Law of Business Orgs Exam 3

Which of the following is false regarding the attributes of a limited liability company?

There are restrictions on the number of members a limited liability company may have.

Which of the following statements is true concerning franchises?

Federal and state governments regulate the franchise relationship.

Which of the following is a taxable entity?

corporation

A freeze-out

results in the minority shareholder having little or no influence in important corporate issues such as reduction or elimination of dividends or loss of employment.

Which of the following is indicative of owners who are a family or small group of people who know one another?

privately held corporation

A corporation is affected by the death of a shareholder.

False

Bruce, a lawyer and member of a limited liability partnership consisting of other lawyers, committed legal malpractice. Which of the following is true regarding the liability of Bruce and the other members of the limited partnership?

Bruce has personal liability, but the other members of the limited liability partnership do not.

Which of the following is typically not subject to unlimited personal liability?

corporate shareholders

One advantage of the corporate form over that of a partnership is that

corporations can more easily hold property over long periods of time.

An S corporation may not have

more than 100 shareholders.

By statute, piercing the corporate veil is also an option for a plaintiff when a limited liability company is involved.

True

Which of the following federal administrative agencies has created rules requiring more information to be turned over to a franchisee regarding the franchise deal?

FTC

The law does not treat a partnership as dissolved when a partner dies.

False

Mary eats at ABC Franchise Company, a fast food restaurant, and gets food poisoning. Once she recovers, she wants to sue. She discovers, however, that ABC Franchise Company has very few assets and little money. She really wants to sue Big Franchise Company, the company that granted the franchise to ABC Franchise Company. Which of the following is true regarding her position in regard to Big Franchise Company?

Mary may be able to establish liability on the part of Big Franchise Company if she can show that because of the control exercised on the part of Big Franchise Company, ABC Franchise Company was not an independent contractor.

Which of the following is true regarding making a choice as to the appropriate form of business organization?

Once it is formed, a partnership may later be changed to a corporate form of business.

The following form of business organization exposes the owner to personal liability the most

sole proprietorship.

An LLC may be sued in its own name.

True

All the partners in a limited liability partnership have equal say in its management, but this may be altered by agreement.

True

In a general partnership, a partner is not automatically entitled to salary and wages.

True

A partner may not assign her right to profits to a creditor.

False

Which of the following is false regarding dissociation of a partnership under the Revised Uniform Partnership Act?

A partner who wrongfully dissociates nevertheless retains the right to demand a dissolution.

The Revised Uniform Partnership Act (RUPA) gives every partner

implied authority to bind the partnership on contracts that are usually appropriate to that business.

If the partnership does not pay off a partnership liability, then the partners become liable only to the extent of their interest in the partnership.

False

A limited partnership must have

one or more general partners and one or more limited partners.

Which of the following demands that a partner exercise reasonable skill and care when conducting partnership business?

duty of care

When a partnership is dissolved, and the partnership has been profitable, after all assets are sold, what is the order of distribution?

All partnership outside creditors are paid; partners who loaned money are paid; any remaining proceeds from the sale of assets are distributed pro rata among the partners based on the net amounts in their capital accounts.

Which of the following allows for liability to be imposed upon the partnership for torts committed by any partner or employee of the partnership while engaged in partnership business?

respondeat superior

If a partnership is established for a term of 20 years, which of the following is true regarding the authority of a partner to continue the business beyond that time?

An individual partner has no right to continue the partnership, and there must be unanimous agreement of all partners in order for the partnership to continue.

A court may not find two persons to be partners even though neither had the specific intent to create a partnership.

False

A partner in a general partnership may not generally engage in activities that are in competition with the partnership.

True

A partner's ownership of partnership property is called

partnership interest.

Which of the following allows for limited liability for both limited partners and general partners?

limited liability limited partnership

Which of the following allows for a partner to sell her partnership interest to another, thus making the purchaser a substitute partner?

buyout agreement

The following are liable for all prior obligations of a continuing partnership

continuing partners.

Generally, if a limited partnership failed to file the proper certificate, it would be treated as a

general partnership.

Jennifer, a limited partner in "Raingear to Go," was dissatisfied with the performance of the business. She began attending staff meetings, working in the store, and participating in the day-to-day operations. Which of the following statements is true?

Jennifer's actions changed her status from a limited partner to a general partner.

Marilyn entered into a contract and sold equipment to Sam who claimed to be acting on behalf of ABC Corporation. Marilyn was not paid, and upon investigation, she learned that while the articles of incorporation were filed for ABC Corporation, they were never issued. Which of the following is the applicable law in regard to her position in a majority of states?

The majority of states follow the old MBCA which follows the approach that all persons who assume to act as a corporation when the certificate of incorporation has not been issued are jointly and severally liable for the business debts.

