Business Law Flashcards
1
Q
What is the revenue limit for an Emerging Growth Company IPO?
A
$1 Billion
1
Q
When does a security interest attach; or become legally enforceable?
A
Secured interest must be supported by consideration given. Debtor must actually own the rights to the collateral or have possession. Secured interest much be recorded
1
Q
What sales are covered under the Uniform Commercial Code (UCC)?
A
Only sales of goods are covered under the UCC.
1
Q
What does Real Property include?
A
Land, Buildings fixed to the land, and Property under/above the land.
1
Q
What is the purpose of a Consulting Engagement?
A
This engagement helps the client be more efficient with personnel and resources in order to accomplish their goals.
1
Q
What are the key points of the 1933 Securities Act?
A
Governs Initial Public Offerings (not subsequent sales). Covers registration statements and accompanying information filed with SEC. Information must include audited financial statements & a prospectus. Note: Even if a company is exempt from registering under the 1934 Act; they still must adhere to the anti-fraud provisions of the Act
1
Q
Describe the Federal Unemployment Tax Act
A
An employer-paid tax. Must file return and pay even if only one employee works there. Deductible to company - Not deductible by the employee. Allows employers to credit the FUTA liability by the amount of State Unemployment Tax (SUTA) they pay.
1
Q
What is considered the biggest change to financial regulation since the Great Depression of the 1930s?
A
The Dodd-Frank Wall Street Reform Act of 2010
1
Q
What must a contract contain?
A
Offer, Acceptance, Consideration, Proper form (oral or written), Legal subject matter, 2 Competent parties
1
Q
What is a promissory note?
A
A promise to pay a specific amount. There are two parties involved - maker and a payee. It can reference other transactions without harming the instruments negotiability. Example: Bank Certificate of Deposit (CD)
1
Q
What are the key elements of a valid Partnership?
A
Must have two or more partners. Must intend to engage in business for profit. Life of partnership is of limited duration in most cases. Agency/fiduciary relationship is created. Partnership interest is always considered personal property.
1
Q
What are the basic actions that occur in a bankruptcy?
A
Bankruptcy gives creditors protection from their creditors and stops them from either permanently (Chapter 7) or temporarily (Chapter 11 or 13) collecting a debt. The filing halts collection activity; grants automatic stay (with certain exceptions), and stops creditors from suing debtor.
1
Q
What is Agency Law?
A
Agency Law deals with someone’s ability to bind you to a contract with a third party
2
Q
For an Emerging Growth Company IPO, how many years of audited financial statements are required?
A
2 years
2
Q
What are the characteristics of perfection of interest in a secured transaction?
A
Gets higher priority over others claiming rights to collateral after the perfection takes place Attachment must take place BEFORE perfection
2
Q
What elements are needed for a sale covered under the Uniform Commercial Code (UCC)?
A
Offer - You offer to sell something at a price Acceptance - the other party accepts Consideration - Something of value has been exchanged for the goods Note: The UCC only covers sales of goods.
2
Q
What are the characteristics of a deed?
A
Must be in writing Signed Description of Property Delivered Recorded
2
Q
What is required by the Statements on Standards for Consulting Services (SSCS)?
A
Competence; Due Professional Care; Planning; Supervision; Obtain Sufficient Data; Serve Client Interest; Agreement: Written or Oral; Communicate w/ Client; Objectivity NOT REQUIRED: Independence
2
Q
What entities are exempt from filing registration statements under the 1933 Securities Act?
A
Banks; Commercial Paper; Farmers; Co-ops; Charities; Governments Also exempt: Securities sold in ONE state; where investors are residents; 80% of business done in one state; and resales can’t occur within 9 months to interstate parties.
2
Q
What are the major aspects of FICA and Social Security taxes?
A
Paid by Employer AND Employee - Employer withholds from employee’s paycheck and must pay tax matching employee’s withholding If employer under-withholds; they are required to make up the difference Self-employed individuals must pay both the employer and the employee share; which is Self Employment Tax People drawing Social Security may have their benefits reduced if they go back to work and earn an income
2
Q
What is the goal of the Volcker Rule?
A
Banking Institutions maintain healthy capitalization ratios
2
Q
What forms may acceptance of a contract take?
A
Can be written or oral Must be in the form/method required by offeror Must be mirror image - i.e. no changes in terms
2
Q
What is a draft?
A
A commercial paper involving three parties- a drawer; a payee and a drawee A drawer orders a sum to be paid to a payee by the drawee May be payable on demand or in the future
2
Q
Can corporations and other partnerships become partners in a partnership?
A
Yes; corporations and other partnerships can become partners of a partnership
2
For what debts does bankruptcy NOT stop collections?
Student Loans Income taxes from previous 3 years Alimony & Child Support Debts/judgements resulting from drunk driving Pension obligations Debts relating to SOX violations Debts arising from illegal activities Debts not listed in the bankruptcy filing
2
What is required for Agency to exist?
