Business Law and Ethics Test 1

Sole Proprietorship

unincorporated business consisting of one person who owns and completely controls the business and its assets.

Fundamentalism

Individuals look to a central authority or set of rules to guide them in ethical decision making.

However, theory is different than reality. Explain proxy voting and how it reverses that pyramidal corporate structure.

Proxy- authorization to vote another's shares at a shareholder meeting top- shareholders- sign and return proxies, sell shares middle- board- delegate authority to officers, ratify actions of officers bottom- officers- control selection of directors, run day-to-day business, control proxy votes

Defendant

The party against who legal action is sought

What's the difference between straight and cumulative voting for Directors?

Straight voting- directors are elected by a plurality of votes Cumulative voting- entitles shareholders to multiply the number of votes they are entitled to cast by the number of directors for whom they are entitled to vote and to cast the product for a single candidate or to distribute the product among two or more candidates

Crime

an act or omission in violation of a public law and punishable by the government

Who manages a corporation?

board of directors

How is a corporation taxed?

double taxation

Sole Proprietorship Formation

formed without any formality, and no documents need be filed with the state. If one person conducts a business and does not file with the state to form another entity, a SP results by default.

Partnership Property

general term for the property acquired by a partnership / sum of all the partnership's assets.

Plaintiff

the party who initiates a civil suit

What vote threshold governs the actions and decisions of the partnership?

Majority Vote

What are LLC owners called? What legally enforceable rights come with ownership status?

Members •1. The financial interest, or the right to share profits and receive other rightful distributions (for ex: salaries, repayment of loans, repayment of capital); and •2. the management interest, which consists of all other rights granted to a member by the LLC operating agreement and the LLC statute.

Revised Uniform Partnership Act (RUPA)

Newest uniform revision of law on limited partnerships.

To elect S-corp taxation status, a corporation must have no more than how many shareholders? How many classes of stock may the corporation have?

No more than 100 shareholders Only one class of stock

Limited Partnership formation

a limited partnership can be formed only by substantial compliance with a state limited partnership statute

How can a promoter release himself from liability on pre-incorporation contracts?

a promoter will be relieved of liability if the contract itself provides that adoption shall terminate the promoter's liability or if the promoter, the third party, and the corporation enter into a novation substituting the corporation for the promoter

Partnership Agreement

the agreement, whether written, oral, or implied, among the partners concerning the partnership, including amendments to the partnership agreement.

What is a promotor?

• person who takes the preliminary steps to organize a corporation.

What is a subscriber? Under the majority rule, can a subscriber revoke his offer?

•a person who agrees to purchase stock in a corporation. •Majority view: Subscription is a continuing offer to purchase stock capable of being revoked at any time prior to its acceptance.

LLC

•an unincorporated BA that provides limited liability to all of its owners ("members") and permits all of its members to participate in management of the business.

Partnership Capital

•general term for the total money and property that the partners contribute and dedicate to use in a new partnership.

What is a "share"?

•is a proportionate ownership interest in a corporation.

Uniform Partnership Act

•provides the basic legal principles governing the nature, control, liability, and dissolution of general partnerships.

LLCs can be managed/controlled in either of two ways. What are they? Explain the difference.

•LLCs may be managed by members or by appointed managers.

Difference between Tort and Crime

A crime is a wrong that arises from a violation of a public duty, whereas a tort is a wrong that arises from a violation of a private duty.

Limited Partnership

A partnership formed by two or more persons under the laws of a state and having one or more general partners and one or more limited partners.

Note that the duty of care is closely-tied to the "business judgment rule." What does that rule mean? What elements must be proven for it to apply?

Business judgement rule- precludes imposing liability on directors and officers for honest mistakes in judgment if they act with due care, in good faith, and in a manner reasonably believed to be in the best interests of the corporation

Dentonology

Determines ethical behavior by results and the means used to achieve those results. (Note utilitarianism only considers the consequences/results.)

Do LLCs carry a filing requirement? In most states, is the filing of an Operating Agreement required (and what is that)?

Formation requires a filing (generally called Articles of Organization) •The operating agreement is the basic contract governing the affairs of an LLC and stating the various rights and duties of the members. It takes precedence over statutes (absent some contrary provision). •Some states also require an operating agreement. Mississippi does not, but creating one is highly advisable.

