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84 Cards in this Set

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List the different types of business options.
1. Sole proprietorship
2. Joint venture
3. General partnership
4. Limited partnership
5. Limited liability part.
6. Business corporation
What is a general partnership?
A voluntary association of two or more persons as co-owners in a business for profit.
What are the three types of property in a partnership?
1. The firm's assets.
2. The partner's ownership
3. Partner's right to manage.
What are the firm's assets?
Assets pruchased with start-up capital, or where an individual partner owns it but intends it to be used as a partnership asset, or if bought as partnership property.
What is the law regarding the use of partnership property?
The firm's property should always be avialable to co-partners for business use.
How are firm assets transferred?
If a partner owns it, intending it to be used as firm property, only he may transfer it.
Before firm property may be conveyed, all partners must approve it. Even if titled to a single partner.
How do the partners make management decisions?
Each partner has 1 vote on all partnership matters, unless the agreement specifies otherwise. Majority wins.
Majority of vote wins in all but two cases in a partnership vote. What two cases?
Unanimous agreement of partners required for:
Amission of a new partner, and
transferring partnership property.
How does liability work for the partners?
Each partner is jointly and severally liable. Individual assets are subjct to all torts and K's the partnership incurs.
What of incoming partner liability?
Not personally liable for obligations incurred before their arrival unless expressly agreed to be.
What of out-going partner liability?
They remain liable for obligations incurred after they left, unless;
They provide actual notice to creditors, and
Publish for the general public that they are no longer a partner.
What 5 ways may a partnership be dissolved?
1. By agreement
2. By unilateral act of any
3. Death of a partner
4. Bankruptcy of a partner
5. Court order for dissolution
At dissolution, a partnership must be divided up and terminated with 3 exceptions.
1. Agreement states it may
2. Wrongfully caused
3. Expulsion for misconduct.
Order of distribution of firm's assests at dissolution.
1. Creditors of the firm
2. General partners who have
loaned money to the firm
3. Partner's investments
4. Partner's profits
What is a limited partnership?
Has the features of a general partnership along with passive investors.
What is a passive investor?
One not willing to risk their personal assets, but are willing to risk some investment money.
Absent instruction in the agreement, how will the profits in a limited partnership be split?
The split for the limited partners will by by ratio IAW their investment. Not equally as with general partners.
How are firm assets conveyed in a limited partnership?
The same as the general partenrship; unanimous vote of the general partners. Limited partners have no say.
How is a limited partnership managed and operated?
The same as the general partnership; only general partners have management authority. Limited partners cannot participate without losing their limited liability.
How do limited partners achieve limited liability and maintain it?
First, must file a certificate with the state declaring certain members have limited liability, and secondly, does not take part in managing the firm.
How is a limited partnership dissolved?
1. By agreement
2. Consent of all parties
3. Withdrawal of a general
If a general partner withdraws, what action may the limited partners take to avoid dissolution?
Limited partners have 90 days to replace the GP and continue the partnership.
Who may be a general partner?
An entity may be a general parnter, i.e. a corporation. Thus fully shielding those in the partnership.
What is a limited liability partnership?
Partners have a shield aginast liability except against a partner personally causing a harm.
If one partner personally causes a harm, will the others be liable?
No, unless they could reasonably have acted to stop the tortfeasor from acting.
What is a limited liability company?
Presents the tax advantages of a partnership with the limited liability of a corporation.
May a general partner bind the partnership by committting to an agreement with a 3rd party without consulting the other general partner? National Biscuit v. Stroud (1959).
Yes. All partners are jointly and severally liable for the acts and obligations of the partnership.
May the act of one partner bind the others even if the agreement exceeds the level of authority the other general partners gave him? Smith v. Dixon (1965).
Yes. A partnership is bound by the acts of a partner when he acts within the scope, or apparent scope of his authority.
May a partner, acting outside the scope of a firm, bind the partnership in acting as an agent for the firm? Rouse v. Pollard (1941).
No. Generally each partner is authorized to act as an agent for his co-partners in all matters within the scope of the business of the firm. No firm liability then attaches if K is outside the scope.
What if the third party reasonably believes the agent is acting within the scope of the firm? Roach v. Mead (1986).
Then the partnerhip will be bound for a breach of trust incident to that agreement.
Does a partner have a duty to inform a co-partner of any chance for a new opportunity whose existence came as a result of his partnership? Meinhard v. Salmon (1928).
