R8-3 Flashcards
(137 cards)
1
Q
Which of the following facts is(are) generally included in a corporation’s articles of incorporation?
~~Name of registered agent
~~Number of authorized shares
a.
Yes
Yes
b.
Yes
No
c.
No
No
d.
No
Yes
A
Choice “a” is correct.
Rule: The articles of incorporation generally must contain both the name of a registered agent upon whom process may be served and the number of shares authorized to be issued.
Choices “b”, “d”, and “c” are incorrect, per the above rule.
2
Q
The limited liability of a stockholder in a closely held corporation may be challenged successfully if the stockholder:
a.
Undercapitalized the corporation when it was formed.
b.
Formed the corporation solely to have limited personal liability.
c.
Sold property to the corporation.
d.
Was a corporate officer, director, or employee.
A
Choice “a” is correct. The limited liability of a shareholder in a closely held corporation may be challenged where the shareholder undercapitalized the corporation when it was formed. Courts can “pierce the corporate veil.”
Choice “b” is incorrect. Forming a corporation to limit personal liability is a perfectly valid reason for electing the corporate form of doing business.
Choice “c” is incorrect. The shareholder may sell property to the corporation.
Choice “d” is incorrect. Shareholders may serve as corporate officers, directors, or employees.
3
Q
Jones, Smith, and Bay wanted to form a company called JSB Co. but were unsure about which type of entity would be most beneficial based on their concerns. They all desired the opportunity to make tax-free contributions and distributions where appropriate. They wanted earnings to accumulate tax-free. They did not want to be subject to personal holding tax and did not want double taxation of income. Bay was going to be the only individual giving management advice to the company and wanted to be a member of JSB through his current company, Channel, Inc. Which of the following would be the most appropriate business structure to meet all of their concerns?
a.
Proprietorship.
b.
C corporation.
c.
S corporation.
d.
Limited liability partnership.
A
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 “c” 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 “b” 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”).
4
Q
Formation of which of the following types of business does not require the filing of documents with the state?
~~Corporation
~~Limited Partnership
~~Sole Proprietorship
a.
Need not file
Need not file
Need not file
b.
Must file
Must file
Need not file
c.
Must file
Need not file
Must file
d.
Need not file
Must file
Need not file
A
Choice “b” is correct. A sole proprietorship can be formed without filing with the state. Formation of either a corporation or a limited partnership requires a filing.
Choices “a”, “d”, and “c” are incorrect per the explanation above.
5
Q
Which of the following statements is a general requirement for the merger of two corporations?
a.
The merger plan must be approved unanimously by the stockholders of both corporations.
b.
The stockholders of both corporations must be given due notice of a special meeting, including a copy or summary of the merger plan.
c.
The absorbed corporation must amend its articles of incorporation.
d.
The merger plan must be approved unanimously by the boards of both corporations.
A
Choice “b” is correct. Both corporations must give shareholders notice and a summary of the merger plan.
Choice “a” is incorrect. A merger plan need only be approved by a majority of the shareholders, not by all shareholders.
Choice “d” is incorrect. The merger plan needs to be approved only by a majority of each board of directors of the corporations.
Choice “c” is incorrect. The absorbed corporation ceases to exist; its articles need not be amended.
6
Q
Under the Revised Model Business Corporation Act, which of the following statements is correct regarding corporate officers of a public corporation?
a.
An officer of a corporation is required to own at least one share of the corporation’s stock.
b.
A corporation may be authorized to indemnify its officers for liability incurred in a suit by stockholders.
c.
Stockholders always have the right to elect a corporation’s officers.
d.
An officer may not simultaneously serve as a director.
A
Choice “b” is correct. A corporation may indemnify its officers for liabilities incurred in a suit by stockholders, especially if the officer prevails.
Choice “d” is incorrect. There is no restriction against serving as both a director and an officer.
Choice “c” is incorrect. The RMBCA provides that officers are to be appointed by the board unless the bylaws provide otherwise.
Choice “a” is incorrect. There is no requirement that an officer own stock in the corporation in which he or she serves.
7
Q
Case Corp. is incorporated in State A. Under the Revised Model Business Corporation Act, which of the following activities engaged in by Case requires that Case obtain a certificate of authority to do business in State B?
a.
Hiring employees who are residents of state B.
b.
Collecting corporate debts in State B.
c.
Maintaining bank accounts in State B.
d.
Maintaining an office in State B to conduct intrastate business.
A
Choice “d” is correct. A domestic corporation is one created under the laws of a given state. A foreign corporation is a corporation created under the laws of another state. A foreign corporation must obtain a certificate of authority from each state in which it does intrastate business. Maintaining an office in State B is a clear indication that Case was “doing business” in State B.
Choices “c”, “b”, and “a” are incorrect because maintaining a bank account, collecting debts, and hiring employees who live within a state are not considered to be “doing business” within the state.
8
Q
Which of the following statements is(are) correct regarding the methods a target corporation may use to ward off a takeover attempt?
I.
The target corporation may make an offer (“self-tender”) to acquire stock from its own shareholders.
II.
The target corporation may seek an injunction against the acquiring corporation on the grounds that the attempted takeover violates federal antitrust law.
a.
I only.
b.
Neither I nor II.
c.
Both I and II.
d.
II only.
A
Choice “c” is correct.
Rule: A tender offer is a general invitation by a bidder to the shareholders of a target company to tender their shares to the bidder at a specified price during a specified time. A target of a takeover may ward off a tender offer by offering to repurchase shares from its shareholders. If a takeover will violate federal antitrust law, a court will enjoin the takeover.
Choices “a”, “d”, and “b” are incorrect, per the above rule.
9
Q
Acorn Corp. wants to acquire the entire business of Trend Corp. Which of the following methods of business combination will best satisfy Acorn’s objectives without requiring the approval of the shareholders of either corporation?
a.
A merger of Trend into Acorn, whereby Trend shareholders receive cash or Acorn shares.
b.
A sale of all the assets of Trend, outside the regular course of business, to Acorn, for cash.
c.
An acquisition of all the shares of Trend through a compulsory share exchange for Acorn shares.
d.
A cash tender offer, whereby Acorn acquires at least 90% of Trend’s shares, followed by a short-form merger of Trend into Acorn.
A
Choice “d” is correct. A parent corporation owning 90% or more of a subsidiary may merge the subsidiary (short form merger) into the parent without the approval of the shareholders of either corporation or the approval of the subsidiary’s board.
Choices “a”, “b”, and “c” all require at least one of the corporations to follow the general procedure for fundamental corporate changes (i.e., board resolution notice, approval by majority shares, and filing).
10
Q
Which of the following parties generally has the most management rights?
a.
Limited partner in a general partnership.
b.
Minority shareholder in a corporation listed on a national stock exchange.
c.
Member of a limited liability company.
d.
Limited partner in a limited partnership.
A
Choice “c” is correct. Unless the articles or operating agreement provides otherwise, all members of the LLC have a right to participate in management. A member of a limited liability company has the most management rights of any of the parties listed. A minority shareholder in a corporation has no management rights (and neither does a majority shareholder). A limited partner has no day-to-day management rights but may have some rights in extraordinary circumstances. It is unclear what a limited partner in a general partnership would even be; the existence of a limited partner would make a partnership a limited partnership and not a general partnership.
Choice “b” is incorrect. Stockholders have very limited rights to run the corporation. They generally only have the right to elect directors and to vote on fundamental changes in the corporation. Such fundamental changes would include dissolutions, amendments to the articles, mergers, consolidations, compulsory share exchanges, and sale of substantially all of the corporation’s assets.
Choice “a” is incorrect. There are no limited partners in a general partnership. There are only general partners. Since there are no limited partners, there are no management rights for limited partners.
Choice “d” is incorrect. Limited partners in a limited partnership have very limited rights to participate in the management of the business. In fact, if they do participate in management, they face potential liability to those who thought they were a general partner (i.e., if a limited partner becomes involved in day-to-day management is some way (participating in control), she may be treated as a general partner and lose her limited liability).
11
Q
Under the Revised Model Business Corporation Act, which of the following statements regarding a corporation’s bylaws is(are) correct?
I.
A corporation’s initial bylaws shall be adopted by either the incorporators or the board of directors.
II.
A corporation’s bylaws are contained in the articles of incorporation.
a.
I only.
b.
Neither I nor II.
c.
II only.
d.
Both I and II.
A
Choice “a” is correct. Under the Revised Model Business Corporation act, a corporation’s initial bylaws may be adopted by either the incorporators or the board of directors.
Choices “c” and “d” are incorrect, because the corporation’s bylaws are a separate document not included in the corporation’s articles of incorporation.
Choice “b” is incorrect, because under the Revised Model Business Corporation Act, a corporation’s initial bylaws may be adopted by either the incorporators or the board of directors.
12
Q
Which form of business entity has the following attributes?
I.
Limited liability for all its owners.
II.
Can permit all its owners to participate in management and control of the entity.
III.
Absent an agreement to the contrary, is dissolved on the death, withdrawal, or bankruptcy of an owner.
a.
A limited liability company.
b.
A corporation.
c.
A limited partnership.
d.
A general partnership.
A
Explanation
Choice “a” 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 “c” 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 “d” is incorrect because general partners in a general partnership have unlimited liability.
Choice “b” 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.
13
Q
Two individuals are planning to form a business with equal ownership. The individuals would like to limit their personal liability, avoid double taxation, and be active in the business. Which of the following organizational structures would meet their requirements?
a.
Limited partnership.
b.
Limited liability company.
c.
General partnership.
d.
C corporation.
A
Choice “b” is correct. The objectives of the two individuals are to limit liability, avoid double taxation, and be active in management. As limited liability company members, they would have no liability beyond their investment. With a limited liability company, the entity would be taxed like a partnership (thus no double taxation) unless they chose otherwise. As limited liability company members, they would have the right to participate in management decisions of the LLC.
Choice “d” is incorrect because a C corporation is subject to double taxation.
Choice “a” is incorrect because in a limited partnership there are both limited and general partners. The general partners have the right to manage, but have unlimited liability. The limited partners have no liability beyond their investment, but have no right to manage or control. Thus, they cannot have both limited liability and the right to manage in a limited partnership.
Choice “c” is incorrect because a general partner in a general partnership has unlimited liability.
14
Q
Under the Revised Model Business Corporation Act, which of the following must be contained in a corporation’s articles of incorporation?
a.
Quorum voting requirements.
b.
Names of stockholders.
c.
The number of shares the corporation is authorized to issue.
d.
Provisions for issuance of par and nonpar shares.
A
Explanation
Choice “c” is correct. The articles must set out the corporation’s authorized shares.
Choice “a” is incorrect. Quorum requirements, if stated at all, usually are in the bylaws; they need not be included in the articles of incorporation.
Choice “b” is incorrect. The articles need not include the names of stockholders.
Choice “d” is incorrect. The RMBCA has eliminated the concept of par value and so does not have a requirement that par value be established in the articles.
15
Q
Under the Revised Model Business Corporation Act, a merger of two public corporations usually requires all of the following, except:
a.
A formal plan of merger.
b.
Receipt of voting stock by all stockholders of the original corporations.
c.
An affirmative vote by the holders of a majority of each corporation’s voting shares.
d.
Approval by the board of directors of each corporation.
A
Choice “b” is correct. A merger can be effected by giving some parties cash or property; not everyone need receive voting shares.
Choice “a” is incorrect. The merger must be pursuant to a formal plan.
Choice “c” is incorrect. An affirmative vote by the holders of each corporation’s voting shares is required.
Choice “d” is incorrect. A plan of merger must be approved by the boards of the merging corporations.
16
Q
Harry, Betty, and Jim decide to form a hair salon business. Betty and Jim agree to equally manage the business and have agreed to accept full personal liability for obligations of the business. Harry contributes money to help them get started. Harry does not want any personal liability but does want access to the books and records and to share in the profits. They have all agreed that unanimous consent is needed to transfer their ownership interests. Assume any necessary filings have been made. What type of business entity best reflects the terms of their agreement?
The three have formed:
a.
A limited partnership.
b.
A limited liability company.
c.
A general partnership.
d.
A corporation.
A
Choice “a” is correct. A limited partnership best reflects the terms of the parties’ agreement. A limited partnership has one or more general partners and one or more limited partners. The general partners are personally liable for partnership obligations and run the business (such as Betty and Jim agreed). A limited partner does not have personal liability for partnership obligations and does not take part in management; however, limited partners have a right to inspect partnership books and records relevant to their interest. Thus, a limited partnership has the attributes that Harry agreed to. Finally, all partners must unanimously consent to a transfer of an ownership interest in a limited partnership, as the parties agreed here. Thus, a limited partnership best reflects the agreement of the parties.
Choice “b” is incorrect. Members of a limited liability company are not personally liable for the company’s debt. (They may agree otherwise, but this is not a general attribute of a limited liability company.) Because the facts say Betty and Jim each agreed to have full personal liability, a limited liability company does not best reflect the parties’ agreement.
Choice “c” is incorrect. All partners are personally liable for all obligations of a general partnership. Because the facts say Harry did not accept personal liability, the agreement does not reflect a general partnership.
Choice “d” is incorrect. Corporate shareholders generally are not liable for the corporation’s obligations. (They may agree otherwise, but this is not a basic attribute of a corporation.) As the facts say Betty and Jim share full personal liability, the agreement does not reflect a corporation.
17
Q
Which of the following provisions must a for-profit corporation include in its articles of incorporation to obtain a corporate charter?
I.
Provision for the authorization of voting stock.
II.
Name of the corporation.
a.
I only.
b.
Both I and II.
c.
Neither I nor II.
d.
II only.
A
Choice “b” is correct. Both I and II.
Rule: In order to obtain a corporate charter, a for-profit corporation must include in its articles of incorporation the name of the corporation and a provision for the authorization of voting stock. In addition, the articles of incorporation must include the names of the incorporators and the name and address of the registered agent.
Choices “a”, “d”, and “c” are incorrect, per the above rule.
18
Q
The corporate veil is most likely to be pierced and the shareholders held personally liable if:
a.
A partnership incorporates its business solely to limit the liability of its partners.
b.
An ultra vires act has been committed.
c.
The shareholders have commingled their personal funds with those of the corporation.
d.
The corporation has elected S corporation status under the Internal Revenue Code.
