Legal Environment of Business Chapter 12

What is meant by fiduciary duty and how is that principle applied

A fiduciary relationship requires that each partner act in good faith for the benefit of the partnership. The partners must place their personal interests beneath those of the partnership.

How is a sole proprietorship formed? When does it come into existence?

A person doing business for her or himself is a sole proprietor. A person may simply do business without formality in enterprises that do not require a government license or permit, although states require business names to be registered if a fictitious business name is used.

How is the income of a sole proprietorship taxed?

Because the profits of the business are taxed to the owner personally, a tax return in the business's name is not required so long as records of income and expenses are kept.

What is the function of the board of directors?

Board of directors set policy and manage major decisions

Can partnership interests be sold?

By agreement, partners can allow partnership interests to be sold or assigned, usually with approval of existing partners

In what ways can a partnership be formed? Must a partnership obtain a charter from the state or federal government to be recognized as a legal entity?

Can be formed by agreement to associate, written, oral, or implied. There is no state or federal charter that you need.

What events terminate a partnership?

Change in composition, withdrawal, death, bankruptcy, incompetence,

How is a partnership defined

Defined as an association of two or more persons to carry on a business for a profit

What are the disadvantages of operating a business as a sole proprietorship?

Difficult to raise capital, unlimited liability

What is termination of a partnership called?

Dissolution and winding up

What leads to termination of a corporation?

Dissolution may be voluntary or involuntary, such as through bankruptcy, and marks the end of the corporation. Upon dissolution, the corporation may not take on any new business. A voluntary dissolution involves approval of the shareholders and the board of directors.

What are the steps necessary to create a corporation?

Every state has a general incorporation statute that sets the procedure for incorporation. In general, a corporation's article of incorporation, along with an application, must be filed with the appropriate state office (usually secretary of state) along with payment of fee

What type of liability do members of LLC's have?

Limited personal liability (may enter K to be liable for debts)

What information must be provided in an application for a certificate of limited partnership?

Name of business, type or character of business, address of an agent who is designed to receive legal process, names and addresses of each general and limited partner, contributions, duration of the limited partnership, the rights for personnel changes in the partnership and continuance of the partnership upon those changes, The proportion of the profits or other compensation that each partner is entitled to receive.

Does the state evaluate the merits of an application for corporate status to determine whether it is a sound business?

No, the state does not determine merits or solvency of entity

Can shareholders ever be held personally liable for corporate debts? What is this called?

No, they cannot be counted liable for corporate debts because they only have limited liability

How can shareholders influence the management of a corporation?

No, they cannot. The shareholders elect the board of directors to do the influencing for them. The shareholders just vote on the board of directors ideas for the business.

Is federal government approval required to form a sole proprietorship?

No, they do not have too.

Must the state or federal government grant approval to form a sole proprietorship?

No, they do not require a license. Although states require business names to be registered if a fictitious business name is used.

Can a partnership consist entirely of limited partners?

No, you have to have at least one general partner so he can make the management decisions. limited partners are not allowed to make any of those decisions.

How is a limited partnership formed?

Partners must execute a written agreement, called a certificate of limited partnership, and file it with the appropriate state official, usually the Secretary of State.

What type of duty do partners owe to each other and the partnership?

Partners owe a fiduciary duty to one another

What are the parties in a partnership called?

Relationship of the Parties

What type of liability do shareholders have?

Shareholders have limited liability

What document governs the formation of limited partnerships?

Statutory Creature

Who owns a sole proprietorship?

The owner is the proprietor. In a sole proprietorship, legally and practically, the owner is the business; capital comes from the owner's own resources or is borrowed with the owner as debtor.

Who owns a corporation?

The shareholders own the corporation

How much control can limited partners exercise over managerial decisions of the business?

They cannot participate in any management decision.

Can LLC members agree by contract to be liable for debts of the business?

Under the statutes, no member or manager is personally liable for debts of an LLC. However, members may agree by contract to be personally liable for the company's debts.

What is the process of terminating a partnership?

Winding up, (complete unfinished business, collect and distribute assets)

Does the fiduciary duty of surviving partners extend to the beneficiary of a deceased partner?

Yes, he can take life insurance out on the partner and if he dies or goes bankruptcy, or withdrawal he can buy back his interest of the business.

Can sole proprietors hire employees?

Yes, they can hire as many as they want, but they are responsible for filing taxes and proper administration for these hires he or she makes.

Were the shareholders in K.C. Roofing Center v. On Top Roofing held personally liable for the debts of the business? Why or why not?

Yes, they were because even though they kept changing their business name it was still their business so they would be personally liable for it.

What are the advantages of operating a business as a sole proprietorship?

simple to form, SP makes all decisions, SP receives all profit, single taxation

What type of liability do partners have?

unlimited liability