R6, M1-M5 Flashcards
What type of bankruptcy case is Chapter 7?
liquidation
What type of bankruptcy case is Chapter 9?
bankruptcy for a municipality
What type of bankruptcy case is Chapter 11?
reorganization
What type of bankruptcy case is Chapter 12?
family farmers with regular income
What type of bankruptcy case is Chapter 13?
adjustment of debts for individuals with regular income
What type of bankruptcy case is Chapter 15?
cross-border cases
What does a trustee do?
- collect debtor’s assets,
- liquidate them, and
- use proceeds to pay off creditors
In a Chapter 7 bankruptcy, are the remaining unpaid debts discharged for an individual? For an entity?
Yes for individual.
No for an entity - the entity itself is dissolved.
What happens in a Chapter 13 proceeding?
The debtor pays part of all of debts over a 3-5 year period, and remaining debts are discharged at the end.
Is there a trustee appointed for a Chapter 13 proceeding?
Yes.
Trustee is required to be appointed in which types of bankruptcy?
Chapter 13 and Chapter 7
Trustee can be appointed in a Chapter 11 bankruptcy in what scenario?
the debtor is acting in bad faith (fraud, incompetency)
Who can file for Chapter 13 bankruptcy?
individuals only
What happens in a Chapter 11 bankruptcy? What happens to the business at the end?
An approved reorganization plan is created and carried out.
The business continues at the end.
What two situations give rise to a Chapter 7 case being converted into a Chapter 13 case or being dismissed?
- granting relief under Chapter 7 would constitute abuse, or
- person has sufficient income to pay debts
What two tests can be used to determine whether you stay in a Chapter 7 case or not?
- monthly income test
- means test
What does the monthly income test entail?
If your average monthly income is greater than the state median for a similar family size, then there is a presumption of abuse and you need to convert the case to Chapter 13 or dismiss it.
What calculation does the means test entail?
Calculate (Average Monthly Income - Allowed Expenses) times 60.
If the calculated amount of the means test is less than ___, you can continue the Chapter 7 case.
If the amount is over ___, you have to convert to Ch. 13 or dismiss the case?
$9,075
$15,150
Who may NOT file for bankruptcy under Chapter 7 (acronym)?
Railroads
Insurance companies or small business investment companies
Banks
Savings institutions
Who may NOT file for bankruptcy under Chapter 11 (acronym)?
Broker
Insurance companies or small business investment companies
Banks
Savings institutions
What does the automatic stay do? When does it go into effect?
stops almost all collection efforts
goes into effect when the bankruptcy petition is filed
Which collection efforts cannot be stopped with an automatic stay (3)?
- criminal prosecutions,
- paternity suits,
- cases to collect spousal or child support obligations
A debtor’s scehdule of assets and liabilities must be stated at what value and cannot be stated at what value?
- must be stated at FMV or liquidation value
- cannot be stated at book value
How many days does a debtor have to file documents before the case is dismissed?
45 days from the date of filing the petition
Does a debtor need to be insolvent (liabilities greater than assets) to file for bankruptcy?
No, they only need to be able to say: “I cannot pay my debts as they become due.”
T/F: Spouses can file for voluntary bankruptcy under Chapter 7 or 11 to avoid duplicate fees.
True.
What is the timing of the order of relief in a voluntary case?
as soon as the petition is filed
What is the timing of the order of relief in an involuntary case?
when the court does their due diligence
Can a secured creditor petition a debtor into involuntary bankruptcy?
No, only unsecured creditors can.
Which two types of organizations cannot be involuntarily petitioned into bankruptcy?
farmers and nonprofit charitable organizations
What dollar threshold of debt needs to be met in order to petition for involuntary bankruptcy?
$18,600
What type of creditor can petition someone into involuntary bankruptcy (2 words)?
unsecured, undisputed debt
If the debtor has fewer than ___ creditors, ___ creditors meeting the threshold can file.
If the debtor has ___ or more creditors, ___ creditors meeting the threshold can file.
- 12, 1 or more
- 12, 3 or more
Does a debtor need to be insolvent to be involuntarily petitioned into bankruptcy?
No, they just are not paying debts as they become due.
