Business Structures Flashcards
What are the key elements of a valid Partnership?
Must have two or more partners.
Must intend to engage in business for profit.
Life of partnership is of limited duration in most cases. Agency/fiduciary relationship is created.
Partnership interest is always considered personal property (Unlimited Liability).
Can corporations and other partnerships become partners in a partnership?
Yes; corporations and other partnerships can become partners of a partnership
Name the Basics of Partnership Formation - Form of agreement and intent
Agreement can be very informal - either ORAL; IMPLIED or WRITTEN
Intent is to make a profit
When must a partnership agreement be in writing?
Must be WRITTEN if partnership activity falls within Statute of Frauds: “GROSS”
Sale of Goods worth $500 or more Real estate sales Over one year required to perform contract Suretyship (Guarantee debt of another) Statements in consideration of marriage
How are profits shared in a partnership?
Profit sharing is equal by default unless:
A. partnership agreement says otherwise
B. specified; sharing of losses follows same pattern as sharing of profits
What is the Liability of General Partners in a partnership?
Joint Liability - Partners are collectively liable for debts/torts
Several Liability - Partners are individually liable for debts/torts
Which assets may creditors of a partnership go after; and in which order?
Creditors must go after partnership assets first before suing partners individually
What are the rights of a General Partner in a partnership?
General Partners have joint control over the management of the partnership and its affairs
Unanimous vote needed to change the structure of the partnership
Each partner has full right to inspect partnership accounting and business
Partner has the authority to assign their interest to another partner
What does and does NOT happen when a General Partner assigns their partnership interest to someone else?
- Other party gets that partner’s share of the profits and/or capital contribution.
- Does NOT give assignee authority to vote on partnership business
- Assignee does NOT have right to inspect partnership books
- Assignor still maintains liability
- Partner does NOT have the right to assign their interest in partnership property or allow partner’s creditors to attach a lien.
What is the actual authority of a partner in a partnership?
Has authority to bind the partners to a contract.
What is the APPARENT authority of a partner in a partnership?
To make virtually any contract that involves the business of the partnership, with the exception of:
- Admitting a new partner
- Selling or pledging property
- Admitting or submitting a legal claim
- Promising to pay the debts of another
Aparent authority doesn’t apply when partners agree to limits on the actual authority of a partner and notify 3rd parties of the limit
With respect to liability on subsequent debts; what happens when a partner withdraws from a partnership?
Partner not liable assuming notice given.
Notice must be given to nullify apparent authority
People who had knowledge of their role must be personally notified
Public must be notified
With respect to PRECEDING debts; what is the liability of a partner in a partnership?
Old partners: Jointly and severally liable unless creditors grant novation
New partners: Only capital account at risk on preceding debts. For subsequent debts; they are joint and severally liable.
What happens upon the death of a partner in a partnership?
Partner’s estate gets share of partnership profits and capital account
Estate does NOT get any partnership assets
Remainder of partners own partnership assets
Heirs of decedent are not added as partners unless remaining partners unanimously agree
What happens during the winding up of a partnership and in what order?
- Creditors get paid; Partners can also be creditors
- Distributions in arrears get paid
- Partners get return of Capital accounts
- Any remaining distributions
Note: NO documents need to be filed with state to dissolve general partnership.
What are the requirements to form a Limited Partnership (LP)?
Governed by state L.P. laws
Must file a certificate of limited partnership (formal)
Only General Partners must be listed; and at least one limited partner
Future additions or subtractions of G.P. require certificate to be updated with state
How are profits and losses split in a Limited Partnership?
Unlike General Partnership.; L.P. profits/losses are split according to capital contributions by default
True or False: In a Limited Partnership; a General Partner can also be a Limited Partner at the same time.
True.
A Limited Partner; however; cannot also be a General Partner and maintain limited liability.
Do limited partners have a fiduciary responsibility to a Limited Partnership?
No. Limited Partners are do not have a fiduciary responsibility to Limited Partnership
What authority does a limited partner have under a Limited Partnership?
- Right to inspect records of the business.
