Business Structure and Other Law Topics

Question 1

Sole Propertiership

Answer 1

1) The sole proprietor is personally liable for all obligations of the business.
2) Cannot exist beyond the life of the sole proprietor.
3) P&L from the business flow through the business to the sole proprietor.
4) A sole proprietor is free to transfer his interest in the sole proprietor at will.

Question 2

Joint Venture

Answer 2

A joint venture is an association of persons or entities with the intent of engaging in a single business venture for profit.

Question 3

Different between Joint Venture and Partnership

Answer 3

Formation of a joint venture is for the purpose of a single transaction or project.

Question 4

General Partnership

Answer 4

1) Papers need not be drawn up to form a general partnership.
2) Nothing need be filed with the State.
3) An express agrement is not required; an agreement can be implied from conduct.

Question 5

Financing the partnership

Answer 5

Not required to make any particular financial contribution in exchange for their partnership interest.

Question 6

Operation of a General Partnership

Answer 6

Absent an agreement to the contrary, all partners have equal rights to manage the partnership business.

Question 7

Areas requiring unanimious consent

Answer 7

1) Admitting new partners.
2) Confessing a judgment
3) Making a fundamental change in the partnership.
4) Changing the partnership agreement
5) Assigning partnership property to others.

Question 8

Agency law in a general partnership

Answer 8

A principal is bound by Actual authority and apparent authority.

Actual authority- includes all authority that a princpal expressly gives to an agent plus any authority that can reasonably be implied from the express grant.

Apparent authority- Act of a partner apparently carrying on in the ordinary course of business the business of the partnership will bind the partnership through apparent authority.

Partner has not right to enter transactions outside of normal course of business.

Question 9

Rights in Partnership Property

Answer 9

Partnership is treated as owning all money and property. Partners are not treated as co-owners of partnership property. Partners have no right to possess or use partnership property other than for partnership purposes.

Question 10

Rights in Partnership Interest

Answer 10

A partner has personal property interest in the partnership consisting of the partner’s right to his share of the profit and surplus.

Interest is assignable to another partner, of which an assignee has rights to partner’s share of profits. The assignee has no management rights.

Question 11

Creditors may attach a partner’s interest-Called a Change Order

Answer 11

A creditor of an individual partner may obtain from a court a charging order against an individual partner’s share of profits.

1) Does not cause a dissolution of the partnership.
2) Does not make a creditor a partner or allow the creditor to participate in partnership affairs.

Question 12

Partner Death

Answer 12

On partner’s death right to profits vests in the heirs. As previously noted, the right to partnership property vests in surviving partners.

Question 13

Other rights of Partners

Answer 13

1) Right to Indeminfaction and Contribution
2) Right to Inspect Books and Records
3) Right to Bring Legal Action Against Partnership

Question 14

Duties and Legal Obligations of Partners

Answer 14

1) FIdicuary Duties Owed to Other Partners

2) Each Partner Personally Liable for All Partnership Obligation. All are liability is joint and several.

Question 15

Profits and Loss Allocation

Answer 15

Absent and agreement to the contrary, all partners have equal rights to share in the profits and losses of the partnership.

Question 16

Distributions

Answer 16

Partners have no specific right to receive distributions from the partnership other than as they agree.

Question 17

Dissociation

Answer 17

Change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business.

Events of Dissociation

1) Partner notifies the partnership that they want to withdraw.
2) An event occurs that was set out in the partnership agreement as an event that would cause a dissociation.
3) Partner is expelled from the partnership by unimous vote or as provided in the partnership agreement.
4) Partner becomes a debtor in bankruptcy or the like;
5) Partner dies

Question 18

Wrongful Dissociation

Answer 18

Partner will be deemed to have wrongfully dissociated if the dissociation is a breach of an express term of the partnership.

