exam 4

Question 1

Sole proprietorship

Answer 1

Simple to set up and avoids double taxation, but the owner is liable for the debts and liabilities of the sole proprietorship (no limited liability) and it can be difficult to raise funds

Question 2

joint venture

Answer 2

two or more persons/corporations for a specific business undertaking, many forms

Question 3

franchise

Answer 3

purely contractual, chain-Style franchise or Distributorship franchise

Question 4

Warrants

Answer 4

granting owners ability to purchase additional ownership interests at a certain price

Question 5

Pre-emptive rights

Answer 5

giving owners a preferential right to participate in future offerings and maintain their existing ownership interest percentage

Question 6

Right of First Refusal (ROFR)

Answer 6

before you can sell, name the price you are selling for, and the entity or other owners have a right to buy your ownership interests at that price. If they don’t, you have a certain period of time to sell to a 3rd party at that or a higher price

Question 7

Right of First Offer (ROFO)

Answer 7

before you can sell, announce you want to sell – the entity or other owners get to name a price for the purchase of your ownership interests. If you reject the offer, you can’t sell to others for less than that ROFO price without going through the process again

Question 8

Tag-Along Rights

Answer 8

Gives minority owners an opportunity to join in a sale being undertaken by the majority owners

Question 9

Drag-Along Rights

Answer 9

Gives the majority owners an opportunity to force the minority owners to participate in a sale being undertaken by the majority owners

Question 9

Merger

Answer 9

2 entities combine with 1 surviving

Question 10

Acquisition

Answer 10

both entities survive, but one is the parent with control, and the other is the subsidiary that is controlled (they are affiliates)

Question 11

hostile takeover

Answer 11

acquirer makes a tender offer directly to the existing owners to buy their interests

Question 12

exchange tender offer

Answer 12

acquirer makes a tender offer directly to the existing owners to buy their interests for some of its ownership interests in the acquirer

Question 12

cash tender offer

Answer 12

acquirer makes a tender offer directly to the existing owners to buy their interests for cash

Question 13

leveraged buyout

Answer 13

management may try to acquire ownership themselves and take the company “private”

Question 14

partnership

Answer 14

more than 1 person or entity involved
relatively easy to set up and avoids double taxation, but the general partners are going to be liable for the debts and liabilities of the partnership (limited partners will not)
Partners will generally have a fiduciary duty to act in good faith in the best interests of the partnership, and a duty of care to act in a reasonably prudent manner

Question 15

general partnership

Answer 15

all the owners are general partners

Question 16

limited partnership

Answer 16

at least one general partner.

Question 17

limited liability company (LLC)

Answer 17

limited liability for all owners, avoids double taxation, and allows for maximum flexibility in terms of creating separate types of ownership interests, allocating rights, responsibilities, profits and losses, etc.

Question 18

corporation

Answer 18

imited liability for all owners, and is generally thought of as the most efficient structure in terms of raising money and allowing owners to easily transfer their ownership interests

Question 19

ultra vires act

Answer 19

avoid taking actions outside of the express and implied powers of the corporation

Question 20

piercing the corporate veil

Answer 20

keep the entity “separate” from its owners (don’t commingle funds, commit fraud, etc.) to preserve limited liability and avoid a plaintiff

Question 21

double taxation

Answer 21

once when the corporation earns the income, and again to the extent that income is distributed to owners as dividends

Question 22

S corporation

Answer 22

avoid double taxation, but the trade-off is a loss of some flexibility in terms of the number and type of owners you can have, and you can only have 1 class of common stock (and can’t issue preferred stock with preferences over common stock for example)

Question 23

not for profit corporation

Answer 23

does not distribute profits to any owners. Donations to a 501(c)(3) not for profit corporation may be tax-deductible

Question 24

publicly held corporation

Answer 24

has issued its stock to the general public - closely held corporation has not.

Question 25

Shareholders

Answer 25

the subscribers who will purchase shares via a subscription agreement). Shareholders will ultimately have the most power via their ability to appoint the Board of Directors and approve major decisions.

Question 26

Board of Directors

Answer 26

who will be responsible for making most of the significant business and financial decisions, and appointing officers

Question 27

Officers

Answer 27

who will implement most day to day decisions of the entity

Question 28

Bylaws

Answer 28

adopt the rules and regulations for the entity

Question 29

quorum

Answer 29

setting a threshold requirement for how many officers / directors must attend a meeting in order to conduct business

Question 30

VA SCC in Virginia

Answer 30

Articles of Incorporation at the state level

Question 31

business judgment rule.

Answer 31

Directors and officers are not expected to make perfect decisions – if they mess up but were acting in good faith and in the reasonable belief their decision was in the best interests of the corporation, they may be protected by the

Question 32

shareholder derivative suit claim

Answer 32

If a shareholder thinks a corporation is harmed by the actions of a director (or others), but directors are not causing the corporation to pursue a claim, any award goes to the corporation, not the shareholder

Question 33

Promissory Note

Answer 33

evidencing borrower’s obligation to repay the loan

Question 34

Term loan agreement

Answer 34

with a fixed amount that needs to be repaid

Question 35

Security Agreement

Answer 35

creates a lien / security interest against personal property

Question 36

UCC Financing Statement

Answer 36

lender “perfects” lien/security interest against personal property - provides future lenders with notice of any existing liens

Question 37

Deed of Trust

Answer 37

Both “creates” and “perfects” (by recording) lien against real property, etc.

Question 38

Deposit account control agreement

Answer 38

lender gets control and perfects lien on bank accounts

Question 39

Collateral assignment

Answer 39

of contracts and/or rents and leases (takes effect following a default)