Unit 6 Test Flashcards
(19 cards)
Partners A and B form a bakery as a valid partnership, contributing a mixer and a blender, respectively.
Which actions may each take in connection with the baking equipment?
Partner A may obtain a personal loan with the blender as collateral. Partner A may give the mixer to his spouse. Partner B may use the mixer to prepare cakes for the partnership. Partner B may sell the mixer to pay her credit card bills.
Partner B may use the mixer to prepare cakes for the partnership
As a partner, Partner B may use the mixer, partnership property, on behalf of the partnership.
What is the term to describe the process when the partners are collecting assets, paying debts, and accounting for the value of partner’s interest in the partnership?
Buy-sell agreement Dissociation Profit sharing Winding up
Winding up
Winding up is the process of collecting, liquidating, and distributing the assets from the firm.
What must an owner retain in order to operate as a sole proprietorship?
Full liability Agency relationships Bylaws Equity
Full liability
If the owner operates a sole proprietorship, then they would retain full liability.
Partners A and B agree to share profits and losses as well as joint ownership of the business.
To what else must they agree in order to form a partnership under the Uniform Partnership Act (UPA)?
Limited liability for the other Sale of any potential goodwill to a qualified buyer Dissociation from the other Equal right to be involved in the business’s management
Equal right to be involved in the business’s management
Partners A and B would agree to an equal right to be involved in their partnership’s business matters and management as part of forming their partnership.
Three people form a limited liability company (LLC). Two years later, one of them dies unexpectedly.
Absent a specific provision in the operating agreement, what is the effect on the LLC?
It dissolves immediately. It continues its operations. It passes in full to the deceased’s heirs. It transfers to one of the remaining members.
It continues its operations
A limited liability company allows the remaining members to continue its operations after another member’s death.
After dissociation with a limited liability company (LLC), which member duty continues with respect to events occurring before the dissociation?
Duty of obedience Duty of loyalty Duty of care Duty of impartiality
Duty of care
The duty of care applies for events that occurred before dissociation.
What is the process in which a corporation adopts preincorporation contracts?
Novation Pierce the corporate veil Dissociation Winding up
Novation
Novation is where a new contract substitutes for the old contract.
A corporation that meets certain qualifying requirements specified in Subchapter S of the Internal Revenue Code can choose to operate as an S corporation.
What is one of the qualifying requirements to operate as an S corporation?
The corporation must have only one class of stock. The corporation may have nonresident alien shareholders. The corporation must have more than 100 shareholders. The corporation must be a member of an affiliated group.
The corporation must have only one class of stock
A close corporation that meets the qualifying requirements specified in Subchapter S of the Internal Revenue Code can choose to operate as an S corporation. Among the numerous requirements for S corporation status, one of the qualifying requirements is the corporation must have only one class of stock.
The acquisition of a share of stock makes a person an owner and a shareholder in a corporation. Shareholders exercise ownership control through the power of their votes.
Which class of stockholders has a right to vote?
Preferred stockholders Common stockholders Bond holders Stock warrant holders
Common stockholders
Shareholders exercise ownership control through the power of their votes. Each common stock shareholder normally is entitled to one vote per share.
What is one of the characteristics of a corporation?
It is a legal entity created at will by the owner. It is a legal entity created by agreement of the parties. It is a legal entity whose owners have unlimited liability. It is a legal entity separate and distinct from its owners.
It is a legal entity separate and distinct from its owners
A corporation is a separate legal entity created and organized by the state law. A corporation is an artificial being distinct from its owner shareholders.
On which tax return does a sole proprietor report business income?
S corporation tax return Partnership tax return Corporation tax return Personal tax return
Personal tax return
The sole proprietor pays taxes on the business profits on the proprietor’s personal tax return.
Which type of law applies when partners are charged with knowledge of acts executed under the partnership relationship?
Agency law Limited liability law Franchise law Registration law
Agency law
As individual agents, or partners, they each are found to have knowledge and responsibility for acts under the partnership.
Partners 1 and 2 decide to form a partnership, drafting and executing an agreement that memorializes their intents.
What is the result if the Uniform Partnership Act (UPA) contradicts Partners 1 and 2’s partnership agreement?
The UPA will govern. The parties will not be governed by either the UPA or the agreement. The parties may choose between the UPA and the agreement. The agreement will control.
The agreement will control
Partners 1 and 2’s agreement will control because it is said to memorialize their intents.
Members 1 and 2 formed a limited liability company (LLC) in a state that has adopted the Uniform Limited Liability Company Act (ULLCA). Member 1 later decides to dissociate from the firm.
By when must Member 1’s interest be purchased by this LLC?
60 days 30 days 180 days 120 days
120 days
The Uniform Limited Liability Company Act requires a limited liability company to purchase a dissociating member’s interest within 120 days.
Unless elected otherwise, which kind of entity is a single-member limited liability company (LLC) treated for federal income tax purposes?
Either a partnership or corporation Sole proprietorship Corporation Partnership
Sole proprietorship
A single-member LLC is automatically treated as a sole proprietorship for federal tax purposes.
Which provision is typically included in the standard operating agreements for limited liability companies (LLCs)?
In what states members can live How members’ interests may be transferred How to change to a member-managed LLC What the value is for each member’s interests
How members’ interests may be transferred
The potential processes and restriction of transfer of members’ interest is typically included in the operating agreement.
Which form of business structure can issue stocks to the general public to obtain financing?
C corporation S corporation Sole proprietorship General partnership
C corporation
A C corporation can issue stock offering to the general public to finance its operations and raise capital through public stock exchanges. Issuing stocks is another way for corporations to obtain financing. Stocks, or equity securities, represent the purchase of ownership in the business firm. The true ownership of a corporation is represented by common stock. Common stock provides an interest in the corporation with regard to (1) control, (2) earnings, and (3) net assets. A shareholder’s interest is generally proportionate to the number of shares owned by the shareholder out of the total number of shares issued.
Which corporation avoids the imposition of income taxes at the corporate level?
Close corporation C corporation Nonprofit corporation S corporation
S corporation
A corporation that meets the qualifying requirements specified in Subchapter S of the Internal Revenue Code can choose to operate as an S corporation. If a corporation has S corporation status, it can avoid the imposition of income taxes at the corporate level while retaining many of the advantages of a corporation, particularly limited liability. An S corporation is treated differently than a regular corporation for tax purposes. An S corporation is taxed like a partnership, so the corporate income passes through to the shareholders, who pay personal income tax on it. This treatment enables the S corporation to avoid the double taxation imposed on regular corporations.
What is one of the disadvantages of a corporation form of business entity?
Limited liability Ease of ownership transferability Perpetual existence Double taxation
Double taxation
One of the disadvantages of a corporate form of business is the double taxation of corporate profits. A corporation pays income tax on net profits and shareholders pay income tax on disbursed dividends they receive. Unlike in a sole proprietorship or a partnership, only the owners or the partners pay income tax at the individual level.
