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Paralegal Exam Review > Corporate and Commercial Law > Flashcards

Corporate and Commercial Law Flashcards

1
Q

What is a Sole Proprietorship and its Advantages & Disadvantages?

A

Sole Proprietorship:

  • Unincorporated business
  • Single owner’s individual capacity
  • No separate legal entity for holding & conducting business

Advantages:

  • Easy & minimal costs startup (no legal docs required)
  • Management and business decisions controlled by owner
  • Owner retains all profits

Disadvantages:

  • Owner has all risk for business (unlimited personal liability)
  • Owner’s personal assets subject to judgment in lawsuit
  • Limited availability of alternative sources of capital
  • Business terminates upon death of owner
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2
Q

What is a General Partnership and its Advantages & Disadvantages?

A

General Partnership (Co-Partnership) = Unincorporated, two or more people to carry on business for profit

Advantages:

  • Relatively easy to form
  • All partners can participate in the management
  • Adding more partners can add capital
  • Pass through tax entity (each partner pays taxes on partnership’s income - partnership itself isn’t taxed)

Disadvantages:

  • Each partner has personal risk and unlimited liability
  • Management authority divided among partners
  • Partners can be held responsible for partnership’s debts
  • Partners’ personal assets subject to judgment in lawsuit
  • If partner withdraws/dies, partnership may not dissolve
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3
Q

What is a Limited Liability Partnership and its Advantages & Disadvantages?

A

Limited Liability Partnership = general partnership w/two or more people, partners have less than full liability for actions of other partners but full liability for their own actions

Advantages:

  • Relatively easy to form
  • Partners can provide additional capital
  • Partnership not taxed - partners pay taxes
  • Limited liability for other partners’ actions

Disadvantages:

  • Partners have personal risk and some liability for the debts of the partnership, general liability for their own actions
  • Authority of LLP divided among partners
  • Death/withdrawal of partner, partnership may dissolve
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4
Q

What is Domestic Jurisdiction for entity formation?

A

The initial state of formation, typically determined by looking at the location of the business, state tax laws, and favorable business case law

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5
Q

What is a Limited Partnership and its Advantages & Disadvantages?

A

Limited Partnership = formed by two or more people with at least one general partner and at least one limited partner

Advantages:

  • General partner(s) don’t need limited partners’ consensus/ permission on managing business
  • Adding additional limited partners can provide capital
  • Limited partners have limited personal liability for actions of the partnership
  • Limited Partnership isn’t taxed, each partner pays taxes

Disadvantages:

  • Limited partners have no management powers
  • General partners have unlimited personal liability
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6
Q

What are Corporations and their Advantages & Disadvantages?

A

Corporation = separate entity from its owners (shareholders/ stockholders), managed by elected board of directors who elect/appoint officers to run the daily operations

Advantages:

  • Limited liability to the shareholders
  • Ownership interests of the shareholders (shares of stock) easily transferrable to others
  • Shareholder changes don’t affect corporation’s existence
  • Can deduct certain expenses from income

Disadvantages:
-Income taxed twice (corp. profit & shareholder dividends)

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7
Q

What is a Professional Service Corporation (PC)?

A

Formed by those licensed in certain professions, such as lawyers and doctors

Can render only one professional service and each shareholder must be licensed in that profession or render one or more professional service and each shareholder must be licensed in one of the professional services

Gives licensed professional the benefits of a corporation while not altering the law regarding the liability of a licensed professional

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8
Q

What is a Nonprofit Corporation?

A

Owners (if any) aren’t permitted to receive any profits of the corporation - commonly formed for education, charitable, and religious organizations

All funds of the nonprofit corporation must be used to further the purposes for which the corporation’s formed

Can make a profit - used by the business to further its mission and/or purpose - profits can’t be distributed to any of its shareholders or members

Not all non-profits are tax exempt - those that are must file form 990 with the IRS annually

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9
Q

What are Publicly Traded Corporations?

