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Business Law - Test 2 Items
Liability, Partnerships, Taxation, etc.
111
Business
03/27/2007

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Cards

Term
In what type of business is there unlimited personal liability towards the owners and employees?
Definition
A Partnership.
Term
What is the word to describe an employee of a company that has the ability to make contracts? What type of business relationship is this?
Definition
An agent of the company, and Principal/Agent relationship.
Term
Do all agents have the power to create contracts?
Definition
No. Only certain agents are able to initiate contracts, while other agents will not have the ability stated in their job description.
Term
If an agent of a company, who is authorized to create contracts, makes a contract with a customer, does that create liability for the company?
Definition
Yes, an agent who has the power to create contracts can also create vicarious liability for the company at any time by negotiating a contract.
Term
What is the other type of business relationship (not Principal/Agent)?
Definition
Master/Servant.
Term
In a Master/Servant business relationship, what employees have the power to create contracts?
Definition
Trick question, none do.
Term
In a Master/Servant relationship, an employee has no ability to create contracts. Does this mean that they cannot create vicarious liability for the company?
Definition
No, servants are still able to create liability for the company if they injure someone with company equipment, or if they are on the job.
Term
Say an employee working for a plumbing corporation hits you while he's on the way to do some emergency work at a house. Because he was on the job, you can sue either him (tort) or sue the company. Which would you rather sue?
Definition
The company, since they have a bigger sum of cash they can pay out.
Term
What is the difference between being 'on the job' and frolicking?
Definition
When an employee is on the job, they are doing something within their job description and doing something for the company. When an employee is frolicking, they are doing something that is not in the job description, and if this is proven in court, then the company is not liable for the actions of the employee.
Term
Say a bartender is taking crap from a customer all night, and he finally has enough and punches the guy in the nose. Could the business that hired the bartender be sued?
Definition
No, because the bartender's job description is not to punch people in the face, it is to serve drinks. Therefore, he was not on the job and was frolicking.
Term
Say a bouncer from a club is escorting someone out because they were getting obnoxious to other customers. The person resists and the bouncer ends up breaking the person's arm. Can the company be sued for this?
Definition
Yes, because it is in the job description of a bouncer to escort unruly guests out of the establishment.
Term
What is 'apparent authority?'
Definition
This is when a business puts an employee in a position where they look like the have authority to be doing something.
Term
If a company places an employee in a position where they have apparent authority, can the company be held liable if someone in an employee's uniform does something to steal from customers?
Definition
Yes.
Term
What is the definition for 'holding yourself out?'
Definition
This is when you pretend to be someone you're really not to a customer. If that customer sues you as something you are pretending to be, you will be able to be sued as the person you are pretending to be, because you're holding yourself out as that thing.
Term
What are the various forms of business ownership?
Definition
Sole Proprietorship, Partnerships, and Corporations.
Term
What is a sole proprietorship?
Definition
This is when only one person owns the whole company.
Term
What are some of the advantages of being a sole proprietor?
Definition
1) Taxes are easy. There is only one return that needs to be filed, and that is from you. You don't need to do one for yourself and one for the company.
2) You are able to be a sole proprietor and have a massive company.
Term
What are some disadvantages to being a sole proprietor?
Definition
1) You need to have a lot of money, or a bank that really trusts you in order to get your business off of the ground.
2) As a sole proprietor, you basically need to be around all the time as a full time employee - there basically is no vacation time.
Term
What is a General Partnership?
Definition
This is when two or more people get together and sign an agreement stating that they own the company. There can be as many equal partners as you want.
Term
What are some advantages to having a partnership?
Definition
1) There is still no need to be regulated by the government (as with sole proprietorship).
2) Taxes are still fairly simple, there is only one return that needs to be filed.
Term
In a partnership, an agreement to initiate the partnership is signed by all partners. Does this agreement need to be shared with customers, employees, and others?

What could this document state?
Definition
No, this agreement can be kept confidential between all the partners.

