Class #19 Business Formation

Vocabulary flashcards covering the types of business organizations including sole proprietorships, partnerships, LLCs, and corporations, along with their management and legal doctrines.

Sole Proprietorship

A business structure where one person owns property in the form of a business enterprise; the simplest and least expensive way of starting a business where the individual remains personally liable for all obligations.

Proprietor

Someone who has legal title to property.

General Partnership

The simplest organizational structure for starting a business when two or more people own and operate the business in pursuit of a common business objective.

Pass-through entity

A nontaxable entity where profits and losses are reported on the partners' or owners' individual tax returns to avoid double taxation.

Partnership Agreement

A document that directs the affairs and operations of a partnership, delineating the rights and obligations of the partners.

Limited Partnership

A business structure with at least one general manager who has unlimited liability and limited partners whose personal assets are shielded from attachment.

Limited Liability Partnership (LLP)

A business form for certain approved professions (e.g., accounting, law) that protects the personal assets of non-negligent partners from the liability of other partners.

Limited Liability Company (LLC)

A separate legal entity where owners are called members and have limited liability while the business functions as a pass-through entity for taxation.

Articles of Organization

The document prepared by owners to form a Limited Liability Company (LLC).

Operating Agreement

A written document for an LLC regarding management policies, procedures, rules, expectations, and the sharing of profits and losses.

Corporations

An organization that has a legal existence separate from its owners, allowing it to own property, enter contracts, and file tax returns in its own name.

Corporate Veil

A legal shield or assumption holding that the actions of a corporation are separate from its principals, insulating owners from corporate creditors.

Articles of Incorporation

Documents that establish the basic terms of a corporation's structure and operations and define its purpose.

Bylaws

Guidance provided to officers regarding a corporation's internal affairs and operations.

Shareholders

The investors and owners of a corporation who can elect the board of directors and change governing instruments.

Common Stock

A type of ownership that gives holders the right to vote on the appointment of directors and other major corporate decisions.

Directors

Individuals who develop and set the strategic vision for a corporation and act according to fiduciary duties of care, loyalty, and obedience.

Duty of Care

A fiduciary duty requiring directors to fulfill their duties like an ordinary person would in similar situations.

Duty of Loyalty

A fiduciary duty to behave in good faith and put corporate interests before individual interests.

Officers

Individuals who take direction from the board of directors to run the corporation on a daily basis and have authority to commit the corporation to financial obligations.

S Corp Election

A status for a domestic corporation with one stock class and no more than $100$ shareholders that allows it to be treated as a pass-through entity for tax relief.

Dodd-Frank Wall Street Reform and Consumer Protection Act

An act requiring publicly held companies to disclose executive compensation information to stockholders.

Shareholder Derivative Action

A legal claim brought by shareholders on behalf of the corporation against its directors or officers for failing to discharge their duties.

Business Judgment Rule

A doctrine protecting directors and officers from personal liability for business decisions as long as they acted on an informed basis, in good faith, and within their authority.

Minority Shareholder Rights

Legal protections ensuring fair treatment for investors with less than $50\%$ voting power to prevent oppression by majority stakeholders.

Piercing the Corporate Veil

A legal action where principals' personal assets become reachable by creditors because they misused the corporate form.

Uniform Partnership Act

The statute that governs a partnership if no formal partnership agreement has been established.

Dissociation

The process that occurs when a single partner leaves a partnership.