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Exam 20: Starting a Business: Llcs and Other Options

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Question 31

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Franchise fees can be costly, but they are usually payable over a number of years, after profits are generated from the business.

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Question 32

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Judy believed that Ray and Don were partners in an automotive repair business. Ray and Don were not partners. Ray owned the business as a sole proprietor. Ray, however, allowed Don, his unemployed brother-in-law, to be around the business. When Judy was having her car repaired, Ray said, "My partner here, Don, will give you a ride to work this morning so you can leave your car here. He will give you a ride back here after work, and your car will be done." Judy allowed Don to drive her to work. While riding with Don, he accidentally ran a stop light and caused an accident. Judy was hurt and claims that both Don and Ray are liable to her. Is she right?

A) Yes. This illustrates a partnership by estoppel.
B) No. Don was not a partner in the business.
C) No. Don was a dissociated partner.
D) No. There was no intent to have a partnership.

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Question 33

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What is a joint venture? Briefly explain the tax and liability implications of a joint venture.

Lily is involved in the winding up of her partnership. Lily is NOT entitled to compensation for her work since she is a partner.

At what stage are the partnership debts paid and the proceeds distributed to the partners?

What federal agency requires that the seller of a franchise give the potential buyer a Franchise Disclosure Document (FDD) and audited financial statements?

Which statement about the financial rights of partners is accurate?

Compare and contrast the following forms of business organization as to ease of formation, liability of owners, management, and tax implications: sole proprietorship, general partnership, limited liability company, and corporation.

The most common form of business ownership is the corporation.

Which is an advantage of a sole proprietorship?

In order to obtain limited liability, Tom and Doris formed an LLC to operate their catering business. They sometimes deposit the proceeds from catering jobs into their personal checking accounts, and if they need to pay personal bills and are short of funds, they use the business account. If creditors of the business cannot get payment for their invoices, is there anything a court can do to help the creditors?

Which is true of an S corporation?

Kayla and Marshall formed a partnership. Marshall incurred a debt in the ordinary course of the partnership business. If the debt is not paid, the creditor may sue

The phrase "piercing the company veil" applies to which type of organization?

When a partner leaves the partnership, whether it be voluntary or by expulsion, death or bankruptcy, it is called

Dennis and Claudia were partners who operated a retail store. They agreed to end the partnership. Dennis agreed to stay at the store and oversee the going-out-of-business sale. Claudia agreed to deal with the accountants and other matters not directly related to the hands-on operation of running the store. Claudia received notice that the store's liability policy would expire on July 1. She decided not to renew the policy and let it lapse. The going-out-of-business sale would not be completed until August 1. In July, a customer slipped and fell in the store. When Dennis learned that Claudia had allowed the liability policy to lapse, he was very upset and claimed he should not be liable for the customer's injury. Is Dennis liable to the customer? Explain.

Alicia and Ted have a written agreement wherein they will share the losses of their joint business. This agreement is strong evidence they are partners.

Jack and Jill were living together. Jack wanted to start a small retail store, but did not have good credit. Jill, whose credit was excellent, signed loan agreements with Jack so he could borrow the money to start the business. Jack used business cards that stated he was the "owner" of the business. He and Jill filed separate tax returns. Jack stated he was self-employed and claimed the business was a sole proprietorship. The money that was earned from the store was placed into a joint checking account owned and used by Jack and Jill. When there were significant decisions to be made about the business, such as deciding to franchise the business, the decision was made jointly by Jack and Jill. ​ Five years after the business was started, Jill left Jack. She claimed she was entitled to one-half the business's profits since she and Jack were partners. Jack disagreed and claimed they never had a partnership. Discuss Jill's claim.

A limited liability company, unlike an S corporation, can have members that are corporations, partnerships, or nonresident aliens.

Jeremiah was a partner in a partnership, but he quit unexpectedly when he got his feelings hurt over an internal decision. Dissociation has occurred.