What is a Section 341 meeting?
a meeting of the creditors
When is the Section 341 meeting typically held?
within 20 to 40 days after the order for relief
Who needs to be given notice of the Section 341 meeting?
all interested parties (debtor, trustee, all creditors)
What property is included in the bankruptcy estate (2 categories)?
all of the debtor’s real and personal property at the time of filing AND DIII within 180 days after filing
What does DIII stand for (180 days after filing property)?
- divorce settlement property received
- inheritence
- insurance
- income generated from estate property (rent, interest, dividends)
What two items are excluded from the bankruptcy estate?
- basic household items needed to live
- money earned after the petition is filed (post-petition earnings)
The trustee is treated like a ___ ___ ___ as of the filing date.
hypothetical lien creditor
The trustee has priority over which creditors?
All except for those with:
- prior perfected security interests
- prior statutory liens
- prior judicial liens
To be a fraudulent transfer, the debtor should have known what?
that they are insolvent/going to bankruptcy court soon
What do you do with a fraudulent transfer?
The trustee can repossess that property for the estate.
What time period does the fraudulent transfer have to occur in to be set aside by the trustee?
within 2 years of the filing date
What is a preference?
a preferential transfer made to a creditor before filing for bankruptcy (to make sure they get paid)
Transfers made to creditors __ days before the filing of the petition will be looked at to see if they are preferential. What is the alternate time period if the amount was paid to an insider?
90 days, 1 year (insider)
What can the court do with the preferential transfer?
take that money back and put it in the bankruptcy estate
Can you make a preferential transfer if the transaction is new debt and not already existing?
No, it has to be debt that is already existing.
The key about a preferential transfer is that the creditor is receiving …
more than they would have if you went to bankruptcy court in the regular process
A preferential transfer includes not only the payment of money or giving of property, but also …
giving a security interest (secured transaction)
A debtor is presumed to be insolvent during the ___ days before the petition is filed.
90
Can a regular payment in the ordinary course of business be treated as a voidable preference?
No.
If you have a secured claim against the debtor, do you need to file a proof of claim?
No, you will get paid for sure even if you do not file proof of claim.
Who needs to file a proof of claim with the court to have their claim considered when distributing funds from the bankrutpcy estate? What do shareholders file?
unsecured creditors
SH file a proof of interest.
Can a trustee also be a professional for the estate (like a tax preparer)?
Yes, if the court approves.
Can a debtor be discharged if they unjustifiably failed to keep books and records?
No.
For a Chapter 7 bankruptcy, how many years need to pass before you can file another Chapter 7 bankruptcy?
8 years
What acronym tells you the six non-dischargeable debts?
WAFTED
What does the W stand for in WAFTED (nondischargeable debts)?
Willful and malicious injury
What does the A stand for in WAFTED (nondischargeable debts)?
Alimony
What does the F stand for in WAFTED (nondischargeable debts)?
Fraud
What does the T stand for in WAFTED (nondischargeable debts)?
Taxes
What does the E stand for in WAFTED (nondischargeable debts)?
Educational Loans
What does the D stand for in WAFTED (nondischargeable debts)?
Debts undisclosed in bankruptcy petition
If a debtor does not want an otherwise dischargeable debt to be discharged, can they do that?
Yes, as long as agreement to reaffirm was made before the granting of the discharge.
What are the three categories of claimaints (in order of payment)?
- secured claimants
- priority claimants (SAG WEG CTI)
- general (unsecured) creditors who filed on time
If the collateral value is not enough to pay a secured creditor’s claim, what happens to the balance?
Remaining debt is treated as regular unsecured debt.
What do you do if there is not enough money to pay all creditors at a particular level?
The creditors share in the money that CAN be distributed pro-rata.
What acronym helps you remember the order of priority of priority claimants?
SAG WEG CTI
What does S stand for in SAG WEG CTI (order of priority claimants)?
support obligations owed to spouses and children (alimony and child support)
What does S stand for in SAG WEG CTI (order of priority claimants)?
administrative costs of bankruptcy (filing fee, court fee, trustee fee, legal and accounting fees)
What does the first G stand for in SAG WEG CTI (order of priority claimants)?
gap claims accrued in the ordinary course of business from time of petition to order of relief being granted
What does W stand for in SAG WEG CTI (order of priority claimants)?
wage claims for employees for sums earned within 180 days of bankruptcy filing
What is the threshold for wage claims that can be priority claims? How does this work with the employee benefit item?
