REG 8

dissolution of partnership example

Step 1. upon dissolution, figure out how much is left after paying all creditors Step 2. profit/loss = how much is left after paying all creditors - amount needed to return the partners' contributions Step 3. distribute this profit or loss based on the partnership agreement, or equally if the partnership agreement doesn't provide otherwise -note that if there is a loss and some partners aren't/can't contribute their share for whatever reason, the remaining partners must share the extra loss proportionally

features of a Chapter 15 case

-"multinational" 1. commencement of ancillary proceeding -a Chapter 15 ancillary case is commenced by a "foreign representative" filing ap petition for recognition of a "foreign proceeding" -this operates as the principal door of a foreign representative to U.S. courts -the petition must show the existence of the foreign proceeding -after notice and a hearing, the U.S. court is authorized to issue an order recognizing the foreign proceeding as either a "foreign main proceeding" (i.e., a country where the debtor's main interests are located) or a "foreign non-main proceeding" (i.e., a country other than one where the debtor's main interests are located) -upon recognition of a foreign main proceeding, the automatic stay and other provisions of the Bankruptcy Code take effect in the U.S. 2. foreign representative's powers -the foreign representative is authorized to operate the debtor's business -once recognized, a foreign representative may seek additional relief from the bankruptcy court and is authorized to bring a full-blown (as opposed to ancillary) bankruptcy case under Chapters 7 and 11 -the foreign representative may participate in a pending U.S. insolvency case 3. prohibition against discrimination -Chapter 15 prohibits discrimination against foreign creditors (except certain foreign government and tax claims, which may be governed by treaty) -note: one of the main goals of chapter 15 4. requirements of notice and cooperation -Chapter 15 requires notice to foreign creditors concerning a U.S. bankruptcy case, including notice of the right to file claims -under Chapter 15, U.S. courts and trustees must "cooperate to the maximum extent possible" with foreign courts and foreign representatives -note: one of the main goals of chapter 15

termination of a corporation

-Dissolution is a fundamental change, requiring director and shareholder approval -dissolution can also be pursuant to a court order -after dissolution, the corporation continues in existence for purposes of winding up -liquidation involves the process of collecting the corporate assets, paying the expenses involved, satisfying creditors' claims, and distributing the net assets of the corporation

dismissal or conversion of a Chapter 7 case

-a Chapter 7 case by an individual consumer debtor may be dismissed (or with the debtor's consent converted to a case under Chapter 13) upon a finding that granting relief under Chapter 7 would constitute abuse or because the debtor has sufficient income to pay debts Step 1. determine whether income is lower than the state median -if yes, then 7 is okay -if an individual filing for Chapter 7 liquidation and his or her spouse have monthly income greater than the state median income, then go to step 2 Step 2. means test -the means test is used to determine whether creditors would be better off under a Chapter 13 five-year reorganization -sixty times the debtor's average monthly income, less allowable expenses, is compared with a high and low threshold ($8,175 and $13,650) -if [avg. monthly income - allowed expenses] * 60 = $X < $8,175, then the debtor may continue under Chapter 7 -if it is $13,650 or more, there is a presumption of abuse and the debtor usually will have to convert the case to Chapter 13 (or just have the Chapter 7 dismissed)

"foreign" corporation must qualify

-a foreign corporation must obtain a "certificate of authority" from each state in which it does intrastate business -a foreign corporation is a corporation created under the laws of another state -maintaining an office in the foreign state would be an example of doing business in the foreign state -but merely maintaining a bank account, collecting a debt, or hiring employees in a foreign state are not instances of doing business in the foreign state sufficient to trigger the qualification requirement

general partnership/joint venture: formation

-a general partnership if formed whenever two or more persons intend to carry on as co-owners a business for profit -papers need not be drawn up to form a partnership -nothing needs to be filed with the sate -an express agreement is not required; an agreement can be implied from conduct -not a taxable entity for income tax purposes: partnerships are treated as entities for most purposes, but they are not taxable entities for income tax purposes 1. joint venture compared -the key difference between a joint venture and a general partnership is that a joint venture is formed for a single transaction or project or a related series of transactions or projects 2. when intent is unclear: sharing of profits -if it is unclear whether the parties intended to enter into a partnership, an agreement to share profits gives rise to a presumption that the parties intended to form a partnership 3. generally, a writing is not necessary -as a general rule, a general partnership agreement need not be in writing -however, if the partners want to enforce an agreement to remain partners for longer than one year, a writing is required under the Statute of Frauds

limited liability partnership

-a limited liability partnership (LLP) is similar to a general partnership in most respects, including the sharing of profits and losses, and generally all of the advantages and disadvantages of a general partnership 1. difference: personal liability a) partners generally not personally liable for acts of fellow partners, employees, or agents -an LLP differs from a general partnership in that a partner in an LLP is not personally liable for the obligations or liabilities of the partnership arising form errors, omissions, negligence, malpractice, or the wrongful acts committed by another partner or by an employee, agent, or representative of the LLP b) personally liable for own negligence and negligence of those under direct control -LLP partner's are, of course, liable for their own negligence or wrongful acts and for the negligence and wrongful acts of those under their direct supervision or control c) generally not personally liable for debts and contractual obligations -generally, partners in an LLP are not personally liable for the debts and contractual obligations of the LLP 2. difference: formation a) LLP must file with the state -to become an LLP the partnership must file a document with the state b) contents of Certificate of Limited Liability Partnership -generally, registration must provide information such as the LLP's name, the name and location of its registered offie, the number of partners, a description of the partnership business, etc.

business structures part 1: MC

-a limited partnership must have at least one general partner and one limited partner -a partner in an LLP is personally liable for tort liabilities arising from his own negligence and the negligence of his direct subordinates. he is not personally liable for the negligent actions committed by his partners -in a general partnership not for a term of years, any one partner may cause a dissolution by giving notice of the intent to withdraw -the owners of a LLC are called members -absent an agreement to the contrary, if a member of an LLC dies, the LLC is dissolved unless the other members consent to continue -absent an agreement among all partners otherwise, an assignment of an interest in a partnership is merely an assignment of the assignor's rights to receive distributions from the partnership; it does not make the assignee a new partner -partners are entitled to share in the profits of the partnership but are not entitled to compensation unless otherwise agreed to in the partnership agreement or in the case of winding up by the surviving partner. it does not matter whether one partner works more than the others

pass key: what type of business entity can be formed without filling organizational documents with the state?

-a partnership or a sole proprietorship are the only possibilities -formation of all other business entities requires filing some sort of organizational document with the state

general partnership/joint venture: operation of a general partnership

-absent an agreement to the contrary, all partners have equal rights to manage the partnership business -management rights and voting power are not based on the amount contributed 1. required approval -decisions regarding matters within the ordinary course of the partnership's business may be controlled by majority vote unless the partnership agreement provides otherwise -matters outside the ordinary course of the partnership's business require consent of all the partners (unanimous consent) -areas requiring unanimous consent include: a) admitting new partners b) confessing a judgment (admitting liability in a lawsuit) or submitting a claim to arbitration; and c) making a fundamental change in the partnership business (ex. the sale of a partnership -note: b/c the above areas require unanimous consent, there is no apparent authority to act individually 2. agency law governs -every partner is an agent of the partnership for the purpose of its business and the partnership is their principal -act act of a partner apparently carrying on in the ordinary course of business will bind the partnership through apparent authority -if a partner acts without actual or apparent authority, the partnership can still become bound if it knows of the material facts of a transaction and assents (aka ratifies), either expressly or by accepting the benefits of the transaction

