What are the key elements of a valid Partnership?
Must have two or more partners. Must intend to engage in business for profit. Life of partnership is of limited duration in most cases. Agency/fiduciary relationship is created. Partnership interest is always considered personal property.
Can corporations and other partnerships become partners in a partnership?
Yes; corporations and other partnerships can become partners of a partnership
Name the Basics of Partnership Formation - Form of agreement and intent
Agreement can be very informal - either ORAL; IMPLIED or WRITTEN Intent is to make a profit
When must a partnership agreement be in writing?
Must be WRITTEN if partnership activity falls within Statute of Frauds: A. Can't be completed in 1 year B. Even if partners reside in different states; not necessary unless within Statute of Frauds C. Neither dollar amount of transactions nor purchasing of real estate has bearing on whether partnership agreement must be in writing
How are profits shared in a partnership?
Profit sharing is equal by default A. Unless partnership agreement says otherwise B. Unless specified; sharing of losses follows same pattern as sharing of profits
What is the Liability of General Partners in a partnership?
Joint Liability - Partners are collectively liable for debts/torts Several Liability - Partners are individually liable for debts/torts
Which assets may creditors of a partnership go after; and in which order?
Creditors must go after partnership assets first before suing partners individually
What are the rights of a General Partner in a partnership?
General Partners have joint control over the management of the partnership and its affairs Unanimous vote needed to change the structure of the partnership Each partner has full right to inspect partnership accounting and business Partner has the authority to assign their interest to another partner
What does and does NOT happen when a General Partner assigns their partnership interest to someone else?
1. Other party gets that partner's share of the profits and/or capital contribution. 2. Does NOT give assignee authority to vote on partnership business 3. Assignee does NOT have right to inspect partnership books 4. Assignor still maintains liability 5. Partner does NOT have the right to assign their interest in partnership property or allow partner's creditors to attach a lien.
What is the actual authority of a partner in a partnership?
Has authority to bind the partners to a contract.
What is the APPARENT authority of a partner in a partnership?
A third party reasonably believes partner has authority to bind partnership to contract Cannot use apparent authority to add a new partner Cannot use apparent authority to sell or bind partnership assets
With respect to liability on subsequent debts; what happens when a partner withdraws from a partnership?
Partner not liable assuming notice given. Notice must be given to nullify apparent authority People who had knowledge of their role must be personally notified Public must be notified
With respect to PRECEDING debts; what is the liability of a partner in a partnership?
Old partners: Jointly and severally liable unless creditors grant novation New partners: Only capital account at risk on preceding debts. For subsequent debts; they are joint and severally liable.
What happens upon the death of a partner in a partnership?
Partner's estate gets share of partnership profits and capital account Estate does NOT get any partnership assets Remainder of partners own partnership assets Heirs of decedent are not added as partners unless remaining partners unanimously agree
What happens during the winding up of a partnership and in what order?
1. Creditors get paid; Partners can also be creditors 2. Distributions in arrears get paid 3. Partners get return of Capital accounts 4. Any remaining distributions Note: NO documents need to be filed with state to dissolve general partnership.
What are the requirements to form a Limited Partnership?
Governed by state L.P. laws Must file L.P. certificate with Sec. of State Only General Partners must be listed Future additions or subtractions of G.P. require certificate to be updated with state
How are profits and losses split in a Limited Partnership?
Unlike G.P.; L.P. profits/losses are split according to capital contributions by default
True or False: In a Limited Partnership; a General Partner can also be a Limited Partner at the same time.
True. A Limited Partner; however; cannot also be a General Partner and maintain limited liability.
Do limited partners have a fiduciary responsibility to a Limited Partnership?
No. Limited Partners are do not have a fiduciary responsibility to Limited Partnership
What authority does a limited partner have under a Limited Partnership?
1. Right to inspect records of the business. 2. Can still vote on partnership business without losing limited liability 3. Can consult and advise partnership without losing limited liability (assuming they don't actually make the decisions)
What limitations does a limited partner have in a Limited Partnership?
1. They have no authority as an agent to bind the partnership 2. They can't participate in management decisions and maintain limited liability.
What is the liability of a limited partner in a Limited Partnership?
Limited partners are liable to the extent of their capital contributions only Exception - A Limited Partner (who cannot participate in management decisions) becomes involved with management decisions Becomes liable to third parties *IF* they knew of their involvement
When does the dissolution of a Limited Partnership occur?
Automatically happens 1. Once final General Partner leaves 2. Time specified in certificate lapses 3. Event specified in certificate happens 4. Unanimous consent by partners 5. Illegal activity
What is required to form a Limited Liability Partnership (LLP)?
