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Business Law Chapter 10
Business Organizations
72
Law
Undergraduate 2
10/29/2009

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Cards

Term

 

 

 

 

What is an entrepreneur?

Definition

 

 

 

One who initiates and assumes the financial risks of a new enterprise and undertakes to provide or control its management.

Term

 

 

 

 

What are the main factors to consider in deciding in what form a business should organize?

Definition

 

 

  •  
    •  
      • Ease of creation
      • Liability of the owners
      • Tax considerations
      • Need for Capital
Term

 

 

 

 

What is a sole proprietorship?

Definition

 

 

 

 

The owner is the business; there is no separate business organization

Term

 

 

 

 

What formalities are required to form a sole proprietorship?

Definition

 

 

 

There are few legal forms involved in setting up this type of business; it is created at will by the owner.

Term

 

 

 

 

How are business profits and losses taxed in a sole proprietorship?

Definition

 

 

 

 

Business profits and loss are taxed as personal income in this single-owner business form.

Term

 

 

 

 

What personal liability does the sole proprietorship have for business debts?

Definition

 

 

 

 

The business owner has unlimited liability, or legal responsibility, for all obligations incurred in doing business.

Term

 

 

 

 

What is the definition of a general partnership?

Definition

 

 

 

 

This business form arises from an agreement between two or more persons to carry on a business for profit.

Term

 

 

 

 

What is the amount of control of the business of each partner in a general partnership?

Definition

 

 

 

Partners are co-owners of the business and have joint control over its operation and the right to share in its profits.

Term

 

 

 

 

What are the tax consequences of a general partnership?

Definition

 

 

 

 

The firm itself does not pay income taxes; profits are passed through to the partners and taxed as individual income.

Term

 

 

 

 

What is the personal liability of general partners for partnership debts?

Definition

 

 

 

General partners are personally liable for partnership obligations; personal assets of the parners are subject to creditors' claims.

Term

 

 

 

 

What is a limited partnership?

Definition

 

 

 

 

This business form has one or more general partners and one or more limited partners.

Term

 

 

 

 

How is a limited partnership formed?

Definition

 

 

 

Formed by agreement of the parties. A certificate of limited partnership is filed with the appropriate state office. A charter is issued by the state.

Term

 

 

 

 

What is the personal liability of a general partner in a limited partnership for debts of the business?

Definition

 

 

 

The general partner(s) assumes responsibility for the management of the partnership and unlimited liability for all partnership debts.

Term

 

 

 

 

What is the personal liability of a limited partner in a limited partnership for debts of the business?

Definition

 

 

 

The limited partners assume no liability for partnership debs beyond the amount of capital he or she has contributed, provided they take not active part in management of the company.

Term

 

 

 

 

What control of the business can a limited partner have?

Definition

 

 

 

A limited partner has no control over the general management or operation of the business. Limited partners may not retain limited liability if they atively participate in management.

Term

 

 

 

 

What are the tax consequences of a limited partnership?

Definition

 

 

 

Generally the same as a partnership - each partner pays pro rata share of income taxes on net profits, whether or not they are distributed.

Term

 

 

 

 

Who owns a corporation?

Definition

 

 

 

Corporations are owned by shareholders -- those who have purchased ownership shares in the business.

Term

 

 

 

 

How is a corporation formed?

Definition

 

 

 

 

A corporate charter is issued by the state where the business incorporates; it is governed by statute.

Term

 

 

 

 

What are the tax consequences of being in the corporate form for shareholders?

Definition

 

 

 

Double taxation - corporation pays income tax on net profits, with no deduction for dividends, and shareholders pay income tax on disbursed dividends they receive.

Term

 

 

 

 

How are tax consequences different for an S-Corp?

Definition

 

 

 

An S Corporation is not taxed at the corporate level; profits are passed through to shareholders and taxed as income.

Term

 

 

 

 

What are the benefits of operating in the corporate form?

Definition

 

 

 

 

A corporation has the ability to raise capital by

selling shares of corporate stock to investors.

Term

 

 

 

 

What is the liability of a shareholder for debts of the corporation?

Definition

 

 

 

 

Shareholders are not liable for the debts of the corporation.

Term

 

 

 

 

What is a closely held corporation?

Definition

 

 

 

 

A closely held corporation is privately-owned; its shares are not publicly traded on the stock market.

Term

 

 

 

 

What is a limited liability company?

Definition

 

 

 

A limited liability company (LLC) is a hybrid form of

business enterprise that offers the limited liability of the corporation but the tax advantages of a partnership.

Term

 

 

 

 

How are LLCs formed?

Definition

 

 

 

An LLC is formed by an agreement of the member-owners of the company. Articles or organization are filed with a central state agency, which issues a charter.

Term

 

 

 

 

What must be included in the name of a limited liability company?