If a LLC is forced to dissolve, what happens during "winding up"? To whom and in what order are liquidated assets distributed?

Involves completing unfitted business, collecting debts, taking inventory, reducing assets to cash, paying creditors, and distributing the remains assets to the members

Limited Partnership taxation

Limited partnerships are taxed with the pass-through taxation method. Profits and losses are passed to the partners and reported on their individual tax returns.

By default (in the absence of contrary provisions in a partnership agreement), how are partnership profits shared?

Shared equally by partners

Your textbook featured a pyramidal chart to explain how publicly-held corporations are managed. In theory, who is at the pyramid's base? In the middle? At the top? Why?

Top- Officers- run day to day operations Middle- Board of Directors- declare dividends, delegate authority to officers Bottom- Shareholders- elect and remove directors, approve fundamental changes

Which judges a responsible defendant liable for damages done to another party- tort law or criminal law? Which one deems a defendant guilty?

Who is bringing the case. In crime, it is the government. In tort, it is the individual/agency.

Are owners responsible for damages stemming from their own torts (like negligent conduct or intentional harm like battery)?

Yes

Tort

a civil wrong causing injury to persons, their property, or their economic interests

Does formation feature a filing requirement for a corporation?

a corporation may be formed only by substantial compliance with a state incorporation statute

Utilitarianism

moral actions are those that produce the greatest net pleasure compared with net pain. Determines what is ethical based upon a decision's results.

Do corporations typically authorize a greater number of initial shares than necessary for capitalization? Why?

only those shares authorized in the articles of incorporation may be issued

A LLCs Operating Agreement can provide how members will share profits. In the absence of such an agreement, in most states, on what basis are profits allocated?

profits and losses are allocated on the basis of the value of its members' contributions

Who has the legal right to participate in management decisions in a limited liability? Who does not? What happens if a limited partner participates in management and control of the business?

the general partners have almost exclusive control and management of the limited partnership; a limited partner who participates in the control of the limited partnership may lose limited liability

Differences between a general partnership and a joint venture

the members of a joint venture have teamed together for a particular purpose or project, while the members of a partnership have joined together to run "a business in common". Each member of the joint venture retains ownership of his or her property.

How does that pyramid look different for closely-held corporations? Why the difference?

top- shareholders- sign and return proxies, sell shares middle- board- delegate authority to officers, ratify actions of officers bottom- officers- control selection of directors, run day-to-day business, control proxy votes

Sole Proprietorship Taxation

• Not a separate taxable entity; "pass-through" taxation means only the sole proprietor is taxed.

How does the court in the Northeast Harbor Golf Club, Inc. v. Harris define a "corporate opportunity"?

•(1) Any opportunity to engage in a business activity of which a director or senior executive becomes aware, either: •(A) In connection with the performance of functions as a director or senior executive, or under circumstances that should reasonably lead the director or senior executive to believe that the person offering the opportunity expects it to be offered to the corporation; or •(B) Through the use of corporate information or property, if the resulting opportunity is one that the director or senior executive should reasonably be expected to believe would be of interest to the corporation; or •(2) Any opportunity to engage in a business activity of which a senior executive becomes aware and knows is closely related to a business in which the corporation is engaged or expects to engage.

In identifying co-owners, two factors are first considered. Can you explain them? Is any one SINGLE factor controlling in identifying a co-owner? How do courts decide who was and was not a co-owner?

•1. A person who receives a share of profits from a business is presumed to be a partner. •Note: This sharing is for unlimited, continuing commercial activity, not for a limited, temporary period of sharing (i.e., for a joint venture) •2. Evidence as to participation in the management or control of a business is NOT conclusive proof of a partner, but it is persuasive on the court, especially together with other facts (including profit sharing).

"Appropriating a corporate opportunity" is a specific example of conduct that violates the duty of loyalty. What does that mean?

•A "corporate opportunity" is one in which the corp. has a right, property interest, or expectancy. •A corporate opportunity should be promptly offered to the corporation, which, in turn, should promptly accept or reject it.

How are limited partnerships different than a general partnership?

•A general partner in a limited partnership has all the rights and powers of a partner in a general partnership. A limited partner who participates in the control of the LP may lose limited liability.

Does the dissociation of a single member generally dissolve an LLC?

