II-5 Business Structure Flashcards
1
Q
What is sole proprietorship?
A
A single-owned business. The firm’s assets and liabilities belong to solely its owner.
2
Q
What is general partnership?
A
An association of 2 or more persons to carry on as co-owners for a business for profit.
Profits are allocated and taxable directly to the partners.
The partnership is a legal entity.
3
Q
What is joint venture?
A
A one-shot general partnership type relationship.
4
Q
What is limited partnership?
A
- A partnership with at least one general partner (who will be generally liable for the firm’s obligations) and at least one limited partner.
- Limited partners give up certain of the general management rights that partners in a general partnership have in exchange for limited liability.
5
Q
What is the difference between general/limited partnership and limited liability partnership (LLP)?
A
LLP carries greater protection from liability.
6
Q
LLP: What is a partner liable for? What are they require to carry?
A
- Their own malpractice
- The malpractice of those they directly supervise
Most states also protect partners from personal liability for LLP contractual obligations.
Minimum levels of malpractice insurance.
7
Q
What is Limited Liability Limited partnership (LLLP)?
A
General partner(s) of limited partnership can also have limited liability.
8
Q
How can Limited partnership become LLLP?
A
By including a one-line stmt to that effect in their certificate of limited partnership.
9
Q
How many states is LLLP authorized?
A
in 20 states.
10
Q
What is corporation (Subchapter C corporation)? Owners (shareholders) liability?
A
An artificial legal entity.
Limited liability.
11
Q
Disadvantage of corporation?
A
Double taxation.
12
Q
How can double taxation be eliminated?
A
By meeting certain requirements of Subchapter S of the Internal Revenue Code;
- No more than 100 shareholders.
- Unanimous election to become S corp.
- Only certain types of shareholders.
13
Q
What is Limited Liability Company?
A
Allows the owners to gain the liability-limiting advantages of the corporate form while also having the single, pass-through tax benefits of the partnership.
14
Q
How can LLC be managed?
A
Like a general partnership (member-managed) or
like a corporation (manager-managed).
15
Q
How many members must be required to form LLC?
A
Single member.
16
Q
What is the best form generally for most small businesses? For professional firms? For large entities?
A
LLC.
LLP.
Corporations.
17
Q
Professional corporation: personal liability? Must have professional license?
A
Yes to both.
18
Q
Can both S and C corporation’s shareholders could be foreign nationals?
A
Not for S.
19
Q
What are 2 types of organizations that do not require formal filing for formation?
A
Sole proprietorship.
General partnership - may file Stmt of Partnership Authority.
20
Q
Formation: What must corporation file? LLC? LP? LLP? LLLP?
A
C: Articles of Incorporation.
LLC: Operating Agreement (Filing not require, does not have to be in writing)
LP, LLP, LLLP: Partnership Agreement.
21
Q
What are 5 things must Articles of Incorporation include?
A
- Name (indicating corp. status - Corp or Inc.
- Number of authorized shares
- Address of registered office
- Name of registered agent at that office
- Names and addresses of incorporators
22
Q
What are basic steps of organizing a corporation?
A
- Execute Articles of Incorporation and file with Secretary of State.
- Hold organizational meeting: elect board of directors, adapt promoter’s contracts
23
Q
Who are the promoters (corporation)?
A
A person who takes the initiative in founding and organizing corporation.
24
Q
What are responsibilities of promoters?
A
Fiduciary duty to the proposed corporation, other promoters, and contemplated investors.
25
When can promoters profit in contracts?
If approved by a fully informed board OR
| Approved by fully informed original shareholders.
26
When is a firm liable on promoter's contract? Does this apply to LLC and LLP?
When board adopts them expressly or impliedly.
The court has began applying the rule to them when similar issues arise.
27
What does certificate of partnership include?
All names of general partners.
28
Non-financial operations: Who makes the decision under sole proprietorship?
The owner. He can also delegate.
29
Non-financial operations: Who makes the decision under GP and LLP?
Absent agreement to the contrary;
* all partners have equal rights in the management and conduct of business affairs.
* majority vote governs all ordinary course of business maters.
30
Non-financial operations: what are exception to majority voting for GP and LLP?