Both parties must consent to the relationship and intend for an Agency relationship to exist Agent owes Principal fiduciary duty Principal doesn't owe Agent fiduciary duty A contract is NOT required and an Agency agreement is not based on Contract Law; Exception - If duties cannot be performed within a year; a signed writing is required
3
How did Reg D, Rule 506 change under the JOBS Act?
General Solicitation and Advertising now allowed
3
How does perfection occur in a secured transaction?
By filing a financing statement By possessing the collateral
3
What are the elements of a Firm Offer?
You offer to sell something at a price and keep that offer open for a set period of time 3 months max Only merchants can make firm offers Must be in writing and signed
3
What are the characteristics of a Mortgage?
Must be in writing Signed Description of property Delivered
3
What is the difference between Express versus Implied duties of an accountant under contract?
Express: Contract specifies what accountant will do Implied: Accountant performs without negligence
3
What are the key points of the 1933 Securities Act; Regulation A?
Issuer can issue $5M of securities per year and be exempt if they file a notice with the SEC Non-issuers (AKA a private individual) can sell $1.5M per year and be exempt
3
When is an employee covered by Workman's Compensation?
Employees injured on the job get protection; even if they messed up and caused the injury themselves Exception: If the employee intentionally harmed themselves; there is no Workman's Compensation
3
How does the Volcker Rule limit banking institutions?
Limits banking institutions from owning more than 3% of a hedge fund's total ownership interest Limits banking institutions from owning interests in hedge funds that exceed 3% of their Tier 1 Capital (Common Stock + Retained Earnings + non-redeemable; non-cumulative Preferred Stock)
3
Who can accept an offer?
Must be accepted by intended party (offeree) Acceptance can only be made by a party who knows an offer has been made and has all of the facts - AKA a meeting of the minds They must intend to accept
3
What is a check?
A check is a type of draft that is payable ON DEMAND; payable to order of drawer or bearer Drawer - person writing the check Payee - person being paid Drawee - the bank
3
Name the Basics of Partnership Formation - Form of agreement and intent
Agreement can be very informal - either ORAL; IMPLIED or WRITTEN Intent is to make a profit
3
How does bankruptcy of a corporation affect the owner's ability to file bankruptcy?
It doesn't; because the corporation is a separate legal entity. Under bankruptcy; corporations are dissolved Under bankruptcy; individuals are discharged
3
What is Actual Authority in an agency?
Actual Authority is what is expressly granted or is implied by the duties you expect the Agent to perform and is necessary to carry them out
4
Under the JOBS Act, what is the capital ceiling under Regulation A?
Reg. A Capital ceiling raised from $5M to $50M
4
When does automatic perfection occur in a secured transaction?
Store sells a consumer good on credit - Store retains security interest A bank finances the purchase of a consumer good - Bank retains security interest
4
Under what situations are sales of goods covered by the Statute of Frauds? What are the exceptions?
If value of goods sold is \> $500; sales contract must be in writing Exceptions: Merchants can enter into oral contracts for \> $500 items. Oral contracts are binding for special or uniquely-made items (i.e. custom cabinets or custom furniture that could not be sold if buyer reneged)
4
What are the characteristics of a lease?
No writing required if \< 1 year Warranty of habitability is implied Death does not terminate a lease Sale of property does not terminate a lease
4
Accountant's liability for negligence - What are the requirements?
DUTY - DAMAGES - RESULT Duty - Accountant must have had duty to perform with due care exercised by an average accountant. Damages - The client experienced actual damages. Result/Causation - The damages were as a result of the negligence.
4
Under the 1933 Securities Act; Regulation D; what are Rules 504; 505 and 506?
Rule 504- Max Amount per year: $1M; Max Investors: Unlimited Rule 505 - Max Amount per year: $5M; Max Investors: 35 Unaccredited or Unlimited Accredited Rule 506 - Max Amount per year: Unlimited; Same as 505; but Unaccredited investors must be sophisticated
4
What age group is protected under Age Discrimination Laws?
They protect people ages 40 and above at companies where at least 20 people are employed
4
What does the Volcker Rule require banking institutions to disclose?
Relationships with hedge funds must be fully disclosed to regulators
4
What happens if an offeree accepts a contract but puts added stipulations?
It is not acceptance; but instead becomes a counter-offer and the original offeror is now the offeree
4
What is the difference between a post-dated check and a negotiable time draft?
A check is payable on demand; even if post-dated. A negotiable time draft is not payable until the date designated for payment.
4
When must a partnership agreement be in writing?
Must be WRITTEN if partnership activity falls within Statute of Frauds: A. Can't be completed in 1 year B. Even if partners reside in different states; not necessary unless within Statute of Frauds C. Neither dollar amount of transactions nor purchasing of real estate has bearing on whether partnership agreement must be in writing
4
What key action will cause a bankruptcy discharge to be denied?
If a debtor fails to keep good records or falsifies documents; a discharge will be denied
4
What is Implied Authority in an agency?
When authority is expressly granted; it is implied that the agent has the authority to carry out the duties Does not include authority to sell or alter a business
5
Under the JOBS Act Title V - Private Company Flexibility and Growth, what is the shareholder limit if there are less than 500 non-accredited shareholders?