Question 19

Dissolution

Answer 19

Must be wound up when any of the following happen

1) Partner in a relationship at will gives notice of intent to withdraw.
2) In a partnership of definite term i) all partners consent to dissolution ii) term has expired iii) 90 days have passed since a partner has died, been declared bankrupt or has wrongfully disociated.
3) Occurance of an event specified in a partnership agreement.
4) Judicial decree on application of a partner or a creditor to dissolve.

All partners, surviving partners or executors may wind up the partnership

Question 20

Distribution of Assets

Answer 20

1) Creditors, including partners who are creditors are paid first.
2) Each partner is entitled to payment.
3) Amount due= deduct from the assets left upon dissolution any amounts owed to creditors.
4) If any money remains, funds are divided among the partners.

Question 21

Limited Liability Partnership

Answer 21

Differences to a GP:

1) Partners not liabilites for acts of fellow partners, employees or agents.
2) Liable for Own negligence and negligence of those under direct control
3) Generally not personally liable for debts and contractual obligations
4) LLP must file with state
5) Must provide name, name and location of its office number of partners etc.
6) Partnerships can convert to LLP.

Question 22

Nature of a Limited Partnership

Answer 22

1) Generally no perpetual life

2) Similiar to a Corporation

Question 23

Formation of a Limited Partnership

Answer 23

1) Must file with state
2) Must include that entity is an LP, agent of service of process, address of office, name and business of each general partner
3) Latest date upon which the limited partnership is to dissolve.
4) Partners in a limited partnership can contribute cash, property or services already performed. Many also permit promissory notes.

Question 24

General Partners in an LP

Answer 24

1) Personally liable for all partnership debts. If there is a loss, only the general partner can be held personally liable.
2) May also be a limited partner at the same time.
3) May be a secured or unsecured creditor.

Question 25

Limited Partners

Answer 25

1) Liability is limited to his investment and unpaid capital.
2) Has no right to part in management of business. Is not an agent of the business.
3) A limited partner who participates in control of the business is liable to any creditor who reasonably believes he is a general parter.
4) Limited partner may vote on extraordinary matters without occurring liability.
5) May assign his interest in the partnership
6) New partner can be added only upon the consent of all partners
7) Limited partner does not owe a fidicuary duty to the partnership.

Question 26

Allocation of Profits and Losses

Answer 26

Absent agreement, based upon capital contributions.

Question 27

Termination of Limited Partnership

Answer 27

May be dissolved:

1) Occurance of event or time period stated.
2) Written consent of all partners
3) Withdrawal or death of general partner
4) Judicial decree

Death of a limited partner will not dissolve the partnership.

Question 28

Distribution of Assets

Answer 28

1) Creditors- includes partners who are creditors
2) Former partners- in satisification of liabilties
3) Partners- First return contributions, and then to distribute profits

If there is a loss, general partners are personally liable, limited partners are not personally liable beyond capital commitments.

Question 29

Limited Liability Company

Answer 29

1) Limited liability that shareholders of a corporation enjoy
2) Ability to be taxed like a partnership (P&L flows through the LLC)

Question 30

Formation of an LLC

Answer 30

Must file articles of organization with the secretary of state

1) Statement that the entity is an LLC
2) Name of the LLC
3) Street address of office and its registered agent
4) If Management is to be vested in managers, a statement to the effect
5) Name of managers of company.
6) Most states allow one person to form an LLC.
7) Members may contribute, property cash or services, or promissory notes.

Question 31

Operation of an LLC

Answer 31

1) All members may participate in management
2) Voting strength proportional to contributions
3) P&L allocated according to contributions
4) No right to distribution
5) Transferibility of Ownership and rights- must have consent of all other members.
6) Books and Records- each member is entitled to inspection of books and records.

Question 32

Termiantion of LLC

Answer 32

Will dissolve upon:

1) Expiration of the period of duration stated in the articles.
2) Consent of all members
3) Death, retirement, resignation, bankruptcy, incompetence
4) Judical decree or adminstrative order dissolving the LLC for violation of law.