bankruptcy part 2 MC

-after the reorganization plan is confirmed, the debtor is released from debts except as provided in the plan or by law -a debt incurred through a fraud on a specific creditor, such as by making a false representation to the creditor, is a non-dischargeable debt -a foreign entity may file an ancillary proceeding under Chapter 15, and may also file a proceeding under Chapter 7 or Chapter 11 -the automatic stay is available under Chapter 15, arising after a petition for recognition is granted by the court -all unimpaired classes do not need to accept the plan if: (i) at least one impaired class has accepted the plan and (ii) the plan does not discriminate unfairly and is fair and equitable to all impaired classes -a reorganization plan under Chapter 11 will not be approved unless the plan provides for the full payment of administration expenses -while a corporation or partnership may voluntarily or involuntarily be petitioned into a Chapter 7 bankruptcy, a corporation or a partnership is "dissolved," while an individual is "discharged" -technically, only the court can confirm a plan; creditors and security interest holders vote whether to accept the plan. through the "cram down" provision, a plan may be confirmed by a court even if only one impaired class votes to affirm the plan

directors: rights, duties, obligations, and authority

-among the specific duties of directors are the election, removal, and supervision of officers; adoption, amendment, and repeal of bylaws; fixing management compensation; and initiating fundamental changes (DAMS) to the corporation's structure -note: directors are not individual agents, but they are fiduciaries (owe a fiduciary duty) -note: cannot vote by proxy, quorum needed, need majority to approve 1. declaration of distributions -the board of directors has sole discretion to declare distributions to shareholders -directors who authorize a distribution in violation of law (i.e., when the corporation is insolvent) are personally liable to the extent the distribution exceeds what would have been lawful -however, they can defend under their right to rely. moreover, the director can recover from a shareholder who received a contribution knowing it was unlawful 2. fiduciary duties and the business judgment rule -directors are fiduciaries of the corporation and must act in the best interests of the corporations -a director will not be liable to the corporation for acts performed or decisions made in good faith, in a manner the director believes to be in the best interest of the corporation, and with the care an ordinarily prudent person in a like position would exercise (this is sometimes called the "business judgment rule") a) right to rely (due diligence) -a director is entitled to rely on information, opinions, reports, or statements if prepared by any of the following: corporate officers, employees or a committee of the board whom the director reasonably believes to be reliable and competent; or legal counsel, accountants, or other persons as to matters the director reasonably believes are within such person's professional competence b) duty of loyalty -directors owe their corporation a duty of loyalty and must act in the best interests of their corporation -the duty of loyalty prohibits directors from competing with the corporation, but does not necessarily prohibit directors from transacting business with the corporation (ex. by buying from or selling to the corporation) -an action in which a director has a conflict of interest will be upheld only if: after full disclosure the transaction is approved by a disinterested majority of the board of directors or the shareholders; or the transaction was fair and reasonable to the corporation -the board of directors has the power to set director compensation c) indemnification (unless bad faith) -corporations are allowed to indemnify directors for expenses for any lawsuit brought against them in their corporate capacity -the corporation may also pay any judgment imposed in a lawsuit on the director, except in a shareholder derivative suit

federal laws and regulations MC

-an employer's payment under the Federal Unemployment Tax Act (FUTA) is a tax-deductible employer expense -an employer is strictly liable for an employee's injuries during the scope of employment under a workers' compensation statute, even if the employee was negligent -under FICA, failure to supply taxpayer identification numbers and/or failure to make timely FICA deposits can both result in penalties -unemployment compensation insurance and workers' compensation insurance both are paid by the employer. they are not deducted from the employee's wages -most employers must participate in workers' compensation programs; however, there are a few exceptions, including an exception for employers employing casual workers. a temporary office worker would be considered a casual employee -the Federal Unemployment Tax Act is administered by the states through their employment laws -an employee is precluded from collecting full worker's compensation benefits for intentional self-inflected injuries but not negligence (noncompliance with an employer's rules) injuries -if an employer pays an employee's portion of FICA and does not seek reimbursement of the payment from the employee, the payment is considered to be a business expense deductible by the employer and taxable income to the employee -Social Security benefits do not include Medicaid payments. Medicaid is a state run program -the federal social security system contains four major benefit programs: old age and survivors insurance (OASI), disability insurance (DI), Medicare, and supplemental security income (SSI) -workers' compensation laws can provide for payments to surviving dependent children -workers' compensation laws do not provide for "full" pay during a disability. with disability benefits the employee may receive a percentage of his/her wages, but not "full" wages -all employers who have quarterly payrolls of at least $1,500 or who employ at least one person one day a week for twenty weeks in a year must participate in FUTA

bankruptcy part 1

-an inheritance received within 180 days after filing of the petition must be surrendered for distribution to the creditors (b/c it will be included in the estate, in addition to proceeds from life insurance, income from property (rents, interest, dividends), or divorce within 180 days) -farmers and nonprofit charities cannot be petitioned involuntarily into bankruptcy -stockholders are specifically excluded from relief under Chapter 11 -a debtor need not be insolvent to file a voluntary petition under Chapter 7. although the debtor's income may not exceed certain specified levels, insolvency is not a requirement -a court appointed trustee may serve as both a trustee of an estate and also be its tax return preparer if authorized by the court. the CPA may receive a separate fee for services rendered in each capacity -the filling of a petition in bankruptcy (both voluntary or involuntary) stops the enforcement of all judgment liens and collection actions against the debtor. this is known as automatic stay -the automatic stay stops creditors from pursuing collection actions against the debtor while the bankruptcy is pending

claims against the estate

-claims include all rights to payment from the debtor's estate -to have a claim allowed (i.e., a right of payment against the debtor's estate), unsecured creditors must file a proof of claim, and shareholders must file a proof of interest with the bankruptcy court -an unsecured creditor who fails to timely file a claim may not take part in the distribution of the debtor's estate

calendar year vs. fiscal year (corporation)

-companies typically have the option of choosing a calendar year-end (a year ending on Dec. 31) or a fiscal year-end (one ending on any day other than Dec. 31) -for tax purposes, a fiscal year must first be approved by the IRS

financing the corporation

-corporate capital comes from the issuance of many types of securities, including equity obligations (or stock) and debt obligations (or bonds) 1. debt securities (bonds) -bondholders are creditors 2. equity securities (stocks) -stockholders are owners of the corporation -a corporation may choose to issue only one class of stock, in which case each share of stock will have the same rights. alternatively, it may choose to issue several classes or series of stock with varying rights (unless it is an S. corp) -unless the articles provide otherwise (ex. by setting a par value for stock), the board of directors has discretion to issue stock at any price it thinks is appropriate -stock may be issued in exchange for any benefit for the corporation (ex. money, property, promises to perform services in the future, promissory notes, etc.)

termination: dissociation of a general partnership

-dissociation is a change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business (dissociation = change in partners) -dissociation of a partner doe snot necessarily cause a dissolution and winding up of the business of the partnership -a partnership at will may be rightfully dissolved by a partner's notice of withdrawal or dissociation at any time 1. events at dissociation -a partner is dissociated from the partnership when the partner gives notice of withdrawal, dies, becomes bankrupt, or is expelled (or if an event occurs that was set out in the partnership agreement as an event that would cause a dissociation) 2. consequences -when a partner dissociates, his right to participate in management ceases, although the dissociated partner's apparent authority to bind the partnership will continue until third parties are given notice of the dissociation 3. dissociated partner's liability to other parties -generally, a dissociated partner remains liable for the debts incurred by the partnership prior to dissociation unless there has been a release by the creditor or a novation -a dissociated partner may be held liable for debts incurred by the partnership for up to two years after dissociation unless the partner gives notice of dissociation -if a new partner is admitted, the new partner is not personally liable for debts incurred by the partnership before becoming a partner (as per usual though, you can lose your investment)

who may be a debtor

-general rule: IPC: individuals, partnerships, corporations 1. limitation in Chapter 7 liquidations (no RIBS) -railroads, savings institutions, insurance companies, banks, and small business investment companies may not file for bankruptcy under Chapter 7 2. compare Chapter 11 reorganizations (no BIBS) -anyone who may be a debtor (except a stockbroker or commodity broker) under Chapter 7 may also be a debtor under Chapter 11 -additionally, a railroad may be a debtor under Chapter 11

automatic stay and duties of debtor after petition is filed (rights and duties of debtors and creditors under Chapter 7 and Chapter 11)

