#9 Business Structure Flashcards
(24 cards)
What happens when a general partner assigns their interest to another person?
Does the assignee become a partner, gain management rights, or take on liability?
No, the assignee does not become a partner automatically.
Unless there is unanimous consent from all existing partners, the assignee:
Does NOT gain management rights
Does NOT get access to books or records
Is NOT liable for any partnership debts
The assignee only receives the assignor’s economic rights — specifically:
The right to partnership profits
The right to surplus upon liquidation
This transfer does not dissolve the partnership.
What information is required in a corporation’s Articles of Incorporation under the Revised Model Business Corporation Act (RMBCA)?
The Articles of Incorporation must include key foundational details such as:
- The corporation’s name
- The nature and purpose of its business (often phrased broadly)
- The term or duration of the corporation
- The name and address of each incorporator
- Capitalization info (authorized shares and classes)
- The initial registered agent and office
- Names of initial board members (if provided)
Not required:
Names/addresses of preincorporation subscribers
Names/addresses of promoters
Tax status elections like C or S corp
Key point: The nature and purpose of the business is required because it defines the legal scope of the corporation’s operations.
Under corporate governance rules, what are directors legally allowed to do when fulfilling their duties?
Can they rely on officer reports, approve transactions alone, or compete with the corporation?
Directors owe two main fiduciary duties to the corporation:
* The duty of care (act prudently, in good faith, and with reasonable diligence)
* The duty of loyalty (act in the best interest of the corporation and avoid conflicts of interest)
A director is legally allowed to rely on information, reports, and recommendations provided by reliable corporate officers or committees, as long as the reliance is reasonable and in good faith.
However, a director may not:
* Take business opportunities for personal gain
* Serve on the board of a competitor (conflict of interest)
* Act unilaterally to approve corporate actions (requires board approval)
Key rule: Directors may rely on corporate officers, but cannot act disloyally or without proper board authorization.
What is one key advantage of operating as a corporation compared to other forms of business ownership?
A key advantage of a corporation is perpetual existence — the business continues even if a shareholder dies or sells their shares.
It also allows for easy transfer of ownership without disrupting operations.
Key Characteristics of a Corporation:
Separate legal entity — Exists apart from its owners
Perpetual life — Continues after death or departure of shareholders
Limited liability — Owners aren’t personally responsible for business debts
Transferable ownership — Shares can be sold or passed on freely
Centralized management — Run by a board and executive officers
State regulated — Created and governed under state law
Double taxation — Both corporate profits and dividends are taxed
What fiduciary duty is violated when a corporate officer accepts money from a third party in exchange for influencing a company decision?
The officer violates the duty of loyalty.
Directors and officers owe two primary fiduciary duties to the corporation:
Duty of care — Act with reasonable diligence, competence, and judgment.
Duty of loyalty — Put the corporation’s interests above personal gain.
When someone like Fuller accepts outside payment to sway a corporate action, they create a conflict of interest. This compromises their obligation to act solely for the benefit of the corporation.
Examples of violating loyalty:
Taking bribes or kickbacks
Engaging in self-dealing
Approving transactions for personal benefit
Competing with the corporation
Key point:
The duty of loyalty prohibits officers from using their position to profit at the corporation’s expense.
When can a corporation merge with another without needing shareholder approval?
A corporation can use a short-form merger to avoid shareholder approval only if it already owns at least 90% of the other corporation’s outstanding shares.
The parent company must acquire 90% ownership before initiating the merger.
Once that threshold is met, the parent can unilaterally approve the merger through its board of directors.
The subsidiary’s shareholders do not get to vote — and the parent’s shareholders usually don’t either.
Dissenting minority shareholders may have appraisal rights to receive the fair value of their shares.
Key rule:
A short-form merger requires preexisting 90% ownership — it’s not a method for acquiring control, but a method for finalizing the merger without a vote.
When is unanimous consent of all general partners required before taking action?
In a general partnership, unanimous consent is required for decisions that go beyond ordinary business activities or that could significantly affect ownership, authority, or risk to the partnership. These include:
- Admitting a new partner
- Guaranteeing the debt of a third party (suretyship)
- Submitting a legal claim to court or arbitration
- Selling or pledging partnership property if it’s outside the normal course of business
- Entering a transaction with a third party who knows a partner exceeded their authority
In contrast, ordinary business decisions — like managing operations or entering day-to-day contracts — typically require only majority approval of the partners.
Key rule:
Any action that affects partnership control, ownership rights, or binds the entire partnership beyond normal operations usually requires unanimous consent from all general partners.
What are the key similarities and differences between a limited partnership (LP) and a corporation regarding formation and liability?
Similarities:
- Both are created under state law by filing formal documentation.
- A limited partnership files a Certificate of Limited Partnership, and a corporation files Articles of Incorporation.
-
Both are legal entities distinct from their owners and governed by statutory rules.
Differences:
In a corporation, all shareholders have limited liability for company debts.
In a limited partnership, only limited partners have limited liability. The general partner is personally liable for all partnership obligations.
