Test 3 Flashcards
Express vs. Implied vs inherent authority vs ratification
express- authority that is in writing or verbal
implied- authority that a person has by default (“purchasing manager” has the implied authority to authorize purchases for the business. )
inherent authority- giving people the impression that they have the authority (real estate agent signing contract to sell house)
ratification- Occurs when an employee is doing something unauthorized and the principal agent does not do anything to prevent it.
Partnership by estoppel
Partnership by estoppel refers to a legal situation where a person behaves or speaks in a manner that leads others to believe they are a partner in a business. Even if the individuals did not intentionally choose to be partners, they can still be held liable as partners for any debts or damages incurred by the business or owed to a third party
Allocation of income vs expenses among partners without express partnership agreement
liability of agent to third persons in fully disclosed vs partially disclosed vs undisclosed agency relationship
Fully Disclosed- the agent generally does not incur liability. The agent is not a party to the contract, and the third party cannot hold the agent liable for breach of contract
Partially Disclosed- the agent becomes a party to the contract, agent may be liable for breach of contract.
Undisclosed Agency-gent is indeed a party to the contract, and agent liability to the third party exists.
Extent of liability of limited partner in limited partnership vs limited liability partnership vs LLLP vs LLC
limited partnership- general partners have unlimited liability, limited partners have liability limited based on amount invested
Limited Liability Partnership - each partner’s liability is limited to the amount they put into the business.
LLLP- Both general partners and limited partners in an LLLP benefit from limited liability.
LLC-The primary advantage of an LLC is limited liability.
Impact of partner’s death in partnership or in LLP (Limited Liability Partnership)
partnership - Partnerships can plan for the possibility of partner deaths using buy-sell agreements. tax issues
LLP- he deceased partner’s estate will be liable for the partnership’s debts until the partnership’s dissolution, unless the partnership agreement states otherwise
Priority of distribution of partnership property upon dissolution/termination of partnership
After satisfying debts, the remaining partnership property is distributed to each partner based on their ownership interest.
Traits of and IRS treatment of LLC as corporation
Single LLC- individual files company’s loss/profits under their own personal tax return
Multiple LLC- File their own share on personal tax return, corporation taxation, double taxation
Perpetual Life
refers to a company’s ability to continue its operations indefinitely, regardless of changes in ownership, management, or personnel.
Limited Liability
Their personal assets remain protected even if they are no longer part of the business.
Centralized management
business structure where decision-making authority and control are concentrated in a single location or with a specific group of individuals
free transferability of shares
refers to the ability of shareholders to buy, sell, or transfer their shares in a company without any significant restrictions.
Articles of Incorporation v. Certificate of Authority
Articles of Incorporation- These formal documents are filed with the government to document the formation of a corporation.
Certificate of Authority- This legal document allows a business entity registered in one state to conduct business legally in another state.
Risks of liability in not having either Certificate of Authority or Articles of Incorporation where ‘doing business’
result in penalties, fines, and back taxes
Dejure v Defacto corporate status
Dejure- de jure corporation enjoys complete legal standing. It has followed all the necessary legal procedures and obtained a certificate of incorporation from the state.
Defacto- operates with a certain degree of legal recognition, but its legal standing may be questioned (good faith attempt)
Close v. closely-held corporation
Close- you are not allowed to sell shares of stock on the outside
closely-held- you are more open to people leaving and selling their shares, but LLC must have opportunity of first refusal to match the outside offer
State of Incorporation with greatest protection under the business judgment rule
Delaware
LLC v. PC
(re: composition: LLC may have different professionals; PC cannot; re: investor accreditation: LLC requires proof of fully educated members as to risk, particularly in manager-managed LLC
Subchapter S corporation features:
Pass through taxation- tax passes to shareholders
Eligible partnerships- LLC, partnerships, Sole proprietors (must become LLC)
Must follow same general corporation procedures similar to C corporations
Undercapitalization
refers to a financial situation where a company lacks sufficient capital or reserves relative to the size of its operations. Here are some key points about undercapitalization:
Commingling of funds
Mixing personal funds with work funds
ultra vires actions
Ultra Vires the Memorandum by the Company: Acts beyond the powers granted in the Memorandum.
Ultra Vires the Articles, Intra Vires the Company: Acts beyond the Articles of Incorporation but within the Memorandum’s powers.
Ultra Vires the Directors, but Intra Vires the Company: Acts by directors beyond their authority but within the company’s overall powers
Domination of minority shareholders
Exercising excessive power over those with less ownership
Application of Business judgment rule defense to piercing the corporate veil to hold executives personally liable
The BJR is a legal principle that shields corporate directors and officers from personal liability for their decisions made in good faith and with reasonable care.
maintaining the separation between the corporation and its owners would sanction fraud or promote injustice.
Promoter(s)/Incorporator(s) liability for pre-incorporation contracts with third parties; means of escaping liability (e.g., express/implied adoption by corporation/ratification)
the promoter becomes personally liable for any pre-incorporation contracts.
To avoid promoter liability, parties should always use the exact name of the already-formed entity in contracts.
Express adoption- he corporation’s board of directors explicitly approves the contract.
Implied adoption- The corporation has knowledge of the contract and accepts its benefits.
Shareholder’s derivative lawsuit; distribution of any damages assessed
legal action initiated by a shareholder on behalf of a corporation against a third party, such as an officer or director of the corporation, for wrongdoing or breach of fiduciary duty.
Any damages or other remedies awarded due to the lawsuit would be paid to the corporation,
Securities Act of 1933 vs. Securities Act of 1934
Securities Act of 1933- in order to be able to sell shares of securities we have to file with the SEC a registration statement (if above threshold)
Securities Act of 1934- ensure greater financial transparency, accuracy, and reduced fraud or manipulation in securities transactions
Key elements of registration statement (‘pro forma’ signatures no longer defense to not exercising
due diligence)
Transaction Accounting Adjustments: These adjustments account for the specific transaction’s financial impact.
Autonomous Entity Adjustments: These address changes related to the registrant’s standalone financials.
Management’s Adjustments: These are discretionary adjustments made by management to provide a more accurate picture of the combined entity.
Insider trading -
individuals trading for gain on non-public material information derived from fiduciary
duty violation(s)
Doff-Frank definition of accredited investor:
net income > 1 million dollars over four years excluding
primary residence
Those natural persons whose income exceeds $200,000 individually or $300,000 jointly with their spouses for the two most recent years, and who reasonably anticipate income to remain constant in the current year.
Application of due diligence defense by outside professionals to avoid liability to investors
in addition to proving non-materiality to outside investor’s investment or divestment from company
crucial strategy for outside directors facing civil liability due to a securities registration statement containing false or misleading material statements or omissions.
LLP partnership types and liability
Must have all people of the same industry and field (Lawyer to lawyer)
each individual is liable for their own mistakes
LLC partnership types and liability
Different industries and fields
Security
investment in a common enterprise with the expectation of profit relying solely on managerial efforts of others
registration statement
designed to make sure that there is no misrepresentation or fraudulent representation of the value of securities to be sold on exchanges
must have description of property and business, articles of incorporation, bylaws, type of security, information of company management, and financial statement certified by auditors
General Partnership
business arrangement where two or more individuals agree to share responsibilities, assets, profits, and financial and legal liabilities of a jointly-owned business.
unincorporated
General Partnership Liabilities
Partners in a general partnership assume unlimited liability,
General Partnership Taxes
General partnerships are pass-through entities, meaning that income flows directly to the partners. Each partner reports their share of partnership profits or losses on their personal tax returns, and the partnership itself is not taxed