A

Shares of stock are traded to the general public on a public stock market exchange

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10
Q

What is the U.S. Securities and Exchange Commission (SEC)?

A

Independent federal government agency whose mission is to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation

Oversees securities exchanges, security brokers and dealers, investment advisors, and mutual funds

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11
Q

What is an Initial Public Offering (IPO)?

A

Offering shares for sale in order for a private company to go public, provides investment capital for the corporation

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12
Q

What is the Sarbanes-Oxley Act of 2002 (SOX)?

A

U.S. federal law that outlines expanded requirements for the management and Boards of Directors of U.S. public companies and public accounting firms

Enacted as result of various major corporate and accounting scandals of larger corporations in the 1990’s where investors lost billions of dollars when the share prices of the affected companies collapsed (Enron)

Provides safeguards to try and eliminate these types of accounting scandals from happening in the future

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13
Q

What are Limited Liability Companies and their Advantages & Disadvantages?

A

Limited Liability Companies = cross between a corporation and a limited partnership; owners are called members; managed either by the members or by managers appointed by members; officers are elected/appointed to run the daily operations

Advantages:

  • Minimal formation paperwork and annual requirements
  • All members have limited liability for actions of the LLC
  • Flexibility with Operating Agreement for broad mgmt
  • LLC itself isn’t taxed

Disadvantages:

  • Not all countries recognize LLCs
  • Don’t protect individual from own negligence in acting on behalf of the LLC
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14
Q

What are Professional Limited Liability Companies (PLLC)?

A

One or more licensed professionals

Gives licensed professionals benefits of LLC while not altering law regarding the liability of a licensed professional

Can render single professional service or two or more professional services - each member and manager be licensed in one of the professional services of the PLLC

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15
Q

What is Fiduciary Duty, Fiduciary, and Principal or Beneficiary?

A

Fiduciary Duty: Highest standard of care that fiduciary has to principal or beneficiary

Fiduciary: Person who holds a legal or ethical relationship of trust with one or more parties

Principal or Beneficiary: Person to whom a duty is owed

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16
Q

What is the Business Judgment Rule?

A

Court will presume that in making business decision, directors and officers acted:

  • in an informed basis
  • in good faith
  • in the honest belief that the actions taken were in the best interest of the corporation

Designed to protect directors and officers from making a decision that turns out badly

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17
Q

What are Mergers and Acquisitions (M&A), a Horizontal Merger and a Vertical Merger?

A

Mergers and Acquisitions = Transactions in which the ownership of companies, other business organizations or their operating units are transferred or consolidated with other entities. Allows enterprises to grow or downsize and change the nature of their business or competitive position

Horizontal Merger = Two or more businesses that offer similar or compatible products or services in the same market combine under a single entity to obtain larger market share - one company acquires a competitor

Vertical Merger = Two or more companies who produce compatible products or services for a specific finished product merge with each other to create an entity that’s more efficient in its operation - companies don’t compete directly with each other but together they may be able to streamline their business

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18
Q

What is a Horizontal Merger?

A

Two or more businesses that offer similar or compatible products or services in the same market combine under a single entity due to desire to obtain larger market share - one company usually acquires a competitor

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19
Q

What is a Vertical Merger?

A

Two or more companies who produce compatible products or services for a specific finished product merge with each other in order to create an entity that is more efficient in its operation, companies don’t compete directly with each other but together they may be able to streamline their business

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20
Q

What is a Conglomerate?

A

Entities merge who have unrelated business activities, companies really have nothing in common, intended to diversity funds, start new revenue lines, or increase branding

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21
Q

What is a Consolidation?

A

Aka amalgamation - the merge and acquisition of many smaller companies into a few much larger ones. (ex. Centura and SCL)

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22
Q

What are Joint Ventures (Non-Merger)?

A

Business agreements in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity, they exercise control over the enterprise and share revenues, expenses, and assets

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23
Q

What is Dissolution (Non-Merger)?