•A member's decision to withdraw (disassociation) does NOT automatically cause dissolution. Includes death, bankruptcy, expulsion, or bankruptcy.

Corporate shareholders don't make day-to-day management decisions, but they do vote on certain fundamental matters. Examples?

•Amendments to the Articles; •Election of members of the BOD; •Issuance of additional stock; •Executive compensation •A sale of lease of substantially all corp assets not in the regular course of business; •Mergers; and •Dissolution.

What sort of information is commonly required in Articles of Incorporation? Bylaws? (Remember that samples of both are posted on Moodle for your reference.) In the event of a conflict between the two, which ones provisions control?

•Articles of Incorporation (or "charter") --- the basic organizational document of a corporation. Generally must include: •Name of the corporation; •Number of authorized shares; •Street address of the registered office and the name of the registered agent. •Bylaws - the rules and regulations that govern the internal, day-to-day management of a corporation. •Charter provisions prevail over bylaw provisions.

In determining whether a GP has been formed, three "elements" (conditions) must be proven. What are they? Can you explain each one?

•Association - two or more persons with legal capacity who agree to become partners •Business for profit incentive. •Co-ownership - includes intent to share of profits and control of the business

Who determines the initial selling price of shares?

•BOD determines the price for which the corp. will issue shares.

By default, what shareholder vote threshold may successfully remove a Director?

•By a majority vote, shareholders may remove any director or the entire board of directors, with our without cause, in a meeting called for that purpose.

Explain the difference between common and preferred stock.

•Common stock - stock not having any special preference rights. •Preferred stock - stock having contractual rights superior to those of common stock, typically with regard to dividends, assets on liquidation, or both. (Must be laid out in the Articles.)

Classifications of corporations

•Corporations may be classified in a number of ways; these classifications are NOT mutually exclusive. •Public or Private •Profit or Nonprofit •Domestic or Foreign •Publicly Held or Closely Held •Subchapter S-Corporation or Subchapter C-Corporation

Explain the difference between the two types of shareholder lawsuits. Examples of each?

•Direct Suits - brought by a shareholder or a class of shareholders against the corporation based upon the ownership of shares. •Exs: Suits to compel dividends be paid, enforce the right of inspection, enforce the right to vote. •Derivative Suits - brought by a shareholder on behalf of a corp to enforce a right belonging to the corp. •Exs: Damages for a managerial breach of duty, improper dividends.

What are dividends? Can you generally explain the process behind their declaration and payment?

•Dividends are a company's way to return surplus cash to its stockholders. •A company's accountants or comptroller recommends a dividend to the board of directors. •The board reviews the company's financial statements and considers the dividend. •If the board feels that a dividend is warranted, it votes to approve the payment. •The declaration date is the day the approval is granted. The board also selects two other dates -- the record date and the payment date. In order for a stockholder to be entitled to a dividend, he must be the owner of record as of the record date. The payment date is the day that dividends are paid to the stockholders.

What is the "duty of care" The "duty of loyalty"? Violating them "pierces the veil" that generally shields business owners from personal financial liability.

•Duty of Care Requires the director or officer make decisions using ordinary good faith, due diligence, and skill and judgment under the circumstances. •The duty of loyalty is the subordination of self interest to the interests of the corporation.

What legal rights do partners possess?

•Each partner has an equal right to control of the partnership (and to share of profits)

Who maintains management and control over a GP's business operations? By default, how is this control shared?

•Each partner has an equal right to control of the partnership (and to share of profits) Partners may assign their financial interest, but the assignee may become a controlling member only if all the other members consent.

How are LLCs generally taxed?

•Generally taxed on a pass-through basis (i.e., taxed like a partnership).

How is a GP taxed?

•Generally taxed on a pass-through basis. Equal share of profits and losses (unless they agree otherwise).

By default, what vote threshold in a LLC controls management decisions?

•In most states, the default rule for voting follows a corporate approach (voting is based on the financial interests of members), while a few states take a partnership approach (each member has equal voting rights).

Must a corporation specify the initial number of shares for sale upon incorporation? In what document? Can this number be changed? Typically---how?

•Initial number of shares to be issued is stated in the Articles and is generally governed by financial needs. Corp is limited, however, to selling only the number of shares that have been authorized in its Articles of Incorporation. •Once the number of shares that the corporation is authorized to issue has been established, it can't be increased or decreased without amendment to the Articles. (So commonly specifies more shares than are to be issued immediately.)

