Chapter 40 LLCs & Limited Partnerships Exam Questions

Business Law, 17e (Langvardt)

Chapter 40 Limited Liability Companies, Limited Partnerships, and Limited Liability Limited Partnerships

1) A limited liability company may elect to pay no federal income tax.

2) An LLC member has no individual liability on LLC contracts, unless he/she also signs LLC contracts in his/her personal capacity.

3) Ordinarily, members of a limited liability company have limited rights to manage the business of the LLC.

4) Limited liability companies are formed under federal law for international commerce purposes.

5) Owners of an LLC are called members.

6) In the absence of a decision by the members of an LLC, any member can demand the distribution of profits prior to the dissolution of the LLC.

7) After all the LLC assets have been sold, the proceeds will be distributed first to the partners.

8) A member's most important right within an LLC is to receive distributions.

9) Except for the liability of limited partners, limited partnerships and LLLPs are identical.

10) The death of a general partner causes dissolution of the limited partnership.

11) Losses of the business allocated to a limited partner in a limited partnership or an LLLP offset his income from any other sources.

12) A certificate of limited partnership must state the capital contributions of the limited partners.

13) A general partner in an LLLP will have unlimited liability if the LLLP was formed defectively.

14) A partner's transfer of his/her transferable interest has no effect on his/her status as a partner, absent a contrary agreement.

15) Each partner in a limited partnership owns an interest in the partnership. This is deemed his personal property.

16) Limited partners have the right to vote on partnership matters as a class.

17) In general, the ULPA does not grant partners much power to expel other partners from the partnership.

18) In a limited partnership, a general partner's liability is limited to his investments in the business.

19) One partner leaving a limited partnership will not cause the partnership to be dissolved.

20) A majority of the members of an LLC must agree to the plan of merger.

21) How are limited liability companies (LLCs) taxed?

A) They are always taxed the same as general partnerships.

B) They are always taxed the same as corporations.

C) They are taxed either as partnerships or as corporations, at the option of the LLC.

D) They are taxed either as partnerships or sole proprietorships, at the option of the LLC.

22) Which state passed the first limited liability company (LLC) statute in 1977?

A) Wyoming

B) Nevada

C) Montana

D) Nebraska

23) The owners of an LLC are called:

A) natural persons.

B) members.

C) partners.

D) managers.

24) A limited liability company:

A) is either member-managed or manager-managed.

B) shares its profits equally with shareholders.

C) is never required to pay federal income tax.

D) is owned only by shareholders.

25) The LLC is not ordinarily liable for the wrongful acts of:

A) manager members in a member-managed LLC.

B) nonmanager members in a manager-managed LLC.

C) nonmanager members in a member-managed LLC.

D) manager members in a manager-managed LLC.

26) Which of the following is correct concerning a limited liability company?

A) It has limited ability to buy, hold, and sell property.

B) Typically, an LLC is a tax shelter for big corporations.

C) It is mandatory to have an operating agreement.

D) Members who manage an LLC are fiduciaries of the LLC.

27) Any of the managers in a manager-managed LLC may be removed at any time by a vote of:

A) one third of all LLC members.

B) two-thirds of all LLC members.

C) a majority of LLC members.

D) the board of directors.

28) Steve, Martha, and Pete formed an LLC two years ago. As of today, Steve has contributed $100,000, Martha has contributed $50,000, and Pete has contributed $50,000 to the LLC. The LLC made a profit of $30,000 in two years. By default, how much will Steve's share of profits be?

A) $10,000

B) $20,000

C) $15,000

D) $30,000

29) What is the document that is filed with the secretary of state to form an LLC?

A) Articles of incorporation

B) Certificate of organization

C) Operating agreement

D) Bylaws

30) Marc and Sonia were the only members of the MS Limited Liability Company. Marc then sold all his rights in the LLC to Gertrude. As a result:

A) Gertrude becomes a member of the LLC.

B) Gertrude gains the right to receive Marc's share of distributions.

C) Marc ceases to be a member of the LLC.

D) the LLC becomes a sole proprietorship of Sonia.

31) Under the RULLCA, which of the following is true about a transferee in an LLC?

A) A transferee has the right to hire managers in a manager-managed LLC.

B) A transferee has limited rights to manage the ordinary business of the LLC.