To take actions contrary to the partnership agreement.
To take action regarding extraordinary matters;
*Admitting a new partner
*Assigning partnership property
*Disposing of goodwill
*Doing any other act which would make it impossible to carry on the ordinary business of the partnership.
31
Which form of business LLP operates like?
General partnership. Sometimes called limited liability general partnership.
32
Operation: LP and LLLP?
One or more general partners make management decisions while limited partners are passive investors.
33
Operation: LLC?
1. Owner-managed: run business themselves like general partnership, but with limited liability.
2. Manager-managed: delegate to managers (members or nonmembers).
34
Operation: Corporation: who elect board of directors?
Shareholders.
35
Operation: Corporation: who select officers?
Board of directors.
36
Operation: Corporation: who runs things day-to-day?
Officers.
37
What is "piercing the corporate veil"? Which type of corporation the court will not do this?
Generally corporation's obligations are not visited upon shareholders. But for more small closely-held corporations, the court may require shareholders to be liable.
Public corporations.
38
What are the elements to determine "piercing of corporate veil"?
* Commingling of funds between corporation and shareholders.
* Diversion of the corporation's fund or assets to the personal use of shareholders.
* Failure to maintain the necessary corporate formalities.
* Failure to adequately capitalize the corporation for the reasonably foreseeable risk.
39
Does the court apply piercing of corporate veil to other forms?
Yes, LLC and LLP.
40
Is partnership a separate legal entity?
Yes.
41
What is the financial structure (allocation of income and taxation) for all the partnership forms (GP, LP, LLP, LLLP)?
Automatically allocated to partners or members.
| Single (pass-through) taxation.
42
Under RUPA (Revised Uniformed Partnership Act), each partner is deemed to have what? How can it be credited? Reduced?
Capital account - balance = (contribution + share of profits) - liability:
* partner contribution of: money plus the value of any other property minus liabilities.
* the partner's share of the partnership profits
Can be reduced by distribution + share of loss
43
What can partners be reimbursed for?
1. Pmts made and indemnified for liabilities incurred in the ordinary course of the partnership business
2. Advances to the partnership made beyond agreed capital contributions (essentially a loan - should get interest if not other agreement)
44
General partnership: How does partners share profits and losses, absent agreement to the contrary? Limited partnership?
Equally.
According to the proportion to their capital contributions.
45
If partners make an agreement to share profits in unequal way, but don't make agreement re: losses, what happens?
The law will presume that losses will be shared unequally, too.
46
What are 2 tests that must be met for corporation to issue shares?
1. Quality test: shares can be issued in exchange for something of value - cash, promissory note, any items of tangible or intangible value to the corporation.
2. Quantity test: shares must be issues at least par (face value) or amount authorized by the board.
47
If shares are issued for less than amount authorized, what happens? Who are liable? Exceptions?
Can be sued by creditors and shareholders.
1. Directors who allowed the sale
2. Buyers who paid too little
3. Transferees of original buyer who both know that he paid too little and who pay too little themselves
Corporation purchase of stock, or to treasury stock transactions.
48
What are 2 restrictions re: dividends and other distributions?
1. Must be authorized by the board.
2. Must:
* be consistent with shareholder's rights
* not render corp. unable to meet its bills as they are due ("bankruptcy insolvency")
* Not render corp. with fewer assets than liabilities ("equity insolvency").
49
Which form of business LLC financial provisions are comparable to?
Corporate provisions (occasionally partnership)
50
What forms must contribution be made of for LLC?
cash, property, or service.
51
When is LLC not permitted to make distributions?
When doing so will cause the firm to be insolvent.
52
Can distribution be made in kind (other than cash) for partnership?
Yes, but if a partner wants cash, she can insist on it. Not required to accept.
53
How are profits shared for C corporation?
100% to the corporation.
54
Must corporation issue both common and pref. stock? Can they have more than one class?
No.
| Yes.
55
What is watered stock?
the stock is acquired by exchanging cash or property worth less than the par or stated value of the stock.
56
What is cumulative pref. stock? What happens to those who hold cumulative pref. stock?