1. automatic stay -when a bankruptcy petition is filed in either a voluntary case or an involuntary case, an automatic stay becomes effective against most creditors -general rule: the stay stops almost all collection efforts (ex. filing a lawsuit or simply demanding payment) -exceptions: the automatic stay does not apply to criminal prosecutions, paternity suits, and cases brought to establish or collect spousal or child support obligations 2. duties of debtor after a petition is filed, a debtor must file, among other things: -a list of creditors and their addresses -a schedule of assets and liabilities, at FMV -a schedule of current income and expenditures -copies of pay stubs -copies of federal tax returns from the last tax year -note: if an individual debtor in a voluntary Chapter 7 case fails to file any of the items specified above within 45 days after filing the petition, the case will be automatically dismissed

operation of a limited partnership

-in a limited partnership, management is the responsibility of the general partners (the agents), just as in a general partnership 1. general partners -a general partner is personally liable for all partnership debts -if there is a loss, only the general partner can be held personally liable -a general partner may also be a limited partner at the same time (ex. by acquiring a limited partners interest, but still has unlimited personal liability) -a general partner may be a secured or unsecured creditor of the partnership 2. limited partners -summary: passive like stockholder, it's a security -a limited partners liability is limited to his investment and unpaid capital commitments -a limited partner has no right to take part in the management of the business -he is not an agent of the business and generally cannot bind the business in contract -nevertheless a limited partner has a right to review the financial information and tax returns of the limited partnership -however, partners cannot be held personally liable for participating in management -in any case, a limited partner may vote on extraordinary matters without incurring liability (ex. admission or removal of a general partner, dissolution, amending the certificate of limited partnership, sale of substantially all assets, etc.) -a limited partner may assign his equity interest in the partnership -the assignment of a limited partner's interest is like an assignment in a general partnership - the assignee has the limited partner's rights to profits -a new partner can be added only upon the consent of all partners -a limited partner does not owe a fiduciary duty to the partnership, because they are not agents 3. allocation of profits and losses -it is different than a GP and LLP (which is equally) -unless otherwise agreed, general and limited partners share profits and losses in proportion to the value of the partners' contributions (like a corporation) -remember, though, a limited partner is not liable for any loss beyond his or her capital contribution

business structure part 2 MC

-in general, a shareholder has a right to inspect the books and records of a corporation for purposes reasonably related to his or her status as a shareholder (a proper purpose). a shareholder need not conduct the inspection personally; a shareholder may send an agent such as an attorney or an accountant -the right to purchase new issuances of additional stock in order to maintain current proportional ownership is known as a preemptive right -voluntary dissolution of a corporation requires the filing of articles of dissolution with the state -shareholders can contribute property into a corporation without being taxed -when a stock dividend is issued in a corporation's own stock, no assets are distributed and the solvency of the corporation remains the same -the principle that protects corporate directors from personal liability for acts performed in good faith on behalf of the corporation is known as the business judgment rule -a promoter is personally liable for any pre-incorporation contract until the corporation assumes the pre-incorporation contract by novation (in a novation, a new party, aka the corporation, is substituted for an old party, aka the promoter, in the contract). all parties must agree to the novation (so when the third party, the corporation, and the promoter enter into an agreement to substitute the corporation for the promoter) -once a dividend is declared, a shareholder becomes an unsecured creditor of the corporation for the amount of the unpaid dividend -in a short form merger (one between a parent and a subsidiary 90% of which is owned by the parent), the subsidiary's shareholders have a right to dissent and take advantage of the appraisal remedy

worker classification

-it is important for a business to property determine whether a person performing services for the business is an employee or an independent contractor -all of the payroll issues discussed below arise only in an employer-employee setting and do not apply when dealing with an independent contract -when determining whether a worker is an an employee or an independent contractor, no one factor is determinative; it is a weighting process -businesses must consider: -whether the business controls what the worker does and how he or she performs the work (right to control the manner and method of the work indicates an employee); -whether the worker owns his or her own business and tools (indicative of an independent contractor); -whether the worker is paid by the job (indicative of an independent contractor), or hourly or by salary (indicative of an employee); -whether the job is of limited duration (indicative of an independent contractor) or ongoing or continuous (indicative of an employee); and -whether the worker receives benefits (indicative of an employee)

Chapter 7 and Chapter 11: Voluntary cases (rights and duties of debtors and creditors under Chapter 7 and Chapter 11)

-note that 13 is always voluntary 1. debtor files for order of relief -a voluntary case under Chapter 7 or Chapter 11 is commenced by the debtor filing a petition for relief -order of relief means you can't pay debts of any amount to any number of creditors when due 2. debtor need not be insolvent but must pass income tests (if individual) -the debtor need not be insolvent to file (meaning liabilities don't need to be greater than assets) -however, a Chapter 7 case may be dismissed if the debtor has too much income 3. spouses may file jointly -spouses may file jointly to avoid duplicate fees -pass key: although it may seem trivial, "spouses may file jointly" often appears as a correct answer on the CPA exam 4. voluntary petition constitutes an automatic order for relief -a filed voluntary petition constitutes an "order for relief," which simply means a case may proceed unless a court orders otherwise -note: compare to involuntary 5. Section 341 meeting: creditors' meeting -ordinarily, within 20 to 40 days after the order for relief, a meeting of the creditors (called a Section 341 meeting) is held -all interest parties, including creditors, the bankruptcy trustee, and the debtor must be given notice of the meeting

general partnership/joint venture: profit and loss allocation; and distributions

-note: same rules as LLP 1. profits -absent an agreement to the contrary, all partners have equal rights to share in the profits of the partnership (regardless of money or services contributed) 2. losses -unless the partners agree otherwise, they share losses in the same manner as they share profits 3. distributions -unless agreed otherwise, partners are not entitled to compensation for services rendered to the partnership

officers: rights, duties, obligations, and authority

-officers are individual agents (and employees) of the corporation who ordinarily conduct its day-to-day operations and may bind the corporation to contracts made on its behalf 1. selection and removal -officers are selected by the directors and may be removed by the directors with or without cause -they are not elected by the shareholders 2. authority -officers are corporate agents and agency rules determine their authority and power -a corporate president will generally have (actual and) apparent authority to enter into contracts and act on behalf of the corporation in the ordinary course of business 3. fiduciary duties and indemnification -corporate officers, like corporate directors, are subject to fiduciary duties and must discharge their duties in good faith and with the same care as an ordinarily prudent person in a like position -like directors, officers may be indemnified for expenses and judgments from litigation brought against them in their corporate capacity, and they are protected by the business judgment rule 4. may also serve as directors -officers may also serve as directors of the corporation 5. not required to be shareholders -an officer is not required to be, but may be, a shareholder of the corporation

distribution of the debtor's estate: payment and priorities (Chapter 7 liquidation)

