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Business Law > Ch. 38 Other Organizational Forms for Small Businesses > Flashcards

Ch. 38 Other Organizational Forms for Small Businesses Flashcards

1
Q

What has become the organizational form of choice among many small businesses?

A

LLCs

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2
Q

What is an LLC?

A
  • Hybrid
  • Combines limited liability aspects of a corporation
  • And tax advantages of a partnership
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3
Q

What are LLCs governed by?

A

State statutes (vary from state to state)

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4
Q

In an attempt to make LLC governance more uniform, what did the National Conference of Commissioners on Uniform State Laws issue?

A

ULLCA: Uniform Limited Liability Company Act

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5
Q

What characteristics do LLCs share with corporations?

A
  • Must be formed and operated in compliance with state law
  • Members enjoy limited liability
  • LLCs are legal entities separate from owners
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6
Q

What are owners in an LLC called?

A

Members

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7
Q

Can members of an LLC be shielded from personal liability when sued by an employee of the firm?

A

YES

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8
Q

Sometimes when a corporation is deemed to be merely an “alter ego” of the shareholder-owner, what will a court do?

A

Pierce the corporate veil (and hold S/H-owner personally liable)

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9
Q

May a court apply the alter-ego theory when a S/H commingles personal and corporate funds?

A

YES

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10
Q

May a court apply the alter-ego theory when a S/H fails to observe required corporate formalities?

A

YES

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11
Q

What was the key issue in the ORX Resources v. MBW Exploration case?

A

Whether the alter-ego theory should be applied to an LLC (YES)

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12
Q

What five nonexclusive factors did the Louisiana Supreme Court identify to be used in determining whether to apply the alter-ego doctrine in the ORX v. MBW case?

A

(1) Commingling of corporate and S/H funds
(2) Failure to follow statutory formalities for incorporating and transacting corporate affairs
(3) Undercapitalization
(4) Failure to provide separate bank accounts and bookkeeping records
(5) Failure to hold regular S/H and director meetings

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13
Q

An LLC formed in one state but doing business in another state is referred to in the second state as what?

A

Foreign LLC

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14
Q

To form an LLC, what must be filed with a central state agency (usually secretary of state’s office)?

A

Articles of organization

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15
Q

What must the article of organization include?

A
  • Name of business
  • Its principal address
  • Name and address of a registered agent
  • Members’ names
  • How the LLC will be managed
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16
Q

What is a preformation contract?

A
  • A contract a businessperson may enter into on behalf of a business organization that is not yet formed
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17
Q

In dealing with the preorganization contracts of LLCs, courts may apply the well-established principles of what?

A

Corporate law relating to preincorporation contractrs

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18
Q

Under the federal jurisdiction statute, a corporation is deemed to be a citizen of the sate where it is incorporated and maintains its principal place of business. While the statute does not mention the state citizenship of LLCs, how have the courts tended to regard these entities?

A

As citizens of every state of which their members are citizens

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19
Q

When may the state citizenship of an LLC come into play?

A

When a party sues the LLC based on diversity of citizenship

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20
Q

When parties to a lawsuit are from different states and the amount in controversy exceeds $75,000, a federal court can exercise what?

A

Diversity jurisdiction

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21
Q

Jen, a citizen of NY, wishes to bring a suit against ABC LLC formed under the laws of CT. One of ABC LLC’s members also lives in NY. Will Jen be able to bring a suit against ABC LLC in federal court on the basis of diversity jurisdiction? Why or why not?

A

No; b/c defendant LLC is also a citizen of NY

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22
Q

What is a key advantage of an LLC?

A

Liability of members limited to their investments

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23
Q

What are the advantages of an LLC?

A

(1) Limited liability
(2) Flexibility in taxation
(3) Flexibility for management and foreign investors

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24
Q

An LLC that has 2 or more members can choose to be taxed as either a what or a what?

A
  • Partnership

- OR corporation

25
Q

Unless an LLC indicates that it wishes to be taxed as a corporation, what will the IRS automatically do?

A

Tax LLC as partnership (one level of taxation at personal level)

26
Q

If an LLC’s members want to reinvest profits in the business rather than distribute the profits to members, what may it prefer to be taxed as?

A

Corporation (b/c corporate income tax rates may be lower than personal tax rates)

27
Q

Can an LLC that has only one member be taxed as a partnership?

A

NO (auto taxed as sole proprietorships unless they indicate they wish to be taxed as corporations)

28
Q

What is the main disadvantage with LLCs?

A

State LLC statutes are not uniform (so businesses that operate in more than one state may not receive consistent treatment in these states)

29
Q

What two options do LLC members have for managing the firm?