2,000
5
What are the priority rules for payment in a secured transaction?
If two parties are perfected; then the first one to file wins If neither party is perfected; then the first one to attach wins
5
When does title and risk of loss transfer on a sale of goods?
If terms are: FOB shipping point: Title transfers at point of shipment (i.e. when loaded on truck) FOB destination: Title and risk transfers once item is delivered
5
What is personal property?
Tangible property; such as cars; equipment; etc. Intangible property such as patents; trademarks; copyrights; etc.
5
What is an Accountant's Liability for Detecting Fraud (Under Normal Circumstances)?
It is not the accountant's job to find fraud and they are not normally liable for not detecting it
5
What are the registration form options under the 1933 Securities Act?
S-1 - Long Form or S-2 and S-3 - Less Detailed and preferred by issuers
5
What are the tenets of the Occupational Safety and Health Act (OSHA)?
Employers should promote a safe workplace and environment for their employees to work in Injury records must be kept Penalties can be both o Civil - $1;000 fine per day o Criminal - Could include imprisonment Employer can require a search warrant for OSHA to investigate their facilities
5
When is an offeror bound by a contract?
When they RECEIVE the acceptance. If the offeree rejects; then accepts - whatever gets to the offeror first is what is binding.
5
What is a trade acceptance?
Seller extends credit to Buyer Buyer agrees to pay Seller - Buyer has primary liability Seller is both Drawer and Payee - Seller has Secondary Liability
5
How are profits shared in a partnership?
Profit sharing is equal by default A. Unless partnership agreement says otherwise B. Unless specified; sharing of losses follows same pattern as sharing of profits
5
What are the basic characteristics of a Chapter 7 bankruptcy (liquidation)?
Discharges all non-exempt debt Can only be filed every 8 years from previous Chapter 7 filing Voluntary or involuntary filing Certain businesses are disallowed from Chapter 7 bankruptcies - Railroads; Banks; Insurance companies; Savings & loans (think: 7th inning RBIs)
5
What is Apparent (Ostensible) Authority in an agency?
Apparent Authority is based on the third party's perspective - they believe that the Agent has the authority to enter into a contract based on: \*Prior dealings with agent \*Agent's title leads the third party to believe they can enter into a contract \*The Principal hires the Agent to carry out duties that normally carry with them the rights to enter into contracts
6
What are the advantages of a creditor holding a lien in a secured transaction?
Creditor holds priority over claims to collateral vs. unperfected security interests Beats perfected security interests filed after lien attachment Exceptions: Purchase money security interest; which has a 10 day grace period to be filed Buyers purchasing in the ordinary course of business are immune from security interests held by merchants
6
What is a Warranty of Title?
The seller has the right to sell the good and no one else can stake claim to that good
6
What are the three requirements for a gift?
Intent for it to be a gift Delivery of the gift Acceptance of the gift
6
When can a client be sued for failing to detect fraud?
When a normal audit following GAAS would have detected the fraud. When an accountant agrees to take on more responsibility than what is required under a normal audit. When accountant words the audit report to indicate this greater responsibility.
6
Name the securities registered under the Securities Act of 1933.
Stocks Stock Options Stock Warrants Limited Partnership Interests - General Partnerships not allowed Bonds
6
What types of discrimination are prohibited for employers based on civil rights laws?
Sex Race Religion National Origin
6
What will void an offer?
If offeror dies or becomes insane before acceptance; offer is void. Contract is binding if acceptance occurs before death/insanity.
6
What is the purpose of the negotiation of commercial paper?
Transfers ownership to another party
6
What is the Liability of General Partners in a partnership?
Joint Liability - Partners are collectively liable for debts/torts Several Liability - Partners are individually liable for debts/torts
6
What are the requirements for a voluntary bankruptcy filing under Chapter 7?
Must pass means test Your income must be below the median income for your state (Note - median; i.e. middle; not mean; i.e. average) Credit card companies made it harder for people to declare Chapter 7 when they lobbied Congress in 2005
6
How is an Agency terminated?
\*Both Agent and Principal agree to terminate \*Principal fires Agent \*Agent fires Principal \*Agent breaches their contract by doing something like violating their obligation to act as a fiduciary to Principal
7
What is Warranty of Merchantability?
This good will do its intended purpose Can be disclaimed
7
What are the rights of found property?
Lost property - Finder's rights to property are less than Owner's Abandoned property - Finder's rights to property are greater than Owner's
7
When has an accountant committed fraud?
Misrepresentation - Accountant misrepresents MATERIAL fact(s) Scienter - Accountant commits scienter Damages - Client has actual damages. Reasonable Reliance - Client reasonably relied on the misinformation.
7
Who can sue under the Securities Act of 1933?
Purchasers of securities only
7
What are the powers granted under the Environmental Protection Act?
