REG CPA EXAM STUDY GUIDE: R6

Dismissal/Conversion of a Chapter 7 Case

A Chapter 7 by an individual may be dismissed if:

a) Upon a finding that granting relief would constitute abuse

b) The debtor has sufficient income to pay the debts

Means Test:

1) If Average Monthly Income < State Median -> Stay in Chapter 7

2) If Average Monthly Income > State Median -> Move to the means test

3) If (Average Monthly Income - Allowed Expense) * 60 < $9,075 -> Stay in Chapter 7

4) If (Average Monthly Income - Allowed Expense) * 60 > $15,150 -> Dismiss

Property of a Bankrupt Estate

Rule: Debtor's estate includes all real/personal property at the time of filing

Also includes DIII found within 180 days after filing:

D - Property the debtor receives from Divorce

I - Income generated from rent, dividends, or interest

I - Inheritance

I - Insurance within 180 days after the petition

Properties excluded from the estate:

- Salaries after the petition (post petition earnings)

- Basic household items needed to live

Preferential payment is:

- A transfer made to or for the benefit of a creditor
- On account of an antecedent (already existing) debt of the debtor
- Made within 90 days prior to the filing (one year if the creditor is an insider, such as an officer of the debtor organization or a close relative or the debtor)
- Made while the debtor was insolvent
- Results in the creditor receiving more than the creditor would have received under the Bankruptcy Code

Chapter 7 Features

Goal:

Give an honest debtor a fresh start by financially discharging most debts

Individual Debt -> Discharged

Entity Debt -> Dissolved

4 Items that Prevent Discharge (Chapter 7)

1) Debtor is not an individual
2) Fraudulent transfers or concealment of property
3) Unjustifiably failed to keep books and records
4) Prior discharge within 8 years

Six Exceptions to Discharge (WAFTED)

Nondischargeable Debts:

W - Willful and malicious injury

A - Alimony

F - Fraud or Fines

T - Taxes within 3 years

E - Educational loans

D - Debts undisclosed in bankruptcy petition

Affordable Care Act

Goal:

Improve access to healthcare by providing workers access to affordable healthcare; creates a national standard (not a national healthcare plan)

Healthcare Coverage may be Offered through:

1) An employer provided plan

2) Plan purchased through Health Insurance Marketplace

3) A government sponsored program (medicare, medicaid)

4) Direct purchase from an insurance company

Participation: Both employers and employees must participate

Applicable Large Employees:

- Employers with 50+ full-time employees (30 hrs a week or 130 a month); must provide an opportunity to purchase Healthcare

- Employers must file annual information to IRS and provide information to workers about Healthcare

- It is illegal to deny coverage to individuals with preexisting condtions

Affordable Care Act: Penalties

- Only applies to employers

Penalty Type 1:

- Must pay $2,880 per employee with the first 30 employees excluded from the calculation if:

a) It does not offer the minimum essential coverage to at least 95% of its full-time employees (and their dependents)

b) At least one full-time employee receives the premium tax credit for purchasing coverage through the Health Insurance Marketplace

Penalty Type 2:

- Must pay $4,320 per employees if:

a) The minimum coverage is not affordable or provide minimum value

General Partnership/Joint Venture

Formation -> Easy to set up, nothing needs to be filed with the state

General Partnership -> Ongoing transactions

Joint Venture -> Single or a series of specific transactions (not ongoing)

- General Partnership agreement does not need to be in writing unless it is longer than a year

Three simple elements of Partnerships:

1) Two or more people

2) Who agree

3) To carry on a business for a profit

Operation of a General Partnership:

- Absent to an agreement, all partners have equal rights to manage

- Management rights and voting power are not based on amount contributed

- Decisions regarding ordinary course of business may be controlled by majority

- Unanimous consent required for: new partners, confessing a judgment or submitting a claim to arbitration

- Making a fundamental change in the partnership business

- Absent an agreement -> All partners have equal rights to share Profits and Losses

- Unless noted in the partnership agreement, partners are not entitled for compensation for services

Limited Liability Partnership (LLP)

- Similar to General Partnership including sharing of Profit and Loss and all advantages/disadvantages

Liability:

- Partners are not liable for acts of fellow partners

- They are still liable for own/employee negligence, errors, omissions or malpractice

Formation:

- Must be filed with the state (some states restrict to only lawyers/accountants)

Certificate of LLP includes:

a) The LLP's name

b) The name and location of its registered office

c) The number of partners

d) Description of the partnership business

Limited Liability Company (LLC)

Feature A: Limited Liability like shareholders of a corporation

Feature B: Ability to be taxed like a partnership

Members = LLC Owners

Formation:

- Files an article of organization with the SEC of state which includes:

a) Statement that the entity is an LLC

b) Name of the LLC and an indication that it is an LLC

c) Address of the LLC's registered office and name of its agent

d) If management is vested in managers

e) Names of the persons who will be managing the company

Generally all members may participate in management

Member-Managed LLC: Each member is an agent and has authority

Manager-Managed LLC: Each member is an agent and has authority

- Voting strength is proportional to contributions

- Partners and Losses get split based on the value of the partners contributions

- Under the ULLCA (which is followed in some states) Profits are shared equally regardless of contributions

