bus law exam 2

dissolution of a partnership

the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business

trade name - doing business as

Putting your name in the company's name; creating a "business name"

special needs trust

trusts made specifically for the benefit of disabled or mentally ill beneficiaries; done because these beneficiaries lack the mental capacity to manage their own finances

general partner, personal liability of

Manage/operate the company; retain unlimited personal liability

rights to participation in management, indemnification, and information

Management - A situation in which, unless otherwise agreed, each partner has a right to participate in the management of a partnership and has an equal vote on partnership matters Indemnification - Right of a partner to be reimbursed for expenditures incurred on behalf of the partnership; Stand in the shoes of; First place for liability falls to business, and then if business cannot indemnify individual partners, the partners will owe debts and obligations Information - Every partner has right to full reconciliation of books, emails, contracts, etc.

uniform partnership act

Model law which is adopted across many states which sets the framework for how partnerships operate; Majority interest of remaining partners can agree to continue partnership within 90 days upon dissolution; Contain list of responsibilities: fiduciary duties; See "Rights" below

operation of a partnership

Must have true business purpose; Fiduciary duty

admissions of new limited partner and dilution of shares

New limited partner can be added only on written consent of all partners

tax treatments for each type of business form (partnership)

One point of taxation only for income = personal return (flow-through taxation); GP not taxed on revenues; LP has single point of taxation at federal level

general powers of directors and officers

Outside board service; External sales and informal marketing; Mergers and acquisitions; Fiduciary management of pension and 401k programs

tax treatments for each type of business form (sole)

Owner is the business and the owner reports business income on his/her personal income tax return; Not taxed on revenues; Owner is legally responsible for all debts and obligations incurred by the business; Low legal, tax and administration expenses; Personal income tax return = business return

functions of shareholder

Owners of a corporation who elect the board of directors and vote on fundamental changes in the corporation; Vote on directors and other major actions taken by the corporation

joint and several liability of limited liability partners in PA

Partners are not personally liable unless one is negligent or commits misconduct; Obligations are solely the obligation of the partnership as a whole

limited partnerships

Partnership that has 2 categories of partners -> At least one general partner, and at least one limited partner Limited partner contributes money (investor) General partner runs business; Has management control

tax treatments for each type of business form (corporations)

Pay income taxes on profits when they are earned

b corporations

Permit/Recommend board of directors and officers to make decisions which are socially conscious and abide by broad-based fiduciary duties to society (Example: Ben and Jerry's); Do not necessarily aim to make highest profit

closely held corporation/privately held corporation

Private for-profit corporation whose shares are usually owned by a few shareholders, who are often family members, relatives, or friends; its stock is publicly traded on occasion but not on a regular basis

related party transactions

a transaction that takes place between two parties who hold a pre-existing connection prior to the transaction. An example is how a dominant shareholder may benefit from making one of their companies trade to the other at advantageous prices.

rule against perpetuity

a trust cannot exist in perpetuity forevermore; Wanted to break up large pieces of wealth in 1800s; No more than 100 years; Many states have abolished this rule Exceptions: Charitable trust can last forever (trust that funds Carnegie Library)

total return trust

if income beneficiaries are not getting a "reasonable rate of return" then we will permit a trustee of an irrevocable trust to distribute more than just the income; state law; some income, some principal - total return; give them 5% instead of 2%; artificial way of helping economy along

termination of a partnership

Ceases to exist in functionality and partners get money back

subsidiary

The corporation that is owned by the parent corporation in a share exchange

inside director

A person on the board of directors who is also an officer of the corporation

case holding in the southern peru copper case

"See if this transaction made sense" = Wrong; Set up special board committee incorrectly; Director/officer had personal stake in oil

capital contributions and requirements in a partnership

(GP): All partners have equal right to participate in management regardless of capital contribution

bylaws

A detailed set of rules adopted by the board of directors after a corporation is incorporated that contains provisions for managing the business and the affairs of the corporation

piercing the corporate veil

A doctrine that says if a shareholder dominates a corporation and uses it for improper purposes, a court of equity can disregard the corporate entity and hold the shareholder personally liable for the corporation's debts and obligations

duty to inform

A duty a partner owes to inform is or her co-partners of all information he or she possesses that is relevant to the affairs of the partnership

duty of loyalty

A duty that a partner owes not to act adversely to the interests of the partnership; Self-dealing (dealing personally with GP), usurping of a partnership opportunity (if offered business opportunity, must offer to partnership), etc.