Yes. As co-partners, the two are held to fiduciary duties.
What is a formal accounting in a partnership?
A review of all transactions, including alleged improprieties which should be reflected in the financial statements. An adjudication of the partners relative rights.
When does an accounting occur?
At common law, it could only occur at partnership dissolution. While the UPA softens this rule, it is still uncommon to have an accounting with an on-going partnership.
Just because there is a legal right to dissolution, may a partner who violates his duty to his co-parnter benefit from it? Collins v. Lewis (1955).
No. The legal right to dissolution rests in equity as does the right to relief from any K. One who has not fully and fairly performed IAW the partnership agreement has no standing in equity to enforce rights under it.
Can one loaning money to a partnership become so involved in its success so as to constitute a membership in the partnership itself? Martin v. Peyton (1927).
Maybe. Only those who are partners between themselves may be charged for partnership debts. A partnership results from a K, express or implied. Statements that no partnership is intended are not conclusive.
How are partnerships taxed?
The partnership does not pay tax. The income/loss by the partnership is passed through to the partners IAW the partnership agreement. Each partner must then include these amounts on his personal tax return.
What is corporate "double taxation"?
A corporations income is taxed, then the dividends distributed by the corporation are taxed as income of the shareholders.
What is an S corporation?
Provides some of the advantages of pass-through taxation. Not allowed to have more than 75 individual shareholders. Cannot have shareholders who are artificial entities or non-resident aliens.
What is a "master limited partnership"?
Large, widely held partnerships whose ownership interests are frequently traded.
How do you determine whether a master limited partnership will be taxed as a partnership or a corporation?
Six characteristics of a corporation:
Associates, intent to divide the gains from the business, continuity of life, central management, liability for debts limited to corporate property, and free transferability of interests.
What is "check the box" taxation?
Since Jan 1, 1977, businesses can select the type of entity they will be taxed as. If created under a corporate statute, it will be taxed as such.
What is a "family limited partnership" (FLP)?
Created by individuals as a way to minimize gift and estate taxes upon distribution of wealth to relatives. Parents are usually the general partners, with younger family as limited partners.
What are the four basic features of a LLC?
1. Limited liability.
2. Partnership tax features.
3. Ability to use central or
direct member mgmt.
4. Creditor protection
Management features of an LLC?
All members have mgmt and control rights just as if they were partners.
Contrast an LLC with an S corporation.
An LLC may have an unlimited number of investors. They may be foreign investors. LLC's may be owned by other LLC's or by corporations. LLC's can't engage in mergers, stock swaps, or other corporate reorganizations on a tax free basis.
What is a business corporation?
An associations of individuals under an assumed name and with a distinct legal entity.
What citizenship rights has the SC refused to grant corporations?
No rights under the Privileges and Immunities Clause, or under the 14th Amendment.
What are the implications of not being a citizen under the Privilege and Immunities Clause and the 14th Amendment?
States have the right to use their police powers to regulate foreign corporations doing business there within the guidelines of the Interstate Commerce Clause.
When is a corporation considered to be a person under the Constitution?
A corporation is a person for purposes of;
4th Amendment protection against unlawful search and seizure.
5th Amend. protection against double jeopardy.
Due Process Clauses of 5th and 14th Amend., and Equal Protection Clause of 14th.
1st Amend. protection.
A corporation is not a person for the purposes of;
Self-incrimination under the 5th Amend.
A corporation has these legal process rights;
Right to jury trial where one existed at common law in 1791.
Constitutional right to effective assistance of counsel.
What are the disadvantages of the corporate form?
More formal procedures of operation are required.
Must follow many statutory formalities.
Double taxation.
What is a publicly held corporation?
Has numerous shareholders, generally traded on a national securities exchange or in over-the-counter markets.
What is a closely held corporation?
Has relatively few shareholders.
Not traded in the securities market.
Often mgmt and ownership are substantially identical.
What is a professional corporation?
Modernly, professionals may use the corporate form or create an association with corporate characteristics; a PC, or PA must generally appear in the letterhead.
What is an agency?
A fiduciary relationship allowing one person (agent) to act on behalf of the other (principal).
What are the elements of an agency?
1. Consent of the principal.
2. Agent's consent.
3. The agreement.
Express, or implied from
the circumstances.
What are the agent's fiduciary duties?
