Business Law Exam 3

Ease of formation

Some business associations can be created with no formality, others require filing documents with the state

General Partnership

Unincorporated business formed for profit by two or more people, formed with no formality and documents filed. This business structure has the easiest formation. Each partner doesn’t have equal rights in management and conduct of business in general or limited partnership.

Sole proprietorship

Unincorporated business owned by one person, formed with no formality and documents filed. Not a separate tax paying entity, and unlimited liability for all debts.

Limited partnership

Unincorporated business formed for profit with at least one general and one limited partner. Not a separate tax paying entity. General partners have unlimited liability and limited partners have limited liability equal to amount of investment. General partners have equal rights to control, limited partners have no right to control. Each partner doesn’t have equal rights in management and conduct of business in general or limited partnership.

Corporation

Legal entity distinct and separate from owners, formed by filing articles of incorporation with the state. Shareholders have limited liability.

Partnership formation

Association of two or more people to become co-owners of a business for profit having full capacity. May be individuals, partnerships, corporations, trusts, other than adjudicated incompetent individuals.

Partnership as legal entity

organization having a legal existence separate from that of its members. May acquire, own, dispose of property and enter into contracts, commit wrongs, sue, and be sued.

Partnership agreements

Should include capital contributions of each partner, division of profits and losses, managerial duties of each partner, doesn’t include agreement to divide tax liability.

Tests of partnership existence

Formation of partnership requires association (two or more people with legal capacity), and for profit business other than social clubs, charity, fraternal orders, and civic societies.

Prima Facie

When no formal agreement exists, sharing profits provides evidence that a person is a partner in a business.

Fiduciary duty

Each partner owes utmost good faith, fairness, and duty of loyalty to his partners.

Duty of obedience

Partners act in accordance with the partnership agreement and business decisions properly made by the partnership. Partners who violate are held individually liable to other partners for resulting loss (Inability to lend credit to relatives).

Duty of care

Each partner owes the partnership a duty of faithful service to the best of their ability; there is no duty of control, only various rights of control.

Right to participate in management

Each partner has equal rights in management of the partnership unless otherwise agreed.

Right to choose associates

No person can become a member of a partnership without consent of all partners or otherwise stated in the partnership agreement.

Delectus Personae

“Choice of person” and indicates the right of partners to select new members in the partnership.

Formation of limited partnership

Requires compliance with applicable (state) statute. Surname of limited partner may not be used in name of partnership.

Filing of certificate

Includes name of limited partnership, address of office and name and address of agent for service of process, name and business address of each general partner, latest date upon which limited partnership dissolves.

Contributions

Partners may provide firms with cash, property, services, promissory note, or other obligations. Not required to contribute anything specific. A limited partner is liable to the partnership for difference between contribution actually made and that is stated in signed writing promising a certain contribution.

Foreign limited partnerships

Created when partnership is in any state (not country) other than where it was formed.

Control

General partners have almost exclusive control and management of limited partnerships. Limited partners cannot participate in control in management of the business (otherwise risk losing limited liability).

Profit and loss sharing

Allocated among partners as provided in agreement; if no provision, profits and losses are allocated on the basis of capital contribution (not equally), except limited partners are liable to the extent of capital contributed.

Extinguishing limited partnership

Dissolution, winding up or liquidation, termination. Limited partners have no right to dissolve partnership.

Limited Liability Company

Noncorporated business organization that provides limited liability to all members and permits all members to participate in management of the business.

LLC Member rights

Ability to vote on proposals to adopt/amend operating agreement, admit any person as a member, sell assets prior to dissolution.

LLC Dissolution

Dissolution of members if remaining members don't choose to continue LLC, expiration of agreed duration or happening of events in the articles, written consent of all members, decree of judicial dissolution. Most LLC states have eliminated member dissolution as a mandatory cause of automatic dissolution.

Merger

Two or more entities combining all assets. The surviving entity receives title to all assets, debt, and other obligations of the merged entity. A merged entity is merged into a surviving entity and ceases to exist as a separate entity.

Limited liability partnership

General partnership, by making statutorily required filing, limits liability of partners for some/all of obligations, reserved for licensed professionals like lawyers or accountants. Some statutes limit only for negligence while others limit for torts, malpractice, and wrongful acts.

PLLC

Difference from LLC includes being able to be sued for malpractice as each member is personally liable for malpractice, but not for other members unlike in a partnership.

Corporation Legal Entity

Corporation is recognized as having legal existence separate from its shareholders.

Limited Liability of Corporations

Corporation is liable for payment of debts, and shareholders are usually held liable only to the extent of their investment.

