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					                                          Midterm Examination

INTRODUCTION____________________________________________________

Note: This examination covers Sole Proprietorships through Limited Liability Partnerships.

        This examination is intended to test your knowledge of the materials that we have

covered in class. Please answer each question concisely. Please use headings (e.g., Liability) as

often as possible; this will help you organize your thoughts and present them clearly. You must

answer all questions with complete sentences. Do not use abbreviations, other than those

commonly used for each business organization (e.g., LP). Please write clearly; I will not grade an

answer that I cannot read.

        The exam will be graded on your ability to answer each question correctly, spelling and

punctuation, as well as neatness. Answer all questions presented. If you cannot answer a question

completely, answer as best you can; partial answers will be given partial credit.



EXAMINATION____________________________________________________

TRUE/FALSE

Please indicate which statements are true and which are false.



        True/False       1. In an agency relationship, a principal acts on behalf of an agent.

        True/False       2. Principals can be held liable for the actions of their agents.

        True/False       3. An agent must be working on the principal’s behalf in order for the

                         principal to be held liable for the agent’s actions.

        True/False       4. A principal may be held liable for the actions of an independent contractor.
True/False   5. Registration of an assumed business name helps avoid co nsumers’

             confusion with other businesses operating under similar names.

True/False   6. A sole proprietorship can have more than one employee.

True/False   7. Sole proprietors may limit their personal liability for business debts

             through contracts.

True/False   8. A sole proprietorship cannot have more than 35 shareholders.

True/False   9. “First in time, first in right” is the rule applicable to the use of a

             business name; that is, the first proprietor to use an assumed business

             name will be granted the exclusive right to use the name, regardless of

             whether the proprietor registered the name with the secretary of state.

True/False   10. Licensing requirements allow states and counties to regulate

             businesses.

True/False   11. Sole proprietors are personally liable for all debts and obligations of

             their businesses.

True/False   12. Creditors of a sole proprietor may seek payment of business debts

             from assets of the sole proprietorship.

True/False   13. Business profits are taxed as a sole proprietor’s personal income.

True/False   14. Sole proprietorships terminate upon the death of the proprietor.

True/False   15. A partnership begins simply by one or more individuals beginning

             business.

True/False   16. The business income of a partnership is taxed as the personal income

             of the partners.
       True/False      17. Creditors of a partnership may seek repayment of business debts from

                       the personal assets of the partners.

       True/False      18. Limited partners manage limited partnerships.

       True/False      19. Limited partners are not responsible for the debts and obligations of

                       their limited partnerships.

       True/False      20. Partners may limit their personal liability for business debts and

                       obligations through a partnership agreement.

       True/False      21. A limited liability partnership (LLP) offers limited partners perso nal

                       liability protections.

       True/False      22. All partners of an LLP may participate in management of partnership

                       business.

       True/False      23. An LLP is regulated by statute and therefore does not need a

                       partnership agreement to define the rights and duties of the partners.

       True/False      24. LLPs offer more expansive personal liability protections to partners

                       than general partnerships.

       True/False      25. The term personal liability refers to a business owner’s personal

                       responsibility for the income taxes assessed on the profits and losses of the

                       business.

 Answer Key: 1. (F) 2. (T) 3. (T) 4. (F) 5. (T) 6. (T) 7. (T) 8. (F) 9. (F) 10. (T) 11. (T) 12. (T)
13. (T) 14. (T) 15. (T) 16. (T) 17. (T) 18. (F) 19. (T) 20. (F) 21. (F) 22. (T) 23. (F) 24. (T) 25. (F)


SHORT ANSWER

Please answer the following questions in complete and concise sentences.

1. What is an assumed business name?
       An assumed business name is a name other than the owner’s name under which a

       business operates.

2. Define the term limited liability.

       The term limited liability refers to limitations placed on business owners’ personal

       responsibility for the debts and obligations of their businesses. If a business organization

       provides owners limited liability, creditors cannot look to the business owners’ personal

       assets to satisfy business debts and obligations.