$15,150
This total amount can be claimed for both categories combined.
What does E stand for in SAG WEG CTI (order of priority claimants)?
employee benefits earned within 180 days of filing
What does the second G stand for in SAG WEG CTI (order of priority claimants)?
grain farmers and fisherman claims (up to $7500)
What does C stand for in SAG WEG CTI (order of priority claimants)?
consumer deposits (up to $3,350)
What does T stand for in SAG WEG CTI (order of priority claimants)?
Tax claims
What does I stand for in SAG WEG CTI (order of priority claimants)?
personal injury claims from DUIs
A creditor’s committee in a Chapter 11 case (reorganization) has to include how many and what types of creditors?
7 largest unsecured creditors
A person engaged in busienss other than ___ __ with debts not exceeding ___ can elect to be treated as a small business and a creditor’s committee not be appointed.
real estate, $2.6M
Can the shareholders of a corporation create their own committee?
Yes.
For how many days after the order of relief does the debtor have the exclusive right to file a reorganization plan?
120 days
If a debtor files a plan but has not obtained acceptance for every class within 180 days after the order for relief, what happens?
others can begin filing reorganizaiton plans
Who votes on the reorganization plan (in a corporation)?
shareholders and creditors
Who votes on the reorganization plan (in a non-corporation)?
creditors only
T/F: Unanimous consent is required for a reorganization plan to be effective.
False.
What is important to recall about the treatment of each claimant in a particular class?
each needs to be treated equally
Who can confirm the organization plan? Is there a difference between confirming the plan and voting on it?
Only the court can confirm.
There is a difference between the two.
A class of impaired debtors is considered to have accepted the plan (in voting) if it is accepted by creditors holding …
- at least 2/3 in total amount of debt, and
- more than 50% of the number of creditors
A class of impaired shareholders is considered to have accepted the plan (in voting) if it is accepted by SHs holding …
at least 2/3 of the total stock issued (in $)
What conditions need to be met for the court to confirm a plan?
- accepted by all classes,
- provides for payments in full for priority expenses and gap claims, and
- plan is feasible
What is a cram down? When does it occur?
The court confirms a plan even though it was not accepted by all impaired classes.
They do this when the clan is still fair and equitable to the dissenting classes.
T/F: If you disagree to a reorganization plan, you are not bound by it when the court confirms it.
False.
Once a plan is confirmed, this terminates the ___ ___.
automatic stay
When a foreign representative files for Chapter 15 bankruptcy, what are they essentially saying?
Hey U.S. court, can you recognize and cooperate with the bankruptcy case going on in another country?”
After notice and hearing, a US court can recognize a foreign proceeding as either …
- foreign main proceeding, or
- foreign non-main proceeding
A foreign representative in a Chapter 15 case is like a
trustee.
What can the foreign representative do in a Chapter 15 case?
- seek additional relief from the BK court,
- bring a full blown case under Chapter 7 or 11,
- participate in pending or existing U.S. cases
T/F: Chapter 15 prohibits ALL discrimination against foreign creditors.
False, it prevents discrimination generally, except for certain foreign government and tax claims.
What is the Chapter 15 right to notice?
requires notice to foreign creditors considering a U.S. bankruptcy case (including notice of right to file claims)
What is the Chapter 15 right to cooperation?
U.S. courts and trustees must cooperate to the maximum extent possible with foreign courts and representatives
When do self-employed individuals have to pay SE tax? (income level)
when net profit exceeds $400 in a year
Are part-time employees subject to FICA?
Yes.
FICA provides workers and their dependents with benefits in case of:
- death
- disability
- retirement
What responsibility does the employer have if they fail to withhold the employee’s share of FICA taxes?
They have to pay the employee’s half, but they can be reimbursed by the employee.
What is the tax treatment for the employer and employee if the employer voluntarily pays for the employee’s share?
Deductible for employer.
Taxable income for employee (like a taxable benefit).
Gross wages for the FICA tax calculation includes what types of income?
salary, bonus, commission
Are deductible contributions to traditional retirement plan (employer plan) subject to federal income tax? Are they subject to FICA tax?
No to federal income tax.
Yes to FICA tax.
Is income from sitting on the board of directors considered self-employed income?
Yes.
Are taxable fringe benefits subject to FICA taxes?
