Fin240 Law And Business Associations; Exam 2

Front 1

what is Sole Proprietorships?

Back 1

1. Business owned by one person.
2. Has sole control over management and profits
3. Personal liability

class notes:
you forming your own business…there’s no separate legal entity… you are the business.
Using an assumed name… there’s no separation
It’s easy to form…everything you earn… u get
Since it’s you…it’s your person liability… operating mom n pops grocery and a kid knocks over a jar and someone slips on it. They far and fracture their tail bone. They’re gonna sue u. Liability insurance. Ocean shipping…under the thread hold because of little business and does not need compliance
One person…owner is liable for everything…ex. if someone slip and falls..
One good thing is that they are small enough to fall under the radar…less regulation… under 15 employees.

Front 2

what is Partnership? What are the two kinds of partnership?

Back 2

Definitions: 2/more people involved in a business
Income taxed only at the partner level, not at the entity level

two types: general and partnership

Front 3

partnership:

what is general partnership?

Back 3

a. management and profits are divided (usually equally) among the partners
b. unlimited personal liability for partnership’s debts

class notes:
General….all partner are liable… when getting a loan…all partner are liable. For tax….partnership is flow through… all incomes and losses are distributed equally and currently. K1 statement…shows your share of the profit or loses. In other words Can not hold earnings off of the entity level because they’ve been distributed for tax purposes. If you do decide to hold the money at a partnership level…u’re still liable for tax on the sum of money. Y do that??…if a company throws a lost…. The lost flow through your individual income tax return where you can used to offset capital gains.

Front 4

partnership:

what is limited partnership?

Back 4

a. At least one general partner and one limited partner
b. general partner (responsible for managing the business)
c. limited partner (do not participate in management. Liability limited to the amount of money they put in)

class notes:
limited partnership…puts in $$$$...can only lose their $$ and partnership. Does not take active role in management…like buying stocks…they get earning and lost…if you do take active role (vote)…u lose the limited partner status…and you become general partnership with liability. Like stock

Front 5

how do you create a partnership?

Back 5

a. RUPA and RULPA- fills in where agreement does not cover an issue
b. You should INVEST time and money to start an agreement
c. The agreement should cover division of profits, duties, termination, and transfer of interests

Front 6

creating partnership:

what is RUPA? what do they do?

Back 6

Fills in where agreement does not cover an issue.

class notes:
If you don’t fill in or left out an agreement … the rupa will fill it in for you

Front 7

what are classifications of Corporation? 4

Back 7

Closely held

publicly held

sub S

Limited liability companies (LLC)

Front 8

corporation:

define closely held

Back 8

Closely held (private)
• owned by a small group of people

class notes:

Front 9

corporation:

what is initial public offering?

Back 9

offering…where the stocks will be sold to the public and no longer by the family

Front 10

corporation:

define publicly held

Back 10

• stock traded on the national securities exchange
• numerous shareholders= investors
• wealthier than any other forms of business organization

class notes:
the ppl/public hold stocks

Front 11

corporation:

what is Sub S?

Back 11

• hybrid of corporation and partnership
• operates like a corporation
• taxes treated like a partnership
• Characteristics:
1. have no more than 35 shareholders (no resident alien)
2. only one class of stock outstanding
3. not a member of an affiliated group of corporations

class notes:
A lot of restrictions…. Max shareholder, one class of stock. All have to vote.

different than C core where income tax paid by corporations and does not flow through. they get $$ by dividends (double tax)

Contrast: C and S…. S… have elections… partnership…there will be taxation (flow through) to the shareholders. Maybe be good… your income tax bracket might be lower than the entity of the corporate level. C is taxed a the entity level….not a flow through. How to get $$$ from dividends… tax of the corporation than anything else is dividends. Some company doesn’t pay dividends…you earn $$ by increase in the share…can sell?? C V S…different in tax. Current gov. No tax bill yet… what are they going to do at the federal tax??? So far…nothing… are they going to change capital gain tax? We’ll have to see.

Front 12

corporation:

what is Limited Liability Companies (LLC)?

