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CM 4211 > Lecture 9 -Business Formations and Licensing Requirements > Flashcards

Lecture 9 -Business Formations and Licensing Requirements Flashcards

1
Q

There are four major types of business formations

A

(1) proprietorship
(2) partnership
(3) corporation
(4) limited liability company

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2
Q

This type of business formation proprietorship has one owner (can be husband and wife in a community property state) who manages the business and usually does the work. and takes on all the risks

A

Proprietorship/ sole proprietorship

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3
Q

T/F A proprietorship is considered the simplest form of business and there are no filings needed to become a business.

A

True

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4
Q

as an entity “created by a contract between two or more persons to combine their efforts or resources in determined proportions and to collaborate at mutual risk for their common profit or commercial benefit

A

partnership

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5
Q

T/F: a partnership is a juridical person separate from its partners.

A

True

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6
Q

T/F: A partnership may be a party or group of people to a contract

A

True

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7
Q

Best options for the agreement of a partnership is:

A
  1. A partnership agreement may be verbal, but it is best to be in writing to at least memorialize the terms of the agreement.
  2. The agreement must be in writing for certain purposes, including if the partnership is to own real immovable property or if the partnership is to obtain a contractor’s license.
  3. The agreement should include a name of the partnership (again not deceptively similar), who the person(s) is who is managing the partnership, the sharing of the gains and losses, and many other administrative items
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8
Q

In most states the liabilities of the partners in a partnership are ____________

A

joint and several as to third persons

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9
Q

that each partner owes in full for the partnership liabilities, to then be fought out among the partners as to reimbursement if one of more partners had to pay beyond their ownership interest

A

joint and several as to third persons

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10
Q

In Louisiana in a partnership, the liability to third persons is a _____ ________

A

virile share

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11
Q

means by heads, followed by reimbursement among the partners

A

virile share

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12
Q

In a partnership The liability to third persons is usually after payment by the ______ from its net ______.

A

partnership; assets

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13
Q

T/F: Dissolution of a partnership does absolve the partners of their liabilities

A

False; does not absolve the partners of their liabilities

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14
Q

Person who has substance. The only person liable in a Limited Liability partnership

A

general partner

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15
Q

When is a limited liability partnership used?

A

used often for real estate investment ventures, but now has limited use because of changes to the tax law

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16
Q

What do the limited partners owe in a limited liability partnership?

A

The limited partners are only liable for what they owe the partnership

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17
Q

What causes a limited partner become a general partner (liable for LLP debts)

A

(1) Commit a breach of a fiduciary duty,
(2) Name the partnership in a limited partner’s name, or
(3) Take too much control in management of the partnership

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18
Q

Which business formations discussed is not advisable in the Construction Industry?

A
  1. Proprietorship
  2. Partnership
  3. Limited Liability Partnership (LLP)
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19
Q

an association of persons with the intent to engage and carry out a single business venture for profit for which they combine efforts, property, money, skill and/or knowledge without creating a partnership

A

Joint Venture

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20
Q

JV’s and Partnerships are very similar. What’s the main difference between a joint venture and a partnership?

A

Joint venture is temporary while a partnership continues from venture to venture and is more permanent

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21
Q

T/F: JV’s are so similar to partnerships that JV’s are treated and taxed the same as a partnership, being flow through to the joint “venturers” (partners)

A

True

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22
Q

Two business formations discussed that are advisable in the construction industry

A

Corporation and Limited Liability Corporation (LLC)

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23
Q

Difference between partnership and a corporation

A

(1) partnership: a juridical person separate from its partners.
(2) corporation: a juridical person created by law distinct from its shareholders (owners)

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24
Q

T/F: A corporation operates under the laws of its state of incorporation and under the laws of the state(s) where it operates

A

True

25
Q

the state of choice when creating a corporation

A

Delaware

26
Q

A corporation by law is required to state it is a corporation. What are the names used to identify that?

A 
Corporation,” 
or “Company” 
or “Inc.,”
 or “Co.,” 
or something similar (in Europe “Limited” is a favorite name
27
Q

By not using these names when forming ta liability can result in what?

A

Shareholders (owners) personal liability

28
Q

How do the owners give direction for the Corporation?

A

elect a Board of Directors to give direction for the corporation

29
Q

The Board of Directors usually meet once a year unless what?

A

an action affects the shareholders’ ownership interest (such as a stock split)

30
Q

The Board of Directors establishes the corporation policies and elects _____ of the corporation.

