Business Structure

Question 1

Sole Proprietorship

Answer 1

o Single-owner business

o Assets/liabilities belong solely to owner

Question 2

General Partnership

Answer 2

o Association of 2 or more persons to carry on as co-owners for profit
o Profits are allocated and taxable directly to the partners (flow-through)
o Viewed as a legal entity for most purposes

Question 3

Joint Venture

Answer 3

o One-shot general partnership

o E.g. - buy property, build, sell

Question 4

Limited Partnership

Answer 4

o Having at least one general and one limited partner
 Limited partner gives up right to engage in the general management in exchange for limited liability (can only lose investment)

Question 5

LLP - Limited Liability Partnership

Answer 5

o Carry greater protection from liability than general/limited partnerships
o Primarily created to protect professionals from undue malpractice arising from errors of their partners (e.g. accounting firms)
o IF LLP, partners are only liable for their own malpractice and those they supervise
o Most states protect partners for contractual obligations
o Must carry minimum levels of malpractice insurance

Question 6

LLLP - Limited Liability Limited Partnership

Answer 6

o Allows general partners to enjoy limited liability, just like the limited partners
o Can become this through ONE line statement in their certificate of limited partnership filed with the state
o BOTH remain liable for TORTS committed while carrying out partnership business
o AUTHORIZED in only 20 states or so

Question 7

Corporation

Answer 7

o Artificial legal entities, whose owners enjoy limited liability
o SUFFER double taxation – corporate income tax, pays out dividends, personal income tax

Question 8

S-Corp - Subchapter S Corporation

Answer 8

o Can eliminate double taxation by meeting certain requirements of Subchapter S Corp
 1. No more than 100 shareholders
 2. Unanimous election
 3.Only certain types of shareholders

Question 9

LLC - Limited Liability Company

Answer 9

o 1990ish – owners gain limited liability advantage of the corporate form while enjoying the single pass-through tax benefits of the partnership form of business
o Member managed LLC – Like GENERAL partnership
o Manager-managed LLC – Like CORPORATION
o All States, VIRTUALLY allow single-member LLCs
o MOST POPULAR FOR SMALL BUSINESSES

Question 10

PC - Professional Corporation

Answer 10

those corporate entities for which many corporation statutes make special provision, regulating the use of the corporate form by licensed professionals such as attorneys, architects, engineers, public accountants and physicians.

Question 11

Formation

Answer 11

• DO NOT REQUIRE formal filing
o Sole proprietorships
o General partnerships
 Certificate of partnership authority (can file this, not necessary)
o Corporations – articles of incorporation
o LLCs – Operating agreement (designed to forestal and resolve disputes among owners)
o LP/LLP/LLLP – Partnership agreement

Question 12

Articles of Incorporation - Requirements

Answer 12

o 1. Name of Corporation (e.g. Corp., Inc. included)
o 2. Number of authorized shares
o 3. Address of registered office
o 4. Name of registered agent at office
o 5. Names and addresses of incorporators

Question 13

Novation

Answer 13

The substitution of a new contract for an old one. The new agreement extinguishes the rights and obligations that were in effect under the old agreement.

• ordinarily arises when a new individual assumes an obligation to pay that was incurred by the original party to the contract. It is distinguishable from the situation that occurs when another individual makes a guarantee that a debtor will pay what he or she owes to a creditor. **In the case of this, the original debtor is totally released from the obligation, which is transferred to someone else. The nature of the transaction is dependent upon the agreement between the parties.
• **IT also takes place when the original parties continue their obligation to one another, but a new agreement is substituted for the old one.

Question 14

Steps to Organization - Corporation

Answer 14

o 1. Execute articles of incorporation and file w/ secretary of state
o 2. Hold organizational meeting – elect board of directors, and directors adopt or reject contracts entered into by promoters
 PROMOTERS – people who take initiative in founding and organizing a corporation
• Owe fiduciary duty to the proposed corp., other promoters, and contemplated investors
• MAY profit in contracts with corporation — IF approved by board or majority vote of shareholders
• FIRM liable on promoter contracts if adopted (expressly or impliedly)

Question 15

RMBCA - Revised Model Business Corporation Act

Answer 15

a model set of law prepared by the Committee on Corporate Laws of the Section of Business Law of the American Bar Association and is followed by twenty-four states

Question 16

Operations/Termination - Sole P

Answer 16

o Sole owner makes decision, unless delegated otherwise

o T - When sole owner dies or otherwise departs from the business

Question 17

Operations - General Partnership/LLP

Answer 17

o All partners have legal rights in the management and conduct of business affairs
o Majority vote governs all ordinary course of business matters
o Unanimity is needed to take actions that are contrary to the partnership agreement OR to take action regarding “extraordinary matters”
 E.g. Admitting new partner, assigning partnership property, disposing of goodwill, any other act that would make it impossible to carry on the ordinary business of the partnership