1. To act solely for the
benefit of the principal.
2. May not deal with the
principal as an adversary.
3. Under a duty to give any
profits earned to the
What are the usual steps in forming a corporation?
1. Reserve the desired
corporate name w/State.
2. Select a registered office
and registered agent.
3. Draft articles of incorp.
4. File the articles w/State.
5. Pay filing fees or
required franchise tax.
6. Hold 1st meeting of
incorporators to elect
7. Adopt by-laws, issue shares
8. Qualify to do business in
any state to be done in.
What is majority rule on corporate name selection?
A name may not be the same or deceptively similar as other corporations in that state.
What is minority rule on corporate name selection?
Only requires that the name be distinguishable upon the records of the sec. of state.
What is a corporate charter?
The entire corporate constitution including articles of incoporation, plus the relevant laws under which it was created.
What are corporate by-laws?
Establish the rules for the internal governance of the corp. They must be reasonable and not conflict with state law, and not unduly limit the rights of the shareholders.
What are the express and implied powers of the corporation?
Express: the corp. laws of the state of incorporation.
Implied: in the absence of express restrictions, corp. mgmt has discretionary authority to enter into K's reasonably incidental to its business purpose.
May a corporation make charitable contributions?
Yes. The corp. has the power to make donations to the public welfare for charitable, scientific, or educational purposes.
Are corporate charitable gifts challengable by the shareholders?
Only if clearly unconnected with the corporations purpose.
What is the key test of charitable donations?
Whether the board acted reasonably in what they believed advanced the corporation's interest.
What is an Ultra Vires Act?
If a corporation acts in a way not authorized by its express or implied powers, such conduct will be deemed ultra vires and void.
What is the modern treatment of the Ultra Vires Act?
Corporate statutes only require a corp. to engage in any lawful purpose.
Modernly, does the ultra vires doctrine cause a K with a corp. not acting within its stated purpose to become void? 711 Kings Hwy v. FIM's(1966).
No. A lawful act of a corp. is not to be held invalid unless such action is brought by shareholder to enjoin the act, or a special proceeding by the Attorney General.
What are the activities of a promoter?
1. Find promising business
2. Make business and financial
3. Make K's on behalf of the
proposed corp.
4. Arrange financing and
issuing securities.
5. Arrange promoter's own
Are promoters considered to be agents?
No. To have an agency, there must be an existing principal.
What are the theories of corporate liability for pre-incorp. K's?
1. Ratification
2. Adoption
3. Acceptance of a continuing
4. Fromation of a new K
5. Novation
What is a ratification?
Courts hold the fiction of the corporation accepting an act made on its behalf by its agent.
What is an adoption?
Very similar to ratification, except courts hold;
A ratified K relates back to the date the promoter made it.
An adopted K binds the corp. on the date of adoption.
Does the receipt of benefits from a K alone bind a corp. to the K?
Generally no. Majority; corp. will be held liable in quantum meruit for the benefits received.
What is required for the corp. to be held liable on the pre-incorp. K?
Corp. representatives must have knowledge of the K at the time they receive the benefits, or at least have reasonable inquiry notice.
When may a corp. have the right to sue on a pre-incorp. K?
Majority; if a corp. expressly or impliedly adpots a pre-incorp. K made for its benefit by the promoter, it is a party to the K and may sue on it.
What is the promoters personal liability on the pre-incorp. K?
Generally, promoters are personally liable for pre-incorp. K's even though they were made on behalf of the corp. to be formed.
When will a promoter not be personally liable for the pre-incorp. K?
If the other party expressly agrees to look to another party for payment, or accepts a novation with the newly formed corp.
What is a de jure corporation?
Has a corporate existence for all purposes.
Must have a valid law under which it may be created, and
an attempt to organize under that law, and be in full compliance with its requirements.
What is a de facto corporation?
Is in substantial compliance with incorporation requirements. Must show valid law, good faith attempt to follow the law, colorable compliance giving the appearance of validity, use of corporate powers, and good faith in claiming to be a corp.
What is corporation by estoppel?
Those doing business as a corp. without having gone far enough to gain de facto status. Those doing business with them are estopped from denying its corp. status. The corp. is also estopped from denying its corp. existence.
Should those K'ng with a defective corp. be able to gain full individual liability against the associates in the business?
Generally, only those associates who deliberately engage in business under the pretense of corp. will be held individually liable.