REG - Business Law

Question 1

What is the difference between a joint venture and a partnership

Answer 1

Partnership is formed to conduct ongoing business while joint venture is to carry out a single or series of business undertakings.

Question 2

What are subchapter S and subchapter C corporations?

Answer 2

Subchapter S corporations are those that elect to be taxed similar to partnerships.
Corporations that do not make this election are subchapter C corps.

Question 3

What is not considered a partnership?

Answer 3

Passive co-ownership of property (joint tenants)

Nonprofit unincorporated associations (labor unions, charitable orgs, clubs)

Question 4

Important notes on partnership assumptions

Answer 4

Do not assume salary is paid to partner unless it has been agreed to by partners
Profits and losses in general partnership are shared equally unless otherwise specified. If unequal profit sharing is agreed upon, then losses are shared per the profit sharing proportions.

Question 5

Fiduciary duty in partnership

Answer 5

Owed by every partner to every other partner, they must act in best interest of others

Question 6

What happens if the corporate veil is pierced?

Answer 6

If the corp does not follow corp formalities such as meetings with relevant minutes, the corp veil is pierced. The corp entity is disregarded and shareholders of company obtain personal liability for corp’s debts (this is an advantage of LLC)

Question 7

What is a silent partner?

Answer 7

A silent partner does not help manage the partnership but still has unlimited liability.

Question 8

Partnership agreement

Answer 8

Can be expressed (can be oral or in writing) or implied based on activities and conduct of partners.
Exception is that a partnership agreement that cannot be completed within one year from the date on which it is entered must be in writing.
Agreements to buy or sell real estate must be in writing, while an agreement to form a partnership whose principal activity will involve the buying and selling of real estate normally need not be in writing unless the stated duration exceeds one year.

Question 9

New partner replacing withdrawing partner rights?

Answer 9

An incoming partner has the same rights as all existing partners, thus, can participate in the mgmt of partnership. Only liable for existing debts of the partnership to the extent of the incoming partner’s capital contribution. A partner does not need to make a capital contribution to be admitted with the same rights as other partners.

Question 10

Partner assigning interest rules

Answer 10

Partner can assign interest in any partnership to a third party. The assignee does not become a partner, but only get the assignor’s rights as to profits and return of partner’s capital contribution. The assignee does not receive the right to manage, to have an accounting, to inspect the books, or to possess or use any individual partnership property.
Assignor is still liable as a partner. It is not considered a dissolution unless the assignor also withdraws.

Question 11

Partner’s authority when dealing with third party - when is it limited?

Answer 11

A partners apparent authority is derived from the reasonable perceptions of third parties due to the manifestations or representations of the partnership concerning the authority each partner possesses to bind the partnership.

Question 12

When is unanimous consent required in a general partnership?

Answer 12

Unanimous to admit a new partner or making the partnership a surety.
Any one partner can cause a dissolution by actions such as withdrawing. Any partner may do things in the regular course of business such as hiring an employee. Any partner can assign their interest without the other partners’ consent.

Question 13

What is the liability for partnerships under RUPA?

Answer 13

Partners have joint and several liability for torts and breaches of contract.

Question 14

What is considered partnership property under RUPA?

Answer 14

Partnership property includes property purchased in the partnership name and property purchased by a partner (an agent of the partnership) with partnership funds.
A partner may use property in the partnership business without it becoming partnership property.

Question 15

What happens when a partner withdraws? And if it is less than their contract length?

Answer 15

Even if a partner agrees not to withdraw before a certain period of time, he has the power to do so anyway. That withdrawal is a break of contract and causes a dissolution of the partnership. If the remaining partners agree to continue the partnership, this would prevent the dissolution. They must decide on what new terms they will operate or else wind up and terminate the partnership.

Question 16

How do you calculate how much is received to a partner on dissolution of a partnership? How to correct a capital deficit (when partner refuses to make any further contributions)?

Answer 16

Take the partner’s capital balance. If loss % is not given, assume to be proportion of capital balance. Allocate loss based on % and subtract from capital balance to get remaining balance.
Need to distribute deficit of insolvent partner (less than 0 balance) based on same %.
A capital deficit may be corrected by the partner investing more cash or assets to eliminate the deficit or by distributing the deficit to other partners in their resulting pnl sharing ratio.

Question 17

What are the assumed split under RUPA? Under RULPA? RULLCA? Majority of state laws?

Answer 17

RUPA, RULLCA - equal
RULPA, majority of state laws - made in proportion to capital contribution
**Unless members have an agreement

Question 18

General partner vs limited partner

What if LP acts like GP

Answer 18

Limited partnership must have at least one GP who has unlimited personal liability. The death or bankruptcy of a LP does not cause a dissolution or termination of a partner unlike a GP.
LP names do not need to be listed, GP names must be listed.
If LP acts like GP, LP has liability of GP to third party. However, LP can act as agent of limited partnership without losing the protection of limited liability. The LP can also vote on removal of GP.
Adding new LP or GP requires approval of all partners (incl LP).

Question 19

What are characteristics of joint ventures?

