Unit 6: Forms of Business Operations Flashcards
(111 cards)
1
Q
A business owned by one person; the owner and the business are legally the same
A
sole proprietorship
2
Q
Easy and inexpensive to form; the owner gets all profits and has full control
A
two advantages of a sole proprietorship
3
Q
Income is reported on the owner’s personal tax return (pass-through); no separate tax return
A
major tax advantage of a sole proprietorship
4
Q
Unlimited personal liability; limited ability to raise capital
A
two disadvantages of a sole proprietorship
5
Q
What happens to a sole proprietorship when the owner dies?
A
the business dissolves
6
Q
What are the three essential elements of a partnership?
A
- Sharing profits/losses
- joint ownership
- equal right to manage the business
7
Q
Is a partnership a separate tax-paying entity?
A
No, it is a pass-through entity
8
Q
What is the governing law for partnerships in the absence of an agreement?
A
Uniform Partnership Act (UPA)
9
Q
A written document outlining the rights and duties of partners
A
partnership agreement (Articles of Partnership)
10
Q
A partnership with a fixed duration or goal; leaving early is a breach
A
“partnership for a term”
11
Q
No set duration; can be dissolved at any time without liability
A
“partnership at will”
12
Q
What voting rights do partners have in management?
A
- Each partner gets one vote
- majority rules for ordinary matters
- unanimous for major decisions
13
Q
What if a partnership agreement doesn’t specify profit sharing?
A
Profits (and losses) are shared equally.
14
Q
Do partners get salaries?
A
Generally no, unless otherwise agreed. Income comes from profit distribution
15
Q
Can a partner sell partnership property?
A
No. Partnership property belongs to the partnership, not individual partners
16
Q
Duty of care and duty of loyalty
A
two fiduciary duties of partners
17
Q
Refrain from gross negligence, reckless conduct, or knowing legal violations
A
duty of care
18
Q
Act in the partnership’s best interest; no self-dealing, competition, or misuse of property
A
duty of loyalty
19
Q
When is a partnership legally bound by a partner’s actions?
A
When the partner acts within the scope of authority or apparent authority
20
Q
All partners must be sued together; each is liable for the full amount
A
joint liability
21
Q
One or more partners can be sued separately; all remain fully liable
A
joint and several liability
22
Q
Are new partners liable for old debts?
A
No, not personally liable for preexisting obligations
23
Q
What is indemnification in a partnership?
A
A partner may be required to reimburse the partnership for damages they caused
24
Q
separation of a partner from the partnership
A
partner dissociation
25
What happens to authority after dissociation?
Actual authority ends; apparent authority may continue for 2 years unless notified
26
What is wrongful dissociation?
When a partner leaves the partnership without the right to do so under the agreement
27
What is a partnership buyout?
The dissociating partner’s interest must be purchased based on valuation rules
28
The formal termination of the partnership
partnership dissolution
29
Collecting, liquidating, and distributing partnership assets after dissolution
winding-up process
30
In what order are partnership assets distributed after dissolution?
* Debts (to creditors and partners),
* Return of capital contributions,
* Distribution of profits.
31
A pre-arranged contract detailing how a partner’s interest will be bought out if needed
buy-sell agreement (buyout agreement)
32
Limited Liability Company (LLC)
hybrid entity that combines the limited liability of a corporation with the tax advantages of a partnership
33
How is an LLC formed?
By filing Articles of Organization with the state (typically the Secretary of State)
34
Can an LLC have only one member?
Yes, most states allow single-member LLCs
35
What must be included in the Articles of Organization?
* Business name (with LLC)
* principal address
* registered agent
* members’ names
* management structure.
36
What are the tax options for an LLC?
It can choose to be taxed as a partnership or corporation
37
How is a single-member LLC taxed?
As a sole proprietorship (pass-through taxation)
38
Why might an LLC choose corporate taxation?
If members want to reinvest profits and benefit from possibly lower corporate tax rates
39
Can foreign investors be members of an LLC?
Yes, foreign investors can be members
40
Member-managed and Manager-managed
two types of LLC management
41
All members participate in decision-making, typically with one vote per member
member-managed LLC
42
Members appoint one or more managers (can be non-members) to handle operations
manager-managed LLC
43
document that outlines the management and operating procedures of the LLC
LLC Operating Agreement
44
Is a written Operating Agreement required?
Not in most states, but it is strongly recommended
45
What causes dissociation in an LLC?
* Death
* expulsion
* court order
* bankruptcy
* voluntary withdrawal
46
What is the order of asset distribution in winding up?
1. Debts to creditors (including members)
2. Return of capital contributions
3. Remainder to members per the agreement
47
partnership with at least one general partner and one limited partner
Limited Partnership (LP)
48
Manages the business and is personally liable for partnership debts
general partner
49
Contributes capital, doesn’t manage, and has liability only up to their investment
limited partner
50
What document must be filed to form an LP?
A Certificate of Limited Partnership
51
An LP where all partners (including general partners) have limited liability
Limited Liability Limited Partnership (LLLP)
52
A legal entity separate from its owners (shareholders), recognized under state law, with rights similar to a natural person
corporation
53
The corporation pays income tax on profits; shareholders also pay tax on dividends received
double taxation
54
Incorporated in the home state
Domestic corporation
55
Incorporated in another U.S. state
foreign corporation
56
Incorporated in another country
Alien corporation
57
A corporation with a small number of shareholders, often family members, and fewer formal requirements
close corporation
58
A small business corporation with pass-through taxation (avoids double taxation) and limited liability. Max of 100 shareholders, must be domestic, and only one class of stock
S Corporation
59
for-profit corporation that also pursues public benefit, with accountability, transparency, and a purpose beyond profit
benefit corporation
60
What are the main disadvantages of a corporation?
