Ch: 8 Business Entities

Question 1

What are the general elements of forming a general partnership?

Answer 1

1. Two or more persons
2. Who agree expressly or impliedly
3. To carry on as co-workers a business for profit

Question 2

Is writing generally necessary to create a general partnership?

What if the partnership is to own real property?

Answer 2

A general partnership can be formed whenever two or more persons agree to enter into a business for profit as co-owners.

The agreement need not be in writing; indeed it need not even be oral. It can be implied from conduct.

That fact that the partnership will own proeprty does not change this.

Question 3

If the general partnership agreement is silent, how are profits and losses dividend in a partnership?

Answer 3

If the partnership agreement is silent, profits and losses are divided equally, regardless of the contribution of each partner.

Question 4

For what services is a partner entitled to compensation if the partnership agreement is silent on the issue?

Answer 4

A partner is generally not entitled to any compensation. There is an exception for the last surviving partner for services rendered to wind up the partnership’s affairs.

Question 5

A partner’s interest in p-ship property is subject to attachment to satisfy the partner’s alimony obligation. True or False?

Answer 5

False, A partner has no right to possess p-ship property other than for p-ship purposes, and a partner’s creditors cannot get any greater rights than the partner’s in such property.

Question 6

What is the liability of each partner for the p-ship obligations?

Answer 6

Partners are personally liable for all contracts entered into and all torts committed by other partners within the scope of the partnership business or which are otherwise authorized.

Question 7

Can a limited p-ship be formed with limited liability for all partners?

Answer 7

No. A limited p-ship must have at least one general partner who will be personally liable for all partnership debts.

Question 8

Is a limited partner personally liable for the debts of the p-ship?

Answer 8

No. A limited partner is not personally liable for the debts of the p-ship unless the limited partner is also a general partner, or, under the revised Uniform Limited Partnership Act, allows his name to be used in the p-ship agreement, or takes control of the p-ship and a creditor reasonably believes the limited partner is a general partner.

Question 9

A limited partner has apparent authority to bind his limited p-ship on contracts apparently within the scope of the p-ship business. True or False?

Answer 9

False. Limited partners are like the shareholders of a corporation and have no apparent authority to bind their p-ship in contract.

Question 10

Can a limited liability company be formed with limited liability for all members?

Answer 10

Yes. Members of a limited liability company are not personally liable for obligations of the company.

Question 11

A member of a limited liability company has apparent authority to bind the company on contracts apparently within the scope of the company’s business unless the company’s articles of organization provide otherwise.

True or False?

Answer 11

True. Generally, unless the articles of organization provide otherwise, LLCs are member-managed, and the members have apparent authority to bind the company on contracts apparently within the scope of the company’s business.

Question 12

Under the Uniform Limited Liability Company Act (ULLCA), if the articles of organization and operating agreement are silent, how are profits and losses divided in a LLC?

Answer 12

Under the Uniform Limited Liability Company Act (ULLCA), profits are shared equally, regardless of capital contributions.

Question 13

When does a member of LLC have a right to distribution?

Answer 13

A member of a LLC has a right to distribution when the articles of organization, an operating agreement, or an agreement of the members so provides.

Question 14

Is a member of the LLC personally liable for the debts of the LLC?

What if the members is also a manager of the LLC?

Answer 14

No, a member of an LLC is like alimited partner or shareholder and is not personally liable for the LLC’s obligations. If the member is also a manager, the member is treated as an officer or director of a corporation rather than as a general partner of a limited partnership and is not personally liable for the obligations of the LLC.

Question 15

Corporation: A promotor, like a shareholder, officer, or director, is not liable on contracts the promoter makes on behalf of the corporations. True or False?

Answer 15

False, generally, promoters are personally liable on contracts that they enter into on behalf of the corporation to be formed.

Question 16

What must be included in the articles of incorporation for a corporation?

Answer 16

1. Name of the corporation
2. Names and addresses of the corporation’s registered agent (on whom process may be served if the corp is sued)
3. Names and addresses of each of the incorporators
4. Number of shares authorized to be issued
5. A clause entitling one or more classes of stock to voting rights

Question 17

Corporation: For what reasons do courts typically disregard the corporate entity (i.e., “pierce the corporate veil”)?

Who is held liable?

Answer 17

• Shareholders, officers, or directors commingle personal funds with corporate funds or otherwise ignore most corporate formalities (“alter ego” theory).
• The corporation is inadequately capitalized at the time of formation.
• The corporation was formed to defraud creditors.

If the corporate entity is disregarded (i.e., the corporative veil is “pierced”), courts can reach the responsible shareholders, officers, and/or directors.

Question 18

What is the minimum number of directors for a corporation?

Answer 18

Under RMBCA, a corporation needs only one director, but the articles of incorporation or bylaws may require as many directors as desired, without limitation.

Question 19

What is the minimum number of officers for a corporation?

Answer 19

The minimum number of officers for a corporation is one. The duty of the officer is to record the minutes of directors’ and shareholders’ meetingsw and to authenticate corporate records. However, corporations are free to provide for more officers in the bylaws.

Question 20

What is the procedure for a fundamental change?

Answer 20

Fundamental changes procedure:

1. Board resolution (majority)
2. Notice to shareholders
3. Shareholder approval (majority)
4. Filing of amendments to the articles

Question 21

What are the fundamental corporate changes that require shareholder approval?

Answer 21

DAMS

Dissolution

Amendments to the articles of incorporation

Mergers, consolidations, and compulsory share exchanges

Sale of substantially all the corporation’s assets outside the regular course of business

Question 22

When does a shareholder of common and/or preferred stock have a right to a dividend?

Answer 22

Generally, shareholders do not have a right to dividend unless and until a dividend is declared by the board of directors.

Question 23

Once a dividend is declared, shareholders have the status of secured creditors. True or False?

Answer 23

False. Once a dividend is declared, shareholders have the status of unsecured creditors.

Question 24

Corporations: What is the advantage of cumulative preferred stock?

Answer 24

The advantage of cumulative preferred stock is that even if a dividend is not declared in a particular year, the right to receive that dividend (if dividends are ever declared) accumulates and that accumulated, but unpaid dividend, must be paid before common shareholders can receive any dividend (although there is no right to the dividend until it is declared).

Question 25

Corporation: What is the main point regarding the inspection rights of shareholders?

Answer 25

Shareholders (or their agents, attorneys, accountants, etc.) may inspect for any proper purpose (a purpose related to the shareholder’s interest in the corporation; e.g., to start a derivative suit or to solicit shareholders to vote for certain directors), but shareholders also may be denied inspection for improper purposes (a purpose personal to the shareholder; e.g., to get names for a retail mailing list).

Question 26

Which of the following businesses can be formed without filing a formation document with the state: partnership, limited partnership, limited liability company, or corporation?

Answer 26

A partnership can be formed without filing a formation document with the state. All of the other businesses require a filing to be formed.

Question 27

How is a limited partnership similar to a corporation?

Answer 27

A limited partnership is similar to a corporation in that both can be formed only by compliance with the statute and **filing **with the secretary of state, and both limited partnerships and corporations provide limited liability for investors (except general partners).

Question 28

Which of the following businesses offer flow-through taxation for their owners: partnership, limited partnership, limited liability company, or corporation?

Answer 28

A partnership, limited partnership, limited liability company (although owners of a LLC may opt to be taxed as a C corporation), and corporations that elect S-corporation status offer flow-through taxation for their owners. C corporations do nto offer flow-through taxation.