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REG
Business Structure
72
Accounting
Undergraduate 4
02/19/2012

Additional Accounting Flashcards

 


 

Cards

Term
Sole Proprietorships
Definition

advantages- total control, simplicity, taxation

disadvantages- general liability

Term
general partnerships and joint ventures
Definition

advantages- pass-through taxation, simplicity

disadvantages- general liability

Term
limited partnerships
Definition

advantages- pass-through taxation, limited liability for the limited partners

disadvantages- general liability for general partners, formality (legal docs must be filed), authority (limited partners can't participate in management)

Term
limited liability partnerships
Definition

 

advantages- pass-through taxation, limited liability 

disadvantages- formality (legal docs must be filed), insurance requirement

 

Term
limited liability limited partnership
Definition

 

advantages- pass-through taxation, limited liability for the limited partners AND general partners

disadvantages- only available in 20 states, formality (legal docs must be filed), 

 

Term
corporations
Definition

 

advantages- limited liability, legal personality, perpetual duration

disadvantages- double taxation, formality (legal docs must be filed), 

 

Term
subchapter S corporations
Definition

 

advantages- limited liability, single taxation

disadvantages- individual taxation, formality (legal docs must be filed), subchapter S requirements 

 

Term
Limited liability companies
Definition

 

advantages- limited liability, pass-through taxation

disadvantages- formality (legal docs must be filed)

 

Term
corporations and s corporations
Definition
contributions by shareholders are not taxed!
Term
Revised Uniform Partnership Act (RUPA)
Definition
  • general partnership governing law (sometimes also LLP governing law)
  • functionally a form contract which provides default rules in case partners in a general partnership have not formed a partnership agreement as to all issues
  • by agreement, partners can vary must RUPA provisions to meet their needs (doesn't need to be written)
Term
Revised Uniform Limited Partnership Act (RULPA)
Definition
  • limited partnership governing law
  • LLLPs governing law
  • (sometimes also LLP governing law)
Term
Revised Uniform Limited Liability Company Act (RULLCA)
Definition
most states have their own version of LLC statute but this is a revised model if needed
Term
Revised Model Business Corporation Act (RMBCA)
Definition
  • many states have adopted some version of this to govern corporations
  • requires corporations file Articles of Incorporation containing:
  1. corporate name
  2. number of authorized shares
  3. address of inital office and agent at that address
  4. name and addresses of incorporators
Term
4 step process for forming a corporation 
Definition
  1. filing articles of incorporation with the Secretary of State
  2. holding an organizational meeting at which a board of directors is elected and contracts entered into by promoters are accepted or rejected
  3. drafting and adopting by-laws
  4. obtaining certificated of authority to do business in other jurisdictions
Term
Promoters
Definition
  • person who takes the initiative in founding and organizing a business
  • have been held to owe a fiduciary duty of loyalty to the proposed corp, other promoters, and contemplated investors
  • forbidden from profiting at all from pre-incorporation contracts unless they (a) make full disclosure to an independent board of directors and gain their approval or (b) make full disclosure to all original shareholders and gain their approval
Term
promoter liability
Definition
  • liable on the contracts they negotiate on prospectives corporations behalf unless the contract specifically says that the 3rd party is looking only at the corporation for performance
  • even if the corp is formed and adpots the contract, the promoter remains liable unless an express release from third party (novation)
Term
corporation liability on promoter contracts
Definition

corp is liable on contracts negotiated by its promoters if it comes into existence and adopts the contract:

  1. expressly- via b.o.d. resolution, or
  2. impliedly- via knowing and voluntary accepetance of the benefits of the contract
Term
right to enforce
Definition
once the corp adopts the promoter's contracts, it has the right to enforce them
Term
3 rules for general partnership operations
Definition
  1. absent aggrement to the contrary
  2. , all partners have equal rights in the management and conduct of business affairs
  3. absent aggrement to the contrary, majority vote governs all ordinary course-of-business matters
  4. unanimity is needed to take actions contrary to the agreement or "extraordinary matters" like adding a new partner, assigning partnership property, disposing of goodwill, or doing any other act which would make it impossible to carry on the ordinary business of the partnership
Term
Corporation operation
Definition
  • s/hs elect directors, directors select officers, officers make day-to-day decisions (in small corps same people might be all 3)
  • piercing-the-vail: situations where closely-held corporations' s/hs become liable

 