This document usually states who is responsible for what in the company, and also will have a plan for what happens to company assets if a partner dies.
Term
Concerning taxes: What is a pass-through entity?
Definition
A pass-through entity is an entity that does not need to file separate tax returns, because the entity is a singular entity.
Term
In a partnership, are loses and profits allowed to be split up between partners on their tax returns?
Definition
Yes, and typically, the people in the higher tax brackets (the rich ones) will typically show the losses on their returns, so their adjusted income will be smaller and reduce taxes needed to be payed to the government.
Term
What is a corporation?
Definition
A corporation is a separate entity from the people working for it. Therefore, it is not a pass-through entity.
Term
How is a corporation formed?
Definition
One has to go to the secretary of state n any state in order to start a corporation.
Term
In a corporation, stockholders own parts of the company. Does this mean they are both the same entity?
Definition
No, the corporation by itself is an entity, and even though stakeholders do own parts of it, does not mean that they are one and the same.
Term
What type of number do corporations have to get when they are formed?
Definition
Taxpayer ID's.
Term
When you form a corporation, there is one thing you must do in order to gain capital and increase ownership in the company. What is this activity?
Definition
You authorize a certain number of stocks to be sold.
Term
Say two people own a partnership. This partnership takes in $100,000 over the course of a year, and $25,000 per parter is spent on things. What is the taxable income to both of the partners?
Definition
The answer is $50,000. This is because partnerships have expenses that can be subtracted from the total income.
Term
Say there is a corporation made up of two employees. It took in a total of $100,000 over the course of a year. $50,000 of that was spent on expenses, and there is a salary cost of $12,500 for the two employees. What is the net taxable income for the corpo
Definition
The net taxable income is $25,000. We subtract all the expenses out in order to get the Net Income.
Term
Say a corporation find out its net income number. How will the corporation be taxed based on that number?
Definition
There will be a percentage tax on that number, and money leftover can be used for investment, hiring, etc.
Term
Corporations suffer from multiple taxation. Besides net income tax, what do they also have to pay taxwise?
Definition
A tax on dividends that are paid out to shareholders.
Term
What is a limited partnership?
Definition
This is where there is one general partner with unlimited personal liability, and there are other partners (limited partners) that will not have unlimited personal liability and enjoy pass-through taxation.
Term
What are limited partners prevented from doing?
Definition
Because they have limited personal liability, they are not allowed to have a management position in the partnership.
Term
What is an 'S' corporation?
Definition
This is a corporation that has special permission from the IRS to be taxed like a partnership instead of like a corporation.
Term
What are the limitations of an S Corporation?
Definition
An S Corporation may only have up to 75 shareholders at any one time.
Term
Do you form an S Corporation any different than you would form a normal corporation?
Definition
No, you form this corporation just like any other, you just need permission from the IRS for the tax exemption.
Term
In a general partnership, who has control of the business?

