8.4 & 8.5 - Business Structures Flashcards by Colette Thro

Under this type of entity, one person owns the business and manages all of its affairs. It is not considered an entity separate from the business. There is also no formality required to form this entity.

Sole proprietorship

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Under this entity, the owner is personally liable for all obligations of the business. The entity cannot exist beyond the life of the entity. For tax purposes profits and losses from the business flow through the business to the owner. The owner is free to transfer their interest at will.

Sole proprietorship

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This entity is formed whenever two or more people intend to carry on as co-owners a business for profit.

General partnership

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Under this entity, there are no papers needed to be drawn up to form this. Nothing needs to be filed with the state, and an express agreement is not required. An agreement can be implied from conduct.

General partnership

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The key difference between a joint venture and a general partnership is that a joint venture:

If formed for a single transaction or project or a related series of transactions or projects

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If it is unclear whether the parties intended to enter into a partnership,

An agreement to share profits gives rise to a presumption that the parties intended to form a partnership

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As a general rule, a general partnership agreement need not be in writing. However, if the partners ant to enforce an agreement to remain partners for longer than one year:

A writing is required under the statute of frauds

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What is necessary to form a general partnership?

Two or more people who agree to carry on as co-owners of a business for profit

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This type of entity is treated as entities for most purposes but are not taxable entities for income tax purposes:

General partnership

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How are rights to manage the general partnership business divided? How is voting power divided in the general partnership business?

All partners have equal rights
It is not based on the amount contributed unless stated an agreement

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Decisions regarding matters within the ordinary course of the partnership’s business my be controlled by:

Majority vote

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Matters outside the ordinary course of the partnership business require:

Consent of all the partners

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Examples of areas requiring unanimous consent under a general partnership are:

Admitting new partners
Confessing a judgement or submitting a claim to arbitration
Making a fundamental change (selling the partnership)

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As a general rule, do partners have a right to possess or use partnership property other than for partnership purposes?

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What happens when a partner assigns their interest in the profits and surplus of the partnership?

The assignee does not become a partner and has no right to attend meetings, vote, etc. just waits for a check in the mail

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A creditor of an individual parter may do what?

Obtain from a court a charging order against an individual partner’s share of profits

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What happens to a partnership when a partner dies?

Their right to profits vests in their heirs. The right to partnership property vests in the surviving partners

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Are partners personally liable for all contracts enters into and al torts committed by other partners within the scope of partnership business or which are otherwise authorized?

Yes

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The partner’s liability is:

Joint and several

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What does the partners liability is joint and several mean?

That each partner is personally an individually liable for the entire amount of all partnership obligations

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How to partners in a partnership share profits and losses?

Equally unless the agreement states something contrary

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Are partners entitled to compensation for services rendered to the partnership?

No, unless agreed otherwise

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A change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business

Dissociation

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This does not necessarily cause a dissolution (winding up of the business)

Dissociation

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A partner is dissociated from the partnership when:

The partner gives notice of withdrawal, dies, becomes bankrupt, or is expelled

When a partner dissociates, what happens?

His right to participate in management ceases although the partner’s apparent authority continues until 3rd parties are given notice of the dissociation

Generally, a dissociated partner remains liable for the debts incurred by the partnership prior to dissociation, unless:

There has been a release by the creditor or a novation

A dissociated parter may be held liable for debts incurred by the partnership for how long? How can a dissociated partner avoid being held liable for that time?

Up to 2 years after dissociation unless the partner gives notice of dissociation

What events would cause a dissolution of a partnership?

A partner gives notice of withdrawal The partners agree to dissolution A court orders a dissolution

When a partnership is dissolved and its assets are reduced to cash, the cash must b used to pay the partnerships liabilities in the following order:

1. Creditors (including partners who are creditors) 2. Partners (in the amount of their contributions) 3. If money still remains, divided amount the partners 4. If less money than needed to pay creditors remains, loss divided among partners

A, B, and C contributed 30,000, 15,000, and 5,000 to the ABC partnership. Upon dissolution after paying all creditors, there was 20,000 dollars remaining. The partnership agreement is silent on how losses re to be divided, but provides that profits re to be allocated 40% to A, 25% to B, and 35% to C. How will profits and losses be divided amongst A, B, and C?

30,000 + 15,000 + 5,000 = 50,000 Contributed - 20,000 remaining = 30,000 loss A = 30,000 X 40% = 12,000 B = 30,000 X 25% = 7,500 C = 30,000 X 35% = 10,500

A limited liability partnership (LLP) is similar to a general partnership except for limited liability partnerships:

1. Partners are not personally liable for the obligations or liabilities of the partnership 2. Partners are liable for their own negligence or wrongful acts of those under their direct supervision 3. Partners are not personally liable for the debts and contractual obligations of the LLP

To form an LLP you must:

File with the state

What’s included when filing for an LLP with the state?

