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CPA: Regulation > Business Structures > Flashcards

Business Structures Flashcards

1
Q

What is the simplest form of business organization?

What is the biggest risk?

A

Sole proprietorship

Unlimited personal liability

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2
Q

Can a sole proprietorship have employees?

A

YES

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3
Q

Does the Federal government typically require a formal filing for a sole proprietorship?

A

NO

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4
Q

What are partnerships governed by?

A

The Uniform Partnership Act (UPA)

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5
Q

How many people does it take to form a partnership?

A

2 or more

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6
Q

Does a partnership have to be a formal agreement?

A

No, can be no agreement at all

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7
Q

How much tax does a partnership pay?

A

Zero.

Files return and all income and loss flows through to partners.

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8
Q

What is the disadvantage of a partnership?

A

unlimited personal liability for all partners in GP

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9
Q

Does the Partnership Agreement have to be in writing?

A

Only if its impossible to complete within one year.

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10
Q

What is a PARTNERSHIP AT WILL?

A

When two or more parties carry on as co-owners of a business without any agreement.

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11
Q

Does a partnership have PERPETUAL EXISTENCE?

A

NO, unlike a corporation.

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12
Q

If no written partnership agreement exists, how are debts distributed?

A

All partners deemed equal.

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13
Q

Can a union or a charity be a partnership?

A

NO, must have a FOR-PROFIT motive.

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14
Q

If a partnership’s purpose is impossible to complete within 12 months, what must be done?

A

Must have explicit agreement in writing.

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15
Q

What is some “evidence” of a partnership?

A
  • Sharing of profits
  • Common business ownership
  • Management rights
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16
Q

Partnership’s authority to bind the partnership to contracts stems from what law?

A

AGENCY LAW

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17
Q

What is TORT LIABILITY in a partnership?

A

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.

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18
Q

The right to manage the partnership cannot be assigned without

A

unanimous consent of ALL partners

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19
Q

Can partnership property assets be assigned or inherited?

A

NO, because they belong to the partnership.

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20
Q

May the ownership by general partners be unequal?

A

YES

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21
Q

Is a general partnership a separate legal entity?

A

YES

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22
Q

If Partner A originally contributed partnership property, can they take the property from the partnership?

A

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.

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23
Q

Who can assign partnership property to creditors?

A

The partnership itself

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24
Q

What is the definition of “partnership interest”?

A

The percentage of partnership capital and surplus owned by an individual partner.

The interest is assignable, attachable, and inheritable.

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25
Q

Does an assignee of partnership interest become a new partner?

A

No, not without unanimous consent of all partners.

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26
Q

Can a partner assign rights to a partnership distribution?

A

YES, just can’t assign partnership property or the right to manage.

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27
Q

How is partnership interest assigned no written agreement exists?

A

Assigned equally

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28
Q

Is an incoming partner liable for past debts of the partnership?

A

NO, NOT liable for past or current debts.

ONLY for future debts of the partnership.

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29
Q

New partners are not admitted to the partnership unless

A

there is unanimous consent of all the partners

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30
Q

Is an outgoing partner still liable for old debts of the partnership?

A

YES. Only the creditor can release the partner and there is no reason they would do that.

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31
Q

The liability of the new partner is generally limited to

A

the amount of his or her capital contribution to the partnership

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32
Q

Is a retiring partner responsible for new debts of the partnership?

A

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.

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33
Q

If a partner assigns partnership interest, are they still a partner?

A

YES

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34
Q

What do shareholders of a corporation have the power to do?

A

Elect the Board of Directors

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35
Q

What does the Board of Directors in a corporation have the power to do?

A
  • Choose the Officers

- Set dividends

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36
Q

What do the Officers in a Corporation do?

A

Day to day management of the business

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37
Q

Biggest pro of a CORPORATION?

Biggest con of a CORPORATION?

A

Pro: limited liability, corp is its own entity

Con: double taxation of earnings

38
Q

Does a corporation have continuous life?

A

YES, perpetual existence

39
Q

How is ownership in a corporation represented?

A

With a stock certificate. Each is 1 vote.

40
Q

What is included in the ARTICLES OF INCORPORATION?

A
  • NAME of the corporation
  • NAME of register agent
  • AUTHORIZED NUMBER OF SHARES of stock
41
Q

What are included in the bylaws of a CORPORATION?

A
  • TIME and PLACE of shareholder meetings
  • VOTING PROCEDURES (quorum #)
  • fundamental CHANGES IN STRUCTURE
  • Company-specific INFORMATION
42
Q

What are the rules of management called that are adopted by the corporation at its first organizational meeting called?

A

BYLAWS

43
Q

What does a promoter do for a corporation?

A
  • Organize and perform business functions before corp is formed
  • Sell stock on behalf of corp
  • Individually liable for all contract breaches
44
Q

If when a corporation is formed they decide not to ratify a contract entered into by the promoter, who is liable?

A

The promoter is held individually liable to the third party.

45
Q

If a corporation continues to use the services pursuant to incorporation that was formed by the promoter, who is liable?

A

Promoter is primarily liable

Corporation had implied acceptance of contract by continuing to use services, also liable

46
Q

What does it mean if the corporation grants novation to the promoter?

