mgmt final exam

joint liability

general partnership, partners are all jointly responsible to owe money

• a 3rd party must sue all of the partners but each partner can be held liable for the full amount

• if a 3rd party sues one partner on an partnership contract, that partner has the right to demand that the other partners be sued as well

several liability

individuals are responsible for their own portion

• the creditor can only collect each party’s share

• if one party can’t pay, the creditor can’t demand more from others

joint and several liability

combines two types of liability

• a 3rd party has the option of suing all of the partners together (jointly) or one or more of the partners separately (severally)

• all partners can be held liable even if a particular partner did not participate in, know about, or ratify the conduct that gave rise to the lawsuit

• if ¾ die, the 1 is responsible for the whole thing

sole proprietorship

the simplest form of business organization, in which the owner is the business. The owner reports business income on his or her personal income tax return and is legally responsible for all debts and obligations incurred by the business

• typically though of as “mom and pop” or family business

• not a contract, you’re by yourself

• can convert into corporation

  • ex; google, amazon

• no formal paperwork, just start the business

ONE OWNER

positive attributes of a sole proprietorship

• easy to form

• easy to manage

• relatively inexpensive to begin and maintain

• can sell or transfer all or part of the business to another party at anytime

• free to make any decisions concerning the business (flexibility)

negative attributes of sole proprietorship

• personal liability of owners for business obligations

• business obligations and limited capital raising ability

partnership

• a contractual relationship for a common business venture that may be verbal or written

• there are many different types

• they may be formed by natural persons, business entities, or any combination

• it can be comprised of many parties and can be very large in terms of financial structure and business operations

• can be formed by corporations/business

• joint control over its operation and the right to share in its profits

• can specify the duration of partnership; if not specified, it is a partnership at will and can be dissolved at any time without liability

TWO OR MORE OWNERS

general partnership

comprised of 2 or more parties

• ex; general motors & toyota

positive attributes of a general partnership

• relatively easy and inexpensive to create

• still somewhat easy to manage

• enhanced ability to raise capital

• more diverse skill and knowledge level

• share profits & losses

negative attributes of a general partnership

• joint and several personal liability of all general partners

• more potential for disputes

• no tax benefits

limited partnership

comprised of 2 groups of partners with at least 1 partner in each group

consists of

• at least one general partner

• one or more limited partners

the general partner of the limited partnership

• runs the business of the limited partnership (manager)

• they have personal liability

• assumes management responsibility for the partnership and has full responsibility for the partnership and for all its debts

• they get a piece of the action w/out putting any money in

• partnership buys insurance (liability/business insurance)

limited partnership pros

• considerable ability to raise capital

• limited liability for “limited” partners

• can have significant tax benefits

limited partnership cons

• can be difficult to manage

• more expensive to create

• greater potential for disputes among partners

limited partner aka silent partner

• only responsible for the amount they invested (no personal liability)

• they only invest money

• beyond their investment they have no other risk

franchise

NOT a type of business entity, it is a way of doing business

• it is renting the trademark

  • ex; automobile dealerships

contract relationship

to use someone’s business trademark/logo

corporations

• considered “persons” in legal terms

• can enter into contracts, own property, be a party to lawsuits, hire and fire people

• it is a legal relationship

• it is born, NOT a contract relationship

OWNED BY SHAREHOLDERS

pros of a corporations

• can raise significant capital (“going public”)

• tax can be favorable

• no liability for corporate obligations (shareholder, director, officer)

cons of a corporation

• can be much more difficult to manage

• more expensive to create

• more complicated form of business structure

• not necessarily the best form of business for all purposes

• double taxation (the company pays taxes on its profits, the profits are passed on to shareholders as dividends, the shareholders must also pay income tax on them)

one exception on corporation

crime/criminal acts

• crime committed in the name of corporation, people themselves do not go to jail in common law

• modern law, they do go to jail

• under modern criminal law, a corporation may be held liable for the criminal acts of its agents and employees

• corporations cannot be imprisoned but they can be fined (corporate directors and officers can be imprisoned)

corporation director role

manages

corporation officer role

runs the business day to day

corporate bylaws

• similar to partnership in that the corporation sets the rules on how to interact w/ each other in how to run the business

• the 3 groups of people in a corporation have to interact with each other

2 ways for corporate to make money (capitalize)