A

When an entity no longer does business or no longer holds any assets, files necessary documentation with appropriate government agencies to dissolve

If agency doesn’t file required annual reports with state government authority, state may take steps to dissolve - entity can file the missing reports, pay required fees and penalties, and be reinstated in good standing by the state

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24
Q

What is an Acquisition of Assets (by a buyer) or Sale of Assets (by a seller)?

A

Occurs when one business entity purchases all or substantially all the assets of another business - buyer is purchasing just the assets and not purchasing an ownership interest in the business

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25
Q

What is Goodwill in an acquisition?

A

Intangible asset that arises when one company purchases another for a premium value - the value of a company’s brand name, solid customer base, good customer relations, and any patents or proprietary technology are goodwill.

Goodwill is based on its reputation and corporate image - a company’s name can be part of its goodwill.

26
Q

What is an Acquisition of an Ownership Interest (by a buyer) or the Sale of Ownership Interest (by a seller)?

A

Occurs when one business entity purchases the ownership interest of another business

27
Q

What is the purpose of antitrust laws and what are the three major Federal antitrust laws in the U.S.?

A

Purpose: Protect the free trade and open markets that are vital to U.S. commerce - prohibit practices that prohibit or restrain free trade.

Laws:

  • Sherman Antitrust Act of 1890
  • Clayton Antitrust Act of 1914
  • Federal Trade Commission Act of 1914
28
Q

What is the Sherman Antitrust Act of 1890?

A

First of the Federal antitrust acts

Attempt by Congress to regulate competition among businesses in the U.S.

Outlaws the restraint of trade and prohibits monopolies in a business

Severe and costly penalties - civil as well as criminal, prosecuted by DOJ

29
Q

What is the Clayton Antitrust Act of 1914?

A

Amendment to the Sherman Act

Enacted to address certain issues that weren’t clear or weren’t addressed in the Sherman Act

Focuses on price discrimination, price fixing, and unfair business practices such as anti-competitive mergers

Clarified the legality of labor unions and their right to peaceful strikes, picketing, and boycotts under Federal law

Enforced by the FTC and DOJ

30
Q

What is the Federal Trade Commission Act of 1914?

A

FTC formed as result of Clayton Act

Mission of FTC is to enforce the rules of the competitive marketplace - to protect consumers & promote competition

FTC enforces antitrust laws so that consumers will be protected from anticompetitive mergers & business practices

31
Q

Which of the following is not found in a general partnership?

A - Limited partner
B - General partner
C - Federal Employee Identification Number
D - Written partnership agreement

A

A - Limited partner (all partners in general partnership are general partners)

32
Q

Which is not a reason that the court would use to pierce the corporate veil of a business:

A - Not following corporate formalities (i.e., holding annual shareholder and director meetings)
B - Not timely filing tax returns
C - Owners commingling corporate funds with personal funds
D - Entity inadequately capitalized

A

B - Not timely filing tax returns

(NOT a reason - corporation must maintain itself as a separate and distinct entity from that of its owners, follow corporate formalities, be adequately capitalized, and the funds of the corporation must be kept separate form the funds of the owners)

33
Q

Why would a court “Pierce the Corporate Veil” and what may happen to the shareholders?

A

If corporation isn’t:

  • maintaining itself as a separate and distinct entity from that of its entities
  • following corporate formalities
  • being adequately capitalized
  • keeping funds of the corporation separate form the funds of the owners

Shareholders can be deemed to be personally liable

34
Q

If a court pierces the corporate veil, then shareholders:

A - Must resign any officer position they hold
B - Are personally liable for the debts of the corporation
C - Must sell their stock in the corporation
D - May be fined

A

B - Are personally liable for the debts of the corporation

35
Q

Shareholder Agreements do not allow a corporation to dispense with:

A - The Board of Directors
B - Discretion or power of the Directors
C - The election of officers
D - Annual meetings of the Directors

A

C - The election of officers

36
Q

To go public, a corporation must offer shares through:

A - A local stock exchange
B - A GASBY 500 offering
C - An initial public offering
D - A Sarbanes-Oxley offering

A

C - An initial public offering

37
Q

An S corporation is federally taxed as a/an:

A - Association
B - Partnership
C - Small business corporation
D - Corporation

A

B - Partnership

38
Q

Once formed, all nonprofit corporations are tax exempt:

A - True
B - False

A

B - False

39
Q

What are S Corporations and C Corporations?

