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Business Associations Flashcards

1
Q

WHAT IS AN AGENCY:

A

“A relationship whereby a person (the agent) acts on behalf of and subject to the will of another person (the principal).”

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2
Q

BUSINESS ASSOCIATION FIDUCIARY DUTIES:

A 
C = Care 
O = Obedience 
I = Information 
L = Loyalty
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3
Q

Contract Liability of Principal:

A

The Principal is liable in contract whenever his agent enters into a contract on his behalf with AUTHORITY. The agent is himself liable only when the other party does not know the identity of the principal.

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4
Q

3 Types of Authority

A

Actual, Implicit, Apparent

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5
Q

APPARANT AUTHORITY

A

A communication from a principal to a third party that his agent has authority to enter into a contract for him. Such as a manager of a store.

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6
Q

WHAT IS A GENERAL PARTNERSHIP?:

A

The unincorporated association of two or more persons acting as co-owners in a business for profit.

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7
Q

HOW IS A GENERAL PARTNERSHIP FORMED?

A

Any manifestation of an intent of the parties to enter into a partnership type relationship, as determined by the facts… No writing or other formalities required. Sharing profits of a business creates a rebuttable presumption.

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8
Q

How to Add New Partners to a General Partnership

A

Unanimous Consent.

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9
Q

Partnership by Estoppel:

A

If an entity holds itself out to be a partnership, to the detriment of a third party who relied on the entity being a partnership, the entity is estoppel from denying it is a partnership.

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10
Q

HOW IS A GENERAL PARTNERSHIP MANAGED?:

A

Unless otherwise agreed in partnership agreement, each partner gets equal say in management, ordinary decisions are by majority, significant decisions are unanimous.

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11
Q

Access to Info (General Partnership):

A

Unless otherwise agreed, all partners have right to inspect all business records.

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12
Q

Agency (General Partnership):

A

All partners are agents of the partnership. Actual and Implied authority can be agreed upon in the partnership agreement, but apparent authority can not be waived.

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13
Q

Duty of Care

A

(General Partnership): Partners have a fiduciary duty to other partners to refrain from GROSS negligence, reckless conduct, intentional misconduct, or knowing violations of the law. Regular negligence is ok.

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14
Q

Property (General Partnership):

A

Property contributed to the partnership is owned by the partnership and no individual partner has any right to receive such property upon leaving the partnership. belongs to the Account for and respect the property of the partnership. Don’t treat partnership property as your own.

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15
Q

Contract Liability (General Partnership):

A

Partners are joint and several liable for all contracts entered into by partners or other agents in the ordinary course of business or with authority.

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16
Q

Tort Liability (General Partnership):

A

Partners are joint and several liable for torts committed by partners or other agents in the ordinary course of business or with authority. Also liable for any misapplication of funds by partners.

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17
Q

The Exhaustion Rule (Partnership):

A

The Exhaustion Rule requires that Creditors exhaust/collect the assets of the partnership before seeking the personal assets of the partners.

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18
Q

Limited Liability Partnership:

A

A business election available to general and limited partnerships, that allows partners to opt out of joint and several liability by filing a document with SDAT.

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19
Q

Property and Profit Distribution (General Partnership):

A

Unless otherwise agreed, the profits and property are distributed equally. By default, no partners have a right to specific partnership property, even if they contributed it.

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20
Q

HOW DOES A PARTNER GET OUT OF A PARTNERSHIP?:

A

A partner has absolute ability to voluntarily dissociate at any time but cannot sell or transfer ownership without unanimous consent. However, a partner can assign his distribution rights.

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21
Q

HOW IS A PARTNERSHIP DISSOLVED?:

A

Unanimous choice of partners or by Court petition any partner or transferee of partner’s distribution interest. Upon dissolution, assets go to pay creditors then are distributed to partners pro-rata, based on capital contributions.

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22
Q

WHAT IS A LIMITED PARTNERSHIP?:

A

A special type of partnership created by law in which at least one partner is a general partner and one or more partners are limited partners.

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23
Q

HOW IS A LIMITED PARTNERSHIP FORMED?:

A

File a Certificate of Limited Partnership with SDAT.

