Business Flashcards
sole proprietorship
- number of owners
- income
- advantages
- disadvantages
- one owner
- pass through taxation
- unlimited personal liability; - last of continuation
- easily formed and owner has sole control
general partnership
- number of owners
- income
- advantages
- disadvantages
- 2 or more people (no limit)
- pass through taxation
- partners share profits and losses according to their agreement (if no agreement; it is shared equally regardless of capital contribution)
- unlimited personal liability
- lack of continuity
- difficulty in transferring partnership interest
- ease of formation
limited partnership
- number of owners
- income
- advantages
- disadvantages
- created by statutes; must have at least 1 general and 1 limited partner
- pass through taxation
- partners share according to their agreement (if no agreement, profit is allocated on basis of contributions)
- lack of control for limited partners
- unlimited liability for general partners
- expensive to form
- continuity of existence
- easy transferablility of partnership interest for limited partners
limited liability partnership (LLP)
- number of owners
- income
- advantages
- disadvantages
- form by complaince with statutes (common in groups of professionals)
- pass through taxation
- allows all partners to take active role in management
- Partners protected against unlimited personal liability for negligent acts of other partners (there are exceptions)
limited liability company (LLC)
- number of owners
- income
- advantages
- disadvantages
- no limit (one person LLC)
- pass through taxation
- Income distributed equally among the members
- Gives its members FULL protection from personal liability
- Allow members to manage a company themselves or elect managers
- Formation complex & expensive
- Some state limit to a term (30 yrs)
- Limit on transfer of interest from one member to another
Business corporation
- number of owners
- income
- advantages
- disadvantages
- under authority of state legislature
- an entity in it of itself
- management centralized in a board of directors
- double taxation
- limited liability
- entitled to corporate deductions
- continuity of existence
- must follow formalities of organizations & operation
S corporation (share holders?) (how are they taxed?)
- limited to 100 share holders
- income passes to shareholders, then pay taxes
- minimizes double taxation
- taxed as a partnership for federal tax purposes
C corporation (shareholders?)
A regular corporation; the corporation files its own tax return (double taxation);
Any corporation with more than 100 shareholders Is automatically a C Corp. for tax reporting purposes
close corporation
- no limit on shareholders; small corps. such as farms
- shareholders are active in managing
public corporation
created by a government entity to administer government purpose
ex. federal government created Federal Home Mortgage association to administer special federal programs
private corporation
created by private persons for private purposes; generally are either nonprofit or for profit
de jure corporation
one which has complied with ALL statutory requirements governing its organization and existence
de facto corporation
not a corporation at all, having failed to comply with satisfactory requirements for organization existence
It is a legal fiction created to identify an entity that has made a good faith effort to comply with statutory requirements and has conducted itself as a corporation. If these elements are present, 3rd parties may NOT assert lack of corporation status as a basis to impose personal liability
security
A share, participation, or other interest in property or an enterprise of the issuer
- include equity and debt security
Equity security
share stock; ownership interest. Entitled to receive DISTRIBUTIONS
debt security
bonds; bond holder is an outside creditor ENTITLED to timely repayment of debt
common stock
- ordinary stock; no special privileges
- voting rights
- (not guaranteed) Entitled to payment of dividends only after shares of dividend preference are paid
- (not guaranteed) Entitled to distribution of assets upon liquidation only after creditors and preferred shareholders received distributions
Preferred stock
- Stock in corporation that grants some preference over common stock (given priority over common stock)
- Generally nonvoting shares
- Entitled to payments of dividends (often fixed amount)
- Entitled to distribution of assets upon liquidation after creditors
redeemable shares
classes of stock subject to re-acquisition (redemption) by the corporation at a fixed price
Convertible shares
where shares of a given class can be converted into shares of another class on some predetermined ratio (the MBCA has provisions - ex. Preferred stock may be converted to common stock, but common stock may not be converted to preferred stock)
The shares outstanding
The total number of shares owned by investors, including the company’s officers
Float
The number of shares available only to the public to buy and sell
Treasury stock
AKA treasury shares, are the portion of shares that a company keeps in its own treasury. When a business buys back its own shares, these shares become “treasury stock” and are decommissioned. They don’t have much value and they do NOT have voting rights and do NOT pay and distributions. This purpose (limiting outside ownership) is mainly to help raise the share price, providing investors with an immediate reward.
