CPA Exam (REG R8)

Sole Proprietorship

Simplest form of bus oship. One person owns the bus and manages all of its affairs, and the sole proprietor isn't considered an entity sep from the bus. No formality is req'd to form a sole prop, and nothing need be filed w/ the state in which the bus ops (unless the state/city reqs a bus license). -personal liab: sole proprietor is personally liable for all obligations of the bus. -duration: limited. A sole prop can't exist beyond the life of the sole proprietor. May be terminated at any time by its owner. -tax treatmt: P/Ls from the bus flow through the bus to the sole proprietor. -transferability: a sole proprietor is free to transfer his int in the sole prop at will. The sole prop may be a good choice of bus entity when an indiv wants to form a bus he/she will manage, wants to claim the inc/losses from the bus on personal taxes, and doesn't want to bother w/ a lot of formality. The indiv risks all of his personal assets, however, when this type of bus entity is formed.

Business Structures; Summary of Entities Continued

5. LLC: -formation: file articles of org w/ state. -liab of owners: members gen not personally liable beyond their investmt. -mgmt: members manage directly or can agree to appoint a manager. -transferability: absent agreemt otherwise, members can't transfer oship int w/o unanimous consent. -taxation: flow through, but members not managing have passive loss restrictions. 6. C corp: -formation: file articles of incorp or corp charter w/ state. -liab of owners: SHs gen not personally liable beyond their investmt. -mgmt: managed by BOD, which appoints officers to run day-to-day ops. -transferability: SHs are free to transfer oship int unless they agree otherwise. -taxation: inc taxed at corp level and taxed again to SHs when divs are distr'd (only non flow through entity here). 7. S corp: -formation: same as reg C corp, plus file S election. -liab of owners: SHs gen not personally liable beyond their investmt. -mgmt: managed by BOD, which appoints officers to run day-to-day ops. -transferability: SHs gen may transfer oship int unless they agree otherwise, but can't transfer to foreign or entity SHs. -taxation: flow through, but SHs not managing have passive loss restrictions.

Confirmation of a Reorganization Plan Under Chapter 11

Only the ct can confirm. Creditors and sec ints vote whether to accept the plan. Unimpaired parties, like secured creditors, are presumed to have affirmed, so their vote isn't necessary. A plan need not be affirmed by 2/3 of SHs (EQ sec holders), but rather by 2/3 of ints (2/3 of outstanding shares, which may be held by < 2/3 of SHs). A class of impaired claims is deemed accepted if it's accepted by creditors holding at least 2/3 in amt and > 1/2 in no of the allowed claims. Through the cram down provision of the bankruptcy code, a plan may be confirmed by a ct even if only 1 impaired class voted to affirm it.

The Securities Act of 1933; Registration Statement Continued

Part II; Info that must be incl abt the secs being issued: -audited B/S and P/L stmt: the registration stmt must incl a B/S dated not > 90 days before the filing and a P/L stmt of the issuer's NI/L for the preceding 5 yrs. The F/S must be certified by a pub accting firm registered w/ the PCAOB. -other mat facts reqing disclosure: the registration stmt must also incl a descr of the issuer's bus and the following (if available): (a) the names/addresses of the directors, officers, underwriters, and SHs who own 10%+ of the co's shs. (b) the amt of stock/debt the issuer has outstanding. (c) the principal purposes for which the offering proceeds will be used. (d) anything that might affect the value of the secs being issued (absence of an earnings history, pending litigation, etc.). Many issuers are almost constantly involved in issuing new secs. It W/B helpful if they could prep just 1 registration stmt for all secs that they will offer in the future (shelf registration). This is a registration stmt for future issuances. Although gen prohibited, shelf registration is permitted if the issuer has continuously filed under the 1934 act for 1 yr (not a first-time issuer) and the info is continuously updated. The registration stmt becomes effective on the 20th day after its filing w/ the SEC unless the SEC issues a refusal or stop order. State laws governing stock sales are called blue sky laws. Much of state blue sky law has been preempted by fed law.