Free transferability of Corporate shares

Corporate shares are readily transferable unless there is an agreement to the contrary.

Perpetual existence

Where the articles of incorporation do not specify a limited duration, corporations have this.

Centralized management

The shareholders elect a board of directors to manage the business of the corporation. The board appoints officers to run the day-to-day operations. Since management responsibility is separated from ownership, shareholders do not participate in the running of the company.

Corporations as a citizen

Corporations are citizens of the state(s) where they are incorporated and they have their principal office located for diversity jurisdiction purposes.

Legal attributes of corporation

Legal entity on its own, owes existence to a state (which also regulates it), provides limited liability to its shareholders, shares of stock are freely transferable, existence may be perpetual, management is centralized (not by shareholders).

Domestic corporation

One created under the laws of a given state in which it was incorporated.

Foreign corporation

one created under the laws of any other state/jurisdiction and must obtain a certificate of authority to do business. Transacting business within a particular state without being qualified cannot use state court to maintain a lawsuit until they do. Failure to obtain a certificate of authority to transact business in the state DOES NOT impair validity of contract.

Public corporation revised act

Authorizes shareholders in closely held corporations to adopt shareholder agreements that depart from statutory norms by altering the governance of the corporation but which terminate automatically if the corporation’s shares are traded publicly.

Requirements to elect S Corporation

Must be domestic corporation, not more than 100 shareholders, each shareholder must be individual/estate/trusts, no shareholder may be nonresident alien, may only have one class of stock.

Promoter of corporation

Arranges capital and financing of the corporation (solicit investors), assembles necessary assets/equipment/licenses/personnel/leases/services in name of corporation, prepare document for actual legal formation of the corporation. Do not continue to solicit capital after incorporation.

Corporation bylaws

Contain rules and regulations governing company’s internal management, doesn’t need to be publicly filed and generally may be altered without shareholder approval.

Corporation de jure

Refers to a corporation that has been created in substantial conformance with state law and organizational procedure.

Corporation de facto

“Existing in fact, although perhaps not intended/legal/accepted.” Failure to comply substantially with the incorporation statute.

De facto corporation recognition

General corporation statute exists, bona fide effort to meet statutory requirements, company transacts business demonstrating a belief corporation has been properly formed.

Defective incorporation consequences

State brings action against association for involuntary dissolution, associates are held personally liable to third party, association asserts that it is not liable on an obligation, third party may assert it is not liable to the association.

Piercing the corporate veil

Reaching behind a corporation shield (disregarding) to prevent individuals from insulating themselves against personal liability and the consequences of their wrongdoing.

Closely held corporations

Creditors unable to recover completely against corporations will request court imposed liability on individual shareholders. Business was not conducted on corporated basis (ignored formalities), company suffered from inadequate capitalization, corporation was used to defraud.

Parent-subsidiary

Subsidiary is a corporation in which corporation (the parent) owns at least a majority of the shares.

Remedies for ultra vires acts

Injunctive action by shareholder to enjoin an act, action on behalf of the corporation or shareholders against officers/directors causing the unauthorized acts, dissolution or injunction action brought by AG of the state of incorporation.

Authority to issue debt securities

Board of directors may issue bonds without authorization or consent of shareholders.

Unsecured bonds

Debentures, backed by only promises of incorporation. Debenture holders are unsecured and will recover their claims on an equal footing with other general creditors.

Equity securities

Represent a claim on the earnings and assets of a corporation

Debt securities

Investments in debt instruments

Shares

Proportionate ownership interest in a corporation, with no vesting of ownership of corporate property (assets). Convey rights in corporation through right to participate in control/earnings/residual assets on dissolution

Preemptive rights

Shareholder’s right to purchase a pro rata share of any additional stock offering in order to prevent his interest from being diluted. Right available to shareholders to maintain their ownership stake by allowing them to buy proportional interest in additional issuance of common stock.

Common stock

Type of stock has no unique or special contract rights and stockholders bear more significant risk of loss should the corporation fail. Stockholders share more in the upside if the corporation prospers.

Preferred stock

Priority over common stockholders with dividends with fixed rate of return but have limited rights.

Dividends

Paid only if cashflow and balance sheet tests are satisfied. Insolvency in the equity sense means that a corporation is unable to meet its debts as they come due.

Business judgement rule

Provides director of corporation immunity from liability when plaintiff sues on grounds director violated duty of care to corporation as long as director’s actions fall within parameter of rule. Evaluate directly if they acted in good faith, with care that a reasonably prudent person would use, and reasonable belief that the director is acting in the best interests of the corporation.