Term
piercing-the-vail: 7 situations where closely-held corporations' s/hs become liable
Definition
  1. commingling of funds and other asets of the corp with those of individual s/hs
  2. dversion of the corps funds or assets to the personal use of s/hs
  3. failure to maintain the necessary corporate formalities
  4. failure to adequately capitalize the corp for the reassonably foreseeable risks of the enterprize
  5. use of the corp as a mere shell or conduit to operate a single venture or some particular aspect of the businesss of an individual s/h
  6. absence of sparately held corporate assets
  7. formation and use of the corp to assume the existing liabilities of another person or entity
Term
2 ways to manage LLC
Definition
  1. owner-managed- LLC members may chose to run the business as if they are general partners though enjoying limited liability
  2. manager-managed- LLC members may chose to delegate powers to one or more members or non-members

 

Term
additional rule for LLC 
Definition
almost all states allow 1 person to form an LLC
Term
termination of sole proprrietorships
Definition
naturally termintated when the sole owner dies or otherwise departs the business
Term
4 causes of "dissociation" of a partner from a pertnership
Definition
  1. notice of a partner's express will to dissolve the partnership
  2. death of a partner
  3. bankruptcy of a partner
  4. expulsion of a partner
Term
if dissolution occurs in a general partnership
Definition
  • partnership shall purchase the interest of the partner at the amount that would have been distributable to him from his partnership account if on the date of dissociation, the assets of the partnership were sold at the greater of liquidation or going-concern value (offset by damages for wrongful dissociation if the case)
  • RUPA provides for a 90-day cooling off period to negotiate
Term
if dissolution forces partnership to be wound up
Definition
  • creidtors must be paid first (if insufficient funds, partners must contribute more)
  • if left over funds, partnership shall make a distribution to partners in amounts equal to any excess credits over charges on partners' accounts
Term
Limited partnerships (LLPs and LLLPs)
Definition
very similar to general partnerships
Term
termination of a corportaion
Definition
  • may by voluntarily dissolved unpon approval of their directors and s/hs (majority of directors vote to propose dissolution and majority of s/h vote to aprove proposal)
  • may be involuntarily dissolved administratively by the Secretary of State for (a) failure to pay franchise taxes, (b) failure to file annyal reports, or (c) failure to properly establish and maintain a registered agent or office
  • may be involuntarily dissolved judicially

 

Term
4 ways a corporation may be involuntarily dissolved judicially
Definition
  1. an action by the attorney general, where (a) the corp fraudulently obtained approval for its articles of incorporation, or (b) the corporation has abused its legal authority
  2. an action by s/hs if (a) management is deadlocked, (b) those controlling the corp are acting in an illegal or oppressive way, such as by looting the corp or wasting its assets, or (c) if the s/hs are deadlocked and can't elect directors
  3. an action by creditors
  4. if a judgment creditor's claim is unsatisfied and the corp is insolvent or if the corp admits in writing that the creditor's claim is due and owing and that it is insolvent
Term
sale of all or substantially all of corps assets and mergers and consolidationg with other companies
Definition

s/h interests are protected in such transactions that can so fundamentally alter their interests by:

  1. procedures- directors owing a fiduciary duty must propose and s/h must approve in a vote
  2. appraisal rights- dissenting s/hs may request that their shares be purchased at a court-valued rate pursuant to their appraisal rights

 

Term
LLCs terminations
Definition
varies state to state but generally follow RUPA for general partnerships although
Term
RULLCAs list of 5 events for dissociating a member of an LLC
Definition
  1. person gives notice of express will to withdraw
  2. event listed in the operating agreement as causing dissociation occurs
  3. person is expelled pursuant to the operating agreement
  4. person dies
  5. person is a corp, partnership, or other organinzation that has been dissolved
Term

RULLCAs list of 5 events that cause LLCs to dissolve

Definition
  1. an event the operating agreement states causes a dissolution
  2. consent of all members
  3. passage of 90 consecutive days in which company has no members
  4. court order for unlawful or reasonably unpracticable activites (upon application of a member)
  5. court order, upon application of a member, that those in control of the company are acting illegaly or fraudulently
Term
procedure for winding up LLC under RULLCA
Definition

gather assets and pay obligationg to creditors

if surplus, distribute to (a) each person whose contributions have not been repaid and then if any money remains to (b) members and dissociated members in equal shares

