Business Law 3

Question 1

Definition of security

Answer 1

An investment of money to be managed by others with an expectation of profit, is probably a security.

Passive investors need legal protection more than investors who are actively involved in the enterprise and their investments are more likely to be deemed securities.

A transaction involving an investment purpose is more likely to create a security than a transaction involving a purpose of consumption. (ex. loan to start a business vs. loan to buy a boat)

Question 2

Investment contract elements:

Answer 2

Investment of money
In a common enterprise
With an expectation of profit
To be earned primarily by the actions of others

Question 3

Under the Securities Exchange Act of 1934, which of the following types of instruments is excluded from the definition of “securities”?

Answer 3

Certificates of deposit

Question 4

Which of the following transactions is subject to registration requirements of the Securities Act of 1933?

Answer 4

The 1933 Act applies to sales of securities, including stocks, bonds and notes that are issued for periods over nine months.

Question 5

Which of the following is least likely to be considered a security under the Securities Act of 1933?

Answer 5

General partnership interests.

Question 6

Which of the following statements concerning the prospectus required by the Securities Act of 1933 is correct?

Answer 6

The prospectus is a part of the registration statement.

Question 7

When a common stock offering requires registration under the Securities Act of 1933,

Answer 7

The issuer would be acting unlawfully if it were to sell the common stock without providing the investor with a prospectus.

Question 8

Under the Securities Act of 1933, which of the following statements is (are) correct regarding the purpose of registration?

Answer 8

The purpose of registration is to adequately and accurately disclose financial and other information upon which investors may determine the merits of securities.

Question 9

The registration requirements of the Securities Act of 1933 are intended to provide information to the SEC to enable it to

Answer 9

Ensure that investors are provided with adequate information on which to base investment decisions.

Question 10

Securities Act of 1933 process

Answer 10

1. Files registration statement with SEC
2. Distributes red herring prospectus and takes oral offers and limited written offers and places tomestone ad
3. Registration statement deemed effective and sales can begin

Question 11

Distribution players:

Answer 11

Issuer-Underwriter-Broker-Investor

Question 12

Content of registration statements:

Answer 12

• Financial Statements audited by independent CPA
• Names of issuer, directors, officers, underwriters, etc.
• Risks
• Description of issuer’s business
• Description of security and intended use for proceeds

Question 13

Shelf Registration

Answer 13

Allowing the largest 2,000 or so companies to file a single registration statement that would cover the securities they expected to sell during the next three years

Securities Offering Reform Program (SORP), the SEC expanded the “shelf registration” concept to what might be considered “company registration.”

Question 14

WKSIs—pronounced “wicksees”

Answer 14

Well-known seasoned issuers, largest users, make up 30% of firms but 95% of firm’s assets listed on exchange

Question 15

Free writing prospectus (FWP)

Answer 15

WKSIs are now allowed to use additional material (FWPs) at any time with few restrictions other than the material usually has to be filed with the SEC

Question 16

Which of the following securities is exempt from the registration requirements of the Securities Act of 1933?

Answer 16

Any security issued by a charity, railroad company, farmers’ co-operative, government, savings and loans, or bank or short term notes (maturing in less than 9 months) is exempt from registering under the 1933 Act.

Question 17

Winslow, Inc. intends to make a $450,000 common-stock offering under Rule 504 of Regulation D of the Securities Act of 1933. Winslow

Answer 17

May sell the stock to an unlimited number of investors.

Rule 504 does not set a limit on the overall number of investors. So long as a company’s total offerings for a year are under $1mn

Question 18

Rationale for exemptions from registration under 1933:

Answer 18

1. Small offerings-small threat to the public
2. Private placement exemptions-Accredited investors (AIs) who can look out for themselves
3. Intrastate offering- regulated by state

Question 19

Rule 504 Section D

Answer 19

1. Amount- Less than 1 million in 12 months
2. Advertising- general solicitation not allowed
3. Purchaser- can be sold to anyone
4. Information requirements- none
5. Filing requirements- Form D within 15 days of first sale
6. Resale- securities held for 6 mo to 1 year

Question 20

Rule 505 Section D

Answer 20

1. Amount- Less than 5 million in 12 months
2. Advertising- general solicitation not allowed unless selling to AIs
3. Purchaser- any amount of AIs, 35 unaccredited investors
4. Information requirements- none for AIs
5. Filing requirements- Form D within 15 days of first sale
6. Resale- securities held for 6 mo to 1 year

Cannot be used by investment companies or those in bad standing with SEC.

