Business Law X: Business Structure Flashcards
Sole Proprietorship
Advantages:
- Total Control
- Simplicity
- Taxation
Disadvantage:
1. General Liability
General Partnership
Advantages:
- Pass-through taxation
- Simplicity
Disadvantage:
1. General Liability
Limited Partnerships
Advantages:
- Pass-through taxation
- Limited liability as long as partners do not take part in management
Disadvantages:
- Formality
- Authority
- General Liability - at least one managing partner
Limited Liability Partnerships
Advantages:
- Pass-through taxation
- Limited liability - other than torts they commit
- Authority - may be active without forfeiting limited liability
Disadvantages:
- Formality
- Insurance requirement
Limited Liability Limited Partnership
Advantages:
- Pass-through taxation
- Limited liability
Disadvantages:
- Not offered in all states
- Formality
Corporations
Advantages:
- Limited liability - other than piercing of corporate veil
- Legal personality
- Perpetual duration
Disadvantages:
- Double taxation
- Formality
S Corp
Advantages:
- Limited liability
- Single taxation
Disadvantages:
- Formality
- Individual taxation
- Special requirements
LLC
Advantages:
- Pass-through taxation
- Limited liability
Disadvantages:
1. Formality
Sole Proprietorship Operation
Sole owner makes all important decisions/delegates
General Partnership Operation
- Absent agreement, all partners have equal rights in mgmt/conduct of business affairs
- Absent agreement, majority vote governs all ordinary matters
- Unanimity needed to take actions contrary to partnership agreement
Limited Partnership, LLP, LLLP Operation
- One or more general partners make mgmt decision, limited partners are passive investors
- If limited partners become active, may forfeit limited liability
Corporation Operations
- Shareholders elect directors, who elect officers, and officers make day-to-day decisions
- Small corps, same people may hold all roles
LLC Operations
- May either be owner-managed or manager-managed
- Terms set forth in operating agreement filed with Secretary of State
- Legal uniformity lacking across nation
- Most states allow single-member LLC
Partnership Termination
Dissociation of a partner leads to either buyout or dissolution.
Corporation Termination
Voluntary - approval of directors/shareholders
Involuntary - administratively dissolved by secretary of state
- failure to pay franchise taxes
- failure to file annual reports
- failure to establish/maintain registered agent/office
Judicially
- Attorney General for fraudulent approval of articles of incorporation or abusing legal authority
- Shareholders for mgmt deadlock, illegal/oppressive controllers, inability to elect directors
- Creditors
- Insolvency
Partnership: Capital Accounts
- Credited amount = money + value of property - liabilities contributed by partner + partner share of profits
- Charged amount = money + value of property - liabilities distributed to partner + partner share of losses
Types of corporate securities
- Equity Securities = Common Stock, preferred stock, treasury stock
- Debt Securities = Notes, Debentures, Bonds
Redeemable Shares
must be repurchase by corporation under specified conditions at specified prices if shareholder so desires
Callable Shares
redeemable at corporation’s option
Convertible Shares
debt securities convertible to equity securities at specified ratios at request of holder
Warrants, rights, options
legal entitlements to purchase equity securities at specified price/time at request of holder
Consideration for Shares
Shares must be issued only in exchange for consideration that meets both:
- Quality Tests
- Quantity tests
Partnership Information Rights
- Partners/Agents entitled to access to books
2. Each partner must provide any info about business affairs or other info reasonably demanded
Partnership Standards of conduct
- Duty of Loyalty
2. Duty of care
Corporate Shareholder Rights
- Vote for directors
- Inspect corp records
- Have financial priorities respected
- Exercise appraisal rights when they dissent from major changes
- File derivative lawsuits against officers/directors who have injured corp
- Exercise preemptive rights to buy their proportional share of new securities
Corporate Director Duties
- Duty of Attention (must direct)
- Duty of Care
- Duty of Loyalty
Corporate Director Rights
- Right to rely (upon reports of officers)
- Business Judgement rule
- Liability protection
Agency Law in Partnerships
Governs regarding authority of partners to bind the partnership
- act of partner for apparently carrying on in ordinary course binds the partnership
- act of partner not apparently carrying on in ordinary course binds partnership ONLY if act was authorized by other partners
Partnership Tort Liability
Partners generally liable for torts committed by partners:
- Intentional Tort - partnership liable
- Misapplication of funds - innocent customer gets most protection
- Joint/Several liability - creditor may sue general partner without suing others
- Late arrivers - liable for subsequently-incurred debts
Corporate Director authority
- Borrow money
- Sell corporate property
- Hire/fire officers/employees
- Declare/refuse to declare dividends
- Make/refuse to make other distributions
- Set salaries
- Propose for shareholder approval sale of major assets, mergers/consolidations, dissolutions, amendments to articles of inc
Corporate Officer authority
Express: Articles of Inc, By-laws, Directors’ resolutions, statutes
Implied: Derived by virtue of their offices (CEO, CFO)
Ratification: Even if officer acts w/o either express or implied authority, BOD could bind corp by ratifying contracts
