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1 Interactive Quiz for ALT-12e, Chapter 38 Chapter 38 Limited Liability Companies and Special Business Forms 1.

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. 2. 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.

The LLC is a form of business organization that: a. was used in ancient Greece and Rome. b. became popular in the United States in the 1800s, during the industrial revolution. c. was authorized in the 1930s by the Securities and Exchange Commission. d. was first authorized in the United States in 1977, by the state of Wyoming.

Answers: a. Incorrect. LLCs were not used in the ancient world. b. Incorrect. The LCC did not become popular in the United States at this time. c. Incorrect. The SEC did notand does notauthorize the creation of LLCs. d. Correct. Wyoming allowed for the creation of LLCs in 1977. 3. 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.

2 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. 4. 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. 5. 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.

3 d. Incorrect. There is no requirement that the name of an LLC be approved by a vote of the state legislature. 6. One disadvantage of an LLC is that: a. it is taxed like a partnership, unless the members choose differently. b. its members have limited liability for LLC debts. c. there is no uniform law governing LLCs in the United States. d. they are subject to extensive regulation by the Treasury Department.

Answers: a. Incorrect. This is one of the advantages of an LLC. b. Incorrect. This is another advantage of an LLC. c. Correct. There is not yet a uniform law on LLC applicable in all, or in most, states of the United States. d. Incorrect. LLCs are not subject to regulation by the Treasury Department. 7. 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. 8. A group of twenty home-schooling parents in New Jersey get together and form a nonprofit membership organization whose purpose is to buy teaching materials and supplies. The parents have probably formed which type of business organization? a. A syndicate. b. A business trust. c. A cooperative. d. A joint-stock company.

Answers:

4 a. Incorrect. These parents have not joined together to finance a project but to purchase goods in quantity. b. Incorrect. These parents have not formed a business trust, because no one has transferred cash or property in exchange for trust certificates. c. Correct. This is cooperative. A cooperative is an association organized to provide an economic service, without a profit, to its members. d. Incorrect. Because there is no evidence that the parents issued stock, this is not a joint-stock company. 9. A joint-stock company may be described as: a. an association that is organized to provide an economic service to its members. b. a business organization in which investors transfer cash or property in exchange for trust certificates. c. an arrangement in which a patent, trademark, trade name, or copyright owner transfers the right to sell or distribute these goods or services. d. a hybrid of a partnership and a corporation.

Answers: a. b. c. d. 10. Incorrect. This describes a cooperative. Incorrect. This describes a business trust. Incorrect. This describes a franchise. Correct. This describes a joint-stock company.

A joint-stock company has many features of a corporation. Which of the following IS NOT one of the ways in which a joint-stock company is like a corporation? a. Its shareholders have personal liability. b. It is usually managed by directors or officers of the company. c. Its ownership is represented by transferable shares of stock. d. It can have perpetual existence.

Answers: a. Correct. The shareholders of a joint-stock corporation have personal liability, as do the partners of a partnership. Corporate shareholders, on the other hand, have limited liability. b. Incorrect. Joint-stock companies share this feature with corporations. c. Incorrect. Joint-stock companies share this feature with corporations. d. Incorrect. Joint-stock companies share this feature with corporations.