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24
Q

New General Partners (Limited Partnership):

A

New general partners can only be admitted with the unanimous approval of the existing general partners and the majority approval of the limited partners (by profit interest, not quantity)

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25
New Limited Partners
Unless otherwise agreed, new limited partners can be admitted only with the unanimous approval of all partners.
26
HOW IS A LIMITED PARTNERSHIP MANAGED?:
The general partners manage the limited partnership in accord with the partnership agreement. Limited partners may not participate in management, but they may by employees, consult the general partners, and vote on extraordinary matters, if general partners allow.
27
Information Access:
Only partners with 5% or more interest, or a group of partners with such interest, may have access to the tax records of the limited partnership and the name and address of the partners. All partners have access to other types of partnership records.
28
Derivative suits
A limited partner cannot file a lawsuit on behalf of the partnership. But, Limited partners may bring a derivative action to enforce a right of the limited partners, but only after first making a demand on the general partners.
29
WHAT FIDUCIARY DUTIES EXIST IN A LIMITED PARTNERSHIP?:
General Partners owe same duties as in a general partnership. However, limited partners owe no fiuciary duties to the partnership.
30
Contract Liability (Limited Partnership):
General Partners are joint and several liable for contracts entered into by general partners or other agents in the ordinary course of business or with authority. Partnership agreement can eliminate actual and implied, but no apparent authority. Limited partners do not have apparent authority
31
Tort Liability (Limited Partnership):
General Partners are joint and several liable for torts committed by general partners or other agents in the ordinary course of business or with authority and for any misapplication of funds by general partners
32
General Partner Liability (Limited Partnership):
GENERAL Partners are jointly and severally liable for all contract and tort obligations of the partnership. The exhaustion rule applies and a limited partnership can also elect to be a "limited liability partnership."
33
Limited Partners Liability (Limited Partnership):
Limited partners are not personally liable for the obligations of the limited partnership at all, contract or tort.
34
WHAT ARE THE ECONOMIC IMPLICATIONS OF A LIMITED PARTNERSHIP?:
Profits are allocated based on the relative capital contributions of each partner, by default, unless otherwise agreed. (Contrast this with regular partnership, which defaults to equal profit sharing)
35
HOW DOES A PERSON GET OUT OF A LIMITED PARTNERSHIP?
Same as general partnership, but limited partners have no default right to voluntarily dissociate from the partnership.
36
HOW IS A LIMITED PARTNERSHIP DISSOLVED?
As agreed in partnership agreement, by unanimous agreement of all partners, court order.
37
WHAT IS A CORPORATION?:
A corporation is an artificial person created by a concession of the government.
38
HOW IS A CORPORATION FORMED?:
Articles of Incorporation are APPROVED by the state. Articles must name initial directors and how many directors the corporation will have.
39
Organization Meeting (Corp):
Statute requires that a corporation must have an organization almeeting of the initial directors after approval of Articles in order to create ByLaws and appoint officers. Directors may issue stock at this meeting also, but not required.
40
ByLaws Requirements:
A corporation must draft bylaws, which are filed with SDAT. There is no content requirement.
41
Officer Requirements (Corp):
A corp must appoint Officers MUST appoint officer at the organization meeting. President, Secretary and Treasurer are only officer required by law. The same person can where multiple hats.
42
Preemptive Rights:
A Preemptive Right is the right of an existing stockholders to buy additionally issued stock in a quantity necessary maintain their current % of ownership interest in the corp. Existing stockholders of a corp do not have such a right.
43
HOW IS A CORPORATION MANAGED?
A corporation is managed by the board of directors and their officers, not the stockholders. Officers work for the board of directors.
44
Annual Stockholder Meeting (Corp):
Once stock is issued, corporation stockholders must meet annually to vote for directors. Each share of stock gets one vote and directors are elected by a plurality, unless charter calls for cumulative voting.
45
Cumulative Voting:
Allows stockholders to aggregate their votes for one director, rather than splitting them among several directors, so as to have some type of power to get a least one director on the board.
46
Agency (Corporation):
Officers are the primary agents of a corporation. Directors are only agents when acting as a group… they have no individual authority because they operate by vote. Stockholders are NOT agents of the corporation.
47
What can Shareholders Do:
Vote for directors, Vote on Fundamental Corporate Changes by 2/3, Bring Derivative Action Suits after demand upon directors.
48
Shareholder Access to Records:
All stockholders have a right to inspect the corporation’s ByLaws, Stockholders' Meeting Minutes, Annual Statements, Voting Trust Agreements, Statement of stock in last year. Those hold 5% or more of stock (or a group) may inspect finances.