EPA has the power to assess civil penalties for violating environmental laws like the Clean Air Act The EPA can sue violators Citizens can sue violators States can sue violators Citizens can even sue the EPA to force enforcement For hazardous waste sites: owners; operators; transporters; and lenders associated with the site can be held liable
7
What actions or circumstances will revoke a contract?
Offeror revokes and offeree receives revocation Offeree finds out prior to acceptance that offeror has sold the item In the case of an Option; offeror cannot revoke until the time of the option has elapsed Initial rejection by offeree doesn't void the option.
7
What is required to maintain the negotiability of a commercial paper?
Must be in writing Signed by drawer/maker Be without conditions for payment (other than limitations on payment sources) Amount of money must be stated Payable to order or bearer
7
Which assets may creditors of a partnership go after; and in which order?
Creditors must go after partnership assets first before suing partners individually
7
What are the requirements for an involuntary bankruptcy filing under Chapter 7?
In some cases; your creditors can force you into Chapter 7 or Chapter 11 BK Creditors must be able to prove that they are not being paid on time (i.e. debtor is insolvent) or that within the past 120 days the debtor assigned a custodian of the secured property If 12+ unsecured creditors - at least 3 must file; claims must be in excess of $14;425 If less than 12 unsecured creditors - only 1 must file; claim(s) must be in excess of $14;425 Upon filing; a judge will declare an order for relief unless the debtor protests
7
How do you terminate Apparent Authority?
\*Let the public know \*Let the people or entities that the Agent previously interacted with know \*In cases of death; or Principal is otherwise not competent to contract; ALL authority is revoked
8
What is Warranty of Fitness?
This good is the right choice for you based on the seller's expert opinion Can be disclaimed
8
What is tenancy in common?
Undivided interest in a portion of the property Upon death; property goes to decedent's heirs
8
What is Scienter?
To report something knowing it is false. Characterized by reckless disregard for truth Intentionally conceal facts
8
Name the Requirements for Accountant to be liable under the Securities Act of 1933.
Damages & Material Misstatements Only o Reliance on financial statements are not a requirement unless purchased more than a year after the security is registered Proving negligence is not a requirement
8
What is an Option?
Some amount of consideration (like money) is put forth by offeror to keep the offer open for a stated period of time
8
What characteristics will cancel the negotiability of a commercial paper?
An additional promise is stated in addition to the promise to pay (like the option to purchase Real Estate) The promise to pay occurs after some action by another party or an event; it cancels negotiability Cannot allow for an alternative such as payment or some other action by the maker Note: a stated amount of payment plus a stated % of interest is OK
8
What are the rights of a General Partner in a partnership?
General Partners have joint control over the management of the partnership and its affairs Unanimous vote needed to change the structure of the partnership Each partner has full right to inspect partnership accounting and business Partner has the authority to assign their interest to another partner
8
What entities are disallowed from involuntary Chapter 7 bankruptcy filings?
Charities Farms
8
What is an Agency Coupled with an Interest?
Agent acquires an ownership interest in the Agency Can only be terminated early (before the interest expiration date) by the Agent Unless the Agency has a specific time limit spelled out in a contract; the Agent's authority is irrevocable by the Principal
9
What is strict liability with respect to buyer protection?
Manufacturers of goods cannot disclaim that their products will be safe Can be liable if negligent
9
What is joint tenancy?
Undivided interest in entire property Upon death; property goes to other joint tenants
9
What is the Accountant's Liability to Third Parties - Privity Defense?
Lack of privity defends against contract breach and negligence. NOT a defense against fraud.
9
Name the Defenses of an Accountant under the Securities Act of 1933.
Accountant used Due Diligence Accountant followed GAAP Damages weren't caused by accountant's work Plaintiff knew of the material misstatements
9
What is a Requirements Contract? How are they limited?
These are contracts where someone becomes the exclusive provider of something in exchange for consideration Companies can't get locked in to one and then have market conditions force them to sell something at what has become an unreasonable price
9
What is required to negotiate Order Paper?
Must have delivery and endorsement If paper is exchanged for value; transferor must give an UNQUALIFIED endorsement
9
What does and does NOT happen when a General Partner assigns their partnership interest to someone else?
1. Other party gets that partner's share of the profits and/or capital contribution. 2. Does NOT give assignee authority to vote on partnership business 3. Assignee does NOT have right to inspect partnership books 4. Assignor still maintains liability 5. Partner does NOT have the right to assign their interest in partnership property or allow partner's creditors to attach a lien.
9
How can a debtor reclaim possession of their property from the interim bankruptcy under Chapter 7?
If the debtor pays the court-assigned bond to keep a property in an involuntary BK; they can reclaim possession of their property from the interim BK trustee
9
When is an employee an Agent; and when does this make the employer liable?
Employees are agents while acting within the scope of their duties. For employees who injure third parties while acting within the scope of their duties; both Employee and Employer are liable
10
What are non-conforming goods with respect to buyer protection?
Buyer can reject some or all of the shipment if the seller didn't perform as agreed and ship what was expected Must give notice Must give seller a chance to remedy the situation
10
The definition of Ultramares Decision:
Accountants are not liable to third parties unless the third party was an intended beneficiary of the engagement AND the accountant knew they would be relying on the financial statements.
