Noncorporate Business Entities

Question 1

The duration of a sole proprietorship is governed by common law

Answer 1

The duration of a sole proprietorship is at the proprietor’s discretion.

Question 2

A major advantage of a sole proprietorship is that it can easily raise equity capital other than the personal resources of the proprietor.

Answer 2

A major weakness of a sole proprietorship is that it cannot raise equity capital other than the personal resources of the proprietor.

Question 3

The proprietor and the proprietorship are distinct entities.

Answer 3

The proprietor and the proprietorship are not distinct entities, so the income or loss of the business is reported by the proprietor.

Question 4

An advantage of a sole proprietorship is that it ordinarily can do business in any state without having to file, register, or otherwise qualify to do business in that state.

Answer 4

An advantage of a sole proprietorship is that it ordinarily can do business in any state without having to file, register, or otherwise qualify to do business in that state. The Internet allows a sole proprietorship to conduct business nationally or even internationally.

Question 5

General partnerships limit personal liability for all losses and debts of the business.

Answer 5

General partners are jointly and severally liable for any partnership obligation, including the torts committed by another partner who acted within the ordinary course of the partnership business or with the authorization of the other partners.

Question 6

A partnership is an entity distinct from the partners (owners).

Answer 6

The Revised Uniform Partnership Act (RUPA) states that a partnership is an entity distinct from the partners (owners).

Question 7

A disadvantage of the general partnership is that it is created with many formalities.

Answer 7

An advantage of the general partnership is that it can be created without any formalities. No filings are required, and the existence of the partnership may arise from a written or oral agreement.

Question 8

If the elements of a partnership are present, it is formed even if the parties do not intend to be partners.

Answer 8

If the elements of a partnership are present, it is formed even if the parties do not intend to be partners. But a partnership is not formed if an element is missing even if the parties intend to be partners.

Question 9

When a partner dies, his or her partnership interest is personal property that may be inherited according to a will. Heirs of the partnership interest are assignees, not partners.

Answer 9

Yes, when a partner dies, his or her partnership interest is personal property that may be inherited according to a will. Heirs of the partnership interest are assignees, not partners.

Question 10

A partner has actual or apparent authority to act as an agent of the partnership in any legal transaction that is normal for the partnership or for a similar partnership.

Answer 10

A partner has actual or apparent authority to act as an agent of the partnership in any legal transaction that is normal for the partnership or for a similar partnership.

Question 11

The partnership is bound by legal agreements even if the partner had no actual authority in the matter unless the third party knew or had received notification of the lack of actual authority.

Answer 11

The partnership is bound even if the partner had no actual authority in the matter unless the third party knew or had received notification of the lack of actual authority.

Question 12

A partner does not have the power to dissociate from the partnership without mutual assent of all the partners.

Answer 12

Dissociation is the legal effect of a partner’s ceasing to be associated in carrying on the business of the partnership. A partner has the power (but not necessarily the right) to dissociate at any time, subject to payment of damages if the dissociation is wrongful.

Question 13

Apparent authority of a partner may continue to exist throughout the winding up process unless notice of the dissolution has been communicated to the other party to the transaction?

Answer 13

Yes, apparent authority of a partner may continue to exist throughout the winding up process unless notice of the dissolution has been communicated to the other party to the transaction.

Question 14

During winding up, if a partner does not make a required contribution, the other partners do not need to pay the difference in the same proportion in which they share losses?

Answer 14

During winding up, if a partner does not make a required contribution, the other partners must pay the difference in the same proportion in which they share losses.

Question 15

A joint venture is treated as a corporation in most legal cases?

Answer 15

A joint venture is treated as a partnership in most legal cases.

Question 16

If the partnership agreement is silent as to the allocation of profits, each partner is allocated an amount in proportion to his or her contribution.

Answer 16

The right to share in profits, unless otherwise agreed, allows each partner to have an equal share regardless of differences in contributions (RUPA).

Question 17

The law of agency governs the powers of partners, even if the partners attempt to limit these powers in their partnership agreement?

Answer 17

The rights, powers, and duties of partners are largely defined by the law of agency. However, partners may agree to limit their rights.

Question 18

Dissolution and winding up are two separate activities. Thus, a partnership may continue to operate even after dissolution.

Answer 18

After dissolution and before winding up, all parties (including any dissociating partner who has not wrongfully dissociated) may waive the right to winding up and termination. In this case, the partnership continues its business as if dissolution had not occurred.

Question 19

When a partnership’s debts are being paid during the winding up process, partners who are also creditors have an equal standing with nonpartner creditors.

Answer 19

Creditors are paid in full before any distributions are made to partners. However, partners who are creditors share equally with nonpartner creditors under the RUPA.

Question 20

In general, limited liability partnerships (LLPs) are restricted to use by professionals.

Answer 20

An LLP is a favorable form of organization for professionals who have not incorporated. In many states, this form is restricted to use by professionals.

Question 21

A limited partner has the right to withdraw from the partnership upon 2 months’ notice or according to the partnership agreement.

Answer 21

A limited partner has the right to withdraw from the partnership upon 6 months’ notice or according to the partnership agreement.

Question 22

A limited partner is liable for partnership liabilities only to the extent of his or her capital contribution. (S)he has no right to participate in control of the business.

Answer 22

A limited partner is liable for partnership liabilities only to the extent of his or her capital contribution. (S)he has no right to participate in control of the business.

Question 23

The death of a limited partner does not automatically dissolve the partnership.

Answer 23

A limited partnership is not dissolved by the bankruptcy, incapacity, or death of a limited partner.

Question 24

Limited partners are active in the management of the limited partnership?

Answer 24

A limited partner is an investor who makes a contribution of cash or other property to the partnership in exchange for an interest in the partnership. A limited partner is not active in management of the partnership.

Question 25

The Revised Uniform Limited Partnership Act (RULPA) requires that a written certificate of limited partnership be filed as a public record with the secretary of state of the state in which it is organized.

Answer 25

The RULPA requires that a written certificate of limited partnership be filed as a public record with the secretary of state of the state in which it is organized. The certificate gives potential creditors notice of the limited liability of the limited partners. If a certificate is not filed, the organization is treated as an ordinary business partnership.

Question 26

A general partner may not also be a limited partner?

Answer 26

A general partner assumes management of the partnership and has full personal liability for debts of the partnership. A person can be both a general partner and a limited partner with the rights and liabilities of each.

Question 27

The owners of an LLC who participate in management have limited liability.

Answer 27

Like the shareholders of a corporation, but unlike the partner-managers of a limited partnership, the owners of an LLC who participate in management have limited liability.

Question 28

A disadvantage of an LLC is that only one class of stock is permitted.

Answer 28

The advantages of limited liability and avoidance of double taxation may attract member-investors. A disadvantage is that LLC interests may be considered securities. Thus, they may be subject to federal and state regulation.

Question 29

In general, an LLC may be taxed as a partnership or corporation.

Answer 29

Members may elect to be taxed as partners, and single-member LLCs are taxed as sole proprietors. Taxation as a corporation may be advantageous if reinvestment in the LLC is desired and corporate rates are lower than personal rates. Thus, an LLC has the advantage of being a pass-through entity or a taxable entity at the discretion of the member(s).

Question 30

Dissociation is a member no longer being associated with the LLC. It generally does not result in automatic dissolution.

Answer 30

Dissolution requires a public filing. Dissociation is a member no longer being associated with the LLC. It generally does not result in automatic dissolution.