Transfer to Fully Secured Creditor

Pmts to fully secured creditors (oversecured) w/in the preference pd (90 days or 12 mos for insiders) will not be set aside as a preferential transfer.

Dissolved v Discharged; Chapter 7 Bankruptcy

Dissolved: corp/pship. Discharged: indiv.

Credit Against Federal Unemployment Tax Rate

An employer may take a credit against the fed unemploymt tax in an equal amt to the state unemploymt rate (when employer's unemploymt rate is < the state's). 5.4%.

Indenture

Agreemt or deed btw parties specifying the terms of any debt. Don't confuse w/ debentures, which are certificates evidencing unsecured debt.

Features of a Chapter 7 Liquidation; Exceptions to Discharge

*FAT WED*. Certain debts of an indiv are *NOT* discharged under chs 7 or 11. These are the exceptions to discharge. Important to remember a bankruptcy case doesn't discharge all debts. Often examiners ask broad Qs like "which of these things is true under the bankruptcy code?" and an answer is "all of the debts of the debtor are discharged." This isn't true. These debts survive bankruptcy: -debts incurred by *F*raud, embezzlemt, or larceny: liabs for obtaining money, prop, or services by false representation/fraud, or through embezzlemt or larceny, aren't dischargeable. -*F*ines and penalties: any obligation to pay a fine/penalty/forfeiture owed to a governmental unit, like a traffic fine, survives the debtor's discharge, as do claims for ct costs. -*A*limony, maintenance, support, and settlemts from martial separation: debts owed to the debtor's spouse, former spouse, or child (in/out of wedlock) for alimony, maintenance, or support are nondischargeable, as are prop settlemts arising out of a divorce decree or sep agreemt. -*T*axes due w/in 3 yrs of filing: most tax claims (fed/state/local) are nondischargeable if the return for the tax was due w/in 3 yrs before the bankruptcy petition was filed. -*W*illful and malicious injury: liabs arising from willful/malicious injury to another aren't discharged. However, liabs arising from negligent torts are dischargeable. -*E*ducational loans: an educational loan owed to a NFP institution of higher education or a student loan that's made/guaranteed/insured/funded by a govt agency or commercial entity is not dischargeable, unless it would impose undue hardship. -*D*ebts undisclosed in the bankruptcy petition: any debt not scheduled or listed by the debtor in time to permit the creditor to file a timely proof of claim is nondischargeable, unless the creditor had notice or actual knowledge of the bankruptcy. -luxury goods: consumer debts incurred for luxury goods (boat, jewelry, etc.) aren't dischargeable if the debts aggregate over $675 to a single creditor and are incurred w/in 90 days if the order for relief. -open-ended credit to consumers: cash advances obtained by a consumer under an open-ended credit plan are presumed nondischargeable if the debts are incurred w/in 70 days of the order for relief and exceed the aggregate amt of $950. So, if a consumer makes purchases on a credit card in an amt > 950 in the 70 days before bankruptcy, the debt will survive bankruptcy. -operating a vehicle while intoxicated: D*W*I = *W*illful. Judgmts rendered against the debtor for death/personal injury incurred as a result of operating a motor vehicle, aircraft, or vessel while legally intoicated survive the debtor's discharge. -denial of discharge in prior bankruptcy: if a discharge was denied in a prior bankruptcy or a previous discharge was waived, debts that predate the prior bankruptcy are not dischargeable in a subseq case. This exception doesn't apply if the basis for denial in the prior case was that the debtor rec'd a discharge w/in 8 yrs. The examiners often ask what debts won't be discharged in bankruptcy. The key to remembering the 6 nondischargeable debts that most commonly appear on the exam is *FAT WED*: *F*raud, *A*limony, *T*axes, *W*illful and malicious injury, *E*ducational loans, and *D*ebts undisclosed in the bankruptcy petition.