10
What does the Securities Act of 1934 govern?
The trading/selling of securities after the IPO
10
What is promissory estoppel?
Promises to donate are legally enforceable Basically; you can't tell a charity; Hey; if you buy this $100;000 piece of land; I'll pay for the building that will go on it; and then renege on your promise
10
What are the major types of endorsements on commercial paper?
Blank - Doesnt name a new payee; transforms into a bearer paper Special - Names a new payee; transforms into an order paper Restrictive - Adds restrictions; doesnt stop further negotiation Qualified - Payment not guaranteed; without recourse added to endorsement
10
What is the actual authority of a partner in a partnership?
Has authority to bind the partners to a contract.
10
What are the basic characteristics of a Chapter 11 bankruptcy (business repayment) filing?
Allows a business a reprieve from creditors Creates a payment plan for the debt Business remains in operation At least 2/3 of each debt class of creditors must consent to reorganization Ch. 11 Involuntary petitions are allowed
10
When are Agents liable for torts (civil wrongs) they commit?
Agents are liable for torts (civil wrongs) committed whether they had authority or not
11
What is the statute of limitations with respect to buyer protection?
Buyer must sue to recover damages within 4 years.
11
What is Common Law Fraud?
Regular fraud Misrepresentation of Material Fact Scienter Damages Reasonable Reliance
11
What reports must be filed under the Securities Act of 1934?
Form 10-K Annual Report - Must be audited Form 10-Q Quarterly Report - Must be reviewed; but not audited Form 8-K - A notice of a material event; Must be filed within 4 days of event
11
What can make a contract VOID?
Fraud in the execution Formed under extreme duress - extreme Illegal
11
If endorsed; within what amount of time must a check be presented for payment in order to hold the ENDORSER liable?
Within 7 days
11
What is the APPARENT authority of a partner in a partnership?
A third party reasonably believes partner has authority to bind partnership to contract Cannot use apparent authority to add a new partner Cannot use apparent authority to sell or bind partnership assets
11
What are the basic characteristics of a Chapter 13 bankruptcy (personal repayment) filing?
Similar to Chapter 11; but for individuals Gives individuals a reprieve from creditors Creates a payment plan for the debt Ch. 13 Involuntary petitions are not allowed
11
Are Agents who act outside of their authority liable?
Agents who act outside of their authority will be liable for the act Exception - Principal ratifies the contract which relieves Agent of liability In order to ratify; Principal must know all of the facts and must ratify before third party cancels agreement If Principal keeps the benefits of the contract; ratification is implied Contract must be 100% ratified or there is no contract
12
What is Constructive Fraud?
Gross Negligence - reckless disregard for truth CPAs usually not liable for simple negligence; but Gross Negligence (aka Constructive Fraud) opens the CPA up to be liable to third parties.
12
Who can sue under the Securities Act of 1934?
Purchases and Sellers of Securities
12
What can make a contract VOIDABLE?
Fraud in the inducement Party not competent to contract Formed under SIMPLE duress Undue influence
12
On a commercial paper; which value will supersede - words or numerical dollar amount?
Written amount supersedes the numerical dollar amount. For example; if the words say One hundred dollars and the numerical amount states $1000.00; the value of the paper will be $100.00.
12
With respect to liability on subsequent debts; what happens when a partner withdraws from a partnership?
Partner not liable assuming notice given. Notice must be given to nullify apparent authority People who had knowledge of their role must be personally notified Public must be notified
12
What are the duties and abilities of a bankruptcy trustee?
Represents the bankruptcy estate Can sue or be sued Oversees bankruptcy and watches for preferential creditor payments Oversees priority transfer of assets to creditors
12
What is an Agent's liability when acting for an undisclosed principle?
\*Agent liable to third party even if acting within authority \*Third party can sue both Principal and Agent if Principal becomes disclosed \*Agent can then sue Principal
13
What are the required actions with Discovery of Illegal Activity?
Accountant must report discovered illegal activity to Audit Committee or Board of Directors If material in public company; BOD has \*1 DAY\* to notify SEC.
13
Name the Requirements for an Accountant to be liable for fraud under the Securities Act of 1934.
Damages Material Misstatements Reliance on financial statements Scienter or reckless disregard for the truth
13
What is the result of a clerical error in a contract?
The contract is unenforceable. Example: Person signs a contract to pay $500.00 to have their lawn re-seeded but due to clerical error; it actually reads $5000.00
13
Define primary liability with respect to a contract.
First in line to pay on the note/draft Maker of a Promissory Note has primary liability and must pay according to terms of the note With a Check; no party has Primary Liability Exception: Drawee (your bank) is primarily liable to pay if they certify - i.e. promise to pay
13
With respect to PRECEDING debts; what is the liability of a partner in a partnership?
Old partners: Jointly and severally liable unless creditors grant novation New partners: Only capital account at risk on preceding debts. For subsequent debts; they are joint and severally liable.