- Can still vote on partnership business without losing limited liability
- Can consult and advise partnership without losing limited liability (assuming they don’t actually make the decisions)
What limitations does a limited partner have in a Limited Partnership?
- They have no authority as an agent to bind the partnership
- They can’t participate in management decisions and maintain limited liability.
What is the liability of a limited partner in a Limited Partnership?
Limited partners are liable to the extent of their capital contributions only
Exception - A Limited Partner (who cannot participate in management decisions) becomes involved with management decisions
Becomes liable to third parties IF they knew of their involvement
When does the dissolution of a Limited Partnership occur?
Automatically happens
- Once final General Partner leaves
- Time specified in certificate lapses
- Event specified in certificate happens
- Unanimous consent by partners
- Illegal activity
What is required to form a Limited Liability Partnership (LLP)?
- Majority vote required to form LLP
- Articles of LLP filed with Secretary of State
- Governed by laws of that State
- Limited Liability Partnership must be in name
- No General Partners - each LLP partner has limited liability - Exception: Negligence of partner or those under partner’s supervision
What are the key aspects of a Limited Liability Company (LLC)?
Members can participate in management and retain limited liability
Members don’t own any interest in LLC property
Members can assign interest; but not transfer it
Members divide profits equally unless otherwise stated
What are the key aspects of Joint Ventures (JV)?
Informal arrangement between 2 or more parties to conduct business. Not a legal entity.
Similar to a General Partnership; except generally; a JV is for a single business activity
Example: two companies promote a concert
Ability to bind other JV partners is limited
JV partners still have a fiduciary responsibility to JV
No state filings or paperwork necessary
What are the key aspects of a corporation?
Shareholders have limited liability to the extent of their capital contribution
C Corporations have a perpetual life and continue even after shareholder death
Corporations are a separate legal entity from their owners and can own property; sue; be sued
Corporations must file Articles of Incorporation in state of governance
What are some of the advantages of a corporation?
Ability to raise capital
Limited liability - unless actions occur that pierce the veil
Ease of ownership transfer
What actions can pierce the veil of a corporation?
Commingling of assets
Fraud
Under-capitalization
How is a corporation governed?
Board adopts Corporate Bylaws to govern company business
What items are required in a corporations Articles of Incorporation?
Name; purpose; powers of Corporation
Name of registered agent & incorporators
Stock share classes authorized; par values
Name of corporate officers NOT required
What is the biggest disadvantage of a corporation?
Double taxation
How are corporations formed by promoters?
Prior to formation, promoters might enter into contracts on its behalf. The contract is not binding unless BOD adopts the contract.
Promoter is personally liable.
BOD cannot ratify the contract.
Promoters have fiduciary duty to act loyal, but aren’t entitled compensation
When is a corporation liable for pre-incorporation actions taken by a Promoter?
Promoter personally liable unless third party agrees to a novation and releases Promoter
from liability; UNLESS the corporation adopts.
In how many states must a corporation incorporate?
Corporations are only incorporated in one state
Become a domestic corp. in that state
Become a foreign corp. in any other state they do business in
Describe Common Stock dividends and their rights/liabilities in relation to shareholders/corporations.
Dividends are NOT a shareholder right
Once declared; dividends become a liability to corporation
What are key aspects related to the holding of Preferred Stock?
No voting rights
Get first rights to dividends and liquidation
Cumulative Preferred Stock dividends that go undeclared accumulate and Corporation must pay it before issuing dividends to Common Stockholders
Participating Preferred Stock gives shareholder right to dividends in addition to what they get as Preferred Stockholders
What aspects are related to all classes of corporate stock?
Valid consideration must be given for shares
Cash; property; or services performed
No promises to pay or perform services
What are the key aspects of Treasury Stock?
No Gain/Loss recognized on Treasury stock
Have no voting rights
Can be re-purchased below par
Cannot produce dividends
What is a stock subscription and what is required for it to be valid?
An offer to buy shares of stock
Must be accepted by corporation to be valid
Offer cannot be revoked for 6 months
Subscriber becomes liable once accepted
When is a corporation liable for torts by employees?
