Business Law Today Study Set 1

Business

Quiz 27 :

Limited Liability Companies and Special Business Forms

Quiz 27 :

Limited Liability Companies and Special Business Forms

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Joint Ventures. In 1993, TOG Acquisition Co. attempted to acquire the Orleander Croup, a manufacturer of bicycle accessories, but failed for lack of financing. Orleander then granted to Herrick Co. an exclusive right to negotiate for the sale of the business. In August, representatives of TOG, Herrick, and SCS Communications, Inc., signed a letter in which they agreed "to work together to acquire the business of the Orleander Group." The "letter agreement" provided that the parties would contribute "equal amounts of capital" and that all of the terms of the acquisition required the approval of each party. On November 19, TOG and SCS told Herrick that it was out of the deal and, ten days later, acquired Orleander without Herrick. Herrick filed a suit in a federal district court against SCS and others, alleging, among other things, that the "letter agreement" was a con-tract to establish a joint venture, which TOG and SCS had breached. The defendants filed a motion for summary judgment. In whose favor should the court rule? Why? [SCS Communications, Inc. v. Herrick Co., 360. F.3d 329 (2d Cir. 2004)]
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The court would rule in favour of T and S because H was unsuccessful in founding definite claims against S and T. Those claims of foreign residences might signify an exit.
H was also unsuccessful to present proof to carry on this claim.
Therefore, it was concluded that the district court preserved the defect of jurisdiction by terminating the party which is nondiversified after allowing for the significant factors. S practical opinions are either lacking merit or ignored.

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Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text. What are the two options for managing limited liability companies?
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The two options for managing limited liability companies are as under:
The associates of the business may select in their agreement of operation to be one or the other a limited liability companies (LLC) which is member managed or a LLC which is manager managed.
Most of the LLC laws states that without the articles of association if not specified otherwise, an LLC is anticipated to be managed by members.

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Case Problem with Sample Answer. Westbury Properties, Inc., and others (collectively the Westbury group) owned, managed, and developed real property. Jerry Stoker and The Stoker Group, Inc. (the Stokers), also developed real property. The Westbury group entered into agreements with the Stokers concerning a large tract of property in Houston County, Georgia. The parties formed limited liability companies. (LLCs), including Bellemcade, I.LC (the. LLC group), to develop various parcels of the tract for residential purposes. The operating agreements provided that "no Member shall be accountable to the [LW] or to any other Member with respect to [any other] business or activity even if the business or activity competes with the [I,I,C's] business." The Westbury group entered into agreements with other parties to develop additional parcels within the tract in competition with the LLC group. The Stokers filed a suit in a Georgia state court against the Westbury group, alleging, among other things, breach of fiduciary duty. What duties do the members of an LLC owe to each other? Under what principle might the terms of an operating agreement alter these duties? In whose favor should the court rule? Discuss. [Stoker v. Bellemeade, LLC, 272 Ga.App. 817, 615 S.E.2d 1 (2005)]
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The court delivered an immediate verdict in the favor of W groups, and the Stokers filed petition to an intermediate appellate court of the state, which confirmed this conclusion. As per the appellate court there was no base for concluding that the group break through fiduciary responsibilities allocated as associate of the LLCs.
An LLC associate has a fiduciary responsibility to perform in a way that one has confidence that it is in the greatest interests of the company having limited liability.
It is the state rule with regards to the companies having limited liability to give greatest possible outcome to the code of freedom of agreement and to the enforceability of functioning contracts.
In this case, the provision regarding the contract between the W group and the Stokers makes it vibrant that the associates implemented the freedom.

