Business

Question 1

What is an agency relationship?

Answer 1

An agency relationship is a fiduciary relationship where an agent acts on behalf of a principal, requiring assent/consent, benefit to the principal, and control by the principal.

Question 2

What is actual authority in agency?

Answer 2

Actual authority is when a principal is bound to contracts entered into by its agent if the agent has express or implied authority.

Question 3

What is express authority?

Answer 3

Express authority occurs when the principal explicitly tells the agent they are entitled to act.

Question 4

What is implied authority?

Answer 4

Implied authority arises when an agent has not been given express authority, but reasonably believes they are authorized to act on the principal’s behalf due to:

1. necessity,
2. prior dealings, or
3. customary practices.

Question 5

What is apparent authority?

Answer 5

Apparent authority occurs when the principal holds out the agent as having authority and a third-party reasonably relies on that authority. The principal is bound by a contract entered into by their agent under such authority.

Question 6

What are the conditions for a principal to be bound by apparent authority?

Answer 6

Under apparent authority, a principal is bound if they hold out the agent as having authority and the third-party reasonably relies on that authority.

Question 7

What is ratification of an agent’s contracts?

Answer 7

Ratification occurs when an agent enters into a contract without authority, and the principal becomes liable by approving the agent’s conduct after having knowledge of all material facts.

Question 8

What defines an employee?

Answer 8

An employee is hired to work for an employer for compensation and is subject to the employer’s control.

Question 9

What is a sole proprietor and a sole proprietorship?

Answer 9

A sole proprietor is the owner of a sole proprietorship.

A sole proprietorship is a single-owner for-profit business operating without formal organization.

Question 10

What is a partner in a partnership?

Answer 10

A partner is a co-owner of a partnership, sharing profits, being a party to the partnership agreement, and having a capital account (the individual accounting of each partner’s investment in the partnership). Typically, partners share profits and losses equally, unless otherwise agreed.

Question 11

What is a member in an LLC?

Answer 11

A member is an owner or co-owner of an LLC, a party to the Operating Agreement, and has a capital account.

Question 12

What is a shareholder?

Answer 12

A shareholder is the owner of one or more shares of stock in a corporation.

Question 13

What is vicarious liability?

Answer 13

Under the doctrine of respondeat superior, vicarious liability holds an employer liable for an employee’s negligent acts within the scope of their employment.

Question 14

What defines an independent contractor?

Answer 14

An independent contractor is contracted to do something but is not controlled by the employer regarding performance.

Question 15

What is the liability of general partners?

Answer 15

General partners are personally liable for all obligations of the partnership unless otherwise agreed.

Question 16

What is the formation of a general partnership?

Answer 16

A general partnership is formed when two or more persons co-own a business for profit, with no formalities required.

Question 17

What is a Limited Partnership (LP)?

Answer 17

A Limited Partnership consists of general and limited partners and must have at least one general partner.

Question 18

What is a Limited Liability Partnership (LLP)?

Answer 18

An LLP is a partnership where all partners have limited personal liability, formed by filing a Statement of Qualification.

Question 19

What are the rights of partners regarding ownership transfer?

Answer 19

A partner can only transfer their interest in profits and losses and their right to receive distributions; other rights cannot be transferred without notice.

Question 20

What fiduciary duties do partners owe?

Answer 20

Partners owe a duty of care and a duty of loyalty to the partnership and each other.

Question 21

What is the process of winding up a partnership?

Answer 21

Winding up is the process of settling partnership affairs after dissolution, continuing until all affairs are completed.

Question 22

What are the restrictions on a partner’s duty of loyalty?

Answer 22

A partner CANNOT: (a) engage in self-dealing, (b) usurp business opportunities, OR (c) compete against the partnership.

Breaching the duty of loyalty may result in profits being disgorged and contracts being revoked or rescinded.

Question 23

What happens upon the dissolution of a partnership?

Answer 23

The partnership is NOT terminated but continues until the winding up of partnership affairs is completed.

Question 24

What is the process of winding up a partnership?

Answer 24

Winding up is the process of settling partnership affairs after dissolution, where partnership assets are converted to cash and distributed in a specific order: (1) outside creditors; (2) inside creditors; (3) partners’ capital contributions; (4) profits to partners.