Yes.
Is the employer’s contribution of FICA taxes deductible to the employer?
Yes.
Is the employee’s contribution of FICA taxes deductible to the employee?
No.
What types of death benefits does FICA provide?
survivor’s benefits, dependent’s benefit
What types of medical benefits are provided under FICA, Medicare, Medicaid, or both?
Medicare only (Medicaid is a state-run profram.)
T/F: Employees may opt out of SS tax if they receive benefits from a private plan (IRA).
False, they cannot opt out.
What is FUTA for? Is FUTA state-run or federal?
unemployment compensation
The guidelines are federal, but the states administer the program and determine the payments.
Does FUTA apply to self-employed individuals?
No, because you cannot fire yourself.
Which employers are subject to FUTA?
- employers with quarterly payrolls of at least $1,500, or
- employ at least one person for 20 weeks in a year
For the employer time requirement under FUTA, does the person employed for 20-weeks need to be a full-time employee?
No, they can also be a part-time employee.
Are FUTA taxes assessed against the employee?
No, only against the employer.
What is the FUTA tax calculation?
6.0% on first $7,000 per year of compensation for each employee
If employer also pays state unemployment taxes, how much of a credit can they receive against their federal unemployment tax?
up to 5.4% of the first $7,000
When can the state rate for unemployment taxes be reduced?
when the employer has a below-average rate of unemployment claims from prior emplpoyees
Are FUTA taxes deductible to the employer?
Yes.
When can an employee receive unemployment compensation?
when the job termination was not their fault
What are the key words to remember for workers compensation?
strict liability
When is an employee entitled to workers’ compensation?
when they are hurt on the job and did not intentionally hurt themselves
If injured due to an employee’s negligence on the job, are they entitled to workers’ compensation?
Yes, the employer is strictly liable regardless of fault.
Can the employer claim worker’s compensation if acting outside the scope of employment?
No.
Employers that only have up to __ or __ employees may also be exempt from worker’s compensation.
3 or 4
Do you need to pay worker’s compensation for independent contractors?
No.
How does an employer pay for worker’s compensation?
purchase insurance from the state or a private carrier
Can an employer avoid purchasing an insurance policy for workers compensation?
Yes, if they prove they are financially responsible.
If you are not required to pay for worker’s compensation insurance, why might you still want a policy?
Without insurance, you can be sued by the employee and give up the defenses of contributory negligence, assumption of the risk, and fellow servant doctrine.
With insurance, you just pay the benefits and are not sued.
Are workers’ compensation insurance premiums deductible to the employer?
Yes.
If you receive money from workers compenation due to an injury, can you sue the employer?
No.
Are survivor’s benefits available under workers’ compensation?
Yes.
T/F: The Affordable Care Act creates a nationwide healthcare program.
False, it just provide improved access to healthcare through more affordable options.
What are four options to obtain health care?
- plan provided by employer
- plan purchased through Health Insurance Marketplace
- coverage under government program (Meicre, Medicaid)
- direct purchase from an insurance company
T/F: All employers are required to offer health care coverage.
False, you only need to if certain criteria are met.
An individual must obtain health care coverage for who?
himself/herself, spouse, and tax dependents
Does the employer have to pay for the employee’s health care coverage in full?
No, they are only required to subsidize the cost of coverage to ensure that healthcare is affordable.
Which employers are required to offer health care coverage?
employers with 50 or more full-time employees (ALEs)
Can non-profit entities and government entities be required to offer health care coverage to employees?
Yes.
How is a full-time employee defined for determining whether an employer is an ALE (health care)?
- works on average 30 hours a week, or
- 130 hours of service a month
Coverage is considered afforable if the employees contribution to the plan does not exceed ___ % of household income for the taxable year.
9.5%
A dependent for health care is an employee’s child who has not reached the age of ___.
26 (25 and under is dependent)
T/F: Employers and employees who do not comply with the ACA will pay a penalty for failure to do so.
False, only employers pay penalties.
Where do you report that you have the minimum essential healthcare coverage?
on tax return
The ACA makes it illegal for an insurer to … (2 OR)
- deny coverage to people with pre-existing conditions, or
- charge more for their coverage
What is the amount of the first type of penalty that can be imposed on an employer for not complying with the ACA?