Definition

 

 

 

 

The words "Limited Liability Company" or the initials "LLC"

Term

 

 

 

 

What are the benefits of operating as a LLC?

Definition

 

Benefits of an LLC:

  • Members' liability limited to their investment
  • LLC with 2+ members can be taxed as a partnership or as a corporation.
  • Flexibility in terms of business operation and management.
Term

 

 

 

 

What sorts of topics should be addressed in the operating agreement of an LLC?

Definition

 

 

An operating agreement should address management, decision-making procedures, division of profit, transfer of member interests, whether the LLC will be dissolved on the death or departure of a member, etc.

Term

 

 

 

 

What duties do the managers of a LLC owe the company?

Definition

 

 

 

Managers of a LLC owe fiduciary duties to the LLC and its members, including the duty of loyalty and the duty of care.

Term

 

 

 

What kinds of businesses are especially likely to operate in the form of a limited liability partnership?

Definition

 

 

 

Professional services businesses (Law firms, Accounting firms, Medical practices, etc.)

 

Family businesses

Term

 

 

 

What is the benefit of operating as a limited liability partnership rather than a general partnership?

Definition

 

 

 

LLP allows professionals to avoid personal liability for the malpractice of other partners.

Term

 

 

 

 

What is a franchise?

Definition

 

 

 

A franchise is an arrangement in which the owner of a trademark, trade name, or copyright licenses others to use the trademark, trade name, or copyright in the selling of goods or services.

Term

 

 

 

 

What is a distributorship franchise?

Definition

 

 

 

Arises when a manufacturing concern licenses a dealer to sell its product.

 

Example - automobile dealership

Term

 

 

 

 

What is a chain style franchise?

Definition

 

 

Exists when a franchise operates under a franchisor's trade name and is identified as a member of a select group of dealers that engages in that franchisor's business.

 

Example - McDonald's

Term

 

 

 

 

What is a manufacturing or processing plant franchise?

Definition

 

 

Exists when the franchisor transmits the essential ingredients or formulas to make a particular product. The franchisee then markets the product wholesale or retail in accordance with the franchisor's standards.

 

Example - Coca Cola bottling

Term

 

 

 

 

What sorts of payments should a franchisee expect to have to make to the franchisor?

Definition

 

 

 

Franchisee can expect to pay an initial fee or lump-sum price for the franchise license, and in most situations a stated percentage of the annual sales or annual volume of business done.

Term

 

 

 

 

What topics would typically be addressed in a franchise contract?

Definition
  • Business premises - leased vs. purchased, and whether the franchisor supplies equipment and furnishings.
  • Location - territory to be served
  • Business organization - requirements for form and capital structure. Standards of operation related to sales quotas, quality, and record keeping
  • Quality control by franchisor - supervision and control
  • Pricing arrangements - franchisee may be required to purchase certain supplies from franchisor
  • Termination of the franchise
Term

 

 

 

What is the danger for the franchisor in exercising too much control over the operation of the business of his franchisee?

Definition

 

 

 

 

They may incur liability under agency theory for the acts of their franchisees' employees.

Term

 

 

 

 

What is the harm to the franchisee if his franchise is terminated?

Definition

 

 

 

The franchisee, who normally invests a substantial amount of time and funds in the franchise operation, may receive little or nothing for the business on termination.

Term

 

 

 

 

How is a corporation formed?

Definition

 

 

 

A corporation is formed when a charter is issued by a state-created statutory authorization.

Term

 

 

 

What are Articles of Incorporation, and what is included in them?

Definition

 

 

 

Articles of incorporation, or corporate charter, include information about the corporation such as its function and the structure of its organization.

Term

 

 

 

 

What are by-laws, and what are included in them?

Definition

 

 

 

 

Bylaws are rules for managing the firm.

Term

 

 

 

 

What occurs at the first shareholder meeting after a corporation is formed?

Definition

 

 

 

 

Bylaws are adopted and a new board of directors is elected.

Term

 

 

 

 

How do corporate directors get their jobs?

Definition

 

 

 

Corporate directors may be appointed in the articles of incorporation; after that they are elected by shareholders.

Term

 

 

 

 

How do corporate officers get their jobs?

Definition

 

 

 

 

Corporate officers are hired by the corporation's board of directors to run the company.

Term

 

 

 

When a corporation has profits that it does not distribute as dividends, what are they called?

Definition

 

 

 

 

Retained earnings

Term

 

 

 

 

What Constitutional protections apply to corporations?

Definition

14th Amendment:

  • Right of access to courts
  • Right of due process
  • Freedom from unreasonable search and seizure
  • Protection from Double Jeopardy

1st Amendment:

  • Freedom of speech
Term

 

 

 

 

What are corporations liable for torts of their employees and officers?

Definition

 

 

 

Corporations are liable for the torts commited by its agents or officers within the course and scope of their employment.

Term

 

 

 

 

When are corporations liable for crimes?