A

An agreement among the parties to substitute the corporation for promoter on contracts with creditors’ consent

47
Q

What does the number of SHARES AUTHORIZED mean?

A

Maximum amount of shares allowed to be issued

48
Q

What does the number of SHARES ISSUED mean?

A

Shares of a corporation which have been allocated and are subsequently held by shareholders.

49
Q

Can treasury stock be distributed as a STOCK DIVIDEND?

A

YES.

50
Q

What is the one case where there is no limit to liability with a corporation?

A

FRAUD

51
Q

The Revised Business Model Business Corporation Act provides that

A

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

52
Q

Who must approve fundamental changes such as mergers?

A

Shareholders

53
Q

The power to amend articles of incorporation and bylaws is a major power held by _______.

A

shareholders

54
Q

If an employee commits the tort of negligence, who is liable?

A

Both the employee and the corporation

55
Q

What are ULTRA VIRES acts?

A

Acts considered outside the scope of corporate authority. NOT illegal, but huge impact on corporation.

Can bring about a shareholder’s derivative lawsuit.

56
Q

Who is the beneficiary of a shareholder’s derivative lawsuit as a result of an ultra vires act?

A

The corporation as an entity, not the shareholders.

57
Q

Corporations may indemnify directors and officers from a lawsuit if they

A

acted in good faith.

58
Q

Who declares dividends?

A

Directors Declare Dividends

Dividends Debt after Declared

59
Q

What kind of voting rights does preferred stock have?

A

NONE

60
Q

What is cumulative preferred stock?

A

Pay dividends in arrears.

61
Q

What is participating preferred stock?

A

1st - preferred gets dividend
2nd - common gets dividend
3rd - participating preferred share remaining dividend with common

62
Q

Once a dividend is declared on preferred stock, what do the shareholders become?

A

Unsecured creditors

63
Q

What kind of distribution is a stock split considered?

A

A capital distribution (NON-taxable)

64
Q

Who must propose and who must pass an effort to dissolve the corporation?

A

BoD passes a resolution

Shareholders approve (do not need unanimous)

65
Q

What is a merger?

A

2 companies combine, one survives

66
Q

Who needs to approve a merger?

A

BoD approval (majority)
Shareholders (majority)
Formal plan of merger

67
Q

What is a consolidation?

A

Two companies combine, neither survives

= NEW COMPANY, new stock

68
Q

What is the exception to the corporate veil?

A

Fraud or undercapitalization

Would not just be limited to your contribution.

69
Q

What happens if a shareholder comingles business funds and personal funds?

A

Pierces the corporate veil and holds the shareholder personally liable

70
Q

When a corporation issues new shares, current shareholder must be given

A

pre-emptive right

71
Q

What is considered DEBT SECURITIES?

A

Corporate bonds

Debentures

72
Q

What is considered EQUITY SECURITIES?

A

Common & Preferred stock

Options

Warrants

73
Q

If you do not file Articles of Limited Partnership, what happens?

A

Default to General Partnership. Unlimited personal liability.

74
Q

LLP must maintain a minimum level of ____ in order to have limited liability

A

INSURANCE

75
Q

Do all partners in an LP have limited liability?

A

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)

76
Q

LLPs were created in an effort to protect:

A

Attorneys, doctors, accountants, engineers, architects, etc. to protect partners from the malpractice of their partners

77
Q

A Corporation must file within ___ days of formation in order to become an S-Corp.

A

75 days

78
Q

S-Corp election requires ______ consent of all owners

A

unanimous

79
Q

S-Corp advantage over C-Corps

A

Eliminate the double taxation that regular corporations face but must meet certain requirements

80
Q

What kind of stock is allowed in an S-corp?

A

Only common, NO PREFERRED.

81
Q

Can an S-Corp have a C-Corp as a shareholder?

A

NO

82
Q

Main reason to chose S-Corp status:

A

AVOID double taxation

83
Q

Is the owner of an LLC protected from liability for a tort they personally commit?

A

NO, liable for torts of negligence or malpractice

84
Q

If a shareholder of an S-corp dies, what happens?

A

The estate becomes a shareholder of the S-corp.

85
Q

If the operating agreement of an LLC does not address Profit and Loss Allocation, what happens?

A

Distributed in accordance with shareholder’s capital accounts

86
Q

An LLC defaults to what kind of tax return?

A

Partnership (1065)

Unless they elect to be taxed as an S-Corp

87
Q

What is a joint venture?

A

Used for a General Partnership type relationship but ONLY FOR A ONE TIME purpose. Governed by GP law.

88
Q

GP vs. LP vs. LLP

A

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

89
Q

What happens if an LP participates in management?

A

Will lose LP status and be considered a General Partner.

90
Q

What happens if a general partner disassociates with the partnership?

A

The partnership is NOT considered DISSOLVED. Does not automatically take place.

91
Q

What are shareholder “appraisal rights” related to?

A

Shareholders who OPPOSE A MERGER

These shareholders may request that their shares be purchased at a price set by the court.

92
Q

Failure to file an annual report for a corporation results in what?

A

An INVOLUNTARY DISSOLUTION

CPA: Regulation (24 decks)

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