Question 1
Business Law and Ethics Practice. Which of the following fiduciary duties do LLC managers owe to the other members of the LLC? Select all that apply.
- The duty of remuneration
- The duty of loyalty
- The duty of care
- The duty of indemnification
- The duty of obedience
Answer: The duty of loyalty; The duty of care
Question 2
LLC laws define the ________ of an LLC as an ________ process triggered by an event that is specified in the operating agreement (such as the death of a key member) or by the decision of the majority of members (or the percentage called for in the operating agreement) to dissolve the company.
- winding up; elective
- dissolution; involuntary
- winding up; mandatory
- dissolution; elective
Answer: winding up; elective
Question 3
A member’s withdrawal from an LLC, referred to as ________, terminates their right to participate in the management and affairs of the LLC but ________ that entitles the member to receive distributions.
- winding up; remains an economic interest
- dissociation; remains an economic interest
- dissociation; results in a total loss of interest
- winding up; results in a total loss of interest
Answer: dissociation; remains an economic interest
Question 4
Who can be our registered agent?
- Basically any person or entity in the state that can receive the mail on behalf of the company.
- Only one of the LLC owners.
- Only a lawyer with authority to act on the company’s behalf.
Question 5
What does it mean to be member-managed or manager-managed?
- That just relates to whether or not your company will have employees.
- That just relates to who will make decisions for the LLC.
Question 6
If we were member-managed, how would decisions be made?
- decisions will be made by a majority of members but you have veto power because the business was your idea.
- decisions will be made by a majority of members.
Question 7
Anything else I should do after I file the articles of organization?
- Nope! You’re all set.
- Yes, it would be a good idea to meet with a lawyer and draft an operating agreement.
Question 7
Sole proprietorships are the most common form of business organization in the United States because they are __________.
- the easiest and least expensive to create
- the only form that protects the owner’s personal assets
- capable of raising the most capital through stock sales
- automatically exempt from all federal and state taxes
Question 8
What is the primary disadvantage of a sole proprietorship?
- High costs of formation and maintenance
- Double taxation of business profits
- Complex government regulations and reporting
- The owner has unlimited personal liability for all business debts
Question 9
Which of the following is true regarding the continuity of a sole proprietorship?
- The business continues to exist even after the owner retires.
- The business legally terminates upon the death of the owner.
- The business can be easily transferred to a new owner without any legal changes.
- The business must be reorganized as a corporation after ten years of operation.
Question 10
The __________ is a legal document that sets forth the rights and duties of the partners and the manner in which the partnership will be managed and profits/losses will be shared.
- Articles of Incorporation
- Partnership Agreement
- Certificate of Limited Partnership
- Operating Agreement
Question 11
What is a characteristic of a sole proprietorship?
- The business is a separate legal entity from the owner.
- The business must file a separate income tax return.
- The owner shares control of the business with other partners.
- The business owner’s personal assets are NOT protected from business debts.
Question 12
Which statement is correct about a franchise?
- A franchise only faces state regulations.
- All transactions of a franchise are protected by privacy laws.
- A franchise faces mandatory disclosures.
- Start-up is simple with very little filing
Question 19
Phoenix Bookstore, LLC with four members incurs substantial debt due to a downturn in book purchases. At the end of the fiscal year they are $100,000.00 in debt. For how much will each of the four member be personally liable?
- Nothing.
- Each member would be personally responsible until all the debt is paid even if it means that some members have to pay more than others.
- $25,000 each
- The amount owed by each member will be in proportion to the percentage of ownership.
Question 20
Cyndy, Shelby, Kennedy and Kristin formed Double Dawn Paddle Board Yoga LLC as a manager-managed LLC naming Kennedy as the managing member. A local yogurt entrepreneur approaches Shelby offering to be the exclusive provider of pink yogurt for their company to give out after their yoga sessions. Loving pink yogurt, Shelby signs a 10 year contract whereby only their pink yogurt will be provided for their company. When Cyndy, Kennedy and Kristin find out what Shelby has done, they are furious and do not want to be bound by the 10 year contract Shelby signed as they all prefer blue yogurt. What most likely will be the outcome of this scenario?
- They will all have to honor the 10 year contract of pink yogurt as Shelby’s actions will bind the LLC.
- The contract will be declared unenforceable as all LLC contracts require the signature of all members to be enforceable.
- The court will determine by judicial decree that the contract of 10 years is excessive and exceeds the scope of reasonableness and will therefore declare the contract unenforceable.
- The contract will not bind the LLC since Shelby did not have the authority to enter into a contract that binds the LLC.