Question 21

Rule 506 Section D

Answer 21

1. Amount- no limit
2. Advertising- general solicitation not allowed unless selling to AIs
3. Purchaser- any amount of AIs, 35 unaccredited investors
4. Information requirements- none for AIs
5. Filing requirements- Form D within 15 days of first sale
6. Resale- securities held for 6 mo to 1 year

Cannot be used by those in bad standing with SEC.

Question 22

Regulation A

Answer 22

1. Amount- 20 or 50 million in 12 months, depending on tier
2. Advertising- allows “testing the waters” to see if there is sufficient interest
3. Purchaser- unaccredited investor limited to 10% of income or net worth
4. Information requirements- 2 years audited or unaudited F/S, depending on Tier
5. Filing requirements- Form 1-A plus offering circular (2 years audited F/S for Tier 2)
6. Resale- none

Question 23

Rule 147 Intrastate Offering

Answer 23

1. Amount- none
2. Advertising- must remain in state
3. Purchaser- must be in-state residents
4. Information requirements- none
5. Filing requirements- none
6. Resale- only to other residents of state for 9 months

Must be organized and doing business in state with 80% of assets, revenue and proceeds in the state

Question 24

Blue Sky Laws

Answer 24

State securities regulations to protect investors from securities fraud, superseded by many federal regulations

Question 25

Sam is a multimillionaire. He invested $100,000 in Company A’s crowdfunded venture. Later that year, he wanted to invest in Company B’s crowdfunded venture. What is the largest amount Sam can invest in B’s offering?

Answer 25

$0

$100,000 is the most someone can invest in crowdfunded ventures during the course of a single year.

Question 26

The JOBS Act allows general solicitation in a Reg D Rule 506 offering if the issuer takes “reasonable steps” to insure what?

Answer 26

That it sells only to accredited investors.

If it does not engage in general solicitation, the issuer can sell to up to 35 unaccredited investors under Reg. D.

Question 27

The maximum amount that a firm can raise through crowdfunding in a single year is:

Answer 27

1 million

Question 28

Under the JOBS Act, a foreign company cannot

Answer 28

Use the crowdfunding exemption.

Question 29

JOBS Act of 2012

Answer 29

1. Created a new category of firms called emerging growth companies (EGCs) that can go public via an initial public offering (IPO) yet avoid most of the burdens of being public for five years
2. Encouraged “crowdfunding”
3. Increased the Regulation A exemption’s ceiling from $5 million to $50 million
4. Allowed firms doing private placements to engage in some general solicitation and advertising
5. Changed the definition of a “public company” in order to allow firms to grow bigger before being forced to go public

Question 30

Emerging Growth Companies (EGCs) benefits:

Answer 30

1. Include only 2 years (instead of 3) of audited F/S in its IPO registration statement.
2. Reduced disclosure requirements regarding their executives’ pay.
3. Right to submit to the SEC a draft equity IPO registration statement for confidential review prior to a public filing.
4. Exempt for five years from complying with:
   - Sarbanes-Oxley Act regarding the auditor attestation report of the company’s internal control over financial reporting
   - New PCAOB rules requiring things like mandatory audit firm rotation
5. Allows more publicity regarding a company that is going public

Question 31

Crowdfunding

Answer 31

Process by which entrepreneurs and business owners can use the Internet to raise capital

1. Up to 1 million in 12 months
2. Foreign companies cannot use
3. Limited to $2000 or 5% of income $100,000 in income
4. Invest through funding portal regulated by SEC

Question 32

Private Company Flexibility and Growth Act

Answer 32

JOBS Act gives companies such as Facebook more control over when they go public by

(a) raising the shareholder count ceiling from 500 to a maximum of either 2,000 persons in total or 500 persons who are not “accredited investors,”
(b) excluding from the count investors who became shareholders through the issuer’s employee compensation plan and investors who bought through crowdfunding.

Question 33

Under the liability provisions of Section 11 of the Securities Act of 1933, a CPA may be liable to any purchaser of a security for certifying materially misstated financial statements that are included in the security’s registration statement.

Under Section 11, which of the following must be proven by a purchaser of the security?

Answer 33

The primary things that plaintiffs must show to win their Section 11 claim are:

1. That there was a material misstatement in the registration statement on the effective date
2. That they can trace their shares to that registration statement
3. That they suffered damages.