13
How and when is a bankruptcy trustee appointed?
Optional - Creditors decide Can be elected by creditors or can be appointed by the court Prior association with the debtor is allowed
13
What are the requirements for a Power of Attorney (POA)?
Must be in writing Must be signed by person granting the POA Ends upon death of Principal General POA - Agent authorized to handle all affairs Special POA - Agent authorized to handle only specific affairs
14
What is the Accountant-Client Privilege?
NO Federal Accountant-Client privilege for non-disclosure of private conversations to a court unless a particular state recognizes such a privilege. If your client tells you Yeah; I cheated on my taxes; a court could force an accountant to testify about that conversation.
14
What procedures must an Accountant have in place under the Securities Act of 1934?
Accountant must have procedures in place to: Determine if Going Concern is an issue Determine if any material related party transactions occurred Determine if material illegal acts occurred
14
Contracts under the Statute of Frauds must be in what form to be valid?
They must be in writing.
14
Define secondary liability with respect to contract liability
Drawers are Secondarily Liable if Drawee fails to pay a Draft Endorsers (the payee) are secondarily liable Holder in due course can hold Endorser liable Exception: Endorsed Without Recourse
14
What happens upon the death of a partner in a partnership?
Partner's estate gets share of partnership profits and capital account Estate does NOT get any partnership assets Remainder of partners own partnership assets Heirs of decedent are not added as partners unless remaining partners unanimously agree
14
What actions can a bankruptcy trustee take with respect to preferential creditor payments in a bankruptcy?
Trustee can void payments on antecedent (past) debts that occur within 90 days of a BK filing A Trustee cannot void a payment made to a creditor that is an even swap (contemporaneous exchange) and for new value A voidable preference must be on an old debt where the debtor is basically picking and choosing which creditors they send money to (AKA a voidable preference)
15
Accountant's Workpapers - Confidentiality Requirements
1. Can be subpoenaed 2. Can be looked at by another CPA doing peer review 3. Property of the accountant who created them Note: Source documents supplied by client must be returned to client if they request them back; even if there is a billing dispute.
15
Insider trading rules under the Securities Act of 1934 apply to which individuals?
Officers; Directors and 10% Owners
15
What makes a contract subject to the Statute of Frauds?
o Cannot be completed within one year o Involves the purchase of real estate o $500+ Sale of Goods o Co-signing and guaranteeing the debt of another
15
Define contract liability.
Guarantees payment of a liability
15
What happens during the winding up of a partnership and in what order?
1. Creditors get paid; Partners can also be creditors 2. Distributions in arrears get paid 3. Partners get return of Capital accounts 4. Any remaining distributions Note: NO documents need to be filed with state to dissolve general partnership.
15
When can preferential transfers be voided by a bankruptcy (BK) trustee?
Made within One Year of BK to insider - Corporate officers/directors; Partners; Relatives Made within 3 Months of BK non-insider Creditor receives larger payment than BK liquidation would have granted
16
True or False: Accountants are responsible for knowing the personal finances of tax preparation clients.
Accountants have no way of auditing individual's personal finances and are not required to do so when preparing a return
16
What are the Proxy Solicitation Requirements under the Securities Act of 1934?
Proxy must give shareholders audited balance sheets from 2 most recent years o Requirement holds true even if one class of stock
16
What is the parol evidence rule?
Prevents one party to a written contract from coming in after the fact and claiming that a certain conversation took place that conflicts with what is agreed upon in the written contract It also prevents using an oral argument to read into the meaning of what is written on paper If it's on paper; it trumps what was agreed-upon orally prior to the written contract Note: does not negate oral agreements made AFTER the contract or disallow oral words from clarifying ambiguous contract language.
16
When does warranty liability occur?
Occurs when you negotiate commercial paper By signing; you warrant to all future parties By not signing; you warrant to current party only
16
What are the requirements to form a Limited Partnership?
Governed by state L.P. laws Must file L.P. certificate with Sec. of State Only General Partners must be listed Future additions or subtractions of G.P. require certificate to be updated with state
16
What is the treatment of a secured creditor in a bankruptcy?
Superior to claims of other types of creditors Can take either collateral or cash proceeds from the sale of an asset If collateral doesn't satisfy amount owed; Secured Creditors become a general creditor for the difference.
17
When a past error is found in a client's tax return; what should an accountant do?
If a past error is found; accountant should inform client of this error. Contacting the IRS is NOT required. If client won't fix it; then the accountant should reconsider whether they want to do business with the client
17
What are the requirements for the assignment of a contract?
Contracts are assignable to a third party beneficiary; but must be done so in good faith Obligations may be assignable- Assignor is still liable Assignor may be released from liability if other party grants a novation
17
What five warranties occur with every commercial paper transfer?
Warranty of Title No defense will stand against it No material alteration No knowledge of bankruptcy proceedings All signatures are legitimate
17
How are profits and losses split in a Limited Partnership?
Unlike G.P.; L.P. profits/losses are split according to capital contributions by default
17
What is the order of priority given to unsecured creditors in a bankruptcy?
