Corporations, Partnerships, and Agency

Question 1

Required information for Certificate of formation

[C-Corp]

Answer 1

1. Corporate name and address
2. Nature of the business or purposes for which Corp is organized
3. Number of shares authorized (par or no-par)
4. Preemptive rights/preferences
5. Duration (if not perpetual)
6. Name and address of Registered Agent
7. Name and address of each organizer
8. Number of Initial Directors, their names and addresses

Question 2

What is a derivative action?

Answer 2

A lawsuit in which a shareholder sues on behalf of the corporation for a harm suffered by the corporation. It may be brought to hold the directors and officers of the corporation personally liable for losses resulting from an ultra vires act or to enforce a cause of action on behalf of the corporation when the corporation has failed to do so.

Question 3

Requirements for a Derivative Action

Answer 3

1. Standing
   a. Shareholder at time of the act or omission
   b. Continue be shareholder throughout the litigation
   c. Fairly and adequately represent Corp’s interests
2. Written Demand
3. Waiting period (90 days from date of demand unless Board responds sooner or irreparable injury would result from delay

Question 4

Duties of Corporate Directors

Answer 4

1. Duty of Care

2. Duty of Loyalty

Question 5

Duty of Care

[C-Corp]

Answer 5

Duty to act with the care of an ordinarily prudent person in like position and similar circumstances, and use any additional knowledge or skills they possess when deciding how to act.

Question 6

Duty of Loyalty

Answer 6

Requires directors to act in manner the director reasonably believes is in the best interest of the Corp.

1. Self-dealing (safe harbor: disclosure + approval)
2. Usurping corporate opportunity (interest or expectancy test and line of business test)
3. Competition with the Corp

Question 7

Merger Requirements

Answer 7

1. Board Resolution of the boards of directors of each company
2. 21-Day written notice to all shareholders
3. Shareholder approval by 2/3 of the shares entitled to vote (both companies)
4. File required documents
5. Surviving Corp takes all assets and assumes all liabilities

Question 8

Requirements for Close Corporations

Answer 8

1. Few shareholders
2. Not publicly traded
3. More relaxed governance under board or shareholder’s agreement (
4. Certificate of formation must state “this is a close corporation”
5. Stock certificates must state “shares issued by a close corporation

Question 9

Requirements for a Shareholders’ Agreement

Answer 9

1. Executed by each shareholder
2. Adopted unanimously
3. Must file statement of operation as a close corporation with Secretary of State

Question 10

Calculating Texas Franchise Tax

Answer 10

1% of Taxable Margin

Taxable Margin = Total Revenue - (greater of: COGS, compensation, or 30% of Total Revenue)

Question 11

Businesses Subject to the Franchise Tax

Answer 11

1. Corporations
2. Partnerships
3. LLPs
4. LLCs
5. Professional associations
6. Professional corporations
7. Business trusts
8. Joint Ventures
9. Holding Companies

Question 12

Businesses NOT Subject to the Franchise Tax

Answer 12

1. Sole Proprietorships

2. General partnerships owned entirely by natural persons.

Question 13

Creation of a partnership

Answer 13

Through association of 2 or more persons to carry on as co-owners of a business for profit

Question 14

Factors considered in determining whether a partnership exists:

Answer 14

Right to receive a share of the profits
Expression of intent of the parties
Right to participate in the control of the business
Agreement to share in the losses/liabilities for business
Agreement to contribute money or property to the business

Question 15

Partners’ Duties

Answer 15

A partner must discharge her duties in good faith and in a manner the partner reasonably believes to be in the best interest of the partnership

1. Duty of Care
2. Duty of Loyalty

Question 16

Partner’s Duty of Care

Answer 16

Acting with the same care that an ordinarily prudent person would use under similar circumstances
Shown by acting -
(1) on an informed basis
(2) in good faith, and
(3) in a manner reasonably believed to be in the best interests of the partnership

Question 17

Partner’s Duty of Loyalty

Answer 17

(1) Accounting to and holding for the partnership any property, profit, or benefit received in conjunction with partnership business or property
(2) Refraining from dealing with the partnership on behalf of a 3rd party whose interests are adverse to the partnership, and
(3) Refraining from competing or dealing adversely with the partnership

Question 18

Default Partnership Sharing Rules

Answer 18

1. Profits equally, if no agreement

2. Losses follow profits

Question 19

Partner’s Partnership Rights

Answer 19

1. Equal right to Management
2. Voting on partnership matters
3. Indemnification with interest for reasonable payments made and obligations incurred
4. Right to inspect and copy partnership books

Question 20

Effect of Death on Partnership Interest

Answer 20

1. With Redemption? –> successor = creditor

2. No redemption? –> successor = transferee

Question 21

Transferee’s Rights

Answer 21

1. Receive distributions of partnership profits to which the transferor was entitled
2. Reasonable information on partnership transactions and inspection of the partnership books for proper purposes
3. Right to the transferor’s net amount distributable on winding up, and an accounting from the date of the last accounting agreed to by all partners