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
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
• Intent to operate a business as co-owner for PROFIT
• Agreement can be very informal - because unlimited liability
► ORAL
► IMPLIED or
►WRITTEN only when state of fraud GROSS
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
→ Real estate sale
→ Over 1 year required to perform a contract
→ Suretyship (guarantee debt of other)
→ Statement in consideration of marriage
How are profits/losses shared in a partnership?
- Profits are shared equal by default unless partnership agreement says otherwise
- Sharing of losses follows same pattern as sharing of profits unless specified
What is the Liability of General Partners in a partnership?
- Joint Liability - Partners are collectively liable for debts/torts/contract
- Several Liability - Partners are individually liable for debts/torts/contract
- Not liable for crime
Which assets may creditors of a partnership go after; and in which order?
Creditors must first go after partnership assets , 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?
AGAST
• A third party reasonably believes partner has authority to bind partnership to contract
• CANNOT use apparent authority to AGAST - consent of all partner
→ Admit a new partner
→ Guarantee the debt of 1/3 party
→ Admit or submit a legal claim in court or to arbitration
→ Sale or pledge partnership property
→ Third parties are notified of a limit to partner actual authority
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
- Actual notice =personal notice to 1/3 party
- constructive notice =public notice
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:
- **Preceding debts Only capital account at risk **
- 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 remainder is given to partner as profit
** Note:** NO documents need to be filed with state to dissolve general partnership.
What are the requirements to form a Limited Partnership?
- Must file L.P. certificate with Sec. of State - Governed by state L.P. laws
- At least one Limited Partners must be listed
- At least one General Partners must be listed - Future additions or subtractions of G.P. require certificate to be updated with state
How are profits and losses share in a Limited Partnership?
in LP profits/losses are split according to _capital contribution_s by default (unlike GP)
True or False: In a Limited Partnership; a General Partner can also be a Limited Partner at the same time.
True. General Partner can also be a Limited Partner
However, a Limited Partner 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 in constract
- 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, dies, files for bankruptcy
- Time specified in certificate lapses
- Event specified in certificate happens
- Unanimous consent by partners
- Court decision
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 in proportion of their capital contribution unless otherwise stated
- ** limited life **
- fiduciary duties: care and loyalty
What are the key aspects of Joint Ventures (JV)?
Similar to a General Partnership; except generally; a JV is for a single business activity Example: two companies promote a concert
- liability is unlimited and each JV is personally liable for debts of the JV
- each JV has to right participate in management
- JV partners still have a fiduciary responsibility to JV
- No state filings or paperwork necessary
- death will not dissolve JV
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 of ownership transfer
What actions can pierce the veil of a corporation?
Actions can pierce the veil of a corporation ⇒ corporation is disregarded and shareholder personally liable
- Commingling of assets: shareholder are treating corporate asset as if they were personal assets
- the corporation is under-capitalization at the time of formation
- Corporation was formed to defraud creditors
- Direct action: the shareholders are running the business directly without election of a BoD or board meeting
How is a corporation governed?
Board adopts Corporate Bylaws to govern company business
What must be included in the Articles of Incorporation?
- Name of the Corp
- Purpose of the Corp
- Name & Address of registered agent - person who may be serve if Corp is sued
- Name & Address of incorporators
- Number of shares classes authorized to be issued - no par values required
What is the biggest disadvantage of a corporation?
Double taxation
How are corporations formed by promoters?
- Prior to the formation of Corp, Promoter may act on behalf of the Corp
- Promoter is NOT an agent
- → Contract signed by promoter are not binding for Corp
- → Promoter liable to 1/3 party unless granted novation
- → no special right of compensation
- Promoter has a fiduciary duty to act loyally and good faith
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
- the corporation adopts the contract.
In how many states must a corporation incorporate?
Corporations are only incorporated in one state ⇒ a domestic corp. in that state
Become a foreign corp ⇒ in any other state they do business in - must obtain approval to operate in the other state
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; → shareholder = unsecured creditor
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 Corp 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 prior services performed
- No promises to pay or perform services
What are the key aspects of Treasury Stock?
Treasury stock is stock that is authorized, issued, but no longer outstanding
- 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
- *•** May be entitled to indemnification
- *•** 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 Good faith is NOT a defense for negligence
What is Ultra Vires?
Corporation management acting beyond what the Articles of Incorporation allow Shareholders can sue for Ultra Vires
When is inspecting Board minutes the right of a shareholder?
Shareholders can inspect Board minutes and records for any proper purpose 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; certain 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 requirements of an S-Corporation?
- Domestic corporation
- Shareholder must be individual, estate or certain trust - NOT Corp
- < 100 shareholders allowed
- Only one class of stock allowed
- Shareholders must be US Citizens/Residents
**Basic Partner Rights **
♦ Participation in management - each partner have this right
♦ Sharing profits & losses
• % may be specified in partnership agreement
• equal sharing of profits and losses when not specified
• Transferable/assignable without need of approval of other partners
♦ Property rights
**Fiduciary duties of partners **
- Duty of loyalty
- Duty of care
- Partner refrain from competing with the partnership
- Duty of good faith and fair dealing in the discharge of all their duties
LLC keys points
- **Formal creation
- at least 1 person**
- **Limited Liability for Contract and debts
- Unlimited Liability for Malpractices and Negligence**
- **Agents/Members
- Taxed as a P/S **
LLP keys points
- Formal creation
- at least 2 persons (accounting, doctor, lawyers)
- **Limited Liability for Malpractices and Negligence
- Unlimited Liability for Contract and debts**
- Agents
- Taxed as a P/S
Actions that constitute dissociation from a partnership
- Partner withdraws from partnership
- Partner engages in conduct that interferes with the ability of partnership to conduct business
- Death of a partner
- Incapacity of partner
NOTE After dissociation occurs the partnership will either **commence dissolution and liquidation/winding up ** OR **continue the partnership business **
Dissolution of Partnership can occurs by
- Partnership agreement
- Agreement of partners
- By decree of court
