CLA/CP Exam Business Organization Types 5 — Questions and Answers
Question 1: What document is used to convert a corporation into an LLC in most states?
- Articles of conversion or a certificate of conversion (Correct answer)
- Articles of dissolution followed by new LLC articles
- A merger agreement between the corporation and a new LLC
- An IRS Form 8832 election only
Correct answer: Articles of conversion or a certificate of conversion
Most states provide a statutory conversion procedure requiring filing articles of conversion (or certificate of conversion) with the Secretary of State to change entity type.
Question 2: A nonprofit corporation that qualifies under IRC § 501(c)(3) must ensure that its assets, upon dissolution, are distributed to:
- Founding members equally
- Another qualifying tax-exempt organization or government entity (Correct answer)
- Shareholders of record at the time of dissolution
- The state attorney general for general fund use
Correct answer: Another qualifying tax-exempt organization or government entity
IRC § 501(c)(3) organizations must include a dissolution clause ensuring remaining assets pass to another 501(c)(3) entity or government, preventing private inurement.
Question 3: Which entity type is typically used for real estate investment and is often structured to avoid both securities registration and double taxation?
- C corporation
- Real estate investment trust (REIT)
- General partnership
- Limited liability company (LLC) (Correct answer)
Correct answer: Limited liability company (LLC)
LLCs are widely used for real estate investment because they provide limited liability and pass-through taxation without the complex regulatory requirements of a REIT.
Question 4: Under partnership law, what is a 'partner by estoppel'?
- A limited partner who takes on management control
- A person who is held liable as a partner because they represented themselves as one (Correct answer)
- A silent partner with no management rights
- A partner who assigns their interest to a third party
Correct answer: A person who is held liable as a partner because they represented themselves as one
A partner by estoppel is someone who, though not actually a partner, is held liable as one because they represented themselves as a partner and a third party relied on that representation.
Question 5: Which of the following is a key advantage of a limited liability limited partnership (LLLP) over a traditional limited partnership?
- It allows unlimited shareholders
- General partners receive limited liability protection similar to limited partners (Correct answer)
- It is taxed as a corporation by default
- It requires no state registration
Correct answer: General partners receive limited liability protection similar to limited partners
In an LLLP, general partners enjoy liability protection for the acts of other partners, unlike traditional LPs where general partners bear full personal liability.
Question 6: A paralegal preparing a certificate of authority for a foreign corporation should file it with:
- The IRS
- The Secretary of State (or equivalent) of the state where the corporation wants to do business (Correct answer)
- The state where the corporation was originally incorporated
- The Federal Trade Commission
Correct answer: The Secretary of State (or equivalent) of the state where the corporation wants to do business
A foreign corporation must qualify to do business in a new state by filing a certificate of authority (or application for authority) with that state's Secretary of State.
Question 7: Which of the following circumstances would most likely trigger the dissolution of a general partnership under the Uniform Partnership Act?
- One partner assigns their economic interest to a third party
- A partner files for personal bankruptcy
- All partners consent in writing to dissolve (Correct answer)
- A partner is temporarily incapacitated
Correct answer: All partners consent in writing to dissolve
Under the UPA, a partnership is dissolved by unanimous partner consent, among other triggering events, such as expiration of a definite term or accomplishment of the stated purpose.
CLA/CP Exam Business Organization Types 5
What document is used to convert a corporation into an LLC in most states?