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Business Structures Flashcards

2
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.

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3
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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4
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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5
Q

When must a partnership agreement be in writing?

A

Must be WRITTEN if partnership activity falls within Statute of Frauds:

A. Can’t be completed in 1 year

B. Even if partners reside in different states; not necessary unless within Statute of Frauds

C. Neither dollar amount of transactions nor purchasing of real estate has bearing on whether partnership agreement must be in writing

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6
Q

How are profits shared in a partnership?

A

Profit sharing is equal by default

A. Unless partnership agreement says otherwise

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

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7
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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8
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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9
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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10
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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11
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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12
Q

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

A

A third party reasonably believes partner has authority to bind partnership to contract

Cannot use apparent authority to add a new partner

Cannot use apparent authority to sell or bind partnership assets

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13
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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14
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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15
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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16
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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17
Q

What are the requirements to form a Limited Partnership?

A

Governed by state L.P. laws

Must file L.P. certificate with Sec. of State

Only General Partners must be listed

Future additions or subtractions of G.P. require certificate to be updated with state

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18
Q

How are profits and losses split in a Limited Partnership?

A

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

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19
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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20
Q

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

A

No. Limited Partners do NOT have a fiduciary responsibility to Limited Partnership

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21
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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22
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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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 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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26
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

27
Q

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

A

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

28
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

29
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

30
Q

What actions can pierce the veil of a corporation?

A

Commingling of assets

Fraud

Under-capitalization

31
Q

How is a corporation governed?

A

Board adopts Corporate Bylaws to govern company business

32
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

33
Q

What is the biggest disadvantage of a corporation?

A

Double taxation

34
Q

How are corporations formed by promoters?

A

Promoter issues prospectus; arranges capital; and is a fiduciary of the corporation.

A promoter may profit from work performed if the corporation is aware of it.

35
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.

36
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

37
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

38
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

39
Q

What aspects are related to all classes of corporate stock?

A

Valid consideration must be given for shares

Cash; property; or prior services performed

No promises to pay or perform services

40
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

41
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

42
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

43
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)

44
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 judgement

Good faith is NOT a defense for negligence

45
Q

What is Ultra Vires?

A

Corporation management acting beyond what the Articles of Incorporation allow

Shareholders can sue for Ultra Vires

46
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

47
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

48
Q

What characterizes a Professional Corporation?

A

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

Limited Liability for debts

Personal Liability for negligence

49
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

50
Q

What is the primary advantage of an S-Corporation?

A

Avoidance of Double Taxation

51
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

52
Q

What are the Powers of a Corporation?

A

Corporations generally have the following powers:

  1. To acquire their own shares (treasury stock) or retire their own shares, but this is typically limited to amount of surplus (retained earnings)
  2. To make charitable contributions
  3. To guarantee obligations of others only if in reasonable furtherance of corporation’s business
  4. Loans to directors - however, this requires SHAREHOLDER approval
  5. Loans to employees (even employees who are also directors) DO NOT need shareholder approval and are appropriate if they benefit the corporation
  6. Generally, a corporation may also be a partner of a partnership
53
Q

In a situation where a director of a corporation wishes to sell an asset to the corporation, in order for this transaction to NOT be a conflict of interest what has to occur?

A

The transaction the director wishes to have with the corporation is not a conflict of interest if ANY one of the following is true:

  1. The transaction is fair and reasonable for the corporation
  2. The shareholders are given the relevant facts and they approve it by a majority vote
  3. The board of directors are given the relevant facts and they approve it by majority vote of the disinterested members of the board of directors
54
Q

What happens when a corporation is dissolved?

A

Once a corporation is dissolved, it may do business only to wind up and liquidate business

Liquidation occurs in the following order:

  1. Expenses of liquidation and creditors
  2. Preferred shareholders
  3. Common shareholders

Dissolution may be done voluntary by corporation or involuntary by a state for cause

  1. Voluntary dissolution occurs when board of directors passes resolution to dissolve

NOTE: Resolution must be ratified by majority of stockholders entitled to vote

  1. Shareholder may petition for judicial dissolution if directors or shareholders are deadlocked

Dissolution of a corporation requires the filing of a dissolution document with the state

55
Q

In which of the following respects do General Partnerships and Limited Liability Partnerships (LLPs) DIFFER?

A

In most states a limited liability partnership (LLP), insulates partners from personal liability for all debts and obligations of the partnership regardless of whether those debts arose from contract or tort

  1. In the level of liability of the partners for torts committed by other partners in the same firm
  2. In the amount of liability of the partners for contracts they themselves signed on behalf of the firm
56
Q

What is one disadvantage of a Subchapter C corporation?

A

A Subchapter S corporation is often formed to help avoid the double taxation that a Subchapter Corporation may face

It may face higher tax burdens than a Subchapter S corporation

57
Q

When a corporation elects to be a subchapter S corporation, what is true regarding the federal tax treatment of the corporation’s income or loss?

A

When a corporation elects to be a Subchapter S corporation, the corporate income and loss flow through to the income tax returns of the individual shareholders even when income is not distributed to them

  1. The shareholders report the corporation’s income on their tax returns even if the income is not distributed to them
  2. The shareholders generally report the corporation’s loss on their tax returns
58
Q

Under the Revised Uniform Partnership Act, which case will property be deemed to be partnership property?

A

Under RUPA, partnership property not only includes property purchased in the partnership name but also includes property purchased by a partner, who is an agent of the partnership, with partnership funds. Note that a partner may use property in the partnership business without it becoming partnership property

  1. A partner acquires property in the partnership name
  2. A partner acquires title to it in his/her own name using partnership funds
59
Q

What is one advantage of an LLC over an S corporation?

A

An LLC is subject to partnership rules; thus it can distribute appreciated property tax-free to an owner

In contrast, an S corporation must recognize gain on the distribution of appreciated property to a shareholder

60
Q

Under the Revised Uniform Limited Partnership Act (RULPA), if partners do NOT agree upon a profit-sharing plan, then how are profits split?

A

Under RULPA, if the partners fail to agree upon a profit-sharing plan, the profits are split in proportion of their capital contributions

61
Q

What management rights do Stockholders have in a corporation?

A

Stockholders have on two management rights:

  1. Elect board of directors
  2. Vote on fundamental changes to the corporation
    a. Amending the article of incorporation
    b. Dissolution
    c. Selling substantially all corp. assets (not buying all assets of another corp.)
    d. Mergers - UNLESS a short form merger
62
Q

QUESTION:

Which one of the following statements concerning the eligibility requirements for S corporations NOT correct?

A
  1. A partnership is NOT permitted to be a shareholder of an S corporation

This is incorrect because a partnership is NOT permitted to own stock in an S corporation (this is a correct statement)

  1. An S corporation IS permitted to own 75% of the stock of another S corporation (this is an incorrect statement)

This is correct because eligibility requirements restrict S corporation shareholders to individuals (other than non-resident aliens), estates and certain trusts. Partnerships and C corporations are NOT permitted to own stock in an S corporation

However, an S corporation IS permitted to be a partner in a partnership and may own any % of stock of a C corporation, as well as own 100% of the stock of a qualified subchapter S subsidiary

REG (18 decks)

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