Question 34

Under which of the following Acts is Thorp most likely to prevail in a lawsuit against Ivor?

Answer 34

The key fact here is that Ivor did not know of the error. It acted negligently, but not with bad intent (scienter). Absent bad intent, there can be no fraud and therefore no liability under Section 10(b) of the 1934 Act, which is an anti-fraud statute. However, defendants who are merely negligent are liable for materially false statements in a defective registration statement pursuant to Section 11 of the 1933 Act.

Question 35

Under Section 11, a CPA will not usually be liable to the purchaser.

Answer 35

If the CPA can prove due diligence.

It is for intentional or reckless misstatements that liability is imposed.

Question 36

Which of the following facts will result in an offering of securities being exempt from registration under the Securities Act of 1933?

Answer 36

The sale or offer to sell the securities is made by a person other than an issuer, underwriter, or dealer.

Question 37

What is the standard that must be established to prove a violation of the anti-fraud provisions of Rule 10b-5 of the Securities Exchange Act of 1934?

Answer 37

Intentional misconduct

Courts hold that a defendant must act with scienter (intent) or “extreme recklessness” (which is similar to scienter) to be liable under 10b-5.

Question 38

An accountant will be liable for damages under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 only if the plaintiff proves that

Answer 38

A plaintiff must generally show several things to win a Section 10(b) case. A CPA must have (1) intentionally or recklessly (2) made a misstatement of material fact or omitted a material fact (3) that was relied upon by the defendant.

Question 39

Which defense must an accountant establish to be absolved from civil liability under Section 18 of the Securities Exchange Act of 1934 for false or misleading statements made in reports or documents filed under the Act?

Answer 39

Good faith and lack of knowledge of the statement’s falsity

Question 40

Which of the following might prevent a plaintiff investor from recovering from a defendant accountant in a Section 18(a) lawsuit?

Answer 40

• The document containing the false statement was not filed with the SEC.
• The plaintiff did not read the false document.
• The defendant established that it acted in good faith and did not know of the error in the document.

Question 41

Section 10(b) and Rule 10b-5 of the 1934 Act

Answer 41

Apply to all securities, no matter how big or small the company is, whether it is registered or unregistered with the SEC, and whether an initial offering or secondary trading is involved.

Whereas the standard of liability under Section 11 is mere negligence (and the burden of proof is on the defendant), the standard of liability under Section 10(b) is scienter (bad intent) and the burden of proof is upon the plaintiff

Question 42

What Plaintiffs Must Prove to Win a 10b-5 Claim

Answer 42

1. False Statement or Omission of Material Fact
2. Scienter- “Recklessness” is sufficiently similar to bad intent to satisfy the requirement. Mere negligence will not suffice.
3. Reliance by plaintiff- not required if an omission, required if an active misrepresentation
4. Causation- plaintiff must show that the false statements or omissions caused him to enter into the transaction

Question 43

Section 10(b) Defenses

Answer 43

1. Statute of limitations- Within 2 years of when the fraud was or should have been discovered, and
   Within 5 years of the fraud.
2. Fraudulent or Reckless Conduct by Plaintiff

Question 44

Section 18(a)

Answer 44

1. Although Section 10(b) is the most significant antifraud provision of the 1934 Securities Exchange Act, accountants are occasionally sued under Section 18(a) as well
2. Applies only to false statements in “filed documents”—documents filed with the SEC

Key Defenses -D acted in good faith and without knowledge that the statement was false or misleading

Question 45

Turtle was audit partner on ABC Accounting’s audit of Jemison Corporation. Turtle knew that the audit was ineptly performed, although he hoped (without much reason) that the financial statements were accurate. He certified them as such. Which of the following is true?

Answer 45

The federal securities laws’ criminal provisions punish “willful” violations of the 1933 and 1934 securities acts.

Question 46

CPA Sobel engages in insider trading of the shares of an audit client. She is caught. The SEC brings a civil action and forces Sobel to give up her insider-trading profits and pay a civil fine of three times the amount of the profits. Sobel thought she had been punished sufficiently, but then the DOJ began an investigation. Which of the following is true?

Answer 46

The DOJ can choose to bring criminal charges to supplement the SEC’s civil action.

It is common for the SEC to bring civil charges and then the DOJ to bring criminal charges in insider-trading cases.