A
Choice “c” is correct. Generally, a corporation is treated as an entity distinct from its shareholders and shareholders are not liable for the corporation’s debts. However, where the shareholders do not treat the corporation as a distinct entity, such as where they commingle their personal funds with the corporation’s funds, courts are likely to ignore the corporate form as well.
Choice “d” is incorrect. An election to be taxed like a partnership under Subchapter S is not grounds to pierce the corporate veil.
Choice “b” is incorrect. An ultra vires act is one beyond the corporation’s powers. The persons who authorized the ultra vires act can be held personally liable for damages caused, but it is not a ground for piercing the corporate veil.
Choice “a” is incorrect. Limiting personal liability is the main reason to incorporate. It is a ground for piercing the corporate veil only if it is done fraudulently (i.e., to avoid paying present creditors).
19
Q
Absent a specific provision in its articles of incorporation, a corporation’s board of directors has the unilateral power to do all of the following, except:
a.
Repeal the bylaws.
b.
Declare dividends.
c.
Fix compensation of directors.
d.
Amend the articles of incorporation.
A
Choice “d” is correct. Amendment of the articles of incorporation, albeit proposed by the directors, cannot usually be effected without the affirmative vote of the shareholders.
Choice “a” is incorrect. The directors ordinarily have the power to repeal bylaws unless the articles or the specific bylaw to be repealed provides otherwise.
Choice “b” is incorrect. The directors have the power to declare dividends at their discretion as long as the dividends do not violate any statute, article provision, bylaw, or contract with a creditor.
Choice “c” is incorrect. Although it seems like there would be a conflict of interest, directors do have the power to set their own compensation, limited only by the fiduciary duties owed to the corporation (e.g., the directors cannot set salaries so high as to constitute waste).
20
Q
Carr Corp. declared a 7% stock dividend on its common stock. The dividend:
a.
Requires a vote of Carr’s stockholders.
b.
Is includable in the gross income of the recipient taxpayers in the year of receipt.
c.
Has no effect on Carr’s earnings and profits for federal income tax purposes.
d.
Must be registered with the SEC pursuant to the Securities Act of 1933.
A
Choice “c” is correct. A stock dividend means that the corporation issues its existing shareholders more stock. In essence, the corporation is merely diluting the proportional ownership interest of existing shares. This has no effect on the corporation’s earnings and profits for federal income tax purposes.
Choice “d” is incorrect. There is no requirement that stock dividends be registered with the SEC because no “sale” is involved.
Choice “b” is incorrect. The receipt of a stock dividend is not the recognition of income. It merely divides the stockholders’ current ownership interests into more pieces; it does not increase proportional ownership interest in the corporation.
Choice “a” is incorrect. The issuance of dividends, including stock dividends, is at the directors’ discretion; shareholders do not vote on dividends.
21
Q
Which of the following rights is a holder of a public corporation’s cumulative preferred stock always entitled to?
a.
Guaranteed dividends.
b.
Dividend carryovers from years in which dividends were not paid, to future years.
c.
Voting rights.
d.
Conversion of the preferred stock into common stock.
A
Choice “b” is correct. Cumulative preferred dividends are dividends that must be paid before any dividend can be paid to holders of non-preferred shares. The right to the dividend accumulates if it is not paid in a particular year.
Choice “d” is incorrect. There is no right to convert preferred shares into common stock unless that right is specifically granted.
Choice “c” is incorrect. Preferred stock need not have voting rights.
Choice “a” is incorrect. Preferred dividends are not guaranteed. They must be paid before any common shareholder can be paid a dividend, but no dividend might ever be paid.
22
Q
Which of the following securities are corporate debt securities?
~~Convertible bonds
~~Debenture bonds
~~Warrants
a.
Yes
Yes
Yes
b.
No
Yes
Yes
c.
Yes
Yes
No
d.
Yes
No
Yes
A
Choice “c” is correct.
Rules: Bonds are debt securities. Thus, convertible bonds and debenture bonds are debt securities. A warrant is a contractual right to purchase stock, which constitutes a share of corporate equity.
Choices “a”, “d”, and “b” are incorrect, per the above rules.
23
Q
Under the Revised Model Business Corporation Act, a dissenting stockholder’s appraisal right generally applies to which of the following corporate actions?
~~Short-form Consolidations
~~Mergers
a.
No
No
b.
Yes
No
c.
Yes
Yes
d.
No
Yes
A
Choice “c” is correct. “Yes-Yes.”
Rule: Shareholders who are dissatisfied with the terms of a merger, consolidation or sale of assets are permitted to compel the corporation to buy their shares at fair market value. This is known as the right of appraisal or the dissenting right.
Rule: A short-form merger is when a parent mergers a 90% or more owned subsidiary into the parent. In this case, only the shareholders of the subsidiary have dissenting rights.
Choices “b”, “d”, and “a” are incorrect, per the above rules.
24
Q
For what purpose will a stockholder of a publicly held corporation be permitted to file a stockholders’ derivative suit in the name of the corporation?
a.
To compel payment of a properly declared dividend.
b.
To compel dissolution of the corporation.
c.
To enforce a right to inspect corporate records.
d.
To recover damages from corporate management for an ultra vires management act.
A
Choice “d” is correct. A derivative action is an action by a stockholder in the name of the corporation to recover damages or to seek some other remedy on behalf of the corporation when the corporation does not enforce its own rights. Such actions are often brought when the directors or officers have breached their duty to the corporation and have refused to sue themselves. An ultra vires act is an act outside of a director’s or an officer’s scope of authority and thus is a breach of duty to the corporation.
Choices “a”, “c”, and “b” are incorrect, because these would all be causes of action against the corporate directors or officers on behalf of the stockholder to recover damages or seek some other remedy against the corporate directors or officers on behalf of the stockholder, not on behalf of the corporation.
25
Under the Revised Model Business Corporation Act, when a corporation's bylaws grant stockholders preemptive rights, which of the following rights is(are) included in that grant?
~~The right to a proportionate share of corporate assets remaining on corporate dissolution
~~The right to purchase a proportionate share of newly issued stock
a.
Yes
No
b.
Yes
Yes
c.
No
Yes
d.
No
No
Rule: Preemptive rights provide a shareholder with a right of first refusal to buy a share of newly issued shares sufficient to maintain the shareholder's proportionate share of rights in any newly issued shares.
Rule: Preemptive rights do not provide a shareholder with the right to a proportionate share of corporate assets on dissolution.
Choice "c" is correct. "No - Yes."
Choices "b", "a", and "d" are incorrect, per the above rules.
26
To which of the following rights is a stockholder of a public corporation entitled?
a.
The right to vote for the election of officers.
b.
The right to a reasonable inspection of corporate records.
c.
The right to have the corporation issue a new class of stock.
d.
The right to have annual dividends declared and paid.
Choice "b" is correct. Stockholders have a right to inspect certain corporate records.
Choice "d" is incorrect. Declaration of dividends is within the directors' discretion. There is no absolute right of shareholders to receive annual dividends.
Choice "a" is incorrect. Officers are appointed by the directors; they are not elected by the shareholders.
Choice "c" is incorrect. Shareholders do not have a right to force the corporation to issue a new class of stock.
27
A parent corporation owned more than 90% of each class of the outstanding stock issued by a subsidiary corporation and decided to merge that subsidiary into itself. Under the Revised Model Business Corporation Act, which of the following actions must be taken?
a.
The parent corporation's stockholders must approve the merger.
b.
The subsidiary corporation's dissenting stockholders must be given an appraisal remedy.
c.
The parent corporation's dissenting stockholders must be given an appraisal remedy.
d.
The subsidiary corporation's board of directors must pass a merger resolution.
Choice "b" is correct. In a short form merger (one between a parent and a subsidiary 90% of which is owned by the parent), the subsidiary's shareholders have a right to dissent and take advantage of the appraisal remedy.
Choice "d" is incorrect. The subsidiary's board is not required to take any action in a short-form merger.
Choice "a" is incorrect. The parent corporation's shareholders have no right to approve or disapprove a short-form merger.
Choice "c" is incorrect. The parent corporation's shareholders have no right to dissent to a short-form merger.
28
Davis, a director of Active Corp., is entitled to:
a.
Serve on the board of a competing business.
b.
Unilaterally grant a corporate loan to one of Active's shareholders.
c.
Rely on information provided by a corporate officer.
d.
Take sole advantage of a business opportunity that would benefit Active.
Choice "c" is correct. As a director of the corporation Davis may rely on information provided to him/her by a corporate officer. A corporate director is under no obligation to verify information given to him by management (corporate officers).
Choice "a" is incorrect. A director is not entitled to serve on the board of a competing business. Doing so would be a breach of fiduciary duty.
Choice "d" is incorrect. A director may not take sole advantage of a business opportunity that would benefit the corporation. Doing so would be a breach of fiduciary duty.
Choice "b" is incorrect. A director may not unilaterally grant a corporate loan to one of the corporation's shareholders. Directors generally must act through a majority vote at a directors' meeting.
29
Leslie, Kelly, and Blair wanted to form a business. Which of the following business entities does not require the filing of organization documents with the state?
a.
Limited partnership.
b.
Subchapter S corporation.
c.
Joint venture.
d.
Limited liability company.
Explanation
## Footnote
Choice "c" is correct. A joint venture is like a partnership. A partnership or joint venture can be formed without filing any documents with the state.
Choice "a" is incorrect. Formation of a limited partnership requires the filing of a certificate of limited partnership with the state.
Choice "d" is incorrect. A limited liability company may be formed only by filing articles of organization with the state.
Choice "b" is incorrect. A corporation, including a Subchapter S corporation, may be formed only by filing articles of incorporation with the state.
30
Knox, president of Quick Corp., contracted with Tine Office Supplies, Inc. to supply Quick's stationery on customary terms and at a cost less than that charged by any other supplier. Knox later informed Quick's board of directors that Knox was a majority stockholder in Tine. Quick's contract with Tine is:
a.
Valid because the contract is fair to Quick.
b.
Void because the disclosure was made after execution of the contract.
c.
Void because of Knox's self-dealing.
d.
Valid because of Knox's full disclosure.
Choice "a" is correct. If a corporation enters into a contract and a director has a conflict of interest in the transaction, the contract is voidable unless the director makes full disclosure of all of the facts to the disinterested directors or the shareholders, who then approve the transaction, or the director can prove that the transaction was fair to the corporation. The stationery purchase was fair to Quick, since it was purchased at a below-market price. Thus, the contract is valid.
Choice "c" is incorrect. A director's self-dealing does not automatically make a contract void. The contract can be upheld if it was fair.
Choice "b" is incorrect. A director's self-dealing does not automatically make a contract void. The contract can be upheld if it was fair.
Choice "d" is incorrect. If a corporation enters into a contract and a director has a conflict of interest in the transaction, the contract is voidable unless the director makes full disclosure of all of the facts to the disinterested directors or shareholders, who then approve the transaction, or the director can prove that the transaction was fair. Mere disclosure after the contract was adopted does not automatically render the contract valid.
31
A stockholder's right to inspect books and records of a corporation will be properly denied if the purpose of the inspection is to:
a.
Obtain stockholder names for a retail mailing list.
b.
Investigate possible management misconduct.
c.
Solicit stockholders to vote for a change in the board of directors.
d.
Commence a stockholder's derivative suit.
Choice "a" is correct. In general, a shareholder has a right to inspect the books and records of a corporation for purposes related to the stockholder's interest in the corporation. This right will be denied where the purpose is not reasonably related to their status as a shareholder. Obtaining stockholder names to create a retail mailing list is a personal purpose.
Choices "d", "c", and "b" are incorrect. The following reasons for shareholders to inspect the books of the corporation are reasonably related to their status as shareholders:
d.
To commence a stockholder's derivative suit.
c.
To solicit stockholders to vote for a change in the board of directors.
b.
To investigate possible management misconduct.
32
Following the formation of a corporation, which of the following terms best describes the process by which the promoter is released from, and the corporation is made liable for, pre-incorporation contractual obligations?
a.
Delegation.
b.
Accord and satisfaction.
c.
Assignment.
d.
Novation.
Choice "d" is correct. A promoter is personally liable for the contracts he or she enters into prior to incorporation. A corporation may become liable by adoption of the contract, and through the process of novation (an agreement among all of the parties), the promoter may be released from contractual obligations.
Choice "c" is incorrect. An assignment is a transfer of a contractual duty to perform. After the transfer, both the assignor and assignee may be held liable for performance. The assignor is not, thereby, released from liability.
Choice "a" is incorrect. A delegation is a transfer of a contractual duty to perform. Both the delegor and delegee are liable to perform after the assignment; it does not release the promoter from liability.
Choice "b" is incorrect. An accord is an agreement to change the performance due under a contract. Once the new terms are performed or satisfied, the original contract terms are terminated. Such an agreement does not automatically result in release of a promoter.
33
Which of the following parties is liable to repay an illegal distribution to a corporation?
a.
A director not breaching his or her duty in approving the distribution and the corporation is solvent.
b.
A director not breaching his or her duty in approving the distribution and the corporation is insolvent.
c.
A shareholder not knowing of the illegality of the distribution and the corporation is solvent.
d.
A shareholder knowing of the illegality of the distribution and the corporation is insolvent.
Choice "d" is correct. Illegal dividends from an insolvent company must be repaid to the corporation for the benefit of the creditors. A shareholder who knowingly accepts an illegal dividend is liable to return it.
Choices "a" and "b" are incorrect. If a director does not breach any duties in approving a distribution, the director is protected by the business judgment rule and is not liable for the distribution whether the corporation is solvent or insolvent.
Choice "c" is incorrect. A shareholder of a solvent corporation who unknowingly accepts an illegal distribution is not obligated to repay the distribution.
34
Which of the following entities does not require the approval of the state in which the entity is formed?
a.
A corporation.
b.
A limited liability partnership.
c.
A general partnership.
d.
A limited liability company.
Choice "c" is correct. Under the common law and the Revised Uniform Partnership Act there is no requirement for a general partnership to file with the state and obtain state approval. All that is necessary to form a general partnership is: (i) an agreement (ii) between at least two competent parties (iii) to carry on as co-owners of a business for profit.
Choices "b", "d", and "a" are all incorrect because a limited liability partnership, a limited liability company and a corporation are all required to file with and be approved by the state.
