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CPA - Regulation > Business Law: Part 2 > Flashcards

Business Law: Part 2 Flashcards

1
Q

What is Chapter 7 - Liquidation?

A

Chapter 7 - Liquidation
- applicable to both individuals and corporations
- wipes out most unsecured debts, like credit card debt, personal loans, and medical bills but NOT debts like back taxes and child support
- eligibility criteria - includes NOT having filed Chapter 7 bankruptcy in the past EIGHT years and passing the means test
- certain domestic debtors as follows are PROHIBITED from filing for Chapter 7 bankruptcy
- savings institutions
- insurance companies
- banks and small business investment companies
- railroads
- discharge of indebtedness - involved liquidation of assets to pay off debts. Most unsecured debts can be discharged.
- there is no limitation on the types of business a debtor may own after bankruptcy

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2
Q

What is Chapter 11 - Reorganization?

A

Chapter 11 - Reorganization
- primarily used by business and corporations, and occasionally by individuals
- helps a business continue operating while debts are reorganized and repaid overtime
- filing criteria - include not having had a bankruptcy petition dismissed in the past 180 days
- certain domestic debtors as follows are PROHIBITED from filing for Chapter 11 bankruptcy
- savings institutions
- insurance companies
- banks and small business investment companies
- stock brokers & commodity brokers
- discharge of indebtedness - often used by businesses, this allows for debt reorganization. The discharge occurs after the payment plan is completed.

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3
Q

What is Chapter 13 - Wage Earner’s Plan?

A

Chapter 13 - Wage Earner’s Plan
- reorganizes debt through a repayment plan
- it’s for individuals with regular income who can repay all or some of their debts in installments over 3 to 5 years
- eligibility includes having sufficient income for payment plan installments and total combined secured and unsecured debts below $2.75 million
- discharge of indebtedness - involves a repayment plan for individuals with a regular income. Discharge occurs after completing the repayment plan.

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4
Q

What is Chapter 15 - cross-border insolvency cases?

A

Chapter 15 - cross-border insolvency cases
- allows for US courts and foreign courts to cooperate

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5
Q

What is Chapter 9 - municipal debt adjustment?

A

Chapter 9 - municipal debt adjustment
- provide a financially distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts
- reorganization of the debts of a municipality is typically accomplished either by extending debt maturities, reducing the amount of principal or interest, or refinancing the debt by obtaining a new loan

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6
Q

What is Chapter 12 - family farmers or family fishermen with regular income?

A

Chapter 12 - family farmers or family fishermen with regular income
- enables financially distressed family farmers and fishermen to propose and carry out a plan to repay all or part of their debts
- debtors propose a repayment plan to make installments to creditors over three to five years.
- generally, the plan must provide for payments over three years unless the court approves longer period (for cause.”

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7
Q

What is included in bankruptcy estate?

A

Bankruptcy Estate
- includes property the debtor receives from the following within 180 days after the filing of the petition:
- bequest
- devise
- inheritance
- property settlement
- divorce decree
- beneficial interest in a life insurance policy or death benefit plan
- income generated by estate property (rents, interest and dividends)

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8
Q

What is excluded from bankruptcy estate?

A
  • excluded from the bankruptcy estate
    • government benefits (such as social security, veterans benefits, unemployment comp and disability)
    • alimony, support or maintenance
      - certain gifts received beyond 180 days after the petition is filed
      - post-petition wages
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9
Q

What are the requirements in voluntary bankruptcy petition?

A

Voluntary Bankruptcy Petition
- does NOT require debtor to be insolvent
- debtor’s income may NOT exceed certain specified levels
- does NOT require three or more creditors

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10
Q

What are the requirements in involuntary petition?

A

Involuntary petition
- requires at least 3 unsecured creditors to file if the debtor has 12 or more creditors
- If a debtor has fewer than 12 creditors, any one or more creditors who are owed at least $18,600 in unsecured debt may petition the debtor involuntarily into bankruptcy.

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11
Q

Under the federal Bankruptcy Code, what elements are necessary to establish a preferential payment?

A

A preferential payment is:
- trade made to or for the benefit of the creditor
- on account of an antecedent debt of the debtor (eg if a debtor makes a payment to a creditor shortly before filing for bankruptcy, that payment might be considered on account of an antecedent debt)
- made within 90 days prior to the filing (one year if the creditor is an insider, such as an officer of the debtor organization or a close relative of the debtor);
- made while the debtor was insolvent; and
- results in the creditor receiving more than the creditor would have received under the Bankruptcy Code

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12
Q

List four common grounds for denial of discharged in bankruptcy.

