Part VI: Business Structure

Question 1

sole proprietor

Answer 1

1. a single-owner business

2. assets and liabilities belong solely to the owner

Question 2

general partnership (GP)

Answer 2

1. 2+ persons working as co-owners to earn a profit.
2. Partners liable for bus. debts.
3. Partners taxed, not the partnership itself.

Question 3

formation of GP

Answer 3

2+ people need to start working together

Question 4

If a GP is dissolved…

Answer 4

the liabilities of the partnership still exist and the owners or former partners are still liable.

Question 5

How are profits divided btwn. partners in a GP?

Answer 5

Absent a specific agreement on how profits will be shared, all profits are divided equally among partners.

Question 6

going into competition w/partnership

Answer 6

1. When a partner performs some act that hurts the partnership.
2. Each partner has a fiduciary duty to not enter competition w/partnership.

Question 7

If a partner acts w/apparent authority and enters a contract on behalf of the partnership..

Answer 7

the partnership will be held to the contract.

Question 8

joint venture (JV)

Answer 8

similar to a GP, but used for a 1-time bus. venture.

Question 9

limited partnership (LP)

Answer 9

Involves 1+ GP(s) and 1+ LP(s).

Question 10

general partner (LP)

Answer 10

full partner that works on day-to-day bus. ops. and is fully liable for the bus. debts.

Question 11

limited partner (LP)

Answer 11

contributes capital, but doesn’t actively manage the business and has limited liability for bus. debts..

Question 12

limited liability partnership (LLP)

Answer 12

Provides more protection from liability specifically for professionals.

Question 13

main idea of LLP

Answer 13

The main idea is to protect partners from the malpractice of other partners.

Question 14

When do limited partners lose their limited liability status?

Answer 14

When they start participating in mgmt. activities.

Question 15

corporation

Answer 15

Provides lim. liab. for the owners- limited to the amount you invested.

Question 16

legal standing of a corporation

Answer 16

The corporation is a legal being separate from its owners.

Question 17

double taxation

Answer 17

The corp. is taxed on its profits, but the shareholders are taxed again on dividend income.

Question 18

articles of incorporation

Answer 18

Necessary to form a corp., these include:

1. Corp. name
2. # of shares authorized to issue
3. street address of registered office and name of agent at that address
4. name and address of each incorporator

Question 19

piercing the corporate veil

Answer 19

corp’s shareholders become personally liable.

Question 20

Causes of piercing the corporate veil:

Answer 20

1. Being thinly capitalized which endangers the legitimate interests of creditors and tort creditors.
2. Owners commingle their funds w/funds of the corps.

Question 21

shareholder rights

Answer 21

1. To a reasonable inspection of corp. records.
2. Preemptive rights when it comes purchasing newly-issued shares, in order to maintain control.
3. Board of directors of a corp. has a fiduciary duty, which is the duty of highest loyalty.

Question 22

Subchapter S Corp.

Answer 22

1. limits the effects of double taxation by meeting certain requirements.
2. flow-through entity.
3. Must have 100 or fewer shareholders to retain the S corp status.

Question 23

professional corp. (PC)

Answer 23

a special type of corp. aimed at professionals that provides the limited liability and other benefits of the corp. form.

Question 24

limited liability company (LLC)

Answer 24

1. Provides limited liability, but the tax benefits of a flow through entity.
2. Owners are known as “members” in an LLC.

Question 25

operating agreement

Answer 25

1. necessary for the formation process for an LLC.
2. Should be in writing, and it maps out how things will work and how disputes will be resolved among the members of the LLC.

Question 26

How do distributions to owners affect owners’ equity?

Answer 26

Decreases it.

Question 27

Distributions to owners include…

Answer 27

1. Cash dividends.
2. Property dividends.
3. Liquidating dividends.

Question 28

Distributions to do not owners include…

Answer 28

stock dividends.