Back 12

• Has limited liability
• Continuity
• Free Transferability
• Centralized Management (Managing Member)
• Members can be corporations, trusts, partnerships, and foreign investors

class notes:
LLC….like sub S…hybrid…part corporation/part partnership… flow through. Has limited liability.
Shareholders are called members. Doesn’t have limitation to numbers of members…have shareholders that are not individuals (can have trust). Many ppl have assets in trust…

In event where someone forms a corporation carries…unlimited liability… both their books are the same…they don’t treat them as a separate entity…because they’ve treated their company as their own…private piggy bank….limited liability goes away…and they can be sue… to fix this…make the corporation a separate entity… so that ppl cant go after you and your assets.

Front 13

what is debts, equity, and leverage?

Back 13

debts is like promise notes...it's a bank loan..u own ppl

equity is like stocks...it's what you have or put in

leverage is a ratio of debt to equity

Would look at debt to equity ratios… higher the debt to equity…higher the leverage. Higher leverage…riskier…business cycle does up and down. High leverage… for a down turn in economy…if you go to the bank and said that you can’t pay the principal of interest…the bank will still make you pay because it’s the. High debt to equity is a fixed obligation.

Front 14

what is common stock?

Back 14

• No preferences
• Greater risk of loss

class notes:
stock…you don’t have to sell anything…don’t have to pay dividends when the economy is in a downturn
Sometimes high leverage is good in that when you’re debt is 5.4% and you can borrow the money and invest it in the business to expand. If you can translate that into return equity of 8% then you’ll be able to pay bad. But if the economy is bad. And you invest and got an 3% then you’re have negative mortgage….and will lead to bankruptcy

Front 15

what are two corporate stocks?

Back 15

common stock

preferred stock

Front 16

what are some preferred stock? 6

Back 16

Cumulative

Convertible preferred

Redeemable

Liquidating preferred

participating preferred

Warrants

Front 17

preferred stock:

what is cumulative returns?

Back 17

accumulated

class notes:
when the company is to pay you $5 a year coupon, but in the first year there’s enough cash flow so they don’t give out any $; however, the following year, they will pay you the $5 for that year and another $5 for the last year… u get caught up

Front 18

preferred stock:

what is convertible preferred?

Back 18

stock may be exchanged to a common stock

class notes:
when the common stock goes up way faster than the preferred stock…than you can convert it to common stock

Front 19

preferred stock:

what is redeemable?

Back 19

corporation has the right to exchange each preferred share for a pre specified monetary amount

class notes:
for the benefit of the company…6% preferred stock and the market is 4%...then company will have to go borrow $$ at a lower rate to pay the 2% needed. Shareholders doesn’t like this one

Front 20

preferred stock:

what is liquidating preferred?

Back 20

upon liquidation, preferred shareholders have the right to receive either par value of stock or a specified monetary amount before common shareholders

Front 21

preferred stock:

what is participating preferred?

Back 21

you get your coupon… and in the event of a common stock where they get dividends… you can get the dividend to…both coupons and dividends

Front 22

preferred stock:

what is Warrants?

Back 22

rights to purchase a stated number of shares at a stated price

class notes:
Warrants to trade publicly… similar in that it gives someone the ability to by stocks at a certain price. Give the bank some warrant…$10 and if the stock goes up at $10… they get interest and they can sell the warrant. Ex. When the interest is too high because u have an idea but have not launch it yet. To get the interest down…u give the bank warrants.

Front 23

what are the steps to create a corporation?

Back 23

a. State law (Delaware)
More than half of Fortune 500 companies are registered in Delaware
Primary concerns: financing and operation
b. Articles of Incorporation
Number of shares of stock
c. Certificate of Incorporation (Good Standing Certificate)
d. Incorporators call first meeting- Board elected and the by-laws are adopted

Front 24

Creating a Corporation: step 1.

what is included in State Law?

Back 24

Pick a state where you want to incorporate. most corporation are in Delaware

Have to incorporate under state law…most of the time it’s in delaware…u don’t have to incorporate in the state u do business. More than 50% are in delaware, because the court favor corporations.

Front 25

Creating a Corporation: step 2.

what is in articles of incorporation?

Back 25

Articles of Incorporation
Number of shares of stock

class notes:
an articles of incorporation… info…name of company and they make sure no other company have that name. U cant make a name similar to another company. Also, what does the company do. What kind of stocks and how many shares…issues an authorize. Meets the requirement and they will incorporate you.

Front 26

Creating a Corporation: step 3

what happens in certificate of incorporation?

