Module 6
a
Even when incorporators miss important steps, it is possible to create (a) a corporation by estoppel (b) a de jure corporation (c) an S corporation (d) none of the above
d
Existence of a partnership may be established by (a) co-ownership of a business for profit (b) estoppel (c) a formal agreement (d) all of the above
concession theory
It is a principle in the creation of corporations, under which a corporation is an artificial creature without any existence until it has received the imprimatur of the State acting according to law, through SEC. The life of the Corporation is a concession made by the State.
Preincorporation stock subscription
Offer to purchase shares in a corporation before its formation
c
Partnerships (a) are free to select any name not used by another partnership (b) most include the partners' name in the partnership name (c) can be formed by two corporation (d) cannot be formed by two partnership
d
Puentes is a limited partner of ABC, LP. He paid $30,000 for his interest and he also loaned the firm $20,000. The firm failed. Upon dissolution and liquidation, (a) Puentes will get his loan repaid pro rata along with other creditors. (b) Puentes will get repaid, along with other limited partners, in respect to his capital and loan after all other creditors have been paid. (c) if any assets remain, the last to be distributed will be the general partners' profits (d) if Puentes holds partnership property as collateral, he can resort to it to satisfy his claim if partnership assets are insufficient to meet creditors' claims.
c
The basic law of partnership is currently found in (a) common law (b) constitutional law (c) statutory law (d) none of above
c
Which is false? (a) an oral agreement to form a partnership is valid (b) most partnerships have no fixed terms and are thus not subject to the Statute of Frauds (c) strict statutory rules govern partnership agreements (d) a partnership may be formed by estoppel
nonprofit corporation
a company not part of the income of which is distributed to its members, directors or officers
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.
out-of-state or foreign corporations
a state could prevent corporations not chartered there - from engaging in what is considered the local, and not interstate, business
closely held corporation
a type of corporation that issues stock to only a few people, who are often family members
publicly held corporation
a type of corporation that sells stock on the open market
personal liability
an individual's responsibility to pay the debts and obligations of a business from personal assets
corporation is a person
does not automatically describe what its rights are, for the courts have not accorded the corporation every right guaranteed a natural person
de facto corporation
does not exist in law but exists in fact.
d
essential to the formation of a de facto corporation is (a) a statute under which the corporation could have been validly incorporated (b) promoters who make a bona fide attempt to comply with the corporation statute (c) the use of exercise of corporate powers (d) each of the above
corporation by estoppel
even if the incorporators omit important steps, it is still possible for a court to treat the business as a corporation
transfer of interest
is done in a corporation through a sale of stock is much easier; but for the stock of a small corporation
moral hazard
is the risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity. In addition, it may also mean a party has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles.
de jure corporation
lawful corporation that has met the substantial elements of incorporation process
municipal corporation
major cities and counties, and many towns, villages, and special governmental units, such as sewer, transportation, and public utility authorities, are incorporated
certificate of limited partnership
must be signed by all general partners, and must include the name of the limited partnership and the names and business addresses of the general partners and it must be filed with the state
Partnership
the association of two or more person to carry on as co-owners a business for profit
express partnership
the most common way of forming a partnership is put into words, orally or in writing
business corporation
two types publicly held (or public) and closely held (or close or private)
Creation of an express partnership
(1) Creation in general (2) Specific issues of concern (3) Who can be a partner (4) Written versus Oral Agreements (5) Validity of the Partnership Name
limited partners
Also known as a silent partner, is a business partner whose liability is limited to the amount of their investment in the company. Because they is not a material participant in business operations, the IRS considers their income as passive income. A limited partner who participates in a partnership for more than 500 hours in a year may be viewed as a general partner.
corporate charter
the ultimate goal of the incorporation process is the issuance of this document and it is a contract between the state and the corporation
Entity characteristics of a partnership
(1) For Purposes of Accounting may keep business records as if it were a separate entity (2) For Purposes of Taxation not taxable entities, so they do not pay income taxes (3) For Purposes of Litigation naming and serving partnership defendants (4) For Purposes of Owning Real Estate partnership property, real or personal, could be held in the name of the partners as "tenants in partnership" - a type of co- ownership or it could be held in the name of the partnership (5) For Purposes of Bankruptcy a partnership is an entity that may voluntarily seek to haven of a bankruptcy court or that may involuntarily be thrust into a bankruptcy proceeding by its creditors
Rights of limited partners
(1) assignment of partnership rights (2) inspection of books (3) addition of new partners (4) compensation
characteristics of corporation
(1) associates (2) an objective to carry on a business and divide the gains (3) continuity of life (4) centralized management (5) limited liability (6) free transfer ability of interest
Tests of partnership existence
(1) association of persons (2) co-ownership (3) sharing of profits (4) business for profit (5) other factors
control and compensation
(1) generally not shared by both classes of partners (2) in the hands of general partners
creation and capitalization of s-corp
(1) it must be incorporated in the United States (2) it cannot have more than one hundred shareholders (3) the only shareholders are individuals, estates, certain exempt organizations, or certain trusts (4) only US citizens and resident aliens may be shareholders (5) the corporation has only one class of stock (6) with some exceptions, it cannot be a bank, thrift institution, or insurance company (7) all shareholders must consent to the this election (8) it is capitalized as is a regular corporation
a
A corporation in which stock is widely held or available through a national or regional stock exchange is called (a) a publicly held corporation (b) a closely held corporation (c) a public corporation (d) none of the above
d
A corporation with no part of its income distributable to its members, directors, or officers is called (a) a publicly held corporation (b) a closely held corporation (c) a professional corporation (d) a nonprofit corporation
e (a and d)
A limited partnership (a) comes into existence when a certificate of partnership is filed (b) always provides limited liability to an investor (c) gives limited partners a say in the daily operation of the firm (d) is not likely to be the business form of choice if a limited liability limited partnership option is available (e) two of these (specify)
professional corporation
IRS finally conceded in 1969 that it would tax this just as it would any other corporation, so that professionals could, from that time on, place a much higher proportion of tax-deductible income into a tax-deferred pension
c
In comparing partnership with corporations, the major factor favoring the corporate form is (a) ease of formation (b) flexible financing (c) limited liability (d) control of the business by investors
partnership by estoppel
Legally binding partnership that may arise where, in fact, no formal partnership agreement is in effect. A person who by conduct or words represents, or allows him/herself to be represented, as a partner in a firm is liable for the credit or loans obtained by firm on the basis of such representation. Also called presumption of partnership.