duty of obedience

A duty that requires partners to adhere to the provisions of the partnership agreement and the decisions of the partnership

bonds

A long-term debt security that is secured by some form of collateral (real estate, personal property, etc.); Bonds are the same as debentures except that they are secured

s corporations

Corporation that has met certain requirements and has elected to be taxed as an S corporation for federal income tax purposes; An S corporation pays no FIT at the corporate level; The S corporation's income or loss flows to the shareholders and must be reported on the shareholders' individual income tax returns

preferred stock

A type of equity security that is given certain preferences and rights over common stock; Can be issued in classes or series

common stock

A type of equity security that represents the residual value of a corporation; Has no preferences; Does not have fixed maturity date

artificial person

Corporations are treated, in effect, as artificial persons created by the state that can sue or be sued in their own names, enter into and enforce contracts, hold title to and transfer property, and be found civilly and criminally liable for violations of law

ability of an agent to make gifts to himself from the principal under a power of attorney

Agent has fiduciary duty to principal to handle with integrity; PA allows principal to allow agent to make gifts for himself

right of first refusal

Agreement that requires a selling shareholder to offer his or her shares for sale to the other parties to the agreement before selling them to anyone else; Partnership itself can buy back share of partner that leaves; Then goes to individual partners

buy sell agreement

Agreement that requires selling shareholders to sell their shares to the other shareholders or to the corporation at the price specified in the agreement; Specifies who can purchase shares of a partnership when someone is exiting that business

liquidity of stocks and bond of C corporations which are publicly traded

All good on way in but when want to sell shares, how do you get out of it; Unicorns less liquid than C corporation publicly traded stocks and bonds

unlimited personal liability

Any lawsuit against sole proprietorship or its employees can lead to unlimited personal liability; Creditors can go after owner's personal assets to satisfy business debts

fiduciary duty of directors, officers, and majority shareholders (duty of care)

Codified under Delaware state law because it is very friendly to directors and officers; Provides a lot of statutory protection against personal liability; Duties of obedience, care and loyalty owed by directors and officers to their corporation and its shareholders

limited partner

Contributes the money for the business (investor); No day-to-day authority in business and has no say in how money is spent; Only liable to extent of capital they invested

typical corporate powers - ownership of property

Corporation has the power to purchase, own, lease, sell, mortgage, or otherwise deal in real and personal property; make contracts; lend money; borrow money; incur liabilities; issue notes and bonds and other obligations; invest and reinvest funds; sue and be sued in its corporate name; make donations for the public welfare or for charitable, scientific, or educational purposes

business judgment rule

Courts will not interfere with business decisions if there is no conflict of interest, decision makers were informed and considered alternatives, make decisions in good faith, in furtherance of a rational corporate purposes; Helps to indemnify/protect business leaders from breach of duty of care lawsuits; Statutory law in DE; Rule will apply in US if the director/officer: • Took reasonable steps to become informed about the matter • Had a rational basis for his/her decision • Did not have a material conflict of interest between his/her personal interest and that of the corporation

charitable trust

Created for the benefit of a segment of society or society in general

advantages of delaware corporate laws

DE corporation code provides for corporations incorporated in DE to adopt so-called poison pills, which make it difficult for another company to take over a DE corporation unless the board of directors of the target corporation agrees and removes such poison pills; Chancery court system, which hears and decides business cases and decides favorably for large corporations and there are no emotional juries because they are experts at deciding law disputes

functions of director

Decides overarching mission and mission statement of a company; Policymaking decisions; Selects and removes corporate officers; Determines capital structure of corporation; Declares dividends

distribution of and rights to profits in a partnership (duty to inform and duty of obedience)