LLP’s name Name and location of its registered office Number of partners Description of the partnership business

A partnership made up of one or more general partners and one or more limited partners:

Limited partnership

Partners who have personal liability for all partnership debts:

General partners

Partners who’s liability for partnership debts generally is limited to their investment:

Limited partners

How can limited partnerships be formed?

By filing with the state

Under a limited partnership, partners are like _______. They contribute capital in exchange for _______. But they do not participate in _______.

Shareholders Partnership interest Management

In a limited partnership (LP), management is the responsibility of the:

General partners

If there is a loss for a limited partnership (LP), only the _____ can be held personally liable.

General partners

A general partner may also:

1. Be a limited partner at the same time 2. Be a secured or unsecured creditor of the partnership

How can a new partner be added to a limited partnership?

Only upon the consent of all parters

Do limited partners owe a fiduciary duty to the limited partnership?

How do limited partnerships share profits and losses?

In proportion to the value of the partners contributions *limited partners are not liable for any loss beyond their own capital contribution*

A limited partnership may be dissolved by:

1. The occurrence of the time or event stated in the partnership agreement 2. Unanimous written consent of all partners 3. Withdrawal or death of a general partner 4. Judicial decree

Does the death of a limited partner dissolve the partnership?

After dissolution, if the limited partnership is terminated, assets are distributed in the following order:

1. To creditors 2. To former parters in satisfaction of liabilities that were not paid on their withdrawal 3. To partners, first to return their contributions, and then to distributes profits

If there is a loss in a limited partnership, who is liable?

General partners only

An entity designed to provide its owners who are called members with two main features: 1. Limited liability that shareholders of a corporation enjoy 2. The ability to be taxed like partnership

Limited liability company

Who may but does not “NEED” to adopt the operating agreements of a limited liability company (LLC)?

The members

How is an LLC formed?

By filing articles of organization with the secretary of the state

How is a corporation formed?

By filing articles of incorporation

Most states require the articles of organization (to form an LLC) to include the following:

1. Statement that the entity is an LLC 2. Name of the LLC 3. Street address of the LLC’s registered office 4. Name of its registered agent 5. If management is to be vested in managers, a statement to that effect 6. Names of the persons who will be managing the company

How many members are needed to form an LLC?

Just one

Unless the articles or an operating agreement provides otherwise, who have a right to participate in management decisions of an LLC?

All members

Each member is an agent of the LLC and has the power to bind the LLC by acts apparently carrying on the business of the LLC under this time of limited liability company:

Member-managed LLC

Each manager is an agent of the LLC and has the power to bing the LLC. The members are not agents of the LLC and do not have the power to bind the LLC under this type of limited liability company.

Manager-managed LLC

How is voting strength determined under an LLC?

It is proportional to contributions

How are profits and losses distributed under LLCs?

Allocated based on members contribution

How can a member of an LLC transfer their interest in the LLC?

Is free to assign their interest in profits at any time with consent of all members but is not free to assign any rights to manage the LLC

An LLC will dissolve upon:

1. Expiration of the period of duration stated 2. Consent of all members 3. Death, retirement, resignation, bankruptcy, incompetence of a member (unless remaining members vote to continue the business) 4. A judicial decree or administrative order

A legal entity (exists as an entity distinct from its shareholders)

Corporation

Shareholders, directors, and officers are not personally liable for what in a corporation?

The contracts made by the corporation or corporate torts except to the extent they participated in the tort

How is a C-Corporation taxed?

As an entity district from its owners Pays taxes on any profit it makes Double taxation

How is an S Corporation taxed?

Not taxed at the corporate level but treated as income of the shareholders Flow-through entity

What are the restrictions of an S Corporation?

1. Stock can’t be held by more than 100 people 2. Shareholders must be individuals, estates, or certain trusts 3. Must be a domestic corporation 4. Only one class of stock 5. Foreign shareholders are prohibited

The power to run the corporation is vested in the:

Board of directors

Who elects the board of directors of a Corporation?

Shareholders

How is ownership transferred in a corporation?

Owners are free to transfer ownership rights to others unless otherwise agreed

Who enters into contracts before the corporation is formed to obtain financing and things the corporation will need once formed?

Promoters

Are promoters personally bound on the contract hey make?

Yes

Even if the corporation adopts a promoter’s contract, the promoter remains liable unless there is a:

Novation

What is a novation?

An agreement that the third party will release the promoter and substitute the corporation

Who files the articles of incorporation with the state for the corporation?