A
  • Member managed LLC
    OR
  • Manager Managed LLC
30
Q

Unless the articles of organization specify otherwise, how is an LLC assumed to be managed?

A
  • Member managed
31
Q

How does a member-managed LLC operate?

A
  • All of the members participate in management

- Decisions are made by majority vote

32
Q

How does a manger-managed LLC operate?

A
  • Members designate a group of persons to manage the firm

- Management group may consist of only members, members and nonmembers, or only nonmembers

33
Q

Under the ULLCA, managers in a manager-managed LLC owe fiduciary duties to whom?

A

LLC and its members (not the case in all states)

34
Q

The members of an LLC can decide how to operate various aspects of the business by forming a what?

A

Operating agreement

35
Q

Operating agreements typically contain provisions relating to what areas?

A

(1) Management and how future managers will be chosen or removed (ULLCA says by majority vote)
(2) How profits will be divided
(3) How membership interests may be transferred
(4) Whether the dissociation of a members, such as by death or departure, will trigger dissolution of the LLC
(5) Whether formal members’ meetings will be held
(6) How voting rights will be apportioned

36
Q

Most LLC statutes provide that if the members have not specified how profits will be divided, then how will they be divided by default?

A
  • Divided equally among the members
37
Q

If a dispute arises and the state’s LLC statute doesn’t cover the issue, courts sometimes apply the principles of what?

A

Partnership law

38
Q

A member of an LLC has the ______ to dissociate from the LLC at any time, but may not have the _______ to dissociate.

A
  • Power

- Right

39
Q

Effect of Dissociation:

In states that have adopted the ULLCA, the LLC must purchase the interest at fair value within how many days after the dissociation?

A

120 days

40
Q

If a member’s dissociation violates the LLC’s operating agreement, it is considered legally wrongful. Can the dissociated member be held liable for damages caused by the dissociation?

A

YES

41
Q

What was the key question in the Ventures Sales v. Perkins case?

A

Whether an LLC could be dissolved b/c continuing the business was impracticable (YES it can be dissolved)

42
Q

How does one wind up an LLC?

A

Members must collect, liquidate, and distribute the LLC’s assets

43
Q

Define joint venture.

A
  • Organization created by 2/more persons in contemplation of a limited activity or a single transaction
  • Similar to partnerships in many respects
44
Q

In what ways does a joint venture resemble a partnership?

A
  • Taxed like partnership
  • Joint venturers owe each other same fiduciary duties
  • Can be held personally liable for venture’s debts
  • Have equal rights to manage enterprise activities, but they can agree to give control to one of members
  • Have authority as agents to enter into contracts for the business that will bind the joint venture
45
Q

In what ways does a joint venture differ from a partnership?

A

Members of a joint venture have less implied and apparent authority than the partners in a partnership

46
Q

Define syndicate.

A
  • An investment group that undertakes to finance a particular project
  • May be organized as a corporation or as a general or limited partnership
47
Q

Define joint stock company

A
  • A business form similar to a corporation in some respects (transferable shares of stock, management by directors and officers, perpetual existence)
  • But otherwise resembling a partnership
48
Q

Define business trust

A
  • A business form created by a written trust agreement that sets forth the interests of the beneficiaries and the obligations and powers of the trustees
  • Similar to a corporation in many respects
  • Beneficiaries not personally liable for the debts or obligations of the business trust
49
Q

Define cooperative

A
  • An association organized to provide an economic service, w/o profit, to its members
  • Can take the form of a corporation or partnership
50
Q

What are some factors to consider when choosing a business form?

A

(1) Liability
(2) Taxation
(3) Continuity of life
(4) Legal formalities and costs associated with organizing the business

51
Q

Why are LLCs attractive in today’s global business environment?

A

Because they allow foreign investors to own interests

52
Q

Can LLCs be taxed like a corporation if they wanted to be?

A

YES (1120)

53
Q

What are the owners called in an LLC?

A

Members

54
Q

What is ownership in an LLC called?

A

Interest

55
Q

Can a third party pierce the LLC veil and hold managing members liable?

A

Yes

56
Q

Do all states recognize LLCs?

A

NO

57
Q

What is an advantage of the LLC in regards to taxation?

A

Profits can be distributed to members w/o double taxation of a corporation; members pay personal income tax on received dividends

58
Q

If an LLC Operating Agreement is silent on an issue, courts will generally apply what?

A

Partnership principles

59
Q

Joint venture members owe a fiduciary duty to each other which includes what?

A
  • loyalty

- no conflicts of interest

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