1. BK Trustee and Attorney fees get paid before all other unsecured credit cards 2. Salaries required to continue business once BK proceedings begin 3. Any claims filed resulting from business operations that occur after involuntary BK is filed 4. Wages owed to employees 5. Retirement contributions within last 6 months 6. Consumer deposits for undelivered goods 7. Child Support & Alimony 8. Taxes 9. Other general unsecured claims
18
Name the key responsibilities of an accountant when preparing a tax return.
Accountant must prepare the return in good faith and ask for more information if something is missing When recommending a tax position; the accountant should realistically believe that it would stand up under the scrutiny of a court
18
When can contracts be discharged by law?
Party under contract is bankrupt Party under contract dies or is incapacitated Party cannot physically complete the contract (i.e. They are in prison so can't finish building your house)
18
What are the requirements for a holder to be a holder in due course?
Holding a negotiable instrument Taking instrument in Good Faith - Even if you buy a stolen note and you dont know that its stolen; youre still an HDC Having no knowledge of defenses again instrument; i.e. problems with the instrument Giving a \*present value\* for the instrument (a future value doesnt count)
18
True or False: In a Limited Partnership; a General Partner can also be a Limited Partner at the same time.
True. A Limited Partner; however; cannot also be a General Partner and maintain limited liability.
18
What are key aspects of a bankruptcy involving a landlord or leases under Chapter 7?
The bankruptcy trustee can act in the best interest of the creditors and assign the leases under contract to the creditors The trustee has 60 days to assume leases on equipment after bankruptcy is granted or the leases will be rejected
19
What are the personal defenses against a holder in due course (HDC) which will LOSE?
An HDC takes an instrument free of Personal Defenses (LOSE vs. HDC) Lack of consideration/value given Breach of contract/warranty Duplicate payments Fraud (in the inducement only) Voidable contracts
19
Do limited partners have a fiduciary responsibility to a Limited Partnership?
No. Limited Partners are do not have a fiduciary responsibility to Limited Partnership
19
What is the bankruptcy estate?
The pool of assets available to creditors until liquidation
20
What are the REAL defenses against a holder in due course (HDC); which will WIN?
A holder in due course takes an instrument subject to Real Defenses (WIN vs. HDC) Material alterations to the instrument Forgery Bankruptcy Maker not competent to Contract Fraud in the execution
20
What authority does a limited partner have under a Limited Partnership?
1. Right to inspect records of the business. 2. Can still vote on partnership business without losing limited liability 3. Can consult and advise partnership without losing limited liability (assuming they don't actually make the decisions)
20
What assets are exempt from creditors in a bankruptcy estate?
Social security Disability payments Unemployment; Child Support; Alimony; Wages; Pensions; Annuities to the extent that they provide reasonable support for debtor and dependents
21
What limitations does a limited partner have in a Limited Partnership?
1. They have no authority as an agent to bind the partnership 2. They can't participate in management decisions and maintain limited liability.
21
How long after a Chapter 7 bankruptcy filing can creditors claim inheritance or insurance payments for repayment?
Inheritance/Insurance payments received within 180 days of filing for a Chapter 7 bankruptcy become part of the BK Estate
22
What is the liability of a limited partner in a Limited Partnership?
Limited partners are liable to the extent of their capital contributions only Exception - A Limited Partner (who cannot participate in management decisions) becomes involved with management decisions Becomes liable to third parties \*IF\* they knew of their involvement
22
What is a garnishment with respect to a bankruptcy?
Court allows a creditor to garnish or take a portion of the debtor's paycheck
23
When does the dissolution of a Limited Partnership occur?
Automatically happens 1. Once final General Partner leaves 2. Time specified in certificate lapses 3. Event specified in certificate happens 4. Unanimous consent by partners 5. Illegal activity
23
What is a mechanics lien?
Lien on real property to secure payment for a repair/improvement done to the house A contractor builds an addition to your house and you won't pay. They can't repo your house; so they get a Mechanics Lien that sticks until you sell your house and they get paid
24
What is required to form a Limited Liability Partnership (LLP)?
1. Majority vote required to form LLP 2. Articles of LLP filed with Secretary of State 3. Governed by laws of that State 4.Limited Liability Partnership must be in name 5. No General Partners - each LLP partner has limited liability - Exception: Negligence of partner or those under partner's supervision
24
What is an artisan's lien?
Applies to personal property like a car If the dealership does $500 in repairs to your car; you don't get the car back until you pay
25
What are the key aspects of a Limited Liability Company (LLC)?
Members can participate in management and retain limited liability Members don't own any interest in LLC property Members can assign interest; but not transfer it Members divide profits equally unless otherwise stated
25
What is a surety (co-signing)?
A third party agrees to be liable for a loan Example: A parent co-signs on their child's car loan
26
What are the key aspects of Joint Ventures (JV)?
Similar to a General Partnership; except generally; a JV is for a single business activity Example: two companies promote a concert Ability to bind other JV partners is limited JV partners still have a fiduciary responsibility to JV No state filings or paperwork necessary
26
How is a surety liable in a transaction?