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Critical Legal Thinking. Although a limited liability entity may be the best organizational form for most businesses, a significant number of firms may be better off as a corporation or some other form of organization. How does the fact that most of the limited liability entities are new forms for doing business affect the reasons for choosing another form of organization in which to do business? Explain.
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Jurisdiction. Joe, a resident of New Jersey, wants to open a restaurant. He asks his friend Kay, who is an experienced attorney and a New Yorker, for her business and legal advice in exchange for a 20 percent ownership interest in the res­taurant. Kay helps Joe negotiate a lease for the restaurant premises and advises Joe to organize the business as a limited liability company (LLC). Joe forms Cafe Ole, LLC, and, with Kay's help, obtains financing. Then, the night before the res­taurant opens, Joe tells Kay that he is "cutting her out of the deal." The restaurant proves to be a success. Kay wants to file a suit in a federal district court against Joe and the LLC. Can a federal court exercise jurisdiction over the parties based on diversity of citizenship? Explain.
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Foreign limited Liability Companies. Walter Matjasich and Cary Hanson organized Capital Care, LLC, in Utah. Capital Care operated, and Matjasich and Hanson man-aged, Heartland Care Center in Topeka, Kansas. LTC Properties, Inc., held a mortgage on the Heartland facilities. When Heartland failed as a business, its residents were transferred to other facilities. Heartland employees who pro-vided care to the residents for five days during the transfers were not paid wages. The employees filed claims with the Kansas Department of Human Resources for the unpaid wages. Kansas state law provides that a corporate officer or manager may be liable for a firm's unpaid wages, but pro-tects LLC members from personal liability generally and states that an LLC cannot be construed as a corporation. Under Utah state law, the members of an LLC can be personally liable for wages due the LLC's employees. Should Matjasich and Hanson be held personally liable for the unpaid wages? Explain. [Matjasich v. Department of Human Resources, 271 Kan. 246, 21 P.3d 985 (2001)]
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Limited Liability Companies. Michael Collins entered into a three-year employment contract with E-Magine, LLC. E-Magine was in business for only a brief time, during which it incurred considerable losses. In terminating opera-tions, which ceased before the term of the contract with Collins expired, E-Magine also terminated Collins's serv-ices. In exchange for a payment of $24,240, Collins signed a "final payment agreement," which purported to be a settlement of any claims that he might have against E-Magine. Collins filed a suit in a New York state court against E-Magine, its members and managers, and others, alleging, among other things, breach of his employment contract. Collins claimed that signing the "final payment agreement" was the only means for him to obtain what he was owed for past sales commissions and asked the court to impose per-sonal liability on the members and managers of E-Magine for breach of contract. Should the court grant this request? Why or why riot? [Collins v. E-Magine, LLC, 291 A.D.2d 350, 739 N.Y.S.2d 15 (1 Dept. 2002)]
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A Question of Ethics-LLC Operation. Blushing Brides, LLC, a publisher of wedding planning magazines in Columbus, Ohio, opened an account with Gray Printing Co. in July 2000. On behalf of Blushing Brides, Louis Zacks, the firm's member-manager, signed a credit agreement that identified the firm as the "purchaser" and required payment within thirty days. Despite the agreement, Blushing Brides typically took up to six months to pay the full amount for its orders. Gray printed and shipped 10,000 copies of a fall/winter 2001 issue for Blushing Brides but had not been paid when the firm ordered 15,000 copies of a spring/summer 2002 issue. Gray refused to print the new order without an assurance of payment. Zacks signed a promissory note for $14,778, plus interest at 6 percent per year, payable to Gray on June 22. Gray printed the new order but by October had been paid only $7,500. Gray filed a suit in an Ohio state court against Blushing Brides and Zacks to collect the balance. [Gray Printing Co. v. Blushing Brides, LLC, 2006 WL 832587 (Ohio App. 2006)] 1. Under what circumstances is a member of an LLC liable for the firm's debts? In this case, is Zacks personally liable under the credit agreement for the unpaid amount on Blushing Brides' account? Did Zacks's promissory note affect the parties' liability on the account? Explain. 2. Does a member of an LLC have an ethical responsibility to meet the obligations of the firm? Discuss. 3. Gray shipped only 10,000 copies of the spring/summer 2002 issue of Blushing Brides' magazine, waiting for the publisher to identify a destination for the other 5,000 copies. The magazine had a retail price of $4.50 per copy. Did Gray have a legal or ethical duty to "mitigate the damages" by attempting to sell or otherwise distribute these copies itself? Why or why not?