-once the debtor's assets have been collected and liquidated, and all objections at that level have been disposed of, the trustee will distribute the assets of the estate -there are three basic categories of claimants, paid in the following order (memorize!) 1. secured claimants 2. priority claimants (SAG WEG CTI) 3. general creditors (who filed their claims on time) -note: payments are made in full to secured claimants to the extent of the value of the collateral secreting their claims (claims in excess of the collateral are treated like claims of other general creditors) -whetever is left over then is used to pay first-priority claimants in full, then second-priority claimants in full, then third-priority claimants are paid, and so on -if money is left after paying all of the priority claimants, it is then split among the general creditors who filed claims on time -if there is not sufficient money to pay all creditors at a particular level, the creditors share pro rata -priority claimants include the following (from highest to lowest priority): 1. Support obligations owed to spouses and children 2. expenses of the bankruptcy Administration , including filling fees, court fees, lawyer fees, accountant fees, trustee fees, etc. 3. claims that accrue in the ordinary course of business after an involuntary petition is filed but before the order of relief (claims in the Gap period, which is the time between when the petition is filed and the court approves it/order of relief granted) 4. Wage claims of employees for sums earned within 180 days of bankruptcy, up to $13,650 5. sums owed for Employee benefits up to whatever of the $13,650 above is left 6. claims of Grain farmers and fishermen (up to a certain amount) 7. Consumer deposits (up to a certain amount) 8. Tax claims 9. personal Injury claims arising from Intoxicated driving -pass key: the priority rules are heavily tested. memorize the order of payment and the dollar limitations. more important, though, remember that payments are made first to secured creditors to the extent of the value of the collateral securing their claims and that claims in excess of the collateral are treated like claims of other general creditors -pass key: it is important to understand the relationship between the exceptions to discharge and payment priorities. some items are both a priority and an exception; other items are one, but not the other. payment is made according to the priority rules (without regard to whether the debt is excepted from discharge). after all possible payments have been made, any remaining debts are discharged unless they are one of the exceptions to discharge (WAFTED)

sole proprietorship

-one person owns the business and manages all of its affairs, and the sole proprietor is not considered an entity separate from the business -no formality is required to form a sole proprietorship, and nothing need be filed with the state in which the business operates (unless the state or city requires a business license 1. personal liability - yes -the sole proprietor is personally liable for all obligations of the business 2. duration -a sole proprietorship cannot exist beyond the life of the sole proprietor (so duration is limited) 3. tax treatment -profits and losses from the business flow through the business to the sole proprietor 4. transferability - yes -a sole proprietor is free to transfer his interest in the sole proprietorship at will

features of a Chapter 7 liquidation

-review: available to individuals, partnerships, and corporations (but individuals must pass tests), voluntary or involuntary -the goal of federal bankruptcy law is to give an honest debtor a fresh start financially by discharging most debts owed by the debtor -in a liquidation, a bankruptcy trustee is appointed -the trustee collects all of the debtor's nonexempt property, liquidates it, and pays off all of the debtor's creditors -most debts of an individual are discharged (that is, the debtor is relieved from personal liability for most debts) but certain debts survive bankruptcy (WAFTED) 1.. objections to discharge -creditors often want to prevent debtors from receiving a Chapter 7 discharge -the code provides two kinds of ammunition for such claims: objections to discharge and non-dischargeable debts (exception to discharge) -the first type of ammunition (objections to discharge) destroys the entire Chapter 7 case - none of the debtor's debts will be discharged -the second type of ammunition (exceptions to discharge) prevents the discharge of specific debts -summary: dishonest debtor/bad faith -the following will prevent the debtor from receiving any discharge: a) debtor not an individual -technically, only individuals (real people as opposed to artificial entities, such as corporations) can receive a discharge under Chapter 7 -artificial entities seeking relief under Chapter 7 usually are dissolved at the conclusion of the case, and so their debts are wiped out b) fraudulent transfers or concealment of property c) unjustifiably failed to keep books and records d) prior discharge within eight years 2. exceptions to discharge -certain debts of an individual are not discharged under Chapter 7 or 11 -those debts not discharged are called the "exceptions to discharge" -the key to remember the six nondischargeable debts that most commonly appear on the exam is the word "WAFTED:" Willful and malicious injury (ex. DWI, but ordinary negligence is dischargeable), Alimony, Fraud (and Fines/penalties that you owe to the government), Taxes (within past three years), Educational loans (unless undue hardship), and Debts undisclosed in the bankruptcy petition 3. reaffirmation of discharged debts -sometimes a debtor does not want a particular debt discharged in bankruptcy (ex. to maintain good relations with a particular creditor) -the debtor may reaffirm such debts only if the agreement to reaffirm the debt was made before the granting of the discharge

features of reorganization cases under Chapter 11

-review: available to individuals, partnerships, and corporations, voluntary or involuntary 1. creation of Creditors' Committee -in a Chapter 11 case, shortly after the order for relief is effective, a committee of unsecured creditors is appointed, usually consisting of willing persons holding the seven largest unsecured claims against the debtor 2. Equity Security Holders' Committee -if the debtor is a corporation, an equity security holders' (stockholders) committee may be appointed consisting of the seven largest holders of the equity securities to ensure that the equity security holders receive adequate representation -the committees can consult with the debtor, investigate the debtor's finances, participate in preparing the reorganization plan, etc. 3. debtor generally remains in possession -in a Chapter 11 reorganization case, a trustee generally is not appointed -instead, the debtor remains in possession of the debtor's assets because the debtor is presumed to be in the best position to run the business

limited partnership

-summary: at least one GP and at least one LP 1. nature of a limited partnership -a limited partnership is a partnership made up of one or more general partners (who have personal liability for all partnership debts) and one or more limited partners (whose liability for partnership debts generally is limited to their investment) -pass key: the examiners sometimes ask whether a limited partnership can be formed with limited liability for all partners. the answer, of course, is no - you need at least one general partner who has unlimited personal liability for all partnership obligations a) generally no perpetual life: -a limited partnership does not have a perpetual life (unless the partnership agreement provides otherwise) b) similar to a corporation: -a limited partnership can be formed only pursuant to a state statute and only by filing with the state -limited partners are very much like shareholders: they contribute capital in exchange for a partnership interest, but they do not participate in management (day to day operations) 2. formation of a limited partnership -a limited partnership can be formed only pursuant to a state statute and only by filing a certificate of limited partnership with the state

fundamental changes (corporations)

-summary: need board and shareholder approval, but not unanimous (unlike a partnership) -decisions regarding issues that might fundamentally change the nature of the corporation require shareholder approval through a special procedure -such fundamental corporation changes include some amendments to the articles of incorporation, dissolutions, mergers, consolidations, share exchanges, and sales of all or substantially all of the corporation's assets 1. pass key: the fundamental changes that require shareholder approval include (DAMS): -Dissolution -Amendments to the Articles of incorporation (not bylaws though) that materially and adversely affect the shareholder's rights -Mergers, consolidations, and compulsory share exchanges -Sale of substantially all the corporation's assets outside the regular course of business 2. general procedure a) board resolution initiates process -a majority of the board of directors must adopt a resolution setting forth the proposed action and submitting it for a vote at a shareholders' meeting b) notice -the corporation must notify all shareholders even if they are not entitled to vote c) shareholder approval -the change must be approved by a majority of the shares voted at the meeting d) filing of articles -a document setting forth the action taken (referred to as "articles") must be executed by the corporation and filed with the estate e) right to dissent/appraisal rights -shareholders who have a right to vote on a fundamental corporate change typically have a right to dissent/appraisal right (i.e., the right to have the corporation purchase their shares at a fair price) if the shareholder votes against the fundamental change and it is nevertheless approved 3. pass key: -the board must approve a resolution, but there is no requirement of unanimity -the shareholders must be given notice and an opportunity to vote on the change. approval requires a majority of the votes case 4. Amendments to the Articles of incorporation -the corporation may amend its articles of incorporation in any and as many respects as desired, as long as the provisions, as amended, are lawful

Federal Insurance Contributions Act (FICA)