35
Food Corp. owned a restaurant called The Ambers. The corporation president, T.J. Jones, hired a contractor to make repairs at the restaurant, signing the contract, "T.J. Jones for The Ambers." Two invoices for restaurant repairs were paid by Food Corp. with corporate checks. Upon presenting the final invoice, the contractor was told that it would not be paid. The contractor sued Food Corp. Which of the following statements is correct regarding the liability of Food Corp.?
a.
It is liable because Jones is not liable.
b.
It is not liable because the corporation was an undisclosed principal.
c.
It is not liable because Jones is liable.
d.
It is liable because Jones had authority to make the contract.
Choice "d" is correct. Where an agent enters into a contract on behalf of a principal and discloses the existence and identity of the principal and acts with authority, the principal is liable and the agent is not liable. Here, Jones signed the contract with an indication that he was signing for the corporation. The president of a corporation is an agent of the corporation and has apparent authority to enter contracts that appear to be within the ordinary scope of the corporation's business. The restaurant repairs here appear to be with the scope of Food Corp.'s business. Therefore, Food Corp. will be bound because Jones had at least apparent authority.
Choice "c" is incorrect, per the rule stated above.
Choice "b" is incorrect. The president signed as acting on behalf of the corporation, thus disclosing the principal.
Choice "a" is incorrect, per the rule stated above.
36
What type of business organization may generally be formed without filing an organizational document or certificate with a state government agency or office?
a.
A limited liability company.
b.
A limited partnership.
c.
A general partnership.
d.
A corporation.
Choice "c" is correct. A general partnership may be formed without filing any organizational documents with the state. All that is needed to form a partnership is an agreement between at least two competent persons to carry on as co-owners a business for profit.
Choice "d" is incorrect. In order to form a corporation, a document, called the articles of incorporation in most states, must be filed with the state.
Choice "a" is incorrect. In order to form a limited liability company, a document, called the articles of organization in most states, must be filed with the state.
Choice "b" is incorrect. In order to form a limited partnership, a document, called the "certificate of limited partnership" in most states, must be filed with the state.
37
Which of the following statements describes the same characteristic for both an S corporation and a C corporation?
a.
Both corporations have the disadvantage of double taxation.
b.
Shareholders can be either citizens of the United States or foreign countries.
c.
Both corporations can have more than 100 shareholders.
d.
Shareholders can contribute property into a corporation without being taxed.
Choice "d" is correct. Either entity's shareholders may contribute property to the corporations without being taxed and may contribute such property as an exchange for stock as appraised by the directors.
Choice "c" is incorrect. An S corporation may not have more than 100 shareholders, although a C corporation may have as many shareholders as desired.
Choice "a" is incorrect. Only the C corporation is subject to the double taxation disadvantage.
Choice "b" is incorrect. Only an S corporation is prohibited from having foreign country shareholders.
38
Smith was an officer of CCC Corp. As an officer, the business judgment rule applies to Smith in which of the following ways?
a.
If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, and CCC is prohibited from reimbursing Smith for any damages Smith paid.
b.
If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, but CCC may elect to reimburse Smith for any damages Smith paid.
c.
If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally not liable to CCC for damages caused.
d.
Because Smith is not a director, the rule does not apply.
Choice "c" is correct. The business judgment rule applies to officers as well as directors, who in their capacity, act in a manner the officer believes to be in the best interest of the corporation, and with the care an ordinarily prudent person in a like position would exercise. If the standards of the business judgment rule are met, the officer is not liable to the company for resulting damages.
Choices "d", "b", and "a" are incorrect, per the above rule.
39
Which of the following statements is correct regarding both debt and common shares of a corporation?
a.
Common shares have a higher priority on liquidation than debt.
b.
Common shares typically have a fixed maturity date, but debt does not.
c.
Common shareholders and debt holders have an ownership interest in the corporation.
d.
Common shares represent an ownership interest in the corporation, but debt holders do not have an ownership interest.
Choice "d" is correct. Common shares represent an investment in the corporation whereby the common shareholder becomes a part owner of the corporation. A debt holder is a creditor of the corporation. The corporation has borrowed money from the debt holder and promises to repay at a later date. A debt holder is not an owner of the corporation.
Choice "c" is incorrect. Unlike a common shareholder, a debt holder does not have an ownership interest in the corporation.
Choice "b" is incorrect. Common shares do not have a fixed maturity date, but debt securities do. This answer is backwards.
Choice "a" is incorrect. Upon liquidation of a corporation, the creditors of the corporation are paid first. After the creditors are paid, the shareholders are paid on a pro rata basis. Thus, debt holders (creditors) have a higher priority than stockholders.
40
In which type of business organization are income taxes always required to be paid by the entity on profits earned as well as by the owners upon distribution thereof?
a.
Subchapter S corporation.
b.
Subchapter C corporation.
c.
General partnership.
d.
Limited liability company.
Choice "b" is correct. A Subchapter C corporation is taxed as an entity for income tax purposes. Additionally, distributions made to stockholders are treated as taxable income to the stockholders. [Note that this type of corporation is more often called a C corporation instead of a Subchapter C corporation.]
Choice "c" is incorrect. A general partnership is not taxed as a separate entity for income tax purposes.
Choice "d" is incorrect. An LLC is not taxed as a separate entity for income tax purposes unless the LLC specifically elects to be taxed like a corporation. [Of course, the word "always" in the question takes care of that.]
Choice "a" is incorrect. A Subchapter S corporation is taxed as a partnership. Thus, it is not taxed as a separate entity for income tax purposes. [Note that this type of corporation is more often called an S corporation instead of a Subchapter S corporation.]
41
Under the Revised Model Business Corporation Act, following what type of corporate acquisition does the acquiring corporation automatically become liable for all obligations of the acquired corporation?
a.
An acquisition of stock for debt securities.
b.
A leveraged buyout of assets.
c.
A cash tender offer.
d.
A merger.
Under the Revised Model Business Corporation Act, following what type of corporate acquisition does the acquiring corporation automatically become liable for all obligations of the acquired corporation?
a.
An acquisition of stock for debt securities.
b.
A leveraged buyout of assets.
c.
A cash tender offer.
d.
A merger.
42
Which of the following actions is required to ensure the validity of a contract between a corporation and a director of the corporation?
a.
The director must disclose the interest to the independent members of the board and refrain from voting.
b.
The director must resign from the board of directors.
c.
An independent appraiser must render to the board of directors a fairness opinion on the contract.
d.
The shareholders must review and ratify the contract.
Choice "a" is clearly the best answer here, although it is not completely correct. Directors owe their corporation a duty of loyalty and must act solely in the best interests of the corporation. If a corporation enters into a contract and a director has a conflict of interest in the transaction, the contract is voidable unless the director makes full disclosure of all of the facts to the disinterested directors or the shareholders who then approve the transaction, or the transaction is fair. Thus, disclosing the interest to the independent members and refraining from voting is one way to ensure the validity of a contract between a director and his or her corporation, but it technically is not required as disclosure to and approval by the shareholders also ensures validity, as does making sure the transaction is fair to the corporation. Nevertheless, the other choices are clearly incorrect - making this the best choice.
Choice "c" is incorrect. A transaction with an interested director will be upheld if it is fair, but it is not necessary to hire an independent appraiser to prove fairness.
Choice "d" is incorrect. One method of approving a contract with an interested director is to disclose all of the material facts to the shareholders and seek their approval. Merely allowing the shareholders to review the contract is not sufficient.
Choice "b" is incorrect. To ensure the validity of a contract between a corporation and a director of the corporation, it is not necessary for the director to resign from the board (i.e., a director is not required to resign because of a conflict of interest). The corporation can approve the conflict if it is disclosed and the director does not participate in the approval process.
43
Which of the following statements is correct regarding the declaration of a stock dividend by a corporation having only one class of par value stock?
a.
A stock dividend causes a decrease in the assets of the corporation.
b.
A stock dividend increases a stockholder's proportionate share of corporate ownership.
c.
A stock dividend is prohibited in such a corporation.
d.
A stock dividend is a corporation's ratable distribution of additional shares of stock to its stockholders.
Choice "d" is correct. Stock dividends are dividends in the corporation's own authorized but unissued shares given to existing shareholders on account of their shares.
Choice "c" is incorrect. Despite the fact that a stock dividend in a corporation with only one class of par value stock does not change a shareholder's proportional ownership or affect capitalization of the corporation, nothing prohibits a corporation, even a corporation with only one class of par value stock, from declaring a stock dividend.
Choice "b" is incorrect. With a stock dividend, when there is only one class of stock, each shareholder receives a proportionate amount of stock, resulting in each shareholder owning the same percentage of the corporation after the dividend is issued as he or she owned before the dividend was issued.
Choice "a" is incorrect. When a stock dividend is issued in a corporation's own stock, no assets are distributed and the solvency of the corporation remains the same.
44
Which of the following corporate actions is subject to shareholder approval?
a.
Removal of officers.
b.
Declaration of cash dividends.
c.
Removal of directors.
d.
Election of officers.
Explanation
## Footnote
Choice "c" is correct. Shareholders have the right to elect and remove directors through the voting process.
Choice "d" is incorrect. Officers are selected by the directors rather than by the shareholders.
Choice "a" is incorrect. Because officers are selected by the directors, generally they may be removed only by the directors.
Choice "b" is incorrect. Dividends generally can be declared only by the directors; shareholders usually do not have any right to declare or vote on a distribution.
45
Which of the following is a requirement for a small business corporation to elect S corporation status?
a.
It has at least one partnership as a shareholder.
b.
It has more than 75 shareholders.
c.
It has only one class of stock.
d.
It has international ownership.
Choice "c" is correct. A corporation may elect to be taxed like a partnership under Subchapter S only if it has only one class of stock.
Choice "a" is incorrect. A corporation can elect S corporation status only if its shareholders are individuals, estates, or certain types of trusts.
Choice "d" is incorrect. Foreign shareholders generally are prohibited in an S corporation.
Choice "b" is incorrect. An S corporation can have up to 100 shareholders, but it may have fewer.
46
The president of a company has signed a $10 million contract with a construction company to build a new corporate office. Which of the following corporate documents sets forth the scope of authority under which this transaction is governed?
a.
Proxy statement.
b.
Bylaws.
c.
Charter.
d.
Certificate of Incorporation.
Choice "b" is correct. The bylaws usually contain the rules for running the corporation.
Choices "d" and "c" are incorrect. These are possible choices, but not as good an answer as "b". A corporation's articles of incorporation (called a charter in a few states) must set out certain information relevant to formation of the corporation, but it may include any other information that it is not illegal. However, usually details about intracorporate power are set out in bylaws rather than in the articles or charter.
Choice "a" is incorrect. A proxy statement is a request to shareholders to allow their shares to be voted by a specified person in a specified way. It has nothing to do with a corporate president's authority.
47
Which of the following statements best states the purpose of cumulative voting?
a.
To allow for the election of one-third of the board of directors each year.
b.
To allow minority shareholders to gain representation on the board of directors.
c.
To assure that a majority of shares voted elects the entire board of directors.
d.
To assure the continuance of incumbent directors.
Choice "b" is correct. In cumulative voting, each share is entitled to one vote for each director position that is being filled and the shareholders may cast the votes in any way, including casting all for a single candidate. This helps minority shareholders gain representation on the board. Thus, choice "c" is incorrect.
Choice "d" is incorrect. Cumulative voting does not insure the continuance of incumbent directors.
Choice "a" is incorrect. Staggering election of the board into three classes (rather than cumulative voting) would facilitate the election of 1/3 of the board each year.
48
Which of the following forms of business generally provides all owners with limited liability while avoiding federal taxation of income at the entity level?
a.
Subchapter C corporation.
b.
Limited partnership.
c.
Subchapter S corporation.
d.
Partnership.
Choice "c" is correct. In a subchapter S corporation the entity is taxed liked a partnership, but the shareholders still enjoy the limited liability of the corporate form.
Choice "a" is incorrect because a C corporation is taxed at the federal level.
Choice "d" is incorrect because a general partner in a partnership has unlimited liability.
Choice "b" is incorrect because a general partner in a limited partnership also has unlimited liability.
49
Under the Revised Model Business Corporation Act, which of the following dividends is not defined as a distribution?
a.
Property dividends.
b.
Liquidating dividends.
c.
Cash dividends.
d.
Stock dividends.
Choice "d" is correct because, technically, dividends paid in stock are not a distribution. Stock dividends are dividends in the corporation's own authorized but unissued shares. No assets are distributed. The stockholder's wealth and percentage of ownership are not increased. A stock dividend has no affect on earnings and profits for federal income tax purposes.
Choice "c" is incorrect because a cash dividend is obviously a distribution.
Choice "a" is incorrect. A property dividend is a distribution of earnings in the form of property.
Choice "b" is incorrect. A liquidating dividend is a dividend that is paid by the corporation to shareholders from capital rather than retained earnings. As such, it is clearly a distribution.
50
What is the most likely effect if a court pierces the corporate veil?
a.
The corporation can lose its tax exempt status.
b.
The corporation's shareholders, officers, and directors can be assigned liability.
c.
The corporation can be held liable for acts of the directors.
d.
The corporation can be held liable for acts of nonofficer employees of the corporation.
Choice "b" is correct. When the "corporate veil is pierced," courts disregard the corporate form and hold shareholders, officers or directors personally liable. Courts generally will pierce the corporate veil for commingling of funds, inadequate capitalization at time of formation or fraud.
Choice "c" is incorrect. "Piercing the corporate veil" does not entail holding a corporation liable for the acts of directors; it entails holding a shareholder, officer or director liable for obligations of the corporation.
Choice "a" is incorrect because "piercing the corporate veil" does not entail a corporation losing tax-exempt status.
Choice "d" is incorrect because "piercing the corporate veil" does not entail holding a corporation liable for the acts of nonofficer employees; it entails holding a shareholder, officer or director liable for obligations of the corporation.
51
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.
General partnership.
c.
Limited partnership.
d.
C corporation.
Choice "d" 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 "b" 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 "c" 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.
52
Which of the following circumstances may permit the piercing of the corporate veil of a closely held corporation and thus may cause its shareholders to be held personally liable?
I.
The corporation is thinly capitalized at the time of formation.
II.
The corporation borrows money from a shareholder without giving the shareholder a security interest in corporate assets.
a.
Neither I nor II.
b.
Both I and II.
c.
II only.
d.
I only.
