Business Associations Practice Questions and Answers PDF

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This contains the intellectual property of your instructor, other instructors at the W. P. Carey School of Business and the authors of your textbook. The contents are intended for distribution to students currently enrolled in LES 305 only. Anyone who uses or distributes this content without the express permission of the instructor or the W. P. Carey School of Business may be subject to criminal and civil penalties. Unauthorized use or distribution may also be considered a violation of the W. P. Carey Code of Academic Integrity. All rights reserved.

Business Associations True or False Questions 1. General partnerships are comprised of one or more general partners and one or more limited partners. False. This describes a limited partnership. General partnerships only have general partners. 2. Prima facie evidence of a partnership exists if two or more people agree to share profits. True. Courts can infer that a partnership exists - even if the parties say that they are not partners – because they agreed to share profits. 3. Anyone who helps a partnership obtain a loan by holding himself out as a partner, although he is not a partner, may be liable on the loan. True. The person will be considered a partner under the doctrine of partnership by estoppel because the person acted like a partner and a lender relied on this status. 4. General partners are liable a. for debts of the partnership personally for their portion of the partnership’s debts. b. for debts of the partnership only to the extent of their contributions to the partnership and only for their portion of the partnership’s debts. c. for all of the partnership’s debts personally. d. None of the above. [Note: This is called joint and several liability. 5. Partnerships do not have to file any tax returns. False. They have to file informational tax returns. 6. Each partner may bind a partnership to contracts with third parties. True. Each partner is considered to be an agent of the partnership. 7. If a partner dies, the partnership property that belonged to the deceased partner goes to the partner’s estate. False. Only the value of the partner’s interest goes to the estate. 8. When one partner dies, the partnership automatically is dissolved by law. True. Dissolution occurs by operation of law at the death of a partner. Note that dissolution and termination are different. 9. Limited partners may manage the business and retain limited liability protection. False . Limited partners lose limited liability protection if they engage in management. 10. If limited partnership interests are easily transferable, the organization may be treated as a corporation by the IRS. True. See the Tax Consequences section on page 697 and the Transferability of Interests section. 11. Intel was incorporated in Delaware. It is a domestic corporation when it does business in Arizona. False. It is a foreign corporation. 12. Transfers of stock are usually restricted in S corporations. True. This serves several practical purposes. First, it is more likely that the IRS will treat you as a partnership for tax purposes because you look less like a C corporation. Plus, you

This contains the intellectual property of your instructor, other instructors at the W. P. Carey School of Business and the authors of your textbook. The contents are intended for distribution to students currently enrolled in LES 305 only. Anyone who uses or distributes this content without the express permission of the instructor or the W. P. Carey School of Business may be subject to criminal and civil penalties. Unauthorized use or distribution may also be considered a violation of the W. P. Carey Code of Academic Integrity. All rights reserved.

may not want strangers to have a say in running your business. Finally, there can be no more than 100 shareholders in S corporations, so if shares are freely transferrable to multiple parties, you may go over that limit and lose your S status. 13. S corporations are subject to double taxation. False. You need to file a “S Election” form with the IRS and the shareholders will be able to avoid double taxation. These types of organizations are referred to in your text as “flow-through” or “pass-through” entities. 14. Corporations end upon the death or withdrawal of a member. False. Corporations exist for an unlimited duration, unlike partnerships, which dissolve upon the death or withdrawal of a partner. 15. Registered agents, also known as statutory agents, may manage the business when the members are unavailable. False. They are only authorized to accept service of process for the organization. 16. Common stockholders a. have voting rights. b. are entitled to fixed dividends. c. have the right to a proportionate share of assets upon dissolution before creditors are paid. d. receive dividends before preferred shareholders. [In most cases, the owners of shares of common stock have voting rights. Preferred shareholders usually do not have voting rights. 17. The corporate veil may be pierced when a. the corporation is inadequately capitalized. b. the owners and managers have not treated the corporation as a separate entity from themselves. c. there are transfers of property and funds without authorization d. All of the above. [Note Option b above is also referred to as alter ego theory. When the “corporate veil” has been pierced, the shareholders lose their limited liability protection. 18. Shareholders elect a. the Board of Directors. b. Executive Committee members. c. Officers. d. Audit committee members. e. A and b only. [Owners of common stock are usually allowed to vote to elect directors, amend corporate documents such as the articles of incorporation and bylaws, and other major corporate matters. The Board appoints corporate officers and the members of the Executive and Audit committees.] 19. Officers and directors are fiduciaries of the corporation, so they must act in the best interests of the corporation and they may not profit at the corporation’s expense. True. 20. The business judgment rule states that a. Directors and officers are responsible for all of their mistakes. b. Directors and officers are never responsible for their mistakes.

This contains the intellectual property of your instructor, other instructors at the W. P. Carey School of Business and the authors of your textbook. The contents are intended for distribution to students currently enrolled in LES 305 only. Anyone who uses or distributes this content without the express permission of the instructor or the W. P. Carey School of Business may be subject to criminal and civil penalties. Unauthorized use or distribution may also be considered a violation of the W. P. Carey Code of Academic Integrity. All rights reserved.

c. Directors and officers are protected from liability if they carefully study and discuss their decisions. d. None of the above. 21. Independent board members a. are required for a majority of the directors. b. include board members that are not a relative of anyone who works for the company. c. Means that the director has not been a manager, office or employee for the previous 3 years. d. Means that the Board member is not a principal or owner of a company that does business with the board or company. e. All of the above. 22. Shareholder groups may obtain control over the vote of the board and other matters by soliciting proxies. True. Shareholders may transfer their votes to someone else, such as shareholder groups. 23. Shareholders who do not agree to a merger or consolidation may get the value of their shares in many states if they follow certain procedural rules. True. As long as they file an objection to the merger or consolidation before the vote. 24. Shareholders are unable to inspect a corporation’s accounting records or meeting minutes. False. They have the inspection right as long as there is a proper purpose. 25. Corporations may only be dissolved voluntarily. False. They may be dissolved by a state agency or by court order. 26. Shares of stock are always freely transferable. False. Some shares have transfer restrictions, which will be valid if they are reasonable, necessary, and disclosed conspicuously. 27. Transfer restrictions on shares of stock are valid a. Only of they are necessary. b. Even if the certificates do not disclose the restrictions. c. If they are necessary, reasonable and disclosed on the shares. d. None of the above. 28. Limited liability companies pay income taxes but distributions to members are not taxed. False. LLCs are not taxed but the members are. 29. Limited liability companies are formed by filing articles of organization with the appropriate state agency. True. 30. A limited liability company a. can be managed by the members b. can be managed by outside parties c. can be managed by one of the members d. all of the above. 31. These forms of organization are formed by filing documentation with the appropriate state agency a. Limited partnership

This contains the intellectual property of your instructor, other instructors at the W. P. Carey School of Business and the authors of your textbook. The contents are intended for distribution to students currently enrolled in LES 305 only. Anyone who uses or distributes this content without the express permission of the instructor or the W. P. Carey School of Business may be subject to criminal and civil penalties. Unauthorized use or distribution may also be considered a violation of the W. P. Carey Code of Academic Integrity. All rights reserved.

b. Corporation c. General Partnership d. A and b only....