Business Organizations Quiz
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Questions and Answers

What is the primary characteristic of a sole proprietorship?

  • It has a distinct body of law governing its operations.
  • It is owned by one individual who has not registered it under another legal form. (correct)
  • It must file annual returns with the IRS.
  • It requires multiple owners to operate.

In which office is the paperwork for registering a sole proprietorship usually filed?

  • Federal Business Administration
  • Secretary of State Office (correct)
  • Business License Department
  • Department of Revenue

What does the lack of legal distinction between the owner and the business imply for a sole proprietor?

  • Business income is taxed separately from personal income.
  • The proprietor is only liable for business debts, not personal assets.
  • All business assets are considered personal assets of the proprietor. (correct)
  • The business can file for separate bankruptcy.

What is the primary governing law for an LLC?

<p>The law of the state of organization (A)</p> Signup and view all the answers

What type of liability do sole proprietors have for business debts?

<p>Unlimited personal liability (D)</p> Signup and view all the answers

What is typically established in an LLC's operating agreement?

<p>Management structure and profit allocation (B)</p> Signup and view all the answers

What is the tax reporting requirement for a sole proprietor?

<p>They report business income on their personal tax return. (C)</p> Signup and view all the answers

In a member-managed LLC, what is true about management authority?

<p>Management authority is shared among all members (B)</p> Signup and view all the answers

Which statement correctly describes management in a sole proprietorship?

<p>The sole proprietor has full authority over business decisions. (A)</p> Signup and view all the answers

What happens when a sole proprietor defaults on business obligations?

<p>Creditors can seize both business and personal assets. (B)</p> Signup and view all the answers

Which of the following statements regarding liability in an LLC is correct?

<p>Members are shielded from personal liability for LLC's debts (A)</p> Signup and view all the answers

What can sole proprietors do regarding delegation of authority?

<p>They can hire employees and delegate authority as needed. (D)</p> Signup and view all the answers

For federal income tax purposes, how is a multi-member LLC treated?

<p>Like a general partnership (D)</p> Signup and view all the answers

What is a feature of the operating agreement in an LLC?

<p>It can define the process for transfer of membership interests (B)</p> Signup and view all the answers

What does 'pass-through taxation' mean for LLC members?

<p>Members report profits and losses on personal tax returns (D)</p> Signup and view all the answers

What is one of the statutory limits regarding the operating agreement in an LLC?

<p>Certain mandatory rules cannot be overridden (A)</p> Signup and view all the answers

Which business structure typically provides full inside liability shields to all owners?

<p>Corporation/LLC (A)</p> Signup and view all the answers

Under which condition can limited partners in a Limited Partnership lose their liability shield?

<p>If they participate in management decisions (A)</p> Signup and view all the answers

What is the main feature of outside liability exposure?

<p>Creditors can recover debts from business assets due to owner's personal debts (D)</p> Signup and view all the answers

Which of the following is NOT a reason for piercing the corporate veil?

<p>Investing personal money into the company (C)</p> Signup and view all the answers

In what circumstance are general partners personally liable for the debts of the business?

<p>Under all business structures regardless of state laws (C)</p> Signup and view all the answers

Which professional entity provides some liability protection but requires all owners to be licensed for the services offered?

<p>Professional Entity (C)</p> Signup and view all the answers

What is a defining characteristic of a Close Corporation?

<p>It has a fixed number of shareholders. (B)</p> Signup and view all the answers

What distinguishes a Benefit Corporation from a traditional corporation?

<p>It has a purpose of creating a general public benefit. (A)</p> Signup and view all the answers

What is a defining feature of a Nonprofit Corporation?

<p>It is organized for public benefit or mutual benefit. (A)</p> Signup and view all the answers

Which organization type is known for managing a business through trustees?

<p>Business Trust (B)</p> Signup and view all the answers

What best describes the concept of a Joint Venture?

<p>It is formed for a specific business opportunity. (A)</p> Signup and view all the answers

What does the Internal Affairs Doctrine govern?

<p>Internal governance of business entities. (C)</p> Signup and view all the answers

Which statement is true regarding a Low Profit Limited Liability Company (L3C)?