Choice "d" is correct. I is a correct statement. The corporate veil of limited liability may be pierced and the personal assets of the shareholders may be reached to satisfy corporate obligations if the corporation was inadequately (thinly) capitalized at the time of its formation. II, however, is incorrect. A corporation borrowing money from a shareholder and not giving the shareholder security is not a ground for piercing the corporate veil.
Choices "c", "b", and "a" are incorrect because I, and only I, is a correct statement.
53
Which of the following acts is most likely to cause a court to pierce the corporate veil?
a.
Using corporate assets for the owner's personal purposes.
b.
Retention of excess capital.
c.
Failure to designate a registered agent in the articles of incorporation (Charter).
d.
Failure to conduct a significant portion of business in the chartering state.
Choice "a" is correct. The corporate veil of limited liability may be pierced and the personal assets of the shareholders may be reached to satisfy corporate obligations if the shareholder commingles personal assets with his own. This includes using corporate assets to pay personal debts.
Choice "c" is incorrect. Failure to designate a registered agent in the articles makes the articles faulty in most states and is a ground for seeking dissolution of the corporation, but in and of itself, it is not a ground for piercing the corporate veil to reach shareholders' personal assets to satisfy corporate obligations.
Choice "b" is incorrect. Retention of excess capital may be a ground for imposing extra taxes on the corporation, but it is not a ground for piercing the corporate veil.
Choice "d" is incorrect. Failure to conduct a significant portion of business in the chartering state has absolutely no impact on corporate obligations. Many corporations are incorporated in states with favorable tax structures and corporate laws (e.g., Delaware) even though they carry on little or no business in the state of incorporation.
54
Hughes and Brody start a business as a closely-held corporation. Hughes owns 51 of the 100 shares of stock issued by the firm and Brody owns 49. One year later, the corporation decides to sell another 200 shares. Which of the following types of rights would give Hughes and Brody a preference over other purchasers to buy shares to maintain control of the firm?
a.
Inspection rights.
b.
Pre-emptive rights.
c.
Cumulative voting rights.
d.
Shareholder derivative rights.
Choice "b" is correct. The right to purchase new issuances of additional stock in order to maintain current proportional ownership is known as a pre-emptive right.
Choice "d" is incorrect. A shareholder's derivative right is the right of a shareholder to enforce a legal obligation, for example, by filing a lawsuit, owed to the corporation by a third party when the corporation does not seek to vindicate its own rights.
Choice "c" is incorrect. Cumulative voting rights refers to the right of a shareholder to cast votes in the election of directors equal to the product of the number of shares the shareholder owns times the number of directors being elected (e.g., if a shareholder owns 100 shares and three directors are being elected, the shareholder may cast 300 votes). Cumulative voting is often used to help assure representation of minority shareholders.
Choice "a" is incorrect. A shareholder's inspection rights refer to the right of a shareholder to inspect and copy certain shareholder records (e.g., minutes of shareholder meetings, list of shareholders, etc.).
55
The business judgment rule is a rule that immunizes corporate:
a.
Management from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith but are not within the power of the corporation or the authority of management to make.
b.
Management from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith and are within both the power of the corporation and the authority of management to make.
c.
Shareholders from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith but are not within the power of the corporation or the authority of shareholders to make.
d.
Shareholders from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith and are within both the power of the corporation and the authority of shareholders to make.
Choice "b" is correct. Under the business judgment rule, a director is protected from liability for decisions made on behalf of the corporation if the director acts in good faith and in a manner that the director believes is in the best interest of the corporation, exercising the care that a reasonably prudent person would exercise in a similar position. The action must also ostensibly be within the power of the corporation to undertake and ostensibly within the authority of management to make.
Choice "a" is incorrect. A director will not be protected under the business judgment rule if he knowingly causes the corporation to undertake action that is not within the power of the corporation to take and not within the authority of management.
Choices "d" and "c" are incorrect. The business judgment rule protects directors; it is not applicable to the shareholders (except perhaps in the case of a closely-held corporation being run by the shareholders).
56
A corporate stockholder is entitled to which of the following rights?
a.
Approve dissolution.
b.
Receive annual dividends.
c.
Elect officers.
d.
Prevent corporate borrowing.
Choice "a" is correct. A stockholder has the right of approval over fundamental corporate changes such as dissolution.
Choice "c" is incorrect. The board of directors selects officers, not the corporate stockholders.
Choice "b" is incorrect. The board of directors have discretion to declare dividends. Corporate stockholders do not have an absolute right to annual dividends.
Choice "d" is incorrect. Corporate borrowing must be accomplished through the actions of a corporate board of directors resolution.
57
Which of the following must take place for a corporation to be voluntarily dissolved?
a.
Approval by the officers of a resolution to dissolve.
b.
Unanimous vote of the stockholders.
c.
Passage by the board of directors of a resolution to dissolve.
d.
Amendment of the certificate of incorporation.
Choice "c" is correct. For a corporation to dissolve, the directors must adopt a resolution recommending dissolution.
Choice "a" is incorrect. The officers are not required to approve resolutions for fundamental corporate changes.
Choice "d" is incorrect. To dissolve, the certificate of incorporation need not be amended; rather, a certificate of dissolution must be executed and filed.
Choice "b" is incorrect. Generally, fundamental corporate changes such as dissolution need only be approved by a majority of the outstanding shares.
58
Under the Revised Model Business Corporation Act, a corporate director is authorized to:
a.
Profit from insider information.
b.
Serve on the board of directors of a competing business.
c.
Rely on information provided by the appropriate corporate officer.
d.
Sell control of the corporation.
Choice "c" is correct. Under the Revised Model Business Corporation Act, a director is authorized to rely on information provided by the appropriate officer. The officers are selected by the board of directors to run the day-to-day affairs of the corporation, and thus will often have more direct access to information. Directors can also rely on information supplied to them by professionals such as attorneys and CPAs hired by the corporation.
Choice "b" is incorrect. The Revised Model Business Corporation Act does not authorize a director to serve on the board of a competing corporation. Such action will usually result in a breach of the duty of loyalty.
Choice "d" is incorrect. The Revised Model Business Corporation Act does not authorize a director to sell control of the corporation. Depending on the circumstances, such action would require approval of the shareholders, or at least of the selling shareholders.
Choice "a" is incorrect. The Revised Model Business Corporation Act does not authorize a director to profit from insider information. In fact, the director could face liability under the securities laws for such conduct.
59
Trish is a promoter for Alpha Corporation. Generally, Trish is personally liable for any pre-incorporation contract until Alpha:
a.
Ratifies the contract.
b.
Rejects the contract.
c.
Assumes the pre-incorporation contract by novation.
d.
Releases Trish from liability.
Choice "c" is correct. In a novation, a new party (the corporation) is substituted for an old party (the promoter) in the contract. All parties must agree to the novation.
Choice "d" is incorrect. The corporation does not have the power to release Trish; the other party to the contract must agree to the release as well.
Choice "a" is incorrect. Technically, only a principal can ratify a contract made by an agent. Because the corporation is not in existence when the promoter acts, the promoter cannot be acting on the corporation's behalf. Thus, the corporation is not the promoter's principal and cannot "ratify" the promoter's contract. Instead, the corporation is said to "adopt" a promoter's contract. In any case, ratification/adoption does not release the promoter from liability; instead, it merely makes the corporation liable along with the promoter.
Choice "b" is incorrect. Rejection of the contract does not affect the promoter's liability.
60
A registered agent for a corporation incorporated in Delaware would:
a.
Take the preliminary steps in organizing the corporation.
b.
Be personally liable for all pre-incorporation contracts.
c.
Agree to buy stock in a corporation before incorporation.
d.
Have legal documents served on it on behalf of the corporation, if the corporation is sued.
Choice "d" is correct. A registered agent is an agent for the corporation who would accept service of process in the event the corporation is involved in a lawsuit.
Choice "c" is incorrect. This describes a stock subscription, and there is no requirement that a registered agent must agree to purchase stock.
Choice "b" is incorrect. This describes the liability of a promoter and the registered agent need not have acted as a promoter for the corporation.
Choice "a" is incorrect. Promoters or the incorporators are responsible for organizing the corporation.
61
Patti is a director of Smackey, Inc. As a corporate director, Patti is:
a.
A principal.
b.
An agent.
c.
A trustee.
d.
A fiduciary.
Choice "d" is correct. Each director owes the corporation fiduciary duties and must act in the best interest of the corporation.
Choice "b" is incorrect. Absent a vote giving a director authority to act on behalf of the corporation, a director is not an agent of the corporation and cannot bind the corporation in contract.
Choice "a" is incorrect. A principal is the person on whose behalf an agent acts. The corporation does not act on behalf of the directors, and while the directors may delegate some of their power to agents of the corporation, the agents act on behalf of the corporation (i.e., the corporation is the principal) and not the directors.
Choice "c" is incorrect. Directors are not trustees of the corporation, as they do not hold legal title to anything belonging to the corporation for the benefit of another.
62
Which of the following disqualifies an entity from an S corporation election?
a.
A 501(c)(3) exempt organization shareholder.
b.
An estate shareholder.
c.
Seventy-seven individual shareholders (including four married couples).
d.
A nonresident alien shareholder.
Explanation
## Footnote
Choice "d" is correct. An S corporation cannot have any foreign shareholders.
Choice "c" is incorrect. An S corporation may have up to 100 shareholders.
Choice "b" is incorrect. An estate may be a shareholder in an S corporation.
Choice "a" is incorrect. A charitable (501(c)(3)) organization may be a shareholder in an S corporation.
63
Davis, an inventor, developed a new product, but lacked money to get the product to the marketplace. Before creating a corporation to raise capital, Davis leased office space and equipment, entered into contracts with third parties, and identified investors. Who has liability for pre-incorporation debts?
a.
Davis is liable until the corporation assumed the debts in novation.
b.
If this corporation is never formed, the unpaid third parties must write off the debt because no corporate entity existed at the time debt was incurred.
c.
If this corporation is never formed, Davis is not liable.
d.
Davis is liable until the articles of incorporation were filed.
Choice "a" is correct. Davis acted as a promoter (a person who procures capital and other commitments for a corporation to be formed). Promoters are personally liable for contracts that they enter into on behalf of the corporation to be formed. They remain liable on the contracts even after the corporation is formed unless the parties enter into a novation (i.e., an agreement among the parties to substitute the corporation for the promoter).
Choice "d" is incorrect. A promoter remains liable on contracts he enters into on behalf of a corporation, even if the corporation is formed by filing articles of incorporation. The corporation does not become liable on the contracts merely because articles were filed.
Choices "c" and "b" are incorrect. Promoters remain liable on contracts they enter into on behalf of corporations even if the corporations are never formed.
64
Which of the following is an advantage of forming a limited liability company (LLC) as opposed to a partnership?
a.
The entity may avoid taxation.
b.
The entity may have any number of owners.
c.
The owner may participate in management while limiting personal liability.
d.
The entity may make disproportionate allocations and distributions to members.
Choice "c" is correct. A member in a limited liability company has limited liability and the ability to manage, while a partner in a general partnership has full liability and the ability to manage.
Choice "a" is incorrect. Generally, both entities' profits are taxable at the ownership level, but a Limited Liability Company may be taxed as an entity if it so elects.
Choice "b" is incorrect. Both entities may have any number of owners.
Choice "d" is incorrect. Both entities may make disproportionate allocations and distributions to their owners.
65
Texas Cat Chow Inc. has only four shareholders. Each shareholder will have the right to approve:
a.
All of the answer choices are correct.
b.
The hiring of an officer.
c.
An amendment to the corporation's articles of incorporation changing the duration for which the corporation was formed.
d.
The declaration of corporate dividends.
Choice "c" is correct. Shareholders have the right to vote on all fundamental corporate changes, including amendments to the articles of incorporation.
Choice "b" is incorrect. The hiring of officers is a right that the directors have.
Choice "d" is incorrect. Directors have the sole discretion to declare dividends.
Choice "a" is incorrect as it includes "b" and "d", both of which are incorrect per the above explanations.
66
In a legal action, a shareholder of Smackey, Inc. might be personally liable for the company's debts if:
a.
Smackey is overcapitalized.
b.
All of the answer choices are correct.
c.
Smackey's articles of incorporation allow for more than one class of stock.
d.
The shareholder's personal interests are materially commingled with Smackey's interests.
Choice "d" is correct. Commingling shareholders' personal assets and other interests with the corporation's interests is a breach of corporate formalities designed to create and keep the corporation as a separate legal entity. Thus, it is a ground for reaching the shareholder's personal assets (i.e., piercing the corporate veil).
Choice "a" is incorrect. Overcapitalization is acceptable. Undercapitalization at the time of formation may cause the shareholder to be personally liable.
Choice "c" is incorrect. It is acceptable for most corporations to have more than one class of stock and this does not affect shareholder liability.
Choice "b" is incorrect as it includes choices "a" and "c", both of which are incorrect per the above explanations.
67
Which of the following corporate shareholder rights is enforceable by means of a derivative suit?
a.
Recovering damages from a third party.
b.
Compelling payment of properly declared dividends.
c.
Protecting preemptive rights.
d.
Enforcing access to corporate records.
Choice "a" is correct. A derivative action is used when a corporation fails to enforce a right that it has against a third party; the shareholder brings suit on behalf of the corporation. A suit against a third party to enforce the corporation's rights against the third party is an example of a corporate shareholder right enforceable by derivative suit.
Choices "b", "d", and "c" are incorrect. All of the other choices are incorrect because they involve suits directly against the corporation rather than against a third party.
68
Berry, Drake, and Flanigan are partners in a general partnership. The partners made capital contributions as follows: Berry, $150,000; Drake, $100,000; and Flanigan, $50,000. Drake made a loan of $50,000 to the partnership. The partnership agreement specifies that Flanigan will receive a 50% share of profits, and Drake and Berry each will receive a 25% share of profits. Under the Revised Uniform Partnership Act and in the absence of any partnership agreement to the contrary, which of the following statements is correct regarding the sharing of losses?
a.
The partners will share in losses according to the allocation of profits specified in the partnership agreement.
b.
The partners will share in losses on a pro rata basis according to the capital contributions.
c.
The partners will share in losses on a pro rata basis according to the capital contributions and loans made to the partnership.
d.
The partners will share equally in any partnership losses.
Choice "a" is correct. Under the Revised Uniform Partnership Act, unless agreed otherwise, partners share losses in the same manner that they share profits.