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Limited Liability Companies and Special Business Forms The city of Papagos, Arizona, had a deteriorating bridge in need of repair on a prominent public roadway. The city posted notices seeking proposals for an artistic bridge design and reconstruction. Davidson Masonry, LLC-owned and managed by Carl Davidson and his wife, Marilyn Rowe-decided to submit a bid for a decorative concrete project that incorporated artistic metalwork. They contacted Shana Lafayette, a local sculptor who specialized in large-scale metal designs, to help them design the bridge. The city selected their bridge design and awarded them the contract for a commission of $184,000. Davidson Masonry and Lafayette then entered into an agreement to work together on the bridge project. Davidson Masonry agreed to install and pay for concrete and structural work, and Lafayette agreed to install the metalwork at her expense. They agreed that overall profits would be split, with 25 percent going to Lafayette and 75 percent going to Davidson Masonry. Lafayette designed numerous metal salmon sculptures that were incorporated into colorful decorative concrete forms designed by Rowe, while Davidson performed the structural engineering. The group worked together successfully until the completion of the project. Using the information presented in the chapter, answer the following questions. Is Davidson Masonry member managed or manager managed?
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The following multiple-choice question is representative of the types of questions available in one of the four sections of ThomsonNOW for Business Law Today. ThomsonNOW also provides feedback for each response option, whether correct or incorrect, and refers to the location within the chapter where the correct answer can be found. A limited liability company (LLC) combines the tax characteristics of a
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The city of Papagos, Arizona, had a deteriorating bridge in need of repair on a prominent public roadway. The city posted notices seeking proposals for an artistic bridge design and reconstruction. Davidson Masonry, LLC-owned and managed by Carl Davidson and his wife, Marilyn Rowe-decided to submit a bid for a decorative concrete project that incorporated artistic metalwork. They contacted Shana Lafayette, a local sculptor who specialized in large-scale metal creations, to help them design the bridge. The city selected their bridge design and awarded them the contract for a commission of $184,000. Davidson Masonry and Lafayette then entered into an agreement to work together on the bridge project. Davidson Masonry agreed to install and pay for concrete and structural work, and Lafayette agreed to install the metalwork at her expense. They agreed that overall profits would be split, with 25 percent going to Lafayette and 75 percent going to Davidson Masonry Lafayette designed numerous metal salmon sculptures that were incorporated into colorful decorative concrete forms designed by Rowe, while Davidson performed the structural engineering. The group worked together successfully until the completion of the project. Using the information presented in the chapter, answer the following questions. 1. Would Davidson Masonry automatically be taxed as a partnership or a corporation? Why or why not? 2. Is Davidson Masonry member managed or manager managed? 3. When Davidson Masonry and Lafayette entered into an agreement to work together, what kind of special business form was created? Explain. 4. Suppose that during construction, Lafayette had entered into an agreement to rent space in a warehouse that was close to the bridge so that she could work on her sculptures near the location where they would be installed. She entered into the contract without the knowledge or consent of Davidson Masonry. In this situation, would a court be likely to hold that Davidson Masonry was bound by the contract that Lafayette entered? Why or why not?
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Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text. What advantages do limited liability companies offer to businesspersons that are not offered by sole proprietorships or partnerships?