Preference over common stock. No guarantee that dividend will be declared, but if it does, it must be paid.
but the shareholder becomes an unsecured creditor of the corporation to the extent declared dividends are not paid; this includes dividends that were declared, but not paid, in previous years.
Their portion is cumulative, if not paid, and must be paid before common stocks.
57
How does sole proprietorship terminate?
Owner dies or depart from business.
58
Does partnership end when there is addition or subtraction of a partner?
No.
59
How does partnership terminate?
When a partner disassociate from the business for whatever the reason UNLESS the departing partner is bought put.
60
What is buy-out formula?
Value of account on the day of dissociation - damages caused (if dissociation was wrongful).
61
How is value of account determined?
Greater of liquidation value or going-concern value.
62
What does RUPA provide for partners to negotiate an amicable buy out?
90 day cooling off period.
63
If partnership is liquidated, who is the first priority for distribution? If not enough money? If there is left over?
Creditors (including partners).
Not enough: partners will have to contribute.
Left over: distribution to partners.
64
How is corporation terminated?
Voluntary dissolution:
A majority of directors vote to propose dissolution and majority of shareholders vote to approve the proposal.
Involuntary dissolution administered by the Secretary of State for;
* Failure to pay franchise taxes
* Failure to file annual reports
* Failure to properly establish and maintain a registered agent or office.
Involuntary judicially:
in an action by the attorney general:
* fraudulently obtained approval for its articles of incorporation.
* Abused legal authority.
in an action by shareholders:
* management is deadlocked
* those controlling corp. is acting legally, oppressively.
* shareholders are deadlocked and can't elect directors.
in an action by creditors - corporation admits in writing that the claim is due and it is insolvent.
65
What are other major changes besides dissolution for corporation?
1. Sale of all or substantially all of a corporation's assets (not in the ordinary course of business).
2. Merger or consolidations with other corporations.
66
Corporation: in the case of major change, how are shareholders' interest protected?
1. By procedures: director must propose the change and shareholders must approve in a vote.
2. Appraisal rights (dissenter's rights): dissenting shareholders may request for corp. to purchase their shares at a court-valued rate pursuant to their appraisal rights.
67
General partnership: what are partners entitled to, absent agreement to the contrary? Re: property rights?
1. Equal management rights
2. Have their capital contribution repaid and share profit equally.
1. Partnership property belong to partnership (not individuals).
2. Partners are entitled to use and possess the property, but only on behalf of the partnership.
68
General partnership: can a creditor for a partner's personal liability possess partnership property? What can the creditor do?
No.
The creditor can go to the court and obtain a charging order - the court orders other partners to pay any distribution due to the debtor partner to the creditor.
69
Are partners entitled to compensation for work performed for partnership?
No except for reasonable compensation rendered in winding up the business of the partnership.
70
What is Delectus Personae?
Veto right of partners for admission of potential new partners. It can be done only by unanimous consent.
71
What is partners' information rights?
1. Entitled to access to partnership books and records during ordinary business hours.
2. Each partner and the partnership must furnish to partners and their legal representatives:
* without demand, any info re: business and affairs reasonably required for proper exercise of partners' rights
* Upon demand: any other info reasonably requested.
72
Partnership: what are fiduciary duties a partner owe to other partners and the partnership?
1. Duty of loyalty:
* accounting for any benefits derived
* Avoiding conflict of interest
* refraining from competing with the partnership business
2. Duty of care; refrain from:
* grossly negligent or reckless conduct
* intentional misconduct
* knowing violation of the law
73
What are shareholders' rights?
1. To vote for corporate directors
2. To inspect corporate records for proper purpose at proper time and locations.
3. To have their financial proprieties respected: ex - preferred shares.
4. To exercise appraisal rights when they dissent from major organic changes
5. To file derivative lawsuits against officers, directors, others who committed wrongful acts that injured the corp.
74
What are directors and officers' duty?
1. Duty of attention.
2. Duty of care
3. Duty of loyalty
4. Respect the corporate opportunity doctrine
75
What is duty of attention?
* Must attend most board meetings
* Must gain a basic familiarity with the company's business
* Must study the company's FS
76
What is duty of care?
Must act:
* in good faith
* with the care of an ordinarily prudent person in a like position
* in a manner reasonably believed to be in the best interest of the corporation.
