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83 Cards in this Set

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Advantages of sole proprietorship
- No need to file with government (unless operating under name other than sole proprietor)

- Business can be sold without approval from others
Disadvantages of sole proprietorship
- Cannot raise capital from partners or shareholders

- Unlimited liability
Definition of partnership
An association of two or more persons to carry on a business as co-owners for profit
Examples of associations that cannot be partnerships
- Passive co-ownership of property

- Not-for-profits: labor unions, charities, clubs
2 elements determining whether co-ownership (and hence partnership) exists
- Profit sharing (need not be equal)

- Joint control (but the right to manage may be contracted away to a managing partner)
5 characteristics of partnerships:

- Duration
- Transfer of ownership
- Lawsuits
- Partners' liability
- Formation
- Duration: limited

- Transfer of ownership: requires agreement

- Lawsuits: partnership may sue and be sued as separate entity

- Partners' liability: unlimited for partnership debts

- Formation: easy, can be informal
Definition of limited partnership
- Consists of one or more general partners and one or more limited partners

- Sole general partner may be a corporation
3 characteristics of a limited partner
- Contributes capital only

- Liable only to extent of capital contribution

- Does not participate in management
Evidence of an implied partnership
- Agreement to share profits (prima facie evidence)
Requirements to form partnership
- Written agreement needed only if partnership cannot be completed within one year

- Filing not needed
Definition of partnership interest
- Right to share in profits and return of capital contribution on dissolution

- Is considered personal property
Assignment of partnership interest: Rights of assignee
- Share of profits

- Return of capital contribution
Definition of partnership property
- Property acquired in name of partnership

- Property acquired with partnership funds

- Property acquired by partner in his/her capacity as partner
Definition of silent partner
- Does not participate in management

- Unlimited liability
Partners' share in profits and losses
- Equal unless stated otherwise in partnership agreement

- Losses are shared per profit-sharing proportions unless stated otherwise in partnership agreement
Partners owe fiduciary duty to one another - details:
- May pursue self-interest if it's not competition

- Any wrongly derived profits must be held by partner for others

- Must abide by partnership agreement

- Liable to other partners for liability caused by going beyond actual authority
Types of authority whereby partners can bind partnership
- Actual authority

- Apparent authority

- Authority by estoppel

- Implied authority
Definition of apparent authority
- Created when parties misrepresent to others that they are partners

- Liable to third parties as if they were actual partners
Definition of partnership by estoppel
- Parties misrepresent to others that they are partners and others are hurt as they rely on this
Implied authority of partners
- Examples: buy and sell goods, receive money, pay debts for partnership

- Third parties can rely on implied authority even if secret limitations (among partners) exist
Liability of partnership for acts by partners
- Not liable for acts outside of express, implied, or apparent authority

- Liable for partner's torts committed in course and scope of business and for partner's breach of trust

- Creditors must try to collect from partnership before individual partners
Unanimous consent of partners needed (so no apparent authority) for:
- Admission of new partner
- Amending partnership agreement
- Assignment of partnership property
- Making partnership a surety or guarantor
- Admitting to a claim against partnership in court
- Submitting partnership claim to arbitrator
- Any action outside scope of partnership business
Personal liability of partners
- Joint and several liability

- Partners may agree to splilt liability according to any proportion, but third parties can collect full amount from an individual partner
Dissolution of partnership can occur by:
- Prior or present agreement among partners

- Partner's withdrawal, death, or bankruptcy if remaining partners do not choose to continue partnership within 90 days
Order of distribution on termination of partnership
- 1. To creditors (including partners as creditors)

- 2. Allocation of profit or loss per profit-sharing agreement

- 3. Allocation of remaining capital according to partners' capital balances

- Partners are personally liable to partnership for capital deficiency and to creditors for insufficiency of partnership assets
Creation of limited partnership
- Must file certificate with Secretary of State

- Must include names of all general partners

- Must include "limited partnership" words in firm's name
Limited partners invest, not manage; can do the following without risking loss of limited liability:
- Act as agent or employee of partnership

