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35 Cards in this Set
- Front
- Back
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Why does someone own a business or an interest in a business?
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To make money
To create value for customers |
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How does the owner of a business make money from the business?
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Receive distributions of all or part of the money the business has earned.
Sell part of her ownership interest in the business for more than she paid for it. |
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How do you determine the worth of a business?
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Through the financial statements:
1. Balance sheet 2. Income Statement 3. Statement of cash flows |
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What is the "entity theory" of corporations?
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The corporation is itself a separate legal person with individual rights under the law, and it is therefore appropriate to expect, and even demand that corporation be "good citizens."
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What is the "principal-agent theory" of corporations?
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The central contractual relationship in a corporation is understood as an agency relationship between the shareholders, who are the "real owners" of the corporation's property and act as "principals", and the directors and managers serve as "agents."
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What is an income statement?
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It indicates how the revenue is transformed into the net income. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period reported.
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What is a balance sheet?
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Is a summary of a person's or organization's balances.
EQUITY = ASSETS-LIABILITIES |
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What is the cash flow statement?
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A financial statement that shows a company's flow of cash. The money coming into the business is called cash inflow, and money going out from the business is called cash outflow. The statement shows how changes in balance sheet and income accounts affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.
CASH FLOW = Profit After Tax + Depreciation - Investment |
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What is the difference between an expense and an investment?
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If a company buys something that it plans to use up in one year it is called an expense. If its use exceeds one year then it is considered an investment.
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What is a sole proprietorship?
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The default business entity. The owner of the business has unlimited liability.
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What is the principle of conservatism?
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It is the lower monetary value between the book value and the fair market value.
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What are the options for choosing a business entity?
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General Partnership
Limited Partnership Limited Liability Partnership |
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What is a disclosed principal? partially disclosed principal? undisclosed principal?
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These terms refer to the principal-agent relationship and in the context of apparent authority.
If the principal is partially disclosed or disclosed then the agent is not liable. If the principal is undisclosed then the agent is liable. |
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What is debt?
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Debt is money that you owe creditors.
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What is equity?
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Equity is money that you receive from investors.
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As between the creditors and owners, who gets paid first?
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Creditors get paid first.
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What is a closely held business?
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Usually has these characteristics:
1. Few owners, most of whom are usually 2. active in the business and often depend on the business for their livelihood (through salaries and to a lesser extent, (dividends)) 3. The owners typically operate the business informally. 4. THERE IS NO MARKET FOR THE OWNERSHIP INTERESTS. |
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What is a publicly held business?
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1. Contains many shareholders
2. Must comply with SEC's rules. |
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MEINHARD v. SALMON
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Fact Summary: Meinhard provided the money for renovations to the building in exchange for a share of the profits from the building over the course of the 20-year lease. Gerry and Salmon entered into a lease and development agreement.
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How do you determine whether to reinvest the earnings in the partnership or give them to the partners?
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The chief consideration is what is more beneficial to the partners. Who is going to make the most money? The partnership itself or the partners through distribution.
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Under the UPA, what happens when a partner withdraws?
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Under the UPA, when a partner withdraws, the following will occur:
1. Dissolution 2. Winding Up 3. Termination |
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What are the three scenarios of withdrawal under UPA § 38?
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1. Dissolution is not caused by an act in contravention of the partnership agreement.
2. Dissolution caused by expulsion of partner. 3. Dissolution caused by an act in contravention of the partnership agreement. |
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What are the rights of a partner in a dissolution not caused by an act in contravention of the partnership?
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Otherwise known as an "at-will" partnership.
Partnership property applied to discharge the partnership liabilities. Any surplus applied to pay in CASH the "net amount owing to the respective partners." |
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What are the rights of a partner in a dissolution caused by expulsion?
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The expelled partner is entitled to only the net amount due him from the partnership.
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What are the rights of a partner in a dissolution caused by an act in contravention of the partnership agreement?
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This is assessed from two perspectives:
1. Partners that did not cause the dissolution in contravention of the PSA. 2. The partner that caused the dissolution in contravention of the PSA. |
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What is the difference between market value and book value?
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Book value = Assets of the business less liabilities plus partner contributions or equity
Market value = includes the value of such intangibles as goodwill |
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What is the liability upon withdrawal for a partner?
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Once a party withdraws from the partnership they are no longer liable for subsequent partnership liabilities and obligations.
A partner is liable for the existing obligations of the partnership accumulated during the course of the partners association with the partnership. However, a partner can be excused from these obligations if there is an agreement to that affect with the partnership and the partnership creditor. |
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Who gets paid first once a partnership winds up?
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1. Creditors other than partners
2. Partner creditors 3. Partner capital contributions 4. Partner profits |
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What is a partnership account?
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A partnership account keeps track of the capital contribution made to the partnership.
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What is a corporation?
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The fundamental attributes of a corporation are:
1. Separate legal entity status - has a life of its own 2. Limited Liability of shareholders - the owners are not personally liable for the debts or obligations of the corporation. 3. Double taxation - the corporation itself pays taxes on the income it earns and the owners pay taxes on the income they receive as dividends 4. Centralized management - the owners of the corporation (shareholders) annually elect a board of directors to set policy for the corporation. |
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What is the purpose of corporate law?
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The facilitation of cooperative activity that produces wealth.
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How do economists view corporations?
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It is a way to reduce transaction costs as compared to frequent transactions in markets.
Economists are concerned about agency costs. |
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What are the four sources of corporate law?
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1. State statutes
2. Articles of Incorporation 3. Case Law 4. Federal statutes |
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What are the legal problems in starting a business as a corporation?
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1. Preparing the necessary papers (articles of incorporation, bylaws)
2. Contracting before incorporating (i.e, a promoter) 3. "Secret Profit" - after a corporation is formed, a promoter might sell property to the corporation; when this happens there is a duty to disclose to the corporation any profit that they are making |
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What are shares of stock in a corporation?
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Shares of stock are the units of ownership in a corporation.
MBCA §6.03 A corporation may issue the number of shares of each class or series authorized by the AOIs. Shares that are issued are outstanding shares until they are reacquired, converted or canceled. |
