M4 Business Structures: Part 1

Question 1

MCQ-05703
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.

Answer 1

A limited liability company.

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

Question 2

MCQ-05713
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?

Answer 2

C Corporation

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.

Question 3

MCQ-05242
In which type of business entity is the entire ownership interest most freely transferable?

Answer 3

Corporation

Among the business entities listed, entire ownership interests are most freely transferable in a corporation. Unless transferability is restricted by contract (restricted shares or
voting trusts or voting agreements), there are no restrictions on the sale of corporate stock (the common stock represents the stockholders’ ownership interest). The right to transfer ownership interests freely is one of the advantages of the corporate form of business

Question 4

MCQ-05811
What type of business organization may generally be formed without filing an organizational document or certificate with a state government agency or office?

Answer 4

A general partnership

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.

Question 5

MCQ-03282
Unless prohibited by the organization documents, a stockholder in a publicly held corporation and the owner of a limited partnership interest both have the right to:

Answer 5

Assign their interest in the business.

Both a shareholder in a publicly held corporation and the owner of a limited partnership interest have a right to assign (sell) their interest. While a shareholder is free to assign his whole ownership interest, a limited partner’s assignable interest is limited to the limited partner’s interest in profits and losses.

Question 6

MCQ-15790
A U.S. citizen and an individual who is a resident and citizen of Australia want to form a business association to sell farm equipment in the United States. They want limited liability to the extent of their investments, to be taxed as a flow-through, and to both actively participate in management. Which of the following types of business organizations best fits their needs?

Answer 6

Limited liability company (LLC)

A limited liability company (LLC) is taxed as a flow-through to the owners (members). All the owners have limited personal liability and are allowed to actively participate in the
management of the business. Owners are not required to be U.S. citizens or residents

Question 7

MCQ-04837
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 taxfree. 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?

Answer 7

Limited liability partnership.

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

Question 8

MCQ-03108
Which of the following is not necessary to create an express partnership?

Answer 8

Execution of a written partnership agreement

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.

Question 9

MCQ-03013
When parties intend to create a partnership that will be recognized under the Revised Uniform Partnership Act, they must agree to:
- Conduct a business for profit
- Share gross receipts from a business

Answer 9

Yes; No

Rule: A partnership is an agreement between two or more persons to carry on as co-owners of a business for profit; partners share management and profits and losses, not gross receipts.

Question 10

MCQ-14905
Two CPAs organized their business as a general partnership. Which of the following advantages may have played a role in their selection of the general partnership form under the Revised Uniform Partnership Act?

Answer 10

The partnership form of business organization allowed them to form their business without the requirement of filing organizational documents with a government agency.

The general partnership form of business organization allows individuals to form a business without being required to file organizational documents with a government agency

Question 11

MCQ-12514
Banner and Smythe merged their competing retail service businesses, each of which previously had been operated as a sole proprietorship. Neither Banner nor Smythe filed any paperwork with the state. They agreed to equally share profits, management rights, and co-ownership rights. What is the status of the merged business?

Answer 11

General partnership

A partnership is formed when two or more people join to operate, as co-owners, a business for profit. No filing is necessary.

Question 12

MCQ-04634
Noll Corp. and Orr Corp. are contemplating entering into an unincorporated joint venture. Such a joint venture:

Answer 12

Will be treated as a partnership in most important legal respects.

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.

Question 13

MCQ-03121
Rivers and Lee want to form a partnership. For the partnership agreement to be enforceable, it must be in writing if:

Answer 13

The agreement cannot be completed within one year from the date on which it will be entered into.

A transaction which cannot be completed within a year must be in writing to be enforceable.

Question 14

MCQ-02963
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?

Answer 14

A joint venture

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.

Question 15

MCQ-02971
A joint venture is a(an):

Answer 15

Association of persons engaged as co-owners in a single undertaking for profit.

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.

Question 16

MCQ-14924
A seven-person partnership lacks a partnership agreement. Under the Revised Uniform Partnership Act, how many votes are required to approve an extraordinary transaction of partnership business?