$2,880 for each full-time employee, with tht first 30 employees excluded from the calculation
When is the first type of penalty for an employer not complying with the ACA applied (2 AND)?
- does not offer mininum essential coverage to at least 95% of its full-time employees, and
- at least 1 full-time employee receives the premium tax credit for purchasing coverage from the Health Insurance Marketplace
When is the second type of penalty for an employer not complying with the ACA applied (2 AND)?
- offers mininum essential coverage to at least 95% of its full-time employees, and
- at least 1 full-time employee receives the premium tax credit for purchasing coverage from the Health Insurance Marketplace
How much is the second type of penalty for an employer that does not comply with the ACA?
$4,320 for each full time employee who receives the PTC
An employee could be eligible to receive the premium tax credit if.. (3 OR)
- the coverage offered by the employer is not affordable
- the coverage offered by the employer is bad quality
- the employer does not offer them coverage
Can an employer deduct the costs of health insurance premiums paid for employees?
Yes.
The PTC helps taxpayers of what income levels?
100 to 400% of the federal poverty level (low to middle income)
A taxpayer claiming the PTC must meet the following requirements:
- household income between …
- does not file a tax return using the filing status ___
- is not a ____
… and a few more we will talk about.
- household income between 100-400% of federal poverty level
- does not file a tax return using the filing status MFS
- is not a dependent
To get the PTC, you need to be enrolled in ___ for at least ____, and not able to …, and not eligible for …
- Marketplace health insurance for at least 1 month
- not able to get affordable coverage via employer
- not eligible for Medicare or Medicaid
What is special about the payout for the Premium Tax Credit?
You can receive it in monthly installments, that directly reduce your health insurance premiums.
What does the FCPA do?
prohibit the payment of bribes to foreign officials to assist in obtaining or retaining business
What if it is common practice in another country to pay bribes to obtain business?
The FCPA still disallows it for U.S. companies.
A bribe includes anything of ___.
value
Can bribing someone indirectly through an intermediary get you out of the FCPA?
No, this is still a violation.
Violations of the FCPA are punished by what amount of civil fines?
2 times the benefit of making the bribe
Violations of the FCPA are punished by what amount of jail time?
5 years
Violations of the FCPA are punished by what two other things?
- criminal fines
- appointment of an independent auditor to monitor compliance
Is a sole proprietorship considered an entity separate from the individual?
No.
Can a sole properitorship last beyond the life of the SP?
No.
Although a SP is a bad idea in terms of personal liability, it is a good option for someone who ..
does not want to bother with any formalities
What is the definition of a partnership?
2 or more competent persosn
intend to carry on, as co-owners
a business for profit
Is a written or oral (express) agreement required to form a partnership?
No, no express agreement is required, a partnership can be implied from conduct.
Which factor has the heaviest weight on whether something is a partnership?
sharing profits from the business
What are the only two entities that can be formed without filing organizational documents with the state?
SP or general partnership
A joint venture is roughly the same as a
general partnership
What is the key difference between a GP and a JV?
JV is for a single transaction or series of transactions. Their respective businesses continue separately.
GP is an ongoing business.
When is writing required for a partnership?
if the partnership is to last more than a year
Is writing required for a partnership that will own or sell land?
No.
Is a partnership treated as a separate entity from the partners?
Yes.
Absent an agreement otherwise, how are management rights divided in a general partnership?
equally amongst the partners
Absent an agreement otherwise, how are voting rights divided in a general partnership?
equally amongst the partners
When voting on something in the ordinary course of business for the partnership, what amount of agreement is needed? What if the partnership agreement says something different?
The partnership agreement governs.
In absense of agreement, 50% for ordinary decisions/
When voting on something outside the ordinary course of business for the partnership, what amount of agreement is needed? What if the partnership agreement says something different?
unanimous consent of the partners
Unless agreement says otherwise.
Does admitting new partners require majority or unanimous vote?
unanimous
Does a partner have any type of authority to make major decisions for the partnership on their own?
No, there is no actual or apparent authority because a third party should know that unanimous consent is required.
Is a partner an agent of the partnership?
Yes.
The (partners/partnership) ownes the money and property contributed to the partnership.
partnership
Can a partner use partnership property for their personal benefit?
No, it has to be used for partnership purposes only.
Can a partner’s personal creditors get a security interest on partnership property?
No.