A
  1. Debtor NOT an individual.
  2. Fraudulent transfers or concealment of property
  3. Failure to keep books and records
  4. Prior discharge within 8 years
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13
Q

What are the six nondischargeable debts?

A

WAFTED
- W - Willful and malicious injury
- A - Alimony
- F - Fraud
- T - Taxes
- E - Educational loans
- D - Debts undisclosed in bankruptcy petition

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14
Q

What are the three basic categories of claimants, paid in the following order:

A

There are three basic categories of claimants, paid in the following order:
1. Secured claimants - up to the extent of the value of the collateral
2. Priority claimants ===» SAG WEG CTI
3. General creditors who field claims on time (pro rata)

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15
Q

What is the hierarchy for paying unsecured priority claims in a bankruptcy proceeding?

A

SAG WEG CTI
S - Support obligations to spouse and children
A - Administrative expenses for bankruptcy filing
G - Gap claims/creditors

W - Wages (up to $15,150) for employees within 6 months
E - Employee benefits (up to $15,150), reduced by wage claims, within 6 months
G - Grains Framers and Fishermen

C - Consumer Deposits
T - Tax claims
I - Injuries from DWI/DUI

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16
Q

What is Federal Insurance Contributions Act (FICA)?

A

Federal Insurance Cotribtutions Act (FICA)
- FICA provides workers and their dependents with benefits in case of:
- death
- disability; or
- retirement
- funded by BOTH employer and employees
- funded by self-employed
- Funding
- employee responsibility - FICA contributions of 6.2% of their net taxable wages of up to $160,200 (2023)
- Medicare contributions of 1.45% of their entire gross wages
- Individuals with income exceeding a threshold amount are liable for an additional Medicare tax of 0.9% of their entire gross wages
- gross wages include all earned income, such as salary, bonuses, and commission
- EXCLUDE from wages - gifts, interest, dividends
- Failure to supply taxpayer ID numbers and failure to make timely FICA deposits can both result in penalties.
**The examiners have often asked what income is subject to FICA. It is key to remember that an employee’s gross wages are subject, and that a self-employed person’s net profits are subject.

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17
Q

What is Unemployment Compensation (FUTA)?

A

Unemployment Compensation (FUTA)
- excludes the self-employed
- participated by employers (most)
- quarterly payrolls of at least $1,500 OR who employ at least 1 person for 20 weeks in a year MUST participate in the system
- 6% on the first $7,000 per year per each employer

18
Q

What is workers’ compensation?

A

Workers’ Compensation
- workers’ compensation laws do not provide for “full” pay during a disability. With disability benefits the employee may receive a percentage of his/her wages, but not “full” wages.
- workers’ compensation laws can provide for the following:
- burial expenses
- cost of a prosthetic devices
- payments to surviving dependent children
- workers’ compensation laws require that employers provide coverage for all eligible employees
- workers’ compensation contributions are made by the employer
- workers’ compensation benefits are available if the employee is injured within the scope of employment

19
Q

What is affordable care act?

A

Affordable Care Act
- both employers and employees are required to participate
- 15 or more of full-time employees

20
Q

What is the formation of various business structures?

A
21
Q

What is the liability of owners of various business structures?

A
22
Q

What is the management of various business structures?

A
23
Q

What is the transferability of various business structures?

A
24
Q

What is the taxation of various business structures?

A
25
Q

What are the general requirements for the merger of two corporations?

A

General requirement for the merger of two corporations
- both corporations must give shareholders notice and a summary of the merger plan
- a merger plan need ONLY be approved by a MAJORITY of the shareholders, not by all shareholders
- the merger plan needs to be approved ONLY by a MAJORITY of each board of directors of the corporation

26
Q

What is the similarity between C Corporation and S Corporation?

A

Either entity’s shareholders may contribute property to the corporations without being taxes and may contribute such property as an exchange of stock as appraised by the directors.

27
Q

What are the differences between C Corporation and S Corporation?

A
28
Q

What are the responsibilities of promoters?

A

A registered agent is an agent for the corporation who would accept service of process in the event the corporation is involved in a lawsuits.

Promoters or the incorporators are responsible for organizing the corporation.

The promoter is only relieved of personal liability on pre-incorporation contracts when there is a novation, which requires an agreement by all parties to substitute the corporation for the promoter.

Promoters are personally liable to contracts that they enter into on behalf of the corporation to be formed. They remain liable on the contracts even after the corporation is formed unless the parties enter into a novation (ie. an agreement among the parties to substitute the corporation for the promoter).

29
Q

What is Novation?

A

In a NOVATION, a new party (the corporation) is substituted for an old party (the promoter) in the contract. All parties must agree to the novation.