-the Federal Insurance Contributions Act (FICA) provides workers and their dependents with benefits in case of death, disability, or retirement 1. participation -all full-time and part-time employees must participate in the program -the self-employed must also participate (if their net profit exceeds $400 in a year) -summary: almost everyone must participate, including self-employed 2. funding -summary: unique to FICA and ACA: funded by both employers and employees -FICA is funded by taxing income earned from labor (ex. wages, salaries, tips, bonuses, commissions, etc.) -FICA is funded by both employers and employees, including self-employed individuals a) employer responsibility -employers must match their employees' contributions to FICA -employers are responsible for paying the tax and withholding the employee's contribution -note that an employer that fails to withhold the employee's contribution is liable to pay the employee's half, but has a right to reimbursement form the employee. if an employer voluntarily pays the employee's share, it is deductible for the employer and taxable income for the employee b) employee responsibility -summary: FICA is net taxable wages and Medicare is gross wages/no limit -for 2021, employees were liable to make FICA contributions of 6.2% on their net taxable wages of up to $142,800 and Medicare contributions of 1.45% of their entire gross wages -individuals with income exceeding a threshold amount are liable for an additional Medicare tax of 0.9% of their entire gross wages -gross wages include all earned income, such as salary, bonuses, and commissions. gifts, interest, dividends, etc. are NOT wages c) self-employed person responsibility -self-employed individuals pay into FICA through the self-employment tax, which is equal to the employer's and the employee's contribution: 15.3% (aka [6.2% + 1.45%) * 2] = 15.3%) -it is imposed only on net profits and only if the net profits exceed $400 in a year -notes: board members are self-employed, remember that it is on net profits (not gross sales) d) pass key -the examiners often ask what income is subject to FICA. remember that an employee's gross wages are subject, and that a self-employed person's net profits are subject 3. deductibility by employer (only) -the employer's contribution is deductible as an ordinary business expense -the employee's contribution is not deductible by the employee -because a self-employed person pays both contributions, one-half of the self-employment tax is deductible in arriving at adjusted gross income 4. benefits -FICA provides a number of benefits, including disability pay, retirement pay, survivor's benefits, dependent's benefits, and medical benefits under Medicare (not Medicaid, which is a state-run program) -benefits are available to all covered employees regardless of whether they are reaching benefits from a private plan -employees may not opt out of Social Security even if they are covered by a private plan 5. pass key: the most important things to remember about Social Security: -the employer must pay the tax and collect an employee's portion of the tax -all income derived from labor is taxed, unearned income is not taxed -all employees are subject to the tax up to a maximum dollar amount for the Social Security with no limit on the Medicare; self-employment income is subject to both employer and employee taxation for income over $300

unemployment compensation (FUTA)

-the Federal Unemployment Tax Act (FUTA) establishes a state-run system of insurance to provide income to workers who have lost their jobs 1. participation -all employers who have quarterly payrolls of at least $1,500 or who employ at least one person for 20 weeks in a year must participate in the system (so must meet either the $1,500 quarterly minimum or time requirements) -unlike FICA, self-employed persons do NOT participate 2. funding -summary: employer only -unemployment taxes are payroll taxes assessed only against the employer -the federal unemployment tax rate currently is 6% on the first $7,000 per year of compensation for each employee 3. employer deductibility - yes -the employer's payment is deductible as an ordinary business expense -the employee may not take a deduction (obviously, b/c they don't pay for it) 4. benefits -unemployment benefits are generally available only when an employee's job termination was not his or her fault -note that payments are not limited to the amount that has been paid by the employer on the employee's behalf 5. pass key: important things to remember about FUTA: -the employer must pay if it employs an employee for at least 20 weeks in a year or paid $1,500 in wages in a quarter. the employee does not pay -because the employer pays, the tax is deductible as a business expense. the employee cannot deduct the payment -if an employer's claim rate is low, the employer may get a deduction for state unemployment tax (the employer may take a credit against the federal unemployment tax in an equal amount up to 5.4%) -the employee's benefits are not limited to the contributions made on his behalf

Affordable Care Act

-the purpose of the Affordable Care Act (ACA) is to improve access to health care in the U.S. by providing workers with access to affordable health care coverage -health care coverage may be offered thorough: a) a plan provided by the employer; or b) a plan purchased through a Health Insurance Marketplace, where employees may qualify for financial assistance; or c) coverage provided under a government-sponsored program such as Medicare; or d) direct purchase by the employee from an insurance company 1. participation -both employers and employees are required to participate: -certain employers must offer health care coverage or pay a penalty -an individual must obtain health care coverage for himself, a spouse, and tax dependents 2. funding -summary: like FICA -both the employer and the employee contribute to the purchase of affordable coverage: -the employer may subsidize the cost of the coverage in order to ensure that it is affordable -the employee will pay a certain amount for coverage, whether purchased through the employer or through another source a) employer responsibility -under the ACA, employers with 50 or more "full-time" employees are called applicable large employers, or ALEs -ALEs are required to provide full-time employees the opportunity to purchase affordable minimum essential health care coverage for themselves and their dependents under an eligible employer-sponsored health care plan -all types of employers can be ALEs, including tax-exempt organizations and government entities -an employee who works for an employer on average at least 30 hours a week is a full-time employee -coverage is considered affordable if the employee's contribution to the plan does not exceed 9.5% of the employee's household income for the taxable year -a dependent is an employee's child who has not reached the age of 26 -employers who do not comply with the ACA will pay a penalty for failure to do so b) employee responsibility -the ACA comes with an individual mandate requiring all Americans to buy health coverage -formerly, a penalty was imposed on persons who failed to purchase health coverage, but the penalty has been eliminated -for low-income individuals, the federal government subsidizes the cost though a tax rebate, even if the individual paid no income taxes 3. benefits -the ACA does not create a national health insurance plan -rather, it sets national standards for how health insurance is structured and priced, and places new requirements on individuals and employers -because purchasing coverage is mandatory, the ACA makes it illegal for an insurer to deny coverage to individuals with preexisting conditions or to charge more for their coverage 4. penalties for failure to comply with ACA -the employer must pay a fee for failure to comply with the Affordable Care Act (either penalty 1 or penalty 2) -note that an employer is not obligated to calculate its liability and should not make a payment without first being contacted by the IRS a) penalty type 1 -an ALE will owe the first type of employer shared responsibility payment if it does not offer minimum essential coverage to at least 95% of its full-time employees (and their dependents) and at least one full-time employee receives the premium tax credit for purchasing coverage through the Health Insurance Marketplace -this payment is equal to $2,700 b) penalty type 2 -even if an ALE member offers minimum essential coverage to at least 95% of its full-time employees (and their dependents), it may owe the second type of employer shared responsibility payment for each full-time employee who receives the premium tax credit for purchasing coverage through the Marketplace -this payment is equal to $4,060 5. deductibility - no -none of the penalties required of the employer under the employer shared responsibility provisions are tax deductible for the employer

intro to bankruptcy

-there are six basic types of bankruptcy cases under federal law: Chapter 7 liquidation, Chapter 9 municipal debt adjustment, Chapter 11 reorganization, Chapter 12 family farmers with regular income, Chapter 13 adjustment of debts of individuals with regular income, and Chapter 15 ancillary and other-cross border cases 1. Chapter 7 Liquidation: Trustee appointed -available to: IPC: individuals, partnerships, corporations -in a Chapter 7 liquidation case, a trustee is appointed -the trustee collects the debtor's assets, liquidates them, and uses the proceeds to pay off creditors to the extent possible -if the debtor is an individual (or a married couple), the debtor's debts are then discharged (i.e., the debtor is relieved from personal liability for most debts), with certain exceptions -if the debtor is an artificial entity, such as a corporation, it is dissolved (no discharge is given but the effect is the same - the debts are wiped out) 2. Chapter 13: adjustment of debts of individuals with regular income -available to: I: Individuals only -in a Chapter 13 case, the debtor repays all or a portion of his debts over a three-year period to a maximum of a five-year period -although there is not a liquidation, a Chapter 13 trustee oversees the handling of a Chapter 13 proceeding 3. Chapter 11 Reorganizations: no liquidation, GR: trustee not required -available to: IPC: individuals, partnerships, corporations -in a Chapter 11 reorganization case, a trustee usually is not appointed -the debtor remains in possession of his or her assets and a plan of reorganization (i.e., a plan to pay off debts at a different time and/or amount from what was originally due) is adopted -creditors are paid to the extent possible and the business continues 4. pass key -a trustee is required for Chapter 7 and Chapter 13 -a trustee is not required for Chapter 11, although the court may appoint one if one is needed 4. Chapter 15: ancillary and cross-border cases -it was adopted to promote a uniform and coordinated legal regime for cross-border insolvency cases