Decisions are made in best interest of partnership, not individuals

spendthrift provisions of a trust

Designed to prevent a beneficiary's personal creditors from reaching his or her trust interest; No third party creditor can get these assets from the grantor/trustee

limited liability partnerships

Differs from limited partnership in that a general partner has same liability as limited partner; LLPs may still manage and control affairs of own LLPs; Pass-through taxation

outside director

Director who does not hold a management position within the corporation; Director also has no conflict of interest and is truly independent

durable power of attorney

Exists during someone's capacity and incapacity; Exists and survives when someone becomes too ill to care for themselves; Exists until death

prudent investor rule

Fiduciary/trustee shall invest and manage property held in a trust as a prudent investor would, by considering the purposes, terms and other circumstances of the trust, and by pursuing an overall investment strategy reasonably suited to the trust

public corporation/publicly traded corporation

For-profit corporations that have many shareholders; Often, they are large corporations with hundreds or thousands of shareholders, and their shares are usually traded on organized securities markets.

distribution of and rights to profits in a partnership (duty of loyalty and duty of care)

General partner has right to an equal share in partnership's profits and losses; In GP, more than one individual has rights to profits

pass through taxation of a partnership

General partnerships do not pay federal income taxes. Instead, the income and losses of a partnership flow onto and have to be reported on the individual partners' personal income tax returns

conflict of interest

Generally not permitted to exist between a corporation and its officer/director; Also applies to LLC, LLP, etc.; Exists when a leader of a company has some type of personal interest that may be against the interest of the corporation he is serving; As long as person does not surrender integrity -> not conflict of interest

functions of officer

Have day-to-day management control over authority; Enact mission statement/strategic plan created by director; Make significant decisions for company; Manage profit and loss; Derive revenue; Make day-to-day hiring and firing decisions; Who customers and employees believe to be responsible for well being of an entity

limited liability companies

Hybrid form that combines the limited liability aspects of the corporation and the tax advantages of a partnership; Accident/Negligence is excused in terms of personal liability; Controlled by operating agreement

duties of a trustee

Identifying assets, paying creditors, paying income and estate taxes, transferring assets to named beneficiaries, and rendering an accounting; Attorney, accountant, bank; Act with honesty, good faith and prudence in administering the trust and must exercise a high degree of loyalty towards all trust beneficiaries; Can charge fee

personal guarantor

If a limited partner personally guarantees a loan made by a creditor to the limited partnership and the limited partnership defaults on the loan, the creditor may enforce the personal guarantee and recover payment from the limited partner who personally guaranteed the repayment of the loan

joint and several liabilities of partners

If one partner is only one who has money or is not detained, that partner is responsible for everyone else's share

requirements for formation of a partnership

It must be... 1. An association of two or more persons 2. Carrying on a business 3. As co-owners 4. For profit

manager managed llc

LLC that has designated in its articles of organization that it is a manger-managed LLC. Non-manager members give their management rights over to designated managers. Managers have authority to bind the LLC to contracts; Managers owe duty of loyalty and care to LLC; Manager can own LLC and take salary without doing anything

member managed llc

LLC that has not designated that it is a manger-managed LLC in its articles of organization and is managed by its members; Each member has equal rights in management of business of LLC, regardless of capital contribution; All members have agency authority to bind the LLC to contracts. A member of a member-managed LLC owes a duty of loyalty and care to the LLC

corporation

Large entities which anticipate extensive subsidiary arrangements; Directors, officers and shareholders all have implicit limited liability; Double taxation both at the shareholder level and corporate level, meaning C corporation pays taxes at corporate level and shareholders pay taxes on dividends paid by corporation; Corporation is liable for the torts and crimes of employees and provides indemnification