Double taxation and complex formation requirements
61
Who owns and manages a corporation?
* Owners: Shareholders
* Managers: Board of Directors and Officers
62
Protects directors/officers from liability for honest mistakes if they acted in good faith and with due care
Business Judgment Rule
63
Prevents corporations from engaging in activities beyond their powers
Ultra Vires doctrine
64
written authorization allowing one person to vote on another’s behalf at a shareholders’ meeting
proxy
65
Allow buyers to cancel certain contracts within 3 business days, e.g., door-to-door sales, home equity loans
"cooling-off" laws
66
Requires timely shipment of orders and consumer notification for delays
FTC Mail, Internet, or Telephone Order Merchandise Rule
67
Luring customers with a low-price item that is unavailable, then pushing a more expensive item
bait-and-switch advertising?
68
Ads that mislead consumers through false claims or omission of material facts
deceptive advertising
69
Exaggerated, vague advertising that is not legally deceptive (e.g., "best coffee in the world")
puffery
70
regulates false advertising and trademark protection; allows lawsuits if deceptive advertising harms businesses.
Lanham Act
71
Restricts autodialed or prerecorded telemarketing calls, and faxes without consent
Telephone Consumer Protection Act (TCPA)
72
Requires clear disclosure of credit terms and protects against unfair lending practices
Truth in Lending Act (TILA)
73
Ensures accuracy in credit reporting, gives consumers rights to correct errors, and mandates disclosures when credit is denied
Fair Credit Reporting Act (FCRA)
74
Aims to prevent identity theft, gives free annual credit reports, and limits account number display on receipts
Fair and Accurate Credit Transactions Act (FACTA)
75
Prohibits harassment, third-party contact, and misleading tactics by debt collection agencies
Fair Debt Collection Practices Act (FDCPA)
76
What is the central idea behind the Securities Acts of 1933 and 1934?
Full, open, and honest disclosure
77
What federal agency was created by the 1933 and 1934 Securities Acts?
The Securities and Exchange Commission (SEC)
78
What does the 1933 Act regulate?
Initial sales of securities
79
What is required of companies under the 1933 Act before selling securities to the public?
File a registration statement with the SEC and provide a prospectus
80
Prevent fraud and require disclosure to investors
main goal of the 1933 Act
81
Ownership in a corporation (e.g., common and preferred stock)
equity securities
82
Evidence of borrowed money (e.g., bonds, CDs)
debt securities
83
A four-part test to define an investment contract:
1. Investment of money
2. In a common enterprise
3. With expectation of profit
4. From efforts of others
Howey Test
84
Securities that are permanently exempt from SEC registration due to low risk or other regulation
exempt securities
85
Government bonds, nonprofit organization securities, bank securities
3 examples of exempt securities
86
A sale of securities that is exempt from registration, like private offerings or intrastate sales
exempt transaction
87
What does SEC Rule 144 regulate?
The resale of restricted, unregistered, and control securities
88
A disclosure document describing the security, company, and risks
prospectus
89
What are the three periods in the registration process?
* Prefiling (no offers),
* Waiting (offers allowed, no sales)
* Post-effective (sales allowed)
90
A large issuer that can sell immediately without SEC review
WKSI (Well-Known Seasoned Issuer)
91
What are the penalties for violating the 1933 Act?
Up to $10,000 fine and/or 5 years in prison
92
What does the 1934 Act regulate?
Trading of existing securities, brokers, and exchanges
93
What are Section 12 companies?
Companies with over $10 million in assets and 500+ shareholders
94
What does Section 10(b) prohibit?
Fraud and manipulation in securities trading.
95
What does SEC Rule 10b-5 prohibit?
Fraud in connection with the purchase or sale of securities
96
Trading based on material nonpublic information
insider trading
97
Tippees can be liable if the tipper breached a fiduciary duty
Tipper/Tippee Theory
98
Liability for trading on confidential information wrongfully obtained
Misappropriation Theory
99
What does Section 16(b) regulate?
Insider short-swing profits (profits from buying/selling within 6 months)
100
A scam that pays old investors using new investors’ money
Ponzi scheme
101
Who ran the largest Ponzi scheme in history?
Bernie Madoff
102
The system for directing and controlling companies
corporate governance
103
Who elects the Board of Directors?
Shareholders
104
What are the responsibilities of the board?
Set strategic direction, oversee management, ensure accountability
105
What does the audit committee do?
Oversees financial reporting and internal controls
106
What law requires auditor review of internal controls?
SOX Section 404(b)
107
What does the compensation committee do?
Sets executive pay and aligns it with shareholder interests.
108
What prompted the SOX Act of 2002?
Major corporate scandals (e.g., Enron, WorldCom)
109
What board was created under SOX?
The Public Company Accounting Oversight Board (PCAOB)
110
What SOX rule protects employees?
Whistleblower protections
111
What are SOX penalties for false certification?
* Up to $1 million fine and/or 10 years in prison
* Up to 25 years for willful violations