30
Q

What are the following:
- bylaws
- articles of incorporation
- shareholder agreement
- certificate of authority
- proxy statement

A

Bylaws - adopted by the incorporators or directors, are not required to be filed, and generally will contain rules desired regarding the operation of the corporation. This usually contain the rules for running the corporation.

Articles of incorporation - filed with the state and contain information regarding the formation of the corporation.

Shareholder agreement - contract between shareholders for any rights or duties agreed upon between the parties.

Certificate of authority - filed with the foreign state that a business wishes to do business in and with permission from that state.

Proxy statement - a request to shareholders to allow their shares to be voted by a specified person in a specified way.

31
Q

What are the items included in the Articles of Incorporation?

A

The articles MUST include:
- Name of the corporation
- Names and address of the corporation’s registered agent (i.e., the person on whom process may be served if the corporation is sued);
- Names and address of each of the incorporators
- Number of shares authorized to be issued

32
Q

What is a derivative action?

A

A derivative action is an action by a stockholder in the name of the corporation to recover damages or to seek some other remedy on behalf of the corporation when the corporation does not enforce its own rights. Such actions are often brought when the directors or officers have breached their duty to the corporation and have refused to sue themselves. An ultra vires act is an act outside of a director’s or an officer’s scope of authority and thus is a breach of duty to the corporation.

33
Q

What is a business judgment rule?

A

The business judgment rule - If a director acts in good faith and in a manner the director believes is in the best interest of the corporation, and the director exercises the care that a reasonably prudent person would exercise in a similar position, the director is protected against liability for decisions the director makes that turn out poorly for the corporation. This is commonly known as the business judgment rule.

34
Q

What is meaning of the following:
- pre-emptive rights
- shareholder derivative rights
- inspection rights
- cumulative voting rights

A

Pre-emptive rights - the right to purchase new issuances of additional stock in order to maintain current proportional ownership is known as a pre-emptive right.

Shareholder derivative rights - A shareholder’s derivative right is the right of a shareholder to enforce a legal obligation, for example, by filing a lawsuit, owed to the corporation by a third party when the corporation does not seek to vindicate its own rights.

Inspection rights - A shareholder’s inspection rights refer to the right of a shareholder to inspect and copy certain shareholder records (e.g., minutes of shareholder meetings, list of shareholders, etc.).

Cumulative voting rights - Cumulative voting rights refers to the right of a shareholder to cast votes in the election of directors equal to the product of the number of shares the shareholder owns times the number of directors being elected (e.g., if a shareholder owns 100 shares and three directors are being elected, the shareholder may cast 300 votes). Cumulative voting is often used to help assure representation of minority shareholders.

35
Q

The board of directors has the unilateral power to do the following:

A

Board of directors has the unilateral power to do the following:
- Repeal the bylaws
- Declare dividends
- Fix compensation of directors

36
Q

The board of directors can not perform the following without stockholder approval:

A

Board of directors CANNOT perform the following without stockholder approval:
- Selling substantially all of the corporation’s assets
- Amending the articles of incorporation
- Dissolving the corporation

37
Q

Under the Revised Model Business Corporation Act, a merger of two public corporations usually requires the following:

A

Under the Revised Model Business Corporation Act, a merger of two public corporations usually requires the following:
- a formal plan of merger
- an affirmative vote by the holders of a majority of each corporation’s voting shares
- approval by the board of directors of each corporation

38
Q

What are the rules on mergers?

A

Rule: Shareholders who are dissatisfied with the terms of a merger, consolidation or sale of assets are permitted to compel the corporation to buy their shares at fair market value. This is known as the right of appraisal or the dissenting right.

Rule: A short-form merger is when a parent mergers a 90% or more owned subsidiary into the parent. In this case, only the shareholders of the subsidiary have dissenting rights.

Rule: Shareholders who vote against a share exchange are entitled to payment for fair value of their shares.

Rule: Preferred shareholders who dissent to having their preferential rights altered or abolished have dissenters’ rights to be paid the fair value of their shares.

The merger of two corporations requires that a special meeting be held and that notice and copy of the merger plan be given to all stockholders of both companies. A merger generally requires the approval of both the directors and stockholders.

39
Q

What are the three reasons of piercing the corporate veil?

A
  1. Commingling personal with corporate funds
  2. Inadequate capitalization
  3. Committing fraud on existing creditors
40
Q

What are the fundamental corporate changes that require shareholder approval?

A

DAMS

D - Dissolution
A - Amendments to the articles of incorporation that materially and adversely affect the shareholders’ rights
M - Mergers, consolidations, and compulsory share exchanges
S - Sale of substantially all the corporation’s assets outside the regular course of business

CPA - Regulation (6 decks)

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