3. What is the difference between a limited partnership and a limited liability partnership?

       A limited partnership is managed by general partners, who are personally liable for all

       debts and obligations of the partnership. Limited partners are merely investors in a

       limited partnership’s business and do not have the right to participate in management of

       the business. In contrast, limited liability partnerships (LLPs) offer all partners

       management rights and limit partners’ vicarious liability for the negligence and

       malfeasance of their partners.

4. Explain the difference between a sole proprietorship and a partnership.

       A sole proprietorship is a business conducted by one person. A partnership is conducted

       by two or more persons or entities.

5. Explain how the business profits and losses of a partnership are taxed.

       The profit and losses of a partnership pass through the partnership and are taxed as the

       personal income of the partners. The partnership itself is not taxed on its profits and

       losses.
ESSAY

                                         Essay Question 1

       Craig wants to sell a small commercial cleaning business that he owns. He isn’t sure what

the sale price for the business should be. He owns about $10,000 worth of business equipment

and has several cleaning contracts with large businesses. What are some of the factors he should

consider in determining a fair sales price?

       Craig should consider not only the value of the tangible business assets (equipment), but

       also the goodwill (reputation) and clientele of the business. These intangible assets of a

       business are generally worth more than the tangible assets.

                                         Essay Question 2

       Joan, a fifth grader at Larson Elementary School, noticed that many people regularly

brought fast food to the local park next to her school during the noon hour. Joan decided that she

would take advantage of the ready- made clientele and open a hot dog stand in the park during the

summer. She obtained the necessary permits for the stand from the county; she did not make any

filings with the secretary of state. On the first day of summer break, she opened her stand, which

she called Hot Doggity. She had a booming business and was thrilled with the income.

       Soon another local hot dog house, Hot Doggedy, started noticing a significant decline in

its lunch-hour business. Hot Doggedy was very surprised at the decline, since it was always a

favorite stop for customers who would eat their lunch in the park that is only half a block away.

Hot Doggedy’s owner noticed the park was still full at lunchtime and people were eating hot

dogs in wrappers that looked just like his, only bearing the name Hot Doggity. As soon as Hot

Doggedy’s owner learned about Joan’s stand, he contacted the secretary of state to complain
about the name of Joan’s hot dog stand. How should the secretary of state decide this matter?

What are the relevant issues that it will consider? Explain your answer.

   Joan is using an assumed business name, which needs to be registered with the secretary of

   state. Had she registered the name, the secretary may have denied her use of the name

   because it is deceptively similar to another assumed business name in use (Hot Doggedy).

   Joan’s use of the name appears to be creating consumer confusion, as demonstrated by the

   decline of Hot Doggedy’s business. (However, this decline could arguably be attributable to

   her location in the park.) Because the names are spelled similarly and are used by similar

   businesses (both hot dog vendors), and because of the close proximity of the businesses, the

   secretary of state will most likely deny Joan’s use of the name Hot Doggity—it is deceptively

   similar to the name Hot Doggedy.
                                          Final Examination

INTRODUCTION____________________________________________________

Note: This examination is cumulative.




          This examination covers the materials studied throughout this class. Each question should

be answered directly and concisely. All questions must be answered; do not answer a question by

referring to an answer previously or subsequently offered. All essay questions must be answered

with complete sentences. Do not use abbreviations, other than those commonly used for each

business organization (e.g. LLP). Please write clearly; I will not grade an answer that I cannot

read.

          This examination will be graded on your ability to answer each question correctly,

spelling and punctuation, as well as neatness. Answer all questions presented. If you cannot

answer a question completely, answer as best you can; partial answers will be given partial

credit.



SHORT ANSWER

1. List four forms of business organizations that are recognized in your jurisdiction.

          This answer varies by jurisdiction; however, the basic organizational forms are

                         1. sole proprietorship

                         2. general partnership

                         3. limited partnership

                         4. limited liability partnership

                         5. corporation
           6. limited liability company



a. Provide a definition of each of the preceding business organizations.

