to
a. issue stocks and bonds.
b. execute contracts and negotiable instruments.
c. buy and sell (or lease) property.
d. perform all acts reasonably appropriate and necessary to accom¬plish its corporate purposes.
D
Bret and Courtney form Delite Day Care, Inc. Ultimate responsibility for pol¬icy decisions necessary to the management of corporate affairs rests with Delite's
a. board of directors.
b. incorporators.
c. officers.
d. shareholders.
A
Rhea is a director of Spex Corporation, which makes and sells sunglasses and other eyewear. As a Spex director, Rhea sits on the board, which
a. governs Spex.
b. is governed by the Spex incorporators.
c. is governed by the Spex officers.
d. is governed by the Spex shareholders.
A
Reba is a director of Quantum Mechanix Corporation. Reba's rights, as a di¬rector, do not include a right to
a. indemnification.
b. inspection.
c. participation.
d. self-dealing.
D
VeriVisual Company makes HD 3D film and video equipment. VeriVisual is like most cor¬porations in that its officers are hired by the firm's
a. board of directors.
b. incorporators.
c. other officers.
d. shareholders.
A
Odell is a director of Price Rite, Inc. As a director, with respect to the corporation, Odell is
a. a fiduciary.
b. a forum.
c. a proxy.
d. a quorum.
A
Gladys is a shareholder of Frozen Yogurt, Inc. As a shareholder, Gladys must approve
a. amending the bylaws.
b. declaring a corporate dividend.
c. hiring a chief executive officer.
d. issuing additional shares.
A
Heidi and Ian are directors and shareholders of Globe Software, Inc. Heidi's written authorization to Ian to vote Heidi's shares at a Globe shareholders' meeting is
a. a violation of the duty of loyalty.
b. a preemptive right.
c. a proxy.
d. a quorum.
C