EXAM 3 Flashcards
Who creates an Entity?
State Statutes
Entities have _______ and ______ like an individual
rights and duties
Entities and owners are __________
SEPERATE
Biggest advantage for Entities:
LPL
Limited Personal Liability
Entity owner is NOT liable for the debts of the entity
Unlimited Personal Liability
Owners ARE liable for the debts of the entity
Sole Proprietorship
One person owns controls…NOT AN ENTITY
General Partnership
2+, co-owners, for profit
Joint Venture
2+, for profit
Limited Partnership
at least one general partner and at least one limited partner
LLC
members participate in management of the business
Limited Liability Partnership
a limited partnership in which the liability of the general partners has been limited to some or all of the partnerships obligations
Can lose capital contribution in:
LPL
Risk Type for Sole Proprietorship:
Unlimited
Risk Type for General Partnership/Joint Venture:
Unlimited AND Lose CC
Risk Type for LLC and Corporations:
Limited AND Lose CC
Risk Type for Limited Partnership (GENERAL PARTNER):
Unlimited AND Lose CC
Risk Type for Limited Partnership (LIMITED PARTNER):
Limited AND Lose CC
Loopholes to LPL:
Guarantees liability for entity OR is wrongful actor that gives rise to liability
3 Ways to create an Entity:
(FAL) File, Agreement, Law
Who must file a document w State Secretary to form Entity?
Corps, LLCs, LPs
Who must enter into agreement to form entity?
GP/JV (sometimes LLCs/LPs but not req. for them)
This entity is the ONLY ONE that forms by law:
GP/JV
3 Requirements for entity to be created by law:
2+, for profit, profit SHARING
________________ is DIFFERENT than ____________
Gross Profit, Revenues
Profit sharing key notes:
Doesn’t have to be paid out or equal
What entity is for a specific period of time
Joint Venture
LLCs are taxed on a:
Personal level ONLY
Flow Through for Tax Purposes:
Entity is not taxed
Which entity is subject to double taxation
C corporation
Which entities have Flow Through
LLCs, LPs, S Corporations, GP/JV
Owners for LLCs are called
Members
Member Managed
Members manage the LLC
Manager Managed
Members elect manager, members only vote on big stuff
Operating Agreement includes:
Rules, rights/duties of members/managers
7 Steps to forming an LLC:
(CCROPS)
1. Choose name
2. Certificate of Formation
3. Registered Agent
4. Organizer signs document
5. Pay filing fee
6. Sign Operating Agreement
Filing fee amount for LLCs
$300
How can Entities isolate risk?
Forming subsidiaries
Advantages to corporations:
(CLEP) Centralized Management, Limited, Easy ownership transfer, Perpetual Existence
Who elects BoD in corp?
Shareholders
When/How are BoD elected?
Annually, vote thru proxy
Can shareholders act on behalf of entity?
NO
2 big voting topics:
Mergers, Loan Facilities
3 powers of BoD:
Elect officers, amend bylaws, Approve BIG items
Can the director (or board) act on behalf of entity?
NO, they just approve
Officers get to:
Make decisions and act on behalf of the entity WITHIN THEIR AUTHORITY
Can employees act on behalf of entity?
Sometimes, can act on behalf of explicit direction from officers
Entities are domestic to where they:
Filed their certificate of formation
If an entity wants to “do business” in a foreign territory, they must:
Register for tax/RA purposes
“Not Doing Business”
Defending a lawsuit, Having bank account, Owning real estate, Collecting a debt (outside of lawsuit)
When does the court expand NDB to DB?
Operating real estate, Performing services, Office located within state
Penalties to not registering to “do business”
Fines, cannot sue as plaintiff
Subchapter S
<100 shareholders, no foreign or entity shareholders, one class of stock, only USA
Want a _______ issue of stock
HIGH
Want a ________ par value on stock
LOW
Why is Delaware the most common state for entity formation?
Revised often, Case Law (predictable, consistent)
Shareholder Agreements in Publicly Traded Companies
Typically don’t exist
Shareholder Agreements for Privately Traded Companies
VERY IMPORTANT
What does Entity Owners Agreement include?
(RFAW)
1. Restrictions on ownership transfer
2. Future Capital Contribution Requirements
3. Action Approval
4. Withdrawal?
Default for transfers:
Consent for new owner needed
First Right of Refusal:
First offer to owners, then sell to outside party if time expires
Drag-Along:
May force owner to sell
Tag-Along:
May force other owners who are selling to include you
Are Capital Contributions Required?
No
What happens if an owner does not contribute capital?
Dilution
Supermajority percentage:
75-90%
Majority percentage:
> 50%
Withdrawal
Can shut entity down, typically prohibited unless payed off over time
ACTIVE requires that an entity abides by:
Reporting and tax requirements in each state
If entity is DISSOLVED/INACTIVE, owner can become __________________
Personally Liable
Piercing the Veil is when:
Owners are held personally liable for the debts of the entity
PtV is __________________
Common Law
Court can accept PtV if:
Entity is Owner’s Alter Ego OR Entity is sham to perpetuate fraud
Entity is considered an Alter Ego when:
Owner uses assets as their own, Comingles entity and owner assets, Lack of corp. formalities
Owners can be held liable when:
Involuntarily terminated/dissolved, PtV, Improper Distributions
