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Business_Structures Flashcards

1
Q

What are the key elements of a valid Partnership?

A
  • 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
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2
Q

Can corporations and other partnerships become partners in a partnership?

A

Yes; corporations and other partnerships can become partners of a partnership

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3
Q

Name the Basics of Partnership Formation - Form of agreement and intent

A

• Intent to operate a business as co-owner for PROFIT
• Agreement can be very informal - because unlimited liability
► ORAL
► IMPLIED or
►WRITTEN only when state of fraud GROSS

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4
Q

When must a partnership agreement be in writing?

A

Must be WRITTEN if partnership activity falls within Statute of Frauds:
GROSS
→ Sale of Goods worth ≥ $500
→ Real estate sale
→ Over 1 year required to perform a contract
→ Suretyship (guarantee debt of other)
→ Statement in consideration of marriage

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5
Q

How are profits/losses shared in a partnership?

A
  • Profits are shared equal by default unless partnership agreement says otherwise
  • Sharing of losses follows same pattern as sharing of profits unless specified
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6
Q

What is the Liability of General Partners in a partnership?

A
  • Joint Liability - Partners are collectively liable for debts/torts/contract
  • Several Liability - Partners are individually liable for debts/torts/contract
  • Not liable for crime
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7
Q

Which assets may creditors of a partnership go after; and in which order?

A

Creditors must first go after partnership assets , before suing partners individually

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8
Q

What are the rights of a General Partner in a partnership?

A
  • 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
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9
Q

What does and does NOT happen when a General Partner assigns their partnership interest to someone else?

A
  • Other party gets that partner’s share of the profits and/or capital contribution
  • Does NOT give assignee authority to vote on partnership business
  • Assignee does NOT have right to inspect partnership books
  • Assignor still maintains liability
  • Partner does NOT have the right to assign their interest in partnership property or allow partner’s creditors to attach a lien
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10
Q

What is the actual authority of a partner in a partnership?

A

Has authority to bind the partners to a contract

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11
Q

What is the APPARENT authority of a partner in a partnership?

AGAST

A

• A third party reasonably believes partner has authority to bind partnership to contract
• CANNOT use apparent authority to AGAST - consent of all partner
→ Admit a new partner
→ Guarantee the debt of 1/3 party
→ Admit or submit a legal claim in court or to arbitration
→ Sale or pledge partnership property
→ Third parties are notified of a limit to partner actual authority

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12
Q

With respect to liability on subsequent debts; what happens when a partner withdraws from a partnership?

A
  • _Partner not liable assuming notice given _
  • Notice must be given to nullify apparent authority
    • Actual notice =personal notice to 1/3 party
    • constructive notice =public notice
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13
Q

With respect to PRECEDING debts; what is the liability of a partner in a partnership?

A
  • Old partners: Jointly and severally liable unless creditors grant novation
  • New partners:
    • **Preceding debts Only capital account at risk **
    • Subsequent debts; they are joint and severally liable
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14
Q

What happens upon the death of a partner in a partnership?

A
  • 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
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15
Q

What happens during the winding up of a partnership and in what order?

A
  1. Creditors get paid; Partners can also be creditors
  2. Distributions in arrears get paid
  3. Partners get return of Capital accounts
  4. Any remainder is given to partner as profit

** Note:** NO documents need to be filed with state to dissolve general partnership.

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16
Q

What are the requirements to form a Limited Partnership?

A
  • Must file L.P. certificate with Sec. of State - Governed by state L.P. laws
  • At least one Limited Partners must be listed
  • At least one General Partners must be listed - Future additions or subtractions of G.P. require certificate to be updated with state
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17
Q

How are profits and losses share in a Limited Partnership?

A

in LP profits/losses are split according to _capital contribution_s by default (unlike GP)

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18
Q

True or False: In a Limited Partnership; a General Partner can also be a Limited Partner at the same time.

A

True. General Partner can also be a Limited Partner

However, a Limited Partner cannot also be a General Partner and maintain limited liability

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19
Q

Do limited partners have a fiduciary responsibility to a Limited Partnership?

A

No. Limited Partners are do not have a fiduciary responsibility to Limited Partnership

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20
Q

What authority does a limited partner have under a Limited Partnership?

A
  • Right to inspect records of the business
  • Can still vote on partnership business without losing limited liability
  • Can consult and advise partnership without losing limited liability (assuming they don’t actually make the decisions)
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21
Q

What limitations does a limited partner have in a Limited Partnership?

A
  • They have no authority as an agent to bind the partnership in constract
  • They can’t participate in management decisions and maintain limited liability
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22
Q

What is** the liability of a limited partner in a Limited Partnership**?

A

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

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23
Q

When does the dissolution of a Limited Partnership occur?

A
  • Automatically happens - once final General Partner leaves, dies, files for bankruptcy
  • Time specified in certificate lapses
  • Event specified in certificate happens
  • Unanimous consent by partners
  • Court decision
24
Q

What is required to form a Limited Liability Partnership (LLP)?