Question 18

Operations - LP/LLLP

Answer 18

o One or more general partners make management decisions while limited partners generally sit on the sidelines playing the role of passive investors
o IF LPs leave sidelines, may forfeit their limited liability

Question 19

Operations - LLC

Answer 19

o Operate in one of two ways
 Owner managed – enjoy limited liability and take active role in the business
 Manager managed – delegate managerial powers

Question 20

Operations - Corporation

Answer 20

o Operate by triangle
 Bottom of triangle are shareholders (own company and get to elect directors)
 Next is Directors who select officers and make broad corporate policy
 Finally, officers run things day to day
o Shareholders sit on sidelines and enjoy limited liability

Question 21

Piercing the Corporate Veil

Answer 21

 Because corporations are distinct legal entities, their obligations are typically not visited upon their shareholders personally
 When dealing with SMALL closely held corporations, may pierce the veil, WILL not pierce public corporations
 Factors in consideration
• Commingling of funds and other assets of the corporation with those of individual shareholders
• Diversion of funds/assets to personal use of the shareholders
• Failure to maintain necessary corporate formalities
• Failure to adequately capitalize the corporation for the reasonably foreseeable risks of the enterprise
 COURTS tend to apply comparable factors in deciding issues in LLCs and LLPs

Question 22

Termination - General Partnership

Answer 22

o Rules laid out in RUPA (LPs, LLPs, LLLPs, & LLCs are fairly similar)

Question 23

RUPA - Revised Uniform Partnership Act

Answer 23

 Addition or subtraction of partners does not automatically lead to dissolution of the partnership
 Causes of DISSOSIATION
• Express will, death, bankruptcy, expulsion
 AFTER dissociation, partnership dissolves OR departing partner is bought out
 BUY-OUT formula = value of account on day of dissociation* - damages caused (if dissociation was wrongful)
• *valued by greater of liquidation value or going concern value
• 90day waiting period between dissociation and liquidation

Question 24

Termination by Liquidation

Answer 24

 1. Creditors (including partners)
 2. May have to reach into partners pockets to pay off creditors
 3. Rest of profits go to partners

Question 25

Termination by Dissolution

Answer 25

o VOLUNTARY DISSOLUTION
o INVOLUNTARY DISSOLUTION
 By SOS, for: taxes, file yearly reports, maintained a registered agent/office
 Judicially, for: fraudulently obtained approval for articles or abused legal authority
 Shareholders, for: deadlocked management, un-functional, legal/oppressive management
 Creditors, for: sue if claim in unsatisfied, corp is insolvent OR corp admits in writing that the creditors claim is due and owing and that it is insolvent
o Shareholder protected interests
 For other major changes
• Procedures – directors must propose/approve in a vote
• Appraisal rights – dissenting shareholders may request their shares be purchased at a court—valued rate

Question 26

Financial Structure - Partnership

Answer 26

o Under RUPA, each partner has a CAPITAL ACCOUNT (credited w/ the amount) = money plus the value of any other property, net of the amount of any liabilities, the partner contributes to the partnership, and the partner’s share of the partnership profits
 Contribution + share of profits – share of liabilities = balance
 OVERTIME balance may be reduced by distributions + partners share of losses
o REIMBURSED for
 Payments made and indemnified for liabilities incurred in the ordinary course of business
 Advances made to partnership beyond agreement
o SHARE profits and losses equally

Question 27

Financial Structure - Corporation

Answer 27

o Raise money by issuing shares
o ISSUING shares
 1. Quality test – can be issued in exchange for cash, prom. notes, any other tangible/intangible value to the corporation
 2. Quantity test – for at least par, face value, or price authorized by board
• IF sold for less than this amount, creditors/other shareholders may sue
o Directors who authorized sale
o Buyers who paid too little
o Transferees of original buyer
o DIVIDENDS/OTHER DISTRIBUTIONS
 Authorized by boards of directors
 MUST be consistent with shareholders’ rights
 Not render corp unable to meet its bills (bankruptcy insolvency)
 Not leave corp with fewer assets than liabilities (equity insolvency)

Question 28

Financial Structure - LLCs

Answer 28

o Tend to reflect comparable corporate/partnership provisions
 Contributions may be in cash, property, or other services
 MAY not make distributions to members if after, the firm would be dissolvent

Question 29

Rights and Duties - General Partnerships; • LPs, LLPs, LLLPs are roughly the same

