L201 Exam 2 Questions with Correct
Answers Latest Update
Sole Proprietorship - Answer--has one owner
-owner has right to make all management decisions
-all profits go to owner
-owner is liable for all obligations of the business
-risky
Aspects of Sole Proprietorship - Answer--not a legal entity, cannot sue or be sued
(creditors must sue the actual owner)
-not a tax paying entity (income is to the owner and must be reported on owner's federal
income tax return)
-responsible for employees' authorized contracts and torts committed ruing employment
-no life outside of owner (if owner dies, business dies)
-the business can be sold to someone else, but buyer must create their own form of
business
What is the most common form of business in the U.S? - Answer-sole proprietorship
Why do people have a sole proprietorship? - Answer-1. it's formed easily and
inexpensively (no formalities necessary)
2. By default- a person going into business by themselves automatically becomes a sole
proprietorship (few people consider the business form)
Partnership - Answer--has 2 or more owners called partners
-partners have right to make all management decisions
-debts for business=debts for partners
Aspects of Partnership - Answer--liable for torts committed in course of business by
partners or employees
-not a tax-paying entity (income must be reported on partners' federal income tax return)
-has life outside of owners, if partner dies or leaves the partnership continues
Why do people have a partnership? - Answer--no formalities
-by default
-partner's right to manage business and deductibility of partnership losses on tax returns
are attractive features
Limited Liability Partnership (LLP) - Answer--identical to partnership, except that a
partner has no liability for most obligations
-BUT does retain unlimited liability for their own wrongful acts
-may elect to be taxed like partnership or corporation
-made by filing a form with the secretary of state
,LLP is a good form for what kind of people? - Answer-a good form for professionals
such as consultant or auditors because it allows management flexibility while insulating
them mostly from personal liability
Limited Partnership - Answer--has one or more general partners and one or more
limited partners
-general partners: similar to partnership, is a corporation
-limited partners: have no rights to manage, if they do they retain their limited liability
-may elect to be taxed like a corp or partnership
-life apart from its owners
-may be created only by complying with state statute permitting
Reasons for Limited Partnership - Answer-1. if they have a corporate general partner,
no human will have unlimited liability for debts
2. if taxed like partnership, losses are deductible on owners' income tax returns
3. investors may contribute capital to business and avoid unlimited liability and
obligation to manage business
What kind of business would want a limited partnership? - Answer-good for a business
needing millions of capital, wanting only few owners to manage business, and expecting
to lose money in its early years
Limited Liability Limited Partnership (LLLP) - Answer--a limited partnership whose
partners have elected limited liability status for all partners
-created by making filing with the secretary of state
-designed to give same limited liability advantaged to general partners
-identical to limited partnership in management and duties/rights, EXCEPT that both
limited partners and general partners will have no liability for obligations
Corporation - Answer--owned by shareholders who elect a board of directors to manage
a business
-board of directors selects officers to run daily affairs of business
-no shareholder has right to manager & no officer or director has to be a shareholder
-shareholders have limited liability for obligation, even if elected
-directors/officers have no liability for contracts they or the corporation's employees sign
-tax paying entity (pays taxes on its profits, not on shareholders individual tax returns)
-separate life from owners/managers
S Corporation Status - Answer-the corporation and shareholders are taxed like a
partnership: income and losses of the business are reported on the shareholders'
individual federal income tax returns
-taxed under Subchapter S of the Internal Revenue Code
-if a corporation elects this, they may have no more than 100 shareholders, have only
one class of shares, and be owned by individuals and trusts
, Professional Corporation - Answer-all states permit professionals (accountants,
dentists, physicians) to incorporate their professional practices
-similar to a business corporation: board of directors & filed through secretary of state
-professional shareholders have no personal liability for the obligations of the
professional corporation, they retain unlimited liability to their clients
-may elect for S Corporation Status
***most professionals like the flexible management structure of the LLP better
Limited Liability Company (LLC) - Answer-intended to combine the nontax advantages
of a corporation with the favorable tax treatment of partnerships
-owned by members who may manage it or elect managers to operate the business
-members have limited liability for obligations
-all states except CA permit professionals to organize as this
-may elect to be taxed like a partnership or a corporation
-limited free transferability of the members' ownership interests
Advantages of LLC - Answer--has limited liability advantage
-if manager-managed, has management advantage of the corporation
-may elect to receive feral tax treatment similar to S Corporation, yet has no limit on the
number or type of owners
Piercing the Corporate Veil - Answer-when the shareholders lose their limited liability (in
order to promote justice and prevent inequity)
-imaginary wall between corporation and their shareholders that protects shareholders
from liability of the corporation's actions
-occurs when shareholders overstep, they lose protection
-requirements: domination of a corporation by its shareholders, use of that domination
for an improper purpose
Domination - Answer--cause of piercing the veil
-if a shareholder causes the corp to act to the personal benefit of the shareholder OR
-failing to observe corporate formalities (maintain separate accounting records & failing
to hold shareholder/director meetings)
Improper Purpose - Answer--cause of piercing the veil
1. defrauding creditors by thinly capitalizing corporation or by looting corporation assets
-thin capitalization: proved when capitalization is very small in relation to the nature of
the business of the corporation
2. circumventing a statute
- a corporation should not engage in a course of conduct that is prohibited by a statute
3. evading an existing obligation
-when a corporation will attempt escape liability on a contract by reincorporating or by
forming a subsidiary corporation
Agency - Answer-a two party relationship in which one party (the agent) has power to
act on behalf of, and under the control of, the other party (principal)
