Term
| What are the key elements of a valid Partnership? |
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Definition
| Must have two or more partners. Must intend to engage in business for profit. Life of partnership is of limited duration in most cases. Agency/fiduciary relationship is created. Partnership interest is always considered personal property. |
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Term
| Can corporations and other partnerships become partners in a partnership? |
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Definition
| Yes; corporations and other partnerships can become partners of a partnership |
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Term
| Name the Basics of Partnership Formation - Form of agreement and intent |
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Definition
Agreement can be very informal - either ORAL; IMPLIED or WRITTEN
Intent is to make a profit |
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Term
| When must a partnership agreement be in writing? |
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Definition
Must be WRITTEN if partnership activity falls within Statute of Frauds:
A. Can't be completed in 1 year
B. Even if partners reside in different states; not necessary unless within Statute of Frauds
C. Neither dollar amount of transactions nor purchasing of real estate has bearing on whether partnership agreement must be in writing |
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Term
| How are profits shared in a partnership? |
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Definition
Profit sharing is equal by default
A. Unless partnership agreement says otherwise
B. Unless specified; sharing of losses follows same pattern as sharing of profits |
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Term
| What is the Liability of General Partners in a partnership? |
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Definition
Joint Liability - Partners are collectively liable for debts/torts
Several Liability - Partners are individually liable for debts/torts |
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Term
| Which assets may creditors of a partnership go after; and in which order? |
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Definition
| Creditors must go after partnership assets first before suing partners individually |
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Term
| What are the rights of a General Partner in a partnership? |
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Definition
General Partners have joint control over the management of the partnership and its affairs
Unanimous vote needed to change the structure of the partnership
Each partner has full right to inspect partnership accounting and business
Partner has the authority to assign their interest to another partner |
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Term
| What does and does NOT happen when a General Partner assigns their partnership interest to someone else? |
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Definition
1. Other party gets that partner's share of the profits and/or capital contribution.
2. Does NOT give assignee authority to vote on partnership business
3. Assignee does NOT have right to inspect partnership books
4. Assignor still maintains liability
5. Partner does NOT have the right to assign their interest in partnership property or allow partner's creditors to attach a lien. |
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Term
| What is the actual authority of a partner in a partnership? |
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Definition
| Has authority to bind the partners to a contract. |
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Term
| What is the APPARENT authority of a partner in a partnership? |
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Definition
A third party reasonably believes partner has authority to bind partnership to contract
Cannot use apparent authority to add a new partner
Cannot use apparent authority to sell or bind partnership assets |
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Term
| With respect to liability on subsequent debts; what happens when a partner withdraws from a partnership? |
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Definition
Partner not liable assuming notice given.
Notice must be given to nullify apparent authority
People who had knowledge of their role must be personally notified
Public must be notified |
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Term
| With respect to PRECEDING debts; what is the liability of a partner in a partnership? |
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Definition
Old partners: Jointly and severally liable unless creditors grant novation
New partners: Only capital account at risk on preceding debts. For subsequent debts; they are joint and severally liable. |
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Term
| What happens upon the death of a partner in a partnership? |
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Definition
Partner's estate gets share of partnership profits and capital account
Estate does NOT get any partnership assets
Remainder of partners own partnership assets
Heirs of decedent are not added as partners unless remaining partners unanimously agree |
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Term
| What happens during the winding up of a partnership and in what order? |
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Definition
1. Creditors get paid; Partners can also be creditors
2. Distributions in arrears get paid
3. Partners get return of Capital accounts
4. Any remaining distributions
Note: NO documents need to be filed with state to dissolve general partnership. |
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Term
| What are the requirements to form a Limited Partnership? |
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Definition
Governed by state L.P. laws
Must file L.P. certificate with Sec. of State
Only General Partners must be listed
Future additions or subtractions of G.P. require certificate to be updated with state |
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Term
| How are profits and losses split in a Limited Partnership? |
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Definition
| Unlike G.P.; L.P. profits/losses are split according to capital contributions by default |
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Term
True or False: In a Limited Partnership; a General Partner can also be a Limited Partner at
the same time. |
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Definition
True.
A Limited Partner; however; cannot also be a General Partner and maintain limited liability. |
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Term
| Do limited partners have a fiduciary responsibility to a Limited Partnership? |
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Definition
| No. Limited Partners are do not have a fiduciary responsibility to Limited Partnership |