Question 33

Nature of a corporation

Answer 33

1) Only the corporation is liable for corporate obligations.
2) No personal liability.

Question 34

C Corporation Taxation

Answer 34

A corporation is taxed as an entity distinct from its owners. It must pay taxes on any profits it makes. Stockholders generally did not have to pay tax on the profits of the corporation until they are distributed.

Question 35

S Corporation Taxation

Answer 35

Restrictions on S Corporations:

1) Stock can be held by no more than 100 persons
2) Shareholders must be individuals,estates or certain trusts.
3) Corporation must generally be domestic corporation
4) There can only be one class of stock
5) Foreign Shareholders are generally prohibited.

Question 36

Power of Corporation

Answer 36

Power to run corporation is vested in the board of directors, which is elected by shareholders.

Question 37

Perpetual Life

Answer 37

Corporation generally has perptual life.

Question 38

Formation of Corporation

Answer 38

1) Corporation are created by complying with a state incorporation statute
2) Promoters promote Capital Committments (IPO)
3) Articles of Incorporation- must file incorporation with the state.

Question 39

Ultra Vires Acts

Answer 39

Each state requires a purpose clause. If a corp has a narrow purpose clause and undertakes business outside the clause it is said to be acting “ultra vires”.

Question 40

Bylaws

Answer 40

Bylaws are adopted by the incorporators or the board of directors. They are not part of the articles of incorporation and are not required to be filed with the state.

Question 41

Disregard of Corporate Entity

Answer 41

Piercing the Corporate Veil:

1) Shareholders commingle personal funds with corporate funds.
2) Corporation was inadequately capitalized at the time of formation
3) Commiting fraud on existing creditors.

Question 42

Foreign Corporations

Answer 42

1) Contents of the Certificate of Authority are the same as the domestic corporation.
2) Effect of transacting business without a certificate it is subject to fines.
3) Transacting business contemplates ongoing and continous transactions.

Question 43

Financing the Corporation

Answer 43

1) Debt Securities
2) Equity Securities (Bonds)
3) Equity Securities (Stocks)- Corps must issue stock.

Question 44

Shareholders Voting Rights

Answer 44

1) Have the right to vote to elect or remove directors.
2) Have right to approve fundemental changes.
3) General rule is that one share, one vote.
4) Shareholders may vote only if a quorum is present.

Question 45

Distributions (dividends)

Answer 45

1) Noncumulative preferred shares- The dividend is cumulative the right to a dividend preference for a particular year is extinguished if it is not declared for that year.
2) Cumulative Preferred Shares- The right to receive the preference accumulates and must be paid before nonpreferred shares may be paid any dividend.
3) Stock Dividends- Issued from a corporation’s own “authorized but unissued shares”.

Question 46

Shareholder Agreements

Answer 46

1) Voting Trusts- Agreement of shareholders whereby all shares owed by the parties to the agreement are transferred to a trust.
2) Voting agreements- Has the same objective as voting trust but less formal. Shareholders simply agree among themselves to vote their share shares as the majority of signers directs.

Question 47

Preemptive Rights

Answer 47

Shareholders have no preemptive rights unless the articles so provide.

They not apply not apply to stock issued:

1) Within 6 months of incorporation
2) In exchange for services or property
3) To directors, employees, etc, as compensation or
4) Shares have been repurchased.

Question 48

Derivative Action vs Direct Action

Answer 48

Derivative action may be brought only to vindicate wrongs against the corporation. If s shareholder seeks to vindicate the shareholder’s own rights against the corporation, a direct action by the shareholder against the corporation is appropriate, rather than a derivative action.

Recoveries in shareholder derivative actions go to the corporation and not to the shareholder who brought the action.