49
Duty of Care (Corp):
Officers and Directors must act in good faith and make subjective and objective reasonable decision in the best interest of the corporation.
50
The Business Judgment Rule:
When someone sues corporate director for breach of duty of care, the court MUST presume that corporate action was done consistent with the duty of care. The burden is on the plaintiff to rebut the presumption.
51
Interested Director Transactions (Corp):
Corporation cannot participate in a business transaction with a director sitting on its own board unless it is completely disclosed AND approved by either 1) the majority of non-interested director, 2) the majority of non-interested stockholders, OR 3) the transaction is fair to the corporation.
52
The Corporate Opportunity Doctrine:
Officers and directors cannot pursue a business opportunity for his own benefit, in which corp. has a “reasonable expectancy” and reasonable ability to take advantage of.
53
Stockholder Fuduciary Duty
None
54
Contract Liability (Corp):
Corporation as an entity is liable for contracts entered into by its agents in the ordinary course of business or with authority. Directors and Officers are not personally liable for contract obligations.
55
Tort Liability:
Corporation is liable for torts committed by its agents in the ordinary course of business or with authority. Directors and Officers are not personally liable for tort obligations.
56
Corporate Liability
Directors and Officers are NOT personally liable for corporate liabilities. Only the corporation itself is liable.
57
Stockholder Liability:
Stockholders are NOT personally liable for corporate contract or tort obligations. Unless, you can pierce the corporate veil.
58
Pierce the Corporate Veil
If you can pierce the corporate veil, you can make shareholders, but not officers or directors, personally liable for contract or torts obligations of the corporation. “In order to pierce the corporate veil you must show a need to prevent fraud or achieve a paramount equity.”
59
Promoter Liability:
A promoter is one who causes a corporation to be formed, organized, and financed. They may sometimes enter into “pre-incorporation” contracts that are sign as “ acting on behalf of…” Promoters are personally liable for such contracts unless the corporation eventually ratifies them and a novation to the contract is executed.
60
Defenses of “Shareholder” of Defective Incorporation:
A Defective Incorporation is one that failed to legally come into existence, typically with corporation paperwork or technical problem. Shareholders may be protected from personal liabilities of the defective corporation via "Corporation by Estoppel" or "De-Facto Corporation" defenses.
61
Corporation by Estoppel:
If a plaintiff contracts with a corporation that turns out to be defective at time of contract, it is estopped from denying that it contracted with a corporation, thus relieving shareholder of personal liability. Only allowed where Shareholders had good faith belief the business was a corporation at time of contract.
62
De-Facto Corporation:
If Shareholders had good faith belief the business was a corporation because it operated like one, it can be considered a De-Facto-Corp, relieving shareholders of personal liability for corporate action.
63
WHAT ARE THE ECONOMIC IMPLICATIONS OF A CORPORATION?:
Corporation distributes profits by paying dividends to its shareholders. Dividends are distributed at the discretion of the directors. A dividend can never be declared if 1) The Corporation will have assets valued at less than its liabilities; or 2) The Corporation will not be able to pay its debts as they become due.
64
HOW DOES A PERSON GET OUT OF A CORPORATION?
Sell your stock. Stock is freely transferable unless subject to a stockholder agreement to the contrary.
65
Forced Redemption (Corp):
A Corporation can be compelled to buy back its stock from stockholder only if a Minority stockholder of a non-publicly traded company files an Objection to a merger or other fundamental corporate change and then Requests for redemption of stock. The value of the stock is either by agreement of both parties or by appraisal.
66
Voluntary Dissolution (Corp):
Approval of the directors and a 2/3 vote of stockholders. If approved, directors file Articles of Dissolution.
67
Involuntary Dissolution (Corp):
If election of directors is deadlock, the corporation can be involuntarily dissolved upon petition of someone representing 25% of stockholders. However, any individual stockholder can petition for dissolution if there is a Stockholder deadlock for two consecutive years OR the acts of directors are illegal, oppressive, or fraudulent. Any stockholder or creditor can petition for dissolution if corporation cannot pay its debts.
68
Forfeiture of charter:
A Corporate Execution by the state. Occurs when corporation, close corporation, or LLC fails to file annual report, pay taxes, or pay workers comp premiums. A forfeited charter can be Reinstated if the defect is cured within 60 days of forfeiture or "revived" by curing the defect for all intervening years and filing Articles of Revival.
69
WHAT IS A CLOSE CORPORATION?
A corp with NO board of directors, that is directly managed by stockholders directly manage the corporation. General corporate laws apply, with limited exceptions.
70
HOW IS A CLOSE CORPORATION FORMED?:
In order to form a close corporation you must specifically say in your Articles of Incorporation that you are a “close corporation.” Close Corp formed moment the Articles are approved.
