Corporations/Partnerships/Agency

Question 1

shareholders agreement

Answer 1

allows shareholders to manage corporation absent a board of directors. Agreement must be signed by all shareholders. President cannot sign the shareholders’ agreement on behalf of corporation

Question 2

Scope of Shareholders’ agreement

Answer 2

shareholders may enter into an agreement concerning the management of corporation. They may (1) eliminate the board of directors; (2) authorize who will manage the corporation; and (3) establish who will serve as director or officer

agreement remain in effect for 10 years unless otherwise provided in the agreement

Question 3

shareholder inspection

Answer 3

shareholder owning stock for at least six months or owning 5% or more of stock, upon written demand stating proper purpose, may inspect and copy books and records at reasonable time.

This right extends to the inspection by the shareholder’s agent

Question 4

Partnership Agency

Answer 4

every partner is an agent of the partnership.

Act of one partner apparently carrying on ordinary course of partnership bounds the partnership unless (1) partner has no authority to act AND (2) person has knowledge partner lacks authority

Question 5

partnership liability

Answer 5

all partners are liable jointly and severally for all debts and obligations of partnership unless otherwise agreed or provided by law

Incoming partners are not liable for debts incurred before their admission

jointly and severally liable for torts committed by another partner or partnership employee in the course of the partnership business or with authority

Question 6

Partner compensation

Answer 6

Generally, a partner is not entitle to compensation for services performed for partnership. The partners’ agreement may provide for salaries and the right to compensation may be implied b course of dealing among the parties

Question 7

Partner contributions

Answer 7

each partner is entitled to repayment for his/her contribution. Partners may agree to share profits other than equally, but the default is equal split of profits.

Question 8

limited partner liability

Answer 8

generally, limited partners are not liable for debts of the partnership. LPs are liable for limited partnership obligations if the limited partner participates in the control of the business and person dealing with LP did not know that the partner was a LP

Question 9

partnership property

Answer 9

partner is not co-owner; property belongs only to the partnership. partner has no power to transfer an interest in partnership property for debts not related to the business of the partnership.

partner can transfer his right to receive profits and losses

Question 10

incorporation requirements

Answer 10

(1) complete and submit a certificate of formation with the Secretary of State; (2) SOS will issue an acknowledgment of filing

Question 11

issuance of stock

Answer 11

initial directors must hold organizational meeting to adopt bylaws, elect directors, and transact other business

Consideration required to purchase stock is fixed by the board

Question 12

Share transfer restriction

Answer 12

may be imposed in the articles, bylaws, or a written shareholder agreement. To be enforced, restriction must be reasonable and conspicuously noted on the share certificate OR transferee has actual knowledge

Question 13

Director Indemnification

Answer 13

directors may authorize a provision allowing the corporation to indemnify a director, and may be adopted by the director at a special meeting called for the purpose. Can only indemnify if acted in good faith

Question 14

piercing the corporate veil

Answer 14

shareholders are shielded from personal liability for corporate obligations UNLESS creditor demonstrates that a shareholder used corporation to perpetrate a fraud on the creditor. Failure to maintain corporate formalities is not sufficient basis

Question 15

certificate of formation

Answer 15

must contain: (1) corporation’s name, including “corporation,” “company,” or “incorporated”; (2) name and address of each organizer; (3) name and address of initial directors; (4) address of registered office and name of agent; (5) purpose of corporation; (6) duration of corporation; and (7) capital structure

Question 16

Director’s Meeting

Answer 16

initial directors must hold organizational meeting to adopt bylaws, elect directors, and transact other business.

Notice of special meeting must state the time and place of the meeting, but the purpose is not required unless required by bylaws.

Quorum must be present for directors to take action. Director who is present is presumed to concur with decision unless files a dissent in the record and minutes

Question 17

Derivative Suit

Answer 17

brought by shareholder on behalf of corporation for harm the corporation suffered.

