Shared Flashcard Set


Regulation 4 Business Law

Additional Accounting Flashcards




Sole Proprietorship 

  • One person owns the business
  • Not considered a seperate entity seperate from owner 
  • No formalities or state filings are required
  • Sole Proprietor is personal liable 
  • Life of entity is limited to life of proprietor. Can be terminated at any time 
  • Propietor is taxed on profits and losses (flow through organization) 
  • Sole Proprietor is sole decision maker- free to transfer his interest at will


Joint Venture

An association of persons or entities with the intent of engaging in a SINGLE business venture for profit. 


NOT ongoing business 


Formed for a single transaction or project or related series of transactions or projects

Nature of a General Partnership

Co-owners of an ongoing business for profit 

At least two owners 

  • Filing with state NOT required 
  • Not treated as a seperate entity for tax purposes
  • Considered seperate entities for employment purposes (FICA, Workers Comp)  
  • Profits and losses flow through partnership to partner's individual tax returns
  • Can sue the partnership OR the partners. 


Formation of a general partnership

All that is necessary to form a partnership is :

An agreement Between at least two competent persons 

To carry on as co-owners of a business for a profit.


Minors CAN be partners, so can individual, corporation, partnership 

No express written agreement is necessary (unless for greater than a year)

-->An agreement can be implied from conduct

(sharing of profits)


Required Approval 

Ordinary Business Decisions: Majority 


Unanimous Consent needed for: 

  • Admitting new members
  • Confessing a judgment or submitting a claim to arbitration
  • Making a fundamental change in partnership business (i.e. partnership goodwill) 
  • Changing partnership agreement
  • Assigning partnership property to others

Actual Authority 

Oral or written instructions. 


Granted by the partnership agreement or "job description" 

Apparent Authority

Due to the title of the partner. Not explicitedly given. 




Signing lease

Hire/fire employees 

Purchase Equipment

Grant Warranties 



Rights in Partnership Property

A partnership is treated as owning all money and property contributed by the partners. 

Partners are NOT treated as co-owners of partnership property, and therefore have no right to posess or use partnership property other than for business purposes. 

No power to assing or transfer his rights in a specific item-- mortgage items or attach partnership property to creditors of for alimony payments. 

Upon death, rights in specific partnership property vest in surviving partners- not passed on to estate

Rights in Partnership Interest

A partner has a personal property INTEREST consisting of his share of profit and surplus.

Can Assign Interest (can't assign asset)

Assignee has the rights to recieve the partner's share of profits and surplus but nothing else (control, influence, meeting attendance, access to books, etc).  

Creditors may claim partner's interest- "charging order" to resolve debts. 

When partner dies, interest rights go to heirs/estate.

Right to Indemnification and Contribution

Partnership must compensate every partner for expenses incurred by partner on behalf of the partner. 


Where one partner is compelled to pay more than his share of partnership debt, he can seek contribution from other partners for their share of the debt. 

Partnership Liability

Partners are personally liable for all contracts entered into and all torts committed by other partners with in the scope of partnership business or which are otherwise authorized. (Within scope of business even if not personally authorized)

Joint and Several-- each partner is personaly and individually liable for the entire amount of all partnership obligations. 


Action May be brought against any partner and/or partnership. 

Usually must exhaust partnership assets before going after personal assets. 




Partnership Proffit and Loss Allocation

Profits: Absent an agreement, all partners have EQUAL RIGHTS to share in partnership profits 


Losses: Same as profit, if not otherwise noted. 

Partnership Distributions 

Partners have NO specific right to receive distributions from partnerships. Although partners are bound to devote full time to partnership--no salary. 


Exception: Surviving partner is entitled to compensation for winding up partnership costs. "Getting paid for being left with all the work." 

Dissociation of General Partnership

Change in relationship of the partners caused by any partner ceasing to be associated in carrying on business. 

Does NOT necessarily cause a dissolution/end of partnership. 

Dissociation occurs when: 

1. Partner notifies partnership he/she wants to withdraw (doesn't have to be in writing) 

2. Event occurs that was set out in partnership agreement as an event that cause a dissociation  (like a pre-nup..cheating ends marriage) 

3. Partner is expelled from partnership by unanimous vote or as provided in partnership agreement or judicial decision (voted off the island) 

4. Partner becomes a debtor in bankruptcy (we don't want no scrubs)

5. Partner dies (bye bye birdie) 

Wrongful Dissociation

Partner will be deemed to have wrongfully dissociated if it is a breach of an express term of partnership. 


When a partnership is for definite term or specific project and the partner is expelled, withdraws, or becomes bankrupt prior to end of the term or undertaking. 


Wrongful partner is then liable for damages. 

If partnership is at will, partners are free to quit at anytime. 

Consequences of Partnership Dissociation

When a partner dissociates, rights to participate in management cease. 


If business continues, the partnership must purchase a dissociated partners interest based on GREATER of 1) partnership's liquidation value 2) value of business as a going concern w/o the partner


If business continues, dissociated partner is still attached for  up to 2 years unless notice is given. 