Question 49

Directors-Rights, Duties, and Obligations

Answer 49

1) Board of directors has sole discretion to declare distributions to shareholders.
2) Directors are Fiduciaries of the corporation and must act in best interests of the corporation.
3) Business Judgement Rule- Director is not liable as long as the act in good faith of the company.
4) Directors are held liable for authorizing a distribution in violation of law.
5) Directors owe their corporation a duty of loyalty and must act in the best interests of the corporation.
6) A director is presented with a business opportunity that is of interest to his corporation, generally the duty of loyalty prohibits the director from taking the opportunity for himself.

Question 50

Indemnifcation

Answer 50

Corps. are allowed to indemnify directors for expenses for any lawsuit brought against them in their corporate capacity.

Question 51

Officers- RIghts, Duties, and Authority

Answer 51

1) Officers are selected by the directors and may be removed by the directors with or without cause.
2) A corporate president will generally have apparent authority to enter into contracts and act on behalf of the corporation in the ordinary course of business.
3) Corporate directors are subject to fidicuiary duties and must discharge their duties in good faith and with the same care as an ordinarily prudent person in a like position.
4) Officers may also serves as directors of the corporation.
5) Officer is not required to be a shareholder of the corporation but he or she may be.

Question 52

General Procedure for Fundamental Changes to Corporation

Answer 52

1) Majority of the board of directors must adopt a resolution setting forth the proposed action and submitting it for a vote.
2) Corporation must notify all shareholders even if they are not entitiled to vote.
3) Change must be approved by a majority of shares voted at the meeting.
4) Document setting forth the action taken must be exectued by the corporation and be filed with the state.

Question 53

Amendments to Articles of Incorporation

Answer 53

May amend articles of incorporation in any and as many respects as desired, as long as the provisions are lawful.

Question 54

Mergers, Consolidation and Share Exchange

Answer 54

Both corporations in a merger and all corporation involved in a corporations involved in a consolidation must follow the general procedure for corporate changes

When its not required:

1) Surviving corporation’s articles of incorporation will not be altered.
2) Number designations, and rights of the shares held byt the surviving corporations shareholders will not be altered.
3) Number of outstanding voting shares of surviving corportation will not increase by 20%
4) Number of participating shares will not increase by 20%.
5) Merger of subsidiary owned 90% or more by corporation.

Question 55

Termination of Corporation

Answer 55

Voluntary or Involuntary action required

1) Judical Dissolution
2) Merger out of existence.

Question 56

Reasons for selecting a Fiscal Year

Answer 56

1) Seasonal Operations
2) Major revenue operates under a fiscal year
3) Deferral of taxation- For tax purposes and ofertedn to push off taxation until another year. Must be approved by IRS.

Question 57

FICA-Federal Insurance Contribution Act

Answer 57

Provides workers and their dependents with benefits in case of death, disability or retirement. Employers must match employee’s contribution and employees are taxed on earned income only.

Question 58

Taxabaility

Answer 58

Social Security disability and health benfits are no taxable.

Question 59

Unemployment Compensation

Answer 59

Federal Unemployment Tax Act establishes a state-run system of insurance to provide income to workers who have lost their jobs.

Employers who have 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.

Payroll taxes generally assessed only against the employer. The federal unemployment tax rate is 6.0% of the first $7,000.

Question 60

Workers Compensation

Answer 60

State-run programs designed to enable employees to recover for injuries incurred while on the job.

Employers are responsible regardless of fault, only requirement being it occured while acting in the scope of employment.

Most employers must participate in workers’ compensation programs.

Employers pay for workers’ compensation by purchasing insurance from the state or a private carrier.

Question 61

Title VII of the Civil Rights Act of 1964

Answer 61

Prohibits discrimination in employment on the basis of race, sex, religion. All complaints are heard by the Equal Employment Opportunity Commission.

Question 62

Equal Pay Act

Answer 62

Prohibits an employer from discriminating by paying unequal wages on the basis of sex.