Chapter 11 reorganization plan

-unless a trustee has been appointed, the debtor has an exclusive right to file a plan during the first 120 days (4 months) after the order for relief is effective -other interest parties (ex. creditors) may file a plan if: a trustee has been appointed; the debtor has not filed a plan within 120 days after the order for relief became effective; or the debtor has filed a plan but has not obtained the acceptance of every impaired class (creditors and stockholders) a) contents of the plan: a Chapter 11 plan must: -classify all claims (ex. secured, first priority, second priority, impaired, unimpaired, etc.); -describe the treatment to be accorded each impaired class; -treat each claimant within a particular class identically; and -establish ways to implement the plan b) acceptance of the plan by creditors and stockholders (if corporation) -need 2/3 by amount (for each class of impaired claims) (doesn't need to be unanimous) c) confirmation of the plan by court -the court will confirm the plan if it meets certain conditions, such as being accepted by all impaired classes, providing for payment in full for priority administrative expenses and gap claims, and the plan is feasible -a plan can be confirmed by the court even if it is not accepted by all impaired classes if at least one impaired class has accepted, and the court finds that the plan is not unfairly discriminatory and is fair and equitable with respect to any dissenting impaired claims. this is called a cram down 5. effects of confirmation -a confirmed Chapter 11 plan is binding on all creditors, equity security holders, and the debtor regardless of whether they accept the plan -once confirmed the debtor pays debts according to the plan -unless the order provides otherwise, confirmation discharges the debtor from most pre-confirmation debts, except that debts not discharged under Chapter 7 are also not discharged under Chapter 11: WAFTED)

Chapter 7 and Chapter 11: involuntary case (rights and duties of debtors and creditors under Chapter 7 and Chapter 11)

-unsecured creditors may petition a debtor involuntarily into bankruptcy proceedings under Chapter 7 or Chapter 11 1. grounds: generally not paying debts when due -in default: for an involuntary petition, creditors must show that the debtor generally is not paying debts as they become due (but don't have to prove insolvency) 2. ineligible debtors: farmers and charities -farmers and nonprofit charitable organizations may not be petitioned involuntarily into bankruptcy 3. who must join petition: owed at least $16,750 -only creditors who are owed, individually or in aggregate, at least $16,750 in unsecured, undisputed debt may petition a debtor involuntarily into bankruptcy -the number of creditors who must file depends on the debtor's total number of credits (know this): a) fewer than 12 creditors: one or more owed $16,750 -if a debtor has fewer than 12 creditors, any one or more creditors who are owed at least $16,750 in unsecured debt may file b) 12 or more creditors: three owed $16,750 -if a debtor has 12 or more creditors, at least three creditors who are owed at least $16,750 in aggregate, in unsecured, undisputed debt must join in the involuntary petition 4. pass key: -remember that the number of creditors and amounts owed necessary to file an involuntary petition only apply to involuntary petitions -summary: if less than 12 creditors, only one creditor needs to file (the one, or more in aggregate, must be owed $16,750 in unsecured, undisputed debt). if 12 or more, at least creditors must file (the three must be owed $16,750 in aggregate in unsecured, undisputed debt)

workers' compensation

-workers' compensation programs are state-run programs designated to enable employees to recover for injuries incurred while on the job -employers are strictly liable regardless of fault -the only requirement is that the employee's injury occurred while acting in the scope of employment -pass key: fault is the most frequently tested issue in workers' compensation. remember that an employee can collect even if the employee was negligent, grossly negligent, or assumed the risk. an employee cannot recover for injuries resulting from intoxication, fighting, or self-inflicted wounds. remember, the purpose of workers' compensation is to enable employees to recover for work-related injuries regardless of negligence 1. participation -most employers most participate in workers' compensation programs 2. funding - employer only -the employer pays for workers' compensation by purchasing insurance from the state or a private carrier 3. deductibility - yes -workers' compensation insurance premiums are ordinary business expenses deductible by the employer -because employees do not pay, there is no deduction for the worker 4. benefits -workers' compensation provides benefits for any injury or disease (including aggravations of existing diseases) resulting from employment -benefits include money for loss of income, disability, loss of limbs, prosthetic devices, medical services, and burial costs -the program works like other insurance - benefits are not limited to what was paid in on the employee's behalf -general rule: cannot sue employer but can sue third parties

limited liability company

1. basic characteristics -an LLC is an entity designed to provide its owners, who are called "members," with two main features: -the limited liability that shareholders of a corporation enjoy (owners are not personally liable for obligations of the business entity) -the ability to be taxed like a partnership (profits and losses flow through the LLC and are treated as the owners' personal profits and losses) 2. controlling law -LLC members may, but need not, adopt operating agreements 3. formation of a limited liability company -an LLC is formed by filing articles of "organization" with the secretary of state (vs. corp files articles of incorporation) a) contents of Articles: -a statement that the entity is an LLC; -the name of the LLC; -the street address of the LLC's registered office and name of its registered agent; -if management is to be vested in managers; and -the names of the persons who will be managing the company b) number of members -most states now allow one person to form an LLC -

formation of a corporation

1. created under statute -corporations are created by complying with a state incorporation statute -pass key: a number of past corporation questions have simply asked which of four statements is true. as simple as it may seem, the key to a number of these questions has been that corporations are governed by statute 2. promoters procure capital commitments -promoters enter into contracts before the corporation is formed to obtain financing and things the corporation will need once formed -promoters are personally bound on the contracts they make -the corporation is not bound unless and until the corporation adopts the contracts after the corporation is formed, either expressly or by accepting the benefits of the contracts -however, even if the corporation adopts a promoter's contract, the promoter remains liable unless there is a novation (an agreement that the third party will release the promoter and substitute the corporation) 3. Articles of Incorporation -incorporators must file articles of incorporation with the state a) the articles may include anything the incorporators consider appropriate but the articles must include: -the name of the corporation; -the names and address of the corporation's registered agent; -the names and addresses of each of the incorporators; and -the number of shares authorized to be issued (stock) -note: one or more classes of shares must have unlimited voting rights -pass key: the examiners often ask what must be included in the articles of incorporation. items not in the above lists are not necessary. for example, the articles need not include a statement of the states in which the corporation is to do business or have offices, the names of the initial directors or officers, terms of office, etc. memorize the list and do not be fooled by other such choices b) optional purpose clause (ultra vires act) -a corporation may include a clause in its articles stating the business purpose for which the corporation was formed -if a corporation has a narrow purpose clause and undertakes business outside the clause (or outside the business permitted by statute), it is said to be acting "ultra vires" -a director or officer who authorizes an ultra vires act may be liable to the corporation for damages caused by the act 4. bylaws (rules) -note: not a fundamental change -in addition to the articles of incorporation, a corporation generally will have bylaws containing rules for running the corporation -they are not part of the articles of incorporation and are not required to be filed with the state 5. disregard of corporate entity (piercing the corporate veil) -courts will sometimes hold the shareholders, officers, or directors of a corporation personally liable because the privilege of conducting business in corporate form is being abused -this disregard of the corporate entity frequently is called "piercing the corporate veil" -courts generally will pierce the corporate veil for any of three reasons (know these) a) shareholders commingle personal funds with corporate funds or use corporate assets for personal use b) the corporation was inadequately (or "thinly") capitalized at the time of formation (shareholders must start the corporation with sufficient capital to reasonably meet the corporation's prospective liabilities) c) the corporation was formed to commit fraud on existing creditors (ex. a sole proprietor transfers all assets to a newly formed corporation so that the assets are not available to pay the sole proprietor's existing creditors) -pass key: be sure to memorize the three reasons for piercing: commingling personal with corporate funds, inadequate capitalization, and committing fraud on existing creditors. be mindful of what is not on the list. the following do not justify piercing: incorporating as an S corp, incorporating a partnership, and bankruptcy of a corporation that was adequately capitalized at the outset