Features of a Chapter 7 Liquidation; Distribution of the Debtor's Estate: Payment and Priorities

*IMPORTANT*! Once the debtor's assets have been collected and liquidated, and all objections at that level have been disposed of, the trustee will distr the assets of the estate. There are 3 basic categories of claimants, paid in this order (memorize): 1. secured claimants 2. priority claimants (9 subcategories. Need to know. *SAG WEG CTI*) 3. general creditors who filed their claims on time Pmts are made in full to secured claimants to the extent of the value of the collateral securing their claims (claims in excess of the collateral are treated like claims of other gen creditors). Whatever is left over is used to pay first-priority claimants in full, then second-priority claimants in full, third, and so on. If money is left over after paying all of the priority claimants, it's split among the gen creditors who filed claims on time. If there's not sufficient money to pay all creditors at a particular level, the creditors share pro rata. The priority rules are prob the most heavily tested rules related to bankruptcy on the CPA exam. Need to memorize order of pmt and the dollar limitations in SAG WEG CTI. Most importantly, remember that pmts are made 1st to secured creditors to the extent of the value of the collateral securing their claims and that claims in excess of the collateral are treated like claims of other gen creditors. 9 subcategories of priority claimants: *SAG WEG CTI*. 1. 1st priority; *S*upport obligations to spouse/children: 1st priority goes to claims for domestic support obligations owed to a spouse, former spouse, or child of the debtor on the date the petition is filed. 2. 2nd priority; *A*dministrative exps: the exps of a bankruptcy administration receive 2nd priority. Incl costs of preserving the estate, trustee fees, filing fees, attorney/acctant fees, etc. 3. 3rd priority; involuntary case *G*ap claims: claims that accrue in the ord course of bus after an involuntary petition is filed, but before the entering of the order for relief or appointmt of a trustee, receive 3rd priority.

The Securities Act of 1933; Exemption from Registration: Securities and Transaction Exemptions

*NOT* every sale of secs is covered by the 1933 act. The act has 2 types of exemptions; securities exemptions (secs issued by certain types of issuers) and trans exemptions (secs issued in certain types of trans). Section 3 of the 33 act specifically exempts these secs from the registration rqmts, they never have to be registered: *BRINGS* -secs issued by *B*anks and savings and loans (like CDs). -secs of regulated common carriers (like secs issued by *R*ailroads). -*I*ns policies (but stocks, bonds, and sim secs of ins cos are not exempt). -secs issued by *N*FP orgs. -secs issued by the *G*ovt (except for certain secs issued for proprietary rather than governmental purposes). -*S*T commercial paper (notes, bonds, etc.) w/ a maturity date of 9 mos or less. -secs issued under ch 11 of the bankruptcy code. -secs issued by a church plan or sim entity that's not an investmt co. The examiners often ask abt exemptions from the registration rqmts of the 33 act. Remember that all issues of secs must be registered unless the secs are exempt. Favorite secs exemptions on the exam incl secs of charitable orgs and bonds issued by municipalities for governmental purposes. Trans exemptions depend on the nature of the offering. Unlike secs exemptions, which exempt a sec forever, the trans exemptions exist only for the trans in Q. If the secs are resold, they must be registered unless they qualify for another exemption. Trans exemptions: -casual sales exempt: not an issuer, underwriter, or dealer. Registration rqmts apply only to issuers, underwriters, and dealers. Sales by others are considered casual sales and are exempt. Book ex for casual sale of securities: D, a CPA, owns 10k shares of GM stock and decides to sell them. She need not register, this is a casual sale. D is not the issuer, an underwriter, or a dealer. -exchanges w/ existing holders and corp reorgs: the 33 act provides an exemption when an issuer exchanges secs w/ its existing holders provided no commission is paid (stock divs and stock splits). There's also an exemption for govt-approved exchanges that occur as a result of corp reorg. -intrastate sales: section 3(a)(11) of the 33 act provides an exemption for secs offered and sold only to persons who are residents of the issuer's state (state in which it's doing bus). Under rule 147, which implements section 3(a)(11), the entire issue must be offered and sold only to residents of that state, the issuer must do at least 80% of its bus in that state, and purchasers can't resell the secs for 9 mos to nonresidents of that state.