Stock option
entitle the option holders to purchase a stated number of shares of a given class from the corporation at a specific price and usually within a limited period of time
Stock warrants
stock options generally are evidenced by certificates called stock warrants, which are LONG term
Stock rights
short term share options; they are often issued in connection with the issuance of debt securities or preferred stock
par value of a share
the lowest price for which a share it can be sold
Preemptive right
right to purchase a proportional share of newly issued shares
shares must be authorized by…
the article of incorporation
voting rights and their definitions (5)
- straight - one share equals one vote
- cumulative - combining all votes into one (pooling votes)
- disproportionate - ties in with class voting (different shares have different voting rights)
- nonvoting stock
functions of a Director (7)
- Authorize distribution
- Amend bylaws
- Appoint officers
- Financial matters: issue stocks; obtain loans; issue bonds; reacquire stocks
- Products and services to be offered and its prices
- Determine wages and benefits
- Initiate mergers or purchase of corp. assets
what can lead to INVOLUNTARY DISSOLUTION of a corporation (4)
a. Fail to pay tax or file reports
b. Fail to register an agent for some period of time
c. Operating after the period of duration
d. Fail to notify that agent has changed
if dissolution of a corporation is voluntary, what must be filed and with who..
Articles of Dissolution will need to be filed with the states
if dissolution of a corporation is INVOLUNTARY, a court will enter… And can the corp. reinstate?
a Decree of Dissolution; a corporation dissolved for administrative or technical reasons can generally apply to be reinstated
Chapter S election
who and why?
A small corporation may elect not to be taxed at the corporation rate; instead its income (whether distributed as dividends or retained by the corporation) is passed through in proportion to the shareholders’ ownership interest and is taxed at each shareholder’s respective individual income tax rate. * Chapter S status may be desirable during the first few years of operation when the corporation is most likely to incur losses.
qualifications of a Chapter S election
Qualifications:
i. No more than 100 shareholders
ii. Shareholders must be natural persons (no corporations or partnerships)
iii. Can only be one class of stock
iv. No nonresidential aliens as shareholders
Section 1244 Stock
who | why | how
section 1244 of the Internal Revenue Code provides a separate method for shareholders of small corporations to receive favorable tax treatment if they sell Section 1244 stock. If the stock becomes worthless, rather than take a capital loss (which ordinarily would occur), the shareholder can treat the loss as ordinary loss, meaning she can credit it against ordinary income to reduce her personal income tax liability.
qualification of Section 1244 Stock
The amount of money to be raised by selling Section 1244 stock plus the corporation’s equity capital cannot exceed one million dollars total
fictitious name law | Arkansas Code
4-27-404
fringe benefits
provided to employees such as health insurance, life insurance, retirement plans, stock options
ultra vires acts
when a company or legal person engage in activities beyond their legal capacity
Sherman anti trust act
1890 passed by congress to regulate competition among enterprises
business judgment rule
helps guard a corporation’s board of directors from frivolous allegations about the way it conducts business
watered stock
shares of stock which have been issued at a price that greatly exceeds its true value; can result in problems of low liquidity, inadequate return on investiture, and low market value for investors
debenture
an unsecured loan certificate issued by a company, backed by GENERAL CREDIT rather than by specific asset
** differs from a bond, which is a loan that is secured by physical asset
uniformed partnership act UPA
includes revision that are called RUPA, is a uniform act proposed by the National Conference of Commissioners on Uniform State Laws NCCUSL for the governance of business partnerships by US states
A partnership is generally treated as an ___ for the purpose of taxation and as a ___ for purpose of litigation.