Which of the following is true regarding involuntary dissolution of a corporation?

A shareholder may ask a court to dissolve a corporation where the directors are in conflict, their deadlock cannot be broken by the shareholders, and the corporation faces ruin as a result.

Corporations do not have to be profit oriented.

True

Promoters are not the agents of the corporation prior to its incorporation.

True

Government corporations, such as a city or sewage district, are referred to as

municipal corporations.

An arrangement where a would-be seller of a corporation’s shares of stock must gain the permission of the corporation’s board of directors or shareholders for any sale of shares other than to the corporation or pro rate to present shareholders is known as a(s)

consent restraint.

Under the Model Business Corporation Act, which of the following is not part of the mandatory contents of the articles of incorporation?

the duration of the corporation

The shareholders may not amend or repeal the bylaws adopted by the directors.

False

Jill, as a promoter, entered into contracts with third parties as part of her duties in bringing ABC Corporation into existence. Her liability to third parties on preincorporation contracts ends

if, and when, the corporation, the promoter, and the third party all agree that the corporation will be substituted for the promoter.

In the context of transfer restrictions, the right of first refusal

either the corporation or its shareholders are given the right to buy shares offered for sale to an outsider willing to purchase them.

What must be filed with the state governing body to legally exist as a corporation?

articles of incorporation

Which of the following are operated by private individuals and not allowed to make a profit?

nonprofit corporations

Maurice, a creditor of ABC Corporation, believes that the corporation, has defrauded him. It appears that the corporation is undercapitalized; that money is being funneled to the three shareholders of the corporation who actively manage the corporation; and that the shareholders intend to defraud suppliers. Which of the following is true regarding options, if any, that Maurice has in this situation?

Maurice should seek to reach assets of the individual shareholders through piercing the corporate veil.

Under the right of final offer, either the corporation or its shareholders are given the right to buy shares offered for sale to an outsider willing to purchase them.

False

The bylaws of a corporation

establish rules for the conduct of internal affairs.

The MBCA recognizes the use of ultra vires as a defense to the enforcement of a contract.

False

Under the historical approach to defective incorporation, when the promoters made an honest attempt to comply with the mandatory provisions of the corporate statute, yet the attempt still failed in some material respect, the corporation is

de facto.

Which of the following is true under the Model Business Corporation Act regarding who may serve as an incorporator of a corporation?

A single person, a partnership, an unincorporated association, or another corporation may act as an incorporator.

In which ways have state and federal governments regulated franchises?

Both (a) and (c) are correct.

A “close” or “closely held” corporation:

Is a corporation in which family members hold stock.

Bob, Joe, and John want to start a sporting goods store. Bob has worked in the sporting goods industry. The plan is for Bob to manage the store. Joe and John will invest money in the business, but neither of them will be involved in managing the store. Which statement is most accurate?

John and Joe are limited partners.

Which statement regarding business structure is not true?

LLCs pay income tax.

Which legal form of business would generally not be required to file articles of organization with the secretary of state?

Sole proprietorship

Which statement about S Corporations is false?

S Corporations pay income tax.

Which is not an advantage of owning shares of stock in a publicly traded corporation?

Double taxation

Jane’s lifelong dream has been to start her own business. She has decided to open a women’s clothing store. She comes to you for advice as to what type of ownership structure to choose for her business. Jane does not want to be personally liable for her store’s losses and liabilities and she does not want double taxation. Which legal form of business would you recommend to Jane?

Limited liability company

Earl Overbearing is in charge of nearly all of the management duties for a real estate sales business. Which is an accurate statement about the relationship between Overbearing and the business?

If the business is operated as a limited partnership, Overbearing cannot be a limited partner.

Tom is a franchisee for a Highway 99 service station. Which is a potential disadvantage to Tom as a franchisee?

Highway 99 has the right to terminate Tom’s franchise each year.

Absent express agreement, any partner may sell or mortgage partnership property.

False

An explicit restriction on a partner’s express or implied authority may prevent the partner from having apparent authority.

False

Larry, Moe, and Curly are partners in an accounting firm. Curly wants to withdraw from the partnership. Curly is entitled to receive the value of his partnership interest only if the partnership can pay its other creditors first.

True

The Uniform Partnership Act has been adopted by a majority of states in the United States.

True

Ben and Joyce prepare tax returns on a part-time basis. The check each other’s work and share their fees. This business may be considered a partnership even though Ben and Joyce never formally agreed to form a partnership.

True

Mark and Jack pool their resources and buy a large tract of land. They plan on developing the land for residential and commercial use. Mark and Jack do not plan on doing business together after this project is finished. This is an example of a joint venture.