Choice "d" is incorrect. Under the Revised Uniform Partnership Act, unless agreed otherwise, partners share losses in the same manner that they share profits. Here, the partners agreed to share profits in a 2:1:1 ratio. Thus, losses will be shared in that manner rather than equally.
Choice "b" is incorrect. Under the Revised Uniform Partnership Act, unless agreed otherwise, partners share losses in the same manner that they share profits. They are not shared in accordance with the partners' capital contributions.
Choice "c" is incorrect. Under the Revised Uniform Partnership Act, unless agreed otherwise, partners share losses in the same manner that they share profits. They are not shared in accordance with the partners' capital contributions or loans.
69
Which of the following statements is correct regarding the apparent authority of a partner to bind the partnership in dealings with third parties? The apparent authority:
a.
Must be derived from the express powers and purposes contained in the partnership agreement.
b.
Will be effectively limited by a formal resolution of the partners of which third parties are unaware.
c.
May allow a partner to bind the partnership to representations made in connection with the sale of goods.
d.
Would permit a partner to submit a claim against the partnership to arbitration.
Choice "c" is correct. Apparent authority of one partner arises from the actions or statements of the partnership or another partner indicating to a third party that the first partner has authority. Moreover, a partner automatically has apparent authority to enter into any transaction apparently carrying on in the usual way the business of the partnership. Thus, if the partnership regularly sells goods, a partner would have apparent authority to make representations about the goods.
Choice "a" is incorrect. Apparent authority can result from any statement made by the partnership to a third party indicating that the partner has authority. Authority arising from express powers and purposes contained in the partnership agreement is actual authority, not apparent authority.
Choice "b" is incorrect. Statements, resolutions, or agreements attempting to limit a partner's apparent authority are not binding on the third party if the third party is unaware of them.
Choice "d" is incorrect. Apparent authority of the partner does not, by itself, allow the partner to submit a claim to arbitration. A partner has apparent authority only to carry on ordinary business, and submitting a claim to arbitration is an extraordinary event.
70
Park and Graham entered into a written partnership agreement to operate a retail store. Their agreement was silent as to the duration of the partnership. Park wishes to dissociate from the partnership. Which of the following statements is correct?
a.
Park may dissociate from the partnership only after notice of the proposed dissolution is given to all partnership creditors.
b.
Park may not dissociate from the partnership unless Graham consents.
c.
Park may dissociate from the partnership at any time.
d.
Unless Graham consents to the dissociation, Park must apply to a court and obtain a decree ordering the dissociation.
Choice "c" is correct. Because the agreement is silent as to duration, it is a partnership at will. A partner may dissociate from a partnership at will at any time.
Choice "d" is incorrect. Because the agreement is silent as to duration, it is a partnership at will. A partner may dissociate from a partnership at will at any time. No court order is required.
Choice "b" is incorrect. Partnerships are consensual relationships, so any partner has the power to dissociate at any time; he or she need not obtain the consent of the other partners (though absent consent, the partner will be liable for damages if the dissociation is wrongful).
Choice "a" is incorrect. There is no requirement of giving partnership creditors a formal notice of intent to dissociate, but it is a good idea to do so to avoid liability on future partnership obligations.
71
Smith and James were partners in S and J Partnership. The partnership agreement stated that all profits and losses were allocated 60 percent to Smith and 40 percent to James. The partners decided to terminate and wind up the partnership. The following was the balance sheet for S and J on the day of the windup:
Cash
$40,000
Accounts receivable
12,000
Property and equipment
38,000
Total assets
$90,000
Accounts payable
$24,000
Smith, capital
30,000
James, capital
36,000
Total liabilities and capital
$90,000
Of the total accounts receivable, $10,000 was collected and the remainder was written off as bad debt. All liabilities of S and J were paid by the partnership. The property and equipment are sold for $32,000. Under the Revised Uniform Partnership Act, what amount of cash was distributed to Smith?
a.
$30,000
b.
$26,000
c.
$34,800
d.
$25,200
Explanation
## Footnote
Choice "d" 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 "d" reflects this amount.
Choices "b", "a", and "c" are incorrect, per the above calculation.
72
Fil and Breed are 50% partners in F&B Cars, a used-car dealership. F&B maintains an average used-car inventory worth $150,000. On January 5, National Bank obtained a $30,000 judgement against Fil and Fil's child on a loan that Fil had cosigned and on which Fil's child had defaulted. National sued F&B to be allowed to attach $30,000 worth of cars as part of Fil's interest in F&B's inventory. Will National prevail in its suit?
a.
Yes, because National had a valid judgement against Fil.
b.
No, because the judgement was not against the partnership.
c.
Yes, because Fil's interest in the partnership inventory is an asset owned by Fil.
d.
No, because attachment of the cars would dissolve the partnership by operation of law.
Choice "b" is correct. A partner has no right to possess partnership property except for partnership purposes. Thus, a personal creditor of a partner has no right to attach items of partnership property to satisfy a partner's personal debt.
Choice "d" is incorrect. There is no such rule. If the partnership were liable for the individual partner's debt, the cars could be attached and the partnership would not be dissolved.
Choice "a" is incorrect. A partner has no right to possess partnership property except for partnership purposes. Thus, a personal creditor of a partner has no right to attach items of partnership property to satisfy a partner's personal debt.
Choice "c" is incorrect. A partner has no right to possess partnership property except for partnership purposes. Thus, a personal creditor of a partner has no right to attach items of partnership property to satisfy a partner's personal debt.
73
The partners of College Assoc., a general partnership, decided to dissolve the partnership and agreed that none of the partners would continue to use the partnership name. Under the Revised Uniform Partnership Act, which of the following events will occur on dissolution of the partnership?
~~Each partner's existing liability would be discharged
~~Each partner's apparent authority would contine
a.
Yes
No
b.
Yes
Yes
c.
No
No
d.
No
Yes
Choice "d" is correct. "No - Yes."
Rule: Upon the dissolution of the partnership, each of the partners continues to have liability for partnership debts. Upon dissolution of the partnership each of the partners will continue to have apparent authority. The apparent authority of a partner can only be negated upon proper notice to third parties.
Choices "b", "a", and "c" are incorrect, per the above rule.
74
Wilson and Thomas are partners. Wilson contributed $150,000 to the partnership, and Thomas contributed $50,000. Wilson does 40% of the work, and Thomas does 60%. They do not have a partnership agreement that addresses the sharing of profits and losses. By the end of the year, the partnership has earned a profit of $200,000. What is Wilson's share of the profit under the Revised Uniform Partnership Act?
a.
$150,000
b.
$80,000
c.
$100,000
d.
$115,000
Choice "c" is correct. In a general partnership, absent an agreement to the contrary, partners' share equally in profits regardless of how much work they perform on behalf of the partnership and regardless of the relative amounts of contributions to capital made by each partner. Here, the partnership earned a $200,000 profit and there were two partners. Thus, each is entitled to $100,000.
Choice "b" is incorrect because it seeks to allocate profits on the basis of the work performed.
Choice "d" is incorrect because it does not allocate profits equally.
Choice "a" is incorrect because it seeks to allocate profits on the basis of contributions.
75
Best friends since college, Juan, Rico, and Sue agree to be partners in Yellow Bus Holdings. Rico quickly earns his CPA license and makes more money than the other two friends. Rico contributes 80% of the capital. The partners agree to split the profits equally. After three years of no profits, Yellow Bus eventually dissolves. Yellow Bus' liabilities are greater than its assets. The losses are paid by:
a.
Juan and Sue because they contributed less of the capital.
b.
All of the partners in proportion to their capital contributions.
c.
Rico, because he is the majority partner.
d.
All of the partners in proportion to their profit-sharing percentages.
Explanation
## Footnote
Choice "d" is correct. Unless there is an agreement to the contrary, losses in a partnership will be shared in the same manner as profits are shared. The facts state that the friends agreed to be partners; thus, they formed a partnership.
Choices "c", "a", and "b" are incorrect per the above explanation.
76
Generally, a partner who devotes his time and energy to partnership business will:
a.
None of the answer choices are correct.
b.
Be entitled to compensation if the partnership agreement is silent.
c.
Not be entitled to compensation if the partnership agreement is silent.
d.
Be entitled to compensation if he or she is an equity partner.
Explanation
## Footnote
Choice "c" is correct. Partners are entitled to share in the profits of the partnership but are not entitled to compensation unless otherwise agreed to in the partnership agreement or in the case of winding up by the surviving partner.
Choices "d", "b", and "a" are incorrect per the above explanation.
77
Tom is one of the original partners in a 6-month-old general partnership. If debts of the firm become due and the firm cannot pay them, Tom will be:
a.
Liable for those debts and obligations only up to the amount of his capital contribution.
b.
None of the answer choices are correct.
c.
Personally liable for those debts and obligations.
d.
Not required to contribute any money toward the satisfaction of these debts and obligations.
Choice "c" is correct. Partners of general partnerships are jointly and severally liable for the debts and obligations of the partnership incurred within the scope of partnership business.
Choices "a" and "d" are incorrect. General partners are personally liable for all obligations of their partnership, even beyond their capital contributions.
Choice "b" is incorrect per the above explanation.
78
Bubbas, LLC has two members, Johnny and Betty Sue. Johnny agrees to provide all of Bubbas, LLC's capital needs. On its federal tax return, unless an election was otherwise made, Bubbas, LLC, will be taxed as:
a.
None of the answer choices are correct.
b.
A sole proprietorship.
c.
A partnership.
d.
A corporation.
Choice "c" is correct. The default treatment of LLCs for tax purposes is to treat them as partnerships, with the flow-through of profits and losses.
Choice "d" is incorrect. In order to be treated as a corporation, an LLC must make an election to be treated as such.
Choice "b" is incorrect. Only a single-member LLC would be treated as a sole proprietorship for tax purposes.
Choice "a" is incorrect. An LLC, unless it elects otherwise, will be treated as a partnership for federal tax purposes.
79
The owners of a limited liability company are known as which of the following?
a.
Partners.
b.
Stockholders.
c.
Shareholders.
d.
Members.
Choice "d" is correct. The owners of a limited liability company are called members.
Choice "a" is incorrect. Partners are the owners of partnerships.
Choice "b" is incorrect. Stockholders are the owners of a corporation.
Choice "c" is incorrect. The term "shareholder" is synonymous with the term "stockholder" and is the name given to the owner of a corporation.
80
Locke and Vorst were general partners in a kitchen equipment business. On behalf of the partnership, Locke contracted to purchase 15 stoves from Gage. Unknown to Gage, Locke was not authorized by the partnership agreement to make such contracts. Vorst refused to allow the partnership to accept delivery of the stoves and Gage sought to enforce the contract. Gage will:
a.
Win, because Locke had express authority to bind the partnership.
b.
Win, because Locke had apparent authority to bind the partnership.
c.
Lose, because Locke was not an agent of the partnership.
d.
Lose, because Locke's action was not authorized by the partnership agreement.
Choice "b" is correct. Every partner is an agent of the partnership and has apparent authority to bind the partnership to contracts that appear to carry on in the usual way the business of the partnership. It would be usual for a partner in a kitchen equipment business to have authority to purchase stoves. Thus, Gage will win because of Locke's apparent authority.
Choice "d" is incorrect. Every partner is an agent for his partnership and has apparent authority to bind the partnership to contracts that appear to carry on in the usual way the business of the partnership.
Choice "c" is incorrect. Every partner is an agent of the partnership.
Choice "a" is incorrect. Locke did not have express authority to purchase the stoves. The facts state that Locke was not authorized to purchase the stoves and thus lacked express authority.
81
A sole proprietorship would be an ideal form of business to select if:
a.
The individual desired no liability beyond his capital investment.
b.
The individual wanted the business to continue indefinitely.
c.
The individual wanted the business to be a separate entity from the sole proprietor.
d.
The individual wanted to be able sell the business at will.
Choice "d" is correct. A sole proprietor is free to transfer or sell the business at will.
Choice "a" is incorrect because a sole proprietor is personally liable for all obligations of the business.
Choice "c" is incorrect. A sole proprietorship is not considered an entity separate from the sole proprietor.
Choice "b" is incorrect because a sole proprietorship ends with the death of the sole proprietor.
82
Which of the following forms of business can be formed with only one individual owning the business?
~~Sole Proprietorship
~~Limited Liability Company
~~Partnership
a.
Yes
Yes
No
b.
Yes
No
Yes
c.
No
No
No
d.
Yes
Yes
Yes
Choice "a" is correct. A sole proprietorship and (in most states) a limited liability company can be formed with only one owner. A partnership requires two or more partners.
Choices "d", "b", and "c" are incorrect per the explanation above.
83
Noll Corp. and Orr Corp. are contemplating entering into an unincorporated joint venture. Such a joint venture:
a.
Must file a certificate of limited partnership with the appropriate state agency.
b.
Must be dissolved upon the completion of a single undertaking.
c.
Will be treated as a partnership in most important legal respects.
d.
Will be treated as an association for federal income tax purposes and taxed at the prevailing corporate rates.
Choice "c" is correct. The legal requirements, the consequences, the advantages, and disadvantages of forming a joint venture generally are identical to those of a general partnership. Joint ventures are treated as a partnership in most important legal aspects.
Choice "b" is incorrect. A joint venture need not be dissolved upon the completion of a single undertaking. Joint ventures may be formed for a single transaction or for a related series of transactions.
Choice "d" is incorrect because a joint venture would be taxed like a partnership, not a corporation.
Choice "a" is incorrect because a joint venture, like a partnership, may be formed without filing with the state.
84
On dissolution of a general partnership, distributions will be made on account of:
I.
Partners' capital accounts.
II.
Amounts owed partners with respect to profits.
III.
Amounts owed partners for loans to the partnership.
In the following order:
a.
III, I, and II.
b.
II, III, and I.
c.
I, II, and III.
d.
III, II, and I.
Choice "a" is correct.
Rule: On dissolution of a general partnership the "order of distribution" would be as follows:
III.
General partner loans.
I.
Partners' capital accounts.
II.
General partners' profits.
85
Which of the following statements is correct with respect to the differences and similarities between a corporation and a limited partnership?
a.
Stockholders may be entitled to vote on corporate matters but limited partners are prohibited from voting on any partnership matters.
b.
A corporation and a limited partnership may be created only under a state statute and each must file a copy of its organizational document with the proper governmental body.
c.