The incorporator

The articles of incorporation must include:

1. Name of the corporation 2. Names and addresses of the corporations registered agents 3. Names and addresses of each of the incorporators 4. Number of shares authorized to be issued

If a corporation has a narrow purpose clause and undertakes business outside the clause (or outside the business permitted by statute) it is said to be acting:

Ultra vires

Are the rules for running the corporation and are not part of the articles of incorporation and are not required to be filed with the state:

Bylaws

Court will sometimes hold the shareholders, officers, or directors of a corporation liable because the privilege of conducting business in corporate form is being abused. This is called:

Piecing the corporate veil

Courts will generally pierce the corporate veil for any of 3 reasons:

1. Shareholders commingle personal funds with corporate funds or use corporate assets for personal use 2. The corporation was inadequately or thinly capitalized at the time of formation 3. The corporation was formed to commit fraud on existing creditors

Corporate capital comes from the issuance of:

Securities, stock, or bonds

Corporate capital comes from the issuance of:

Securities, stock, or bonds

Include secured mortgage obligations and unsecured debentures and even those that are convertible into stock:

Bonds

Bond holders are _____.

Creditors

Include shares of the corporation, stock warrants, and stock options:

Equity securities

Stockholders are ______ of the corporation.

Owners

Have the right to vote to elect or remove directors. They also have the right to vote on whether to approve fundamental changes to the corporation:

Shareholders

Unless otherwise stated, each share of stock in a corporation is entitled to:

One vote

The articles can give shareholders the right to do this which entitles each share to one vote for each director position that is being filed and the shareholder may cast the votes in ay way including casting all for a single candidate.

Cumulative voting

Shareholders do not have a right to a distribution (including cash dividends an repurchases of shares) unless:

It is declared by the board of directors

Once the board declares a distribution, the shareholders are treated as:

Unsecured creditors

How do distributions affect the corporations shareholder’s equity?

It decreases it

Non-cumulative preferred shares are usually entitled to:

A fixed amount of money before distributions can be made with respect to non preferred shares

With this type of share, if a dividend is not declared in a particular year, the right to receive the preference accumulates and must be paid before non-preferred shares may be paid any dividend:

Cumulative preferred shares

Issued from a corporation’s own “authorized but unissued shares”

Stock dividends

Do the shareholders receiving the stock dividends owe taxes on it?

No because it is not a distribution of corporate assets

This is a right for shareholders to purchase additional shares of stock in order to maintain their proportional voting strength when a corporation proposes to issue additional shares of stock:

Preemptive right

Do preemptive rights exists regardless if mention in the articles of incorporation?

No - must be stated in the articles

When a corporation has a legal cause of action against someone but refuses to bring the action, they shareholders my have a right to bring a shareholder ________ to enforce the corporations rights.

Derivative actions

Like a derivative action. It the shareholder seeks to vindicate the shareholder’s own rights against the corporation:

Direct action

What are the specific duties of directors?

Election, removal, and supervision of officers Adoption, amendment, and repeal of bylaws Fixing management compensation Initiating fundamental changes

Has sole discretion to declare distributions to shareholders:

Board of directors

Directors who authorize a distribution in violation of law are:

Personally liable to the extent the distribution exceeds what would have been lawful

Individual agents of the corporation who ordinarily conduct its day-to-day operations and may bing the corporation to contracts made on its behalf:

Officers

Selected by the directors and may be removed by the directors with or without cause. And they are not elected by the shareholders.

Officers

Corporate agents of the corporation and agency rules determine their authority and power:

Officers

Are subject to fiduciary duties and must discharge their duties in good faith and with the same care as an ordinarily prudent person in a like position:

Corporate officers and corporate directors

Can an officer also serve as a director of a corporation?

Yes

Can an officer of a corporation be a shareholder of a corporation?

Yes

Decisions regarding issues that might fundamentally change the nature of the corporation require:

Shareholder approval through a special procedure

Fundamental changes that require shareholder approval include:

Dissolution Amendments to the articles of incorporation Mergers, consolidations, and compulsory share exchanges Sale of substantially all the corporations assets outside the normal course of business

What is the general procedure for a fundamental change in a corporation?

1. A majority of the board must adopt the resolution 2. All shareholders must be notified 3. The change must be approved by a majority of the shares voted at the meeting 4. A document setting forth the action takes is filed w the state

Shareholders who have a right to votes on a fundamental corporate change typically have a ________ if the shareholder votes against the fundamental change and it is nevertheless approved.

Right to dissent/appraisal right

The right to have the corporation purchase their shares at a fair price is:

A right to dissent / appraisal rights

One or more corporations joining with another corporation and one corporation survives:

Merger

One or more corporations join together to form a new corporation

Consolidation

A transaction in which one corporation acquires all of the outstanding shares of one or more classes of stock of another corporation:

Share exchange

Which corporations of the following three combinations must follow the general procedures for fundamental changes: Mergers Consolidations Share exchanges

Both corporations involved in a merger and consolidation Only the corporation whose shares are being acquired in a share exchange

When a parent corporation owning 90% or more of a subsidiary corporation merges the subsidiary into the parent th out the approval of the shareholders of other corporation or the approval of the subsidiaries board…is this ok and what’s it called?

Yes and its called a short-form merger