A

S Corporation = Small business corporation that has chosen a tax status that allows it to be taxed as a partnership to avoid corporate income tax

C Corporation = regular private corporation that pays income taxes and distributes taxable dividends to shareholders because it has chosen not to be treated as a S corporation, can issue qualified small business stock

40
Q

A nonprofit corporation that’s tax exempt must annually file with the IRS which of the following IRS tax forms:

A - 1120
B - 2553
C - 8832
D - 990

A

D - 990

41
Q

An unincorporated entity with two or more persons is called:

A - Limited liability company
B - Limited partnership
C - Nonprofit corporation
D - General partnership

A

D - General partnership

(LLC is cross b/w corporation & partnership and is organized; Limited Partnership requires a Certificate of Limited Partnership to be filed; Nonprofit corporation is a type of corporation and is organized; only General Partnership is an unincorporated entity with two or more persons)

42
Q

Which of the following are considered primary fiduciary duty?

A - Duty of care and duty of loyalty
B - Duty of care and duty of confidentiality
C - Duty of disclosure and duty of confidentiality
D - Duty of disclosure and duty of good faith

A

A - Duty of care and duty of loyalty

Duty of care & loyalty are the primary fiduciary duties; confidentiality, disclosure, and good faith are secondary

43
Q

Which fiduciary duties are Directors in a corporation charged with as part of their managerial responsibilities and which are their primary fiduciary duties?

A

DUTY OF CARE (Primary) - be prepared and informed, assess information with a critical eye

DUTY OF LOYALTY (Primary) - protect interests of corporation, refrain from doing anything that would injure the corporation, not further their private interests

Duty of Good Faith - advance interests of the corporation

Duty of Confidentiality - do not disclose corporate info

Duty of Disclosure - disclose facts to shareholders

44
Q

The Sarbanes-Oxley Act was enacted as a result of various major corporate and accounting scandals of larger corporations in the 1990’s.

A - True
B - False

A

A - True

45
Q

Under the business judgment rule, a court will presume that in making a business decision, directors and officers of a corporation acted:

A - In an informed basis, in good faith, and in the honest belief that the actions taken were in the best interest of the corporation
B - In an informed basis and in a manner that benefits the officers and directors
C - Only for the benefit of the shareholders of the corporation
D - There is no such thing as a business judgment rule

A

A - In an informed basis, in good faith, and in the honest belief that the actions taken were in the best interest of the corporation

46
Q

The business judgment rule is designed to protect directors and officers from making decisions for the corporation when they were ill-formed.

A - True
B - False

A

B - False

Designed to protect them from making a decision that turns out badly

47
Q

The Hart-Scott-Rodino Act is:

A - A business corporation act enacted in Delaware
B - Enacted by Congress to enforce the business judgment rule
C - A set of amendments to the Clayton Antitrust Act
D -Requires all sellers of a business to make a filing with the Department of Justice

A

C - A set of amendments to the Clayton Antitrust Act

48
Q

What is the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act)?

A

Amendments to Clayton Act, certain parties not able to enter into certain types of mergers, acquisitions or transfer of securities or assets until a detailed filing is made with the FTC and DOJ prior to the transaction and approval is obtained from both agencies to proceed with the transaction

49
Q

The first Federal antitrust act enacted in the U.S. is called the:

A - Clayton Antitrust Act
B - Federal Trade Commission Act
C - Hart-Scott-Rodino Antitrust Improvements Act
D - Sherman Antitrust Act

A

D - Sherman Antitrust Act

50
Q

Goodwill of a company is defined as:

A - The value of a company’s brand name
B - The reputation of the company
C - The amount of assets of a company
D - The value of the company’s brand name and the reputation of the company

A

D - The value of the company’s brand name and the reputation of the company

51
Q

The sale of assets of a business always results in the change of owners of a business.

