Chapter 9 Study Guide Business Law

Be able to identify the two sub-categories of for-profit corporations.

"Publicly held corporations" and "closely held" or "family" corporations

What two things does the "duration" of a business partnership involve?

1) To whom can the creditors turn when the owner quits 2) How easy is it for the owner to "alienate" her interest. Is this right?

RULE OF LAW: What is The Business Partnership Rule? Be able to identify its elements. Under what circumstances does it become legally enforceable? How does it define the rights, duties, and obligations of business partners?

A legally enforceable business partnership is formed whenever two or more persons enter into a business for profit; unless specified differently in writing, business partners will share equally in the business profits, losses, assets and decision-making power, and each partner is equally liable to the other(s) for the contracts and torts which arise from the conduct of the business. Application of this rule determines the authority, liability and share of profits or losses as between the business partners.

Be able to identify the three ways a business partnership can arise.

A partnership can arise expressly, impliedly or apparently (by estoppel).

RULE OF LAW: What is The Corporate Liability Rule? Be able to identify its elements. What general protection does it provide to shareholder-owners? Under what circumstances might this general protection not be available and what would the result be?

A properly formed corporate entity provides liability protection for its shareholder-owners for losses arising out of the corporate entity's conduct of business, and shareholder-owners risk no more loss than the total value of their shares of stock; however, persons harmed by the misconduct of an undercapitalized corporate entity may "pierce the corporate veil" and sue shareholder-owners directly if the shareholder-owners operated the corporate entity's business day-to-day and engaged in the misconduct that caused the harm. Application of this rule determines the liability of a corporate entity or its shareholder-owners for losses suffered by others.

As a general rule, how long does a sole proprietorship last? How does this concern creditors who are looking for payment? Generally, can creditors sue any new owners of a sole proprietorship if the old owner is insolvent?

As a general rule it lasts until its owner dies, retires, or transfers it to another. Creditors, who look to the owner personally for payment, are very concerned about who owns the business. Generally creditors can not sue any new owners of a sole proprietorship if the old owner is insolvent.

With regards to business partners' liability, what activities bind the partnership (See RULE OF LAW: The Business Partnership Rule)?

Contracts and torts which arise from the conduct of the business. -?

According to the RUPA, how do all partners share in the profits (or losses) of the business (See RULE OF LAW: The Business Partnership Rule)?

Equally. -?

Identify the two initial ways corporations can raise money. Be able to describe each.

Equity financing: the corporation sells itself off to people who buy shares and become owners-shareholders- whose ownership interest in the corporation is manifested by a share certificate or a stock certificate. Debt financing: the corporation borrows money. When it borrows money it gives the creditors a piece of paper evidencing the debt and promising to repay the loan at some future time at a certain interest rate. This promissory not is called a bond (the word "bond" means "promise").

In the eyes of the law, how is a sole proprietorship viewed in regards to taxation? Who claims business deductions, the business or the individual?

In the eyes of the law, the sole proprietorship does not exist independently from its owner. It is not a distinct legal entity, as a corporation is. Therefore, it neither files a tax return nor pays any income tax. To claim any proper business deductions, the individual would attach Schedule C (or Schedule F for farmers) to the Form 1040, but this is only an informational return; no tax liability is associated.

With regards to the issue of liability, what is one important reason for the invention and popularity of the corporate form? What is the general rule regarding corporations and liability?

It affords its owners insulation from liability. The general rule is this: the corporation is a legal entity, responsible for its own obligations; the owners (shareholders) are not liable for more than the value of their contribution.

What is, probably, the single most important aspect of the corporate form?

It allows one group of people (managers) to use money from another group (investors) essentially without personal risk.

Describe the control of a business partnership (See RULE OF LAW: The Business Partnership Rule).

It is equal. -?

What is the "corporate veil?"

It is the legal entity interposed between the shareholders and the corporate creditors.

How might a sole proprietorship be defined? What is the legal distinction between the business and the individual who owns it?

It might be defined as "a business owned and operated by a single individual." There is no legal distinction at all between the business and the individual who owns it; they are an identity. There is no specific body of law relating to the sole proprietorship, because legally it is simply a single person doing business.

How is the owners' interest in a corporation manifested? As a result, how long can a corporation exist? Identify and list four ways corporations can be ended?

It's owner's interest in it is manifested by stock certificates, which are personal property, transferable and alienable. The corporation is said to have perpetual existence. It can last forever. It can be ended by: Director's resolution of dissolution A vote of the shareholders By insolvency (which precludes the continuation of business) By failure to pay the annual licensing fee. The corporation may also disappear when it merges with another firm or when it is taken over.

Does a business partnership pay Federal income tax? How is income tax paid by business partners?

No. The individual partners pay tax on the income they withdraw from the firm.

Describe one benefit relating to the creation of a sole proprietorship. Identify and describe a specific challenge faced by an individual proprietor in starting up a business.

One benefit of the sole proprietorship is its ease of creation. All the owner needs to do is start the business. A specific challenge face by an individual proprietor in starting up a business is the difficulty in raising capital. No start-up businessman operate without some capital, without some pot of money to buy equipment and supplies (or pay employees) until revenues are collected.

How do the owners of corporations receive compensation?

Owners are shareholders and receive salaries and/or dividends. - I think?

What is the RUPA and when was it promulgated?

Revised Uniform Partnership Act and it was promulgated in 1997.

If the agreement between business partners fails to address a particular issue, what does the RUPA provide?

The RUPA will usually provide the default position.

Who appoints (hires) corporate officers? What are the officers of a corporation analogous to?

The board of directors in accordance with corporate bylaws and generally serve at the pleasure of the CEO. The officers of a corporation are analogous to the cabinet officers at the federal level (secretary of commerce, secretary of defense) or to the major department heads at the state or local level (director of the department of licensing, director of personnel).

Be able to describe the important disadvantage of a sole proprietorship relating to liability.

The important disadvantage to the sole proprietorship is that any liabilities incurred by the business are the owner's, directly and without limit (this follows from the rule that the sole proprietorship is an identity; the same as its owner).

Be able to identify the seven rights of shareholders to control a corporation.

The right to vote for directors The right to vote on extraordinary corporate transactions The right to inspect corporate boards The right to bring a derivative lawsuit The right to subscribe to new shares of stock (Preemptive Right) The right to compensation: to receive dividends The right to receive a fair share of assets on liquidation

Describe the level of control a sole proprietor has over the business.

The sole proprietor answers to no one; she has complete control.

How does the owner of a sole proprietorship get compensated? Does it make sense for a sole proprietor to get a salary?

The way an owner of a sole proprietorship gets compensates is from the profits of the business. It makes no sense for a sole proprietor- or a partner or a shareholder, for that matter- to talk of getting a salary. After all the expenses of the business are paid, what is left over is hers to take home and use as she sees fit; the profit.

What is a corporate board of directors analogous to? What is an "inside director."

They are analogous to a city council, or to Congress; its function is to set the policy, the execution of which is the role of the officers. An inside director is one that is also an employee of the company (usually and officer).

Do corporations pay Federal income tax? Describe the "double taxation" of corporate income.

Yes. Corporations pay taxes on its profits and then distributes the profits to shareholders in the form of dividends. Shareholders who receive the dividends also must pay taxes on this income, just as if they had earned it. So the money is apparently taxed twice.