Stock of a corporation may be subject to the registration requirements of the federal securities laws but limited partnership interests are automatically exempt from those requirements.
d.
Directors owe fiduciary duties to the corporation and limited partners owe such duties to the partnership.
Choice "b" is correct. Both a limited partnership and a corporation:
1.
Can only be created by statute, and
2.
Each must file a copy of its certificate with the proper state agency.
Choice "a" is incorrect. There are instances in which limited partners do vote on certain partnership matters (e.g., approve new general or limited partners).
Choice "c" is incorrect. Limited partnership interests are not automatically exempt from the federal securities laws.
Choice "d" is incorrect. Limited partners do not owe a fiduciary duty to the limited partnership.
86
Which of the following is not necessary to create an express partnership?
a.
Intention to conduct a business for profit.
b.
Execution of a written partnership agreement.
c.
Agreement to share ownership of the partnership.
d.
Intention to create a relationship recognized as a partnership.
Choice "b" is correct. A written partnership agreement, while certainly desirable, is not usually necessary to form a valid partnership; partnership agreements are not normally subject to the statute of frauds.
Choice "c" is incorrect. A partnership is an association of two or more persons who agree to carry on as co-owners of a business for profit. Thus, an agreement to share ownership of the partnership is a requirement for creating an express partnership.
Choice "a" is incorrect. A partnership is an association of two or more persons who agree to carry on as co-owners of a business for profit. Thus, an intent to carry on a business for a profit is a requirement for creating an express partnership.
Choice "d" is incorrect. A partnership is an association of two or more persons who agree to carry on as co-owners of a business for profit. The intent to create a business relationship recognized as a partnership is a requirement for creating an express partnership.
87
Eller, Fort, and Owens do business as Venture Associates, a general partnership. Trent Corp. brought a breach of contract suit against Venture and Eller individually. Trent won the suit and filed a judgment against both Venture and Eller. Trent will generally be able to collect the judgment from:
a.
Eller's personal assets only after partnership assets are exhausted.
b.
The personal assets of Eller, Fort, and Owens only.
c.
Partnership assets only.
d.
Eller's personal assets only.
Choice "a" is correct. When a judgment is obtained against both a partnership and an individual general partner, the plaintiff must proceed against the partnership assets first and then the assets of any individual general partner. The partnership assets must be exhausted before any general partner's individual assets can be attached.
Choices "c", "b", and "d" are incorrect, per the above rule.
88
Heather, Erika, and Shelby are members in HES LLC. Heather works 40 hours per week and Erika and Shelby work 20 hours per week. Heather contributed $30,000 to the LLC and Erika and Shelby contributed $60,000 each. Erika and Shelby have each originated 45% of the LLC's business and Heather has originated the other 10%. Absent an agreement to the contrary among the owners, who controls the management of the HES LLC?
a.
Heather, because she works the most.
b.
Erika and Shelby equally because they contributed the most.
c.
Heather, Erika, and Shelby in proportion to their ownership interests.
d.
Erika and Shelby, because they originate most of the work.
Choice "c" is correct.
Rule: Absent an agreement to the contrary, the members' voting strength is proportionate to their contributions.
Choices "a", "b", and "d" are incorrect, per the above rule.
89
Which of the following statements is correct regarding a limited liability company's operating agreement?
a.
It is necessary for a limited liability company to exist.
b.
It is designed to forestall and resolve disputes among the owners.
c.
It must be in writing.
d.
It must be filed with a central state agency.
Choice "b" is correct. An operating agreement is an optional agreement among members of a limited liability company (LLC) setting out the details of how the LLC will be run.
Choice "d" is incorrect. Articles of organization must be filed with the state in order to form an LLC. An operating agreement is an agreement among the members and need not be filed.
Choice "c" is incorrect. In most states, operating agreements must be in writing to be enforceable, but this is not true in some states.
Choice "a" is incorrect. As indicated above, the articles of organization are required for formation; an operating agreement is optional.
90
Heather, Erika, and Shelby are members in HES, a partnership. Heather works 40 hours per week and Erika and Shelby work 20 hours per week. Heather contributed $30,000 to the partnership and Erika and Shelby contributed $60,000 each. Erika and Shelby have each originated 45% of the partnership's business and Heather has originated the other 10%.
If HES were a general partnership, who controls management?
a.
Erika and Shelby equally because they contributed the most.
b.
Erika and Shelby, because they originate most of the work.
c.
Heather, Erika, and Shelby equally.
d.
Heather, because she works the most.
Choice "c" is correct.
Rule: Absent an agreement to the contrary, partners have equal management authority.
Choices "d", "a", and "b" are incorrect, per the above rule.
91
Heather, Erika, and Shelby are members in HES LLC. Heather dies. Absent an agreement to the contrary, what is the result?
a.
The LLC is dissolved unless the other members consent to continue.
b.
The LLC ceases to exist.
c.
The LLC continues as though nothing happened.
d.
The LLC must dissolve.
Choice "a" is correct. Absent an agreement to the contrary, if a member of an LLC dies, the LLC is dissolved unless the other members consent to continue.
Choice "d" is incorrect, because the LLC does not have to dissolve upon the death of a member.
Choice "b" is incorrect, because the LLC does not cease to exist immediately.
Choice "c" is incorrect, because the LLC does not continue unless the members consent to continue.
92
Aarons Group, Limited Partnership, was formed by three brothers, Aaron, Barry, and Sam. Aaron is the general partner and devotes more than 60 hours per week to the business. Barry and Sam are limited partners who work for different companies having no relationship to the limited partnership. The partners' capital contributions are as follows: Aaron invested 20%. Barry and Sam invested 40% each.
During the formation of the limited partnership, the brothers signed an agreement that addresses how the brothers will split profits and losses. At year-end, the limited partnership enjoyed large profits due to high demand for the business' product line.
The profits will be divided:
a.
According to the agreement.
b.
Equally.
c.
In proportion to each partner's capital contribution.
d.
By determining by the amount of time and labor each partner devoted to the operation of the partnership.
Explanation
## Footnote
Choice "a" is correct.
Rule: Partners in a limited partnership can agree as to how they will split profits and losses, with losses shared up to the amount of the limited partners' capital. Profits and losses are shared on the basis of percentages of capital contributions only in the absence of an agreement otherwise.
Choices "c", "b", and "d" are incorrect, per the above rule.
93
Which of the following statements is correct regarding the division of profits in a general partnership when the written partnership agreement only provides that losses be divided equally among the partners? Profits are to be divided:
a.
Proportionately among the partners.
b.
Based on the partners' participation in day-to-day management.
c.
Equally among the partners.
d.
Based on the partners' ratio of contribution to the partnership.
Choice "c" is correct.
Rule: When the partnership agreement is silent as to how profits are to be divided, they are divided equally. Note also that when the agreement is silent, losses are treated similar to profits, there is no reverse rule that profits are treated like losses.
Choices "d", "b", and "a" are incorrect, per the above rule.
94
The partnership agreement for Owen Associates, a general partnership, provided that profits be paid to the partners in the ratio of their financial contribution to the partnership. Moore contributed $10,000, Noon contributed $30,000, and Kale contributed $50,000. For the year ended December 31, Year 3, Owen had losses of $180,000. What amount of the losses should be allocated to Kale?
a.
$40,000
b.
$90,000
c.
$100,000
d.
$60,000
Choice "c" is correct.
Rule: When the partnership agreement is silent as to how losses will be shared, they are shared in the same manner as profits.
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)].
Choices "a", "d", and "b" are incorrect, per the above rule.
95
Downs, Frey, and Vick formed the DFV general partnership to act as manufacturers' representatives. The partners agreed Downs would receive 40% of any partnership profits and Frey and Vick would each receive 30% of such profits. It was also agreed that the partnership would not terminate for five years. After the fourth year, the partners agreed to terminate the partnership. At that time, the partners' capital accounts were as follows: Downs, $20,000; Frey, $15,000; and Vick, $10,000. There also were undistributed losses of $30,000.
Which of the following statements about the form of the DFV partnership agreement is correct?
a.
It must be in writing because partnership profits would not be equally divided.
b.
It could be oral because the partners had explicitly agreed to do business together.
c.
It could be oral because the partnership did not deal in real estate.
d.
It must be in writing because the partnership was to last for longer than one year.
Choice "d" is correct. Under the statute of frauds, an agreement, which by its terms cannot be performed within a year, must be evidenced by a writing containing the material terms and signed by the parties to be charged. Absent a writing, the partnership will be treated as a partnership at will.
Choice "a" is incorrect. There is no requirement that partnership agreements be in writing merely because profits will be divided unequally.
Choice "b" is incorrect. The statute of frauds requires contracts that cannot by their terms be performed within one year to be evidenced by a writing containing the material terms and signed by the parties to be charged.
Choice "c" is incorrect. Whether or not a partnership is to deal in real estate is irrelevant to whether the partnership agreement must be in writing.
96
Downs, Frey, and Vick formed the DFV general partnership to act as manufacturers' representatives. The partners agreed Downs would receive 40% of any partnership profits and Frey and Vick would each receive 30% of such profits. It was also agreed that the partnership would not terminate for five years. After the fourth year, the partners agreed to terminate the partnership. At that time, the partners' capital accounts were as follows: Downs, $20,000; Frey, $15,000; and Vick, $10,000. There also were undistributed losses of $30,000.
Vick's share of the undistributed losses will be:
a.
$9,000
b.
$0
c.
$10,000
d.
$1,000
Rule: Where the partnership agreement is silent, losses are shared in the same proportion as profits.
Choice "a" is correct. Vick was entitled to 30% of the profits and so will be responsible for 30% of the undistributed $30,000 loss, or $9,000.
Choices "b", "d", and "c" are incorrect, per the above rule.
97
Gillie, Taft, and Dall are partners in an architectural firm. The partnership agreement is silent about the payment of salaries and the division of profits and losses. Gillie works full-time in the firm, and Taft and Dall each work half time. Taft invested $120,000 in the firm, and Gillie and Dall invested $60,000 each. Dall is responsible for bringing in 50% of the business, and Gillie and Taft 25% each. How should profits of $120,000 for the year be divided?
a.
Gillie $30,000, Taft $60,000, Dall $30,000.
b.
Gillie $30,000, Taft $30,000, Dall $60,000.
c.
Gillie $40,000, Taft $40,000, Dall $40,000.
d.
Gillie $60,000, Taft $30,000, Dall $30,000.
Choice "c" is correct. $40,000 − $40,000 − $40,000 (equally).
Rule: In the absence of an agreement to the contrary, the profits will be shared equally regardless of investment of money or time.
Choices "d", "a", and "b" are incorrect, per the above rule.
98
Joint ventures are most similar to which of the following types of business organizations?
a.
General partnerships.
b.
Limited partnerships.
c.
Business trusts.
d.
Subchapter S corporations
Choice "a" is correct. The legal requirements, consequences, advantages, and disadvantages of forming a joint venture generally are identical to those of a general partnership.
Choices "b", "c", and "d" are incorrect. Joint ventures are not similar to limited partnerships, a business trust or a subchapter S corporation. Joint ventures are similar to a general partnership.
99
Heather, Erika, and Shelby are members in HES LLC. Heather works 40 hours per week and Erika and Shelby work 20 hours per week. Heather contributed $30,000 to the LLC and Erika and Shelby contributed $60,000 each. Erika and Shelby have each originated 45% of the LLC's business and Heather has originated the other 10%. Absent an agreement to the contrary, how will the LLC's $120,000 profits be divided among the members?
Heather
Erika
Shelby
a.
$24,000
$48,000
$48,000
b.
$12,000
$54,000
$54,000
c.
$40,000
$40,000
$40,000
d.
$60,000
$30,000
$30,000
Rule: Absent an agreement to the contrary, the LLC's profits will be divided among the members in proportion to their contributions. Here, Heather's, Erika's and Shelby's contributions were $30,000, $60,000, and $60,000, respectively. Thus, the profits will be divided in a 1:2:2 ratio (20% of $120,000 to Heather; 40% of $120,000 to Erika; and 40% of $120,000 to Shelby).
Choice "a" is correct.
Heather
Erika
Shelby
"a"
$24,000
$48,000
$48,000
Choices "d", "c", and "b" are incorrect, per the above rule.
100
With respect to the following matters, which is correct if a general partnership agreement is silent?
a.
A partner may assign his interest in the partnership but only with the consent of the other partners.
b.
A partner may sell the goodwill of the partnership without the consent of the other partners when the sale is in the best interest of the partnership.
c.
A partnership will continue indefinitely unless a majority of the partners votes to dissolve the partnership.
d.
Partnership losses are allocated in the same proportion as partnership profits.
Choice "d" is correct. As a general principle of partnership law, as well as under the Revised Uniform Partnership Act, in the absence of an agreement otherwise partnership losses are allocated among partners in the same proportion as partnership profits.
Choice "c" is incorrect. A partnership will dissolve on the death, bankruptcy, incapacity, or other withdrawal of a partner, unless the partners vote to continue.
Choice "a" is incorrect. A partner may assign his interest in the partnership at any time without consent of the partners since such an assignment does not make the assignee a partner; instead it merely gives the assignee the assignor's rights to distributions from the partnership.
Choice "b" is incorrect. A sale of partnership good will is an extraordinary transaction that requires consent of the partners. A single partner has no authority to make such a sale on his own accord.
101
Lisa is a limited partner in a limited partnership. Jen, one of the other limited partners, is seeking to sell her interest in the partnership to Karen and allow Karen to become a new limited partner. Which of the following statements is true?
a.
Jen may withdraw from the limited partnership without giving notice to the partnership.
b.
Lisa may engage in the management of the limited partnership without losing her limited liability.
c.
Lisa has a right to vote on the transferring of interest to and admission of Karen as a limited partner.
d.
Jen may transfer her interest and make Karen a new limited partner without the approval of the other partners.
Choice "c" is correct. Limited partners have the right to vote on the transfer of interest and admission of a new partner. Admission of a new partner requires unanimous consent.
Choice "b" is incorrect. A limited partner who acts as a general partner loses her limited liability status to those she acted as a general partner towards.
Choice "d" is incorrect. Partners can freely transfer their interests in profits and losses to third parties, but the third party cannot become a limited partner without the unanimous consent of the other partners.