• debt (borrow it) (loaning the corporation money) (corporate bond/IOU)

• sell stock

  • equity

  • ownership

bond is a form of a

loan

corporate bond is an

IOU

limited liability company (LLC)

hybrid between corporation (protection/limited liability) and partnership (tax advantages)

• NOT a contract relationship, born/formed by state law

• preferred structure for many small businesses

• governed by state statutes, which vary from state to state

OWNED BY MEMBERS

pros of limited liability company

• more flexible operating rules than corporation

• tax and liability protection

  • can choose to be taxed as corporation or partnership (but is automatically taxed as partnership unless they wish to be taxed as a corporation)

  • if there is only 1 member they are automatically taxed as sole propietorships

• easy to form

• can raise capital

• simpler than a corporation (not as many rules)

• foreign investors allowed to become LLC members

cons of limited liability company

• state LLC statutes are not uniform

  • businesses that operate in more than one state may not receive consistent treatment in these states

operating agreement

• governs the relationship of the members

• instead of bylaws for LLC

how to raise capital - private vs. public and stocks vs. bonds

private: from owners, friends, banks, private investors

public: selling stocks (equity) or bonds (debt) on public markets

• stocks: sell ownership in company

• bonds: borrow money and repay with interest

ethical issues for business

ex insider trading

origin of real estate concepts

english common law

• to the “center of the Earth” and “to heaven” - common law

• reasonable use - modern law

types of property

• intellectual

• real

• personal

example of intellectual property

• paintings

• music

• photos

• logo

why are the different types of property treated differently?

• tax

• insurance

• accounting

difference between “ownership” and “posession”

Ownership

• is the legal right to possess, use, enjoy, and dispose of a thing to the exclusion of others. It is a bundle of legal rights recognized and protected by law.

Possession

refers to the control or occupancy of property without necessarily having ownership. A person may possess property (e.g., lease it or borrow it) without being the legal owner.

type of ownership

• fee simple

• life estate

• pur autri vie

fee simple

you are the owner & no one has greater entitlement

• can be sold or willed away

• potentially infinite in duration and is assigned forever to owners and their heirs without limitation or condition

life estate

you own the property as long as you are alive, does not exist after death

• you cannot will away a life estate, legally impossible

pur autri vie

for the life of another

vesting

how title is indicated

• it’s physically typed

title

ownership

grant

deliver/give

types of possesion

• leases

• easement

leases

• periodic

• month to month

easement

the right to use another person’s (real) property for a specific purpose

• ex; the right to walk across another’s property

• ex; gas company, phone company

title “vesting”

• grant deed vs. bill of sale

• sole or multiple owners

• common law vs. modern law ownership priority

grant deed

• how (the piece of paper) that one owner uses to transfer title to the new owner

• for real estate

bill of sale

for personal property

sole or multiple owners

• tenant in common

• joint tenancy

• community property (California)

• other states

community property (California)

all property acquired after marriage (including salary & wages)

note

the obligation to pay & the terms of payment. the lou

• the interest rate & the amount of time

common law vs. modern law ownership priority

• first in time - first in right

if a guy sells a property to 4 different people:

under COMMON LAW, the first person he sold it to is the rightful owner

under MODERN LAW, whoever records or files it first is the rightful owner

• race notice

legal aspects of real estate finance

• mortgage

• escrow

• the “players” - bank, seller, buyer, and broker - contract issues

• basic documents

• foreclosure

mortgage (deed of trust)

• secures the loan

• the document that authorizes the bank to take your house back from you if you don’t pay

• recorded as collateral by the bank for the note

escrow

• to facilitate the settlement

• the completion/closing of the transaction

• independent 3rd party hired by buyer, lender, & seller

• they make the exchange between the parties & settles the deal

• records the mortgage or deed of trust document

antitrust laws

public policy is to enhance/promote competition in the marketplace by preventing unreasonable restraints on trade (monopoly — conspiracy).

