Chapter 9 Flashcards
How might a sole proprietorship be defined?
A business owned and operated by a single individual
What is the legal distinction between the business and the individual who owns it? (for sole proprietorship)
There is no distinction – they are an identity
Describe one benefit relating to the creation of a sole proprietorship.
Its ease of creation – all the owner needs to do is start the business
Identify and describe a specific challenge faced by an individual proprietor in starting up a business.
Difficult to raise capitol. No start up business can operate without some capitol (money), hard to get the money without collecting revenue
Describe the level of control a sole proprietor has over the business.
They have complete control
How does the owner of a sole proprietorship get compensated?
From the business
Does it make sense for a sole proprietor to get a salary?
No, they would be paying themselves
Be able to describe the important disadvantage of a sole proprietorship relating to liability.
Any liabilities incurred by the business are the owners.
In the eyes of the law, how is a sole proprietorship viewed in regards to taxation?
Sole proprietorship doesn’t exist independently from its owner
Who claims business deductions, the business or the individual?
Individual files them
As a general rule, how long does a sole proprietorship last?
Until its owner dies, retires, or transfers it to another
How does this concern creditors who are looking for payment?
Creditors are concerned about who owns the business. Each person is responsible for obligations with the creditors and it stays with them, not the business
Generally, can creditors sue any new owners of a sole proprietorship if the old owner is insolvent?
no bitch
What is the RUPA and when was it promulgated?
Revised Uniform Partnership Act – 1997
Revised version of the uniform partnership act: addressed the rights, liabilities and interest of persons acting as partners in businesses
Be able to identify the three ways a business partnership can arise.
- expressly
• the individuals agree to go into a partnership - impliedly
• two or more people conduct their business in a way that it fits the definition of the partnership - by estoppel (apparently)
• if appearances suggest that a person is a partner, whoever allowed the appearances to arise may be estopped (prevented) from denying the partnership relationship
If the agreement between business partners fails to address a particular issue, what does the RUPA provide?
That all partners share equally in the profits or losses of the business
With regards to business partners’ liability, what activities bind the partnership (See RULE OF LAW: The Business Partnership Rule)?
Torts committed while in the scope of partnership
Does a business partnership pay Federal income tax?
No, because a partnership is not a taxable entity
How is income tax paid by business partners?
Individual partners pay tax on the income they withdraw from the firm
What two things does the “duration” of a business partnership involve?
- to whom can the creditors can turn to when the owner quits
- how easy is it for the owner to “alienate” their interest
What is, probably, the single most important aspect of the corporate form?
It allows one group of people (managers) to use money from another group (investors) essentially without personal risk.
Be able to identify the two sub-categories of for-profit corporations.
- publicly held corporations
2. closely held (family) corporations
Identify the two initial ways corporations can raise money.
Be able to describe each
1.equity financing
• corporation sells itself off to people who buy shares and becomes owners (shareholders)
2. debt financing
• corporation borrows money. (bondholders)
Be able to identify the seven rights of shareholders to control a corporation.
- The right to vote for directors
- The right to vote on extraordinary corporate transactions
- The right to inspect corporate records
- the right to bring a derivative lawsuit
- the right to subscribe to new shares of stock (preemptive right)
- the right to compensation: to receive dividends
- the right to receive a fair share of assets on liquidation
What is a corporate board of directors analogous to?
City council, or congress. Its function is to set the policy. the execution is the role of the officers.
What is an “inside director.”
if a director is also an employee of the company
Who appoints (hires) corporate officers?
The board of directors
What are the officers of a corporation analogous to?
Cabinet officers at the federal level, or major department heads at the state level. Function is to run the day to day operations of the company.
How do the owners of corporations receive compensation?
Shareholders are paid their appropriate share of the profits of the business in dividends
What is the general rule regarding corporations and liability?
The corporation is a legal entity, responsible for its own obligations The owners (shareholders) are not liable for more than the value of their contribution
What is the “corporate veil?”
The legal entity interposed between the shareholders and the corporate creditors
Do corporations pay Federal income tax?
yes bitch
Describe the “double taxation” of corporate income.
The money from the company is taxed twice: once with the corporation and once with the shareholder who receives it
How is the owners’ interest in a corporation manifested?
Stock certificates (which are personal property)
Identify and list four ways corporations can be ended?
- by the directors resolution of dissolution
- by vote of the shareholders
- insolvency (precludes the continuation of business)
- failure to pay the annual licensing fee