71
New Stockholders (Closed Corp):
After the initial issuance of stock by the close corporation, no additional stock may be issued without the unanimous approval of the stockholders.
72
Annual Meeting (Close Corp):
Not required, unless a stockholder requests one.
73
Closed Corp Management:
Managed by stockholders in accordance with unanimous stockholders’ agreement. By default, Fundamental corporate changes must be approved unanimously by the stockholders. All stockholders have full access to info.
74
Officers (Close Corp):
A close corporation has the same required officers as a regular corporation (treasurer, secretary, president).
75
WHAT FIDUCIARY DUTIES EXIST IN A CLOSE CORPORATION?:
The stockholders of a close corporation that has elected to have no board of directors have the same fiduciary duties as the directors of a regular corporation, meaning they are personally liable for corporate contract or tort obligations
76
HOW ARE LIABILITY ISSUES RESOLVED IN A CLOSE CORPORATION?
Liability issues for a close corporation are identical to those of a regular corporation. Thus, Shareholder’s personal assets are not up for grabs, unless pierce the corporate view.
77
WHAT ARE THE ECONOMIC IMPLICATIONS OF A CLOSE CORPORATION?:
Dividends distributed at will of shareholders.
78
HOW DOES A PERSON GET OUT OF A CLOSE CORPORATION?
A shareholder may not transfer his stock without the unanimous approval of other shareholders. However, a stockholder may petition for dissolution if approval not gained.
79
Involuntarily Dissolution (Close Corp):
Allowed for 1) Same reasons as corp, 2) Upon Petition for internal dissension, or 3) upon the petition of a stockholder whose transfer of stock was not approved. However, any stockholder may avoid dissolution by paying the petitioning stockholder the fair value of his or her stock.
80
WHAT IS A LIMITED LIABILITY COMPANY?
Hybrid of a partnership and corporation. Owners are called “members” and the members have no personal liability, but operate internally as a partnership. Instead of ByLaws, LLC must create an operating agreement.
81
HOW IS A LIMITED LIABILITY COMPANY FORMED?
Articles of Organization are approved.
82
New Members (LLC):
New members may only be admitted with unanimous consent
83
HOW IS A LIMITED LIABILITY COMPANY MANAGED?:
LLC is managed per the terms of its “Operating Agreement.” By default, each member has a vote based on his proportion to the member’s relative capital contribution; Majority (of capital ownership) wins ordinary decision, 2/3 for extraordinary decisions.
84
LLC Access to Info:
All members have a right to inspect all books and records of the partnership.
85
LLC Agency:
All members are agents for the LLC unless there is a statement to the contrary contained in the articles of organization. Unlike a partnership, LLC member do not automatically have apparent authority, but operating agreement can vest it in someone.
86
WHAT FIDUCIARY DUTIES EXIST IN A LIMITED LIABILITY COMPANY?:
General COIL and those specified in operating agreement.
87
Contract Liability:
LLC is liable for contracts entered into by members or other agents in the ordinary course of business or with authority. No personal liability.
88
Tort Liability:
LLC is liable for torts committed by members or other agents in the ordinary course of business or with authority. No Personal Liability.
89
Member Liability (LLC):
Members are not personally liable for the obligations of the LLC (same as stockholders in a corporation).
90
WHAT ARE THE ECONOMIC IMPLICATIONS OF AN LLC?
There are no distribution requirements set by law. By default, distributions are pro-rata in accordance with the relative capital contributions. Members have no right to distribution of specific LLC property, much like a partnership.
91
Transfer Interest (LLC):
Like a partnership, members can freely assign their rights to profits and distributions… but cannot bring in new members or sell interest without full consent.
92
Withdrawal (LLC):
A member may "withdraw" from an LLC by giving at least six months notice to the other members… but the LLC is not required to pay the member off… instead can just continue to give the withdrawn member his share of profits. LLC member may have court appraise their interest.
93
HOW IS AN LLC DISSOLVED?
Articles of Dissolution must be filed unless forfeiture of charter. Can be dissolve on unanimous vote of all members, petition of any member, or forfeiture of charter. Upon dissolution, the assets of the LLC remaining after creditors have been paid are distributed to the members pro-rata based on the relative fair market values of their respective capital contributions
94
Merger/Consolidation:
Must file Articles of Merger. In a merger one company swallows the other… in a consolidation both companies go away and a new company is formed.
95
Acquisition of an Interest:
A entity/person may acquire a business through buying up all its ownership interest. In such a case, NO Articles of Merger are filed.
96
Acquisition of Business Assets:
An entity/person may acquire a business by buying all the assets of another business. NO Articles of Merger are filed. Liabilities are NOT transferred to owner of the assets…unless there is….Fraud....Expressly Agreement... the asset buyout is considered a de facto merger… OR the new company has exactly the same owners and same management as the old company.

Business Associations (1 decks)

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