1 Interactive Quiz for Modern-1e, Chapter 17 Chapter 17 Sole Proprietorships, Partnerships, and Limited Liability Companies

1.

One of the major advantages of a sole proprietorship is that: a. the proprietor receives dividends. b. the proprietor receives all the profits. c. the proprietor assumes very limited risk. d. the proprietor is taxed as a corporation.

Answers: a. Incorrect. Proprietors do not receive dividends from their business. b. Correct. If the sole proprietorship makes any profits, they all flow to the proprietor. c. Incorrect. The proprietor assumes full risk for the venture. d. Incorrect. The proprietor is taxed as an individual, not as a corporation 2. Partnerships may be classified as general or limited and also as: a. an aggregate or an entity. b. personal or impersonal. c. service or nonservice. d. executory or executed.

Answers: a. Correct. Partnerships may be classified as an aggregate of individuals or as a single entity. b. Incorrect. Partnerships are not classified as personal or impersonal. c. Incorrect. Partnerships may provide services but they are not classified as service or nonservice partnerships. d. Incorrect. Partnerships are not classified as executory or executed. 3. When assets are marshaled, what property is used first to satisfy partnership debts? a. The individual property of partners. b. The property of partners and their families. c. Partnership property. d. Stocks owned by the partners individually.

Answers: a. Incorrect. The partnership property is used first to satisfy partnership debts.

2 b. Incorrect. The property of the partnership is used first. c. Correct. Partnership property is used first to satisfy partnership debts, then the property of individual partners may be used. d. Incorrect. This is not used first. 4. Assume that Kyle and Larsen have a general partnership. In this case, what rights does each have regarding the management of the dog biscuit business? a. One partner must be the superior in rights. b. They have equal management rights. c. One partner must conduct the partnership business, while the other provides the capital. d. The partner who put in more money has a bigger voice in management.

Answers: a. Incorrect. The partners have equal rights in management. b. Correct. Even though one partner may have contributed more money to the partnership than the other, Larsen and Kyle have equal management rights. c. Incorrect. This is not the rule. d. Incorrect. Kyle and Larsen have equal management rights. 5. The first stage in the termination of a partnership is known as: a. incorporation. b. dissolution. c. invidiation. d. a charging order.

Answers: a. b. c. d. Incorrect. The stage is not known as incorporation. Correct. The stage is known as dissolution. Incorrect. There is no such thing as invidiation. Incorrect. A charging order is not the first stage in the termination of a partnership.

6.

The key characteristics of a limited liability company (LLC) are: a. the tax characteristics of a corporation, plus the liability of shareholders. b. the tax characteristics of a partnership, plus the liability of partners. c. the tax characteristics of a corporation, plus the liability of a partnership. d. the tax characteristics of a partnership, plus the liability of a corporation.

Answers: a. b. c. d. Incorrect. These are the characteristics of a corporation. Incorrect. These are the characteristics of a partnership. Incorrect. This would be the worst of both forms. Correct. These are the characteristics of a limited liability corporation.

7.

With respect to LLCs, a member is someone: a. who has an ownership interest in an LLC and limited liability for LLC debts. b. who purchases the securities of an LLC in order to resell these to the public. c. who manages an LLC as a nonowner. d. who has management responsibility and unlimited liability for all debts.

Answers: a. Correct. A member has an ownership interest in an LLC and limited liability for LLC debts. b. Incorrect. This describes an underwriter, not a member of an LLC. c. Incorrect. This describes a manager or an employee, not a member. d. Incorrect. This describes a general partner in a limited partnership, not a member of an LLC.

8.

One of the great benefits of LLCs, which helps promote investment, is that: a. investors must be accredited investors to participate. b. foreign investors are allowed to become LLC members. c. members are registered with the SEC. d. LLC articles of organization are privately filed, protecting the identities of investors.

Answers: a. Incorrect. Investors in LLCs do not need to be accredited. b. Correct. LLCs allow foreign investors to participate, thus making them attractive investment vehicles. c. Incorrect. LLC members do not register with the SEC, although the LLC must register with the appropriate state official. d. Incorrect. The articles of organization of an LLC are filed with a public official; they are not private.

9.

Management of an LLC may take one of two forms, a member-managed LLC or a manager-managed LLC. In the latter: a. a state-appointed receiver manages the firm. b. the managers must all be certified public accountants. c. the managers may be members only, nonmembers only, or a combination of both. d. members may not participate in management.

Answers: a. Incorrect. This is not the definition of a manager-managed LLC. b. Incorrect. This is not required in a manager-managed LLC. c. Correct. Management in a manager-managed LLC may consist of such groups. d. Incorrect. Members may participate in the management of a managermanaged LLC. 10. When a group of members join to form an LLC, the name of their organization: a. must convey the purpose of their organization. b. must be registered with the SEC. c. must include the words limited liability corporation or the letters LLC. d. must be approved by a vote of the state legislature.

Answers: a. Incorrect. The name need not convey the purpose of the organization, it may be ambiguous, or simply the names of the members. b. Incorrect. LLC names do not need to be registered with the SEC, but with an appropriate state office. c. Correct. In order to alert consumers and others with whom they deal to the nature of the organization (and the limited personal liability of its owners), members of an LLC must use these words or letters in their organizations name. d. Incorrect. There is no requirement that the name of an LLC be approved by a vote of the state legislature.