C) A transferee has only a limited right to information about the LLC's accounts.

D) A transferee is a member of the LLC.

32) A member of an LLC is treated as a transferee of his/her transferable interest only after:

A) he/she transfers his/her transferable interest to another person.

B) he/she gives notices to third parties about the transfer.

C) a creditor receives his/her transferable interest.

D) his/her dissociation from the LLC due to judicial expulsion.

33) Which of the following is a nonwrongful type of member dissociation from an LLC?

A) Dissociation caused by a member being a debtor in a bankruptcy.

B) Dissociation caused by a member's death due to a motor vehicle accident.

C) Dissociation caused by the judicial expulsion of a member.

D) Dissociation caused by a member withdrawing from an LLC before the LLC's term has expired.

34) A dissociating member will be liable to the LLC for damages caused by the dissociation due to:

A) the member being a debtor in a bankruptcy.

B) the member's death due to a motor vehicle accident.

C) a guardian being appointed over affairs of an Alzheimer-inflicted member.

D) the member withdrawing from the LLC after its term has expired.

35) Johnathan LLC has a term of eight years. It had only two partners, Jonathan and John, in its first five years of existence. It was not dissolved when John withdrew from membership in the sixth year. The LLC has continued its business and Johnathan has agreed to pay John, as per the provisions of the RULLCA. Consequently, Johnathan is obligated to pay John the value of his interest within:

A) 120 days after John's dissociation.

B) 90 days after John's dissociation.

C) 120 days after the end of the LLC's term.

D) 90 days after the end of the LLC's term.

36) The RULLCA allows for automatic dissolution of an LLC when:

A) a member of the LLC dies.

B) a majority of the members dissociate.

C) a member of the LLC goes bankrupt.

D) it becomes unlawful for the LLC business to continue.

37) Nathan wrote a new software and named it "Black Mamba." To commercialize it, he formed an LLC (with a 50-year term) with his friend Pete. Two years later, Nathan withdrew from membership of the LLC since his and Pete's working styles did not match in any way. Under which of the following conditions can Nathan ask for a judicial dissolution of the LLC?

A) The LLC failed to purchase Nathan's interest within a week of his dissociation.

B) Since Nathan wrote "Black Mamba," Pete should not profit from it or the LLC.

C) Pete is using the profits from the LLC to sell a fake version of "Black Mamba."

D) The LLC failed to give fair value to Nathan for his transferable interest.

38) After all the assets of an LLC have been sold, the proceeds will be distributed first to LLC:

A) creditors.

B) founders.

C) transferees.

D) dissociated members.

39) Joshua, Rachel, and Daniel formed an LLC to manage their accounting business. Joshua contributed $20,000 to the LLC. Rachel and Daniel contributed $40,000 each. A year later, the LLC needed capital injection and Joshua lent a credit of $50,000. However, nothing could save the LLC and it entered bankruptcy and was dissolved. Joshua was the only creditor of the LLC. If a total of $50,000 was obtained after the sale of all the assets of the dissolved LLC, how much will Rachel get?

A) $0

B) $10,000

C) $50,000

D) $25,000

40) Josh, Betty, and Danny formed an LLC to manage their accounting business. Josh contributed $20,000 to the LLC. Betty and Danny contributed $40,000 each. Being close friends, they did not include a profit and loss sharing plan in the operating agreement. A year later, they realize their working styles do not match. All the members agree to dissolve the LLC and sell all of its assets. Assuming that the LLC did not have any creditors and a total of $175,000 was obtained after the sale of all the assets of the dissolved LLC, how much will Betty get?

A) $100,000

B) $75,000

C) $50,000

D) $65,000

41) Who is liable for the acts of the managers of the LLC?

A) Only the LLC itself

B) The organizers of the LLC

C) The members of the LLC

D) The incorporators of the LLC

42) The primary reason to choose the limited liability limited partnership instead of a limited partnership as a form of business is to:

A) create a tax shelter for the partners.

B) raise large amounts of capital.

C) limit the liability of all of its general partners.

D) relieve owners from managing the business.

43) A limited partner in a limited partnership:

A) contributes capital and shares profits.

B) is a fiduciary of the business.

C) has management powers.

D) possesses complete liability for its obligations.

