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Flashcards in Business Structure Deck (29):

Business Judgement Rule

if acting in good faith, it's assumed officers/directors will not breach fiduciary care by making poor business decisions - A breach will stem from negligent action


C Corporation

Assumed corporate statust unless S-election made

1. typical form for large public companies

2. Subject to double taxation

3. No personal iability for shareholders


Derivative Action

Shareholder(s) sues director/officer on behalf of corporation for damages caused to the corp



When a partner is no longer affiliated with a partnership - remaining partners must decide whether to continue partnership within 90 days of dissociation

Notice must be provided to remove apparent authority of a dissociated partner (actual notice to existing creditors, SOC 90 filing)

1. partner withdraws (voluntarily or by force) (in accordance or in violation of partnership agreement)

2. partner engages in conduct interfering with partnerships ability to conduct business

3. bankruptcy of partner

4. death of partner

5. incapacity of partner



The process of ending a partnership



General Partnership

association of two or more persons to carry on a for-profit business as co-owners

- partners have unlimited personal liability

- does not require formal procedures to create

- unless otherwise stated, profits are evenly shared amongst partners


Joint Venture

association of two or more persons/entities engaged in a business for a specific purpose

- each joint venturer is not necessarily an agent of other joint venturers

- death of joint venturer does not automatically dissolve joint venture

Unlimited liability


Limited liability company

business entity run primarily like a general partnership

- limited life

- all owners have limited liability (typically maintained even if partners fail to follow usual formalities in conducting business) and membership rights (rights to manage affairs, vote, etc)

- if converted from a partnership, partners retain same liaiblity they had before. new limited liability applys only to transactions after date of conversion

- unless stated otherwise in partnership agreement, most states require profits & losses be divided by % cap cont. RULLCA divides profits equally

- may be member-managed or manager-managed

- sepereate legal entity apart from owners


Limited liability partnerhsip

operates as a general partnership but  partners have limited liability from actions of the other partners

- requires one general partner (unlimited liability), one limited partner (no personal liability)

- majority vote by members can create an LLP

-unless otherwise stated, profits are shared based on percentages of capital contributions

- requires state compliance to create (certificate w/ SOC)

a. name and address of partnership

b. name and address of agent

c. latest date the partnership is to dissolve

d. names of general partners (not limited)

-Partnership will dissolve after the death or bankruptcy of a general partner


Limited partner

partner w/ no personal liability (in a limited partnership)

-not allowed to participate in the running of the business or they will maintain liability of a general partner

Can: (a) act as an agent (b) consult w/ and advise general partners (c) approve/disapprove partnership agreement amendments (d) vote on dissolution, loans, change in nature of business, removal of general partner (e) bring derivative lawsuit 

- can be a limited and general partner at the same time

- cannot withdraw capital contribution if it impairs creditors


Partnership Agreement

rules by which the partnership is run

Revise Uniform Partnership Act will apply when partnership agreement is silent on a particular rule

must be in writing if its purpose cannot be acheived in under a year


Partnership Interest

Partners right to profits

- freely transferable (vs ownership interest which can only be transferred with consent of all partners) may be assigned to secure a loan

-considered personal property

- does not automatically transfer to estate heirs (unless stated in the partnership agreement)




corporation taxed like a partnership

- partners have no personal liability

- S-election must be made

-corp must have only one class of stock and less than 100 shares

-foreign ownership not allowed



Sole proprietorship

one-owner business

unlimited liability


Ultra vires 

action that goes beyond the authority of a coporation

-violates the fiduciary duty of obedience


Winding up

liquidation of a partnership



association of two or more persons to carry on a for-profit business as co-owners

-does not include passive co-ownership of property

-agreement to share profits (not gross receipts) implies partnership


Partnership Management

1. Partners have a right inspect books, act as an agent of the partnership, share profits and losses and to participate equally in management

-ordinary business decision made by majority vote

-funadmental changes (admitting new partners, actions outside scope of normal business, action contrary to the partnership agreement) require unanimous vote




may be

1. Silent - does not help manage but still has unlimted personal liability

2. Creditors of the partnership

3. have no right to salary for work (partners may agree to pay salaries though)

4. Jointly and severally liable for all debts

-New partners are liabile for existing debts only to the extent of their capital contribution

-Withdrawing partners must post notice to avoid liability for subsequent debt (90 day filing with SOC)


Fiduciary Duty (partnerships)

each partner owes a fiduciary duty to other partners

- must act in best interest of others

- general partners owe fiduciary duty to limited partners, limited partners do not owe duty because they are not involved in management


Continuation Agreement

Clause in the partnerhip agreement stating partnership will continue after the dissociation of a partner



- limited liaibility for shareholders

- ownership interest is transferrable

- continuous life (not ended by death of a shareholder)

- if a corp does not follow corporate formalities, the corporate veil can be pierced, exposing shareholders to personal liability



LLC Manager 

Fiduciary duties:

1. dty of loyalty and care to LLC (trustee of company property, refrain from competing with the company)


Foregin Partnership

-doing business in a state other than where incorporated

does not include: (a) defending a lawsuit (b) holding a bank account (c) using mail to solicit orders (d) collecting debts (e) using independent contractors to make sales

- may need to obtain certification from state operating in


Professional Corporation

- shares may be owend only by licensed professionals

- retain personal liability for professional acts

- limited liability for corporate debts


Close Corporation

- can operate without some of the formalities of a regular corp.

a. for corps with less than 50 shareholders

b. two-thirds of each share-class must approve "close" classification

c. all share certificates and articles must state corp is "close"


De facto corporation

corporation has been formed but has not properly under the law

- usually defective because of small error

- filing by Secretary of State of Articles of Incorporation is deemed conclusive proof of incorporation

- De jure corporation has been formed correctly



- persons who form coporations (arrange capitalization)

- issues prospectus, promotes stock subscriptions, draws up corporate charter

- has fiduciary relationship with corporation but not an agent of the corp

- agreements made by promoter are not binding on the future corporation unelss formally adopted

- promoter may be personal liabile for agreements made


Ultra vires

Corporate action beyond the scope of the corporate powers

- state attorney general may dissolve corporation for ultra vires acts