Business Structure Flashcards
Benefits of organizing as an LLP
An LLP can have multiple owners, corporate owners, and pass-through taxation.
Consuelo is a limited partner who has become ensnared in various activities of her limited partnership. She is worried that her activities may cause her to be liable as a general partner. Which of the following activities may subject her to personal liability?
A. Working for the partnership as a file clerk.
B. Attending meetings of the partners.
C. Guaranteeing a partnership loan.
D. None of the above.
D
The owners of a limited-liability company are known as which of the following A. Partners. B. Members. C. Stockholders. D. Shareholders.
B
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. A Subchapter C corporation. B. A Subchapter S corporation. C. Partnership. D. Limited partnership.
B - If the requirements of a Subchapter S corporation are met, the corporate entity pays no federal income tax. All income is passed through to the shareholders. Although the shareholders enjoy limited liability, they do pay personal income tax on dividends received.
Requirements for articles of incorporation
(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.
Which of the following statements is correct regarding a limited liability company’s operating agreement?
A. It must be filed with a central state agency.
B. It must be in writing.
C. It is designed to forestall and resolve disputes among the owners.
D. It is necessary for a limited liability company to exist.
C - 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).
Under the RMBCA, which of the following dividends is not defined as a distribution? A. Cash dividend. B. Property dividends. C. Liquidating dividends. D. Stock dividends.
D - A stock dividend is a pro rata distribution of additional shares of a corporation’s stock to shareholders. For example, shareholders may receive two additional shares of stock for each ten they already own. Because the corporation essentially created new stock, giving stock dividends to shareholders is not considered a distribution for these purposes.
Carr Corp. declares a 7% stock dividend on its common stock. The dividend
A. Must be registered with the SEC pursuant to the Securities Act of 1933.
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. Requires a vote of Carr’s stockholders.
C - The tax on corporate profits is the same, whether the profits are reinvested in the company or distributed to shareholders in the form of dividends
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?
A. Universal will be liable to Price as an unsecured creditor for $10,000.
B. Universal will be liable to Price as a secured creditor for $20,000.
C. Price will have priority over the claims of Universal’s bond owners.
D. Price will have priority over the claims of Universal’s unsecured judgment creditors
A - Cumulative preferred stock gives the holder the right to payment of dividends before common shareholders are paid. It does not guarantee that dividends will be declared, but if dividends are declared, they must be paid.
Once a corporation declares dividends, the payments become corporate debt. Here, Price is owed $5 x 2,000 shares = $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
Under the 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 partnership debts.
II. The assignee is entitled to the assigning partner’s interest in partnership profits and surplus on dissolution of the partnership
II only - The assignee of a partnership interest gains the rights to the assigning partner’s share of profits upon distribution and assets upon dissolution.
The assignee does not gain any other rights, such as the right to vote or the right to use partnership property for partnership purposes
Unless the partnership agreement prohibits it, a partner in a general partnership may validly assign rights to
- Partnership property.
- Partnership distributions.
Partnership distributions only. 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.
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?
A. To compel payment of a properly declared dividend.
B. To enforce a right to inspect corporate records.
C. To compel dissolution of the corporation.
D. To recover damages from corporate management for an ultra vires management act.
D - Shareholders can sue the corporation and its officers and directors for injuries done to them individually. Shareholders may also file derivative lawsuits against persons who have injured the corporation. 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. The shareholder stands in the proverbial shoes of the corporation to bring an action to remedy an injury done to it. A shareholder who sued to force payment of dividends, to enforce a right to inspect records, or to compel dissolution, would most likely be suing to redress an injury done to him/her individually. Such an injury is remedied through an individual lawsuit brought on the shareholder’s own behalf, not a derivative lawsuit brought on the corporation’s behalf. This is why Choices A, B, and C are not correct. However, an ultra vires act would likely injure the corporation itself, which is why it is the most logical candidate for a derivative suit and why Choice D is the best answer
Under the Revised Model Business Corporation Act (RMBCA), which of the following statements is correct regarding corporate officers of a public corporation?
A. An officer may not simultaneously serve as a director.
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 of a corporation is required to own at least one share of the corporation’s stock.
B
