Partnerships and corps

Question 1

Rights of partners in a LP. (10 of them)

Answer 1

a) General Partners manage partnership.
b) Limited Partners invest.
c) Profits shared as per certificate agreement (if none stated, then on percentages of capital contributions!)
d) Unless agreement states elsewise, admission of a new partner requires WRITTEN agreement of all partners.
e) LP interests may be assigned
f) All partners may inspect books/tax info
g) Can be limited and general partner at same time.
h) Limited Partners may own competing interests.
i) Limited Partner may be secured/unsecured creditor of LP
j) Limited Partner may not withdraw capital contribution if it impairs creditors.

Question 2

What can a limited partner in a Limited Partnership do in respect to the LP without risking loss of limited liability (i.e., limited to capital contribution)
(9 of them)

Answer 2

1) Act as an agent or employee of LP.
2) Consult with and advise general partner or the LP about partnership business.
3) Approve / disapprove amendments to the LP agreement.
4) Vote on the dissolution or winding up of the LP.
5) Vote on loans of LP.
6) Vote on changing the nature of the business of LP.
7) Vote on removing a general partner.
8) Bring a derivative lawsuit on behalf of the LP.
9) Be a surety for the LP.

Question 3

How are profits and losses shared in a Limited Partnership?

Answer 3

Shared as agreed upon in the certificate agreement. If no agreement on profits and losses exists, then shared based on the percentages of capital contributions. (Note: losses and any further liability are limited to capital contributions for limited partners)

Question 4

Do limited partners owe a fiduciary duty to the LP?

Answer 4

No, general partners do owe a fiduciary duty to both general and limited partners, but limited partners (in general) do not owe fiduciary duties since they do not engage in managing the business.

Question 5

What causes dissolution of a limited partnership?

6 of them

Answer 5

a) completion of time period specified in certificate.
b) Upon event specified in the partnership agreement.
c) Unanimous WRITTEN consent of all partners.
d) Dissolution of court decree when not practical to continue p-ship.
e) Event causing p-ship business to become illegal.
f) Withdrawal of the general partner by retirement, removal bankruptcy, fraud against other partners, insanity or death, unless:
-all partners agree in writing to continue business,
-partnership agreement allows partners to continue business,
-withdrawal or death of a limited partner doesn’t cause dissolution.
(Note: dissolution of LP requires filing with the state)

Question 6

What is the distribution of assets after dissolution and winding up of a Limited Partnership?
(4 of them)

Answer 6

In order of priority:
1) Creditors, including partners who are creditors.
2) Partners and ex-partners to pay off unpaid distributions.
3) Partners to return capital contributions.
4) Partners for partnership interests in proportions for which they share distributions.
(Note: general and limited partners share equally in the priorities, and partners can vary their rights by agreement of all affected parties)

Question 7

What is a Joint Venture?

Answer 7

An association of two or more persons (or entities) organized to carry out a single business undertaking (or series of related undertakings) for profit.

Question 8

What are the differences between JV’s and partnerships?

Answer 8

1) Joint venturers not necessarily agent of the other joint venturers - there is limited power to bind others, and no apparent authority for the joint venturer.
2) Death of a joint venturer does NOT automatically dissolve the JV.

Question 9

What are similarities between Joint Ventures and Partnerships?

Answer 9

JV is interpreted as a special form of a partnership:

1) fiduciary duties of partners apply,
2) each joint venturer has a right to participate in management,
3) liability is unlimited and each joint venturer is personally liable for the debts of the JV.

Question 10

Characteristics of Limited Liability Companies (LLC)

7 of them

Answer 10

a) All owners (i.e., members) have limited liability (no personal liability).
b) Must be formed according to LLC statute of state being formed in.
c) LLC is a separate legal entity so can sue or be sued in own name.
d) Name of LLC must include words “limited liability company” or “limited company” (or L.L.C., LLC, L.C., LC) to give notice to public.
e) Formed when one or more persons act as organizers by filing a Certificate of Organization with the secretary of state. (operating agreement?)
f) No limit to the number of members allowed.
g) LLC not taxed - tax liability flows through to individual members.

Question 11

What is the liability of a LLC owner for the LLC?

Answer 11

Members have limited liability (no personal liability), limited to their capital contributions (including obligation to make contribution) plus equity in the LLC.
(NOTE: if business formalities are not followed for LLC, the limited liability is usually retained. If a corporation fails to follow formalities (like minutes at corp meetings) the corporate veil can be pierced, making shareholders personally liable for corporation debts)

Question 12

How are profits and losses shared in an LLC?

Answer 12

According to the p & l sharing agreed in the operating agreement (may divide profits differently than losses).
- in most state laws, absence of an agreement then p & l shared in proportion to their capital contributions.
- under RULLCA, absence of agreement, members divide equally.
(NOTE: on test, if not specified RULLCA, assume majority rule)

Question 13

What authority do members have in LLC?