- Advise general partner on partnership business

- Vote on or approve of changes in partnership business

- Bring lawsuit on behalf of partnership

- Being surety for partnership
Profit and loss sharing for limited partners
- Losses and any liability are limited to capital contributions

- If no profit-sharing agreement, then profits and losses are shared based on percentages of capital contributions
Admission of general and limited partners
- Admission of limited partner requires written approval of all partners

- Admission of general partner requires approval of general partners only
Fiduciary duties of general and limited partners
- General partners owe fiduciary duty to general and limited partners

- Limited partners do not owe fiduciary duty
Withdrawal of general and limited partners
- Withdrawal of general partner causes dissolution of partnership unless prior or present agreement among partners to continue business

- Withdrawal or death of limited partner does not cause dissolution
Order of distribution on dissolution of limited partnership
- Same as general partnership

- General and limited partners share equally
Definition of joint venture
- Association of two or more persons (or entities) organized to carry out a single business undertaking (or series of business undertakings) for profit
Differences between joint venture and partnership
- Each joint venturer is not necesssarily an agent of other joint venturers

- Death of joint venturer does not automatically dissolve joint venture
Advantages of LLC
- Limited liability for all members: limited to capital contribution and any equity in LLC

- Limited liability is retained even if members fail to follow usual formalities in conducting business
Formation of LLC
- Members adopt operating agreement and file it with Secretary of State; required to be in writing

- Members form articles of organization

- Initials LLC or LC required in company name
Profit and loss sharing in LLC
- According to operating agreement

- In absence of other agreement, members divide profits and losses equally
Member-managed and manager-managed LLCs: authority and compensation
- All members have authority to bind LLC unless LLC is manager-managed (then only managers have authority)

- Member who is not manager has no right to compensation

- Managers receive compensation according to agreed contract
Duties of members (if member-managed) and managers of LLC
- Fiduciary duty

- Duty of due care

- Duty of loyalty
Dissolution of LLC occurs when:
- All members agree in writing (prior or present)

- Member withdraws, dies, goes bankrupt, or becomes incompetent

- Court order
Formation of LLP
- File articles of LLP with Secretary of State

- Firm's name must include initials LLP or RLLP

- Most states require only majority approval of partners to become LLP
Characteristics of LLP
- Works well for professionals who want to do business as professionals in a partnership but still pass through tax benefits while limiting personal liability of the partners

- Most partnership law applies to LLP
Liability provisions of partners in LLP
- Unlike traditional partnerships, LLP has no general partner with unlimited liability

- Regulations require liability malpractice insurance

- Parners retain unlimited liability for their own negligence

- Parners avoid some personal liability for mistakes or malpractice of other partners
Advantages of corporate structure
- Limited liability for shareholders: risk only their investment

- Transferability of interest through sale of shares

- Continuous life unless dissolved, merged, or otherwise terminated

- Separate legal entity: can hold and convey property, can contract with shareholders or third parties, can sue and be sued

- Easy to raise large amounts of capital by issuance of stocks and bonds
Disadvantages of corporate structure
- Tax burden: may be double taxation when income is taxed at corporate level and then dividends are taxed at shareholder level

- Costs of incorporating

- Formal operating requirements
Characteristics of foreign corporation
- Definition: corporation doing business in a state other than the one in which it is incorporated

- "Doing business" includes maintaining an office or selling personal property in state

- "Doing business" does not include defending against a lawsuit, holding bank account, using mail to solicit orders, collecting debts, using independent contractors to make sales
Promoter of corporation: characteristics
- Forms corporations and arranges capitalization

- Has fiduciary relationship with corporation

- Is not an agent of the corporation (because it is not yet in existence)
Articles of Incorporation (charter) contain:
- Proposed name of corporation
- Purpose of corporation
- Powers of corporation
- Name of registered agent of corporation
- Name and address of each incorporator

- Majority vote (or sometimes two-thirds vote) required to amend Articles of Incorporation
Uncertificated securities
- Securities not represented by written documents
Authorized stock
- Amount and types permitted to be issued in Articles of Incorporation
Issued and unissued stock
- Issued stock: authorized and delivered to stockholders