Choice "a" is incorrect. Limited partners must give 6 months notice of withdrawal in absence of an agreement to the contrary.
102
A member of a limited liability company may generally do all of the following, except:
a.
Have limited liability.
b.
Participate in the management of the company absent an agreement to the contrary.
c.
Order office supplies for the company.
d.
Transfer his membership in the company without the consent of the other members.
Choice "d" is correct. The transfer of a member interest requires the consent of the other members. Members may not assign their interest without the other members' consent.
Choice "b" is incorrect. Unless the members have agreed to operate as a manager managed limited liability company, all members have the power to participate in management.
Choice "a" is incorrect. Members in a limited liability company all have limited personal liability.
Choice "c" is incorrect. Unless otherwise agreed, members have the right to manage the every day operations of a limited liability company. This can include the ordering of office supplies.
103
Under the Revised Uniform Partnership Act, which of the following statements concerning the powers and duties of partners in a general partnership is(are) correct?
I.
Each partner is an agent of every other partner and acts as both a principal and an agent in any business transaction within the scope of the partnership agreement.
II.
Each partner is subject to joint and several liabilities on partnership debt and contracts.
a.
I only.
b.
Both I and II.
c.
Neither I nor II.
d.
II only.
Choice "b" is correct.
Rule: Partners are agents of the other partners of a partnership, and thus act as both an agent and principal (for the actions of other partners) in authorized partnership transactions. All partners are subject to joint and several liabilities on partnership debts and contracts under the Revised Act.
Choices "a", "d", and "c" are incorrect, per the above rule.
104
Under the Revised Uniform Partnership Act, which of the following statements is(are) correct regarding the effect of the assignment of an interest in a general partnership?
I.
The assignee is personally responsible for the assigning partner's share of past and future parthernship debts.
II.
The assignee is entitled to the assigning partner's interest in partnership profits and surplus on dissolution of the partnership.
a.
II only.
b.
Neither I nor II.
c.
Both I and II.
d.
I only.
Choice "a" is correct. A partner may assign his or her interest in the partnership. The effect of such an assignment is to transfer the partner's right to receive the partner's share of profits or surplus only. Such an assignment does not cause dissolution or make the assignee a new partner. The assignor is still regarded as a partner and is liable for past and future partnership debts. The assignee, since he is not a partner, is not liable for past and future partnership debts.
Choice "d" is incorrect. The assignee of an interest in a general partnership is not personally responsible for the assigning partner's share of past and future partnership debts but is entitled to the assigning partner's interest in partnership profits and surplus on dissolution of the partnership.
Choice "c" is incorrect. The assignee of an interest in a general partnership is entitled to the assigning partner's interest in partnership profits and surplus on dissolution of the partnership but is not personally responsible for the assigning partner's share of past and future partnership debts.
Choice "b" is incorrect. The assignee of an interest in a general partnership is entitled to the assigning partner's interest in partnership profits and surplus on dissolution of the partnership but is not personally responsible for the assigning partner's share of past and future partnership debts.
105
Which of the following statements generally is correct regarding a general partner in a general partnership as compared to a general partner in a limited partnership?
a.
A general partner in a general partnership has greater rights and powers than a general partner in a limited partnership.
b.
A general partner in a general partnership has greater liability than a general partner in a limited partnership.
c.
A general partner in a general partnership has rights and powers provided by articles of partnership, while a general partner in a limited partnership has rights and powers provided by statute.
d.
A general partner in a general partnership and a general partner in a limited partnership have the same rights and powers.
Choice "d" is correct. A general partner in a general partnership and a general partner in a limited partnership have the same right to manage the partnership and both are personally liable for all obligations of the partnership.
Choices "a" and "b" are incorrect. They both indicate differences between general partners in the two types of partnerships.
Choice "c" is incorrect. A general partner's rights and powers are not necessarily limited to those provided in articles of partnership, because general partnerships are not required to have articles of partnership.
106
Fanny and John each own and manage their own companies. Fanny's business is manufacturing freight boxes of all types, and John's business is selling freight boxes to different industries. They decide to combine their expertise and knowledge to produce and sell freight boxes specifically designed for the new airline company that just formed in their city. Which of the following best describes the business formed by the parties?
a.
A joint venture.
b.
A general partnership.
c.
A sole proprietorship.
d.
A limited liability partnership.
Choice "a" is correct. A joint venture is formed for a single business undertaking such as building and designing freight containers to be sold specifically to one company. Each company coming together in this joint venture has its own business outside of this one endeavor.
Choice "b" is incorrect. A general partnership is like a joint venture, but it contemplates a broader relationship rather than one limited to a single transaction or a related series of transactions.
Choice "d" is incorrect. A limited liability partnership is primarily designed for professionals who want to work as partners but with limited personal liability.
Choice "c" is incorrect. Sole proprietorships have only one person in the business.
107
Which of the following statements is (are) usually correct regarding general partners' liability?
I.
All general partners are jointly and severally liable for partnership torts.
II.
All general partners are liable only for those partnership obligations they actually authorized.
a.
II only.
b.
Neither I nor II.
c.
Both I and II.
d.
I only.
Choice "d" is correct.
Rule: Partners are jointly and severally liable for partnership torts. Moreover, partners are liable for all partnership obligations, whether or not they personally authorized the obligation.
Choices "a", "c", and "b" are incorrect, per the above rule.
108
Toby invested $25,000 in a limited partnership with Connor and Blair. Toby was a general partner in the limited partnership. The partnership failed to pay Kelly $45,000 for services on behalf of the partnership. Which of the following statements is generally correct regarding Toby's liability under the Revised Uniform Limited Partnership Act?
a.
Toby was liable for $25,000 because this was a limited partnership.
b.
Toby was liable for $15,000 because this was a limited partnership.
c.
Toby was liable for $45,000 because Toby was a general partner.
d.
Toby was liable for zero because this was a partnership debt, not a personal debt.
Choice "c" is correct. Toby was a general partner and general partners in a limited partnership are personally liable for all obligations of the partnership. If the partnership does not pay Kelley, Toby will be liable for the amount owed.
Choices "a", "d", and "b" are incorrect, based on the above explanation.
109
Which of the following statements best describes the effect of the assignment of an interest in a general partnership?
a.
The assignment transfers the assignor's interest in partnership profits and surplus.
b.
The assignee becomes a partner.
c.
The assignment automatically dissolves the partnership.
d.
The assignee is responsible for a proportionate share of past and future partnership debts
Choice "a" is correct. The assignee of an interest in a partnership receives the assignor's rights to profits and surplus.
Choice "b" is incorrect. An assignee may become a partner only with the consent of all of the existing partners; a mere assignment by one partner of his or her interest is not enough.
Choice "d" is incorrect. An assignee of an interest in a partnership does not become liable for partnership debts - the assignee gets the assignor's rights to profits but the assignment does not include a delegation of the assignor's duties to pay partnership obligations.
Choice "c" is incorrect. An assignment does not dissolve the partnership.
110
Eller, Fort and Owens are members of Venture Associates, LLC. Trent Corp. brought a breach of contract suit against Venture for a contract executed by Eller as an agent of the LLC. If Trent prevails, Trent will generally be able to collect the judgment from:
a.
The personal assets of Eller, Fort and Owens jointly.
b.
The LLC's assets only.
c.
Eller's personal assets only.
d.
Eller's personal assets only after LLC assets are exhausted.
Choice "b" is correct.
Rule: Members of an LLC are not personally liable for the LLC's obligations. Moreover, an agent is not liable on a contract the agent enters into on behalf of a disclosed principal. Here, the contract was entered into by Eller on behalf of Venture, an LLC, and Eller disclosed that he was acting only as an agent of Venture. Thus, Trent Corp. can collect from the LLC'S assets only.
Choices "a", "d", and "c" are incorrect, per the above rule.
111
A joint venture is a(an):
a.
Corporate enterprise for a single undertaking of limited duration.
b.
Association of persons engaged as co-owners in a single undertaking for profit.
c.
Association limited to no more than two persons in business for profit.
d.
Enterprise of numerous co-owners in a nonprofit undertaking.
Choice "b" is correct. A joint venture is an association of persons engaged as co-owners in a single (special transaction) undertaking for profit. A joint venture is treated as a partnership for most important legal respects.
Choice "c" is incorrect. A joint venture may include more than two persons.
Choice "d" is incorrect. A joint venture must have a profit motive.
Choice "a" is incorrect. A joint venture is treated as a partnership and not as a corporate enterprise.
112
Which of the following statements is correct concerning liability when a partner in a general partnership commits a tort while engaged in partnership business?
a.
The partner committing the tort is the only party liable.
b.
Each partner is jointly and severally liable.
c.
Each partner is liable to pay an equal share of any judgment.
d.
The partnership is the only party liable.
Choice "b" is correct. Each partner is jointly and severally liable for torts committed by any partner while in the course of partnership business.
Choice "a" is incorrect. All partners may be held liable for a tort committed by a partner in the course of partnership business.
Choice "d" is incorrect. Each partner is liable for torts committed by any partner while in the course of partnership business.
Choice "c" is incorrect. Each partner is liable for the full amount of damages incurred as a result of a partner's tort; the partners are not liable only for their pro rata share.
113
Lark, a partner in DSJ, a general partnership, wishes to withdraw from the partnership and sell Lark's interest to Ward. All of the other partners in DSJ have agreed to admit Ward as a partner and to hold Lark harmless for the past, present, and future liabilities of DSJ. As a result of Lark's withdrawal and Ward's admission to the partnership, Ward:
a.
Is personally liable for partnership liabilities arising before and after being admitted as a partner.
b.
Has the right to participate in DSJ's management.
c.
Acquired only the right to receive Ward's share of DSJ profits.
d.
Must contribute cash or property to DSJ to be admitted with the same rights as the other partners.
Choice "b" is correct. The general rule is that the mere assignment of a partner's interest does not make the assignee a partner. One may become a partner only with the consent of all other partners. Here, all other partner's consented to Ward's becoming a partner. Thus, Ward is a partner with full rights to participate in management.
Choice "c" is incorrect. The general rule is that the mere assignment of a partner's interest does not make the assignee a partner. One may become a partner only with the consent of all other partners. Here, all other partner's consented to Ward's becoming a partner. Thus, Ward is a partner with full partner rights.
Choice "a" is incorrect. An incoming partner is not liable for debts that the partnership incurred before admission beyond the incoming partner's contribution, but is fully liable for debts incurred after becoming a partner.
Choice "d" is incorrect. A partnership is a consensual relationship; there is no requirement of a contribution to become a partner.
114
Green Trees, LP is a limited partnership. Dave is a limited partner. Seeds Today, Inc. is a creditor of the limited partnership. Upon dissolution of the partnership, the assets of Green Trees, LP will be distributed to pay:
a.
The general partners first.
b.
Seeds Today, Inc. and Dave.
c.
Seeds Today, Inc., first.
d.
Dave first.
Choice "c" is correct.
Rule: Upon dissolution, the assets of a limited partnership are first used to pay off creditors. The contributions of limited partners, such as Dave, are returned next.
Choices "d", "b", and "a" are incorrect, per the above rule.
115
A limited partnership must have:
a.
One general partner and two limited partners.
b.
All limited partners.
c.
All general partners except one limited partner.
d.
At least one general partner and one limited partner.
Choice "d" is correct.
Rule: A limited partnership must have at least one general partner and one limited partner.
Choices "a", "c", and "b" are incorrect, per the above rule. Be careful of answers that include the word "all."
116
Juan is a limited partner in Pet Food and Fun, Limited Partnership. Juan visited Chow, Inc., a local supplier of dog food claiming to be a "partner" in the partnership and negotiated a distribution contract between the supplier and limited partnership on behalf of the partnership.
As a result of these actions, Juan:
a.
Has full personal liability to all creditors.
b.
None of the answer choices are correct.
c.
Has limited liability as a limited partner to all creditors except Chow, Inc.
d.
Has limited liability as a limited partner in reference to all creditors.
Choice "c" is correct.
Rule: A limited partner will be considered a general partner with full personal liability only to those that the limited partner transacts with as if he were a general partner.
Choices "d", "a", and "b" are incorrect, per the above rule.
117
Doug was the sole general partner in Heavy Foot, Limited Partnership. While driving to work one morning, Doug died in a car accident. The limited partnership:
a.
Continues to exist as it was before Doug's death.
b.
Dissolves by operation of law as a result of Doug's death.
c.
Converts to a general partnership and all former limited partners become general partners.
d.
Dissolves only by attaining a judicial decree.
Choice "b" is correct.
Rule: The death of a general partner will, by operation of law, dissolve the limited partnership. Because the dissolution is by operation of law, there is no requirement of obtaining a judicial decree. Remaining limited partners do not automatically become general partners as a result of the death of the general partner.
Choices "a", "d", and "c" are incorrect, per the above rule.
118
Tim, Peter, and Rick want to form a limited liability company. What document must they file with the state?
a.
Articles of Incorporation.
b.
Articles of Organization.
c.
Operating Agreement.
d.
Bylaws.
Explanation
## Footnote
Choice "b" is correct. The Articles of Organization must be filed with the secretary of state.
Choice "c" is incorrect. An operating agreement is an agreement between the members containing provisions relating to management, profit sharing, transferring interests, etc. and does not need to be filed with the state.
Choices "a" and "d" are incorrect. Articles of incorporation and bylaws are documents relating to corporations, not an LLC
119
Jeb, a member in J & S LLC, sold his interest in the LLC to Chris without obtaining the other members' consent. Absent an agreement to the contrary, Chris:
I.
May participate in the management of J & S.
II.
May receive Jeb's share of J & S's profits.
III.
Is not entitled to anything since Jeb did not obtain the other members' consent.
a.
I only.
b.
III only.
c.
I and II only.
d.
II only.
Choice "d" is correct. Absent an agreement to the contrary, if a member in the LLC sells his interest in an LLC without obtaining the other members' consent, the assignee is only entitled to receive the assignor's share of profits.
Choices "a", "c", and "b" are incorrect, because, absent an agreement to the contrary, although a member of an LLC is allowed to assign his interest in profits and losses, an assignee of a membership interest may not participate in the management of the LLC.
120
The articles of organization for a limited liability company must contain everything, except the following:
a.
The name and address of the registered agent.
b.
The name of the entity that includes some indication it is a LLC.
c.
If the company is to be manager managed, a statement to that effect.
d.