Term
Capital Accounts for partnerships
Definition
  • under RUPA, each partner is deemed to have an account that is:
  1. credited with an amount equal to contributions (net liabilities contributed) and the partner's share of partnership profits
  2. charged with an amount equal to distributions (net liabilities distributed) by the partnership to the partner and the partner's share of partnership losses
  • partners are reimbursed for advances to the partnerships beyond agreed capital contributions. these loans put these partners on par with creditors
Term
interest for partners under RUPA
Definition
partners, absent agreement to the contrary, should receive interest on advances made to the partnership beyond the amount of capital the agreed to contribute
Term
distributions to partners
Definition
they have no right to receive and may not be required to accept a distribution other than cash
Term
consideration in a corporation
Definition
shares must be issued in exchange for consideration that passes the quality and quantity tests
Term
quality test for considerations
Definition
traditionally, promissory notes and promises to perform future services or transfer property later were not considered proper consideration, but now they are if the board only issues the shares when there is a good chance the consideration will be realized
Term
quantity test for considerations
Definition
  • RMBCA abolished the concept of par value but it is still used in soem states
  • watered stock (stock issued in exchange for consideration that is less than the par value of the shares) is sometimes used, which makes par value a bad gauge of corporation's solvency
  • in states where par value is still used, corporations can use nominal value
Term
in states where par value is still used
Definition

if considerations are less, then liability to creditors and other s/h may be placed on:

  1. board who allowed sale
  2. buyer who paid too little, and
  3. subsequent transferees of the original buyer who both knew that he paid too little and who pay too little themselves
Term
2 qualifications for corporation dividends to be proper (repurchase of shares must meet these standards also)
Definition
  1. paid out of legally available funds and
  2. in accordance with applicable preferences

 

Term
2 situations a distribution by corporation can't be made in
Definition
  1. after giving effect to the distribution, the corp would be insolvent 
  2. distribution exceeds the surplus (excess of the net assets over stated capital)
Term
Corporation board's discretion
Definition

general rule- b.o.d. decision to pay or not pay div and choice of amounts is presumed legit

exception- to overcome this presumption and force a board to pay more div, s/h must prove:

(a)board acted in bad faith, and (b)funds to pay dividends existed in a legally available source

Term
5 LLC financial structure components
Definition
  1. contributions can be made in cash, property, or services
  2. obligations to contribute are not excused by death, dissability, or inability to perform and are enforceable by creditors of the LLC who have relied upon them
  3. LLCs may not make distributions to members if after doing so the firm would be insolvent (compensation doesn't count)
  4. if improper distribution is made, managers who approve it are liable to creditors, as are members who receive distributions they know are improper. liability limited to amount above what could have been properly made
  5. if LLC commits to distribute and doesn't, the promised members who come up empty become general, unsecured creditors to the LLC for that amount
Term
partnership property rights
Definition
  • belongs to partnership
  • partners are entitled to use it only on behalf of partnership
  • creditors of individual partners are not allowed to seize property from partnership (must go to court to obtain a charging order in which a judge will make other partners pay what creditor is owed)
Term
2 information rights of partners
Definition
  1. partners and agents are entitles to access the partnership books and records during oridnary business hours
  2. each partner and the partnership shall furnish to partners and legal team (a)without demand- if reasonably required for proper exercise of partners' rights and (b) upon demand-any other partnership info reasonably requested
Term
2 Standards of Conduct for partners (general owe to limited in limited partnership)
Definition
  1. duty of loyalty - (a) accounting for any benefit derived, (b) avoiding conflicts of interest, and (c) refraining from competing with the partnership business
  2. duty of care - includes refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law
Term
6 s/h rights in a corporation
Definition
  1. vote for directors
  2. inspect records for proper purposes at proper times in a proper location
  3. have financial priorities respected
  4. exercise appraisal rights when they dissent from major organic changes
  5. file derivative lawsuits against officers, directors, and others who have committed wrongful acts
  6. exercise preemptive rights to buy their proportional share of new issuances of securities in order to maintain their relative voting strength
Term
3 duties of directors of a corp
Definition
  1. duty of attention
  2. duty of care
  3. duty of loyalty
Term
duty of attention (3)
Definition
  1. attend most board meetings,
  2. gain a basic familiarity with company's business, and
  3. study the company's financial statements
Term
duty of care
Definition

don't have to be perfect but must act:

  1. in good faith,
  2. with the care of an ordinarily prudent person in a like position, and
  3. in a manner reasonably believed to be in best interest of the corp
Term
duty of loyalty (3)
Definition

must be loyal to the corp and its s/hs meaning:

  1. they should avoid conflicts of interest,
  2. tranactions between a director an the corp are not automatically void (must be approved by majority of directors not involved, s/hs, or they are fair to corp)
  3. they sshould represent the corp opportunity docterine by not appropriating for themselves business opportunities that rightfully belong to the corp
Term
3 director's rights in a corp
Definition
  1. right to rely
  2. business judgment rule
  3. liability protection
Term
right to rely
Definition

directors have right to rely upon reports of officers and other directors unless they have some reason to be suspicious

 