Dissociated Partner's Liabilities

Generally remains liable for debts incurred prior to dissociation unless there is a release by creditor or novation. 


A dissociated partner MAY BE liable for debts arising within 2 years after dissociation unless notice is given. 


Incoming partners are not personally liable for debts incurred before entering partnership although their investment may go to pay them off. 



Partnership Dissolution 



A partnership is dissolved and its business must be wound up when: 

A partner in a partnership at will gives notice of intent to withdraw

In partnership for a definite term:

1. all partners consent to dissolution

2. term has expired

3. 90 days have passed since partner has died, been declared bankrupt, wrongfully dissociated AND a majority of interest of remaining partners do not wish to continue 

Occurence of event specified by partners in partnership agreement as an event that will call dissolution (pre-nup..cheating ends marriage) 

Judicial Decree on application of a partner or a creditor to dissolve. 


Distribution of Assets after Partnership Dissolution

When assets are reduced to cash, cash must be paid the liabilities in this order. 

1. Creditors

2. Partners (return of capital)

3. Partners (division of profits/surplus) 

Limited Liability Partnership

Similar to General Partnership


Differences: Partners Generally Not Personally liable for acts of fellow partners, employees, agents for debts and contractual obligations


Personally Liable for own negligence of themselves and subordinates 


Must file with the state

Limited Partnership

Made up of one or more general partners (personally liable) and one or more limited partners (liability limited to investment) 


Generally no perpetual life


Similar to corporation: must file with state, limited partners are like shareholders (contribute capital, but do not manage) 

General Partners in a Limited Partnership

Control, agents, fudiciary 


1. Personally liable for all partnership debts. If there is a loss, only general partner can be held personally liable. 


2. May also be a limited partner. 


3. May be a secured or unsecured creditor of the partnership

Limited Partners in Limited Partnership

Passive, Silent 


1. Libability limited to investment and unpaid capital committments 

2. NO right to take part in management 

3. Names can not be identified with the business 

4. May vote on extraordinary matters without incurring liability 

5. May assign his interest in the partnership 

6. New partner can be added only upon consent of ALL partners 

7. Does not owe a fidcuiary duty to partnership



Allocation of Profit and Lossses in Limited Partnership

General and Limited Partners share profits and losses in proportion to value of contributions. 


Unless otherwise stated. 

Termination of Limted Partnership

Dissolution is caused by: 

1. Occurence of the time or event stated in partnership agreement

2. Written consent of all partners

3. Withdrawal or death of a GENERAL partner (not limited partner)

4. Judicial decree


Order of Distribution of Assets in Limited Partnership

1. Creditors

2. Former Partners for liabilities for distributions that should've been made upon withdrawal

3. Current partners 


If Loss: only general partners are personally liable. Limited partners are limited by contribution. 

Limited Liability Company

Basic Features: 

1. Limited liability of a corporation 

2. Taxed like a partnership - profits and losses flow through 

3. Distinct legal entitry

4. Same powers as a corporation 

Formation of Limited Liability Company 

Formed by Articles of Organization with Secretary of State 


1. statement that entity is a LLC 

2. name of LLC

3. street address

4. management is to be vested in managers

5. names of persons who will be managing company 


-simialar to articles of incorporation 

Voting Strength in Limited Liability Company
Voting strength is proportional to contributions of captial. 
Profit and Loss Allocation in a Limited Liability Company
Based on capital contributions.
Rights of Members of Limited Liability Companies

No rights to distributions


No right to transfer all of his interest without consent of all other members. Can assign interest. 


Can inspect books and records. 

Termination of Limited Liability Company

Dissolution upon:


1. Expiration of period of duration stated in articles

2. Consent of all members

3. Death, retirement, resgination, bankruptcy, incompentence, etc. of a member *unless the remaining vote to continue the business* - these events dissociate the member 

4. Judicial decree or administrative order dissolving the LLC 


Distinct Legal Entity - state incorporated

Can be sue, be sued, own property


Only the corporation is liable for corporate obligations (tort, contract) 


Owned by shareholders but managed by directors 


Has a perpertual life, may continue to exist long after founders have left or died.

Promoters of Corporations

Promoters procure capital committments through contracts known as stock subscription with third parties who are interested in becoming shareholders of the corporation once formed. 


Promoters are personally liable before the corporation is formed. Third party must release the promoter. 


Stock subscriptions are irrevocable for 6 months unless provided otherwise. 

Articles of Incorporation

Must file articles of incorporation with the state with the following information 


1. Name

2. Name and addresses of registered agent 

3. Name & addresses of each of the incorporators

4. Number of shares to be authorized. 


May include purpose clause, business outside of this clause is considered "ultra vires"

Corporation Bylaws 

Generally will have bylaws that contain rules for running the corruption. 

NOT part of the articles of incorporation, NOT required to be filed with state. 


Amended by Board OR Shareholders. Articles of Incorp. changes on the other had must be approved by BOTH. 