If committed within the normal scope of the employee’s job
Even if they were disobeying orders
Per respondeat superior
What are the key aspects of a corporate officer?
Appointed by the Board of Directors
Act as Agents
Owe a fiduciary duty to the corporation
Can have legal fees paid by corporation for defense in lawsuit brought on them from carrying out their normal duties (exception- suit brought against officers by shareholders)
What are the key aspects of a corporation’s board of directors (BOD)?
- Elected by shareholders
- Owe fiduciary duty to corporation
- Must act in good faith to avoid being liable for bad judgment
- Adopt by-laws
- Reacquire T/S and declare dividends
- Hires, Fires, sets salaries of officers (mgmt)
What is Ultra Vires?
Corporation management acting beyond what the Articles of Incorporation allow
Shareholders can sue for Ultra Vires (only those board members that voted to take action)
When is inspecting Board minutes the right of a shareholder?
Shareholders can inspect Board minutes and records only if request is in good faith
Who must approve mergers and consolidations?
Boards must approve
Shareholders must approve by Majority
Disapproving shareholders can get an appraisal and get their stock back at current market price
Merger does NOT need creditor approval
What characterizes a Professional Corporation?
Shares owned only by licensed professionals (CPAs; attorneys; etc.)
Limited Liability for debts
Personal Liability for negligence
Who can and cannot own an S-Corporation?
CAN be owned by Estates; Trusts; and Individuals
CANNOT be owned by a C-Corporation
What is the primary advantage of an S-Corporation?
Avoidance of Double Taxation
What are the disadvantages of an S-Corporation?
No more than 100 shareholders allowed
One class of stock allowed
Shareholders must be US Citizens/Residents
In a partnership, when is unanimous consent required?
“AGAST”
Admitting a new partner
Guaranteeing the debts of a 3rd party (suretyship)
Admitting or submitting a legal claim in court
Sale or pledge or partnership property
Third parties are notified of a limit to the partner’s actual authority
If a partnership breaches a contract, what must the 3rd party do to recover damages?
Attempt to recover damages out of partnership assets first, then may access the personal assets of the partners for remaining amounts owed. If one partner is bankrupt, then may access sufficient assets from solvent partners.
If a partner’s losses reduce the partner’s capital account below zero, what happens?
The partner is personally liable for the deficit
What happens if a partner transfers their interest in the partnership to another party?
The transferor remains the partner and continues to have liability for losses and claims against the partnership
The transferee is entitled to that partner’s share of profits and surplus, but has not other rights or obligations - and is not a partner
What is the difference between the general partner and the limited partner in a limited partnership (LP)?
General partner is responsible for the management of the entity, has a fiduciary responsibility and has unlimited personal liability for the obligations of the partnership
Limited partner is a passive investor with limited authority and liability - no personal liability
General partner may withdraw from the partnership, a limited partner may not
The withdrawal of a general partner will dissolve the LP
The withdrawal of a limited partner will not
When is an Limited Partnership (LP) most applicable?
In arrangements like real estate deals where one group of partners (the limited partners) provide most of the capital and benefit from the limited liability, and another group (the general partners) do the work and make the decisions and do not have limited liability
When are Limited Liability Partnerships (LLPs) most applicable?
Popular among professionals, such as accountants, and many states only allow LLPs for such groups. They are designed to provide protection to innocent partners against the action of other partners.
When are Limited Liability Companies (LLCs) most applicable>
To provide characteristics of a corporation in the form of limited liability to its owners with the tax characteristics of a sole proprietorship. In many cases, an LLC is the general partner in an LP for the purpose of providing the general partners with the same limited liability as limited partners.
Members have no interest in the LLC’s assets, only the LLC itself (like a corporation)
LLC’s operating agreement does not need to be in writing, but its existence can help prevent and resolve disputes among the owners
By-Laws - what are they and who adopts them?
Rules and regulations that govern and help to guide the internal management in performing its duties.
Either incorporators or the BOD adopts them
What is the “Business Judgement Rule”?
A principle that protects directors from personal liability for acts performed in good faith on behalf of the corporation.
They are liable for their own negligence.