Term
business judgment rule
Definition
decision deemed ok as long as not in bad faith or with gross abuse of discretion
Term
liability protection
Definition
most states allow s/hs to ammend article of incorp to eliminate director liability for errors of judgment or even carelessness
Term
officers of corp
Definition
same duties of care and loyalty duties as directors
Term
4 rights and obligationg of LLCs
Definition
  1. whether managed by members or non-members, those managing generally owe duties of care and loyalty to the other members
  2. RULLCS prohibits agreement from totally eliminating duty of loyalty, care, or other fiduciary duty
  3. RULLCA provides that members in an LLC should discharge their duties under the act and under the operating agreement consistently with contractural obligations of "good faith and fair dealing"
  4. RULLCA also says operating agreement can (a) i.d. specific types of activities that do not violate the duty of loyalty, (b) alter the duty of care, except to authorize intentional misconduct or knowing violation of law, and (c) eliminate a member or manager's liability to the LLC for money da,ages except for such actions as breach of duty of loyalty or intentional infliction of harm
Term
2 way courts protect LLC members additionally
Definition
  1. allow them to escape an operating agreement by convincing a court that its provisions are "manifestly unreasonable" and
  2. providing a judicial remedy dissolving an LLC if the managers or members controlling the firm are guilty of "oppressive conduct" directly harmful to a member
Term
authority of partners
Definition
  • mostly goverened by agency law
  • an act of a partner for apparently carrying on in the ordinary course of the partnership binds the partnership unless (a) the partner had no authority to act for the partnership and (b) the person with whom the partner was dealing with knew the person lacked authority
  • an act of a partner which is not apparently for carrying on in the oridinary course of the partnerships business binds the partnership only if the act was authorized by the other partners
Term
2 situations when partner biinds bothe the partnership and other partners
Definition

when he acts with

  • actual authority (express or implied), or
  • apparent authority which cannot exist where (a) 3rd party knowns of lack of authority or (b) partner's action is one the requires unanimity
Term
ratification
Definition
an act lacking borth actual and apparent authority may still bind a partnership that ratifies the action expressly or by knowingly accepting the benefits of the agreement
Term
tort liability of partnerships
Definition

partnerships are generally liable for torts committed by their partners or other agents within the scope of their employment or authority

  • intentional torts- a partnership is usually liable if a partner commits an intentional tort while trying to advance partnership interests even if he does so in a wrongful way
  • misapplication of funds- RUPA imposes virtually strict liability on a partnership for the misapplication of money received by the partnership in the course of its business. innocent clients get more protection then innocent partners
  • joint and several liability-under RUPA, contract and tort liability are usually joint and several meaning that a creditor can sure any general partner and hold them completely liable without suing others.  RUPA says the assets of the parntership must be exhausted before the partnership creditor proceeds against the individual assets of the general partners
  • late arrivers- if a general partner joins an existing partnership, he or she is personally liable for all subsequently-incurred debts, but is liable for preexisting debts only out of his or her partnership contribution
Term
7 authorities of directors of a corporation
Definition
  1. borrow money
  2. sell corporate property
  3. hire and fire officers and other employees
  4. declare or refue to declare dividends
  5. make or refuse to make other distributions to s/hs
  6. set the salaries of employees, officers, and even themselves
  7. propose sale of major assets, mergers and consolidationg, dissolution, and amendments to the articals of incorp to s/hs
Term
2 authorities of officers of a corporation
Definition
  • express authority derived from the articles of incorp, by-laws, directors' resolutions, and statutes
  • implied authority derived from virtue of their offices

 

Term
corporation ratification
Definition
even if an officer acts outside his authority, b.o.d. can bind the corporation by ratifying the contract
Term
Member-managed LLC (according to the operating agreement)
Definition

operates like a general partnership:

  1. each member has equal rights in management
  2. ordinary business issues are decided by a majority vote
  3. acts outside the oridinary course of business require unanimous approval
  4. the operating agreement may be ammended only with consent of all members
Term

Manager-managed LLC (according to the operating agreement)

Definition

operates like a limited partnership.  the managers assuming the role of general partner:

  1. except as otherise provided in RULLCA, matters related to the activities of the company must be decided exclusively by the managers
  2. managers have equal rights in management and conduct of the firm
  3. issue arising in ordinary course of business is decided my majority vote of managers
  4. consent of all managers is required to engage in extraordinary transactions
  5. managers may be removed at any time by a majority vote of the managers
Term
"statutory apparent authority" 
Definition
  • RULLCA provides that a member is not an agent of the LLC solely by reason of being a member
  • this still exists in several states but because LLC can be manager-managed, RULLCA eliminated it
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