<p>They primarily pursue socially beneficial purposes. (B)</p> Signup and view all the answers

What is the corporate income tax rate for Sub-C entities after the 2018 reform?

<p>21% (D)</p> Signup and view all the answers

What is the total amount Clare ends up with after taxes if CCI earns $100,000 and distributes $79,000 as dividends?

<p>$67,150 (C)</p> Signup and view all the answers

How much more does Clare pay in total taxes when taxed under Sub-C compared to Sub-S?

<p>$15,810 (D)</p> Signup and view all the answers

Which tax structure allows for the avoidance of double taxation?

<p>Sub-S (B)</p> Signup and view all the answers

In a disregarded entity, how is the net income or loss treated?

<p>It is reported directly on the owner's personal federal income tax return. (A)</p> Signup and view all the answers

What is one limitation of a single-member LLC regarding tax options?

<p>It cannot opt for Sub-K taxation. (D)</p> Signup and view all the answers

What is one important factor business owners must consider when choosing a tax structure?

<p>Minimizing tax liability (C)</p> Signup and view all the answers

What happens to distributions from a Sub-C corporation?

<p>They are taxed at both the corporate and owner level. (B)</p> Signup and view all the answers

What must a third party do to establish a claim of apparent authority in the H.H. Taylor Case?

<p>Demonstrate that they relied reasonably on the agent's apparent authority. (C)</p> Signup and view all the answers

How does the Restatement (Third) of Agency differ from some courts regarding apparent authority?

<p>It does not impose a reliance requirement for finding apparent authority. (B)</p> Signup and view all the answers

What was the outcome for Monet when Bose charged paint despite being told not to?

<p>Monet was bound due to Bose's apparent authority as crew chief. (A)</p> Signup and view all the answers

In the case of Arroyo, what allowed the paint store to charge paint to Monet's account despite Arroyo having been fired?

<p>The store had previously recognized Arroyo's authority. (D)</p> Signup and view all the answers

What happens to apparent authority when a store knows of an agent's termination?

<p>The apparent authority is nullified if the store had prior knowledge. (B)</p> Signup and view all the answers

Which statement accurately describes the relationship between apparent authority and actual authority?

<p>Apparent authority can exceed actual authority in certain situations. (B)</p> Signup and view all the answers

What is the primary role of a principal's manifestation in establishing apparent authority?

<p>It helps the third party form a reasonable belief in the agent's authority. (D)</p> Signup and view all the answers

What is a key requirement for a court to impose a reliance element for apparent authority?

<p>The third party must be able to demonstrate a reasonable belief in the agent's authority. (C)</p> Signup and view all the answers

Flashcards

Governing Law for LLCs

LLCs are governed by the law of the state where they are formed.

Operating Agreement

A written document that modifies default LLC rules to fit member needs.

Member-Managed LLC

An LLC where all members have management authority.

Manager-Managed LLC

An LLC where the members hire mangers to run the company.

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Limited Liability (LLCs)

Members are not liable for the LLC's debts beyond their investment.

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Multi-Member LLC Taxation

Treated as a partnership for federal taxes; profits/losses flow directly to members.

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Single-Member LLC Taxation

Treated as a sole proprietorship for federal taxes, viewed as a disregarded entity.

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LLC Operating Agreement Purpose

Establish member-managed or manager-managed and allocate profits, losses and taxation.

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Sole Proprietorship Definition

A business owned by one person, who hasn't registered it under a different legal form.

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Sole Proprietorship Legal Entity

The owner and the business are legally the same, meaning personal assets are at risk.

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Sole Proprietorship Governance

The owner has complete control over business decisions without needing any formalities or approvals from others.

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Sole Proprietorship Liability

The owner is personally responsible for all business debts and obligations, including possible lawsuits.

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Sole Proprietorship Tax Reporting

Business income and losses are reported on the owner's individual tax return.

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Sole Proprietorship Management

The owner can hire employees and delegate tasks without restrictions.

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Sole Proprietorship Default Status

A single-owner business automatically falls into this category unless the owner registers it for another legal structure, like an LLC.