Back 26

Certificate of Incorporation (Good Standing Certificate)

class notes:
File the articles with the fee to the state selected. They go through it and if there’s nothing missing…. U get a good standing certification

Front 27

Creating a Corporation: step 4

what happens in Incorporators call first meeting?

Back 27

Incorporators call first meeting- Board elected and the by-laws are adopted

class notes:
call first meeting….board are selected by shareholders. And board elects officer… u also pass bylaws…it covers…shareholders meetings, who are the officers, special meetings. Can be amended by board or shareholders. If give it to the board…shareholders are giving them a lot of power

Front 28

what does corporate financing include?

Back 28

Debt
a. Notes (short-term loans)
b. Bonds (secured long-term loans)
c. Debentures (unsecured long-term loans)
d. Others (synthetics, off-balance sheet)
Equity
a. Classes- voting/non-voting

Front 29

define debt?

Back 29

owing ppl... ex. going to bank and getting a loan.

Front 30

debt: what are notes?

Back 30

short term debts.. under 5 years

Front 31

debt: what are bonds?

Back 31

they are longer… 10-20 years. Can be sold publicly or privately…they have coupon rate. Real estate…long assets bonds

Front 32

what kinds of debt do we want? long or short?

Back 32

both....Want long term and short term debts so that you can pay things over a certain amount of time. If you refinance and the interest rate is high then you’re screwed.

Front 33

debt: what are debentures?

Back 33

unsecured long-term loans

class notes:
Debentures are bonds… they are insecure…not many company can attract buyers…relied on the cash flow

Front 34

debt: others

what is off balance sheet?

Back 34

if on balance sheet..it effect leverage. Going off balance ..it’s not debt. Do a transaction…looks like a loan but off balance. Operating lease
ex. Two types of books…accounting and tax. Accounting books are reported to the shareholders…. While the tax book goes to the IRS… hope that earnings are zero…so they don’t have to pay taxes. Both books do not need to agree.
Ex. one of the object is an operating lease…. It’s off balance….not included in debt….it’s this year payment of rent. How do you structure it…goes to the accounting and make sure it’s operating lease and not capital lease (on balance sheet…like a conditional sale…u buy something and pay for it.. a purchase…asset value goes away over time). To get the operating lease off the balance sheet you have to fail the 90% test… take all payments required under the lease and compare it to the value of the underline asset you are leasing, if less than 90% of the value than it’s operating lease off the balance sheet. To do this… Just structure the deal to fail the 90% test. To fail… the assets at the end of the lease terms has the has the value…where the payment is less than 90% of the value of the asset. Ex. doing a 5 years lease on a 747… 5 years lease payment.

Front 35

debt: others

what is synthetics real estate?

Back 35

Synthetics real estate – company needs a new office building…what’s the option? Go to bank get a loan…that’s debt. To get it off the balance sheet… ask the bank to buy the building and lease the building with terms that it will qualify as an operating lease. Operating lease for accounting purposes
IRS…don't look at it the same way…it’s not a lease, I looks like a lease… the tax person sees the owner as the person lending…because say within a 5 years…the leaser is going to buy the place. Y than would a bank or a company buy the place for another company because it’s off balance sheet. It’s a win win situation. The lender will have the building off balance sheet and the leaser (owner) will have depreciation.

Front 36

debt: others

what is Special Purpose Entity (SPE)

Back 36

A company needs money…they go to the bank and have their account receivable as collateral… it’s debt..they don’t want that but they still want the banks capital. So the bank sets up an SPE…where you sell the account receivable to an entity… entity needs a 3% ownership of the account receivable that’s not connected to the company…it’s sold to the third party. Y bank would do this??? Because it’s account receivable is like a security. This is good…but downside…to it..like eron…where they had a continuity obligations (this was not disclosed) where in the event of an asset sold and it didn’t give out enough cash to buy the bank loan..enron is on the hook. There was a lot of disguise obligations so when the market crash….they died.

Front 37

what's the management triangle?

Back 37

director, officers, shareholder….each on has a part to play in managing the corporation…some more than others. they have this to keep a balance... want to make the most profit for stockholders.

Front 38

what is board of directors and what do the do?

