CLA/CP Exam Business Organization Types 4 — Questions and Answers
Question 1: What is the term for a shareholder's agreement provision that restricts a shareholder's ability to transfer shares to outside parties?
- Right of first refusal (Correct answer)
- Drag-along right
- Anti-dilution provision
- Shotgun clause
Correct answer: Right of first refusal
A right of first refusal requires a selling shareholder to offer existing shareholders the opportunity to purchase the shares before selling to an outside party.
Question 2: A benefit corporation (B corp) differs from a traditional corporation primarily because:
- It is exempt from all state and federal taxes
- Its directors must consider social and environmental impact alongside profit (Correct answer)
- It cannot issue stock or pay dividends
- Its shareholders have unlimited personal liability
Correct answer: Its directors must consider social and environmental impact alongside profit
A benefit corporation is a statutory entity type that requires directors to consider the interests of employees, community, and environment, not just shareholder profit.
Question 3: Under the Uniform Partnership Act, when no partnership agreement addresses profit sharing, profits are divided:
- In proportion to each partner's capital contribution
- Equally among all partners (Correct answer)
- Based on each partner's hours worked
- At the discretion of the managing partner
Correct answer: Equally among all partners
The UPA default rule is that partners share profits equally regardless of their capital contributions, unless the partnership agreement provides otherwise.
Question 4: Which of the following best describes a 'series LLC'?
- An LLC that converts to a corporation after a set number of years
- A single LLC statute that allows the creation of separate cells with distinct assets and liabilities (Correct answer)
- An LLC owned by another LLC
- An LLC with more than 100 members
Correct answer: A single LLC statute that allows the creation of separate cells with distinct assets and liabilities
A series LLC, authorized in some states, allows one LLC to create internal cells (series) each with its own members, assets, and limited liability shield.
Question 5: A 'close corporation' is typically characterized by:
- Shares traded on a public stock exchange
- A small number of shareholders, no public market for shares, and active owner-management (Correct answer)
- Unlimited membership open to the general public
- Mandatory annual shareholder meetings with formal proxy voting
Correct answer: A small number of shareholders, no public market for shares, and active owner-management
A close (or closely held) corporation has few shareholders, restrictions on share transferability, and owners who typically also manage the business.
Question 6: When a general partner in a limited partnership loses their general partner status, what must happen to maintain the LP's existence?
- The LP automatically dissolves
- A new general partner must be admitted or limited partners must consent to continue (Correct answer)
- All limited partners automatically become general partners
- The LP converts to an LLC by operation of law
Correct answer: A new general partner must be admitted or limited partners must consent to continue
Most state LP statutes allow a limited partnership to continue if a new general partner is admitted or if the remaining partners consent to continuation within a specified period.
Question 7: A 'statutory close corporation' may be permitted to operate WITHOUT which typical corporate formality?
- State registration
- Paying taxes
- A board of directors and formal director meetings (Correct answer)
- Maintaining a registered agent
Correct answer: A board of directors and formal director meetings
Some states allow statutory close corporations to operate without a board of directors, permitting shareholders to manage the business directly without typical director formalities.
CLA/CP Exam Business Organization Types 4
What is the term for a shareholder's agreement provision that restricts a shareholder's ability to transfer shares to outside parties?