Answer 16

Seven votes

Seven votes are required to approve an extraordinary transaction of partnership business.
The Revised Uniform Partnership Act (RUPA) requires that any partnership matters not in the ordinary course of business be approved by all the partners unless there is an agreement to the contrary in the partnership agreement.

Question 17

MCQ-03165
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

Answer 17

Both I and II

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.

Question 18

MCQ-02990
Sam, CPA, is one of the partners in a limited liability partnership with other CPAs. Sam avoids personal liability for:

Answer 18

The malpractice of his partners regarding errors and omissions.

Rule: A partner in an LLP is personally liable for tort liabilities arising from his own negligence and the negligence of his direct subordinates. He is NOT personally liable for the negligent actions committed by his partners.

Question 19

MCQ-02996
In a general partnership, which of the following acts must be approved by all the partners?

Answer 19

Admission of a partner

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.

Question 20

MCQ-03005
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

Answer 20

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.

Question 21

MCQ-03086
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:

Answer 21

Win, because Locke had apparent authority to bind the partnership.

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.

Question 22

MCQ-03224
Which of the following statements best describes the effect of the assignment of an interest in a general partnership?

Answer 22

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

The assignee of an interest in a partnership receives the assignor’s rights to profits and surplus.

Question 23

MCQ-03240
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?

Answer 23

II only

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.

Question 24

MCQ-03124
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:

Answer 24

Equally among the partners.

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.

Question 25

MCQ-11107
A partner in a general partnership is usually not entitled to which of the following?

Answer 25

To be liable only for personal negligence.

A partner in a general partnership is not entitled to be liable only for personal negligence; a partner is liable for all obligations of the partnership.

Question 26

MCQ-05573
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?

Answer 26

The partners will share in losses according to the allocation of profits specified in the partnership agreement.

Under the Revised Uniform Partnership Act, unless agreed otherwise, partners share losses in the same manner that they share profits.

Question 27

MCQ-03126
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?

Answer 27

$100,000

Rule: When the partnership agreement is silent as to how losses will be shared, they are shared in
the same manner as profits.
Application of the 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)].

Question 28

MCQ-03137
Lewis, Clark, and Beal entered into a written agreement to form a partnership. The agreement required that the partners make the following capital contributions: Lewis, $40,000, Clark, $30,000, and Beal, $10,000. It was also agreed that in the event the partnership experienced losses in excess of available capital, Beal would contribute additional capital to the extent of the losses. The partnership agreement was otherwise silent about division of profits and losses. Which of the following statements is correct?

Answer 28

Profits are to be divided equally among the partners.

Rule: Regardless of the contributions and obligations of the partners, unless the partnership agreement specifically states otherwise, all partners are entitled to an equal share of the profits.

Question 29

MCQ-03141
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?

Answer 29

Gillie $40,000, Taft $40,000, Dall $40,000.

$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.

Question 30

MCQ-04844
Juan, Rico, and Sue form a partnership: Yellow Bus Holdings. Rico contributes 80% of the capital. The partners agree to split the profits equally. After three years, the friends dissolve Yellow Bus because it has never been profitable. Yellow Bus’ liabilities are greater than its assets. Who will pay Yellow Bus’ losses?

Answer 30

All of the partners equally.

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 agree to share
profits equally. Thus, they will share the losses equally.

Question 31

MCQ-03294
Grey and Carr entered into a written partnership agreement to operate a hardware store. Their agreement was silent as to the duration of the partnership. Grey wishes to withdraw from the partnership. Which of the following statements is correct?

Answer 31

Grey may withdraw from the partnership at any time.

Rule: Where a partnership agreement does not state the duration of the partnership, the partners may withdraw at any time. The partner need not obtain consent of the other partners or of the court.

Question 32

MCQ-04845
Alex, Becky, and Cindy form a partnership. They each contribute $20,000. Alex and Cindy have full time jobs and contribute only a few hours of work at the partnership business each week. Becky devotes 50 hours a week to the business. Is Becky entitled to compensation?