Question 47

Taxes payable under the Federal Unemployment Tax Act (FUTA) are

Answer 47

Deductible by the employer as a business expense for federal income-tax purposes.

Question 48

Federal Insurance Contributions Act (FICA): Social Security and Medicare

Answer 48

1. To be “fully insured,” one must work a minimum of 40 quarters (10 years) during which he or she pays social security (FICA) taxes into the system
2. A currently insured worker that has not put in 10 years would still be eligible for limited survivor benefits, disability and lump sum death benefits
3. In 2016, the rate is 7.65% of the employee’s wages, which is allocated 6.2% for Social Security and 1.45% for Medicare.
4. SS caped at income of $118,500, Medicare tax is unlimited

Question 49

Self-Employed Contributions Act (SECA) Tax

Answer 49

Self-employed persons must pay not only their federal income tax on taxable earnings but also Social Security and Medicare taxes on their own self-employed taxable earnings.

1. Can deduct 50% of FICA from taxes, pay the employer and employee combined rate (15.3% in 2016)

Question 50

Federal unemployment tax (currently 6%)

Answer 50

1. Must be paid by employer who employs persons covered by this act.
2. Only the first $7,000 paid to each covered employee is taxable under FUTA
3. The maximum federal rate fluctuates, but was 6.0% in 2016 with a maximum state offset credit of 5.4%, so many employers pay a federal tax of only 0.6% (on $7,000)
4. Employers must file if they pay $1,500 or more in wages during any calendar quarter, or have at least one full-time, part-time, or temporary employee during at least 20 different weeks during the year

Question 51

Which of the following individuals are not required to purchase health insurance coverage under the ACA?

Answer 51

1. Indian tribal members
2. People in prison
3. Individuals making only $9,000 per year

Question 52

The ABC Co. has 75 full-time employee equivalents (FTEs). It does not offer any health insurance to those employees, some of whom buy insurance policies from the ACA Marketplace and qualify for federal subsidy. What is its annual penalty under the ACA’s employer mandate?

Answer 52

ABC’s liability would be $90,000 because it has 75 employees, but the first 30 are exempted. 75 – 30 (EE exclusion) = 45. 45 × $2,000 = $90,000

Question 53

If a married couple filing jointly has active income of $220,000 and net investment income of another $200,000, how much must they pay to satisfy their Medicare surtax obligation?

Answer 53

The couple’s Medicare surtax should be 3.8% of the lesser of (a) net investment income ($200,000 in this case), or (b) the excess of AGI over the AGI threshold ($170,000 in this case–$420,000 minus $250,000). Therefore, the correct tax is 3.8% of $170,000, which is $6,460.

Question 54

In 2013, thirty-something Tessa had an AGI of $75,000. She had some severe dental problems and paid her dentist $10,000 that was not covered by insurance. How much may Tessa deduct from her income tax form under the ACA?

Answer 54

Under the ACA, Tessa could deduct all expenses over $7,500 (the 10% threshold of AGI), which means a $2,500 deduction.

Question 55

Affordable Care Act extensions of coverage

Answer 55

1. Coverage of Preexisting Conditions- can’t discriminate
2. No Dropping Coverage Because of Illness
3. Eliminating Gender (and Other) Discrimination (can charge more for age, location, tobacco use)
4. Minimizing Out-of-Pocket Expenses (ex. $6,850 for an individual plan and $13,700 for a family plan in 2016)
5. Eliminating Lifetime Limits
6. Medicaid Expansion

Question 56

Employer Mandate

Answer 56

1. It is a firm that has employed an average of at least 50 full-time equivalent employees (FTEs) on average business days during the preceding year.
2. Coverage must be affordable, costing less than 9.5% of the employee’s income.

Question 57

Employer Mandate (tax penalty)

Answer 57

1. If the employer did not offer coverage to workers as required, the penalty in 2016 was a flat $2,000 per full-time employee (excluding the first 30 employees).
2. If only a few workers were not covered, or if that coverage did not meet minimum value standards, the fine in 2016 was $3,000 per full-time employee who received cost assistance

Question 58

Individual Mandate (tax penalty)

Answer 58

A per person amount of $695 per adult and $347.50 per child, capped at $2,085 per family

Question 59

Revenue-Raising Provisions for ACA

Applies only to:
$200,000 for a single taxpayer
$250,000 for joint filers
$125,000 for a married taxpayer filing separately

Answer 59

1. Medical Care Expense Tax Deduction-raised for most taxpayers from 7.5% of adjusted gross income (AGI) to 10%
2. The taxable amount subject to the 3.8% surcharge is the lesser of:
   - Net investment income, or
   - The excess of AGI over the AGI thresholds.
3. Medical Device Excise Tax
4. Additional Medicare Tax—The ACA imposes a 0.9% Additional Medicare Tax (AMT) on wages and self-employment income above set amounts
5. Cadillac tax on excessive plan benefits for employers

Question 60

Which of the following professions might well be deemed statutory employees under the proper circumstances?