Merger, consolidation, and share exchange

1. definitions a) merger: A + B = A -one corporation survives the merger and continues in existence, while the other merging corporation(s) cease to exist following the merger c) consolidation: A + B = C -a consolidation involves one or more corporations joining together to form a new corporation -each constituent corporation ceases to exist after the consolidation; only the new corporation goes on -the new corporation is liable for the debts of the old corporation d) share exchange -a share exchange is a transaction in which one corporation acquires all of the outstanding shares of one or more classes of stock of another corporation -both corporations continue to exist as separate entities 2. procedure in general -both corporations in a merger and all corporations involved in a consolidation must follow the general procedure for fundamental corporate changes set out above (board resolution, notice, approval by majority of the shares, and filing) -the notice must include a summary of the plan or merger, consolidation, share exchange, etc. -in a share exchange, only the corporation whose shares are being acquired need follow the fundamental change procedure a) exception: merger of subsidiary (short-form merger) -summary: neither entity -a parent corporation owning 90% or more of a subsidiary corporation may merge the subsidiary into the parent without the approval of the shareholders of either corporation or the approval of the subsidiary's board b) effect of mergers into a surviving corporation -a corporation merged into a surviving corporation ceases to exist as a separate entity -the surviving corporations has all rights, liabilities, and obligations of the merged corporations c) fending off unwanted takeover attempts -if a corporation is faced with the prospect of being taken over and the board of directors wants to resist the takeover attempt, it may do so in a number of ways, including: -persuading shareholders to reject the offer; -suing the person or company attempting the takeover; -merging with a white knight (a company with which the directors want to merge); -making a "self-tender" (an offer to acquire stock from its own stockholders and thus retain control in order to prevent a takeover); -paying "greenmail" (i.e., pay the person or company attempting the takeover to abandon its takeover attempt); -locking up the crown jewels (i.e., give a third party an option to purchase the company's most valuable assets); -undertaking a "scorched earth" policy (which is to sell of assets or take out loans that would make the company less financially attractive); or -applying "shark repellent," which means amending the articles of incorporation or bylaws to make a takeover more difficult (ex. require a large number of shareholders to approve the merger)

nature of a corporation

1. distinct legal entity -as a distinct legal entity, usually only the corporation is liable for corporate obligations -generally, shareholders, directors, and officers are not personally liable for contracts made by their corporation -neither are they liable for corporate torts, except to the extent the shareholder, officer, or director participated in the tort 2. taxation: a) C corporation (double taxation) -generally, a corporation is taxed as an entity distinct from its owners -it must pay taxes on any profits it makes -stockholders generally do not have to pay tax on the profits of the corporation until they are distributed (ex. as dividends) b) S corporation (flow though) -the tax laws permit certain corporations to elect to be taxed like partnerships (i.e., profits are not taxed at the corporate level but rather are treated as income of the shareholders) -there are a number of restrictions on S corporations, such as: -stock can be held by no more than 100 personsl -shareholders must be individuals, estates, or certain trusts; -the corporation must generally be a domestic corporation; -there can be only one class of stock; and -foreign shareholders are generally prohibited 3. owned by shareholders but managed by directors (except small closely held) -corporations are owned by their shareholders, but unless the articles of incorporation provide otherwise, the shareholders do not run the corporation -the power to run the corporation is vested in the board of directors, which is elected by the shareholders 4. perpetual life -a corporation generally has a perpetual life (this is unique to corporations) 5. freely transferable ownership -its owners (shareholders) are free to transfer all of their ownership rights to others (this is unique to corporations)

termination: dissolution of a general partnership

1. events causing dissolution -generally, a partnership is dissolved and its business must be wound up if a partner gives notice of withdrawal, the partners agree to dissolution, or a court orders dissolution -the death of a partner does not cause a dissolution if the remaining partners agree to continue the partnership -pass key: a partnership is not of unlimited duration - because any one of the above events can trigger a dissolution 2. partnership continues after dissolution -a partners continues to exist after dissolution until its business is wound up, at which time the partnership is terminated -for example, each partner will continue to have apparent authority to bind the partnership, and each partner will continue to be liable for the obligations of the partnership. the partnership is terminated only after the winding-up process is complete 3. order of distribution of assets (final accounting) -when a solvent partnership is dissolved and its assets are reduced to cash, the cash must be used to pay the partnership's liabilities in the following order: a) creditors -creditors, including partners who are creditors, must be paid before the non-creditor partners receive any payments b) partners -after obligations to creditors are satisfied, each partner is entitled to payment, first to return their contributions and then on account of profits 4. application (final accounting) a) amounts due or owed -to determine the amounts due or owed, deduct from the assets left upon dissolution any amounts owed to creditors (including partners who are creditors) and then deduct the amount needed to return the partners' contributions b) divide profit (if any) -if money still remains, it is profit that must be divided among the partners -if the assets at dissolution are less than what is needed to pay the creditors and return contributions, then there is a loss that must be divided among the partners -in either case, remember that unless the partnership agreement provides otherwise, profits are divided equally among partners, and losses are divided the same as profits

general partnership/joint venture: duties and legal obligations of partners

1. fiduciary duties owed to other partners -each partner owes a fiduciary duty to the partnership and other partners 2. *each partner is personally liable for all partnership obligations -partners are personally liable for all contracts entered into and all torts committed by other partners within the scope of partnership business or which are otherwise authorized -the partners' liability is joint and several: this means that each partner is personally and individually liable for the entire amount of all partnership obligations -in many states, however, a creditor cannot satisfy a judgment against an individual partner unless the partner was named in the lawsuit and the assets of the partnership are exhausted

operation of a limited liability company

1. generally all members may participate in management -unless the articles of an operating agreement provides otherwise, all members have a right to participate in management decisions of the LLC a) member-managed LLC -if the members are managing the LLC, each member is an agent of the LLC and has the power to bind the LLC by acts apparently carrying on the business of the LLLC b) manager-managed LLC -if management is by managers, each manager is an agent of the LLC and has the power to bind the LLC -in this case, the members are not agents of the LLC and do not have the power to bind the LLC 2. voting strength proportional to contributions (like a corporation) -voting strength is proportional to contributions 3. profit and loss allocated according to contributions (like an LP and corporation) -unless the articles or an operating agreement provide otherwise, profits and losses of an LLC are allocated on the basis of the members' contributions in most states 4. transferability of ownership and rights -most statutes provide that unless the operating agreement provides otherwise, a mamba of an LLC may not transfer all of her interest in the LLC without the consent of all other members -a member is free to assign her interest in distributions (ex. of profits or on dissolution) but is not free to assign any rights to manage the LLC -thus, transferability of ownership is similar to that of a partnership 5. books and records -each membership of an LLC is entitled to inspect toad copy the books and records 6. termination of a limited liability company: an LLC will dissolve upon (limited life): -expiration of the period of duration stated in the articles; -the consent of all members; -the death, retirement, resignation, bankruptcy, incompetence, etc. of a member (unless the remaining members vote to continue the business) - these events dissociate the member; or -a judicial decree or administrative order dissolving the LLC for violation of law

termination of a limited partnership

1. methods of dissolution: a limited partnership may be dissolved by: -the occurrence of the time or event stated in the partnership agreement; -written consent of all partners (i.e., unanimous written consent to dissolve); -withdrawal or death of a general partner; or -a judicial decree 2. death of a limited partner does not cause dissolution -note that the death of a limited partner will not dissolve the partnership 3. order of distribution of assets -after dissolution, if the limited partnership is terminated, assets are distributed in the following order: a) to creditors, including partners who are creditors; b) to former partners in satisfaction of liabilities that were not paid on their withdrawal; and c) to partners, first to return their contributions, and then to distribute profits (which is based on capital) 4. loss sitation -if there is a loss, only the general partners are personally liable (limited partners have no personal liability beyond their capital commitments)

property of the bankruptcy estate (rights and duties of debtors and creditors under Chapter 7 and Chapter 11)