LLCs are often said to the "best of both worlds," combining the benefits of both a partnership and a corporation. How so?

•It is a hybrid entity between a corporation and a partnership. Like a GP, the members of the LLC provide capital and manage the business according to their agreed terms; like a corporation, members are not personally liable for debts of the LLC unless "veil-piercing" is justified by equity or justice. •It benefits outweigh those of an LP, too, because all members not only enjoy limited liability but can still participate in management and control.

Must a person file with the state to form a general partnership?

•It is formed without formality and no documents need by filed. If two or more people conduct a business together and do not file with the state to form another type of BA, a GP results by default.

Once present, does it remain present?

•Maj. View = once a quorum is present, REMAINS present.

What sorts of things happen at shareholder meetings? Is notice required in advance?

•Minutes of the previous meeting: The minutes of the previous year's meeting must be presented and approved. •Financial statements: The company presents its annual financial statements to its shareholders for approval. •Ratification of director's actions: The shareholders approve and ratify the decisions made by the board of directors over the previous year. This often includes the payment of a dividend. •Election of the board of directors: The shareholders elect the board of directors for the upcoming year. •Vision-casting by company leadership. •Written notice of date, time, place and purpose (for special meetings) is required in advance.

Do both Directors and Officers owe fiduciary duties? Can both groups bind the corporation (i.e., act as agents)?

•Officers are, like the directors, fiduciaries to the corporation. Officers act as agents who can legally bind the corp.

Generally speaking, what do Officers do? Who hires and fires them?

•Officers run the day-to-day operations of the corporation. •Selection and Removal of Officers - most states, (high level) officers are hired and terminated by the Board. Serve at Board's pleasure (may be removed with our without cause, absent an employment contract.)

Is financial liability limited for the owners of a sole proprietorship?

•Partners have unlimited liability for the SP's debts.

Is financial liability limited for a GP's owners?

•Partners have unlimited liability for the partnership's debts.

Arguments against social responsibility

•Profitability: Because corporations are artificial entities established for profit-making activities, their only social obligation should be to return as much money as possible to shareholders. •Unfairness: Whenever corporations engage in social activities, such as supporting the arts or education, they divert funds rightfully belonging to shareholders and/or employees to unrelated third parties. •Accountability: A corporation is subject to less public accountability than public bodies are. •Expertise: Although a corporation may have a high level of expertise in selling its goods and services, there is absolutely no guarantee that any promotion of social activities will be carried on with the same degree of competence.

Promoters often enter into contracts on behalf of a corporation. Do promoters remain liable for payment of those contracts made prior to incorporation?

•Promoters often arrange for capital and financing, assemble necessary assets, equipment, licenses, personnel/employees, leases, and services. On incorporation, the promoter's organization tasks are finished. •These responsibilities often require the promoter to enter into contracts. Generally, promoters remain liable on pre-incorporation contracts made in the name of the corp.

Do promoters owe fiduciary duties? To whom?

•Promoters owe a fiduciary relationship among themselves as well as with the corp. and subscribers.

Who owns partnership property (an individual or the partnership itself) determines a number of issues---particularly how it is disposed of when a partnership ends ("dissolves").

•Property acquired in the name of the partnership becomes partnership property. Ultimately, the parties intention controls whether property belongs to the partnership or individuals.

The most important classification: publicly-held vs. closely-held corporations. What is the difference? What is the major benefit of forming a closely-held corporation? The major detriment(s)?

•Publicly Held - corporation whose shares are owned by a large number of people and are widely traded. •Closely Held - corporation that is owned by few shareholders and whose shares are not actively traded. •Since the majority shareholders rarely release any of their shares, this makes it difficult for an outside entity or corporation to attempt a hostile takeover, as only a minority stake is regularly traded. This means its stock price is (generally) stable. •Cons: Shareholder agreements of most closely held corporations contain restrictions on the transfer of shares; small number of shareholders make raising capital difficult (and sale must be to an existing shareholder).

What's a quorum? Why is it required for voting at shareholder meetings? Are returned proxy votes counted as part of that quorum?

•Quorum- minimum number necessary to be present at a meeting in order to transact business. •A quorum of shares must be present at the meeting, either in person or by proxy. Decisions made have no effect without a quorum.