What about a limited partnership?
Definition
All partners have equal control in a general partnership. In a limited partnership, only the general partners have power and control over the business.
Term
Who has power and control in a corporation.
Definition
Stockholders with the most stock in the company sit on the board and vote on company decisions, but the officers of the company are the ones that actually make things happen. An S-Corporation is exactly the same.
Term
In a partnership, being a general partner means what according to who owns the business?
Definition
A general partner is basically the same thing as being an owner.
Term
There are three partners in a company. One of them dies, and there is no clause of what happens if this occurs in the partnership agreement. What, in general, happens?
Definition
1/3 of the assets in the company go to the partner's estate that died. This usually means the company is done for.
Term
Say the scenario in the previous flashcard is still true. What if the other 2 partners want to keep the business going? What do they do?
Definition
They go to a bank and ask for an auditor to come out and evaluate how much of the deceased partner's share of the company is worth. After the partners that remain find that out, they will ask the bank for a loan of that amount and pay the deceased partner's estate.
Term
In a corporation, what happens if a shareholder dies?
Definition
Not too much, those shares that were owned can easily be redistributed.
Term
What is a Buy-Sell agreement (concerning a general partnership)?
Definition
This is the clause that will tell the partners what to do to establish value of the company and what to do if one of the partners dies.
Term
What is the SEC, when was it created, and why was it created?
Definition
The Securities Exchange Commission, created in 1934 due to terrible regulation of securities before the Great Depression.
Term
What are state regulations about securities also called?
Definition
Blue Sky Laws
Term
What is the CFTC?
Definition
Commodities Futures Trading Commission - Almost all commodities are traded in the future.
Term
What is the definition of a security?
Definition
Anything that can be considered an 'investment contract,' meaning investors who invest in a company will expect a return on their money.
Term
What does the phrase 'Going Public' in relation to corporations, mean?
Definition
This is when the Initial Public Offering of stocks and bonds are offered up to the public.
Term
What does it take for a company to have permission to 'go public?'
Definition
You have to register with the SEC and tell them everything about you and your company. This document is known as a prospectus.
Term
Just to see if you've forgotten already, what's a prospectus document?
Definition
This is a document to the SEC of you spilling your guts about yourself and the company you are registering.
Term
What stages are there of registering with the SEC?
Definition
1) Pre-Filing: You are not allowed to sell securities until you file and are approved.
2) Waiting Period: This is where you are waiting for the SEC to approve your prospectus. You never really know how long this process will take, especially if you lie in your prospectus.
3) Post-Effective: Just another word for 'approved' and you are able to begin selling securities.
Term
What do you have to give someone before selling them a security?
Definition
A copy of the prospectus.
Term
Does everyone buying securities read the prospectus?
Definition
No, in fact, a lot of people simply toss it aside.
Term
Is an SEC approval the same as giving your security a value?
Definition
No, the SEC is only there to make sure you disclose everything to prospective buyers of your securities. It is not the government's place to tell people to invest or not.
Term
If you are post effect and are selling securities on the street, and someone finds that you didn't disclose something in your prospectus, what could the SEC do?
What could people who lost all their money in your securities do?
Definition
They could file criminal charges and issue an injunction against you to stop selling securities.

People who lost money in these could also bring you up on civil charges.
Term
What is the 1934 Securities act, and what does it relate to?
Definition
The 1934 securities act was all about being public, instead of just going public, meaning it placed rules on companies who were operating and selling securities.
Term
What is the primary issue in the 1934 Securities Act?
Definition
Insider trading. Those with inside information may not buy or sell stocks.
Term
What are administrative agencies commonly referred to?
Definition
The fourth branch of government, because 1 out of 4 government employees work for an administrative agency.
Term
Why do we have administrative agencies?
Definition
1) To enforce a countrywide standard.
2) Congress and the like will have no experience in the fields that the agency will regulate, so that agency will hire people experienced in that field.
3) Congress and courts are always overbooked with cases, so they love handing off cases to administrative agencies to resolve.
Term

-Administrative Agencies-



What is the first thing administrative agencies do to help people?
Definition
They advise people on how to go about something legally.
Term

-Administrative Agencies-



What do these agencies do to make sure the law is followed?
Definition
Supervise. These agencies oversee people and make sure you follow the rules.
Term

-Administrative Agencies-



What do agencies do to institute guidelines?
Definition
They make rules using the legislative branch. People in the agency will come up with rules that need to be followed.
Term

-Administrative Agencies-



How can an agency tell if a rule has been broken?
Definition
Agencies are given the power to investigate rule violations. They only do an investigation if they are very sure you have broken rules.
Term

-Administrative Agencies-



If an agency finds you have broken the rules, what will they do?
Definition
The agency will bring you up on charges and prosecute you. They will only prosecute if their investigation comes back with positive evidence you've done something wrong.
Term

-Administrative Agencies-



What can also happen besides prosecution if you are caught breaking the rules by an agency?
Definition
The agency can adjudicate and decide on whether or not to revoke your license or whatnot.
Term
What are some of the dangers of administrative agencies?
Definition
These agencies basically have all the powers of government inside of them, which gives them unprecedented power.
Term
So, say you are charged with something by an administrative agency. What do you look to to try and protect yourself?
Definition
Judicial Standards for Administrative Agencies.
Term

Judicial Standards for Administrative Agencies



When you say that an agency's interpretation of their existence is a problem, what are you implying?
Definition
You are saying that the agency's goal or statement is too broad. But, because congress usually knows how to form agencies, you'll usually lose this argument.
Term

Judicial Standards for Administrative Agencies



Say you accuse an agency of doing something beyond what they are supposed to be doing. What are you really saying?
Definition
You are saying that the agency is outside their boundaries, and if an agency is going outside of them, then they are not able to regulate it.