Back 38

5. Board of Directors (manage corporation)
Duties
• Overseers
• Authorize payment of dividens
• Selection of Officers
• Executive Compensation
• Audit

Directors are in charged of managements…they meet periodically…3-6 times a years….does have all the info on what goes on in the company
Independent directors who are not officers of the company…they maybe officers of other companies, professor, etc.
Over the years… large companies are trying to get more independent directors. Directors need to be feed with information.
Corporation…separation of ownership and control…the board of directors vote for the officers and their decision is to benefit the shareholder
Directors get together and break down into committees. Most common is the audit committees that audit the books and a compensation committee for the officers and the government committee which helps filled director vacancy and do self assessment on the board themselves (they would do an evaluation every year).

Front 39

board of directors:

what does an audit committee do?

Back 39

very important…there’s external and internal to audit the book. The external reports to the audit committee so that officers management doesn’t do any thing fishy or fraud.

Front 40

board of directors:

what does a compensation committee to?

Back 40

they pay commission to officers. supposed to be structured to produce results…paid for performance.

Front 41

what is shareholder derivative lost?

Back 41

when shareholders sue directors. Because they’ve breach their duty…duty of care. Duty of loyalty…to the shareholder and not themselves. Duty of good faith….what they believe to be the best interest of the shareholders. Directors do make mistake…therefore, there’s a presumption that if a director act in the best interest of the shareholder…than they cannot be sue. If you think about it.. This rule is for directors to take risk.

Front 42

what are Director “Independence”?

Back 42

they are directors who are not related to the corporation. they are not officers.

class notes:

Independent directors who are not officers of the company…they maybe officers of other companies, professor, etc.
Over the years… large companies are trying to get more independent directors.

Front 43

what are officers and what do they do?

Back 43

a. Day to day management and control of corporation
b. Used to require president, vp, and treasurer. Now relaxed.
c. Fiduciary responsibility
1. In a good faith
2. Be prudent
3. best interests of a corporation

class notes:
Officers are agent of the corporation….they have an idea of day to day stuff happening in the company.

Front 44

what are the duites of shareholders?

Back 44

a. Vote at Annual Meeting of Shareholders in person or by Proxy
b. Proxy Solicitation
c. Shareholder Resolutions
d. Consent to action w/o a formal meeting
(shareholders or directors)

class notes:
The vote at the annual meeting for directors. One slated director….where you can either vote for them or not…they only need on vote and they’re elected. Some have majority voting so that in the event where the director does not get at least 50% cast…cant be director… relatively new

Front 45

what is proxy solicitation?

Back 45

Attempt by a group to obtain the authorization of other members to vote on their behalf in an organizational ballot. In corporate settings, a proxy solicitation is usually accompanied by a 'proxy statement.'

Front 46

what is shareholder resolutions?

Back 46

Shareholder resolutions are proposals submitted by shareholders for a vote at the company's annual meeting. Typically, resolutions are opposed by the corporation's management, hence the insistence for a vote

class notes:
not very effectual…u cant cover issues at meeting that is not operating issue. It’s not approvable and management will exclude them. And they have a limit of 500 words. Not much of a power

Front 47

Irving trust vs. Deutsch

Back 47

corporate opportunity case

where a company needed money and the officers couldn't find money so they used their money and bought the company the following day. shareholder sued and won even though they said that they where unable to find fundings for the company.
they should've consent the shareholders first.

Front 48

what is conflicts of interest?

Back 48

Occurs when an officer/director enters into a transaction with the corporation in which he or she has a personal interest

class notes:
okay as long as the shareholders are aware of the conflict

Front 49

what's business judgment rule?

Back 49

judge will not second guess if the officer and director made decision for the benefit of shareholder

Front 50

smith v. Van Gorkum

Back 50

business judgment rule case

case in Chicago….gorkum was the ceo of tran union… old guy…wants to cash out this stock so he found someone to buy his stock…he goes to his friend…didn’t go to gordan. Friend paid $55 per share. gordan goes back to the board… the board agree to sell the company. It took them 20mins. Did the director think about the shareholder? Is $55 a good number? Where did it come from? Should they’ve done research? They were found guilty for non duty of care.

Front 51

In re Walt Disney company derivative litigation

Back 51

business judgment rule

director getting friend to be on board member… mike didn’t know how to run the company. Court said no breach of care. They have to be grossly negligent. Gave mike 140 million to leave the position.

Front 52

case

geier et al v america honda motor company

Back 52

geier sued honda for negligent design