Answer 60

Life insurance agents. (Drivers, home workers, sales people)

This profession is listed in the rules as potentially being a statutory employee if three conditions are met: the service contract states or implies that substantially all the services are to be performed by the worker personally, the worker does not have a substantial investment in the equipment and property used to perform the services; and the services are performed on a continuing basis for the same business.

Question 61

LMN Corporation classified many of its workers as independent contractors, but that classification became the subject of litigation and was determined to be erroneous. Which of the following does support a safe harbor defense for LMN?

Answer 61

• The classification is consistent with industry practice.
• A previous IRS ruling found these workers to be independent contractors
• An IRS ruling in a case involving JKL Co. found similarly situated workers to be independent contractors.

Question 62

A corporation that intends to make an election to become an S corporation seeks advice. An accountant would most appropriately make which of the following recommendations?

Answer 62

Evaluate the eligibility of all shareholders.

Because there are so many restrictions on types of shareholders for a Subchapter S corporation (no more than 100, no nonresident aliens, all must be individuals—though exceptions are made for certain tax exempt organizations, estates and trusts)

Question 63

Which of the following statements describes the same characteristic for both an S corporation and a C corporation?

Answer 63

Shareholders can contribute property into a corporation without being taxed.

Question 64

The owners of a limited-liability company are known as which of the following

Answer 64

Members

Question 65

Which of the following forms of business generally provides all owners with limited liability, while avoiding federal taxation of income at the entity level?

Answer 65

A Subchapter S corporation.

Question 66

Assuming all other requirements are met, a corporation may elect to be treated as an S corporation under the Internal Revenue Code if it has

Answer 66

One hundred or fewer shareholders.

Question 67

Which of the following statements is correct concerning the similarities between a limited partnership and a corporation?

Answer 67

Each is created under a statute and must file a copy of its certificate with the proper state authorities.

Limited partnership is a separate legal entity like a C corp (has a general and limited partner)

Question 68

What type of business organization may generally be formed without filing an organizational document or certificate with a state-government agency or office?

Answer 68

A general partnership.

Question 69

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?

Answer 69

Novation

When the corporation comes into existence and adopts the contracts, the general rule is that both the promoter and the corporation are now liable under them.

However, if the other party agrees to release the agent from liability and to look only to the corporation for satisfaction, then a novation has taken place.

Question 70

Under the Revised Model Business Corporation Act (RMBCA), which of the following must be contained in a corporation’s articles of incorporation?

Answer 70

The articles of incorporation must include (1) the name of the corporation; (2) the number of shares it is authorized to issue; (3) the street address of its registered office and the name of its agent at that address; and (4) the name and address of each incorporator.

Question 71

Under the Revised Uniform Limited Partnership Act (RULP), which of the following statements is correct regarding limited partnerships?

Answer 71

Limited partners may lose limited liability if they participate in management activities

While limited partners may consult with the general partners, work for the partnership in a non-management capacity, guaranty its obligations and do a number of other things without forfeiting limited liability, they may not participate in management

Question 72

Which of the following statements is correct regarding a limited liability company’s operating agreement?

Answer 72

It is designed to forestall and resolve disputes among the owners.

This is the purpose of an LLC operating agreement, which is why it is a good idea that these be in writing and filed with the state (although this is not required).

Question 73

The corporate veil is most likely to be pierced and the shareholders held personally liable if

Answer 73

The shareholders have commingled their personal funds with those of the corporation. OR Failure to adequately capitalize the corporation

The corporate veil is almost never pierced, and investors almost never lose more than their investment. Only when shareholders use a corporation for their own (usually fraudulent) personal use is there even a remote possibility that the veil will be pierced

Question 74

General Partnership Operations

Answer 74

1. Absent agreement to the contrary, all partners have equal rights in the management and conduct of business affairs
2. Absent agreement to the contrary, majority vote governs all ordinary course-of-business matters.
3. Unanimity is needed for actions contrary to partnership agreement or to take action regarding extraordinary matters

Question 75

Wilson and Thomas are partners. Wilson contributes $150,000 to the partnership, and Thomas contributes $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?

