LES 305: First Test

What are the core Fiduciary Duties of Officers and Directors?

Duty of Care: Act as a reasonably prudent person.

Duty of Loyalty: Act in the best interest of the corporation without personal financial conflict (unless fully

disclosed and approved by a majority of disinterested parties).

Good Faith: Act honestly with the best information available and no private self-interest.

What is the Business Judgment Rule?

Protects Directors and Officers (Ds & Os) from personal liability if a business decision turns out badly, provided

They acted in good faith, with no private interest, and based on the best available information.

What is the difference between a Shareholder Derivative Action and a Direct Action?

Derivative Action: A lawsuit brought by shareholders on behalf of the corporation against insiders (e.g.,directors/officers) for breaching duties.

Direct Action: A lawsuit brought by shareholders to enforce their own individual rights as shareholders.

What are the primary sources of law and what is NOT tested?

Primary Sources:

1. Constitutional Law

2. Statutory Law

3. Common Law

4. Administrative Law

Note: Secondary Law will NOT be tested.

What is Federalism and the Supremacy Clause?

Federalism: Power is divided between federal and state governments.

Supremacy Clause: Federal law is the supreme law of the land and overrides conflicting state law (via Preemption).

What are Statutes, Ordinances, and Common Law?

Statutes: Laws enacted by federal/state legislatures.

Ordinances: Local municipal/city laws (e.g., zoning, health & safety).

Common Law: Judge-made law that fills gaps not covered by statutory law.

What is Stare Decisis and Precedent?

Stare Decisis: 'Let the decision stand' — obligates courts to follow established precedent so similar cases yield

similar outcomes.

Precedent: Created ONLY by appellate courts when deciding cases without a controlling statute.

Note: Trial courts DO NOT create precedent.

What is the difference between Courts of Law and Courts of Equity?

Courts of Law: Award monetary damages.

Courts of Equity: Based on fairness/justice; offer equitable remedies when money is inadequate (e.g.Injunctions, Restraining Orders, Specific Performance).

How does the Commerce Clause empower and limit government?

Federal Power: Grants Congress the authority to regulate business and interstate commerce.

State Police Powers: States may regulate business for health/safety, but cannot discriminate against out-of-state business or unduly burden interstate commerce.

What protections are granted by the 1st, 4th, 5th, and 14th Amendments?

1st: Protects unpopular speech (except immediate incitement of lawless action).

4th: Protects against unreasonable searches; requires probable cause (except under exigent circumstances).

5th: Due Process (notice & opportunity to be heard) and Takings Clause (just compensation).

14th: Equal Protection Clause.

What is Subject Matter vs. Personal Jurisdiction and Venue?

Subject Matter Jurisdiction: Court's authority over the topic (e.g., Federal Question).

Personal Jurisdiction: Authority over the specific parties (extended via Long-Arm Statutes).

Venue: The most appropriate geographic location for litigation (can change due to pretrial bias).

What are the key features of a Sole Proprietorship?

• Owned by one individual (size doesn't matter).

• Uses DBA ('Doing Business As') for trade names.

• No corporate tax return (pass-through).

• Major Drawback: Total lack of asset protection; owner is personally liable for all debts.

What defines a General Partnership (GP)?

• Formed whenever 2+ people carry on as co-owners of a business for profit (no state filing required).

• Default rule: Partners share profits equally.

• Pass-through entity for tax (files info return).

• Liability: Partners are jointly and severally liable with personal assets.

How is a Limited Partnership (LP) structured?

- Requires filing a Certificate of Limited Partnership.

- Must have at least 1 General Partner (manages business, unlimited personal liability) and at least 1 Limited

Partner (investor, no management, limited liability).

What is a Limited Liability Company (LLC)?

• Highly favored entity combining corporate limited liability with partnership pass-through taxation.

• Formed by filing Articles of Organization.

• Principals are called Members.

• Internal rules are governed by an Operating Agreement.

What is Member-Managed vs. Manager-Managed LLC?

Member-Managed: All members have managerial authority to bind the business.

Manager-Managed: Designated managers handle operations; non-manager members do not bind the firm.

What are Domestic, Foreign, and Alien Corporations?

Domestic: Operating in the state where incorporated.

Foreign: Operating in a US state other than where incorporated.

Alien: Formed in another country operating in the US.

How is a Corporation formed?

1. Promoters handle initial setup (personally liable for pre-inc contracts).

2. File Articles of Incorporation with the state.

3. State grants a Charter.

4. Write Bylaws, appoint Officers/Directors, issue stock.

What is 'Piercing the Corporate Veil'?

When courts strip away personal liability protection (the corporate veil) and hold shareholders or directors personally liable for corporate debts/actions (e.g., due to fraud, commingling funds, or severe undercapitalization).

What is C Corp Taxation vs. Subchapter S Corp?

C Corporation: Subject to double taxation (entity pays tax on profits, shareholders pay tax on dividends).

S Corporation: Avoids double taxation via pass-through tax status, but subject to strict eligibility limits.

What are the roles of Shareholders, Directors, and Officers?

Shareholders: Owners; elect and remove Directors.

Directors: Board sets overall strategy; appoints and removes Officers.

Officers: Manage day-to-day operations.

Is a Franchise a business entity type?

No. A franchise is a method of conducting business, not a distinct legal entity type (like an LLC or Corporation).

How must a Director handle a potential conflict of interest?

They must fully disclose any personal financial interest or corporate opportunity, record it in meeting minutes, abstain from voting, and have a majority of disinterested parties approve it.

What are Executive Orders and Administrative Agencies?

Executive Orders: Issued by the President, have force of law, but can be set aside by future presidents.

Administrative Law: Agency regulations combining executive, legislative, and judicial powers.

What 5 factors drive the choice of business entity?

1. Formation costs & complexity

2. Liability protection for principals

3. Capitalization / Raising capital

4. Taxation (Pass-through vs. Double)

5. Management structure & control