Business Structures Flashcards
What is the simplest form of business organization?
What is the biggest risk?
Sole proprietorship
Unlimited personal liability
Can a sole proprietorship have employees?
YES
Does the Federal government typically require a formal filing for a sole proprietorship?
NO
What are partnerships governed by?
The Uniform Partnership Act (UPA)
How many people does it take to form a partnership?
2 or more
Does a partnership have to be a formal agreement?
No, can be no agreement at all
How much tax does a partnership pay?
Zero.
Files return and all income and loss flows through to partners.
What is the disadvantage of a partnership?
unlimited personal liability for all partners in GP
Does the Partnership Agreement have to be in writing?
Only if its impossible to complete within one year.
What is a PARTNERSHIP AT WILL?
When two or more parties carry on as co-owners of a business without any agreement.
Does a partnership have PERPETUAL EXISTENCE?
NO, unlike a corporation.
If no written partnership agreement exists, how are debts distributed?
All partners deemed equal.
Can a union or a charity be a partnership?
NO, must have a FOR-PROFIT motive.
If a partnership’s purpose is impossible to complete within 12 months, what must be done?
Must have explicit agreement in writing.
What is some “evidence” of a partnership?
- Sharing of profits
- Common business ownership
- Management rights
Partnership’s authority to bind the partnership to contracts stems from what law?
AGENCY LAW
What is TORT LIABILITY in a partnership?
Joint and several (SEPARATE) liability.
A partner who commits a tort in the ordinary course of business creates a liability for HIMSELF AND FOR OTHER PARTNERS.
The right to manage the partnership cannot be assigned without
unanimous consent of ALL partners
Can partnership property assets be assigned or inherited?
NO, because they belong to the partnership.
May the ownership by general partners be unequal?
YES
Is a general partnership a separate legal entity?
YES
If Partner A originally contributed partnership property, can they take the property from the partnership?
Once property is deemed partnership property, no partner can take that property from the partnership, even if that partner originally owned and contributed it.
Also, a partner may not assign partnership property.
Who can assign partnership property to creditors?
The partnership itself
What is the definition of “partnership interest”?
The percentage of partnership capital and surplus owned by an individual partner.
The interest is assignable, attachable, and inheritable.
Does an assignee of partnership interest become a new partner?
No, not without unanimous consent of all partners.
Can a partner assign rights to a partnership distribution?
YES, just can’t assign partnership property or the right to manage.
How is partnership interest assigned no written agreement exists?
Assigned equally
Is an incoming partner liable for past debts of the partnership?
NO, NOT liable for past or current debts.
ONLY for future debts of the partnership.
New partners are not admitted to the partnership unless
there is unanimous consent of all the partners
Is an outgoing partner still liable for old debts of the partnership?
YES. Only the creditor can release the partner and there is no reason they would do that.
The liability of the new partner is generally limited to
the amount of his or her capital contribution to the partnership
Is a retiring partner responsible for new debts of the partnership?
Yes and would be liable unless the partnership gave notice of the partner’s retirement.
Actual notice to current creditors.
Constructive notice to potential creditors.
If a partner assigns partnership interest, are they still a partner?
YES
What do shareholders of a corporation have the power to do?
Elect the Board of Directors
What does the Board of Directors in a corporation have the power to do?
- Choose the Officers
- Set dividends
What do the Officers in a Corporation do?
Day to day management of the business
Biggest pro of a CORPORATION?
Biggest con of a CORPORATION?
Pro: limited liability, corp is its own entity
Con: double taxation of earnings
Does a corporation have continuous life?
YES, perpetual existence
How is ownership in a corporation represented?
With a stock certificate. Each is 1 vote.
What is included in the ARTICLES OF INCORPORATION?
- NAME of the corporation
- NAME of register agent
- AUTHORIZED NUMBER OF SHARES of stock
What are included in the bylaws of a CORPORATION?
- TIME and PLACE of shareholder meetings
- VOTING PROCEDURES (quorum #)
- fundamental CHANGES IN STRUCTURE
- Company-specific INFORMATION
What are the rules of management called that are adopted by the corporation at its first organizational meeting called?
BYLAWS
What does a promoter do for a corporation?
- Organize and perform business functions before corp is formed
- Sell stock on behalf of corp
- Individually liable for all contract breaches
If when a corporation is formed they decide not to ratify a contract entered into by the promoter, who is liable?
The promoter is held individually liable to the third party.
If a corporation continues to use the services pursuant to incorporation that was formed by the promoter, who is liable?
Promoter is primarily liable
Corporation had implied acceptance of contract by continuing to use services, also liable
What does it mean if the corporation grants novation to the promoter?