a partnership is treated as an AGGREGATE for the purpose of TAXATION and as a SEPARATE ENTITY for the purpose of litigation
domestic corporation
a corporation charted in the forum state (where the corp. is formed)
foreign corporation
an existing corp. that wants to conduct business in a state where it was not formed must qualify to do business as a foreign corp. in that state
requirements of domesticating a foreign corporation
a foreign corp. has the option of domesticating in the state (rather than operating as a foreign corp.) - the requirements include not only filling appropriate forms for domestication, but dissolving or ceasing existence in the state where the corp. was originally formed
benefits of incorporating (forming a corporation)
- personal asset protection
- save taxes
- improve credibility as business
- name protection
- ease of ownership & transfer of ownership
- perpetual existence
surety
the guarantee of the debts of one party by another
*** a limited partner can be a surety
registered agent
a responsible 3rd party who is registered in the same state in which a business entity was established and who is designed to receive service of process notices, correspondence from the secretary of state, and other official government notifications
Directors are ___ but they are not ___
directors are fiduciaries but they are NOT agents
Agents are ___ to the ___ and its ___
agents are FIDUCIARIES to the CORPORATION and its SHAREHOLDERS
officers are ___ of the ___ and their conduct is governed by ___ of ___ ___.
officers are AGENTS of the CORPORATION and their conduct is governed by GENERAL PRINCIPLES of AGENCY LAW
derivative action
a lawsuit brought by a shareholder against the directors, management and/or other shareholder for a failure by management; in effect, the shareholder claims to be acting ON BEHALF OF THE CORPORATION
appraisal remedy/right
the statutory right of a shareholder who dissent or oppose some extraordinary corporate action, such as a merger, to have their shares judicially appraised and to demand that the corporation buy back their shares at the appraised value
LLC operating agreement outlines…
legal document that outlines the OWNERSHIP and MEMBER DUTIES; also sets out the FINANCIAL AND WORKING RELATIONSHIPS among business owners (members) and between members and managers
EIN is filed with the…
IRS
Under Section 7.32 of the Model Business Corporation Act, Shareholder Agreements are authorized to allow Shareholders to dispense with the formality of a …
a Board of directors and holding annual Shareholder meetings; the section of the Act DOES NOT ALLOW for the corporation to dispense with OFFICERS
an LLC can be manager by:
either it’s members or managers as designated by the members
voting trust
confers on a trustee the right to vote or otherwise act for the shareholder (under section 7.3 of the MBCA)
Initial Public Offering
for a private company to go public, the company must first offer their shares through an Initial Public Offering; an IPO is the first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded
Sarbanes-Oxley Act (SOX)
United States Congress passed this to protect shareholders and the general public from accounting errors and fraudulent practices in enterprises, and to improve the accuracy of corporate disclosures
form 990
annually required to be filled for a tax-exempt organization; this form allows the IRS and the general public to evaluate a nonprofit’s operations
form 1120
if a nonprofit organization is NOT tax exempt, then it must fill out this form (specifically, C corporations)
form 8832
the Entity Classification Election form from the IRS. It is filed to elect a tax status other than the default status for your entity. For example, an LLC can elect to be taxed as a C Corporation
form 2553
A corporation or other entity eligible to elect to be treated as a corporation must use Form 2553 to make an election under section 1362(a) to be an S corporation (small business corp.)
the state that has the most favorable tax laws
the State of Delaware boasts that it has favorable tax laws, an advanced and flexible corporate law and a Court of Chancery that is experienced in hearing corporate cases
the default tax classification for an LLC that has 1 member is…
The default tax classification for an LLC with 1 member is a DISREGARDED ENTITY (an LLC can make an election to be taxed as something other than its default classification by filing the form 8832)
Tender offer
an active and widespread solicitation by a company or third party (often called the “bidder” or “offeror”) to purchase a substantial percentage of the company’s securities/stocks
Corporate charter
AKA “charter” or “articles of incorporation” — is a written document filed with a U.S. state by the founders of a corporation detailing the major components of a company such as its objectives, its structure and its planned operations.
The valuation date of a taxable gift is the date…
The date the property is TRANSFERRED to the recipient AND of the beneficiary it takes ownership of the property
Corporate bylaws
a set of rules used by a corporation to organize its internal management by setting out the rules and responsibilities for shareholders, directors, and officers.
An Operating Agreement for a LLC provides provisions related to: (3)
- the dissolution of entity
- elections of directors
- transfer of membership
What are the reasons a court would decide to pierce the corporate veil of a corporation or LLC:
- the corp. was inadequately capitalized
- the corp. failed to follow corporate formalities
- the owners of the business commingled the funds of the business