A - True
B - False

A

B - False

(in an asset sale, one business entity purchases all or substantially all the assets of another business - the buyer is purchasing just the assets and not purchasing the ownership interest in the business)

52
Q

A horizontal merger occurs when:

A - Two businesses merge to offer different products or services
B - Two businesses form a third corporation in order to diversify product lines
C - Two businesses merge to offer similar or compatible products or services in the same market
D - Two businesses merge to offer new products in the market

A

C - Two businesses merge to offer similar or compatible products or services in the same market

53
Q

A vertical merger occurs when:

A - Two businesses merge to offer different products or services
B - Two businesses form a third corporation in order to diversify product lines
C - Two businesses merge to offer new products in market
D - Two businesses merge who produce compatible products or services for a specific finished product

A

D - Two businesses merge who product compatible products or services for a specific finished product

54
Q

Which of the following is not a type of merger?

A - Vertical
B - Horizontal
C - Consolidation
D - Dissolution

A

D - Dissolution

horizontal & vertical, conglomerate, and consolidation are all mergers; joint ventures and dissolution are non-mergers

55
Q

Which of the following is the default tax rule under the check-the-box regulations for a single member limited liability company?

A - Single member LLC is taxed as a partnership
B - Single member LLC is taxed as a sole proprietorship
C - Single member LLC is taxed as a corporation
D - Single member LLC is taxed as an S corporation

A

B - Single member LLC is taxed as a sole proprietorship

(single member LLC considered a disregarded tax entity for federal tax purposes in which case it’s treated as a pass-through conduit such as a sole proprietorship)

56
Q

Which of the following is the default tax rule under the check-the-box regulations for a multi member limited liability company?

A - Multiple member LLC is taxed as a partnership
B - Multiple member LLC is taxed as an association
C - Multiple member LLC is taxed as a corporation
D - Multiple member LLC is taxed as an S corporation

A

A - Multiple member LLC is taxed as a partnership

multiple member LLC taxed as partnership for federal tax purposes

57
Q

The owners of in an LLC are called:

A - Members
B - Managers
C - Shareholders
D - Partners

A

A - Members

(owners in a LLC are called members - the LLC is managed either by the members of the LLC or by managers appointed by the members)

58
Q

Under the Model Business Corporation Act, which of the following is the responsibility of the shareholders of a corporation?

A - Elect the Officers of the Corporation
B - Elect the Directors of the Corporation
C - Appoint the Registered Agent of the Corporation
D - Authorize the bank account of the Corporation

A

B - Elect the Directors of the Corporation

(the Board of Directors elects the Officers of the Corporation, appoints the Registered Agent of the Corporation, and authorizes the bank account of the corporation - the shareholders only elect the Directors of the Corporation)

59
Q

Under the Model Business Corporation Act, the officers elected must include which of the following:

A - President, Vice President, Secretary, and Treasurer
B - Chairman of the Board, Secretary, and Treasurer
C - Chairman of the Board, President, Secretary, and Treasurer
D - President, Secretary, and Treasurer

A

D - President, Secretary, and Treasurer

(Officers must be at least a President, Secretary, and Treasurer - Vice-President isn’t required and Chairman of the Board is part of the Board of Directors not the Officers)

60
Q

What are the Board of Directors’ and Shareholders’ responsibilities in a corporation under the Model Business Corporation Act (MBCA)?

A

Board of Directors:

  • Confirm actions of incorporator
  • Elect Officers - at least a President, Secretary, and Treasurer - and grant officers of the corporation authority to execute documents and enter into contracts
  • Issue stock to shareholders
  • Authorize a corporate bank account
  • Authorize any other necessary actions, like appointing the registered agent of the corporation

Shareholders:
-Elect the Directors of the corporation

Paralegal Exam Review (9 decks)

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