Answer 32

No, unless the partnership agreement provides otherwise.

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. It does not matter whether one partner works more than the others.

Question 33

MCQ-03007
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?

Answer 33

Dr. Addison being adjudicated bankrupt.

The bankruptcy of a partner will result in the dissociation of a partner.

Question 34

MCQ-03030
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 continue

Answer 34

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.

Question 35

MCQ-08962
A CPA firm, operated as a general partnership, will dissolve by mutual agreement at the end of the year. During the year, distributions have been made to some partners in excess of their capital invested in the partnership. Which of the following statements is correct regarding the distribution of
assets at the end of the partnership’s existence?

Answer 35

Partners with negative capital accounts must contribute additional funds to the partnership.

Partners in a partnership can be held personally liable for the partnership’s debts, but in any case are liable for the contributions they agree to make. If a partner has a negative
capital account when the partnership is dissolved, the partner must contribute enough to make up for the shortfall.

Question 36

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?

Answer 36

$25,200

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 “A” reflects this amount.

Question 37

MCQ-02977
A limited partnership must have:

Answer 37

At least one general partner and one limited partner.

Rule: A limited partnership must have at least one general partner and one limited partner. Be careful of answers that include the word “all.”

Question 38

MCQ-03123
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:

Answer 38

According to the agreement.

Rule: Partners in a limited partnership can agree as to how they will split profits and losses, although limited partners’ losses are limited to their capital contributions. Profits and losses are shared on the basis of percentages of capital contributions only in the absence of an agreement otherwise.

Question 39

MCQ-03242
Which of the following statements is correct with respect to a limited partnership?

Answer 39

A general partner may be a secured creditor of the limited partnership.

In a limited partnership, a general partner may be a secured creditor of the limited partnership.

Question 40

MCQ-03254
In general, which of the following statements is correct with respect to a limited partnership?

Answer 40

A limited partner has the right to obtain from the general partner(s) financial information and tax returns of the limited partnership.

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.

Question 41

MCQ-03261
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?

Answer 41

Barr will not become a substituted limited partner unless Grey also consents

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.

Question 42

MCQ-06548
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?

Answer 42

Toby was liable for $45,000 because Toby was a general partner

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 can
be held liable for the amount owed.

Question 43

MCQ-02969
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:

Answer 43

The LLC’s assets only.

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.

Question 44

MCQ-02981
Tim, Peter, and Rick want to form a limited liability company. What document must they file with the state?

Answer 44

Articles of Organization.

The Articles of Organization must be filed with the secretary of state.

Question 45

MCQ-08642
A CPA was preparing the financial statement for a limited liability company. To which of the following would the CPA’s report be addressed?

Answer 45

Member

The owners of a limited liability company are called members

Question 46

MCQ-05877
The owners of a limited liability company are known as which of the following?

Answer 46

Members

The owners of a limited liability company are called members.

Question 47

MCQ-03119
Heather, Erika, and Shelby are members in HES LLC. Heather dies. Absent an agreement to the contrary, what is the result?

Answer 47

The LLC is dissolved unless the other members consent to continue.

Absent an agreement to the contrary, if a member of an LLC dies, the LLC is dissolved unless the other members consent to continue.

Question 48

MCQ-03156
A member of a limited liability company may generally do all of the following, except:

Answer 48

Transfer his membership in the company without the consent of the other members.

The transfer of a member interest requires the consent of the other members. Members may not assign their interest without the other members’ consent.

Question 49

MCQ-02988
Unless there is an agreement to the contrary, the voting power of members in a limited liability company is determined by:

Answer 49

Each member’s capital contribution.

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.

Question 50

MCQ-03289
In a member managed LLC, the apparent authority of a member to bind the LLC in dealing with third parties:

Answer 50

Will be effectively limited by a formal resolution of the members of which third parties are aware.

This is really an agency question on apparent authority. Apparent authority is authority that a third party reasonably believes an agent has. If the third party is aware of a restriction
on the agent’s authority, the third party cannot reasonably believe that the agent has the restricted authority.