If you lose this, you can argue Constitutional rights.
Term

Judicial Standards for Administrative Agencies



Say a rule that an administrative agency made is random and out of the blue. In judicial terms, what would you call this?
Definition
An arbitrary rule. This goes against the constitution.
Term

Judicial Standards for Administrative Agencies



Can agencies make rules that are harmful in intent? What are these types of rules called?
Definition
The obvious answer is 'no.' We call these rules Capricious rules.
Term
Does the judicial branch want people who disagree with government agencies to file suits in court against them?
Definition
No, this would clog up the judicial branch even more than it already is. You must follow a specific set of instructions to be able to file a suit against an agency.
Term
What is the first major prerequisite in order to file a suit against an administrative agency?
Definition
You (the plaintiff) must have been personally and directly harmed.
Term
If you were personally harmed by what an agency did to you, what is the process called you must go through before you can file a suit against the agency in court?
Definition
Exhaustion of remedies.
Term
What is the definition of 'exhaustion of remedies' in respect to you trying to file a suit against an administrative agency?
Definition
This is where you are required to use all available remedies within the agency (review committees, etc.) before you are allowed to proceed to the courts. This process is usually long and very convoluted.
Term
In the IRS, how would you exhaust all the remedies you need to before going to court?
Definition
The first thing is the IRS agent, you then go to the supervisor, then to the District Director, then finally the IRS court of appeals (which is full of tax attorneys). If all these parts do not agree with what happened to you, then you may finally go to court.
Term
Is exhausting all the remedies available to you and easy and cheap task?
Definition
Not at all. Generally, by the time you are able to get to the courts to file a case, the penalties you are receiving for not rectifying the problem are growing, and you are simply exhausted from going through all the red tape.
Term
So, you go through the exhaustion of remedies process and are able to file a suit. What are your chances for winning against the agency?
Definition
Very low. The rules are structured in the agency's favor.
Term
What do the agencies have in their favor in court?
Definition
They do not have as high of a burden of proof as you do.
Term
What are the three levels of proof, from lowest to highest?
Definition
1) Manifest Weight - The largest burden of proof level.
2) Ponderance - About 70% of the jury convinced.
3) Substantial Evidence - As a reasonable mind would accept.
Term
You, as the plaintiff, must prove what level of proof to the jury in orer to win the case?
Definition
Manifest Weight.
Term
What is level of proof an agency must provide?
Definition
Substantial Evidence.
Term
Concerning the government, what is delegation of power?
Definition
Assigning power to lower levels of government.
Term
What do state governments do concerning delegation of power? Something different than the federal government?
Definition
No, states usually work just the same as the federal government and delegate power within the state.
Term
What is the term that supposedly keeps our different levels of government equal?
Definition
Checks and Balances. Certain parts of the government an check up on another to see if they're doing their job properly.
Term
So, are the three branches of government actually equal?
Definition
No, some people say the judicial branch is the strongest.
Term
Why is the Judicial Branch supposedly more powerful than the other two branches of our government?
Definition
Judicial Review.
Term
What is judicial review?
Definition
This is when the Supreme Court looks over something and decides whether or not it is constitutional or not.
Term
Can the supreme court talk about anything they want concerning judicial review? (Meaning can they elect what they review or not by themselves?)
Definition
No, a petition must be made by someone else and taken to the Supreme Court.
Term
How many petitions per year are actually reviewed by the court, compared to how many are actually given to the court and thrown out?
Definition
Only about 100 are discussed, while nearly 5000 are submitted.
Term
What was the court case that actually created judicial review?
Definition
Marbury vs. Madison. This court case was about a guy (Marbury) going against the secretary of state for not appointing him as a justice of the peace.
Term
How did Marbury vs. Madison create judicial review?
Definition
Madison wouldn't appoint marbury, so marbury went to court and filed a petition about this. The court accepted it and debated it. (This was the birth of judicial review.)
Term
Who won (but ultimately lost) Marbury vs. Madison after the judicial review was completed?
Definition
Madison and Jefferson (who penned the constitution). Jefferson didn't know it at the time, but the judicial branch has just given themselves more power to review decisions made by the other branches of the government.
Term
Who appoints new supreme court justices?