An agreement among the parties to substitute the corporation for promoter on contracts with creditors’ consent
What does the number of SHARES AUTHORIZED mean?
Maximum amount of shares allowed to be issued
What does the number of SHARES ISSUED mean?
Shares of a corporation which have been allocated and are subsequently held by shareholders.
Can treasury stock be distributed as a STOCK DIVIDEND?
YES.
What is the one case where there is no limit to liability with a corporation?
FRAUD
The Revised Business Model Business Corporation Act provides that
any shareholder may inspect a corporation’s books and records on five days notice for a proper purpose
this right CAN’T be limited by bylaws or articles
Who must approve fundamental changes such as mergers?
Shareholders
The power to amend articles of incorporation and bylaws is a major power held by _______.
shareholders
If an employee commits the tort of negligence, who is liable?
Both the employee and the corporation
What are ULTRA VIRES acts?
Acts considered outside the scope of corporate authority. NOT illegal, but huge impact on corporation.
Can bring about a shareholder’s derivative lawsuit.
Who is the beneficiary of a shareholder’s derivative lawsuit as a result of an ultra vires act?
The corporation as an entity, not the shareholders.
Corporations may indemnify directors and officers from a lawsuit if they
acted in good faith.
Who declares dividends?
Directors Declare Dividends
Dividends Debt after Declared
What kind of voting rights does preferred stock have?
NONE
What is cumulative preferred stock?
Pay dividends in arrears.
What is participating preferred stock?
1st - preferred gets dividend
2nd - common gets dividend
3rd - participating preferred share remaining dividend with common
Once a dividend is declared on preferred stock, what do the shareholders become?
Unsecured creditors
What kind of distribution is a stock split considered?
A capital distribution (NON-taxable)
Who must propose and who must pass an effort to dissolve the corporation?
BoD passes a resolution
Shareholders approve (do not need unanimous)
What is a merger?
2 companies combine, one survives
Who needs to approve a merger?
BoD approval (majority)
Shareholders (majority)
Formal plan of merger
What is a consolidation?
Two companies combine, neither survives
= NEW COMPANY, new stock
What is the exception to the corporate veil?
Fraud or undercapitalization
Would not just be limited to your contribution.
What happens if a shareholder comingles business funds and personal funds?
Pierces the corporate veil and holds the shareholder personally liable
When a corporation issues new shares, current shareholder must be given
pre-emptive right
What is considered DEBT SECURITIES?
Corporate bonds
Debentures
What is considered EQUITY SECURITIES?
Common & Preferred stock
Options
Warrants
If you do not file Articles of Limited Partnership, what happens?
Default to General Partnership. Unlimited personal liability.
LLP must maintain a minimum level of ____ in order to have limited liability
INSURANCE
Do all partners in an LP have limited liability?
NO, Still need a general partner with unlimited liability
Then, rest of partners have limited liability (won’t lose more than what they initially invested)
LLPs were created in an effort to protect:
Attorneys, doctors, accountants, engineers, architects, etc. to protect partners from the malpractice of their partners
A Corporation must file within ___ days of formation in order to become an S-Corp.
75 days
S-Corp election requires ______ consent of all owners
unanimous
S-Corp advantage over C-Corps
Eliminate the double taxation that regular corporations face but must meet certain requirements
What kind of stock is allowed in an S-corp?
Only common, NO PREFERRED.
Can an S-Corp have a C-Corp as a shareholder?
NO
Main reason to chose S-Corp status:
AVOID double taxation
Is the owner of an LLC protected from liability for a tort they personally commit?
NO, liable for torts of negligence or malpractice
If a shareholder of an S-corp dies, what happens?
The estate becomes a shareholder of the S-corp.
If the operating agreement of an LLC does not address Profit and Loss Allocation, what happens?
Distributed in accordance with shareholder’s capital accounts
An LLC defaults to what kind of tax return?
Partnership (1065)
Unless they elect to be taxed as an S-Corp
What is a joint venture?
Used for a General Partnership type relationship but ONLY FOR A ONE TIME purpose. Governed by GP law.
GP vs. LP vs. LLP
GP - unlimited personal liability of all partners (default if not state filing)
LP - one GP, limited liability for rest
LLP - limited liability of all partners
What happens if an LP participates in management?
Will lose LP status and be considered a General Partner.
What happens if a general partner disassociates with the partnership?
The partnership is NOT considered DISSOLVED. Does not automatically take place.
What are shareholder “appraisal rights” related to?
Shareholders who OPPOSE A MERGER
These shareholders may request that their shares be purchased at a price set by the court.
Failure to file an annual report for a corporation results in what?
An INVOLUNTARY DISSOLUTION