6 Basic Types of Bankruptcy Cases

Chapter 7 -> Liquidation
Chapter 9 -> Municipal Debt Adjustment
Chapter 11 -> Reorganization
Chapter 12 -> Family Farmers with Regular Income
Chapter 13 -> Adjustment of Debt of Individuals with Income
Chapter 15 -> Ancillary + Other Cross Boarder Cases

Trustee Requirements

Chapter 7 -> Trustee must be appointed
Chapter 13 -> Trustee must be appointed
Chapter 11 -> Trustee isn't required but courts

Automatic Stay

- Stops almost all collection efforts (not alimony)
- Starts when the petition is filed

Section 341 Meeting

Creditors Meeting

Three Categories for Claiants

Paid in Order:

1) Secured Claimants

2) Priority Claimants (SAG WEG CTI)

3) General Creditors who filed claim on time

Federal Insurance Contributions Act (FICA)

Goal:

Provide workers with benefits in the case of death, disability or retirement

Participation:

1) All full-time and part-time employees

2) Self-employment if net profits exceed $400

- Employees have right to reimbursement if they pay both sides of the FICA taxes

Funding:

Is funded jointly by employers and employees, responsibility of employers is to withhold taxes

- Income includes all earned income (salary, bonuses, and commissions) does not include gifts, interest, and dividends

FICA Contributions -> 6.2%

Medicare Contributions -> 1.45%

Unemployment Compensation (FUTA)

Goal:

Establish a state-run system of insurance to provide income to workers who lost their job

- Excludes the self-employed

Participation:

- All employers who have either

1) Quarterly payrolls of at least $1,500

2) Employs at least 1 person for 20 weeks in a year

Funding:

Only the employer pays and can be deductible as a business expense

Social Security/FICA Benefits Four Major Programs

1) Old Age and Survivors Insurance
2) Disability Insurance
3) Medicare (but not Medicaid)
4) Supplemental Security Income

Workers' Compensation

Goal:

- A state-run program designed to enable employees to recover for injuries occurred on the job

Employers are strictly liable regardless of fault:

- Even in negligent or assumption of risk

- Only for employees in the scope of employment

Participation:

- All employers must participate except for:

-> Agriculture workers

-> Domestic workers

-> Casual workers (temporary office workers)

-> Public employees

-> Independent contractors

Funding:

- Funded through the employer through state/private insurance

Premium Tax Credit

Goal:

Refundable tax credit that helps low/mid income taxpayers to cover premiums for Healthcare through the markertplace

Eligibility:

1) Has household income within a certain range (100-400% of the federal poverty level)

2) Does not file a Married Filing Separately

3) Cannot be claimed as a dependent

4) Must be enrolled in the marketplace for 1 month

Foreign Corrupt Practices Act (FCPA)

Goal:

Generally prohibits the payments of bribes to foreign officials

Penalties:

Twice the amount benefit + 5 years in prison

Sole Proprietorship

- Simplest form of business ownership

- Sole proprietorship is Personally Liable for all obligations of the firm

- One owner

Duration:

- Cannot exist beyond the life of the sole proprietorship

Benefits of a Sole Proprietorship:

a) Wants to form a business that they will manage

b) Wants to claim income/losses on taxes

c) Does not want to bother with formality

Formation of Corporations

- Most states are created using the Revised Model Business Corporation Act (RMBCA)

Promoters -> procure capital to form corporations

Articles of incorporation must include:

1) Name of the corporation

2) Name/address of corporation registration

3) Name/address of each of the incorporators

4) Type/number of shares authorized to be issued

Commonly wrong answers, don't need to include:

1) Type of business

2) Business purpose

3) Where the offices are located

4) Initial directors or officers name

Ultra Vires Act -> clause in articles stating purpose

Piercing the Corporate Veil (ICF)

Disregarding the corporate entity:

I - Inadequate capitalization

C - Commingling personal with corporate funds

F - Fraud

Who can be a debtor in Chapter 7 (RIBS)

Rule:

Only an individual, partnership, or corporation that resides in the U.S. or has a place of business in the U.S.

Exceptions (May not file for Chapter 7) No RIBS in Chapter 7:

R - Railroads

I - Insurance companies or small business Investment companies

B - Banks

S - Savings Institutions

Who can be a Debtor in Chapter 11

Rule:

Only an individual, partnership, or corporation that resides in the U.S. or has a place of business in the U.S.