• applies to every industry except baseball

types:

• sherman act

• clayton act

• federal trade commission act

federal trade commission (FTC)

the federal government agency that enforces antitrust law

• to oversee

the “rule of reason”

permits antitrust activity if reasonable and there is no practical alternative

• ex; telephone companies

sherman act

federal law passed in 1890 which attempts to prohibit “anti-monopoly” between businesses

prohibits monopoly

bans certain type of trade restraints that fall into 2 main categories:

• horizontal restraints

• vertical restraints

clayton act

prohibits conspiracy

• 2 companies cannot conspire together to drive another company out of business

robinson pattman act

prohibits price discrimination

• if there is a difference in quantity or volume, its okay

strengthens section 2 of the clayton act

horizontal and vertical integration

• may violate antitrust laws

the “33” and “34” securities act

federal law regulating initial issuance and resale of securities. the term “securities” is not limited to stock.

state securities laws (blue sky laws)

state laws that regulate the offer and sale of securities within its borders

33 security act

provide structure & stability for the stock market & economy

• disclosure

• Requires disclosure to prevent fraud in initial securities offerings.

insider

anyone who has access to info (not just employee)

• they sell stock to make profit

• they are criminally liable and so is anyone who they give a tip to

securities exchange comission

federal regulator

• formed at same time as securities act

SEC rules

• 10b5

• 16b

• 14a

10b5

prohibits fraud in connection with the purchase or sale of any security

• anti-fraud

• anti insider-trading (buying & selling stock)

• tippers or insiders are only guilty of securities fraud if they shared important information in exchange for a personal benefit

• includes transactions of purchase or sale

16b

requires an insider to return any profits made buying or selling the company’s stock within a 6 month period

• used to prevent insiders from taking advantage of their inside information about wether the company’s stock price is likely to go up or down in the short term

• all short swing profits must be returned to corporation wether the insider used the information or not

• “insider” in this case means officers, directors, and large stockholders

14a

proxy solicitations (authorization/permission to allow a stockholder to appoint an agent to vote their stock)

• companies like apple, amazon

• does not include a sales transaction, simply borrowing the right to vote someone’s shares

“insider trading” and “tippee” liability ethical issues

anyone who acquires inside information as a result of a corporate insider’s breach of a fiduciary (involving trust) duty can be liable under SEC 10b-5

types of stock

• common

• preffered

• etc (debt vs. equity)

common stock

• most risky

• most rewarding

• paid last (if at all)

• typically 1 vote, 1 share

preferred stock

• less risky

• paid before common shareholders

order of payments

• bond holders

• preferred stock

• common stock

*****SHORT-SALE

selling short

• Selling borrowed stock with the expectation that its price will drop so it can be bought back at a lower price and returned, generating a profit

34 security act

registration/application requirement

33 & 34

provides protection and integrity in the market (can still make stupid decisions)

liquidate

sell all assets of the company

tenant in common

4 people owning the same property

• if 1 dies they can will it away to family

everything besides real property is

personal property (both under english common law)

intellectual property

modern law

all 3 real estate types can be

bought, sold, inherited

howey test

used to decide if something is a security. if it involves:

• investment of money

• with expectation of profit

nonprofit corporations

corporations formed for purposes other than making a profit

• ex; private hospitals, educational institutions, charities, religious organizations

file the articles with the state

once the articles of incorporation have been prepared and signed, they are sent to the appropriate state official, usually the secretary of state, along with the required filing fee

then the secretary of state stamps the articles “filed” and returns a copy of the articles to the incorporators. once this occurs, the corporation officially exists

piercing the corporate veil

the action of a court to disregard the corporate entity and hold the shareholders personally liable for corporate debts and obligations

• landlord, bank, etc., can come after corporate owner

• generally courts do this when the corporate privilege is abused for personal benefit or when the corporate business is treated so carelessly that it is indistinguishable from that of a controlling shareholder

commingling of money

• not separating corporate vs. individual money

• factor that lead courts to pierce the corporate veil

alter ego

when a person or group controls a corporation so completely that there’s no real separation between them

corporate financing

corporates normally are financed by the issuance and sale of corporate securities

securities

stocks and bonds

• evidence an ownership interest in a corporation or a promise repayment of debt by a corporation

bonds

debt securities

• represent the borrowing of funds

• issued by business firms and governments as evidence of funds they are borrowing from investors

business judgement rule

a corporate director or officer will not be liable to the corporation or to its shareholders for honest mistakes of judgement and bad business decisions

shareholders

• acquisition of a share of stock makes a person an owner and shareholder in a corporation

• no responsibility for the daily management of the corporation, they are responsible for choosing the board of directors

articles of organization

must be filed to form an LLC

concurrent ownership

persons who share ownership rights simultaneously in particular property (including real and personal property)