Answers Latest Update
Sole Proprietorship - Answer--has one owner
-owner has right to make all management decisions
-all profits go to owner
-owner is liable for all obligations of the business
-risky
Aspects of Sole Proprietorship - Answer--not a legal entity, cannot sue or be sued
(creditors must sue the actual owner)
-not a tax paying entity (income is to the owner and must be reported on owner's federal
income tax return)
-responsible for employees' authorized contracts and torts committed ruing employment
-no life outside of owner (if owner dies, business dies)
-the business can be sold to someone else, but buyer must create their own form of
business
What is the most common form of business in the U.S? - Answer-sole proprietorship
Why do people have a sole proprietorship? - Answer-1. it's formed easily and
inexpensively (no formalities necessary)
2. By default- a person going into business by themselves automatically becomes a sole
proprietorship (few people consider the business form)
Partnership - Answer--has 2 or more owners called partners
-partners have right to make all management decisions
-debts for business=debts for partners
Aspects of Partnership - Answer--liable for torts committed in course of business by
partners or employees
-not a tax-paying entity (income must be reported on partners' federal income tax return)
-has life outside of owners, if partner dies or leaves the partnership continues
Why do people have a partnership? - Answer--no formalities
-by default
-partner's right to manage business and deductibility of partnership losses on tax returns
are attractive features
Limited Liability Partnership (LLP) - Answer--identical to partnership, except that a
partner has no liability for most obligations
-BUT does retain unlimited liability for their own wrongful acts
-may elect to be taxed like partnership or corporation
-made by filing a form with the secretary of state
,LLP is a good form for what kind of people? - Answer-a good form for professionals
such as consultant or auditors because it allows management flexibility while insulating
them mostly from personal liability
Limited Partnership - Answer--has one or more general partners and one or more
limited partners
-general partners: similar to partnership, is a corporation
-limited partners: have no rights to manage, if they do they retain their limited liability
-may elect to be taxed like a corp or partnership
-life apart from its owners
-may be created only by complying with state statute permitting
Reasons for Limited Partnership - Answer-1. if they have a corporate general partner,
no human will have unlimited liability for debts
2. if taxed like partnership, losses are deductible on owners' income tax returns
3. investors may contribute capital to business and avoid unlimited liability and
obligation to manage business
What kind of business would want a limited partnership? - Answer-good for a business
needing millions of capital, wanting only few owners to manage business, and expecting
to lose money in its early years
Limited Liability Limited Partnership (LLLP) - Answer--a limited partnership whose
partners have elected limited liability status for all partners
-created by making filing with the secretary of state
-designed to give same limited liability advantaged to general partners
-identical to limited partnership in management and duties/rights, EXCEPT that both
limited partners and general partners will have no liability for obligations
Corporation - Answer--owned by shareholders who elect a board of directors to manage
a business
-board of directors selects officers to run daily affairs of business
-no shareholder has right to manager & no officer or director has to be a shareholder
-shareholders have limited liability for obligation, even if elected
-directors/officers have no liability for contracts they or the corporation's employees sign
-tax paying entity (pays taxes on its profits, not on shareholders individual tax returns)
-separate life from owners/managers
S Corporation Status - Answer-the corporation and shareholders are taxed like a
partnership: income and losses of the business are reported on the shareholders'
individual federal income tax returns
-taxed under Subchapter S of the Internal Revenue Code
-if a corporation elects this, they may have no more than 100 shareholders, have only
one class of shares, and be owned by individuals and trusts
, Professional Corporation - Answer-all states permit professionals (accountants,
dentists, physicians) to incorporate their professional practices
-similar to a business corporation: board of directors & filed through secretary of state
-professional shareholders have no personal liability for the obligations of the
professional corporation, they retain unlimited liability to their clients
-may elect for S Corporation Status
***most professionals like the flexible management structure of the LLP better
Limited Liability Company (LLC) - Answer-intended to combine the nontax advantages
of a corporation with the favorable tax treatment of partnerships
-owned by members who may manage it or elect managers to operate the business
-members have limited liability for obligations
-all states except CA permit professionals to organize as this
-may elect to be taxed like a partnership or a corporation
-limited free transferability of the members' ownership interests
Advantages of LLC - Answer--has limited liability advantage
-if manager-managed, has management advantage of the corporation
-may elect to receive feral tax treatment similar to S Corporation, yet has no limit on the
number or type of owners
Piercing the Corporate Veil - Answer-when the shareholders lose their limited liability (in
order to promote justice and prevent inequity)
-imaginary wall between corporation and their shareholders that protects shareholders
from liability of the corporation's actions
-occurs when shareholders overstep, they lose protection
-requirements: domination of a corporation by its shareholders, use of that domination
for an improper purpose
Domination - Answer--cause of piercing the veil
-if a shareholder causes the corp to act to the personal benefit of the shareholder OR
-failing to observe corporate formalities (maintain separate accounting records & failing
to hold shareholder/director meetings)
Improper Purpose - Answer--cause of piercing the veil
1. defrauding creditors by thinly capitalizing corporation or by looting corporation assets
-thin capitalization: proved when capitalization is very small in relation to the nature of
the business of the corporation
2. circumventing a statute
- a corporation should not engage in a course of conduct that is prohibited by a statute
3. evading an existing obligation
-when a corporation will attempt escape liability on a contract by reincorporating or by
forming a subsidiary corporation
Agency - Answer-a two party relationship in which one party (the agent) has power to
act on behalf of, and under the control of, the other party (principal)