d
One of the advantages to the LLC form over the sub-S form is (a) in the sub-S form, corporate profits are effectively taxed twice (b) the sub-S form does not provide "full-shield" insulation of liability for its members (c) the LLC cannot have a "manager-manager" form of control, whereas that is common for sub-S corporations (d) the LLC form requires fewer formalities in its operation (minutes, annual meetings, etc.)
d
Partnerships (a) are not taxable entities (b) may buy, sell, or hold real property in the partnership name (c) may file for bankruptcy (d) have all of the above characteristics
d
Peron and Quinn formed P and Q Limited Partnership. Person made a capital contribution of $20,000 and became a general partner. Quinn made a capital contribution of $10,000 and became a limited partner. At the end of the first year of operation, a third party sued the partnership and both partners in a tort action. What is the potential liability of Peron and Quinn, respectively? (a) $20,000 and $10,000 (b) $20,000 and $0 (c) unlimited and $0 (d) unlimited and $10,000 (e) unlimited and unlimited
c
Reference to "moral hazard" in conjunction with hybrid business forms gets to what concern? (a) that general partners in a limited partnership will run the firm for their benefit, not the limited partners' benefit (b) that the members of a limited liability company or limited liability partnership will engage in activities that expose themselves to potential liability (c) that the trend toward limited liability gives bad actors little incentive to behave ethically because the losses caused by their behavior are mostly not borne by them (d) that too few modern professional partnerships will see any need for malpractice insurance
joint-stock companies
individuals contributed capital to the enterprise, which traded on behalf of all the stockholders
limited liability company
is a corporate structure whereby the members of the company cannot be held personally liable for the company's debts or liabilities. Limited liability companies are essentially hybrid entities that combine the characteristics of a corporation and a partnership or sole proprietorship. While the limited liability feature is similar to that of a corporation, the availability of flow-through taxation to the members of an LLC is a feature of partnerships.
s-corporation
is a form of corporation that meets specific Internal Revenue Code requirements. The requirements gives a corporation with 100 shareholders, or less, the benefit of incorporation while being taxed as a partnership. The corporation may pass income directly to shareholders and avoid double taxation. Requirements include being a domestic corporation, not having more than 100 shareholders which include only eligible shareholders, and having only one class of stock.
Joint venture
is an association of persons to carry on a particular task until completed
aggregate theory
partnership is only the totality of the partners who make it up. According to this theory, each partner is treated as the owner of a direct and undivided interest in partnership assets, liabilities and operations and is not viewed as a taxpaying entity. Tax is actually paid at the partner level. Partners are treated as a group of individual sole-proprietorship's for the purpose of tax rules that provide separate elections or limitations, such as IRC section 108 cancellations of debt (COD) income exclusions, itemized deductions, and tax preferences. All partners, under this theory, individually report their respective shares of income and deductions.
Promoters
the "midwives" of the enterprise, they are the individuals who take the steps necessary to form the corporation and they often will receive stock in exchange for their efforts. They have four principal functions: (1) to seek out or discover business opportunities (2) to raise capital by persuading investors to sign stock subscritions (3) to enter into contracts on behalf of the corporation to be formed (4) and to prepare the articles of incorporation
Entity theory
the concept of a business firm as a legal person, with existence and accountability separate from its owners
delaware
the most popular state in which to incorporate for several reasons, including the following: (1) low incorporation fees (2) only one person is needed to serve the incorporator of the corporation (3) no minimum capital requirements (4) favorable tax climate, including no sales tax (5) no taxation of shares held by nonresidents (6) no corporate income tax for companies doing business outside of the state
piercing the corporate veil
when a court sets aside the unlimited liability protection normally given to corporate shareholders
Implied Partnership
when in fact there are two or more persons carrying on a business as co-owners for profit but nothing is put into words