Corporations may exist perpetually by default, while LPs usually have a fixed duration unless otherwise stated.
Corporations are taxable entities (unless they elect pass-through S corp status), whereas LPs are typically treated as pass-through entities for tax purposes.
Key rule:
Only the limited partners in an LP are shielded from personal liability. The general partner is fully liable unless the LP is structured with a corporate or LLC general partner.
What rights do shareholders have in a corporation?
Shareholders are the owners of a corporation, but their rights are limited compared to directors and officers who manage day-to-day operations. Shareholder rights typically include:
- The right to vote on major corporate matters (e.g., electing directors, approving mergers)
- The right to receive dividends if and when declared by the board
- The right to inspect corporate records, but only for a proper purpose tied to their role as an owner
- The right to transfer or sell their shares, subject to any restrictions in the bylaws or agreements
5.The right to sue on behalf of the corporation in a derivative lawsuit if the corporation is harmed
- The right to be treated fairly and equally compared to other shareholders of the same class
- Shareholders do not have direct control over corporate decisions and are not entitled to manage or access records at will. Their powers are defined and limited by state law and the corporate charter.
Key point:
Shareholders have powerful ownership rights, but they are carefully structured to protect corporate stability and centralized management.
What approvals are typically required for the consolidation of two corporations?
To consolidate two corporations into a new entity, the following approvals are usually required:
Board of directors of each corporation must approve the plan of consolidation
Shareholders of each corporation must vote to approve the transaction, typically by a majority of voting shares
Dissenting shareholders who oppose the merger may have the right to an appraisal, allowing them to sell their shares for fair market value
However, it is not required that all shareholders receive voting stock in the new entity. This may occur in some consolidations, but it’s not a legal condition for the deal to proceed.
Key point:
Board and shareholder approval are essential for consolidation, but the form of consideration given to shareholders (such as voting stock) is not a legal requirement.
Which of the following statements correctly compares corporations and limited partnerships?
Correct:
Both corporations and limited partnerships must be formed under state law by filing official documents.
* Corporations file Articles of Incorporation
* Limited partnerships file a Certificate of Limited Partnership
Incorrect options explained:
A. Directors owe fiduciary duties… and limited partners do too —
Wrong: Limited partners generally do not owe fiduciary duties to the partnership. Only general partners do.
C. Shareholders may vote, but limited partners can’t vote —
Wrong: Limited partners can vote on key issues like dissolution, business changes, or general partner removal.
D. Corporation stock is subject to securities laws, but LP interests are exempt —
Wrong: Limited partnership interests can be securities and are often subject to federal registration requirements if sold to investors.
Key takeaway:
Both entities are governed by state law and require formal filing to exist, but they differ in partner rights, liability, and regulation.
Under the Revised Uniform Limited Partnership Act (RULPA), what approvals are required to admit a new limited partner?
To admit a new limited partner, written approval from all existing general partners and all existing limited partners is required.
This unanimous consent rule ensures that:
New limited partners cannot be added without full agreement from both ownership and management sides of the partnership.
Both groups must agree to share control, profits, and risk with the new partner.
Why other options are wrong:
Approval from only a majority of general partners or limited partners is not sufficient.
Even if the general partners agree unanimously, the limited partners must also consent in writing.
Key point:
Admitting a new limited partner requires unanimous written approval from both classes of partners — general and limited.
What key information must be included in a corporation’s Articles of Incorporation under the Revised Model Business Corporation Act (RMBCA)?
The Articles of Incorporation must include several core items required by state law:
1) The corporation’s legal name
2) The number of shares the corporation is authorized to issue
3) The name and address of each incorporator
4) The name and address of the registered agent
5) The street address of the corporation’s registered office
6) The purpose of the corporation (optional in many states)
Common misconceptions:
- The name and address of preincorporation subscribers are not required.
- The name and address of the promoter are not required.
- Electing C or S corporation status is a federal tax election and is not included in the Articles.
Key point:
The number of authorized shares must be included because it defines the corporation’s capital structure from the start.
What rights do stockholders have, and what limitations exist regarding their role in managing a corporation?
Stockholders are owners of the corporation, but they do not manage its operations unless they also serve as directors or officers.
1) Stockholders have **no right to manage the corporation’s daily activities **or strategic decisions.
2) Only stockholders who are elected or appointed as directors or officers have authority to manage.
3) Stockholders may receive dividends, but only if declared by the board of directors.
4) Stockholders have a limited right to inspect corporate records — but only for a proper purpose.
5) Stockholders may request a list of shareholders (for a proxy fight or governance issue), but cannot request a list of corporate customers for personal gain.
Key point:
Corporate law separates ownership from control — stockholders are not involved in management unless they formally hold a management position.
What types of consideration are legally sufficient to purchase corporate stock under the Revised Model Business Corporation Act?