Answer 75

$100,000

In a general partnership, profits (in this case, $200,000) are shared equally among partners.

Question 76

Price owns 2,000 shares of Universal Corp.’s $10 cumulative preferred stock. During its first year of operations, cash dividends of $5 per share are declared on the preferred stock, but were never paid. In the second year, dividends on the preferred stock were neither declared, nor paid.

If Universal is dissolved, which of the following statements is correct?

Answer 76

Universal will be liable to Price as an unsecured creditor for $10,000.

He is an unsecured creditor, because this debt has not been secured by a separate agreement that creates a security interest. His debt does not have priority over judgment creditors, bond owners, or secured creditors.

Question 77

An owner of common stock will not have any liability beyond actual investment unless the owner

Answer 77

Paid less than par value for stock purchased in connection with an original issue of shares.

A shareholder who buys watered stock is liable to the corporation for the difference between the price actually paid and the par value of the shares purchased.

Question 78

Profits of general partnership

Answer 78

Use partnership agreement, if no agreement, share equally, if agreement to losses only, share profits the same way as losses

Question 79

Limited partnership profits

Answer 79

Use partnership agreement, if not addressed, share according to capital contributions made and not returned

Question 80

S corporation profits

Answer 80

To shareholders in accordance with % of stock ownership

Question 81

LLC profits

Answer 81

Use operating agreement and if not addressed in accordance with capital account:
Contribution+Profits allocated-Losses allocated-Distributions

Question 82

The Maglie Corporation has been doing business for many years, but it has had some difficulties lately. Which of the following is true about the rules for involuntary dissolution for Maglie?

Answer 82

If Maglie has admitted in writing that a creditor’s claim is due and owing and that Maglie is insolvent, the creditor could sue for an involuntary judicial dissolution of Maglie.

Question 83

Amanda is a member of the Ames Network LLC. She has had some conflict with other members of the LLC and is seeking your advice. Please tell Amanda which of the following is true.

Answer 83

If Amanda can prove that she is a minority member of the LLC and that the members in control of the LLC are looting the LLC’s assets for their own personal benefit, she can likely successfully sue for dissolution.

The Revised Uniform Limited Liability Company Act (RULLCA) provides for dissolution via court order if a member sues and shows that those in control are behaving illegally, fraudulently, or oppressively.

Question 84

The partners of College Assoc., a general partnership, decide to dissolve the partnership and agree that none of the partners will continue to use the partnership name.

Under the Uniform Partnership Act, which of the following events will occur on dissolution of the partnership?

Answer 84

Simply deciding to dissolve a partnership does not dissolve liability. If money is owed on contracts, tort judgments, or otherwise, the partners are still responsible for them. Apparent authority does continue after partners have decided to dissolve the partnership. Notice must be given to others before apparent authority stops.

Question 85

Which of the following actions may be taken by a corporation’s Board of Directors without stockholder approval?

Answer 85

Purchasing substantially all of the assets of another corporation.

Shareholders have the right to vote on many important corporate changes, including amendments to the articles of incorporation, dissolution, sale of all or substantially all of the corporation’s assets, and mergers & consolidations.

Question 86

Which of the following is (are) a true statement about LLPs?

Answer 86

• LLPs have fewer requirements to qualify for pass-through taxation than do Subchapter S corporations.
• In most states, LLPs need not limit themselves to 100 shareholders, as must Subchapter S corporations. However, they are limited to professionals, such as doctors and accountants.
• In many states, the LLP must purchase a minimum amount of liability insurance in order for limited liability to be granted to its partners.

Question 87

Carr Corp. declares a 7% stock dividend on its common stock. The dividend

Answer 87

Has no effect on Carr’s earnings and profits for federal income-tax purposes.

Question 88

Which of the following statements best describes the effect of the assignment of an interest in a general partnership?

Answer 88

The assignment transfers the assignor’s interest in partnership profits and surplus.

Question 89

General partnership dissolusion

Answer 89

RUPA lists a few situations in which a partnership must be wound up; in all other situations, a buyout of a partner must occur.