- Unissued stock: authorized but not yet issued
Outstanding stock
- Issued and not repurchased by the corporation (i.e., owned by shareholders)
Treasury stock
- Issued but not outstanding; corporation repurchased it

- Are not votable and do not receive dividends

- Corporation does not recognize gain or loss on transactions with its own stock

- Must be purchased out of unrestricted retained earnings

- May be distributed as part of stock dividend

- Can be resold without regard to par value or preemptive rights

- No purchase of treasury stock may be made if it renders corporation insolvent
Par-value stock
- Amount is set in Articles of Incorporation

- Stock should be issued for this amount or more

- May subsequently be traded for any amount

- Creditors of corporation may hold purchaser liable (for difference between amount paid and par value) if stock originally purchased at below par ("watered stock"), unless purchased in good faith without notice that sale was below par
No-par stock
- Issued without a set par value

- May have a stated value
Stated capital (legal capital)
- Number of shares issued times par value (or stated value)

- Dividends may not be declared or paid out of stated capital

- Increase stated capital: Exercise of stock option; Small common stock dividend

- Do not change stated capital: Acquisition or reissuance of treasury stock under cost method; Stock splits; Payment of organization costs
Retained earnings (previously "earned surplus")
- Cumulative amount of income (net of dividends) retained by the corporation during its existence
Surplus (of corporation)
- Excess of net assets over stated capital
Capital surplus (of corporation)
- Surplus [excess of net assets over stated capital] less retained earnings
Contributed capital
- Total consideration received by corporation upon issuance of stock
Characteristics of common stock
- Entitled to dividends if declared by the directors

- Shareholders entitled to share in final distribution of assets

- Votes may be apportioned to shares by one vote per share or other ways (one vote per ten shares, etc.)

- Corporation may issue more than one class of common stock with varying terms (no voting rights, different par value, etc.)
Characteristics of preferred stock
- Usually nonvoting

- Dividend usually a fixed rate

- May be cumulative (dividends in arrears must be paid) or noncumulative (dividend will not be paid once it has passed); held to be implicitly cumulative unless different intent shown

- Participating: may participate further in corporate earnings remaining after a fixed amount is paid to preferred shares

- Callable: may be redeemed at a fixed price by the corporation

- Convertible: gives shareholder option to convert to common stock at a fixed exchange rate
Powers of corporation
- To acquire or retire their own shares (typically limited to amount of surplus)

- To make charitable donations

- To guarantee obligations of others only if in reasonable furtherance of corporation's business

- Loans to directors: only with shareholder approval

- Loans to employees: do not need shareholder approval
Liability of corporations for crimes or torts
- Corporations are liable for crimes they are capable of committing

- Punishment for crimes usually consists of crimes or forfeiture; rarely, prison sentences for directors

- Corporations are liable for damages resulting from torts committed by officers, directors, agents, or employees within the course and scope of their corporate duties
Ultra vires acts
- Definition: acts beyond the scope of the corporate powers (as defined in Articles of Incorporation)

- State may dissolve corporation for ultra vires act

- Stockholders have right to object to ultra vires acts

- Directors or officers may be sued by shareholders or by corporation itself for ultra vires acts
Powers and duties of directors
- Cannot bind corporation except as board member at a board meeting

- Declaration of dividends

- Selection of officers

- Must comply with Articles of Incorporation; cannot amend Articles

- Delegate authority to officers and agents

- Not entitled to compensation unless so provided in articles, bylaws, or a resolution of the board passed in advance
Liability of directors
- Directors must exercise ordinary care and due diligence in performing their duties

- Directors are personally liable for torts committed while acting for corporation

- Business judgment rule: if acting in good faith, not liable for errors of judgment unless negligent

- May be held liable for wrongs of other directors if director intentionally or negligently does not prevent them

- Personally liable for ultra vires acts of the corporation unless they dissented on the record
Negligence of directors
- Directors are liable for negligence if their action was the cause of the corporation's loss