What does it mean to assign your partnership interest?
give an assignee the right to receive the partner’s share of profits (distributions)
Can an assignee of a partnership interest vote on matters, attend meetings, and inspect partnership books and records?
No, they can only do this if admitted as a partner.
Can a partner’s personal creditors get a security interest on a partner’s interest in a partnership?
Yes, but they are treated as an assignee (only get distributions).
When a partner dies, what happens to their right in profits to the partnership (who does it go to)?
their estate/heirs
When a partner dies, what happens to their right to partnership property (who does it go to)?
remaining partners
In a GP, are you liable for the torts committed by other partners?
Yes, if in the scope of partnership business.
Can a creditor directly take the assets of a partner in a partnership?
not unless the partner was named in the lawsuit AND assets of partnership are exhausted first
How are profits divded in a general partnership in absence of an agreement?
equally amongst all partners
How are losses divded in a general partnership in absence of an agreement?
the same way you divide profits
T/F: Partners who work for the partnership are entitled to compensation for services rendered.
False, unless this is provided for in the partnership agreement.
What is the difference between dissociation and dissolution?
Dissociation is one partner ceasing to be associated with the partnership.
Dissolution is winding up the entire business of the partnership.
What is a partnership at will?
a partnership with no definite end date
When a partner dissociates, does their actual authority terminate? Does their apparent authority terminate?
Actual terminates, apparent does not until 3rd parties are given notice.
Is a dissociated party liable for partnership debts incurred before dissociation? When can they be released?
Yes. They can be released by the creditor or novation.
Is a dissociated party liable for partnership debts incurred after dissociation?
Yes, for partnership debts up to two years after dissociation, unless they given notice of dicssociation.
Is a new partner personally liable for debts incurred by the partnership before they became a partner?
Not personally liable, but can lose their investment.
If a partner gives notice of withdrawal, does this dissolve a 2-person partnership?
Yes, it is dissolved automatically.
If a partner gives notice of withdrawal, does this dissolve a more than 2-person partnership?
Not necessarily. The partnership will dissolve unless the remaining partners agree to continue the business as a new partnership.
Does death of a partner dissolve a partnership automatically?
No, the remaining partners have 90 days to agree to continue the partnership.
Is a partnership immediately terminated upon dissolution?
No, it is only terminated after the winding up process is complete.
When a partnership dissolves, what is the order of payments?
- Pay amounts owed to creditors (including partners who are creditors).
- Pay partner contributions back (basis).
- Distribute the rest in accordance with P/L sharing ratios.
What do you do if the assets left on dissolution is not enough to pay creditors and return contributions?
The loss (excess) needs to be divided among the partners.
What if a partner is insolvent or refuses to pay their share of loss that exceeds basis?
Split the remaining amongst the other partners.
What is the liability difference between a GP and LLP?
In an LLP, you are only liable for your own torts, but not of other partners.
In an LLP, are you liable for the torts of people under your direct supervision/control?
Yes.
In an LLP, are you liable for the debts and contractual obligations of the LLP?
No.
To become an LLP, the partnership must file a document with the state called a statement of ___ or certificate of __ ___.
qualification; limited partnership
A limited partnership must contain how many general partners and how many limited partners?
1+ GPs, 1+ LPs
A limited partner is treated like a _____ investor or ____ in a corporation.
passive, shareholder
Can limited partners participate in day to day management?
No, only general partners can.
Can limited partners vote on fundamental changes to the business?
Yes (like a corporate shareholder).
Can a general partner in a limited partnership also be a limited partner? What is their liability?
Yes, but they still have unlimited liability.
If someone assigns their limited partnership interest to someone else, are they still considered a limited partner?
No, because they basically gave away the main benefit of their interest.
Does a limited partner owe a fiduciary duty to the partnership?
No, because they are not an agent to the partnership.
How are profits divded in a LLP in absence of an agreement?
equally, same as a GP
How are profits divided in a limited partnership in absence of an agreement?
in proportion to contributions
Does the withdrawal or death of a general partner dissolve an LP? What about the withdrawal or death of a limited partner?
GP: Does cause dissolution.
LP: Does NOT cause dissolution.
When a limited partnership dissolves, what is the order of payments?
- Pay amounts owed to creditors (including partners who are creditors).
