REG 15 - Business Structures Flashcards
General Partnership
An association between two or more persons to operate a business as co-owners for profit. Important characteristics are:
- It is informally created
- ALL Partners have Unlimited Liability for contracts & debts
- NOT taxed as an entity but,
- Treated as pass-through entity (1065)
- Due 4/15, 5 month extension
- Treated as pass-through entity (1065)
- Under RUPA, P/S are separate legal entities
- May sue or be sued
- May own property in P/S name
- Partners are Agents of the P/S
- Limited Duration
What are the 3 Basic Partner Rights?
(PPP)
The partners are agents of the partnership. In such arrangement, the partners have three basic rights:
-
Profits (Interest) - each partner has a right to an equal share of the profits & surpluses generated by the business
- This right personal & IS transferable/assignable
-
Property - each partner has the right to use partnership property for partnership purpose.
- This right is NOT transferable/assignable
-
Participation (Mgmt) - each partner has the right to participate in the mgmt of the business including the right to inspect the books, make contracts, & vote.
- This right is NOT transferable/assignable
Formation of a General Partnership (3)
The formation of a partnership is informally created since the partners have unlimited liability. The establishment can result from an agreement that is:
-
Written - This is req’d when the Statute of Fraud applies.
- Sale of Goods >$500
- Real Estate sales
- Over 1 yr to perform contract
- Suretyship (co-signment of debt)
- Statements in consideration of marriage
- Oral - Is acceptible if Statute of Frauds doesn’t apply
- Implied - This applies when two or more are sharing profits from a venture
What are the two types of Authority?
TESTED
(Actual & Apparent)
Actual Authority - P/S intends to give the partner power to contract or get job/tasks done.
- Express - P/S explicitly states the partner has authority.
- Implied - P/S gives authority that is reasonable & necessary to get job/task done.
Apparent Authority - P/S creates impression that the partner has authority. (HEAVILY TESTED)
- The ability to bind the partnership & partners without the actual authority to do so due to the impression.
- Authority that a Good faith 3rd party reasonably assume the partner has due to the impression. (TESTED)
A Partner of a P/S generally does NOT have the Authority to?
(AGAST)
The actual authority of a partner is based on agreement from P/S, but a partner has the apparent authority to make virtually any contract that involves the business of the P/S, with the exception of the following: (Generally requires unanimous decision)
- Admitting a new partner (req’d by ALL partners)
- Guaranteeing the debts of a thrid party (Suretyship)
- Admitting or submitting legal claim in court
- Sale or Pledge of P/S property (can’t sell Goodwill of P/S)
- Third parties are notified of a limit to the partner’s actual authority. (3rd party is aware that the Partner has no Authority)
Partnership Liability
Contracts/Debts vs. Torts
Partners have joint & several liability on the contracts & debts (voluntary) made by the partnership with third parties. If P/S breaches a contract, the 3rd party must attempt to recover damages out of the P/S assets first, then may acces the personal assets of the partners.
Partners are jointly & severally liablie on the torts (involuntary/negligence) commited by any of the partners within the scope of the partnership. If a tort (wrongful act) is commited, the 3rd parties may attempt to recover P/S & personal assets of the partners in any order.
Retiring partner may be liable for debts created later until what kind of proper notice are given?
(Actual or Constructive)
A retiree may continue to be held liable for debts created after reitrement if proper notice of retirement isn’t given. There are two types of notices:
- Actual Notice - 3rd parties are directly informed (letter, calls)
- Constructive Notice - 3rd parties are informed indirectly via publications, trade periodicals
Dissolution of a General Partnership(4)
Dissolution is the result of the change in the relation of the partners when a partner ceases to be associated with the carrying of the business. The P/S does NOT terminate on dissolution, but continues until the winding up of the P/S is complete. Examples leading to dissolution:
- Change of partners
- P/S agreement specifying the length of a P/S
- A court decree, which will likely be granted if partner becomes insane or incapacitated
- A violation of the P/S agreement
Correct! Under the Revised Uniform Partnership Act (RUPA), a partner’s withdrawal, death or bankruptcy does not automatically cause dissolution of the partnership; partners who own a majority of the partnership may choose to continue the general partnership within ninety days of a partner’s withdrawal, death or bankruptcy. Furthermore, any partner has the power to withdraw from a partnership even if they had agreed not to, but is liable for breach of such a contract. A withdrawal that reduces the number of partners to one does automatically cause dissolution, since a partnership cannot consist of just one person. There is no indication, however, that Wind’s withdrawal reduced the number of partners to
Winding Up
(Dissolution)
When a P/S is terminated, there is a winding up of the P/S’s affairs. Winding up means that the remaining partners may elect to wind up & terminate the P/S or not wind up & continue the business.
The process of dissolving a partnership or corporation by collecting all assets and outstanding income, satisfying all the creditors claims, and distributing whatever remains (the net assets).
Upon Termination of the P/S, partners are entitled to receive pmts on claims in what order? (4)
- Creditors
- Loans made by the Partner to the P/S
- Capital Contributions
- Partner’s share of profits
P/S Distribution Order (3)
Distributions to Partners will be made in the following order:
- Amounts owed to Partners for loans to the P/S
- Partner’s capital accounts
- Amounts owed to the Partners for profits
Limited Partnership (LP)
In order to be formed, a Limited Partnership requires at least one general partner & one limited partner.
- General partner is responsible for management/operations & has unlimited liability.
- Limited partner is a passive investor w/ limited authority (not Agents) & liability, that in most cases, is limited to the amount invested.