Definition

 

 

 

Corporations can sometimes be held liable for criminal acts of its agents and employees, provided the punishment is one that can be applied to the corporation.

Term

 

 

 

 

What types of corporate action must be approved by shareholders?

Definition

 

 

 

Shareholders vote to amend the articles of incorporation and bylaws, approve mergers or dissolution of the corporation, and sale of all or substantially all of the corporation's assets.

Term

 

 

 

 

How often must a corporation hold a shareholder meeting?

Definition

 

 

 

 

Annually

Term

 

 

 

 

What is a quorum?

Definition

 

 

 

The minimum number of members of a body of officials or other group that must be present in order for business to be validly transacted.

Term

 

 

 

 

What is a proxy?

Definition

 

 

 

A written agreement in which a stockholder authorizes someone else to vote the stockholder's shares in a certain manner.

Term

 

 

 

 

What is cumulative voting?

Definition

 

 

A method of voting designed to allow minority shareholders representation on the board of directors.

 

# Members to be elected * # voting shares

Term

 

 

 

 

Why do bylaws have to provide for compensation of directors?

Definition

 

 

 

Because directors have a fiduciary relationship and there must be an express agreement or provision for compensation in order for them to receive money from the funds that they control.

Term

 

 

 

 

Can directors vote by proxy?

Definition

 

 

 

 

No; directors must vote in person.

Term

 

 

 

Can an individual director bind the corporation by his action?

Definition

 

 

 

 

No individual director can act as an agent to bind the corporation.

Term

 

 

 

 

What are examples of decisions made by boards of directors?

Definition
  • Declaration and payment of corporate dividends to shareholders
  • Authorization of major corporate policy decisions
  • Appointment, supervision, and removal of corporate officers and other managerial employees and the determination of their compensation
  • Financial decisions, such as the issuance of authorized shares and bonds
Term

 

 

 

 

What is a fiduciary?

Definition

 

 

 

A person who has a legal and ethical duty to act in the best interests of another person.

Term

 

 

 

 

What fiduciary duties do the directors and officers owe to the corporation and shareholders?

Definition

 

1. A duty of care - to be honest and use prudent business judgement in the conduct of corporate affairs

 

2. A duty of loyalty - requiring the subordination of the self-interest of the directors and officers to the interest of the corporation.

Term

 

 

 

What is required for a transaction by the board of directors to be valid when there is a conflict of interest between the corporation and one of the officers or directors?

Definition

 

 

Transaction is valid if it is

  • fair and reasonable to the corporation
  • fully disclosed
  • approved by a majority of the disinterested directors or shareholders
Term

 

 

 

 

What is the business judgement rule?

Definition

 

 

 

Honest mistakes of judgement and poor business decisions on the part of corporate management do not make them liable to the corporation for resulting damages.

Term

 

 

 

 

What is a stock certificate?

Definition

 

 

 

A certificate issued by a corporation that evidences ownership of a specified number of shares in the corporation.

Term

 

 

 

 

What are preemptive rights and what effect do they have?

Definition

 

 

Give preferences to shareholders over all other purchasers to buy shares of new issues of stock in proportion to the percentage they already own.

 

Allow shareholders to retain their proportionate control over the firm after new stock issues.

Term

 

 

 

 

What is a dividend?

Definition

 

 

 

A distribution of corporate profits or income ordered by the directors and paid to the shareholders in proportion to their respective shares in the corporation.

Term

 

 

 

When is payment of a dividend illegal, and what is the liability of a shareholder if a dividend is paid illegally?

Definition

 

When it is paid while the corporation is insolvent or if it is improperly paid from an unauthorized account.

 

If a shareholder knew that a dividend was illegal when it was received, he is liable for repaying that money to the corporation.

Term

 

 

 

 

Can a board of directors not declare a dividend when the company has made a profit?

Definition

 

 

 

 

Yes, the corporation can decide to retain earnings.

Term

 

 

 

 

What is a shareholder's right of inspection?

Definition

 

 

 

It is limited to the inspection and copying of corporate books and records for a proper purchase, provided the request is made in advance.

Term

 

 

 

What is a shareholder derivative suit, and where would money recovered in the suit be paid?

Definition

 

 

 

It is a lawsuit brought on behalf of the corporation by the shareholders.

 

Money recovered is paid to the corporation.

Term

 

 

 

Why would a court pierce the corporate veil and make a shareholder liable for a corporate debt?

Definition

 

 

 

If a corporate entity is used by its owners to perpetrate a fraud, circumvent the law, or in some way accomplish and illegitimate objective.

Term

 

 

 

 

What is par value?

Definition

 

 

 

The face value of shares of stock; their formal cash-in value.

Term

 

 

 

 

When does a shareholder have a fiduciary duty to other shareholders?

Definition

 

 

 

When they own enough shares to exercise de facto control over the corporation.

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