1. property included -summary: property includes most items as of time of filing and items "DIII" (divorce, income from property, inheritance, insurance; within 180 days after filling) -the debtor's estate (i.e., assets available to pay off creditors) generally includes all of the debtor's real and personal property at the time of filing -the estate also includes Income generated from estate property received within 180 days after the filing of the petition for relief -it also includes property the debtor receives from Divorce, Inheritance, or Insurance within 180 days after the filing of the petition -pass key: the fact that inheritance received within 180 days (6 months) after the filing of a petition for relief is included in the debtor's estate has been tested often 2. property excluded from estate -money the debtor earns after a petition is filed and basic household items needed to live (such as clothing, medical devices, etc.) are excluded from the bankruptcy estate 3. trustee is a hypothetical lien creditor as of filing date -the trustee is treated as having a lien on all of the debtor's property the instant the bankruptcy petition is filed -this means that the trustee has priority over all creditors except creditors with prior perfected security interests or prior statutory or judicial liens 4. power power over fraudulent transfer (2 years) -the trustee also has power to set aside fraudulent transfers made within two years of the filing date -a fraudulent transfer is any transfer made with intent to hinder, delay, or defraud creditors or any transfer in which the debtor received less than equivalent value while the debtor was insolvent -note: applies when debtor is insolvent 5. trustee can disaffirm preferences -the trustee has the power to set aside preferences -when the payment is "set aside", the payment is taken back from the creditor who received it and becomes part of the bankruptcy estate -a preferential payment is: a) a transfer made to or for the benefit of a creditor; b) on account of an antecedent debt (i.e., already existing) of the debtor; c) made within 90 days prior to the filing of the petition (one year if the creditor is an insider, such as an officer of the debtor organization or a close relative of the debtor); d) made while the debtor was insolvent; and e) *results in the creditor receiving more than the creditor would have received under the Bankruptcy Code -note: applies when debtor is insolvent -pass key: preferential payment is a heavily tested concept 6. preferential payment: antecedent (preexisting debt), rather than a contemporaneous exchange -a payment is a preference only if it is for an antecedent (preexisting) debt -a contemporaneous exchange for new value is not a preference (ex. receiving new inventory from a supplier and paying for them upon arrival) 7. preferential payment: receipt of greater share: creditor received more -a preference exists only if the creditor receives more than she would receive in a bankruptcy distribution -therefore, payment to a fully secured creditor is not a preference, because the creditor would have received the collateral and been paid in full anyway 8. exceptions to preferential payment: transfers in the ordinary course of business are okay: -a transfer made to repay a debt that the debtor incurred in the ordinary course of business is not a voidable preference -ex: a regular monthly installment payment will not be set aside as a preference. similarly, payment of a current utility bill or a current lease payment does not constitute a preference

general partnership/joint venture: rights of partners

1. rights in partnership property (ex. inventory, PP&E, etc.) -a partnership owns all money and property contributed to the partnership by the partners and all other property acquired by the partnership -partners do not own partnership property -as a general rule, partners have no right to possess or use partnership property other than for partnership purposes -thus: an individual partner may not assign or sell partnership property for his own benefit; and a partner's personal creditors cannot attach partnership property to satisfy an individual partner's debt 2. rights in partnership interest (aka owner's equity) -a partner may assign her interest in the profits and surplus at any time -the assignee obtains the right to receive the partner's share of the profits -the assignee does not become a partner and so has no right to attend partnership meetings, inspect the partnership books and records, vote, etc. -pass key: the examiners like to ask about the effect of a partner transferring interest in a partnership without the consent of the other partners. the key is t o remember that such a transfer does not make the assignee a partner (that can be done only with the consent of all of the partners). thus, the transfer has no power to manage the partnership, inspect the partnership's books and records, vote, etc. generally, the assignee's only right is to get whatever distribution the assignor would have gotten a) personal creditors may attach a partner's interest (called a charging order) -a creditor of an individual partner may obtain from a court a charging order against an individual partner's share of profits b) upon death, heirs are entitled to a deceased partner's share of profits -when a partner dies, his or her right to profits vests in his or her heirs -however, the partner's right to partnership property vests in the surviving partners c) right to inspect books and records - yes -every partner has the right to inspect and copy the books and records of the partnership

shareholders: rights, duties, obligations, and authority

1. voting rights -shareholders have the right to vote to elect or remove directors -they also have the right to vote on whether to approve fundamental changes to the cooperation, such as dissolution a) general rule: one share, one vote -unless the articles of incorporation provide otherwise, each share of stock is entitled to one vote b) exception: cumulative voting for directors -the articles can give shareholders the right to cumulative voting with respect to electing directors -in cumulative voting, each share is entitled to one vote for each director position that is being filled, and the shareholder may cast the votes in any way, including casting all for a single candidate -this helps minority shareholders gain representation on the board 2. distributions (dividends) -shareholders do not have a right to a distribution unless and until it is declared by the board of directors -once the board declares a distribution, the shareholders are treated as unsecured creditors of the corporation to the extent of the dividend -distributions decrease the corporation's shareholders; equity -pass key: the fact that shareholders have the status of unsecured creditors once a dividend is declared has been a favorite correct answer choice on a number of past exam questions a) preferred shareholders -a corporation need not give each shareholder an equal right to receive distributions. shares may be divided into classes with varying rights -noncumulative preferred shares: shares with a preference usually are entitled to a fixed amount of money before distributions can be made with respect to non preferred shares -cumulative preferred shares: dividends carry over to future years. if a dividend is not declared in a particular year, the right to receive the preference accumulates and must be paid before nonpreferred shares may be paid any dividend b) stock dividends -stock dividends are issued from a corporation's own "authorized but unissued shares" -because no assets are distributed, the shareholders receiving the stock generally do not owe any taxes on it -thus, a stock dividend is not a distribution of corporate assets 3. right to inspect books and records - yes -shareholder may inspect books and records if he/she has a proper purpose (one related to the shareholder's rights in the corporation, such as to start a derivative suit or to solicit shareholders to vote for certain directors) -but shareholders can be denied inspection for improper purposes (ex. to get names for a retail mailing list) 4. preemptive rights -when a corporation proposes to issue additional shares of stock, the current shareholders often want to purchase shares in order to maintain their proportional voting strength -this right is known as the "preemptive right" -preemptive rights do not exist unless the articles of incorporation provide for them 5. derivative actions -summary: shareholders represent best interest of corporation. money damages received go to corporation -when a corporation has a legal cause of action against someone but refuses to bring the action, the shareholders may have a right to bring a shareholder derivative action to enforce the corporation's rights -such an action may be brought against directors of the corporation or outsiders a) derivative action vs. direct action -derivative actions may be brought only to vindicate wrongs against the corporation -if a shareholder seeks to vindicate the shareholder's own rights against the corporation, a direct action by the shareholder against the corporation is appropriate