           1. Sole proprietorship: business operated by one person for profit

           2. General partnership: business operated by two or more persons

               (including corporations, etc.) for profit

           3. Limited partnership: business operated by two or more persons for

               profit with managers (general partners) and investors (limited

               partners)

           4. Limited liability partnership: a general or limited partnership that

               registers as a limited liability partnership and thereby protects

               partners from vicarious liability for the negligence or malfeasance of

               the other partners

           5. Corporation: a legal entity that is separate and distinct from its

               owners and traditionally is characterized by (a) continuity of life, (b)

               centralized management, (c) limited liability, and (d) free

               transferability of interests

           6. Limited liability company: an unincorporated entity that offers its

               members management rights, limited personal liability, and the pass-

               through taxation of partnerships



b. What are the advantages of a corporation versus a limited liability partnership?

   Corporations offer continuity of life, free transferability of interests, limited
               personal liability, and centralization of management. With the exception of S

               corporations, corporate owners suffer double taxation. In contrast, partnerships

               generally terminate on the death or withdrawal of a partner, impose restrictions

               on ownership, offer all partners (general partners) management rights, and

               subject partners to personal liability for the debts and obligations of their

               partnerships. However, unlike corporations, partnerships receive pass-through

               taxation.



2. What are the disadvantages of a limited liability partnership?

       In a limited liability partnership, not all partners can participate in the management of

       the business, and all partners remain personally liable for their own negligence and

       malfeasance as well as those they participated in or supervised.



3. Identify and define four types of corporations.

                      1. C corporation: basic business corporation owned by investors and

                      managed by an elected board of directors and appointed officers.

                      2. Statutory close corporation: small corporation whose shareholders

                      often participate in business management. Minimal formalities are

                      required for formation of a close corporation; however, ownership is not

                      freely transferable.

                      3. Professional corporation: corporation owned by professionals for the

                      purpose of rendering professional service. It protects professionals from

                      personal liability for negligence or malfeasance of their associates;
                       however, they remain liable for their own negligence and malfeasance.

                       4. Nonprofit corporation: corporation formed by nonprofit organizations.

                       Profits of nonprofit corporations may not be distributed to shareholders,

                       directors, or officers.

                       5. Note: S corporation is not a separate corporate designation. Rather, it

                       is an IRS designation.



           a. What are the two basic corporate forms?

                       1. C corporation

                       2. Statutory close corporation



           b. What is an S corporation?

                       An S corporation is an IRS designation available to qualified small

                       corporations. S corporations are taxed as partnerships.



4. What does it mean for a business to offer its participants “limited liability”? Why is limited

   liability considered advantageous?

       Limited liability protects a business owner’s personal assets from attachment by

       creditors for satisfaction of business debts and obligations.



5. What is the basic document that must be prepared to form a corporation?

       Articles of incorporation
           a. If a corporation’s formation documents are not prepared correctly, what is the

              status of the business (i.e., is it a corporation or not)?

              A business owner who in good faith attempts to satisfy the state’s statutory

              incorporation procedures but fails to strictly comply may have his or her business

              classified as a de facto corporation if the business is conducted in good faith as

              though it were in fact a corporation. As a de facto corporation, a creditor of the

              corporation cannot hold the shareholders personally liable for the corporate

              debts and obligations.



           b. If a corporation is properly formed, is it possible to reach the personal assets of the

              shareholders? On what theories?

              There are two exceptions to the general rule that a shareholder will not be held

              personally liable for the debts and obligations of the corporation. A shareholder

              may be held personally liable (1) to prevent fraud or injustice (piercing the

              corporate veil) or (2) if the shareholder personally guarantees loans made to the

              corporation. The three most common reasons that the corporate veil may be

              pierced are (1) failure to comply with necessary corporate formalities, (2)

              commingling of personal and corporate assets and (3) inadequate capitalization.



6. What is a limited liability company (LLC), and what are the advantages of this business form?

       An LLC is a business entity offering its members personal liability protections, shared

       management rights, finite duration, pass-through taxation, and limited transferability of

       interests. The primary advantages are shared management rights, limited liability, and
       partnership taxation.