-
Formation is formal by filing a Certificate of LP with the Secretary of State which includes:
- Names & signatures of General partners
- Names & address of its Agents
- Names & address of the Limited Partnership (entity)
- The latest date on which the LP is expected to terminate
LLC
- Formal Creation
- Articles of Organization
- Operating Agreement - is not a formally required document but its existence can help prevent and resolve disputes among the owners.
- 1 Person
- Limited Liability for Contracts/Debts
- Unlimited Liability for Malpractice/Negligence
- Agents or Members (called either)
- Typically Taxed as a Partnership (P/S issues a K-1) or
- May be taxed like a C Corp if only 1 Partner (1120)
NOTE: Correct! A limited liability company’s operating agreement is not a formally required document but its existence can help prevent and resolve disputes among the owners.
LLP
- Formal (Articles)
- Partnership Agreement & Application for LLP
- 2+ People
- Unlimited Liability for Contracts/Debts
- Limited Liability for Malpractice/Negligence
- Agents
-
Taxed as a Partnership (P/S issues a K-1)
- Form 1065, due 4/15, 5 month extention
C Corporations
An entity separate from its owners, governed by the laws established under the Model Business Corporation Act (MBCA) & providing owners with limited liability. Notable characteristics:
- Limited Liability for shareholders
- Independent Life - death of a shareholder doesnt dissolve the business
- Ease of Transfer - changes of ownership is by sale of shares
-
Taxation - a taxable entity, files 1120
- Due on 3/15 with 6 month extension
- Centralized Management - controlled by board of directors
S Corporations
(what are the 7 req’s)
A corporations that provides its owners the same liability-related benefits as a C Corporation (limited liability), but is not taxed as a separate entity, but instead treated as a flow through entity (Issues a K-1). Notable characteristics are:
- Formal Creation - Election MUST BE UNANIMOUS
- Less than 100 shareholders
- All shareholders must be Individuals
- All shareholders must be resident/citizen of the US
- Only 1 class of stock
- Corporation must be domestic (within the US)
- It cannot re-elect status for 5 years if it has been revoked
Filing due on 3/15 with 6 month extention.
Articles of Incorporation (8)
(TESTED)
- Name of the corporation
- Nature & Purpose
- Term Life of the corporation (indefinite duration)
- Name & Address of each Incorporator
- Capitalization - Amount & types of stock
- Initial Board - Names of the people in the Board
- Registered Agent - the place where the state may serve a court order if corporation is being sued or needs legal action
- By-Laws - Rules & regulations of the corporation
Board of Directors
(Rights [3])
The board of directors are in charge of general operations of the corporation. Some imporant principles related with the board are:
- Act as a board (act as a group)
- NOT Agents
- Adopt the Bylaws of the corporations.
- Duty to hire/fire the Officers (CEO) who’s:
- In charge of day-to-day operations
- Are considered Agents of the corporation
- Right to be Indemnified (right to get reimbursed)
- Duty to Issue/Reaquire Treasury Stock
- Duty to declare Dividends
- Duty to hire/fire the Officers (CEO) who’s:
Shareholder Rights (6)
The shareholders of a corporation have various rights:
- The right to vote for the following:
- Board of Directors (choose whom)
- Liquidating Dividends
- Consolidation, Mergers
- Dissolution
- Amend the Articles of Incorporation
- Loans to Directors
- NOT considered Agents
- Right to inspect books & records
- Limited Liability of investments
- Right to declare dividends (unsecured creditor) - a shareholder can pledge or use div as a collateral
- Appraisal Right - right to get stock appraised, which the board must then repurchase at the appraised amount if shareholder does not agree w/ a merger. (This right is for the subsidiary company)
- Transfer of Shares - can transfer ownership of shares without approval (freely transferrable)
- Preemptive Right - right to prevent dilution of interest
- Derivative Lawsuits - A shareholder may sue on behalf of the corparation if harmful acts against the company are not countered by the board
What are the 4 cirmustances where the cours will pierce the corporate veil?
Certain circumstances where the shareholder loses the protection of “limited liability” & instead becomes liable in the eyes of the courts. Four examples below:
- Undercapitalized - courts examine the amount of capital present at the formation of the corp. If amount is inadequate, then shareholders are liable upon the insolvency of the corporation
- Shareholder Fraud - shareholders are intentionally using the corporation for illegal activities
- Direct Action - shareholders are directly running the business without electing a board or without the board meeting atlest once a year
- Commingling Assets - shareholders are treating assets as if they were personal assets, regularly using them for personal purposes such as home mortgage payments or grocery purchases for their family
Concentrations of Voting Power
(Proxies, Voting Trusts, Shareholder Agreements)
Certain devices enable groups of shareholders to combine their voting power for purposes such as obtaining or maintaining control or maximizing the impact of cumulative voting.
- Voting Trust - is a device by which one or more shareholders agree to issue all or part of their stock to a trustee who then holds legal title to the stock and has all the voting rights possessed by the stock.
- Proxies - is the authorization by a shareholder to an agent to vote his shares at a particular meeting.
- Shareholder Agreements - shareholders may agree in advance to vote in specified manner for the election or removal of directors or any matter subject to shareholder approval.
Shareholder Liability
(Veil Pierced, Watered Stock)
Veil Pierced - If shareholders use corporation for fraud, fail to elect a board that meets regularly, undercapitalized when formed, or commingle corporate assets with personal ones, they may be held personally liable for all corporate debts.
Watered Stocks - If stock is issued below par value, the purchasing shareholder is contingently liable for the difference.
Business Judgment Rule
The Business Judgment Rule is a principle that protects directors, officers & managers from personal liability for acts perfomed in good faith on behalf of a corporation