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Term
| What authority does a limited partner have under a Limited Partnership? |
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Definition
1. Right to inspect records of the business.
2. Can still vote on partnership business without losing limited liability
3. Can consult and advise partnership without losing limited liability (assuming they don't actually make the decisions) |
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Term
| What limitations does a limited partner have in a Limited Partnership? |
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Definition
1. They have no authority as an agent to bind the partnership
2. They can't participate in management decisions and maintain limited liability. |
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Term
| What is the liability of a limited partner in a Limited Partnership? |
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Definition
Limited partners are liable to the extent of their capital contributions only
Exception - A Limited Partner (who cannot participate in management decisions) becomes involved with management decisions
Becomes liable to third parties *IF* they knew of their involvement |
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Term
| When does the dissolution of a Limited Partnership occur? |
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Definition
Automatically happens
1. Once final General Partner leaves
2. Time specified in certificate lapses
3. Event specified in certificate happens
4. Unanimous consent by partners
5. Illegal activity |
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Term
| What is required to form a Limited Liability Partnership (LLP)? |
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Definition
1. Majority vote required to form LLP
2. Articles of LLP filed with Secretary of State
3. Governed by laws of that State
4.Limited Liability Partnership must be in name
5. No General Partners - each LLP partner has limited liability - Exception: Negligence of partner or those under partner's supervision |
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Term
| What are the key aspects of a Limited Liability Company (LLC)? |
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Definition
Members can participate in management and retain limited liability
Members don't own any interest in LLC property
Members can assign interest; but not transfer it
Members divide profits equally unless otherwise stated |
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Term
| What are the key aspects of Joint Ventures (JV)? |
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Definition
Similar to a General Partnership; except generally; a JV is for a single business activity
Example: two companies promote a concert
Ability to bind other JV partners is limited
JV partners still have a fiduciary responsibility to JV
No state filings or paperwork necessary |
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Term
| What are the key aspects of a corporation? |
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Definition
Shareholders have limited liability to the extent of their capital contribution
C Corporations have a perpetual life and continue even after shareholder death
Corporations are a separate legal entity from their owners and can own property; sue; be sued
Corporations must file Articles of Incorporation in state of governance |
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Term
| What are some of the advantages of a corporation? |
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Definition
Ability to raise capital
Limited liability - unless actions occur that pierce the veil
Ease of ownership transfer |
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Term
| What actions can pierce the veil of a corporation? |
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Definition
Commingling of assets
Fraud
Under-capitalization |
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Term
| How is a corporation governed? |
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Definition
| Board adopts Corporate Bylaws to govern company business |
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Term
| What items are required in a corporations Articles of Incorporation? |
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Definition
Name; purpose; powers of Corporation
Name of registered agent & incorporators
Stock share classes authorized; par values
Name of corporate officers NOT required |
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Term
| What is the biggest disadvantage of a corporation? |
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Definition
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Term
| How are corporations formed by promoters? |
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Definition
Promoter issues prospectus; arranges capital; and is a fiduciary of the corporation.
A promoter may profit from work performed if the corporation is aware of it. |
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Term
| When is a corporation liable for pre-incorporation actions taken by a Promoter? |
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Definition
Promoter personally liable unless third party agrees to a novation and releases Promoter
from liability; UNLESS the corporation adopts. |
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Term
| In how many states must a corporation incorporate? |
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Definition
Corporations are only incorporated in one state
Become adomestic corp. in that state
Become aforeign corp. in any other state they do business in |
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Term
| Describe Common Stock dividends and their rights/liabilities in relation to shareholders/corporations. |
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Definition
Dividends are NOT a shareholder right
Once declared; dividends become a liability to corporation |
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Term
| What are key aspects related to the holding of Preferred Stock? |
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Definition
No voting rights
Get first rights to dividends and liquidation
Cumulative Preferred Stock dividends that go undeclared accumulate and Corporation must pay it before issuing dividends to Common Stockholders
Participating Preferred Stock gives shareholder right to dividends in addition to what they get as Preferred Stockholders |
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Term
| What aspects are related to all classes of corporate stock? |
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Definition
Valid consideration must be given for shares
Cash; property; or services performed
No promises to pay or perform services |
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Term
| What are the key aspects of Treasury Stock? |
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Definition
No Gain/Loss recognized on Treasury stock
Have no voting rights
Can be re-purchased below par
Cannot produce dividends |
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Term
| What is a stock subscription and what is required for it to be valid? |
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Definition
An offer to buy shares of stock
Must be accepted by corporation to be valid
Offer cannot be revoked for 6 months
Subscriber becomes liable once accepted |
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Term
| When is a corporation liable for torts by employees? |
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Definition
If committed within the normal scope of the employee's job
Even if they were disobeying orders
Per respondeat superior |
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Term
| What are the key aspects of a corporate officer? |
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Definition
Appointed by the Board of Directors
Act as Agents
Owe a fiduciary duty to the corporation
Can have legal fees paid by corporation for defense in lawsuit brought on them from carrying out their normal duties (exception- suit brought against officers by shareholders) |
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Term
| What are the key aspects of a corporation's board of directors (BOD)? |
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Definition
Elected by shareholders
Owe fiduciary duty to corporation
Must act in good faith to avoid being liable for bad judgment
Good faith is NOT a defense for negligence |
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Term
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Definition
Corporation management acting beyond what the Articles of Incorporation allow
Shareholders can sue for Ultra Vires |
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Term
| When is inspecting Board minutes the right of a shareholder? |
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Definition
| Shareholders can inspect Board minutes and records only if request is in good faith |
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Term
| Who must approve mergers and consolidations? |
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Definition
Boards must approve
Shareholders must approve by Majority
Disapproving shareholders can get an appraisal and get their stock back at current market price
Merger does NOT need creditor approval |
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Term
| What characterizes a Professional Corporation? |
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Definition
Shares owned only by licensed professionals (CPAs; attorneys; etc.)
Limited Liability for debts
Personal Liability for negligence |
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Term
| Who can and cannot own an S-Corporation? |
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Definition
CAN be owned by Estates; Trusts; and Individuals
CANNOT be owned by a C-Corporation |
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Term
| What is the primary advantage of an S-Corporation? |
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Definition
| Avoidance of Double Taxation |
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Term
| What are the disadvantages of an S-Corporation? |
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Definition
No more than 100 shareholders allowed
One class of stock allowed
Shareholders must be US Citizens/Residents |
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