R6 M4 - Business Structure: Part I Flashcards
(15 cards)
In a general partnership, which of the following acts must be approved by all the partners?
A. Dissolution of the partnership B. Admission of a partner C. Authorization of a partnership capital expenditure D. Conveyance of real property owned by the partnership
Explanation
Choice “B” is correct. As a general rule, decisions regarding matters within the ordinary course of the partnership’s business may be controlled by majority vote. Matters outside the ordinary course of the partnership’s business require the consent of all the partners. Admitting a new partner is an extraordinary event. Thus, unanimous consent is required.
Choice “A” is incorrect. Although dissolution is an extraordinary act, in a general partnership not for a term of years, any one partner may cause a dissolution by giving notice of the intent to withdraw.
Choice “C” is incorrect. A capital expenditure could well be within the ordinary scope of partnership business and thus would require only a majority vote.
Choice “D” is incorrect. The sale of partnership real property could easily be within the ordinary scope of partnership business (e.g., a partnership can be formed for the purpose of buying and selling real property) and thus would require only a majority vote.
Rule: When the partnership agreement is silent as to how losses will be shared, they are shared in the same manner as profits.
Application of the Rule: Here, the partnership agreement provided that profits were to be split among Moore, Noon, and Kale 1:3:5, respectively. Thus, Kale’s share of the loss is $100,000 [5 × (1/9 × 180,000)].
Choice “B” is correct. All members in a limited liability company have limited liability. Unless they choose otherwise, all members of a limited liability company may participate in management. A limited liability company is dissolved upon the death, retirement, resignation, bankruptcy, etc., of a member.
Choice “A” is incorrect. A limited partnership must have at least 1 general partner and 1 limited partner. The general partner has unlimited liability for all limited partnership debts. Additionally, limited partners have a limited right to manage.
Choice “C” is incorrect because general partners in a general partnership have unlimited liability.
Choice “D” is incorrect on two counts. First, although shareholders are the owners of the corporation, they generally have no power to run the corporation. That is done by the board and the officers. Second, death, withdrawal or bankruptcy of a stockholder does not dissolve a corporation.
Eaton is the sole owner of a construction company. Eaton is concerned about personal liability. Which of the following entities will best allow Eaton to limit personal liability?
A. Sole proprietorship. B. C corporation. C. General partnership. D. Limited partnership.
Choice “B” is correct. One of the main advantages of a corporation is that stockholders, directors and officers generally are not personally liable for the obligations of the corporation. Generally, only the corporation itself can be held liable.
Choice “A” is incorrect because a sole proprietor is personally liable for all obligations of the business.
Choice “C” is incorrect because all general partners have unlimited personal liability. Additionally, Eaton could not be the sole owner in a general partnership; he would have to share ownership with other partners.
Choice “D” is incorrect because in a limited partnership there must be at least one limited and one general partner. The general partner in a limited partnership has unlimited liability. Eaton would not choose to be a limited partner because then Eaton would have no right to manage and control the business; he would have to give up control to a general partner.
In which type of business entity is the entire ownership interest most freely transferable?
A.
General partnership.
B.
Limited partnership.
C.
Corporation.
D.
Limited liability company.
Choice “C” is correct. Among the business entities listed, entire ownership interests are most freely transferable in a corporation. Unless transferability is restricted by contract (restricted shares or voting trusts or voting agreements), there are no restrictions on the sale of corporate stock (the common stock represents the stockholders’ ownership interest). The right to transfer ownership interests freely is one of the advantages of the corporate form of business.
Choice “A” is incorrect. A general partner in a general partnership may assign his or her right to receive profits or surplus. A general partner cannot assign his interest and confer partnership status on the assignee without unanimous consent of all other partners.
Choice “B” is incorrect. Both general partners and limited partners in a limited partnership may assign the right to receive profits and surplus. Neither general nor limited partners can confer general or limited partnership status on the assignee without the unanimous consent of all general and all limited partners.
Choice “D” is incorrect. In most states, limited liability company (LLC) members may not sell and confer ownership interest without the consent of all LLC members.
Rivers and Lee want to form a partnership. For the partnership agreement to be enforceable, it must be in writing if:
A. Rivers and Lee reside in different states. B. The agreement cannot be completed within one year from the date on which it will be entered into. C. Either Rivers or Lee is to contribute more than $500 in capital. D. The partnership intends to buy and sell real estate.