- Corporation may indemnify directors against suits if acted in good faith and in best interest of corporation

- Corporation may purchase liability insurance for directors
Fiduciary duty of directors
- Owe fiduciary duties of loyalty and due care to the corporation

- Corporation may deal with other corporation in which director has interest if one of the following:

1) Conflict of interest is disclosed or known to board and majority of disinterested members approve

2) Conflict of interest is disclosed or known to shareholders and majority of voting shareholders approve

3) Transaction is fair and reasonable to corporation
Characteristics of officers (as contrasted with directors)
- Is agent of corporation and can bind corporation if acts are within scope of authority

- Selected by directors for a fixed term
Stockholder's right to transfer stock
- Stock certificates are negotiable instruments

- Reasonable limitations on transfer may be imposed; must be plainly printed on certificate
Stockholder's voting rights
- Right to vote for election of directors, decision to dissolve the corporation, and any other fundamental corporate changes

- Governed by the charter and the class of stock owned

- Can assign voting rights (vote by proxy)

- Requiring majority approval of shareholders: amendment of Articles of Incorporation; fundamental changes such as a merger, consolidation, or sale of all assets
Stockholder's right to dividends
- No right to dividends unless declared by board of directors

- Dividends become a liability of corporation only when declared, even for cumulative preferred stock

- Cash dividends may be paid out of unrestricted retained earnings unless corporation will be insolvent because of dividend
Stockholder's preemptive right
- Right to subscribe to new issues of stock at fair market value so that ownership will not be diluted without the opportunity to maintain it

- Usually applies to common stock only

- No preemptive right unless provided in Articles of Incorporation
Stockholder's right to sue
- Stockholder may sue corporation on own behalf if interests have been directly injured

- Stockholder may sue others on behalf of corporation (derivative suit) if a duty to the corporation is violated

- In derivative suit, stockholder must first demand that directors sue in name of corporation (suit may be barred if directors make good faith business judgment that suit is not in corporation's best interest)

- In derivative suit, damages go to corporation
Stockholder's right on dissolution
- Right to a pro rata share of distribution of assets after creditors have been paid
Stockholder's liability
- Generally limited to price paid for stock

- If corporate veil is pierced, court disregards corporate entity and holds stockholders personally liable

- Majority shareholders owe fiduciary duty to minority shareholders and to corporation
Examples of piercing the corporate veil
- Corporation used to perpetrate fraud (e.g. forming an under-capitalized corporation)

- Owners/officers do not treat corporation as separate entity

- Shareholders commingle assets, bank accounts, financial records with those of corporation

- Corporate formalities not adhered to
Merger
- Union of two corporations where one is absorbed by the other

- Surviving corporation issues its own shares to shareholders of original corporations
Consolidation
- Joining of two or more corporations into a single new corporation

- All assets and liabilities are acquired by the new company

- New corporation is liable for debts of old corporations
Requirements to accomplish a merger or consolidation
- Boards of both corporations must prepare and submit plan to shareholders of both corporations

- Approval of board of directors of both companies

- Shareholders of both corporations must be given copy or summary of merger plan

- Majority vote of shareholders of each corporation

- Surviving corporation gets all assets and liabilities of merging corporations

- Dissatisfied shareholders of subsidiary may dissent and assert appraisal rights, thereby receiving the fair market value of their stock
Dissolution of corporation
- Liquidation (winding up of affairs and distribution of assets) occurs in the following order:

1) Expenses of liquidation and creditors
2) Preferred shareholders
3) Common shareholders

- Dissolution may be voluntary (board of directors passes resolution) or involuntary (by state for cause)
Subchapter S corporation
- Avoid double taxation by not paying tax at the corporate level; instead, corporation income flows through to the income tax returns of individual shareholders

- Shareholders report the income or loss even if income is not distributed to them

- Rules involving criteria to be met to be taxed as Subchapter S corporation often change, e.g.:

1) Number of shareholders S corporation can have
2) Which types of entities cannot be shareholders
3) Citizenship of shareholders
4) How much of corporation's income can come from passive income