(1) must have owned shares when the challenged act occurs; (2) must fairly and adequately represent the corporation’s interest; (3) before initiating, must make a demand on the board to take suitable action and wait 90 days for a response

Question 18

apparent authority

Answer 18

when an agent, although without express authority, performs a transaction with a third party that has a reasonable belief that it has authority by representations previously made by the partnership

Question 19

tort liability

Answer 19

employer is vicariously liable for the tort committed by an employee within the scope of his employment. Employee is a servant if employer had the right to control the employee when the tort occurred

Question 20

corporation

Answer 20

separate legal entity; can sue and be sued; can hold property; limited liability; formalities must be observed; double taxation (corporate and shareholders’ dividends); complex management

must hold directors’ and shareholders’ meetings, maintain minutes, books and records, and follow policies for taking action

Question 21

General Partnership

Answer 21

Association of two or more persons to carry on a business for profit.

no formalities required; partners can allocate management by agreement; single taxation; jointly and severally liable (no limited liability)

do not have to create a governing document and nothing is filed with the Secretary of State

P’ship income deemed to “flow through to each partner” and taxed only once at the individual level

can freely transfer interest, but transferor will remain a partner and transferee will not have rights of partner, unless admitted to partnership by other partners

Partners share profits and losses equally (unless otherwise agreed)

Question 22

Limited Liability Company

Answer 22

(1) members can manage and avoid formalities through the certificate of formation; (2) members are not vicariously liable for firm’s obligations; (3) pass-through taxation unless LLC elects to be taxed like a corporation; (4) limited liability (only liable for own acts)

similar to corporation, in that unless agreed otherwise, must follow formalities and complexities and formalities of management, such as: regular board and shareholder meetings, minutes, books and records

Question 23

LLC membership interest

Answer 23

can be assigned in whole or in part. Assignee has the right to (1) receive the income or distribution; (2) make reasonable inspection of the company’s books and records; and (3) require reasonable information or account of the company’s transactions for any proper purpose

assignee of membership interest may become member upon approval of all existing members

assigning interest can be limited through operating agreement, formation certificate, bylaws, or membership agreement

Question 24

Professional Limited Liability Company / PC

Answer 24

professional entity may render only one kind of professional service. Only members who are licensed may be admitted

Question 25

agency authority

Answer 25

principal is bound by a contract executed by an agent acting with authority. An agent who is authorized to bind the principal is not liable on a contract he enters on the principal’s behalf

Question 26

Partnership wrongful withdrawal

Answer 26

if partner withdraws before the period of duration expires, but partner will be liable to partnership for any damages resulting from a wrongful withdrawal

Question 27

withdrawing partner’s liability

Answer 27

for one year after withdrawal, partner can bind P’ship to a transaction that would have bound the p’ship had it occurred before withdrawal if (1) party did not have notice; (2) had done business with the p’ship within one year before withdrawal; and (3) reasonably believed the withdrawn partner was still a partner

Question 28

partnership agreement

Answer 28

governs relations of the partners and between partners and the partnership. it cannot unreasonably restrict right to access books.

Can eliminate liability UNLESS partner is found (1) liable for breach of duty of loyalty; (2) receipt of an improper personal benefit; (3) intentional misconduct or knowingly violates the law; or (4) an act for which liability is provided by statute

Question 29

Partner admittance

Answer 29

only on unanimous consent UNLESS partners agree to a different arrangement

Question 30

preemptive rights

Answer 30

allows existing shareholders to acquire the unissued shares in proportional amounts. It must be in the certificate of formation.

The amount is equal to the current amount of ownership in the shares already issued. They do not apply to stock being issued as compensation.

Question 31

Shareholder’s right of dissent

Answer 31

(1) fundamental change; (2) before vote, or within 20 days, must send written notice to president and secretary of dissent; (3) must vote no; (4) must give appraisal of fair value of shares and request a buyout; (5) 20 days after notice, must send certificates representing his shares to the corporation

no right of dissent if more than 2,000 shareholders of record or corporation is listed on the national securities exchange