Choice “B” is correct. A transaction which cannot be completed within a year must be in writing to be enforceable.
Choice “A” is incorrect. Residence of the prospective partners is not relevant.
Choice “C” is incorrect. The statute of frauds $500 threshold applies to the sale of goods only.
Choice “D” is incorrect. Transactions in land are within the statute of frauds, but the possibility that a partnership may engage in a real estate transaction is not a transaction in land.
Rule: Regardless of the contributions and obligations of the partners, unless the partnership agreement specifically states otherwise, all partners are entitled to an equal share of the profits.
What causes an event of dissociation in a partnership?
- When the partner gives notice of withdrawal.
- Dies
- is expelled
- Becomes Bankrupt
A. $25,200
B. $26,000 C. $30,000 D. $34,800
Choice “A” is correct. Upon termination of the partnership creditors are paid first. After payment of creditors, each partner is deemed to have an account that is charged or credited an amount equal to the partner’s contribution plus or minus the partner’s share of any profits or losses.
The agreement between Smith and James was that profits and losses would be allocated 60% to Smith and 40% to James. The partnership had $82,000 in assets ($40,000 in cash, $10,000 from accounts receivable, and $32,000 from property and equipment). The partnership had $90,000 in liabilities and capital. Of the $82,000 in assets, $24,000 is paid first to creditors. This leaves a balance of $58,000. Smith contributed $30,000 in capital and James contributed $36,000 in capital. With $66,000 owed in capital and only $58,000 available, there is a deficit of $8,000. By agreement, Smith is responsible for 60% of the $8,000 deficit or $4,800.
Smith would be credited an amount equal to his capital ($30,000) minus his share of the loss ($4,800) or $25,200. Only choice “A” reflects this amount.
Choices “B”, “C”, and “D” are incorrect, per the above calculation.
In a limited partnership, a general partner may be a secured creditor of the limited partnership. A limited partner can be a general partner and a limited partner at the same time.
In order to form an LLC, you would need an Article of Organization.
The voting power of members in an LLC is determined by each member’s capital contribution.
When one of the members of an LLC dies, absent of an agreement the LLC will dissolve unless they agree to continue.
All other members in an LLC need to consent the transfer of his membership to someone else
Choice “D” is correct. An LLP does not pay taxes on its earnings. Instead, the profits and losses flow through to the partners as in a general partnership. The LLP files an informational tax return like that of a general partnership. The partners may agree to have the entity managed by one or more of the partners. A partner may be another entity.
Choice “A” is incorrect. A proprietorship by definition has only one owner, not three owners.
Choice “B” is incorrect. While an S corporation allows for the same treatment of its earnings and distributions as in the facts, it is prohibited from having another company as an owner.
Choice “C” is incorrect. A C corporation pays its own taxes on its earnings, and any distributions to its shareholders are again taxed at the shareholder level (known as “double taxation”).
A limited liability company (LLC) is taxed as a flow-through to the owners (members). All the owners have limited personal liability and are allowed to actively participate in the management of the business. Owners are not required to be U.S. citizens or residents.
Choice “A” is incorrect. An S corporation is taxed as a flow-through to the owners (shareholders), and all the owners have limited personal liability and are allowed to actively participate in the management of the business. However, only U.S. citizens or residents can be shareholders in an S corporation. Since one of the owners is a resident and citizen of Australia, he or she would not be able to organize the business as an S corporation.
Choice “B” is incorrect. All the owners (shareholders) of a C corporation have limited personal liability and are allowed to actively participate in the management of the business. Shareholders are not required to be U.S. citizens or residents. However, a C corporation is not taxed as a flow-through entity. The corporation’s income is taxed at the corporation level and then taxed again to shareholders when dividends are distributed.
Choice “C” is incorrect. A limited partnership (LP) is taxed as a flow-through to the owners (shareholders). Owners are not required to be U.S. citizens or residents. However, in a limited partnership there must be at least one limited partner and one general partner. The limited partner has limited personal liability but is not allowed to actively participate in management. The general partner is allowed to actively participate in management but does not have limited personal liability. In this situation, only one owner could have limited liability but could not participate in management of the business, and the other owner could participate in management of the business but would have personal liability for partnership debts.