Answer 19

• each joint venturer is personally liable for the debts of a joint venture
• each jv has the right to participate in the mgmt of the jb
• the jvs owe each other fiduciary duties

Question 20

What are characteristics of LLC?

Answer 20

Separate legal entity from its owners - Provides limited liability of its members even if owners fail to follow formalities usual in conducting business
Typically has limited duration of existence - provisions often provide that they exist for 30 years at most and dissolve if a member dies.
Members/owners can participate in mgmt of LLC or can choose mgmt. Owners and managers of LLC owe a duty of care and duty of loyalty to LLC.
Interests of the members are not freely transferrable. The other members have to agree to admit new members.
LLC must be formed pursuant to the filing requirements of the relevant state statute.

Question 21

How are LLC and subchapter S corp taxed?

Answer 21

LLC can be taxes similar to a partnership if formed to do so. Subchapter S corp has the limited liability of the corp but is taxed similar to a partnership.

Question 22

LLP - what and when is there liability

How does it differ from general partnerships?

Answer 22

Limited liability unless partner actually committed the tort or party that commited the tort was under the partner’s supervision.
LLP insulates partners from personal liability for all debts and obligations of the partnership regardless of whether those debts arose from contract or tort.
In both LLP and GP, the partners have unlimited liability for their own torts.

Question 23

Main similarities and difference between Subchapter C corp and Subchapter S corp

Answer 23

Similar in provisions for limited liabiity of shareholders and in corporate mgmt structure
Tax treatment is main difference.

Question 24

What are the advantages of a corporate form?

Answer 24

• continuous life and not terminated by death of shareholder/manager, separate legal entity
• free transferability of the shares of stock
• limited liability to what was paid for stock
• persons who manage the corp are not necessarily shareholders - can encourage professional managers to get involved
• can contract in its own name with shareholders and third parties, hold property, sue or be sued in its own name

Question 25

Corporate form - how is manager liable?

Answer 25

Managers do not have limited liability for their actions as managers. If a manager is also a shareholder, that person has limited liability for the stock but can still be sued for misdeeds as a manager.

Question 26

Why is subchapter S formed over C

Answer 26

Help avoid the double taxation that a C corp may face - income tax at corporate level and dividends taxed at shareholder level

Question 27

Difference between domestic and foreign corp?

Answer 27

Domestic - operates and does business within state in which it was incorporated
Foreign - one doing business in any state except the one in which it was incorporated
Business does not need to incorp in foreign but must qualify to do business there - qualifying usually means filing required documents with the state for certificates of authority

Question 28

Define de facto vs de jure

Answer 28

de facto corp has been formed in fact but has not been formed properly under the law (due to small error) Only state can challenge, not third parties.
de jure corp has been formed correctly in compliance with the incorp statute.

Question 29

Who can own shares in professional corporations?

Answer 29

Normally under state laws, only licensed professionals can own shares in professional corporations. Licensed pros retain personal liability for their professional acts in the professional corp.

Question 30

What is and is not considered doing business in another state?

Answer 30

IS - maintaining an office or selling personal property in state
NOT - defending against lawsuit, holding bank accounts, using mail to solicit orders, collecting debt, and using independent contractors to make sales

Question 31

What does the promoter do?

Answer 31

Promoter is one who forms a corporation with the goal of the corp eventually coming into existence. Promoter is not an agent, as their is no principal yet as corp is not yet formed. Thus they cannot use agency law.

Question 32

What are similarities between corporation and limited partnership

Answer 32

Corporations and limited partnerships may only be create pursuant to state statutes. Normally, both the articles of incorporation and a certificate of limited partnership must be filed with the secretary of state.

Question 33

When does par value apply

Answer 33

Par value is the minimum amount that a corp may sell stock INITIALLY. Par value does not apply to the corp’s purchase of stock or treasury stock. Thus, corp cannot sell below par value on issuance but can sell below par on sale of repurchased shares.

Question 34

What are considered debt securities?

Answer 34

Corporate debt securities include registered bonds, bearer bonds, debenture bonds, mortgage bonds, redeemable bonds, and convertible bonds.

Question 35

What is a warrant?

Answer 35

A warrant is not a corporate debt security, it is written evidence of a stock option which grants its owner the option to purchase a specified amount of shares of stock at a stated price within a specified period of time.

Question 36

What is considered valid consideration or value to purchase shares of stock?

Answer 36

Can be any benefit to the corp including any services contracted for that are yet to be performed in the future. Can be services performed or intangible property.

Question 37

What is treasury stock?

Answer 37

Treasury stock is stock that a corp issued previously but is no longer outstanding because the corp repurchased it back. It is not votable and does not receive dividends.

Question 38

What is the difference between bond and debenture?

Answer 38

Bond represents long term secured debt and debenture is long term UNsecured debt

Question 39

What is watered stock?

Answer 39

Watered stock refers to when the stock is acquired by exchanging cash or property worth less than the PAR or stated value of the stock, NOT the market value.

Question 40

What are powers of corporations?