2. Pay former partners not paid on withdrawal. - Pay partner contributions back (basis).
- Distribute the rest in accordance with P/L sharing ratios.
Does the operating agreement of an LLC need to be filed with the state?
No.
A LLC files an articles of ___ with the state. A corporation files articles of ___ with the state.
organization, incorporation
What is the agency relationship in an LLC that is member-managed?
Members are agents of the LLC.
What is the agency relationship in an LLC that is manager-managed?
Managers are agents of the LLC, members are not.
How are profits divided in a LLC in absence of an agreement (generally)?
in proportion to contributions
How is voting strength divided in a LLC in absence of an agreement?
in proportion to contributions
How are profits divided in a LLC in absence of an agreement (for a state that follows the ULLCA)?
equally, regardless of contributions
Shareholders of a corporation have the power to elect ___, who hire ____.
Board of Directors, management
What does a promoter of a corporation do?
enter into contracts before the formation of the corporation for financing
What is the liability of a promoter for the contracts made on behalf of the corporation?
personally bound on these contracts
When does the corporation become bound by the promoters contracts?
after the corporation is formed, they adopt these contracts (expressly or through conduct)
When is the promoter free from their contracts made on behalf of the corporation?
novation (all parties agree to release the promoter)
The articles of incorporation must include what four things?
- name of corporation
- names and address of registered agent
- name and address of incorporators
- type and number of shares authorized to be issued
What is a registered agent?
designated point of contact for legal matters
T/F: In a corporation, one or more class of SHs need to have unlimited voting rights.
True, this is usually common stock.
Does the articles of incorporation need to include the statement of the states that the corporation does business in and the names of directors and officers?
No!
If a corporation includes a clause in its articles stating the narrow business purpose for which it was formed, what happens if an officer/director acts outside of that purpose?
They are acting “ultra vires.”
Are bylaws filed with the state?
No.
Who adopts the bylaws of a corporation?
incorporators or the board of directors
Can the board of directors modify the corporation’s bylaws without shareholder approval?
Yes.
Can the board of directors modify the corporation’s articles of incorporation without shareholder approval?
No.
What does it mean to pierce the corporate veil?
to hold the officers/directors persoanlly liable for an act
What three reasons could the corporate veil be pierced?
- commingling of funds or using corpoate assets for personal use
- inadequately capitalized at the time of formation
- formed to commit fraud on existing creditors
T/F: Stock warrants and stock options are treated like equity.
True.
What two things do shareholders vote on?
- directors election
- fundamental changes
Under cumulative voting, how many votes does a shareholder who owns 1 share and is voting amongst 3 director positions have? What bout 5 shares and 3 director positions?
3, 15
What does cumulative voting help with?
helps minority shareholders gain representation on the board
Once a dividend is declared, shareholders have the status of ___ ___.
unsecured creditors
What is the difference between noncumulative and cumulative preferred stock?
Cumulative means if you do not pay dividends in one year you will have to pay all dividends owed even from prior years before paying any common shareholders.
T/F: A stock dividend is not a distribution of corporate assets.
Trues, it is just a change in form of equity.
What is the shareholder’s right to inspect books and records?
need 5 days written notice and proper purpose (related to SH rights in corporation)
Can a shareholder send a lawyer or accountant to inspect records for them?
Yes.
Can a shareholder ask to inspect books and records to make a mailing list for their new business?
No, this not related to the SH’s rights.
Does a shareholder get preemptive rights automatically (as the default rule)?
No, this has to be provided in the articles of incorporaiton.
What is a derivative action?
When a corporation has a legal case against a 3rd party, but refuses to bring action, the SH can sue the 3rd party on the corp’s behalf.
Can a derivative action suit be brought against directors of the corporation?
Yes.
What is a direct action?
SH suing the scorporation to vindicate their own rights
Who do damages get paid to in a derivative action suit?
corporation
Who do damages get paid to in a direct action suit?
SHs
Can directors vote by proxy? Can shareholders?
Directors cannot, but shareholders can.
What is a quorum?
the minimum directors that must be present at a vote
How many directors need to vote in favor of something to be approved?
a majority of the people present (which has to be a quorum)
Who decleares dividends to SHs, directors or officers?
directors
Is a director personally liable for an illegal dividend (super large)?
Yes, to the exent that it exceeds what is lawful.
What does the business judgment rule say?