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Sole Proprietorship Governing Body

There is no separate body of law specific to sole proprietorships because there isn't a need for complex rules.

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Professional Entity

Business structures like 'PLLP', 'PLLC', or 'PC' offering some liability protection for owners, but with limitations. All owners must be licensed to provide the services offered by the entity.

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Close Corporation

A corporation with a fixed number of shareholders, governed by a state's close corporation statute. This designation is explicitly stated in the company's charter or articles of incorporation.

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Nonprofit Corporation

A corporation formed under a state's nonprofit statute, with a primary purpose of public benefit, religious activities, or mutual member benefits. They do not issue stock and are usually exempt from federal income tax.

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Benefit Corporation

A type of corporation incorporated in states with a benefit corporation statute. They aim to create a positive impact on society and the environment, measured by a third-party standard.

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Benefit Limited Liability Company

An unincorporated version of a Benefit Corporation. Only available in a few states, it combines profit-making with a social mission.

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Internal Affairs Doctrine

A legal principle that decides which state's laws govern a business entity's internal operations, including owner rights, management, and director duties.

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Internal Governance

The rules and procedures that govern how a business entity operates internally, including the rights and responsibilities of owners, managers, officers, and directors.

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Apparent Authority?

The power an agent appears to have, based on the principal's actions, even if they lack actual authority.

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Apparent Authority Reliance

For apparent authority to exist, the third party must reasonably rely on the agent's apparent authority.

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Manifestation of Authority

The principal's actions that make the agent appear authorized, like giving them a title or allowing them to use company letterhead.

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Apparent Authority Beyond Actual Authority

An agent's apparent authority can be broader than their actual authority, as long as the third party relies on the principal's manifestations.

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Lingering Authority

If an agent is terminated, apparent authority can still exist if the third party didn't know or should have known about the termination.

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What is the Restatement's view on Apparent Authority Reliance?

Unlike some courts, the Restatement (Third) of Agency doesn't require reliance for finding apparent authority.

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Agency: H.H. Taylor Case

This case required a reliance element for apparent authority, meaning the third party must reasonably believe the agent has authority.

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Apparent Authority: Example?

If Monet hires Bose as a crew chief but tells him not to charge paint, but Bose is allowed to charge paint by a store recognizing his position, Monet is bound.

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Marginal Tax Rate

The tax rate applied to the last dollar of income earned.

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Double Taxation (Sub-C)

Corporate profits are taxed at the corporate level and again when distributed to owners as dividends.

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Sub-S Taxation

Profits and losses are passed through to the owners' personal income tax returns; no corporate tax is paid.

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Disregarded Entity

A single-owner LLC that is not taxed separately from its owner; income and losses are reported on the owner's personal return.

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Sub-K Taxation

Applies to partnerships and certain LLCs with two or more owners; profits and losses are reported on the partners' personal returns.

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Tax Planning Considerations

Choosing the right business entity structure can minimize tax liability for the owner.

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Tax Efficiency

Minimizing tax liability while maximizing profits.

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Sub-C vs. Sub-S

Sub-C entities face double taxation, while Sub-S entities avoid it, resulting in lower overall tax liability for the owner.

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Inside Liability Exposure

The risk that business owners face of being personally liable for business debts, even if the business has a legal structure like an LLC or corporation to limit liability.

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Piercing the Corporate Veil

A legal doctrine that allows creditors to hold business owners personally liable for business debts, even if the business has a legal shield, when the business is seen as a mere facade or sham.

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Outside Liability Exposure

The risk that creditors of an individual owner can recover the debt from the business's assets, even if the debt is owed personally by the owner, not the business.

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Direct Involvement in Liability

When owners are personally liable for business debts because they were directly involved in the act or omission that caused the liability, even if there's a liability shield in place.

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Liability Shield

A legal structure like an LLC or corporation that limits the personal liability of owners for business debts.

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Study Notes

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Description

Test your knowledge on the characteristics and laws governing sole proprietorships and LLCs. This quiz covers various aspects including liability, management, and tax obligations related to these business structures.

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