Does this person have full control over if they are put into the court or not?
Definition
The current president of the US, and no. Congress (the senate) must also approve the nomination, as well.
Term
What is considered a liberal judge in legal terms?
Definition
A judicial activist, who believes they are in place to lead society.
Term
Who is considered a conservative judge in legal terms?
Definition
A judge who follows judicial restraint and believes that their only purpose is to interpret what the constitution thinks is the right decision.
Term
What is the commerce clause, and where is it found?
Definition
The commerce clause is found in the constitution, and gives the federal government the ability to regulate interstate commerce.
Term
What is the difference between intra-state and inter-state commerce?
Definition
Intra state commerce is when a business sells products or services that do not have anything included from outside the state when bought or sold. Because this is completely obsolete this day and age, inter-state commerce always overrules it.
Term
What was the landmark case that decided basically all busienss was inter-state commerce?
Definition
Wikard vs. Filburn - This was when Wikard, a farmer, decided not to comply with the USDA's order to shut down part of his lands due to a grain surplus. He argued his lands didn't need to be shut down because he only used the land the USDA wanted him to close for feeding his animals.
Term
In Wikard vs. Filburn, what was decided in the case? Was Wikard actually doing intra-state commerce by using his lands to feed his animals?
Definition
The court ruled that he was doing interstate commerce, because his other land was producing a surplus of grain that would not be there had he shut down part of his land for production.
Term
What does the term 'Dominimus' mean?
Definition
This means that the effect of what you did was too small to be a problem.
Term
When are states able to regulate commerce? (What type of power does it fall under, and what does that power have control over?)
Definition
Police power, and police power is everything regarding health, safety, morals, and general welfare.
Term
What areas of regulation are there concerning commerce? (Remember, there are five.)
Definition
Exclusively Federal, Federal Law Pre-Empts the field, Federal Law does not Pre-empt, and No Federal Law in Existance.
Term
If something is uniform across the country, does that mean the federal government is required to regulate it?
Definition
No, the government can decide to regulate uniform things, but they are not required to.
Term
What is a federal law that preempts state law referred to as? (Hint: A federal law that does not preempt is also considered a part of this.)
Definition
A Dual Regulation law.
Term
If a state makes a law, but the federal government also passes a law with less restrictions, and the bill says the law preempts, what does that mean?
Definition
It means that the state law is now preempted by the federal law and no longer applies.
Term
What is a Federal Law that does not preempt?
Definition
This is where states are allowed to make their own rules about a law, even if there is already a federal law in place- it does not preempt the state's decision.
Term
Even if there is a Federal law that does not preempt in place, what could a state do that would still make their law unconstitutional?
Definition
If there is a federal law that does not preempt in place, a law can still be unconstitutional if:
1) There is an irreconcilable conflict in the state law against the federal law.
2) The law is discriminatory to interstate commerce.
3) Creates an undue burden on Interstate commerce.
Term
If no Federal Law exists, are states given free reign on what to do?
Definition
Kind of, but they still have to abide by these rules: Interstate commerce cannot have an undue burden placed on it, be discriminated against, and the law cannot be arbitrary, capricious, or unreasonable.
Term
What is a WRIT OF MANDAMUS? (This concerns judicial review)
Definition
This is an order of the court ordering an executive person to follow their decision.