True

Jean, Jane, and Joan form a partnership to operate a clothing store. Jean invests more time and money in the business than do the other two partners. Jean will receive more of the profits from the business even if the partners do not have an agreement for how profits and losses are to be shared.

False

Although the partnership will face liability for a tort committed by a partner while acting within the scope of partnership business, the other partners who did not commit the tort cannot be held liable.

False

B, P, and T formed a partnership. They made no express agreement as to how profits were to be divided. Of the $50,000 initial capital of the firm, B and P each contributed$20,000; T contributed $10,000. The partnership had a profit of $30,000 during the first year of business. What is P’s share of the profit?

$10,000

Tom, Chris, and John are partners in a liquor store. The partnership agreement states that only Chris has the authority to buy liquor from suppliers. Tom orders a large quantity of beer from a beer distributorship. Which of the following statements is true?

Tom can bind the partnership to this contract because he has apparent authority.

Tom, Taylor, and Rhonda are partners in a sporting goods store. Which of the following statements is/are true concerning their partnership?

All of the above are correct.

M is a partner in a retail toy store business. The partnership frequently must borrow money to purchase inventory and satisfy other requirements. Needing money to pay personal debts, M borrowed $10,000 from Local Bank, and signed the name of the partnership on all loan documents. Although she told the Bank the money was for the partnership, she used it for herself. M cannot now repay, and the Bank has sued the partnership. Is the partnership liable?

Yes, because borrowing is in the ordinary course of business and M had apparent and implied authority to borrow money for the partnership.

Rob, Buddy, and Sally are partners in a business that books entertainment acts in clubs across the country. The partners share profits and losses equally. If the partners decide to dissolve the partnership, which of the following statements is true?

Debts owed to Third Bank must be paid first.

Jerry, George, and Elaine are partners in a restaurant. George decides that he is tired of the restaurant business and wants to sell his partnership interest to Kramer. Which of the following statements is not true?

When Kramer joins the partnership, he becomes liable for all previous obligations of the partnership.

Kyle, Tara, and Maggie formed a partnership to operate an obedience school for dogs. Kyle and Tara each contributed capital of $20,000. Maggie contributed $10,000. The three partners agreed that Kyle and Tara would each assume 45 percent of any losses of the business, and that Maggie would assume the remaining 10 percent of the losses. Their agreement contained no express provision concerning how profits were to be divided. During the first year of operation, the business made $60,000 in profits. What is Maggie’s share of the profits?

$20,000

According to Revised Uniform Partnership Act (RUPA), if a partner retires before the completion of a partnership, it is called a

dissociation

Which of the following is true regarding articles of partnership?

Although generally not required, it is highly desAnnetteble to have written articles of partnership.

ABC is a partnership firm dealing in the manufacture of toy cars. Renita, one of the partners, thinks the firm should liquidate its current inventory before the end of the calendar year. For this action, Renita

must have the unanimous agreement of all the partners

Under the Revised Uniform Partnership Act (RUPA), when a partnership that has suffered losses winds up,

all partnership creditors are paid first

William, Ahad, and Annette form a partnership. William's capital contribution to the firm is $5,000, while Ahad and Annette contribute $10,000 each. The parties do not make any express agreement concerning how profits are to be divided. However, they agree to share losses as follows: William, 40 percent, Ahad and Annette, 30 percent each. During the first year of the partnership, the business makes a profit of $30,000. Given this scenario, what is William's share of the profit?

$10,000

To act contrary to a partnership agreement,

a unanimous agreement among the partners is required

The significant difference between a joint venture and partnership is that

joint venturers sometimes are held to have less implied and apparent authority than partners

Which of the following is true regarding a partner's right to compensation?

The partners may agree that one or more of them is to be paid a salary in addition to sharing in profits.

A partner has the express authority to do whatever they are authorized to do by

the written articles of partnership

Which of the following is true regarding partner liability to creditors in the continuation of a partnership?

New partners are liable for prior obligations only to extent of their contribution unless they agree to greater liability.

Charlene, Darrin, and Eleanor form a partnership. They make no express agreement concerning how profits are to be divided. Of the $30,000 initial capital of the firm, Charlene and Darrin each contributed $12,000. Eleanor contributed $6,000. The partnership had a profit of $15,000 during the first year of operation of the business. Given this information, Darrin's share of the profit is

$5,000

The liability of partners for torts committed by the partnership

is joint and several, permitting the injured person to sue any partner individually or all of them together

After retiring from Jones Corporation (a partnership founded by Megan Jones and other partners), Megan grew tired of staying at home and started visiting the firm's place of business. The current partners would introduce her to prospective customers as "My partner, Ms. Jones," or "Our partner, Ms. Jones." Megan did not bother to correct anybody about this. She was introduced in this manner to Tiffany, a new customer. Relying on the belief that Megan was a partner, Tiffany entered a contract with Jones Corporation. Which of the following is true regarding Megan's liability to Tiffany if Jones Corporation does not fulfill its obligations?