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Limited Liability Companies. A "Certificate of Formation" (CF.) for Grupo Dos Chiles, LLC, was filed with the Delaware secretary of state in February 2000, naming Jamie Rivera as the "initial member." The next month, Jamie's mother, Yolanda Martinez, and Alfred Shriver, who had a personal relationship with Martinez at the time, signed an "LLC Agreement" for Grupo, naming themselves "managing partners." Grupo's business was the operation of Dancing Peppers Cantina, a restaurant in Alexandria, Virginia. Identifying themselves as Grupo's owners, Shriver and Martinez borrowed funds from Advanceme, Inc., a restaurant lender. In June 2003, Grupo lost its LI,C status in Delaware for failing to pay state taxes, and by the end of July, Martinez and Shriver had ended their relationship. Shriver filed a suit in a Virginia state court against Martinez to wind up Grupo's affairs. Meanwhile, without consulting Shriver, Martinez paid Grupo's hack taxes. Shriver filed a suit in a Delaware state court against Martinez, asking the court to dissolve the firm. What effect did the LLC Agreement have on the CF? Did Martinez's unilateral act reestablish Grupo's LLC status? Should the Delaware court grant Shriver's request? Why or why not? [In re Grupo Dos Chiles, LLC, A.2d (Del.Ch. 2006)
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Limited Liability Companies and Special Business Forms The city of Papagos, Arizona, had a deteriorating bridge in need of repair on a prominent public roadway. The city posted notices seeking proposals for an artistic bridge design and reconstruction. Davidson Masonry, LLC-owned and managed by Carl Davidson and his wife, Marilyn Rowe-decided to submit a bid for a decorative concrete project that incorporated artistic metalwork. They contacted Shana Lafayette, a local sculptor who specialized in large-scale metal designs, to help them design the bridge. The city selected their bridge design and awarded them the contract for a commission of $184,000. Davidson Masonry and Lafayette then entered into an agreement to work together on the bridge project. Davidson Masonry agreed to install and pay for concrete and structural work, and Lafayette agreed to install the metalwork at her expense. They agreed that overall profits would be split, with 25 percent going to Lafayette and 75 percent going to Davidson Masonry. Lafayette designed numerous metal salmon sculptures that were incorporated into colorful decorative concrete forms designed by Rowe, while Davidson performed the structural engineering. The group worked together successfully until the completion of the project. Using the information presented in the chapter, answer the following questions. When Davidson Masonry and Lafayette entered into an agreement to work together, what kind of special business form was created? Explain.
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Limited Liability Companies. John, Lesa, and Trevor form a limited liability company. John contributes 60 percent of the capital, and Lesa and Trevor each contribute 20 percent. Nothing is decided about how profits will be divided. John assumes that he will be entitled to 60 percent of the profits, in accordance with his contribution. Lesa and Trevor, however, assume that the profits will be divided equally. A dispute over the profits arises, and ultimately a court has to decide the issue. What law will the court apply? In most states, what will result? How could this dispute have been avoided in the first place? Discuss fully.
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Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text. What is a joint venture? How is it similar to a partnership? How is it different?
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Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text. How are limited liability companies formed, and who decides how they will be managed and operated?
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What arc the essential characteristics of joint stock companies, syndicates, business trusts, and cooperatives, respectively?
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Question with Sample Answer-Special Business Forms. Faraway Corp. is considering entering into two contracts, one with a joint stock company that distributes home products east of the Mississippi River and the other with a business trust formed by a number of sole proprietors who are sellers of home products on the West Coast. Both contracts involve large capital outlays for Faraway, which will supply each business with soft-drink dispensers. In both business organizations, at least two shareholders or beneficiaries are personally wealthy, but each organization has limited financial resources. The owner-managers of Faraway are not familiar with either form of business organization. Because each form resembles a corporation, they are concerned about whether they will be able to collect payments from the wealthy mem­bers of the business organizations in the event that either orga­nization breaches the contract by failing to make the payments. Discuss fully Faraway's concern.
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Answers to the even-numbered questions in this For Review section can be found in Appendix F at the end of this text. What are the essential characteristics of joint stock companies, syndicates, business trusts, and cooperatives, respectively?
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