Number of shares authorized and issued.
Choice "d" is correct. Limited liability companies do not issue "shares" held by shareholders like in a corporation. Instead, members (the owners) are said to have "interests" in the LLC.
Choices "b", "a", and "c" are incorrect. These are all required to be included in the articles of organization.
121
Cobb, Inc., a partner in TLC Partnership, assigns its partnership interest to Bean, who is not made a partner. After the assignment, Bean asserts the rights to:
I.
Participate in the management of TLC.
II.
Cobb's share of TLC's partnership profits.
Bean is correct as to which of these rights?
a.
Neither I nor II.
b.
II only.
c.
I and II.
d.
I only.
Choice "b" is correct.
Rule: The assignee of a partner's interest in the partnership does not thereby become a partner absent the unanimous consent of the other partners. Thus, the assignee has no right to participate in the management of the partnership and has only a right to receive the assignor's share of the partnership profits.
Choices "d", "c", and "a" are incorrect, per the above rules.
122
Which of the following statements is correct with respect to a limited partnership?
a.
A limited partner may not be an unsecured creditor of the limited partnership.
b.
A general partner may be a secured creditor of the limited partnership.
c.
A limited partnership can be formed with limited liability for all partners.
d.
A general partner may not also be a limited partner at the same time.
Choice "b" is correct. In a limited partnership, a general partner may be a secured creditor of the limited partnership.
Choice "a" is incorrect. In a limited partnership, a limited partner may be an unsecured creditor of the limited partnership.
Choice "d" is incorrect. In a limited partnership, a general partner may also be a limited partner at the same time.
Choice "c" is incorrect. In a limited partnership, only the limited partners will have limited liability. A limited partnership must have at least one general partner and general partners have unlimited liability. (The word "all" makes this option wrong.)
123
Unless there is an agreement to the contrary, the voting power of members in a limited liability company is determined by:
a.
Each member's share of profits.
b.
Each member's capital contribution.
c.
When the member was admitted to the company.
d.
Each member's salary.
Choice "b" is correct.
Rule: Absent an agreement otherwise, all members generally participate in management, and their voting strength is determined in proportion to ownership interest. This is calculated by comparing each member's capital contribution to that of the other members.
Choices "d", "a", and "c" are incorrect, per the above rule.
124
Sam, CPA, is one of the partners in a limited liability partnership with other CPAs. Sam avoids personal liability for:
a.
The malpractice of his partners regarding errors and omissions.
b.
His own negligent acts.
c.
The negligent actions of his subordinates under his direct control.
d.
The wrongful acts of employees acting under his supervision.
Choice "a" is correct.
Rule: A partner in a LLP is personally liable for tort liabilities arising from his own negligence and the negligence of his direct subordinates and for breach of contract damages. He is NOT personally liable for the negligent actions committed by his partners.
Choices "d", "b", and "c" are incorrect, per the above rule.
125
A limited liability partnership must:
a.
Hold all partners personally liable for all debts and liabilities of the partnership and partners.
b.
Carry no less than one hundred thousand dollars of property insurance.
c.
File registration documents with the state in which it is formed.
d.
Not have partners with professional licenses.
Choice "c" is correct.
Rule: To have limited liability, an LLP must file with the state a registration statement usually referred to as Articles of LLP. It is generally designed for professionals who desire to be partners with other like professionals and yet not have liability for the malpractice of their partners. Some states require that personal liability insurance (not property insurance) be carried to protect those harmed by the professionals' malpractice.
Choices "a", "b", and "d" are incorrect, per the above rule.
126
Which of the following statements regarding a limited partner is(are) generally correct under the Revised Uniform Limited Partnership Act?
~~The limited partner is subject to personal liability for partnership debts
~~The limited partner has the right to take part in the control of the partnership
a.
No
No
b.
No
Yes
c.
Yes
Yes
d.
Yes
No
Choice "a" is correct.
Rule: The Revised Uniform Limited Partnership Act, which is followed by a majority of states, provides that a limited partner's liability for partnership debts is limited to his capital contribution. Only general partners have the right to take part in the control of the partnership.
Choices "c", "d", and "b" are incorrect, per the above rule.
127
In a general partnership, which of the following acts must be approved by all the partners?
a.
Admission of a partner.
b.
Conveyance of real property owned by the partnership.
c.
Dissolution of the partnership.
d.
Authorization of a partnership capital expenditure.
Choice "a" 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 "c" 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 "d" is incorrect. A capital expenditure could well be within the ordinary scope of partnership business and thus would require only a majority vote.
Choice "b" 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.
128
A partner's interest in specific partnership property is:
~~Assignable to the partner's individual creditors
~~Subject to attachment by the partner's individual creditors
a.
Yes
Yes
b.
No
No
c.
Yes
No
d.
No
Yes
V
Choice "b" is correct. No - No.
Rule: A partner's interest in specific partnership property is neither assignable to the partner's individual creditors nor is it subject to attachment by the partner's individual creditors.
Choices "a", "c", and "d" are incorrect, per the above rule.
129
In general, which of the following statements is correct with respect to a limited partnership?
a.
A limited partnership can be formed with limited liability for all partners.
b.
A limited partner may not also be a general partner at the same time.
c.
A limited partner has the right to obtain from the general partner(s) financial information and tax returns of the limited partnership.
d.
A limited partner may hire employees on behalf of the partnership.
Choice "c" is correct. A limited partner has rights similar to those of a corporate shareholder; he must be allowed to review financial and tax information of the limited partnership.
Choice "a" is incorrect. A limited partnership must have one or more general partners, whose liability is unlimited.
Choice "b" is incorrect. One may be both a general and a limited partner simultaneously. Such a person has all of the rights and liabilities of both a limited partner and a general partner.
Choice "d" is incorrect. A limited partner has no management authority, rather he is a passive investor, like a corporate shareholder.
130
What term is used to describe a partnership without a specified duration?
a.
An indefinite partnership.
b.
A partnership at will.
c.
A perpetual partnership.
d.
A partnership by estoppel.
Choice "b" is correct. A partnership at will is a partnership with no definite term (i.e., without specified duration). Such a partnership can be terminated at any time.
Choice "c" is incorrect. A partnership without a specified duration is called a partnership at will, not a perpetual partnership. There is no such thing as a perpetual partnership because a partnership is not perpetual. A partnership may be dissolved after a partner dies or otherwise dissociates from the partnership.
Choice "d" is incorrect. A partnership by estoppel is the appearance of a partnership when there is no formal partnership. If parties who are not partners give the appearance to third parties that they are partners, the law may deem the parties to be a partnership by estoppel. The parties will be treated as partners, even though they are not.
Choice "a" is incorrect. The legal term for a partnership of indefinite duration is a partnership at will, not an indefinite partnership.
131
Which of the following partners of a limited liability partnership (LLP) may avoid personal liability when a partner commits a negligent act?
a.
The supervisor of the negligent partner.
b.
All the partners other than the supervisor of, and, the negligent partner.
c.
All the partners.
d.
All the partners other than the negligent partner.
Choice "b" is correct. LLP partners are liable only for their own negligence and the negligence of anyone who commits a wrongful act under the partner's direct control.
Choices "c", "a", and "d" are incorrect, per the above.
132
Under the Revised Uniform Partnership Act, which of the following have the right to inspect partnership books and records?
a.
Transferees of partners' interests.
b.
Inactive partners.
c.
Former partners.
d.
Employees.
Choice "b" is correct. Every partner in a partnership - whether active or inactive - has the right to inspect the partnership's books and records.
Choice "d" is incorrect. Only a partner has a right to inspect the partnership's books and records; an employee of the partnership has no such right.
Choice "c" is incorrect. Only current partners have a right to inspect the partnership's books and records; former partners do not have such a right.
Choice "a" is incorrect. Only partners have a right to inspect a partnership's books and records. A transferee of a partner's interest has only the partner's right to distributions.
133
What business entity can be voluntarily dissolved and terminated only by filing a dissolution document with the state of organization?
a.
A general partnership.
b.
A limited liability limited partnership.
c.
A corporation.
d.
A limited partnership.
hoice "c" is correct. Voluntary dissolution of a corporation requires the filing of articles of dissolution with the state.
Choice "a" is incorrect. A general partnership does not file a document with the state in order to be formed and does not need to file a document with the state in order to be dissolved. A partnership will be considered to be dissolved upon the happening of a number of events, including upon the agreement of the partners.
Choices "b" and "d" are incorrect. Although a limited partnership and a limited liability limited partnership may be formed only by filing with the state, dissolution of such entities does not require a filing with the state. It is sufficient merely to give creditors and persons with whom the limited partnership dealt notice of the dissolution. (However, such entities also have the option to file a statement of dissolution.)
134
White, Grey, and Fox formed a limited partnership. White is the general partner and Grey and Fox are the limited partners. Each agreed to contribute $200,000. Grey and Fox each contributed $200,000 in cash while White contributed $150,000 in cash and $50,000 worth of services already rendered. After two years, the partnership is insolvent. The fair market value of the assets of the partnership is $150,000 and the liabilities total $275,000. The partners have made no withdrawals.
If Fox is insolvent and White and Grey each has a net worth in excess of $300,000, what is White's maximum potential liability in the event of a dissolution of the partnership?
a.
$175,000
b.
$62,500
c.
$112,500
d.
$125,000
Rule: The liability of a limited partner for partnership debts is limited to the extent of the capital, which he has contributed or has agreed to contribute. A general partner, however, is liable for all partnership debts and liabilities.
Choice "d" is correct. In this case, both Grey and Fox are limited partners and, thus, their respective maximum liability for partnership debts may not exceed their contributions ($200,000 each). Because White is a general partner, however, he will be personally liable for the excess of any debt remaining after assets have been applied upon a dissolution. Therefore, White will be liable for $125,000 (the difference between the fair market value of assets ($150,000) and partnership liabilities ($275,000) at dissolution).
Choices "b", "c", and "a" are incorrect, per the above rule.
Rule: The liability of a limited partner for partnership debts is limited to the extent of the capital, which he has contributed or has agreed to contribute. A general partner, however, is liable for all partnership debts and liabilities.
Choice "d" is correct. In this case, both Grey and Fox are limited partners and, thus, their respective maximum liability for partnership debts may not exceed their contributions ($200,000 each). Because White is a general partner, however, he will be personally liable for the excess of any debt remaining after assets have been applied upon a dissolution. Therefore, White will be liable for $125,000 (the difference between the fair market value of assets ($150,000) and partnership liabilities ($275,000) at dissolution).
Choices "b", "c", and "a" are incorrect, per the above rule.
135
When a partner in a general partnership lacks actual or apparent authority to contract on behalf of the partnership, and the party contracted with is aware of this fact, the partnership will be bound by the contract if the other partners:
~~Ratify the contract
~~Amend the partnership agreement
a.
Yes
Yes
b.
No
No
c.
Yes
No
d.
No
Yes
Choice "c" is correct. "Yes - No."
Rule: The authority of partners is governed by agency law. Under agency law, a principal is not bound to the third party unless the agent had actual authority or apparent authority. When the agent has no actual authority and no apparent authority, the principal (in this case the partnership) will only be liable if it chooses to adopt the agreement (i.e., ratify).
Rule: Amending the partnership agreement (presumably to grant authority) will not cause the partnership to be bound because authority must exist at the time the contract is made or the partnership must ratify the contract.
Choices "a", "d", and "b" are incorrect, per the above rules.
136
White, Grey, and Fox formed a limited partnership. White is the general partner and Grey and Fox are the limited partners. Each agreed to contribute $200,000. Grey and Fox each contributed $200,000 in cash while White contributed $150,000 in cash and $50,000 worth of services already rendered. After two years, the partnership is insolvent. The fair market value of the assets of the partnership is $150,000 and the liabilities total $275,000. The partners have made no withdrawals.
Unless otherwise provided in the certificate of limited partnership, which of the following is correct if Fox assigns her interest in the partnership to Barr and only White consents to Barr's admission as a limited partner?
a.
Barr will become a substituted limited partner because White, as general partner, consented.
b.
Barr will have the right to inspect the partnership's books.
c.
Barr will not become a substituted limited partner unless Grey also consents.
d.
The partnership will be dissolved.
Choice "c" is correct. In the absence of an agreement between all partners, the assignment of a partner's interest does not make the assignee a substitute partner; it merely transfers the assignor's rights to distributions to the assignee.
Choice "b" is incorrect. Absent an agreement among the partners otherwise, an assignment of an interest in a partnership is merely an assignment of the assignor's rights to receive distributions from the partnership and does not give the assignee any right to inspect the partnership's books.
Choice "d" is incorrect. Absent an agreement among the partners otherwise, an assignment of an interest in a partnership is merely an assignment of the assignor's rights to receive distributions from the partnership; it does not make the assignee a new partner. Since there is no change in who is a partner, there is no dissolution.
Choice "a" is incorrect. All partners must agree to make someone a partner, not just the general partner.
137
On February 1, Addison, Bradley, and Carter, physicians, formed ABC Medical Partnership. Dr. Bradley was placed in charge of the partnership's financial books and records. On April 1, Dr. Addison joined the City Hospital Medical Partnership, retaining the partnership interest in ABC. On May 1, ABC received a writ of attachment from the court attaching Dr. Carter's interest in ABC. The writ resulted from Dr. Carter's failure to pay a credit card bill. On June 1, Dr. Addison was adjudicated bankrupt. On July 1, Dr. Bradley was sued by the other partners of ABC for an accounting of ABC's revenues and expenses. Under the Revised Uniform Partnership Act, which of the preceding events resulted in the dissociation of a partner?
a.
Dr. Addison joining the City Hospital Medical Partnership.
b.
Dr. Carter's interest in the partnership being attached by the court.
c.
Dr. Bradley being sued for an accounting by the other partners of ABC.
d.
Dr. Addison being adjudicated bankrupt.
Choice "d" is correct. The bankruptcy of a partner will result in the dissociation of a partner.
Choice "a" is incorrect, because although joining the city hospital medical partnership could be construed as a breach of fiduciary duty owed to the other partners in ABC medical partnership, standing alone, it would not result in a dissociation.
Choice "b" is incorrect. All that was attached was the partner's right to distributions, which does not cause dissociation.
Choice "c" is incorrect, because although being sued might cause Dr. Bradley to resign, which would cause dissociation, standing alone, being sued by the other partners does not cause dissociation.