Partnership shall purchase the interest of the dissociating partner at the amount that would have been distributable to the dissociating partner from his or her partnership account

Question 90

Limited partnership dissolution

Answer 90

The departure of a limited partner will not result in the dissolution of a limited partnership, and the departure of a general partner need not do so either with proper planning.

Question 91

Corporations may be involuntarily dissolved administratively by the secretary of state for such reasons as:

Answer 91

• Failure to pay franchise taxes;
• Failure to file annual reports; or
• Failure to properly establish and maintain a registered agent or office.

Question 92

Corporations may be involuntarily dissolved judicially in:

Answer 92

1. An action by the attorney general, where:
   The corporation fraudulently obtained approval for its articles of incorporation, or The corporation has abused its legal authority.
2. An action by shareholders;
   If management is deadlocked; acting in an illegal or oppressive way, or shareholders are deadlocked and cannot elect directors.
3. In an action by creditors if:
   The creditor’s claim has been reduced to judgment, the execution on the judgment returned unsatisfied, and the corporation is insolvent; or The corporation has admitted in writing that the creditor’s claim is due and owing and the corporation is insolvent.

Question 93

Among the events that cause the LLC to dissolve, according to RULLCA:

Answer 93

1. An event caused dissolution based on the operating agreement
2. Consent of all members
3. Passage of 90 consecutive days during which the company has no members
4. Court order, upon application of a member, dissolving the LLC on grounds that the conduct of its activities is unlawful or that carrying on the company’s activities is not “reasonably practicable” in conformity with the operating agreement

Question 94

Unless the partnership agreement prohibits it, a partner in a general partnership may validly assign rights to

Answer 94

Partnership property-NO
Partnership distributions-YES

Partners cannot assign their rights to use partnership assets or management rights to anyone without the unanimous consent of other partners. The only thing that may be assigned without this consent is a partner’s right to the distribution of profits.

Question 95

To which of the following rights is a stockholder of a public corporation entitled?

Answer 95

The right to a reasonable inspection of corporate records.

Question 96

For what purpose will a stockholder of a publicly held corporation be permitted to file a stockholder’s derivative suit in the name of the corporation?

Answer 96

To recover damages from corporate management for an ultra vires management act.

A shareholder’s derivative suit is so named because the shareholder is not suing for an individual injury done to him/her but, instead, for an injury done to the corporation.

Question 97

Which of the following positions best describes the nature of relationship of the Board of Directors of XYZ Co to the company as a whole?

Answer 97

Fiduciary

The core of the directors’ relationship to the company is that they owe it a fiduciary duty - the duty of highest loyalty.

Question 98

Duties of corporate directors:

Answer 98

1. Duty of attention- must direct
2. Duty of care- act in good faith
3. Duty of loyalty- avoid conflict of interest

Question 99

Rights of corporate directors:

Answer 99

1. Right to rely on reports of officers and other directors
2. Business judgement rule- course uphold officer’s decisions in absence of evidence of bad faith
3. Liability protection- as long as acted in good faith and intent to benefit corporation
4. Right to profit

Question 100

Duties of partners:

Answer 100

1. Duty of loyalty- avoid conflict of interest and competing with partnership
2. Duty of care- act in good faith

Question 101

Which of the following statements is (are) usually correct regarding general partners’ liability?

Answer 101

All general partners are jointly and severally liable for partnership torts.

General partners are jointly and severally liable, or potentially liable, for an entire tort judgment against their firm. Their liability extends beyond acts they authorized. Even unauthorized acts can create liability for the general partners.

Question 102

Under the Revised Model Business Corporation Act (RMBCA), which of the following statements is correct regarding corporate officers of a public corporation?

Answer 102

A corporation may be authorized to indemnify its officers for liability incurred in a suit by stockholders.

Under Subchapter E of the RMBCA, a corporation may indemnify officers in such suits, so long as the officers acted in good faith and followed the business-judgment rule.

Question 103

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

Answer 103

Eller’s personal assets can be seized only after partnership assets are exhausted.

Question 104

Under the Uniform Partnership Act, which of the following statements concerning the powers and duties of partners in a general partnership is (are) correct?

Answer 104

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 liability on partnership debts and contracts.

Question 105

The principle that protects corporate directors from personal liability for acts performed in good faith on behalf of the corporation is known as

Answer 105

The “business-judgment rule.”