Under the Revised Model Business Corporation Act (RMBCA), several types of consideration are acceptable when purchasing corporate stock. These include:
1) Services already performed
2) Services promised to be performed in the future
3) Negotiable promissory notes to pay cash
All three are treated as legally valid forms of consideration, provided the corporation’s board of directors accepts them in good faith as having fair value.
Key point:
Modern corporate statutes allow flexibility in how stock can be purchased, including promises and obligations that have not yet been fulfilled.
What actions may cause a court to pierce the corporate veil and hold shareholders personally liable?
Courts may pierce the corporate veil when the corporation is misused to commit fraud, avoid legal obligations, or when the corporation is not treated as a separate legal entity. Common triggers include:
1) Using corporate assets for personal purposes
2) Commingling personal and corporate funds
3) Failing to observe corporate formalities (e.g., no meetings or records)
4) Under-capitalizing the corporation to avoid liability
5) Using the corporation to perpetrate fraud or injustice
Actions that are merely administrative or discretionary — like failing to designate a registered agent, retaining excess capital, or choosing where to incorporate — do not on their own justify veil piercing.
Key point:
The veil is pierced only in rare cases when the owners abuse the corporate form, especially by treating the business as their alter ego or ignoring its separate existence.
Under what circumstances may a creditor seek involuntary judicial dissolution of a corporation?
A creditor may petition for involuntary judicial dissolution of a corporation under the Revised Model Business Corporation Act (RMBCA) if specific statutory requirements are met:
1) The corporation has admitted in writing that the debt owed to the creditor is due and remains unpaid
2) The creditor has obtained a final judgment on the claim, and the judgment remains unsatisfied
3) The corporation is proven to be insolvent — meaning it cannot pay its debts as they come due or its liabilities exceed its assets
This remedy is available only when the creditor demonstrates both legal entitlement to the claim and the corporation’s ongoing inability to satisfy that obligation. It is not available merely for unpaid debts or operational mismanagement — the threshold includes proof of insolvency and a written or judicial acknowledgment of the claim.
Key point:
Judicial dissolution by a creditor is an extraordinary remedy designed to protect creditors when a financially distressed corporation refuses or is unable to pay a valid, admitted or adjudicated debt.
Under the Revised Uniform Partnership Act (RUPA), what rights and liabilities apply to a general partnership and its partners?
Under RUPA, a general partnership is a separate legal entity, and the following apply:
1) The partnership may own property in its own name — title does not need to list individual partners.
2) Partners have joint and several liability for contractual obligations of the partnership. Creditors may recover the full amount from any one partner.
3) Partners are also jointly and severally liable for torts committed by a partner in the ordinary course of business or with actual/apparent authority.
Key point:
RUPA treats the partnership as an independent legal actor, but still holds individual partners personally liable for the business’s contracts and torts.
Under the Revised Uniform Partnership Act (RUPA), what are the liability rules when a creditor sues a partnership but not all partners?
Under RUPA, partners are personally liable for partnership debts, and that liability is joint and several for both contract and tort obligations. This means:
1) A third party may recover from any one partner, a combination of partners, or the partnership entity itself.
2) It is not necessary for all partners to be named in the lawsuit for the plaintiff to recover.
3) If a judgment is entered against the partnership, creditors can enforce it against any partner who was a party to the case.
4) A partner who pays more than their share may seek contribution from the others, including those not sued.
Key point:
Joint and several liability allows creditors to hold individual partners fully accountable, even if some partners are not named in the suit — as long as the partnership was found liable.
What must a director do to ensure a contract with the corporation is valid
1) Disclose the personal interest to the independent board members
2) Refrain from voting on the contract
Which corporate power belongs to shareholders rather than the board of directors?
1) Amending the Articles of Incorporation requires a shareholder vote — not board approval.
2) The board of directors can select officers of the corporation.
3) The board of directors can declare dividends to shareholders.
Key point: The board manages the corporation, but structural changes like amending the charter require shareholder authority.
What is the primary purpose of cumulative voting in corporate elections?
1) To help minority shareholders gain board representation by concentrating their votes on fewer candidates.
2) Shareholders receive one vote per share times the number of open board seats.
3) This system allows shareholders to allocate all their votes to one or a few candidates instead of spreading them equally.
Key point: Cumulative voting increases the chance that minority shareholders can elect at least one director.
When is a shareholder liable to repay an illegal corporate distribution?
1) A shareholder must repay an illegal distribution if the corporation is insolvent, even if the shareholder was unaware of the illegality.
2) Directors are not liable as long as they complied with their duties of care and loyalty.
3) A shareholder is not liable to return the distribution if the corporation remains solvent.
Key point: Shareholder liability for illegal distributions depends on the corporation’s solvency — not the shareholder’s knowledge.
Under the Revised Model Business Corporation Act, what is not required to complete a merger between two public corporations?
1) Receipt of voting stock by all shareholders is not legally required to complete the merger.
2) A valid merger typically requires:
- A formal plan of merger
- Board approval from both corporations
- Majority shareholder approval from each corporation
Key point: Consideration given to shareholders (e.g., cash, stock, mix) is flexible — not all must receive voting stock.