The Securities Exchange Act of 1934; Reporting Requirements

2 categories of cos are req'd to make reports (report 5% TIP). These cos are referred to as reporting cos. (1) all cos req'd to register under the 34 act must report (rqmts on prior card) and (2) any issuer that must register under the 33 act must also report. Cos registered under the 33 or 34 act are req'd to file these periodic bus reports: -Form 10-K (10-KSB for small businesses) is a req'd report that must be filed annually w/in 60 days (for large corps - 90 for small businesses) of the end of the fiscal yr. Must contain mat facts concerning mgmt or otherwise affecting the value of the co's secs and F/S certified by indep acctants. -Form 10-Q (10-QSB for small bus) is a quarterly report filed w/in 40 days for large corps (45 for small) of the end of the 1st 3 quarters of each fiscal yr. Must contain reviews of interim fin info by indep CPAs. -Form 8-K must be filed w/in 4 days after a major change in the co, like a change in control, disposition of major assets, change in officers/directors, resignation of directors, etc.

Features of a Chapter 7 Liquidation; Distribution of the Debtor's Estate: Payment and Priorities Continued

4. 4th priority; *W*age claims up to 12,850: employees who have claim for wages earned w/in 180 days prior to the filing of the petition receive a 4th priority. This is limited to 12,850/employee. So if an employee is owed 15k for wages, 13k of which was earned w/in 180 days prior to bankruptcy, the employee would have a 12,850 priority claim and a 2,150 nonpriority claim. 5. 5th priority; *E*mployee benefit plans (EBPs) up to 12,850: claims for contrs to employee benefit plans (health ins or pension plans) receive a 5th-level priority if they arose w/in 180 days prior to bankruptcy. This may not exceed 12,850/employee and is *reduced by the amt paid to each employee as a 4th-priority wage claim*. Remember that there are 3 restrictions on priority pmts for unpaid wages and EBPs: -only unpaid wages and EBPs that arose w/in 180 days prior to filing are entitled to a priority. Those that arose after filing are nonpriority claims. -only unpaid wages and EBPs up to 12,850 receive a priority. -the 12,850 priority for EBPs is reduced by any amt paid to the employee for a priority wage claim. 6. 6th priority; *G*rain farmers and fishermen up to 6,325: claims of grain producers or US fishermen against a debtor who ops a grain storage facility or fish product storage/processing facility have a 6th priority up to 6,325. 7. 7th priority; *C*onsumer deposits up to 2,850: consumer claims for a deposit made to a retail bus prior to the retailer's bankruptcy are entitled to a 7th-level priority to the extent of 2,850/customer. Ex: if a customer made a 3k deposit for furniture to be delivered, but the seller files a bankruptcy petition prior to delivery, the customer is entitled to a 2,850 7th-priority and a 150 nonpriority claim. 8. 8th priority; *T*ax claims: most tax claims are entitled to an 8th-level priority. 9. 9th priority; personal *I*njury claims arising from *I*ntoxicated driving: DWI. Claims for death/personal injury arising from the op of a motor vehicle or vessel by the debtor while the indiv was legally intoxicated have a 9th priority. The examiners often ask Qs reqing candidates to prioritize debts. Remember that properly perfected secured creditors are paid up to the value of their collateral. They are unsecured, nonpriority creditors for any deficiency. The order of pmt for the 9 priority creditors (next in line) can be remembered w/ *SAG WEG CTI*: -*S*upport obligations to spouse/children. -*A*dministrative exps of a bankruptcy proceeding. -*G*ap creditors. -*W*ages up to 12,850/employee if earned w/in 180 days prior to filing. -*E*BP contrs up to 12,850/employee, reduced by wage claims, if earned w/in 180 days prior to filing. -*G*rain farmers' and fishermen's claims up to 6,325. -*C*onsumer deposits for goods paid for but not delivered up to 2,850. -*T*axes. -*I*njury claims caused by intoxicated driving.