De Jure Corporation
If substantially all of the requirments for incorporation are met and its existence will be recognized for all purposes.
De Facto Corporation Doctrine
If incorporators made a good faith attempt to incorporate, but made some error. The business will be treated as a corporation in all respects except the state may bring an action (quo warranto) challenging the corporation status. 
Doctrine of Incorporation by Estoppel
A party who treats a business as if it was a valid corporation will be estopped (legally barred) from claiming in a legal proceeding. 

Disregard of Corporate Entity 

(Piercing the corporate veil) 


Courts will sometimes hold shareholders, officers, or directors of a de jure corporation liable because the privilege of conduction business in corporate form is being abused. (taking away the privilege for misuse)


1. Commingling personal and corporate funds

2. Inadequately capitalization-- insufficient funds upon formation

3. Committing fraud on Existing personal creditor

4. Corporation Defective- Not incorporate properly

Foreign Corporations
Incorporated in a different STATE. must register with state an obtain a certificate of authority to transact business in that state IF has an office within the new state or regularly conducts business in the state. 
Corporation Shareholder Voting Rights

Right to vote to elect or remove directors. 


Right to vote on fundamental changes: 


Amendaments to articles of incorporation

Mergers, consolidations, share exchanges

Sale of substanitally all of corporation's assets outside regular cosurse of business 

Corporation shareholder Voting Rules

One share, one vote. 


May only vote if a quorum is present-- simple majority. 


Can appoint a proxy to vote for them-- proxy form, valid for 11 months, generally revocable 

Corporation Distributions 

Shareholders do not have a right to a dividend unless and until a dividiend is declared by the board of directors. 


Once the board decalres a dividend, the shareholders are treated as unsecured creditors of the corporation to extent of dividend. 

Noncumulative Preferred Shares

The right to a dividend prefrence for a particular year is extinguished if it is not declared in that year. 


Taken on a year to year basis, last year means nothing. If you didn't get it this year, you don't get it. 

Cumulative Preferred Shares

The right to receive the preference accumulates and must be paid before nonpreferred shares may be paid any dividiend. 


What you are owed adds up, and get priority before any other shareholders. 

Stock Dividiends

Issued from a corporation's "own authorized but unissued shares". 


No assets distributed, shareholders recieving stock generally do NOT OWE ANY TAXES. 

Preemptive Right of Corporate Shareholders

When a corporation proposes to issue additional shares of stock, current shareholders have the right to purchases shares in order to maintain their proportional voting strength. 

Articles must provide this right. 

No preemptive rights apply (regardless if in articles) if: 

1. Within 6 months of incorporation

2. In exchange for services or property

3. To directors, employees etc as compensation 

4. To treasury stock

Dissenting Shareholder Appraisal Rights

Shareholders who do not agree with fundamental corporate changes have the opportunity to dissent and demand the corporation pay them for FV of their shares rather than remain shareholders. 


Exception: Shareholders can not dissent if merger is with a subsidary where 90% + is already owned. 

Directors Duties in a Corporation 

Election, removal, and supervision of officers


Adoption, amendment, and repeal of bylaws 


Fixing management compesation


Initating fundamental changes to the corporation's structure 


Declare dividiends

Fiduciary Duties of Directors in Corporations

Right to Rely-- business judgment & "due diligience"


May be held liable for unlawful distributions 


Must be loyal to company--prohibited from competiting with the corporations 


Giving first opportunities to the corporation

Limitiations and Exceptions to Director Liability

Articles of Incorporation may limit director's liability except in cases of : 


1. Financial benefits received by director to which the director was not entitled 

2. Intentional harm inflicted on corporation or shareholders

3. Unlawful distribtuions authorized by director

4. Intentional violaions of criminal law

5. Breaches of the duty of loyalty 

Corporation Officers

Selected & Removed by Directors with or without cause 

Have apparent & actual authority

Subject to fudiciary duties 

May be indemified for expenses 

May also serve as directors of corporation

Not required to be a shareholder, but can be.

Fundamental Changes to a Corporation

DAMS Require shareholder approval through special procedure--> 

1. Board Resolution: must adopt a resolution setting forth proposed action & submitting it for vote at shareholders meeting 

2. Notice : must notify ALL shareholders, even if they aren't entitled to vote 

3. Shareholder Approval: must be approved by majority of shares 

4. Filing of Articles: A document setting forth action taken, must be executed by corporation and filed with state



One or more corporation joing with another. One corporation continues, other merger corporation ceases to exist. 


A + B = A 


Must follow fundamental change procedure. 


One or more corporations joinging together to form a new corporation. Each constituent corporation ceaes to exist after the consolidation, only the new corporation goes on. 


New corporation liable for old debts.


A + B = C


Must follow fundamental changes procedure. 

Stock Exchange

Transaction in which one corporation acquires all of the outstanding shares of one or more classes of a stock of another corporation. Both corporations continue to exist as seperate entities. 


Only the corporation who shares are being acquired must follow the fundamental changes procedure. 

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