A director is not liable for actions made:
(1) in good faith,
(2) in a manner that they believed was in the best interest of the corporation, AND
(3) with the care that a ordinarily prudent person would exercise (due care, reasonable care)
Can a director use a defense that they relief on information prepared by internal or external personnel?
Yes, as long as you can reasonably rely on these parties (competent).
Can a director of a corporation also be on the board of a competitor?
No, this breaches the duty of loyalty.
Can a director of a corporation transact with the corporation?
Yes.
If a director has a conflict of interest, what are two ways they can still go through with that transaction?
- full disclosure of the potential transaction (before the transaction) and a disinterested majority of the board or shareholder approves, OR
- transaction was fair and reasonable to the corporation
Can directors be indemnified for legal costs of a lawsuit brought against them?
Yes, unless it is a shareholder derivative suit against the directors.
Are officers protected under the business judgement rule?
Yes.
Can officers be indemnified for legal costs of a lawsuit brought against them?
Yes.
What is a fundamental change for a corporation?
something that would change the nature of the corporation
What are the four most common fundamental changes for a corporation?
D - Dissolution
A - Amendments to Articles of Incorporation
M - Mergers, consolidations, share exchanges
S - Sale of Substantially All the Corporation’s Assets (outside regular course of business)
What is the first step in making a fundamental corporate change?
majority of the board adopts a resolution for the proposed action (initiates change)
What is the second step in making a fundamental corporate change?
coporation notify ALL shareholders of the change and vote
Does the corporation have to notify a shareholder of a fundamental change if they are not entitled to vote?
Yes.
What is the third step in making a fundamental corporate change?
change must be approved by a majority of the shares voted at the meeting (of the people present)
What is the fourth step in making a fundamental corporate change?
filing amended articles
T/F: Like a partnership, corporate fundamental changes must be unanimous.
False, you only need a majority vote.
If a shareholder does not agreement with the fundamental change made and voted against it, what right do they have (name and description)?
dissent/appraisal right
The right for your shares to be bought out.
In a merger, how many corporations go in, and how many come out? (As and Bs)
2 go in, and 1 gets absorbed into the other, so only 1 comes out
A + B = A
In a consolidation, how many corporations go in, and how many come out? (As and Bs)
2 go in, and form a single new entity, the 2 single corporations cease to exist
A + B = C
In a consolidation, are the separate corporate debts of the entities wiped out?
No, the new entity is liable for the old debts.
In a share exchange, how many corporations go in, and how many come out? (As and Bs)
2 go in, one corporation buys the shares of the other entirely, but they continue to exist independently (2 come out)
A + B = A + B
In a merger, who needs to approve the fundamental change (go through the entire process)?
Both corporations’ boards and shareholders must agree and go through the entire process.
In a consolidation, who needs to approve the fundamental change (go through the entire process)?
Both corporations’ boards and shareholders must agree and go through the entire process.
In a share exchange, who needs to approve the fundamental change (go through the entire process)?
only the corporation whose shares are being acquired
What is a short-form merger?
a parent owning 90% or more of a subsidiary decides to merge with them
In a short form merger, who needs to approve the fundamental change (go through the entire process)?
Only the board of the parent corporation needs to approve (no SH vote, no voting from the subsidiary).
What additional step must a corporation take in a short-form merger?
mail a copy of the paln to each shareholder
What does merging with a white knight do to deter a takeover attempt?
merge with a company that the directors do want to merge with
What does making a self-tender do to deter a takeover attempt?
offer to acquire stock from SHs to retian control
What does paying greenmail do to deter a takeover attempt?
pay the company attempting to take you over to go away
What does locking up crown jewels do to deter a takeover attempt?
give a third party the option to purchase your significant assets in case of a takeover
What does a scorched earth policy do to deter a takeover attempt?
sell off your attractive assets and take out more loans
What does applying shark repellent do to deter a takeover attempt?
amending the articles or bylaws to make takeover more difficult
T/F: A foreign corporation is a corporation outside the U.S.
False, it describes a corporation that is not incorporated in a given state.
What does a foreign corporation need to do in each state that it does business?
obtain a certificate of authority
Does maintaining an office in a state count as doing business?
Yes.
Does maintaining a bank account, collecting a debt, or hiring remote employees in a state count as doing business?
No.