limited partnership shares - lack of liquidity

Limited partners in a limited partnership have an illiquid investment because there is no readily available market for buying and selling limited partnership interests

offshore corporation

Refers to a corporation, LLC or similar class of entity formed in a foreign country to that of the principals of the organization or one that can only operate outside of its country of formation

authority to conduct ordinary business activities as a partner

Responsibility of general partner in LP; In GP, right to participate in management, indemnification, information

proxy

Shareholder's authorizing of another person to vote the shareholder's shares at the stakeholders' meetings in the event of the shareholder's absence; Shareholders vote by proxy, or appoint another person as their agent to vote at a shareholders' meeting; Proxy may be directed exactly how to vote the shares or may be authorized to vote at own discretion; May be in writing or posted online; Written document itself is called the proxy and is valid for 11 months

sole proprietorship

Simplest form of business; Legally responsible for all debts and obligations incurred by the business; Unlimited personal liability major flaw

liability treatments for each type of business form

Sole Proprietorship - Sole proprietor bears the risk of loss of the business; Owner bears all liability Partnership - Personal liability is unlimited for every general partner; Partners of general partnership have personal liability for the contracts and torts of the partnership; New partner admitted to general partnership is liable for the existing debts and obligations only to extent of his or her capital contribution Corporations - Legal entity separate from shareholders/owners

case holding from the us steel case

Stands for proposition that directors and officers who are exercising their fiduciary duty of care have to make decisions about property controlled and owned by the corporation; It is in fact within the purview of directors/officers to make decisions about property; Must make decision in best interest of corporation (most profitable)

unicorns

Start-up ventures that are getting bigger and generally not publicly traded companies; Held by institutional and wealthy investors like venture capital firms; Can get extremely big because of the wealthy investors; Privately held; If unicorn doesn't do well, who do shareholders sell stock to?

articles of incorporation

The basic governing documents of a corporation. It must be filed with the secretary of state of the state of incorporation; Articles of incorporation must include: • Name of corporation • Number of shares the corporation is authorized to issue • Address of corporation's initial registered office and the name of the initial registered agent • The name and address of each incorporator

entire fairness standard

The business judgment rule is a default rule where the plaintiff has the burden of proof. The "entire fairness standard" is triggered where a majority of the directors approving the transaction are interested or where a majority stockholder stands on both sides of the transaction.

parent

The corporation that owns the shares of the subsidiary corporation in a share exchange

duty of care

The obligation partners owe to use the same level of care and skill that a reasonable person in the same position would use in the same circumstances. A breach of the duty of care is negligence

fiduciary duty

Trustee must invest the funds in the trust, what to sell/hold on to, decide how much of the assets will get distributed out to heirs; Duty of loyalty/duty of care;

springing power of attorney

When a health-related issue happens to principal; Power of attorney that occurs for someone of incapacity; Type of durable power; Only springs to life upon incapacity

irrevocable trust

after you write trust and invest funds, cannot revoke; typically created for reasons such as estate depletion, special needs child, drug/alcohol addiction - move money away from yourself so it is hard for them to get, in high income/high risk career and can get used; give to artificial person; usually done for tax purposes

income

all income that is generated by the trust in a given tax year

step up in cost basis

every asset was bought at some point in time for a certain amount (ie, painting, real estate, most of the time talking about a stock); if a stock was bought a long time ago, chances are price went up and split a lot; when a stock was last actually bought a long time ago, cost basis is likely to be very low; stocks gifted to prof from gma still taxed at cost basis

stock buyback by corporations

redeemable preferred stock permits a corporation to redeem (buy back) the preferred stock at some future date; The terms of the redemption are established when the shares are issued; Corporations usually redeem the shares when the current interest rate falls below the dividend rate of the preferred shares

principal

the property and assets held in a trust; amount originally received minus expenses; all property available to produce ordinary income