A
  • Majority vote required to form LLP
  • ** Articles of LLP filed with Secretary of State -** Governed by laws of that State
  • Limited Liability Partnership must be in name
  • No General Partners - each LLP partner has limited liability - Exception: Negligence of partner or those under partner’s supervision
25
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 d**ivide profits in proportion of their capital contribution** _unless_ otherwise stated * ** limited life ** * **fiduciary duties:** care and loyalty
26
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 * **liability is unlimited** and each JV is personally liable for debts of the JV * each JV has to **right participate in management** * JV partners still have a **fiduciary responsibility** to JV * **No state filings or paperwork necessary** * **death will not dissolve JV**
27
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_
28
What are some of the **advantages of a corporation**?
* **Ability to raise capital** * **Limited liability** - _unless_ actions occur that _pierce the veil_ of ownership transfer
29
What **actions can pierce the veil of a corporation**?
**Actions** can **pierce the veil** of a corporation **⇒** corporation is disregarded and **shareholder personally liable** * **Commingling of assets:** shareholder are treating corporate asset as if they were personal assets * the corporation is **under-capitalization at the time of formation** * Corporation was **formed to defraud creditors** * **Direct action:** the shareholders are running the business directly without election of a BoD or board meeting
30
**How** is a corporation governed?
**Board adopts Corporate Bylaws** **to govern** company business
31
What **must be** included in **the Articles of Incorporation**?
* **Name** of the Corp * **Purpose** of the Corp * **Name & Address of registered agent** - person who may be serve if Corp is sued * **Name & Address of incorporators** * **Number of shares classes authorized to be issued** - no par values required
32
What is the **biggest disadvantage** of a corporation?
**Double taxation**
33
_How_ are **corporations formed by promoters**?
* Prior to the formation of Corp, Promoter may **act on behalf of the Corp** * Promoter is **NOT an agent** * → Contract signed by promoter are not binding for Corp * → Promoter liable to 1/3 party **unless** granted novation * → no special right of compensation * Promoter has **a fiduciary duty** to act loyally and good faith
34
_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 * the **corporation adopts the contract**.
35
In how many states must a corporation incorporate?
Corporations are only **incorporated in one state** ⇒ a **domestic corp**. in that state Become **a foreign corp** ⇒ in any other state they do business in - must obtain approval to operate in the other state
36
Describe Common Stock dividends and their rights/liabilities in relation to shareholders/corporations.
Dividends are **NOT a shareholder right** ## Footnote **Once declared →** dividends become a **liability to corporation**; **→** shareholder = **unsecured creditor**
37
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 Corp 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
38
What aspects are related to all classes of corporate stock?
* Valid consideration must be given for shares Cash; property; or prior services performed * No promises to pay or perform services
39
What are the key aspects of **Treasury Stock**?
Treasury stock is **stock that is authorized, issued, but no longer outstanding** * No Gain/Loss recognized on Treasury stock * Have no voting rights * Can be re-purchased below par * Cannot produce dividends
40
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
41
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
42
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 * *•** May be **entitled to indemnification** * *•** 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)
43
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
44
What is **Ultra Vires**?
Corporation management acting beyond what the Articles of Incorporation allow Shareholders can sue for Ultra Vires
45
When is inspecting Board minutes the right of a shareholder?
Shareholders can inspect Board minutes and records for **any proper purpose only if request is in good faith**
46
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
47
What characterizes a **Professional Corporation**?
* Shares owned only by licensed professionals (CPAs; attorneys; etc.) * Limited Liability for debts * Personal Liability for negligence
48
Who can and cannot own an S-Corporation?
* **CAN be owned by** Estates; certain Trusts; and Individuals * **CANNOT be owned by** a C-Corporation
49
What is the primary advantage of an S-Corporation?
**Avoidance of Double Taxation**
50
What are the **requirements of an S-Corporation**?
* **Domestic corporation** * **Shareholder must be individual, estate or certain trust** - NOT Corp * **\< 100** shareholders allowed * **Only one class** of stock allowed * Shareholders must be **US Citizens**/Residents
51
**Basic Partner Rights **
♦ **Participation in management - each partner have this right** ♦ **Sharing profits & losses** • % may be specified in partnership agreement • equal sharing of profits and losses when not specified • Transferable/assignable without need of approval of other partners ♦ **Property rights**
52
**Fiduciary duties of partners **
* Duty of **loyalty** * Duty of **care** * Partner **refrain from competing** with the partnership * Duty of **good faith and fair dealin**g in the discharge of all their duties
53
**LLC** keys points
* **Formal creation * at least 1 person** * **_Limited Liability_ for Contract and debts * _Unlimited Liability_ for Malpractices and Negligence** * **Agents/Members * Taxed as a P/S **
54
**LLP** keys points
* Formal creation * at least 2 persons (accounting, doctor, lawyers) * **_Limited Liability for_ Malpractices and Negligence * _Unlimited Liability_ for Contract and debts** * Agents * Taxed as a P/S
55
Actions that constitute **dissociation** from a partnership
* Partner withdraws from partnership * Partner engages in conduct that interferes with the ability of partnership to conduct business * Death of a partner * Incapacity of partner **NOTE** After dissociation occurs the partnership will either **commence dissolution and liquidation/winding up ** OR **continue the partnership business **
56
**Dissolution** of Partnership can occurs by
* Partnership agreement * Agreement of partners * By decree of court

Regulation (21 decks)

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