Question 63

Age Discrimination Act

Answer 63

Prohibits discrimination in the hiring, firing or compensating of workers on the basis of age. Protects workers age 40 and applies to employers having 20 or more employees.

Question 64

Americans with DIsabilities Act

Answer 64

Prohibits employers with 15 or more employees from discriminating against individuals.

Question 65

Occupational Safety and Health Act.

Answer 65

Set safety standards for worksites and may conduct worksite inspections, examine employers’ records and question employees with advance note and without a search warrant.

Question 66

Fair Labor Standards Act

Answer 66

Establishes a federal minimum wage. As long as covered employees are making at least the minimum wage, the basis of pay may be hourly, weekly, monthly, be piece rate, etc.

Question 67

National Labor Relations Act

Answer 67

Originally was adopted to give workers the right to bargain collectively for wages and other terms of employement.

Taft-Hartley Act prohibits labor unions from charging excessive union fees, forcing employers to pay for unperformed services or calling an improper strike.

Question 68

Employee Retirement Income Security Act

Answer 68

Governs federal pension laws.

Establishes standards for funding and investing of pension plans. These financial controls are to avoid mismanagement.

Not all employees need be eligible and may be required a period of eligibility.

Question 69

Consolidated Omnibus Budget Reconciliation Act of 1985

Answer 69

Allows certain individuals to continue the group health insurance coverage that they have through an employer after employment ends by paying up to 102% of the cost of the insurance.

Question 70

Money Laundering

Answer 70

Criminal practice of processing ill-gotten gains, or dirty money, through a series of transactions so that the gains appear to be proceeds from legal activities.

Stages of Money Laundering

1) Placement-Putting proceeds of illegal activities into system.
2) Layering-Move Funds Around to Make it Difficult to Follow.
3) Integration- Movement of money into Legitimate-Looking Transactions.

Question 71

Bank Secrecy Act

Answer 71

Was enacted in 1970 and is one of the primary tools used to fight money laudering

Question 72

Government Agencies Involved

Answer 72

Financial Crimes Enforcement Network-Bureau of treasury that administers the BSA.

Federal Banking Agencies

Question 73

Required Reports and Records

Answer 73

1) Currency Transaction Report-Transaction of more than $10,000, must be filed by bank for any transaction greater than $10K. Must be filed within 15 days of transaction.
2) Suspcious Activity Report- Must File an SAR for any suspicious transaction relevant to a possible violation of law or regulation.
3) Report of International Transportation of Currency or Monetary Instruments- Must be filed for anyone who physically transports any amount greater than $10,000.
4) Report of Foreign Bank and Financial Accounts exceeding $10,000- Must file if a foreign entity has accumulated securities, cash in account greater than $10,000.
5) Designation of Exempt Person- Must file an exempt person form to designate a customer who is exempt for the purpose of CTR reporting.

Question 74

Recordkeeping Requirements

Answer 74

1) Customer ID Program Information
2) Monetary Instrument Sales Records
3) Funds Transfer Recordkeeping and Travel Rule Requirements.
4) Phase I Exemptions from the CTR Requirements
5) Phase II Exemptions for the CTR Filing Requirements.

Question 75

Money Laundering Penalities

Answer 75

1) 20 years imprisonment and a fine of $500,000
2) Civil Forefeitures
3) Other Penalties.

Question 76

Sherman Act Section 1

Answer 76

1) Balance Anticompetitive and Competitive Effects
2) Per Se Violations-Inherently Illegal and without Legal Justification
3) Horizontal Restraints-Agreements Between Competitors
4) Vertical Restraints-Agreements by Those at Different Marketing Levels
5) Concerted Action Requirement-Action by Two or More Parties
6) Price Fixing-Agreements to Set Prices for Goods or Services
7) Market Allocations-Agreements Not to Compete in Specific Markets
8) Boycotts-Two or More Firms Agree not to Deal with a third party.
9) Tying Arrangements-Must buy one product to get another
10) Joint Ventures and Trade Associations