Question 25

When does a corporation's existence begin?

Answer 25

A corporation’s existence begins on the date the Articles of Incorporation are filed with the Secretary of State, UNLESS a delayed effective date is specified.

Question 26

What must the Articles of Incorporation contain?

Answer 26

The Articles of Incorporation MUST contain: (1) the corporate name; (2) the number of shares authorized; (3) the address of the initial registered office and the name of its initial registered agent; AND (4) the name and address of each incorporator.

Question 27

What is required to form a Limited Liability Company (LLC)?

Answer 27

An LLC is formed when: (1) the Articles of Organization are filed with the Secretary of State; AND (2) the company has at least one member.

Question 28

What does the Operating Agreement govern in an LLC?

Answer 28

The Operating Agreement governs: (1) relations between members and the LLC; (2) rights and duties of managers; (3) activities and affairs of the company; AND (4) means and conditions for amending the Operating Agreement.

Question 29

What is a de jure corporation?

Answer 29

A legally formed corporation is called a de jure corporation, formed when the Articles of Incorporation are filed with the Secretary of State.

Question 30

What is a de facto corporation?

Answer 30

A de facto corporation exists where the entity: (1) made a good faith attempt to incorporate; (2) is otherwise eligible to incorporate; AND (3) took action indicating it considered itself a corporation.

Question 31

What is the doctrine of corporation by estoppel?

Answer 31

Under this doctrine, any person or entity that treated a business as a corporation may be estopped from denying that the business is a corporation, even if a valid corporation was NOT formed.

Question 32

What is promoter liability?

Answer 32

A promoter remains personally liable on any pre-incorporation contract entered into, EVEN IF the corporation subsequently adopts the contract.

Question 33

What are the exceptions to promoter liability?

Answer 33

Exceptions include: (1) subsequent novation; OR (2) if the contract explicitly states the promoter has no personal liability.

Question 34

What are ultra vires acts?

Answer 34

Ultra vires acts are activities outside the stated corporate purpose in the Articles of Incorporation and are generally deemed void and unenforceable.

Question 35

How can a corporation's power to act be challenged?

Answer 35

It can be challenged by: (1) a shareholder suing to enjoin the act; (2) the corporation suing an officer or director for damages; OR (3) the state bringing an action to dissolve the corporation.

Question 36

What powers does a corporation have under the RMBCA?

Answer 36

A corporation has the power to do all things necessary or convenient to carry out its business, including: (1) sue and be sued; (2) own property; (3) make contracts; (4) incur liabilities; (5) lend money; (6) make charitable donations; and (7) engage in lobbying.

Question 37

What is shareholder liability?

Answer 37

Generally, shareholders, directors, and officers are NOT personally liable for the corporation's liabilities, but courts may pierce the corporate veil in certain situations.

Question 38

What is watered stock?

Answer 38

Watered stock is stock issued at a price greater than its actual market value, exposing the stockholder to liability up to the actual value.

Question 39

Who has the discretion to declare dividends?

Answer 39

Decisions to declare dividends are within the discretion of the Board of Directors, and only they have the power to issue dividends.

Question 40

What is the duration of a proxy?

Answer 40

A proxy is valid for 11 months unless otherwise stated.

Question 41

What are the requirements for a voting agreement?

Answer 41

To be enforceable, a voting agreement MUST be in writing and signed by all participating shareholders.

Question 42

What is a voting trust?

Answer 42

A voting trust is a formal agreement where a trustee votes shares according to the Voting Trust Agreement, retaining beneficial ownership by the shareholders.

Question 43

What is the right of a shareholder to inspect books and records?

Answer 43

Under the RMBCA, a shareholder has an unqualified right to inspect and copy certain records of the corporation with at least 5-days written notice.

Question 44

What is the durational limit for agreements under the prior act?

Answer 44

The 10-year limit still applies unless amended by all shareholders.

Question 45

What records can a shareholder inspect under the RMBCA?

Answer 45

A shareholder can inspect Articles of Incorporation, Bylaws, Board Resolutions, Minutes of shareholder meetings for the past 3 years, written communications to shareholders within the last 3 years, names and business addresses of current Directors and Officers, and the most recent Annual Report. ## Footnote These records must be inspected during regular business hours with at least 5-days written notice.