7. What are the taxation advantages of a partnership?

       The profits and losses of a partnership are taxed as the personal income of the partners.

       Partnership losses may offset other sources of personal income of the individual

       partners.



8. Should a limited liability company designate its status (LLC) in its name?

       Yes. LLCs must notify the public of their status.



               a. Do other forms of business organizations have to designate their status in their

                   names? Why?

        Yes. All business organizations that offer owners personal liability protections must

        notify the public of their organizational status in order to put the public on notice of

        their respective liability protections.
ESSAY

                                 Essay Question 1



       Dave and Cindy recently graduated from the U of M School of Law. They want to

start a general practice law firm together. They were best friends in law school and are

confident in each others’ ability to practice law. They both have about $1,000.00 to invest

in the business, and neither has any significant personal assets (neither owns a home, and

both have junker cars from their law school days).

       They aren’t sure how to form their business association, and they visit the

attorney that you work for to learn about their options. Your attorney tells you that she

will recommend that they form an LLP, an LLC, or a professional corporation. What

form would you recommend and why? In answering this question, discuss the liability

issues and tax ramifications of your choice.

               Each of the organizational forms listed would be viable. However, law

       firms generally prefer the “partnership” designation; therefore, an LLP probably

       would be the most desirable for Dave and Cindy. LLPs offer their partners the

       right to participate in business management as well as personal liability

       protections from the negligence or malfeasance of other partners. In addition,

       LLPs receive pass-through taxation; therefore, the profits and losses of the firm

       will be taxed as the personal income of Dave and Cindy.



                                 Essay Question 2
       What are the differences between the LLP, the LLC, and the corporation?

Distinguish each form of business organization.

               LLPs offer business owners the right to participate in business

       management, limited liability (for the negligence or malfeasance of other

       partners), and pass-through taxation.

               LLCs allow business owners the right to participate in management,

       limited liability for all debts and obligations of the company, and pass-through

       taxation.

               Corporations generally provide centralized management (unless the

       corporation is a statutory close corporation), limited liability for all debts and

       obligations of the corporation, and possibly pass-through taxation if S election is

       made. However, unless a corporation qualifies as an S corporation, corporate

       profits will be taxed twice; once at the corporate level and then again when

       corporate profits are distributed as dividends to shareholders.

               Distinguishing the three forms, LLCs offer more extensive liability

       protections than LLPs and can provide more advantageous taxation rates than

       corporations.



                                     Essay Question 3



       Kent and Craig are brothers who want to start a horse-training business. They

both have considerable experience working with horses, and both want to be involved in

the business, including daily training of horses. They have spoken to an insurance agent
about getting insurance to cover the potential liabilities, but they were told that they can’t

get insurance to cover this type of high-risk business (because of the potential for

personal injury).

        They come to your firm seeking advice about forming their business; they are

particularly concerned about their potential liabilities, especially to any other trainers that

they might hire. What business form(s) would you recommend to your supervising

attorney for this business? Why? What are the advantages and disadvantages of this

business form? Explain what protections this business form would offer them from

potential liabilities.

                 Due to the high-risk nature of their business, Kent and Craig should

        consider forming either an LLC or a corporation. Both of these organizational

        forms offer extensive liability protections to their owners. However, some states

        do not allow high-risk or uninsurable businesses to form LLCs; therefore, this

        organizational form may not be available to this business in all states.



                                      Essay Question 4



        Gerard is an incredible candy maker and would like to go into business for

himself, but he needs some money to get started. His parents want to help him get his feet

on the ground and start his career. They agree to invest in his business; however, they

don’t want to be involved in any part of the business, they are just trying to help him out.

Gerard asks your supervising attorney for advice on how to organize his business. The
task is assigned to you. What business form would suit the needs of Gerard? Why? What

are the advantages of this business form?

               A limited partnership is advisable for Gerard and his parents. A limited

       partnership would allow Gerard’s parents to invest in his business venture

       without participating in management decisions. Limited partnerships are

       relatively simple to form, offer limited liability to investors, and offer the

       advantage of pass-through taxation.

				
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