Answer 13

Member-managed LLC: all members have authority to bind LLC to contracts on behalf of LLC.
Manager-managed LLC: only managers have authority to bind LLC to contracts for LLC (only bound to contracts that LLC has authorized under agency law, or are made in the ordinary course of business).
(NOTE: authority for either managed LLC can be restricted by filing statement of authority with Sec of State - deemed proper notice to 3rd parties; or via operating agreement - only proper to those receiving direct notification.)

Question 14

What causes the dissolution of a LLC?

Answer 14

• all members agree in writing to dissolution
• time period passes or event occurs as specified in the operating agreement
• member withdraws, is voted out, dies, goes bankrupt, or becomes incompetent (most states allow remaining members to continue if agreed unanimously)
• court order dissolves the LLC.

Question 15

What is the distribution of assets upon LLC dissolution?

Answer 15

LLC assets are distributed upon dissolution in the following priorities:

1) To creditors (including managers and members, except for members shares in the distribution of profits)
2) To members and past members for unpaid distributions, unless otherwise agreed upon
3) To members to receive back capital contributions, unless otherwise agreed upon
4) To members for their distributions as agreed in the operating agreement, or if no agreement, in proportion to contributions made.

Question 16

How is a Limited Liability Partnership (LLP) formed?

Answer 16

1) Articles of LLP filed with Secretary of State.
2) Firm’s name must include phrase “Limited Liability Partnership” or “Registered Limited Liability Partnership” (or initials LLP, RLLP) to provide public notice.
3) Majority of states require approval from only a majority of partners to become LLP (unanimous approval of partners not required)
4) Generally, laws of state where formed governs affairs of LLP in all other states.

Question 17

What is the liability to a partner in a LLP?

Answer 17

1) General partner has no personal liability for contractual obligations of the firm (majority rule).
2) Partners have no personal liability for debts arising from torts of the LLP, unless they committed the tort or supervised the party committing the tort (majority rule).

Question 18

What corporation may choose to be a close (closely held) corporation?

Answer 18

One that:

• has 50 or fewer shareholders
• 2/3 of each class of stock approve the choice
• statement must be made in the articles of corporation
• all share certs must state it is one

Question 19

What makes a close corporation desirable?

Answer 19

1) Helps corps made up of entrepreneurials since it functions w/o some of the formalities of operating corps
2) may function w/o BOD (if all s/h approve) - managed by s/h
3) needn’t hold s/h meetings unless at least on s/h demands in writing
4) s/h may share as a partnership for purposes of governing
5) allows s/h to have limited liability
6) usually transfer of ownership (sale of stock) is restricted

Question 20

What is a “de jure” corporation?

Answer 20

A corporation that has been formed correctly in compliance with incorporation statutes.

Question 21

What is a “de facto” corporation?

Answer 21

A corporation that has been formed in fact but has not been formed properly under the law. (Usually due to a small error; filing of Articles of Incorporation deemed conclusive proof of incorporation and disallows 3rd parties from challenging existence, but state can still challenge)

Question 22

What does a promoter do for a corporation?

Answer 22

Form corporations and arrange capitalization. Handles issuing of prospectus, promoting stock subscriptions, draws up the corporate charter. Has a fiduciary relationship with corporation - is not permitted to act against interests of the corporation (although does not prevent personal profit if fully disclosed). Not an agent because no corporation exists yet.

Question 23

Are agreements made by the promoter binding on the corporation?

Answer 23

Only agreements (preincorporation contracts) that are adopted by the corporation after coming into existence are binding (requires an actual resolution by the BOD).

Question 24

Is the promoter liable for agreements/contracts made by promoter?

Answer 24

Yes, even if adopted by the corporation, unless a novation is made by the party to the contract, and thereby substituting the corporation.

Question 25

What is the corporate charter?

Answer 25

The Articles of Incorporation that are filed with the state and contain (may be subsequently amended):

1) Proposed name of corp and initial address
2) Purpose of corp
3) Powers of corp
4) Name of registered agent of corp
5) Name and address of each incorporator (may be promoters)
6) Number of authorized shares of stock.

Question 26

What do corporate bylaws do?

Answer 26

Provide specific rules for management of the corporation.

Question 27

What is an uncertified security?

Answer 27

A security not represented by written documents.

Question 28

What is a stockholder’s preemptive right?

Answer 28

The right to subscribe to new issues of stock so as to retain the stockholder’s ownership percentage (voting %) w/o dilution. Usually only for common stock and must be provided for in the Articles of Incorporation.

Question 29

What is a derivative suit?

Answer 29

Stockholder sues on behalf of the corporation.