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Business Structures Flashcards

1
Q

What are the key elements of a valid Partnership?

A

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).

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2
Q

Can corporations and other partnerships become partners in a partnership?

A

Yes; corporations and other partnerships can become partners of a partnership

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3
Q

Name the Basics of Partnership Formation - Form of agreement and intent

A

Agreement can be very informal - either ORAL; IMPLIED or WRITTEN

Intent is to make a profit

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4
Q

When must a partnership agreement be in writing?

A

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
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5
Q

How are profits shared in a partnership?

A

Profit sharing is equal by default unless:
A. partnership agreement says otherwise

B. specified; sharing of losses follows same pattern as sharing of profits

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6
Q

What is the Liability of General Partners in a partnership?

A

Joint Liability - Partners are collectively liable for debts/torts

Several Liability - Partners are individually liable for debts/torts

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7
Q

Which assets may creditors of a partnership go after; and in which order?

A

Creditors must go after partnership assets first before suing partners individually

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8
Q

What are the rights of a General Partner in a partnership?

A

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

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9
Q

What does and does NOT happen when a General Partner assigns their partnership interest to someone else?

A
  1. Other party gets that partner’s share of the profits and/or capital contribution.
  2. Does NOT give assignee authority to vote on partnership business
  3. Assignee does NOT have right to inspect partnership books
  4. Assignor still maintains liability
  5. Partner does NOT have the right to assign their interest in partnership property or allow partner’s creditors to attach a lien.
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10
Q

What is the actual authority of a partner in a partnership?

A

Has authority to bind the partners to a contract.

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11
Q

What is the APPARENT authority of a partner in a partnership?

A

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

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12
Q

With respect to liability on subsequent debts; what happens when a partner withdraws from a partnership?

A

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

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13
Q

With respect to PRECEDING debts; what is the liability of a partner in a partnership?

A

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.

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14
Q

What happens upon the death of a partner in a partnership?

A

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

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15
Q

What happens during the winding up of a partnership and in what order?

A
  1. Creditors get paid; Partners can also be creditors
  2. Distributions in arrears get paid
  3. Partners get return of Capital accounts
  4. Any remaining distributions

Note: NO documents need to be filed with state to dissolve general partnership.

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16
Q

What are the requirements to form a Limited Partnership (LP)?

A

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

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17
Q

How are profits and losses split in a Limited Partnership?

A

Unlike General Partnership.; L.P. profits/losses are split according to capital contributions by default

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18
Q

True or False: In a Limited Partnership; a General Partner can also be a Limited Partner at the same time.

A

True.

A Limited Partner; however; cannot also be a General Partner and maintain limited liability.

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19
Q

Do limited partners have a fiduciary responsibility to a Limited Partnership?

A

No. Limited Partners are do not have a fiduciary responsibility to Limited Partnership

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20
Q

What authority does a limited partner have under a Limited Partnership?

A
  1. Right to inspect records of the business.
  2. Can still vote on partnership business without losing limited liability
  3. Can consult and advise partnership without losing limited liability (assuming they don’t actually make the decisions)
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21
Q

What limitations does a limited partner have in a Limited Partnership?

A
  1. They have no authority as an agent to bind the partnership
  2. They can’t participate in management decisions and maintain limited liability.
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22
Q

What is the liability of a limited partner in a Limited Partnership?

A

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

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23
Q

When does the dissolution of a Limited Partnership occur?

A

Automatically happens

  1. Once final General Partner leaves
  2. Time specified in certificate lapses
  3. Event specified in certificate happens
  4. Unanimous consent by partners
  5. Illegal activity
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24
Q

What is required to form a Limited Liability Partnership (LLP)?

A
  1. Majority vote required to form LLP
  2. Articles of LLP filed with Secretary of State
  3. Governed by laws of that State
  4. Limited Liability Partnership must be in name
  5. No General Partners - each LLP partner has limited liability - Exception: Negligence of partner or those under partner’s supervision
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25
Q

What are the key aspects of a Limited Liability Company (LLC)?