Exceptions (May not file for Chapter 11) No BIBS in Chapter 11:

B - Brokers

I - Insurance companies or small business Investment companies

B - Banks

S - Savings institutions

Involuntary Cases (Chapter 7 and Chapter 11)

- Creditors must file a petition and show that the debtor is not paying debts and is in default

- Debtors who cannot be involuntarily petitioned:

a) Farmers

b) Non-profit charitable organizations

- Only creditors who are owed at least $18,600 in unsecured, undisputed debt can petition:

With Fewer than 12 Creditors -> Only one creditor owed at least $18,600 is needed

With More than 12 Creditors -> At least 3 creditors owed at least $18,600 combined are need

Priority Claimant Include (SAG-WEG-CTI)

From Highest to Lowest Priority:

S - Support obligations owed to spouses and children

A - expenses of bankruptcy Administration (filing fees, court fees, trustee fees, legal/accounting fees)

G - Gap claims accrued in the ordinary course of business after an involuntary petition is filed

W - Wage claims of employees for sums earned within 180 days of bankruptcy (up to $15,150)

E - Sums owed for Employee benefits up to whatever of the $15,150 above is left

G - Claims of Grain farmers and fishermen up to $7,475

C - Consumer deposits up to $3,350

T - Tax claims

I - Personal Injury claims arising from Intoxicated driving

Formation (Summary of Business Entities)

Sole Proprietorship -> No formalities required, owner can simply operate a business

General Partnership/Joint Venture -> No formalities required, formed by verbal or written agreement or mere conduct

Limited Liability Partnership -> Formalities, file a statement of qualification with the state

Limited Partner -> Formalities, file certificate of Limited Partnersip with the state

Limited Liability Company -> Formalities, file articles of organization with the state

C-Corporation -> Formalities, file articles of incorporation/corporate charter with the state

Subchapter S-Corporation -> Formalities, file articles of incorporation/corporate charter with the state; also needs S-Corporation election

Liability of Owners (Summary of Business Entities)

Sole Proprietorship -> Unlimited personal liability for all business obligations

General Partnership/Joint Venture -> Unlimited personal liability for all partnership obligations

Limited Liability Partnership -> Partners are generally not liable for partnership obligations, unless caused by their own negligence or by their direct employees

Limited Partner -> General Partner has unlimited personal liability while

Limited Partner is not liable beyond investment

Limited Liability Company -> Members are generally not personally liable beyond their investment

C-Corporation -> Shareholders are generally not personally liable beyond their investment

Subchapter S-Corporation -> Shareholders are generally not personally liable beyond their investment

Management (Summary of Business Entities)

Sole Proprietorship -> Sole Proprietor manages directly or can appoint manager

General Partnership/Joint Venture -> Owners manages directly or can agree to appoint managing partner

Limited Liability Partnership -> Partners manages or can appoint managing partners

Limited Partnership -> General Partners are the exclusive manager(s)

Limited Partners do not normally manage

Limited Liability Company -> Members manage directly or can agree to appoint a manager

C-Corporation -> Managed by the Board of Directors which appoints officers to run day-to-day operations

Subchapter S-Corporation -> Managed by the Board of Directors which appoints officers to run day-to-day operations

Transferability (Summary of Business Entities)

Sole Proprietorship -> Sole Proprietorship can sell the business at will

General Partnership/Joint Venture ->

Partners cannot transfer ownership interest without unanimous consent

Limited Liability Partnership ->

Partners cannot transfer ownership interest without unanimous consent

Limited Partner -> Partners (whether General or Limited) cannot transfer ownership interest without unanimous consent

Limited Liability Company -> Absent agreement otherwise, cannot transfer ownership interest without unanimous consent

C-Corporation -> Shareholders are free to transfer ownership interest unless they agree otherwise

Subchapter S-Corporation -> Shareholders generally may transfer ownership unless they agree otherwise, but cannot transfer to foreign or entity shareholders

Taxation (Summary of Business Entities)

Sole Proprietorship -> "Flow Through" Taxation

General Partnership/Joint Venture -> "Flow Through" Taxation

Limited Liability Partnership -> "Flow Through" Taxation (but partners may have passive loss restrictions)

Limited Partnership -> "Flow Through" Taxation (but partners may have passive loss restrictions)

Limited Liability Company -> "Flow Through" (but partners may have passive loss restrictions)

C-Corporation -> Income taxed at corporate level and again for taxpayers with dividends

Subchapter S-Corporation -> "Flow Through" Taxation

Limited Partnership (LP)

General Partners:

- Have personal liability for all partnership debts

- Manages the day-to-day business activities

Limited Partners:

- Liability for debts is generally limited to their investment

- Does not manage day-to-day

Absent an agreement -> Profits and Losses get split based on the value of the partners' contributions

Methods of Dissolution:

1) The occurrence of the time/event stated in the partnership agreement

2) Written consent of all of the partners (unanimous consent)

3) Withdrawal or death of a General Partner (not a Limited Partner)

4) Judicial Decree

Nature of Corporations

Liability:

- Only the corporation is liable for corporate obligations

Disadvantage:

- Subject to double taxation

Advantage:

- Perpetual life

- Freely transfer of ownership

Management:

- Run by the Board of Directors

Shareholders

- Have the right to vote
- Can approve fundamental changes to the corporation

Dividends Declared

Once dividends are declared the corporation has a legal liability to pay out dividends. At such point shareholders become unsecured creditors of the company. Shareholders can not enforce the corporation to payout dividends.