What are RUPA's rebuttable presumptions in determining who owns partnership property?

•RUPA provides rebuttable presumptions: •1. Property acquired in the name of the partnership becomes partnership property •2. Property purchased with partnership funds is presumed to be partnership property, without regard to the name in which the title is held; and •3. Property acquired in the personal names of the one or more of the partners and without use of partnership funds or credit, is presumed to be the partner's separate property, even if used for partnership purposes.

Arguments for Social Responsibility

•Reducing carbon footprints •Improving labor policies •Demonstrating charitable giving •Volunteering in the community •Enacting corporate policies that benefit the environment •Making socially and environmentally conscious investments

Generally speaking, what do Directors do? By default, what vote threshold controls their decisions?

•Selecting and removing officers; •Determining the corporations capital structure; •Particularly fixing the selling price of newly issued shares (unless articles reserve this to the shareholders) or borrowing money, issuing notes/bonds, or selling/leasing the assets of the corporation in the usual course of business. •Initiating fundamental changes; •Such as amending or repealing the bylaws (unless articles limit this power exclusively to shareholders) or effect a merger. •Declaring dividends (amount and type, if any); and •The board may purchase or redeem its own shares upon board approval. • Setting officer compensation.

Who are a corporations owners? Generally speaking, is their liability shielded?

•Shareholders, as owners of a percentage of the corporation, are only responsible for the payment of their shares to the company's treasury upon issuance and are shielded from liability.

Who maintains management and control over business operations of a sole proprietorship?

•Sole proprietor has total control.

Do any laws restrict the payment of dividends? Which ones? Explain.

•States restrict the payment of dividends to protect creditors in the event of insolvency. All states impose a "cash flow test" which prohibits payment of any dividend when the corp is insolvent or would become so through the payment of the dividends. •The "Impairment of Capital rule" requires dividends be paid out of retained earnings. •Retained earnings = net income of the corporation that is retained by the corporation at a particular point of time; •As long as there are sufficient funds in retained earnings, a company can pay a dividend even if it is losing money in the current quarter. •Shareholders may sue to compel a dividend at any time, but it's a rare win. Moreover, the Revised Act imposes personal liability on the directors of a corp. who wrongly vote for a declaration of dividends. •Why?- See "the business judgment rule."

How does that case establish a Director and her corporation should proceed in order to avoid a Director's wrongful appropriation of a corporate opportunity (and by extension, a violation of her duty of loyalty)?

•The ALI test may bring clarity to a murky area of the law because it provides a clear procedure whereby a corporate officer may insulate herself through prompt and complete disclosure form the possibility of a legal challenge. If followed, the officer/director could still pursue her own interests!

Where do the default rules for general partnerships come from?

•The UPA and RUPA provide "default" rules as to many aspects of a partnership relationship including formation, the ownership of partnership assets, the assessment of fiduciary duties, the settlement of partnership disputes....

For whom is liability limited?

•The gen partners have unlimited liability; the limited partners have limited liability (liable only to the extent of the capital that the limited partner contributed or agreed to contribute).

Why are closely-held corporations at a higher risk of veil- piercing? What are some examples of conduct requiring the piercing of a closely-held corporations veil?

•The joint and active management by all the shareholders frequently results in a tendency to forego corporate formalities (such as board meetings). •Plus, their smaller size encourages creditors to ask the court to pierce the veil to fully satisfy corporate liabilities/debts. 1. Not conducted the business on a proper corporate basis •2. Have not provided an adequate financial basis for the business; •3. Have used the corporation to defraud; •4. Have failed to adhere to minimal corporate formalities.

What sort of things do promoters do?

•These persons procure offers by interested persons, known as subscribers, to buy stock in the new corp., once created. •Promoters also prepare the necessary incorporation papers. Typically files the articles of incorporation with the Sec. of State, who issues the charter (or certificate of incorporation).

By default (unless the Articles provide otherwise), what constitutes a shareholder quorum?

•Unless Articles provide otherwise, a majority of shares entitled to vote constitutes a quorum; generally may not consist of less than 1/3 entitled shares.

General Partnership

•a business association (BA) consisting of two or more persons who co-own a business for profit.

Corporation

•a company or group of people authorized to act as a single entity (legally a person) and recognized as such in law.