Question 46

What additional accounting records can a shareholder inspect?

Answer 46

A shareholder can inspect annual financial statements for the last three fiscal years, audit reports, excerpts of Board meeting minutes, and the record of shareholders if certain conditions are met.

Question 47

What is a proper purpose for inspecting corporate records?

Answer 47

A proper purpose is reasonably relevant to the shareholder's interest, such as determining share value, investigating wrongdoing, or protecting financial interests.

Question 48

What is required for a Board of Directors meeting to have a quorum?

Answer 48

A majority of the Board of Directors is necessary to make a quorum, unless otherwise stated in the Articles of Incorporation, which must require at least one-third of the directors to be present.

Question 49

What happens if a quorum is present at the beginning of a meeting but is lost before a vote?

Answer 49

The Board of Directors cannot vote or act if the quorum is lost before a vote.

Question 50

How is an act approved at a Board of Directors meeting?

Answer 50

An act is approved by the affirmative vote of a majority of directors present unless the Articles of Incorporation or bylaws require a greater number.

Question 51

What must a director do to dissent from an action taken at a meeting?

Answer 51

A director must object at the beginning of the meeting, have their dissent noted in the minutes, or deliver written notice of dissent before adjournment.

Question 52

Who has the authority to vote at a Board of Directors meeting?

Answer 52

Outside Directors have full authority to vote and object at a Board of Directors meeting.

Question 53

Who determines the compensation of directors and officers?

Answer 53

The Board of Directors determines the compensation unless stated otherwise in the bylaws or Articles of Incorporation.

Question 54

How are directors elected?

Answer 54

Directors are elected by shareholders at the corporation's annual shareholders' meeting.

Question 55

What is required for the removal of a director?

Answer 55

A director may be removed by a majority vote of shareholders for cause or without cause unless the Articles of Incorporation state otherwise.

Question 56

How can an officer be removed from their position?

Answer 56

An officer may be removed at any time with or without cause by the Board of Directors, the officer who appointed them, or any other authorized officer.

Question 57

What authority does an officer have?

Answer 57

An officer has actual authority as outlined in the Bylaws or provided by the Board of Directors and apparent authority if a third party reasonably believes they have authority.

Question 58

What is the Duty of Care for directors and officers?

Answer 58

Directors and officers must act in good faith, in the best interests of the corporation, and with appropriate care, as per the Business Judgment Rule.

Question 59

What does the Duty of Loyalty entail?

Answer 59

The Duty of Loyalty requires directors and officers to act in the best interests of the corporation and avoid personal conflicts.

Question 60

What constitutes a conflicting interest transaction?

Answer 60

A conflicting interest transaction is a breach of the Duty of Loyalty unless approved by disinterested directors or shareholders after full disclosure.

Question 61

What is a corporate opportunity?

Answer 61

A corporate opportunity is any opportunity that the corporation has an interest in or is in its line of business.

Question 62

What is the difference between direct and derivative actions?

Answer 62

A direct action involves an injury to a shareholder, while a derivative action involves a shareholder suing to enforce the corporation's claim.

Question 63

What must a shareholder do to commence a derivative suit?

Answer 63

A shareholder must be a shareholder at the time of the act, represent the corporation's interests, and make a written demand for action.

Question 64

What is required for a fundamental change in a corporation?

Answer 64

A fundamental change must be approved by a majority of the total votes entitled to be cast, and a special meeting must be held with proper notice.

Question 65

What does Rule 10b-5 prohibit?

Answer 65

Rule 10b-5 prohibits fraudulent schemes in the purchase or sale of securities, including material misrepresentations or omissions.

Question 66

What does Section 16(b) require from certain corporate insiders?

Answer 66

Section 16(b) requires directors, officers, or shareholders owning more than 10% to surrender profits from equity securities transactions within a 6-month period.

Question 67

How are corporate assets distributed upon dissolution?

Answer 67

Corporate assets are distributed first to outside creditors, then inside creditors, and finally to shareholders according to their ownership share.

Question 68

What is the Deep Rock Doctrine?

Answer 68

Under the Deep Rock Doctrine, a shareholder's claim may be subordinated to outside creditors if the corporation was undercapitalized or if the shareholder acted wrongfully.