Answer 40

They have the power to

• acquire or retire their own shares without shareholder approval
• can make charitable donations without sh approval
• loans to directors require sh approval

Question 41

Who is liable when employee commits tort? What if mgmt warns the employee already they would not be responsible?

Answer 41

A business is liable for the torts of its employees committed in the normal course and scope of employment. Intentional torts usually fall outside the scope of employment, but there are situations where intentional torts fall within the scope of employment. Principals can be held liable for the agent’s fraud where the agent is authorized or appears to be. Torts involving violence can fall within scope of employement if foreseeable.
The injured third party can hold BOTH liable.

Question 42

Under the Revised Model Business Corporation Act, what can a corp do?

Answer 42

Corp is authorized to indemnify its officers for expenses, attorney fees, judgments, fines and amounts paid in settlement incurred in a suit by stockholders when the liability is a results of the officer’s good faith, nonnegligent actions on behalf of the best interest of the corp.
Corp can purchase liability insurance for lawsuits for its directors.

Question 43

Describe officers and directors - how do they get to be?

Answer 43

Officers can also be directors.
Officers are appointed by directors who are in turn elected by shareholders
Officers do not need to own any shares of corp stock.

Question 44

How can a director remove a conflict of interest for a transaction? Ex - purchase of equipment owned by director

Answer 44

Any one of the following must be true

• transactions is fair and reasonable for the corp
• shareholders are given the relevant facts and they approve with majority vote
• board of directors are given relevant facts and approve by majority vote of the disinterested members of the BOD (not including the director with conflict)

Question 45

Who do officers and directors, minority and majority shareholders owe a fiduciary duty to?

Answer 45

To the corp to act in the best interest of corp.
Also since majority shareholders can exercise a lot of power in a corp, they owe a fiduciary duty to minority shareholders when the majority have de facto control with their concentrated membership.
Minority shareholders do not owe a fiduciary duty to corp.

Question 46

What can the board of directors do?

How can articles of incorp be amended?

Answer 46

Board of directors can select officers of the corp, and declare dividends.
Articles of incorp can be amended by the shareholders vote, NOT by BOD.

Question 47

How can corp have business combination without requiring sh approval of either corp?

Answer 47

When corp buys 90%+ of other corp shares, it has control. It can then accomplish a short form merger into the corp. Anything outside of regular course of business, compulsory share exchange requires sh approval.

Question 48

Preferred stockholder - what is corp liable to them for if dissolved?

Answer 48

Only declared cash dividend are legal debt of corp
Preferred shareholders become unsecured creditors of corp. They have same priority as the unsecured bond owners and the unsecured judgment creditors.

Question 49

What does preemptive right do for a shareholder

Answer 49

Preemptive right allows the shareholder the right to purchase new issues so to keep the same overall % of ownership in corp. Right is given if in article of incorp.
Note that the right to a proportionate share of assets upon dissolution is a right to ALL shareholders.

Question 50

Under the Revised model business corp act, what action by the corp entitles a stockholder to dissent from the action and obtain pmt of the FV of their shares?

Answer 50

When the rights of individual shareholders may be adversely affected, the shareholder is given the right to dissent and receive pmt of FV of their shares. This occurs when they have been outvoted, rights are being abolished, or when their shares are being acquired by other corp as it can affect value and rights of shares.

Question 51

What are stockholders rights

Answer 51

They can inspect the corporate records if done in good faith for a proper purpose. They can demand a list of shareholders for a proper purpose such as to help wage a proxy fight.
They do not have a right to dividends as this is decided by BOD.
They do not have the right to manage corp unless they are officers or directors.

Question 52

When can the stockholder be liable for more than their share value?

Answer 52

If the corp is being used to defraud people or other injustices. such as being merely an agent or instrument of its owners - ex: if shareholders commingle assets and financial records

Question 53

Ultra vires act - what is it and who is liable?

Answer 53

Ultra vires can be a legal action but is beyond the power or the authority of the corp. This violates the fiduciary duty of obedience.
Corporate officers responsible for the act are liable

Question 54

What happens in a short form merger? What is the remedy to shareholders?

Answer 54

Corp owns 90%+ of subsidiary shares and can merge without shareholder approval.
However, a merger resolution is required by the BOD of parent company. Dissenting shareholders of sub company must be given an appraisal remedy, which is the right to obtain pmt for their shares from the parent. The shareholders of the parent do not have this remedy because the merger has not materially changed their rights.

Question 55

How can a merger of two public corps be accomplished?

Answer 55

A formal plan of merger must be prepared and approved by a majority vote of the BOD and stockholders of BOTH corps.

Question 56

When does a corp voluntarily dissolve?

Answer 56

When its BOD passes a resolution to dissolve and liquidate ratified by a majority shareholder vote. Following ratification, the corp must file a certificate of dissolution with the proper state authority, cease business, wind up affairs, and publish notice of dissolution.
Note do NOT need approval by officers or to amend certificate of incorp.

Question 57

Subchapter S corp - Where does the corporate income and loss show?

Answer 57

The corporate income and loss flow through to the income tax returns of the individual shareholder even when income is not distributed to them.
The corporate income is not taxed at corporate level when election is made.