1. Majority vote required to form LLP 2. Articles of LLP filed with Secretary of State 3. Governed by laws of that State 4.Limited Liability Partnership must be in name 5. No General Partners - each LLP partner has limited liability - Exception: Negligence of partner or those under partner's supervision
What are the key aspects of a Limited Liability Company (LLC)?
Members can participate in management and retain limited liability Members don't own any interest in LLC property Members can assign interest; but not transfer it Members divide profits equally unless otherwise stated
What are the key aspects of Joint Ventures (JV)?
Similar to a General Partnership; except generally; a JV is for a single business activity Example: two companies promote a concert Ability to bind other JV partners is limited JV partners still have a fiduciary responsibility to JV No state filings or paperwork necessary
What are the key aspects of a corporation?
Shareholders have limited liability to the extent of their capital contribution C Corporations have a perpetual life and continue even after shareholder death Corporations are a separate legal entity from their owners and can own property; sue; be sued Corporations must file Articles of Incorporation in state of governance
What are some of the advantages of a corporation?
Ability to raise capital Limited liability - unless actions occur that pierce the veil Ease of ownership transfer
What actions can pierce the veil of a corporation?
Commingling of assets Fraud Under-capitalization
How is a corporation governed?
Board adopts Corporate Bylaws to govern company business
What items are required in a corporations Articles of Incorporation?
Name; purpose; powers of Corporation Name of registered agent & incorporators Stock share classes authorized; par values Name of corporate officers NOT required
What is the biggest disadvantage of a corporation?
How are corporations formed by promoters?
Promoter issues prospectus; arranges capital; and is a fiduciary of the corporation. A promoter may profit from work performed if the corporation is aware of it.
When is a corporation liable for pre-incorporation actions taken by a Promoter?
Promoter personally liable unless third party agrees to a novation and releases Promoter from liability; UNLESS the corporation adopts.
In how many states must a corporation incorporate?
Corporations are only incorporated in one state Become adomestic corp. in that state Become aforeign corp. in any other state they do business in
Describe Common Stock dividends and their rights/liabilities in relation to shareholders/corporations.
Dividends are NOT a shareholder right Once declared; dividends become a liability to corporation
What are key aspects related to the holding of Preferred Stock?
No voting rights Get first rights to dividends and liquidation Cumulative Preferred Stock dividends that go undeclared accumulate and Corporation must pay it before issuing dividends to Common Stockholders Participating Preferred Stock gives shareholder right to dividends in addition to what they get as Preferred Stockholders
What aspects are related to all classes of corporate stock?
Valid consideration must be given for shares Cash; property; or services performed No promises to pay or perform services
What are the key aspects of Treasury Stock?
No Gain/Loss recognized on Treasury stock Have no voting rights Can be re-purchased below par Cannot produce dividends
What is a stock subscription and what is required for it to be valid?
An offer to buy shares of stock Must be accepted by corporation to be valid Offer cannot be revoked for 6 months Subscriber becomes liable once accepted
When is a corporation liable for torts by employees?
If committed within the normal scope of the employee's job Even if they were disobeying orders Per respondeat superior
What are the key aspects of a corporate officer?
Appointed by the Board of Directors Act as Agents Owe a fiduciary duty to the corporation Can have legal fees paid by corporation for defense in lawsuit brought on them from carrying out their normal duties (exception- suit brought against officers by shareholders)
What are the key aspects of a corporation's board of directors (BOD)?
Elected by shareholders Owe fiduciary duty to corporation Must act in good faith to avoid being liable for bad judgment Good faith is NOT a defense for negligence
What is Ultra Vires?
Corporation management acting beyond what the Articles of Incorporation allow Shareholders can sue for Ultra Vires
When is inspecting Board minutes the right of a shareholder?
Shareholders can inspect Board minutes and records only if request is in good faith
Who must approve mergers and consolidations?
Boards must approve Shareholders must approve by Majority Disapproving shareholders can get an appraisal and get their stock back at current market price Merger does NOT need creditor approval
What characterizes a Professional Corporation?
Shares owned only by licensed professionals (CPAs; attorneys; etc.) Limited Liability for debts Personal Liability for negligence
Who can and cannot own an S-Corporation?
CAN be owned by Estates; Trusts; and Individuals CANNOT be owned by a C-Corporation
What is the primary advantage of an S-Corporation?
Avoidance of Double Taxation
What are the disadvantages of an S-Corporation?
No more than 100 shareholders allowed One class of stock allowed Shareholders must be US Citizens/Residents