Bankruptcy

6 types of bankruptcy cases under fed law: ch 7 liquidation, ch 9 muni debt adjustmt, ch 11 reorg, ch 12 fam farmers w/ reg inc, ch 13 adjustmt of debts of indivs w/ reg inc, and ch 15 ancillary and other cross-border cases. Must know 7, 13, and 11 below. In a ch 7 liquidation case, trustee is appointed. Indivs, pships, and corps (IPC) can declare ch 7. Trustee collects the debtor's assets, liquidates them, and uses the proceeds to pay off creditors to the extent possible. -If the debtor is an indiv/married couple, the debtor's debts are then discharged (relieved from person liab for most debts), w/ certain exceptions. -If the debtor is an artificial entity (corp), it's dissolved. No discharge is given but the effect is the same - debts are wiped out. In a ch 13 case (adjustmt of debts of indivs w/ reg inc), the debtor repays all/a portion of his debts over a 3 - max 5 yr pd. There's not a liquidation, but a trustee oversees the handling of a ch 13 proceeding. At the conclusion of a ch 13 proceeding, the remaining debts of the debtor are discharged. In a ch 11 reorg case (usually by a bus but available to IPC), no liquidation and a trustee is usually not appointed (GR). There's hope! -The debtor remains in possession of his assets and a plan of reorg (to pay off debts at a diff time/amt from what was OG due) is adopted. -creditors are paid to the extent possible and the bus continues. Examiners often ask if a trustee is req'd for a type of bankruptcy. Remember: -trustee is req'd for chs 7 and 13. -*NOT* req'd for ch 11, although the ct may appoint one if necessary. Ch 15 (ancillary and cross-border cases) is the US adoption of the model law on cross-border insolvency promulgated by the UN. Adopted to promote a uniform and coordinated legal regime for cross-border insolvency cases.

Features of Reorganization Cases Under Chapter 11 Continued

A ch 11 plan must, among other things: -classify all claims (secured, 1st priority, 2nd priority, etc. under *SAG WEG CTI*, impaired, unimpaired, etc.). -descr the treatmt to be accorded each impaired class. -treat each claimant w/in a particular class identically and -establish ways to implement the plan. Any creditor/EQ sec holder (stockholder) who has filed a claim against the debtor's estate must be given an opp to accept/reject the plan. -a class of impaired claims is deemed accepted if it's accepted by creditors holding at least 2/3 in amt and > 1/2 in no of the allowed claims. -a class of impaired ints (EQ sec holders, stockholders) is deemed to have accepted the plan if it's accepted by the EQ sec holders having at least 2/3 in amt of the allowed claims. -*NOT* unanimous! The ct will confirm the plan if it meets certain conditions like (GR) being accepted by all impaired classes, providing for pmt in full for priority admin exps and gap claims, and the plan is feasible (has a reasonable chance of succeeding). A plan can be confirmed by the ct even if it's not accepted by all impaired classes if at least 1 impaired class has accepted, and the ct finds that the plan is not unfairly discriminatory and is fair and equitable w/ respect to any dissenting impaired classes. This is called a cram down A ct confirmed ch 11 plan is binding on all creditors, EQ sec holders, and the debtor, regardless of whether they accept the plan. Gen, once confirmed the debtor pays debts according to the plan. Unless the order provides otherwise, confirmation discharges the debtor from all preconfirmation debts except the debts not discharged under ch 7, which are also not discharged under ch 11 (*FAT WED*). So discharges most debts. Confirmation also terminates the automatic stay.

