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21 Cards in this Set
- Front
- Back
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What was the FORM of business relationship?
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Under Business Law, the relationship between 2 or more people engaged in a business for profit can be a GENERAL, or LIMITED PARTNERSHIP, a CORPORATION, or a simple AGENCY RELATIONSHIP. The default form of business whenever two or more people join together for a business profit is the GENERAL PARTNERSHIP.
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What do LIMITED PARTNERSHIPS and CORPORATIONS require?
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LIMITED PARTNERSHIPS and CORPORATIONS require filing and approval by the government. A corporation requires the filing of ARTICLES OF INCORPORATION.
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How an AGENCY RELATIONSHIP exists?
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An AGENCY RELATIONSHIP Exists where one party, the AGENT, is authorized to act and agrees to act for another party, the PRINCIPAL.
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What are the RIGHTS and LIABILITIES of a general partner?
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Under Business Law, general partners share equal control of the business unless otherwise agreed, and each is jointly and severally liable for all liabilities arising out of the acts by the other partners within the scope of the business. All profits and losses pass through to the general partners.
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What TERMINATES a general partnership?
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Under Business Law, a general partnership automatically terminates with the DEATH of any partner, by unilateral WITHDRAWAL of any partner, or by AGREEMENT. No partner can transfer his share except by unanimous agreement.
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What are the rights and liabilities of a LIMITED PARTNER?
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Under Business Law, a limited partnership consists of one or more general partners and one or more limited partners, and formation requires government approval. The general partner has unlimited liability, but the limited partners’ liabilities are limited to the amounts invested. To maintain limited liability, the limited partners must refrain from management decisions. The profits and losses of limited partnerships pass through to the individual partners, but losses are subject to passive loss limitations under both federal and California tax law.
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What TERMINATES a limited partnership?
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Under Business Law, a limited partnership automatically terminates with the DEATH of a GENERAL partner, or by AGREEMENT. A LIMITED partner can transfer his share subject to agreed limitations, but a GENERAL partner can only transfer his share by unanimous agreement.
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What are the rights and liabilities of a SHAREHOLDER?
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Under Business Law, a corporation is formed upon proper filings and approvals by State and IRS. The liability of a corporation shareholder is limited to the amount of their investment. The corporation is controlled by a board of directors, and the shareholders have no direct control over the corporation.
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DE JURE Corporation
DE FACTO Corporation and Shareholder Liability |
A legally incorporated corporation is a DE JURE corporation. When necessary documents are not filed but the parties have proceeded in a good faith belief a de jure corporation exists, a shareholder may claim a DE FACTO corporation exists as a defense against unlimited liability.
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Types of Corporation
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A corporation can be formed as either C corporation or an S corporation. Also a corporation may be formed as either “general” or “closely held” corporation.
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Income Tax of Corporation
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The income of a C corporation is taxed at corporate income tax rates. Any remaining surplus can be passed to the shareholders as dividends, taxable a second time under personal income tax law. Losses of a “C” corporation can NOT be passed to the shareholders, so they do not have any direct ability to “write off” the losses.
The income and losses of a “S” corporation can be passed through to the shareholders, but losses are subject to passive loss restrictions under federal and California law. |
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Transferability of Shares
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Stock of a “general C” corporation is freely transferable, subject to SEC requirements involving registration, but the stock of “closely held” and “S” corporations are subject to transfer restrictions involving the number of shareholders and the relationship between them. To protect its own legal status, the “closely held” or “S” corporation will usually have a “right of first refusal” when a shareholder wishes to sell her interest.
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What TERMINATES a corporation?
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Under Business Law, a corporation has perpetual life unless the board decides to dissolve the corporation and liquidate the assets.
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What are the rights and liabilities of an AGENCY PRINCIPAL?
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Under business law, an agent is a party that agrees to act on behalf of the principal, with approval from the principal. A principal is liable for all acts taken by an agent, if they are undertaken within the SCOPE of the agency relationship. The existence and scope of an agency relationship depends on the level of control of the principal over the actions of the agent.
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What are the rights and liabilities of an AGENCY PRINCIPAL? (2)
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An agency relationship may be (1) ACTUAL by EXPRESS or IMPLIED AGREEMENT, (2) INHERENT in the AGENT’S POSITION or (3) APPARENT from the ACTIONS of the parties that prevent them by ESTOPPEL from later denying the agency relationship. A party that reasonably relies on the existence of an agency relationship may raise ESTOPPEL to prevent subsequent denial of the agency.
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PROMOTER LIABILITY (1)
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Promoters are PERSONALLY LIABLE for financial commitments they make prior to the filing of Articles of Incorporation. They are liable under BREACH OF WARRANTY theory if they MISREPRESENT that they (1) WILL ACT or (2) HAVE ACTED to form a corporation. (3) that a corporation EXISTS or (4) that an existing corporation AUTHORIZES them to act on its behalf. A promoter is not liable for commitments made on behalf of a “corporation to be formed” or for commitments made after the Articles of Incorporation are filed.
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PROMOTER LIABILITY (3)
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Promoters that act under a good faith belief that the Articles of Incorporation have been filed when they have not been, and no DE JURE corporation exists, may argue that a DE FACTO corporation existed as a defense against unlimited personal liability.
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Should the court PIERCE THE CORPORATE VEIL?
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Under Business Law, a shareholder may be PERSONALLY LIABLE for obligations of the corporation if a court finds it is NECESSARY to pierce the corporate veil to PREVENT FRAUD and ACHIEVE EQUITY.
Courts may find evidence of fraud where the corporation was (1) DELIBERATELY UNDER-CAPITALIZED, or (2) RUN AS A PROPRIETORSHIP with NO CORPORATE FORMALITIES, a COMMINGLING of funds and NO DIVIDENDS paid to shareholders. |
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Can a corporate action be voided by a SHAREHOLDER DERIVATIVE ACTION?
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Under Business Law, a shareholder may bring a DERIVATIVE ACTION on behalf of the corporation (1) under the ULTRA VIRES doctrine, (2) for DIRECTOR GROSS NEGLIGENCE, and/or (3) for BREACH OF FIDUCIARY DUTY by DIRECTORS, OFFICERS, or CONTROLLING SHAREHOLDERS.
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Can a corporate action be voided by a SHAREHOLDER DERIVATIVE ACTION?
ULTRA VIRES DOCTRINE |
Under the ULTRA VIRES DOCTRINE, a shareholder can have a corporation action declared VOID if it is outside the scope of the declared corporate purpose.
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Can a corporate action be voided by a SHAREHOLDER DERIVATIVE ACTION?
BUSINESS JUDGMENT RULE |
Under the BUSINESS JUDGMENT RULE, good faith decisions by disinterested directors are VOIDABLE if they are the result of GROSS NEGLIGENCE because the directors breached their DUTY OF DUE CARE to act as a reasonably informed, prudent person would, and the breach is NOT RATIFIED by a vote of the SHAREHOLDERS.
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