A

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

26
Q

What are the key aspects of Joint Ventures (JV)?

A

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

27
Q

What are the key aspects of a corporation?

A

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

28
Q

What are some of the advantages of a corporation?

A

Ability to raise capital

Limited liability - unless actions occur that pierce the veil

Ease of ownership transfer

29
Q

What actions can pierce the veil of a corporation?

A

Commingling of assets

Fraud

Under-capitalization

30
Q

How is a corporation governed?

A

Board adopts Corporate Bylaws to govern company business

31
Q

What items are required in a corporations Articles of Incorporation?

A

Name; purpose; powers of Corporation

Name of registered agent & incorporators

Stock share classes authorized; par values

Name of corporate officers NOT required

32
Q

What is the biggest disadvantage of a corporation?

A

Double taxation

33
Q

How are corporations formed by promoters?

A

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

34
Q

When is a corporation liable for pre-incorporation actions taken by a Promoter?

A

Promoter personally liable unless third party agrees to a novation and releases Promoter
from liability; UNLESS the corporation adopts.

35
Q

In how many states must a corporation incorporate?

A

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

36
Q

Describe Common Stock dividends and their rights/liabilities in relation to shareholders/corporations.

A

Dividends are NOT a shareholder right

Once declared; dividends become a liability to corporation

37
Q

What are key aspects related to the holding of Preferred Stock?

A

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

38
Q

What aspects are related to all classes of corporate stock?

A

Valid consideration must be given for shares

Cash; property; or services performed

No promises to pay or perform services

39
Q

What are the key aspects of Treasury Stock?

A

No Gain/Loss recognized on Treasury stock

Have no voting rights

Can be re-purchased below par

Cannot produce dividends

40
Q

What is a stock subscription and what is required for it to be valid?

A

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

41
Q

When is a corporation liable for torts by employees?

A

If committed within the normal scope of the employee’s job

Even if they were disobeying orders

Per respondeat superior

42
Q

What are the key aspects of a corporate officer?

A

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)

43
Q

What are the key aspects of a corporation’s board of directors (BOD)?

A
  • 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)
44
Q

What is Ultra Vires?

A

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)

45
Q

When is inspecting Board minutes the right of a shareholder?

A

Shareholders can inspect Board minutes and records only if request is in good faith

46
Q

Who must approve mergers and consolidations?

A

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

47
Q

What characterizes a Professional Corporation?

A

Shares owned only by licensed professionals (CPAs; attorneys; etc.)

Limited Liability for debts

Personal Liability for negligence

48
Q

Who can and cannot own an S-Corporation?

A

CAN be owned by Estates; Trusts; and Individuals

CANNOT be owned by a C-Corporation

49
Q

What is the primary advantage of an S-Corporation?

A

Avoidance of Double Taxation

50
Q

What are the disadvantages of an S-Corporation?

A

No more than 100 shareholders allowed

One class of stock allowed

Shareholders must be US Citizens/Residents

51
Q

In a partnership, when is unanimous consent required?

A

“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

52
Q

If a partnership breaches a contract, what must the 3rd party do to recover damages?

A

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.

53
Q

If a partner’s losses reduce the partner’s capital account below zero, what happens?

A

The partner is personally liable for the deficit

54
Q

What happens if a partner transfers their interest in the partnership to another party?

A

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

55
Q

What is the difference between the general partner and the limited partner in a limited partnership (LP)?

A

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

56
Q

When is an Limited Partnership (LP) most applicable?

A

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

57
Q

When are Limited Liability Partnerships (LLPs) most applicable?

A

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.

58
Q

When are Limited Liability Companies (LLCs) most applicable>

A

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

59
Q

By-Laws - what are they and who adopts them?

A

Rules and regulations that govern and help to guide the internal management in performing its duties.

Either incorporators or the BOD adopts them

60
Q

What is the “Business Judgement Rule”?

A

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.

REG (18 decks)

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