Features of a Chapter 7 Liquidation; Objections to Discharge

A ch 7 liquidation is for IPC, voluntary/involuntary, and indivs must pass inc tests. The goal of fed bankruptcy law is to give an honest debtor a fresh start financially by discharging most of their debts. In a liquidation, a bankruptcy trustee is appointed (7 and 13). The trustee collects all of the debtor's nonexempt prop, liquidates it, and pays off all of the debtor's creditors. Most debts of an indiv are discharged (the debtor is relieved from personal liab for them), but certain debts survive bankruptcy (*FAT WED*). Entities are dissolved, indivs are discharged. Creditors often want to prevent debtors from getting a ch 7 discharge. The code provides 2 kinds of ammunition for such claims: objections to discharge and nondischargeable debts. Objections to discharge destroy the entire ch 7 case, none of the debtor's debts will be discharged. Nondischargeable debts prevent the discharge of specific debts. These things will prevent the debtor from receiving any discharge (gen, debtor dishonest): -debtor not an indiv: technically, only indivs (real people, not artificial entities like corps) can receive a discharge under ch 7. Artificial entities seeking relief under ch 7 are dissolved at the conclusion of the case, so their debts are wiped out. -fraudulent transfers/concealmt of prop: debtor isn't entitled to discharge if he transferred, destroyed, or concealed prop in the yr before/after the petition was filed w/ the intent to hinder/delay/defraud creditors. -unjustifiably failed to keep books/records: the debtor isn't entitled to discharge if he unjustifiably concealed, falsified, or failed to keep/preserve adequate books/records from which the debtor's financial condition or bus trans might be ascertained. -prior discharge w/in 8 yrs: a debtor is entitled to only 1 discharge w/in an 8 yr pd. 8 yrs must elapse before another discharge can be granted. -commission of a bankruptcy crime: in addition to constituting fed crimes, these acts give rise to objections to discharge when committed knowingly/fraudulently in connection w/ the bankruptcy case: (a) making a false oath or acct (b) presenting or using a false claim (c) giving or receiving a bribe (d) withholding records or docs -failure to explain loss of assets: a debtor who is unable to explain satisfactorily the disappearance/loss of assets is not entitled to discharge. -refusal to obey orders or answer Qs: if a debtor refuses to obey a lawful order of the ct, a discharge is denied. The examiners sometimes ask what will prevent a party from getting a discharge in bankruptcy. The most often tested reasons are the 1st five; not an indiv, fraudulent transfers/concealmt of prop, unjustifiably failed to keep books/records, prior discharge w/in 8 yrs, and commission of a bankruptcy crime. Most frequent is failure to keep records.

Corporation; Nature of a Corporation

A corp is a legal entity (exists as an entity distinct from its SHs. As a distinct legal entity, usually only the corp is liable for corp obligations. Gen, SHs, directors, and officers aren't personally liable for contracts made by their corp. Neither are they liable for corp torts, except to the extent to the extent the SH, officer, or director participated in the tort. Taxation: -C corp: double taxation. Gen, a corp is taxed as an entity distinct from its owners. Must pay taxes on any profits it makes. SHs gen don't have to pay tax on the profits of the corp until they're distr'd (as divs under tax laws). -S corp: flow through. The tax laws permit certain corps to elect to be treated like pships (profits aren't taxed at corp level but are treated as inc of the SHs). There are a no of restrictions on S corps, like: (a) stock can be held by no > 100 persons. (b) SHs must be indivs, estates, or certain trusts. (c) the corp must gen be a domestic corp. (d) there can be only 1 class of stock. (e) foreign SHs are gen prohibited. Corps are owned by their SHs, but unless the articles of incorp provide otherwise, the SHs don't run the corp. The power to run the corp is vested in the BOD, which is elected by the SHs. Except small closely held. A corp gen has a perpetual life (unique to corp). One of the key distinguishing chars of a corp is that its owners/SHs are free to tranfer all of their oship rights to others, unless otherwise agreed (unique to corp).