44) With regard to an LLLP, a ________ is conclusive proof that a limited partnership exists.

A) Domicile Certificate

B) Certificate of Authority

C) Certificate of Incorporation

D) Certificate of Existence

45) A (n) ________ may be the sole general partner of a limited partnership.

A) association

B) natural person

C) corporation

D) trust

46) A certificate of limited partnership must contain the:

A) partners' shares of profits.

B) signature of each general partner.

C) names of the limited partners.

D) capital contributions of the general partners.

47) A general partner in a limited partnership believes wrongly that an LLLP has been created. In such a case, which of the following will apply?

A) He will be considered a limited partner of the limited partnership.

B) He will lose his management powers over the limited partnership.

C) He will have to share profits equally with all other partners.

D) He will have unlimited liability for the obligations of the limited partnership.

48) Jason believes that he is a limited partner in Yorktown Yankees Limited Partnership. Jason discovers that no limited partnership certificate has been filed with the secretary of state. What should he do?

A) Withdraw from the limited partnership by obtaining a refund of his capital contribution.

B) Cause a proper certificate of limited partnership to be filed with the secretary of state.

C) File with the secretary of state a limited partner certificate declaring his limited partner status.

D) Nothing. His status is not affected by the failure to file a limited partnership certificate.

49) Terrance and Barbara created a limited partnership, but inadvertently misstated its name in the certificate of limited partnership. How will this affect their liability?

A) The partners will have unlimited liability.

B) Only general partners will have limited liability.

C) Only general partners will have unlimited liability.

D) The partner contributing more will be held for liability.

50) Under the Uniform Limited Partnership Act (ULPA), a new partner may be admitted only upon the fulfillment of which of the following conditions?

A) Each partner's consent is required.

B) A written agreement is required.

C) The secretary of state's consent is required.

D) The Vote of the partners is required.

51) A limited partner's obligation to contribute capital may be enforced only by the:

A) general partners and the creditors of the limited partnership.

B) limited partners of the limited partnership.

C) limited partnership and the general partners.

D) limited partnership and creditors of the limited partnership.

52) Carol is the only general partner in ABC Limited Partnership. She contributes $50,000 in capital. Wayne and Hosek are the only limited partners. Wayne contributes $25,000 in capital, and Hosek contributes $25,000 in capital. ABC suffers a loss of $5,000. What is Hosek's share of the loss?

A) $1,250

B) $2,500

C) $5,000

D) $0

53) The limited partnership agreement of Davos Limited Partnership has no clause on partners who transfer their transferable interests. Davos is the only general partner of the limited partnership. There are five limited partners. Two of them transfer their transferable rights to their sons (one each). By consent of all the partners, the two transferees are also made partners. How many limited partners does Davos Limited Partnership now have?

A) 6

B) 7

C) 5

D) 3

54) Amanda and Sally are close friends who form a limited partnership to open a salon. They refuse to put a buyout clause for withdrawing partners in the limited partnership agreement, assuming that their friendship and business will last forever. Amanda, as a general partner, contributes $100,000 and Sally, as a limited partner, contributes $125,000. Two years later, Sally accuses Amanda of falsifying data and withdraws from the limited partnership. How much will Sally receive from the limited partnership?

A) $125,000

B) $10,000

C) $100,000

D) $0

55) Under the default rules of the ULPA, a limited partner who wishes to withdraw from a limited partnership has:

A) the power but not the right to withdraw.

B) the right but not the power to withdraw.

C) neither the power nor the right to withdraw.

D) both the power and the right to withdraw.

56) Under the ULPA of 2001, a limited partner who participates in management and control of the limited partnership:

A) has unlimited liability to creditors of the limited partnership.

B) has limited liability only to those creditors with whom he has transacted businesses.

C) has unlimited liability only to those creditors with whom he has transacted business and who reasonably believe that he is a general partner.

D) has liability up to the limit of his capital contribution.

57) If a limited partner becomes a general partner as well in a limited partnership:

A) her share of profits will go down.

B) she will lose her managerial powers.

C) she will lose her limited liability.

D) she will lose her right to receive profits.

58) A dissociated limited partner:

A) retains his right to receive profits.

B) retains his right to vote as a limited partner.

C) loses his limited liability status.

D) retains his managerial powers.