Answer 29

o Entitled to equal management rights
o Right to have capital contribution repaid
o Share equally in profits
o Certain property rights – entitled to use/possess property on BEHALF of the partnership
o CREDITORS – of individual partners may NOT seize partnership property to satisfy individual debts of partners
 Can go to court and obtain a charging order
 Charging order = judge orders other partners to pay any distribution due to the debtor partner to that creditor instead
o COMPENSATION
 Partners NOT entitled to work performed for the partnership
 Unless special arrangement/agreement
o Delectus Personae –
 Partners may veto admission of potential new partners (NEED unanimous consent)
o INFORMATION RIGHTS
 Entitled to partnership books/records
 Each partner MUST furnish to partners/legal reps without demand: any information concerning the partnership’s business and affairs reasonably required for proper exercise of partners’ rights
o STANDARDS OF CONDUCT
 RUPA says only fiduciary duties
• 1. Duty of loyalty – don’t take more than share, avoid conflicts of interest, and refrain from competing w/ partnership business
• 2. Refraining from grossly negligent conduct, intentional misconducts, or knowing violation of the law

Question 30

Rights and Duties - Corporations

Answer 30

o Shareholders have few duties, several important rights
 1. Vote for corporate DIRECTORS
 2. Right to inspect corporate records (proper purpose/time/location)
 3. Right to have their financial priorities respected (e.g. if they hold preferred shares)
 4. Right to Exercise appraisal rights
 5. Right to file derivative lawsuits
o Directors/Officers
 1. Directors must direct – attend board meetings, basic familiarity, study financials
 2. BOTH have duty of care
• Good faith, best interests of corporation
 3. BOTH duty of loyalty
• Avoid conflicts of interest; transactions will be scrutinized
 4. DIRECTORS
• Respect the corporate opportunity doctrine
o BY NOT appropriating for themselves business opportunities that rightfully belong to the corporation
 DIRECTORS’ RIGHTS
• Right to rely on the reports of officers and other directors unless they have reason to be suspicious
• Business judgment rule – erroneous decisions (if in good faith) meaning bad decision will not be challenged by shareholders (courts NOT business experts)

Question 31

Rights and Duties - LLCs

Answer 31

o Owe duties or care and loyalty
o Operating agreement may limit but NOT totally eliminate these fiduciary duties
o RULLCA
 Provides that members shall discharge their duties consistently with contractual obligations of “good faith and fair dealing”
o Courts may protect members to escape an operating agreement by convincing them that
 1. Provisions are “manifestly unreasonable”
 OR
 2. Provide judicial dissolution if those managing the firm are guilty of “oppressive conduct”

Question 32

Authority of Owners and Managers

Answer 32

• AGENCY law provides the basic rules for the authority of owners and managers of various forms of business to bind their firms

Question 33

Authority - Partnerships LPs, LLPs, LLLPs

Answer 33

o An act of a partner, for apparently carrying on in the ordinary course of business the partnership business binds the partnership
 UNLESS the partner had no authority
o An act that is UNUSUAL
 Will bind only if specifically authorized by other partners
o AUTHORITY
 Actual authority (expressed or implied)
 Apparent authority
• CANNOT exist where the third party knows of a partner’s lack of authority OR the partner’s action is one that requires unanimity, such as admitting new partner
 EVEN if it lacks either of these can still bind partnership by being ratified through acceptance of other partners of the act or its benefits
o TORT LIABILITY
 Consistent with agency law, partnerships are generally liable for the torts committed by their partners or other agents within the scope of their employment
 INTENTIONAL torts – a partnership is usually liable if a partner commits an intentional tort while trying to advance partnership interests, even if he or she does so in a wrongful way
o LIABILITY
 Joint and Several Liability
• Under RUPA, a creditor may sue ANY general partner and hold solely liable without suing the others
• The assets of the partnership must be exhausted FIRST before proceeding against the individual assets
 LATE ARRIVERS
• If a general partner joins an existing partnership, he or she is PERSONALLY liable for all subsequently-incurred debts, BUT is liable for preexisting debts ONLY out of his or her partnership contribution

Question 34

Authority - Corporations

Answer 34

o	Directors
	Manage the business in a “big picture” sense 
	Broad authority to borrow money, sell corporate property, hire/fire officers other employees, declare/refuse to declare dividends, make/refuse to make other distributions to shareholders;, set the salaries of employees, officers, and even themselves, & propse for shareholder approval major changes
o	Officers
	Day-to-day management
	Express authority derived from 
•	Articles of incorporation
•	By-laws
•	Directors’ resolutions
•	Statutes
	Implied authority
•	Derived by virtue of their offices 
	Always board ratification

Question 35

Authority - LLCs

Answer 35

o Member or manager managed – per operating agreement
o Absent provision - assumed that member managed (much like general partnership)
 1. Each member has equal rights in management
 2. Ordinary business decision – need majority vote
 3. Outside ordinary business – need unanimous approval
 4. Operating agreement may only be amended with approval of all members
o IF manager managed –
 WILL operate much like a limited partnership – managers assuming the role of the general partner
• RULLCA – matters related to the activities of the company will be decided exclusively by the managers
• Managers have equal rights in management and conduct of the firm
• Issues arising in the ordinary course of business are decided by majority vote of the managers
• Consent of ALL the managers is required in extraordinary transactions
• Majority vote of members to remove manager