A surety is primarily liable Surety can be released from liability if the creditor behaves in a way that increases the risk that they initially agreed to Surety can be released from liability if the debtor changes the loan agreement in a way that materially increases the surety's risk
27
What are the key aspects of a corporation?
Shareholders have limited liability to the extent of their capital contribution C Corporations have a perpetual life and continue even after shareholder death Corporations are a separate legal entity from their owners and can own property; sue; be sued Corporations must file Articles of Incorporation in state of governance
27
What is a cosurety; and how are they liable in a transaction?
Two sureties are guaranteeing the same debt Proportionately liable - If one cosurety is released from their obligation; then the remaining cosureties have their proportionate share reduced by the released party's percentage If one surety pays more than their proportionate share of the risk; then the other sureties must compensate them for the difference; which is called Right of Contribution
28
What are some of the advantages of a corporation?
Ability to raise capital Limited liability - unless actions occur that pierce the veil Ease of ownership transfer
28
What is a guarantor?
Similar to surety; but a guarantor is secondarily liable
29
What actions can pierce the veil of a corporation?
Commingling of assets Fraud Under-capitalization
29
What are the basic rights of a debtor under the Fair Debt Collection Practices Act?
Basically - your creditors have the right to collect from you; but not abuse you or embarrass you The can't contact you once you're represented by an attorney They can call other people to find out where you are; but they cannot identify themselves as collectors They must stop calling you at work if you send them a certified letter that says my employer doesn't allow me to take calls at work. They must call you only at reasonable hours of the day - according to your time zone; not theirs
30
How is a corporation governed?
Board adopts Corporate Bylaws to govern company business
31
What items are required in a corporations Articles of Incorporation?
Name; purpose; powers of Corporation Name of registered agent & incorporators Stock share classes authorized; par values Name of corporate officers NOT required
32
What is the biggest disadvantage of a corporation?
Double taxation
33
How are corporations formed by promoters?
Promoter issues prospectus; arranges capital; and is a fiduciary of the corporation. A promoter may profit from work performed if the corporation is aware of it.
34
When is a corporation liable for pre-incorporation actions taken by a Promoter?
Promoter personally liable unless third party agrees to a novation and releases Promoter from liability; UNLESS the corporation adopts.
35
In how many states must a corporation incorporate?
Corporations are only incorporated in one state Become adomestic corp. in that state Become aforeign corp. in any other state they do business in
36
Describe Common Stock dividends and their rights/liabilities in relation to shareholders/corporations.
Dividends are NOT a shareholder right Once declared; dividends become a liability to corporation
37
What are key aspects related to the holding of Preferred Stock?
No voting rights Get first rights to dividends and liquidation Cumulative Preferred Stock dividends that go undeclared accumulate and Corporation must pay it before issuing dividends to Common Stockholders Participating Preferred Stock gives shareholder right to dividends in addition to what they get as Preferred Stockholders
38
What aspects are related to all classes of corporate stock?
Valid consideration must be given for shares Cash; property; or prior services performed No promises to pay or perform services
39
What are the key aspects of Treasury Stock?
No Gain/Loss recognized on Treasury stock Have no voting rights Can be re-purchased below par Cannot produce dividends
40
What is a stock subscription and what is required for it to be valid?
An offer to buy shares of stock Must be accepted by corporation to be valid Offer cannot be revoked for 6 months Subscriber becomes liable once accepted
41
When is a corporation liable for torts by employees?
If committed within the normal scope of the employee's job Even if they were disobeying orders Per respondeat superior
42
What are the key aspects of a corporate officer?
Appointed by the Board of Directors Act as Agents Owe a fiduciary duty to the corporation Can have legal fees paid by corporation for defense in lawsuit brought on them from carrying out their normal duties (exception- suit brought against officers by shareholders)
43
What are the key aspects of a corporation's board of directors (BOD)?
Elected by shareholders Owe fiduciary duty to corporation Must act in good faith to avoid being liable for bad judgment Good faith is NOT a defense for negligence
44
What is Ultra Vires?
Corporation management acting beyond what the Articles of Incorporation allow Shareholders can sue for Ultra Vires
45
When is inspecting Board minutes the right of a shareholder?
Shareholders can inspect Board minutes and records only if request is in good faith
46
Who must approve mergers and consolidations?
Boards must approve Shareholders must approve by Majority Disapproving shareholders can get an appraisal and get their stock back at current market price Merger does NOT need creditor approval
47
What characterizes a Professional Corporation?
Shares owned only by licensed professionals (CPAs; attorneys; etc.) Limited Liability for debts Personal Liability for negligence
48
Who can and cannot own an S-Corporation?
CAN be owned by Estates; Trusts; and Individuals CANNOT be owned by a C-Corporation
49
What is the primary advantage of an S-Corporation?
Avoidance of Double Taxation
50
What are the disadvantages of an S-Corporation?
No more than 100 shareholders allowed One class of stock allowed Shareholders must be US Citizens/Residents
