09.02 Rights, Duties, Legal Obligations, and Authority of Owners & Management Flashcards
In a sole proprietorship who has management control?
100% control by sole proprietor
In a partnership, who has management control?
General partners all have a vote; material items require vote; day-to-day operations covered under agency law.
In an LP, who has management control?
Only general partner manages with limitations on material actions; limited partners have votes on material actions by GP.
In an LLP, who has management control?
Like a general partnership, all have a say.
In an LLLP, who has management control?
Like a general partnership, all have a say.
In an LLC, who has management control?
The operating agreement should indicate whether the LLC will be member managed or manager managed. Absent such a provision in the operating agreement, an LLC is assumed to be member managed.
Describe a member managed LLC.
Under this model, the members of the LLC have the authority of general partners. Each member has equal rights in management. Ordinary business issues are decided by majority vote. Acts outside the ordinary course of business require unanimous approval. The operating agreement may be amended only with the consent of all members.
Describe a manager managed LLC.
In this model, the LLC behaves more like a limited partnership with a general partner. An LLC can choose in its operating agreement to delegate managerial powers to one or more members or can hire an outsider (professional manager). There is a designated manager given the authority to manage as a general partner. The manager of a manager-managed LLC must be disclosed in the articles of organization. Any change in managers in a manager-managed LLC must be filed with the state so that the authority of the manager is clear to third parties.
What is the Corporate Pyramid?
Shareholders > Directors > Officers
Shareholders are passive investors whose input into corporate management is voting for directors. Directors then set overall corporate policy and select officers. Officers are at the top of the pyramid, making the day-to-day decisions that bind the firm.
What does a director’s broad authority allow them to do?
Borrow money; sell corporate property; hire/fire officers and other employees; declare or refuse to declare dividends; make or refuse to make other distributions to shareholders; set the salaries of employees, offices, and themselves; propose for shareholder approval - sale of major corporate assets, mergers or consolidations with other firms, dissolution, and amendments to the articles of incorporation.
What does piercing the corporate veil mean?
Corporations are distinct legal entities; shareholders are not usually personally liable. The most shareholders can lose when investing in a corporation is the amount they spent to purchase the shares unless the corporate entity is not honored. However, if the corporate structural operation is not honored, courts can pierce the corporate veil and impose personal liability.