Megan will be liable because she failed to correct the statement introducing her as a partner.

Barbara Nuss, along with Joseph Sabad, decided to form a corporation to purchase and manage land in Mexico. Pursuant to their agreement, Nuss wired $135,000 to Sabad which was to be 50% of the purchase price of the land Joseph had located. Later, Barbara discovered that the actual price was only $163,500. Was this a breach of Sabad’s fiduciary duty as promoter?

Yes

ICI breached numerous contracts in its final months of operation. One of its creditors, Flame, obtained a judgment against ICI for breach of contract. To satisfy its judgment against ICI, Flame sought to attach property that was owned by Freight Bulk Pte. Baransky (son of ICI’s chairman of the board) was the sole shareholder of Freight Bulk. Baransky is also the sole shareholder of Vista Corp. The basic theory is that Baransky aided ICI in evading its creditors by funneling ICI money and other assets into Freight Bulk and Vista. Flame now argues that Baransky, Freight Bulk, and Vista should all be liable for ICI’s debt to Flame. ICI, Freight Bulk and Vista shared the same employees. Further, Baransky regularly siphoned off cash and assets from ICI and distributed it to Freight Bulk and Vista. It also is important to note that the Visa and Freight Bulk failed to observe corporate formalities, did not maintain proper records, shared the same office space and did not deal with one another at arm’s length. Instead, Baransky directed their operations. In addition to ICI, who else should be liable for ICI’s debt to Flame?

Baransky, Freight Bulk, & Vista Corp

Brookhaven Academy is a for-profit general purpose corporation. One of the enumerated corporate purposes for the Academy in its articles of incorporation is for the organization and operation of schools. It has many others, including “To have and to exercise all powers conferred by the laws of the State of Mississippi upon corporations” and to act in matters concerning the sale, lease, acquisition, and disposal of real and personal property. Keene, an Academy shareholder, sued the corporation after it set up and transferred the use of assets to a nonprofit, educational foundation. Keene argued that the transfer was an ultra vires act. Was Keene correct?

No

Shelly wants to open a restaurant. After studying the various types of business ownership structures, Shelly decides she wants her business to be a sole proprietorship. What are some reasons that Shelly may have picked this type of business?

Ease and Low Cost of Formation, Complete Control and Decision-Making, Sole Right to Profits, and Simplified Taxation

Earl and Pearl are partners in a travel agency. Earl dies. Is the partnership dissolved? Can Pearl still operate the business?

Yes partnership is dissolved. Yes Pearl can still operate, but with limits.

Arthur King is the chief executive officer of Camelot, Inc., a close corporation. He is also the majority shareholder in the corporation. King knows that two lawsuits are about to be filed against Camelot. One pertains to an alleged breach of a contract to which Camelot was a party. King had been actively involved in the negotiation of the terms of the contract. The other lawsuit that will be filed against Camelot pertains to an automobile accident allegedly caused by the negligence of Lance Allot, a Camelot employee. Allot was acting within the scope of his employment when the accident occurred. King is concerned that he could face personal liability for damages that may be awarded in these suits, if Camelot’s assets prove insufficient to satisfy the damage awards. Should he be concerned? Why or why not?

No, as long as he has maintained proper corporate formalities.

Tinker was a limited partner in Evers & Chance Limited Partnership. Evers and Chance were the firm’s general partners. Tinker had invested $50,000 in the limited partnership. Evers and Chance had each invested $10,000. Originally, Evers and Chance had done all of the managing of the partnership business. As time went on, however, Tinker became involved, along with Evers and Chance, in management of the firm’s business activities. After this change in responsibility for management had taken place, Evers (while in the course of partnership business) negligently caused crippling physical injury to Cobb. Assume that Cobb’s tort claim is a valid one worth at least $500,000, an amount easily in excess of not only the initial contributions to the partnership but also the value of all partnership property and assets. What is the extent of liability (if any) that Tinker, Evers, and Chance, respectively, may have to Cobb?

Evers - unlimited personal liability, Chance - unlimited personal liability, & Tinker - depends on partnership laws regarding participation in management

Legal Eagles law firm was founded as a general partnership. What would be some advantages for Legal Eagles to switch to a limited liability partnership?

Protection from Personal Liability for Partners Malpractice, Preservation of Tax Advantages, Operational Flexibility, and Continued Entity Status