77
What is duty of loyalty?
* avoid conflicts of interest
| * be compliant when involving in transactions with corporation
78
When is the directors/officers' transaction with the corp. permitted?
* Approved by an affirmative majority of disinterested directors,
* Approved by a majority of knowledgeable shareholders OR
* They are "fair" to the corp.
79
How does directors respect the corporate opportunity doctrine?
By not appropriating for themselves business opportunities that rightfully belong to the corp.
80
What are directors' rights?
1. Right to rely: on reports of officers and other directors unless they have reason to be suspicious
2. Business judgement rule
81
Business judgement rule: the essence? How has the burden of proof? Does this apply to officers?
When shareholders want to sue directors, directors are presumed to have acted in good faith and best interest of the corp, in the absence of a showing a bad faith or gross abuse.
Yes.
82
LLC: What responsibilities do members/managers owe? Can it be eliminated by an operating agreement?
Duty of care and loyalty to the other members.
Good faith and fair dealings.
No, but can be limited.
83
When does court protects members re: their duties?
* If member can convince that the operating agreement provisions are "manifestly unreasonable"
* If those managing the firm are guilty of "oppressive conduct" - provide judicial dissolution.
84
Who can vote to amend the articles of incorporation?
Shareholders.
85
What law governs authority of various business forms?
Agency law
86
Agency laws: what binds the partnership? Exceptions?
An act of a partner for apparently carrying on in the ordinary course of the partnership business.
Unless the partner had no authority to act in the particular matter and the third party knew he didn't have the authority. Otherwise, the third party has a right to demand.
87
What types of authority a partner must have to bind the partnership and other partners?
1. Actual authority (expressed or implied)
| 2. Apparent authority
88
When can apparent authority not exist?
The third party knows of a partner's lack of authority.
| The partner's act requires unanimity - ex: admit a new partner.
89
What a way for others partners and the partnership to still authorize a partner's action without authority?
Ratification - Accept the act or knowingly accept the benefits.
90
Who are general partners have tort liability for? In the case of intentional torts?
Tort committed by partners or other agents within the scope of employment.
Still liable even if misappropriation (strict liability).
91
What is joint and several liability for general partnership? What's the prerequisite for the action?
A creditor may sue any general partners for contracts and tort liability and hold that partner completely liable without suing others.
The assets of the partnership must be exhausted before the creditor can go after general partners.
92
Is late arrivals (new partners) personally reliable for preexisting an subsequent debts?
Preexisting - only out of his partnership contribution.
| Subsequent - yes.
93
What do board of directors supervise?
The business and affairs of corporation;
1. Borrow money
2. Sell property
3. Hire/fire
4. Declare or refuse dividends
5. Make or refuse to make other distributions to shareholders.
6. Set salaries, even themselves
7. Propose for shareholder approval;
* Sale of major assets
* Merger or consolidations
* Dissolution
* Amendements to the articles of incorporation
94
What types of authority officers of corporation have?
1. Express authority from;
* Articles of incorporation
* By-laws
* Director's resolution
* Statutes
2. Implied authority from virtue of their office. But in questionable cases, a board of directors resolution may be demanded.
95
Will LLC be member-managed or manager managed , absent provision to the contrary?
Member-managed
96
LLC member-managed: (1) what's the allocation of member's right in management? (2) How are ordinary business issues decided? (3) Acts outside the ordinary course of business? (4) How can operating agreement amended? (5) Which business form is this similar to?
1. Equal rights.
2. By majority vote.
3. By unanimous approval
4. With the consent of all members.
5. General partnership
97
LLC manager-managed: (1) Which business form is this similar to? (2) Unless otherwise states, how matters of the company will be decided (ordinary course of business)? (3) What's the allocation of rights among managers? (4) How decisions re: extraordinary transactions made? (5) Rule re: managers' termination?
1. A limited partnership
2. By managers, by majority vote.
3. Equal rights.
4. By the consent of all managers
5. Terminated anytime without case by a majority vote of the members.
98
LLC: Can a member be an agent of LLC solely by being a member?
No because LLC can either be member-managers or manager managed.