59) Shawn was a manager and a limited partner in a Wall Street securities investment firm limited partnership. He was expelled from the limited partnership after his conviction in a securities fraud. Which of the following is true?

A) Shawn will retain his right to receive profits.

B) Shawn will retain his right to vote as a limited partner.

C) Shawn will lose his limited liability status.

D) Shawn will retain his managerial powers.

60) To give notice of a dissociation that is effective against everyone, the ULPA permits the filing of a Notice of Dissociation which is effective:

A) 120 days after filing.

B) 90 days after dissociation.

C) 90 days after filing.

D) 120 days after dissociation.

61) Ken was a general partner in a limited partnership until March 2011, when he transferred all his transferable rights to his wife. A few days later, he was expelled from the limited partnership by other partners. If the limited partnership did not give any notice of dissociation, Ken will retain his apparent authority to transact for the limited partnership until:

A) 2012.

B) 2013.

C) 2014.

D) 2015.

62) What type of partner in a Limited Liability Limited Partnership (LLLP) contributes capital and manages the business.

A) General Partner

B) Limited Partner

C) Foreign Partner

D) Domestic Partner

63) What type of statute would authorize an individual to form an LLLP?

A) Federal statute

B) State statute

C) International statute

D) City statute

64) The ULPA and the RULLCA permit limited partnerships and LLCs to merge with other businesses. For the merger procedure, the first requirement is that the companies have to:

A) file a suit in the proper court.

B) obtain consent from the state secretary.

C) adopt a conversion plan.

D) enter into an agreement.

65) How long does it take before a certificate of dissociation is effective to prevent liability as a partnership is winding down?

A) 90 days

B) 180 days

C) 365 days

D) 30 days

66) The ________ provides default rules that govern an LLC in the absence of a contrary agreement of its owners.

A) RULLCA

B) ULPA

C) RUPA

D) RULPA

67) If an operating agreement provides that a transferee of a member's transferable interest becomes an LLC member, then:

A) the transferee has the rights, powers, and liabilities of the transferring member.

B) the transferee only has the right to distributions.

C) the transferee only has the right to manage the LLC.

D) the transferee only has the right to access LLC records.

68) Passive investors in an LLC may use their shares of LLC losses:

A) as deductions on their state tax returns.

B) as deductions on their federal tax returns.

C) to offset only income from any other investments.

D) to offset only income from other passive investments.

69) Which of the following would be an improper name for an LLC?

A) The Jones Law Firm, LLC

B) The Jones Law Firm Limited

C) The Jones Law Firm, L.L.C.

D) The Jones Law Firm Limited Company

70) ________ will usually state whether an LLC is member-managed or manager-managed and how members will share profits.

A) Bylaws

B) Articles of incorporation

C) Certificates of organization

D) Operating agreements

71) Which of the following is not a characteristic of an LLC?

A) It may sue and be sued in its own name.

B) It must be taxed as a partnership.

C) It can buy, hold, and sell property.

D) It can make contracts and incur liabilities.

72) Which of the following statements about LLC members is false?

A) A member's liability is limited to her capital contribution to the LLC.

B) A member is liable for the torts she commits while acting for the LLC.

C) A member must make capital contributions to the LLC as she agreed.

D) A member can never be personally liable on an LLC contract.

73) In Hecht v. Andover Assoc. Mgmt. Co., the case in the text, why did the court deny the defendant's motion to dismiss?

A) The defendant acted in good faith and exercised honest judgment in furtherance of the plaintiff's best interests.

B) The defendant owed a duty to the plaintiff and delegation of such a duty is not an excuse for the failure to fulfill it—even if the failure was made in good faith.

C) The defendant was aware of Madoff's Ponzi scheme and tried to escape liability with its delegation.

D) The defendant failed to show that the plaintiff was negligent with his investment.

74) Which of the following was the court's holding in the case in the text, McDonough v. McDonough?

A) The operating agreement prohibited its LLCs members to continue the company after a party requested to dissolve the LLC.

B) The operating agreement permitted a majority of the LLCs members to continue the company.

C) The operating agreement was silent on the issue and the RULLCA applied.

D) The operating agreement contained terms that were deemed against public policy.

75) Which of the following countries claims to be the first nation to permit LLCs?