A

officers

31
Q

officers manage the corporation and hire the _______ to carry out the operations of the corporation.

A

employees

32
Q

Employees are personally liable for what in a corporation?

A

for their actions working at the corporation

33
Q

What are officers personally liable for in a corporation?

A

for poor operation of the corporation and for irresponsible hiring of employees.

34
Q

What are Directors personally liable for in a corporation?

A

Directors are personally liable for the policies they chose and for irresponsible hiring of officers. `

35
Q

T/F: . Shareholders are not personally liable unless they also serve as a director, officer, and/or employee

A

True

36
Q

In a small corporation, why does the owner usually have liability?

A

an owner usually will also wear all of those other hats and therefore have liability (employee, director, officer, ect.)

37
Q

Why is it important to physically name directors, officers, and employees?

A

to spread risk throughout the corporation, so all the risk doesn’t fall on one person

38
Q

Characteristics of a Corporation

A

(1) perpetual duration
(2) centralized management,
(3) ease of ownership and transferability of ownership (unless restricted as is normal in privately owned corporations),
(4) ease of contracting,
(5) access to capital by sale of stock
(6) broad flexibility in conducting business

39
Q

it continues until it is dissolved by some action (Characteristics of a Corporation)

A

perpetual duration

40
Q

a board of directors (Characteristics of a Corporation)

A

centralized management

41
Q

T/F: A corporation continues in existence when there is a change of management or a death of an important person in the corporation.

A

True

42
Q

What happens when you pierce the veil in a corporation?

A

Make the owner have personal liability when the corporation they own doesn’t have funds to pay its debts, and the creditor looks to “pierce the corporate veil” and go after the shareholders (owners)

43
Q

Requirements to pierce the corporate veil include:

A

(1) if the corporation is formed to frustrate the ends of justice (a corporation for an illegal purpose among other things),
(2) commingling of funds (the usual reason a veil is pierced),
(3) a violation of statutory formalities for incorporation,
(4) undercapitalization (provide company with insufficient capital to complete a job),
(5) failure to hold regular shareholder and/or director meetings (usually at least once a year), and
(6) failure to conduct business on a corporate footing, thereby disregarding the corporate entity.

44
Q

A corporation has tax elections it can make. What are the two main tax elections?

A

C Corporation S corporation

45
Q

taxed as a separate entity and the corporation pays the taxes on its net profits. Double Taxation. Can take its net profits and pay bonuses to its officers and employees. Bonuses are deductible to the corporation

A

C corporation

46
Q

If it is small enough and all of the shareholders (and wives) sign on, the corporation can select a flow-through status similar (but not the same) to a partnership by electing to be a________

A

Subchapter S Corporation

47
Q

Why is a corporation an advisable business formation?

A

no personal liability of the shareholders as shareholders

48
Q

is an unincorporated association having one or more members organized via a state Secretary of State. A separate juridical person, distinct from its members

A

A limited liability company (LLC)

49
Q

Tax statuses of a LLC

A

(1) as a partnership with flow through characteristics, and which is the default status if there is no timely election made),
(2) as a C corporation, or
(3) as an S corporation

50
Q

Why would an LLC want to get taxed as a C corporation?

A

to obtain tax advantages (franchise tax that does not affect LLC’s)

51
Q

What does the C stand for in LLC

A

Limited Liability COMPANY (not Corporation)

52
Q

How can an LLC be managed?

A

Manager managed (manager, president, ect.) or memeber managed

53
Q

Why is member management not a practical choice in an LLC?

A

requires votes of the members too often

54
Q

Why is an LLC advisable business formation in the Construction Industry?

A

no personal liability of the members as members.

55
Q

Requirements to get licensure for a construction company

A

(1) to safeguard life, health, and property,
(2) to promote public welfare, and
(3) to safeguard against incompetent, inexperienced, or untrained individuals

56
Q

Why is it important to get a license in the construction industry?

A

It is usually unlawful for anyone to engage in the business of contracting without a proper license (if one is required), subject to criminal penalties and possibly injunctions against doing work or any project. The fines can be extremely steep, so beware.

57
Q

How do you get the proper licensure to run a company?

A

(1) apply for the license in a particular field (e.g., as a plumber or carpenter, or as a general contractor),
(2) show some minimum net worth,
(3) take and pass a test in the field applied for, and
(4) have references.

58
Q

Basics of Licensing Penalties:

A

Get the proper license or you’re working for less than free and dont lend your license to somebody who is unlicensed

CM 4211 (8 decks)

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