A) Germany

B) Brazil

C) Mexico

D) Belgium

76) A(n) ________ is a form of business organization that has one or more general partners who manage the business and have unlimited liability for the obligations of the business and one or more limited partners who do not manage and have limited liability.

A) s corporation

B) limited liability company

C) limited partnership

D) limited liability limited partnership

77) Which of the following statements about LLLPs is false?

A) It may be created only in accordance with a statute.

B) A general partner has no right to manage the business or to act as its agent.

C) Limited and general partners share the profits in relation to their capital contributions.

D) General partners are fiduciaries of the business.

78) A limited partnership begins its existence:

A) when the secretary of state issues a Certificate of Existence.

B) 60 days after mailing a certificate of limited partnership to the secretary of state.

C) when all partners sign a certificate of limited partnership.

D) at the time a certificate of limited partnership is filed by the office of the secretary of state.

79) In Moser v. Moser, the case in the text, why did the court hold that Barbara did not make a gift of the limited partnership's property to her children?

A) Barbara did not relinquish control over her ownership in a manner consistent with the intent to make a gift.

B) Barbara exercised her powers similar to "a benevolent dictator" and freely transferred property to and from the partnership.

C) Barbara did not intend to relinquish her ownership interest until her death.

D) Barbara did not delivery the Memorandum of Gift letters to her children.

80) Under the ULPA, if two general partners contribute $100,000 each and 20 limited partners contribute $2,000,000 each, and the profit is $2,010,000, each general partner's share of the profits is ________ and each limited partner's share is ________.

A) $100,000; $5,000

B) $10,000; $100,000

C) $100,000; $10,000

D) $5,000; $100,000

81) Which of the following is not required to be approved by all members under the ULPA of 2001?

A) The transfer of one partner's interest to a third party

B) An amendment of the limited partnership agreement

C) An amendment of the limited partnership certificate

D) The sale of all the partnership's assets outside the ordinary course of business

82) The ULPA makes it harder for a limited partnership to dissolve and provides few rights for partners who dissociate from the limited partnership before the partners expect because:

A) the partners receive tax benefits.

B) they typically are used for high risk businesses.

C) they are intended for long-term businesses.

D) courts want to enforce agreements to support freedom of contract.

83) A limited partnership agreement may not restrict a general partner's:

A) capital contributions.

B) involvement in the firm.

C) right to withdraw.

D) power to withdraw.

84) ________ is when the holder of preferred stock can convert their preferred shares into other stock of the corporation.

A) Merger

B) Transfiguration

C) Conversion

D) Floating rate

85) In Lach v. Man O'War, LLC, the case in the text, why did the court hold that the general partners were not required to comply with the requirements for conversion?

A) A new LLC was formed and the limited partnership dissolved.

B) The partners did not owe a fiduciary duty to one another.

C) The partners were unable to carry out the business due to extenuating circumstances.

D) The partnership agreement contained a conversion clause.

86) Kallie and Lisa wish to start XYZ Limited Liability Company. What steps do they need to take in order to establish it?

87) Samantha is the general partner and Jack and Jared are the limited partners of Profiler Limited Partnership. Samantha has contributed capital of $30,000 to the partnership, Jack has contributed $150,000, and Jared has contributed $120,000. They have not agreed on how to share profits or losses. Profiler incurs a loss of $90,000 in its first year. What is Jack's share of the loss? If Jack has a total income of $225,000 from other sources and an income of $15,000 from other passive investments, how much of the loss may he deduct on his federal income tax return?

88) Brady is the sole general partner in ABC Limited, a limited partnership. There are five limited partners. One day, Brady went to the grocery store to purchase groceries for himself. He forgot his personal checkbook. However, he had the partnership's checkbook. Unable to otherwise pay for the groceries, he wrote a check from the partnership account, thinking that he "owned" part of the money in the account anyway. Discuss.

89) Bob is a partner in XYZ Limited Partnership. For tax reasons, Bob wishes to be both a general and a limited partner. May he do this?

90) Sandra starts a new LLLP for her gelato business. She becomes the general partner of the LLLP and her friend Katy becomes a limited partner. There are no other general or limited partners in the LLLP. Apart from being a general partner, Sandra wishes to become a limited partner in the LLLP to increase her share of profit. Can she do it? If not, suggest a method by which she might be able to do it.