General Partnership/Joint Venture; Formation

A gen pship is formed whenever 2+ persons intend to carry on as co-owners of a bus for profit. Papers need not be drawn up to form a pship. Nothing need be filed w/ the state. An express agreemt is not req'd, an agreemt can be implied from conduct. Book ex for formation of a pship: S and B decide to op a hot dog cart together. S agrees to pay for the cart and B agrees to make/sell the hot dogs. The 2 also agree to split the profits. A pship has been formed even though S and B never expressly agreed to form one. A very common bus entities Q on past exams asks simply: what type of bus entity can be formed w/o organizational docs w/ the state? A pship or sole prop are the only possibilities. Formation of all other bus entities reqs filing some sort of organizational doc w/ the state. Cts sometimes try to distinguish joint ventures (JVs) from gen pships, but the legal rqmts and consequences, as well as advs/disadvs, are identical to those of a gen pship. For exam purposes, the key diff btw a JV and a gen pship is that a JV is formed for a single trans/project or related series of trans/projects. If it's unclear whether the parties intended to enter into a pship, an agreemt to share profits gives rise to a presumption that the parties intended to form a pship. As a GR, a gen pship agreemt need not be in writing. However, if the partners want to enforce an agreemt to remain partners for > 1 yr, a writing is req'd under the statute of frauds (M*Y* LEGS). The examiners often ask what's necessary to form a gen pship. The key is to remember three simple elements: (i) 2+ persons, (ii) who agree (expressly/impliedly) (iii) to carry on as co-owners of a bus for profit. There's no rqmt of a writing, even if the pship is to own land, unless the pship is to last for > 1 yr. Gen pships are treated as entities for most purposes (may hold prop and sue/be sued in own name, etc.), but they are not taxable entities for IT purposes.

Limited Partnership Continued

A limited partner may assign his int in the pship (EQ). The assignmt of a limited partner's int is like an assignmt in a gen pship, the assignee has the limited partner's rights to profits. Unless otherwise agreed, the assignor ceases to be a limited partner upon assignmt of all of his limited pship int. A new partner can be added only upon the consent of *ALL* partners. A limited partner doesn't owe a fiduciary duty to the pship (bc not an agent). If the partners have agreed on how profits are shared, the agreemt governs. Unless otherwise agreed, gen and limited partners share P/Ls in proportion to the value of the partners' contrs (unlike GP and LLP where share equally, more like a corp). Remember that a limited partner isn't liable for any loss beyond his cap contr. A limited pship may be dissolved by: -the occurrence of the time/event stated in the pship agreemt. -written consent of all partners (unanimous written consent needed to dissolve). -withdrawal/death of a gen partner or -judicial decree. The death of a limited partner will *NOT* dissolve the pship. After dissolution, if the LP is terminated, assets are distr'd in this manner: 1. to creditors, incl partners who are creditors. 2. to former partners in satisfaction of liabs that weren't paid on their withdrawal and 3. to partners, 1st to return their contrs, the to distr profits (based on capital). If there's a loss, only the gen partners will be personally liable. Limited partners have no personal liab beyond their capital commitmts.

The Securities Exchange Act of 1934; Antifraud Provisions: Rule 10b-5 Continued

Book ex for CPA liab for false stmts: B, a CPA, audited F/S of H. B intentionally gave an unqualified opinion on the F/S even though she discovered MMs. The F/S and B's unqualified opinion were incl in a registration and prospectus for an OG offering of H's stock. B can be held liable for a violation of Rule 10b-5 (and also under section 11 of the 33 act). It's key to recog the diff btw an action under section 11 of the 33 act and under Rule 10b-5. -Section 11 of the 1933 act reqs no proof of scienter, reliance, or negligence. The plantiff need only show that he *A*cq'd the stock and suffered a *L*oss, and that there was a *M*at *M*isrep or *M*at omission of fact in the registration stmt. -Rule 10b-5 of the 34 act reqs proof of both scienter and reliance. The plaintiff must show he bought/sold the stock (*I*nduced), suffered a loss (*D*amages), a *M*at *M*isrep/omission of fact, *S*cienter, and *A*ctual reliance. -proof of negligence is insufficient under Rule 10b-5! Under Rule 10b-5, it's illegal for a person to trade on the basis of inside info if the person would breach a duty of trust owed to the issuer of the sec or the SHs of the issuer. Basically, inside info is any mat, nonpub info abt the sec or issuer. Insider trading under Rule 10b-5 = fraud. Typically, a securities issuer's insiders, like directors, officers, controlling SHs, and employees of the issuer will be held to owe a duty of trust/confidence. Outsiders, like an issuer's CPAs, attorneys, and even printers, may also be held to owe a duty of trust. A private person injured by a violation of Rule 10b-5 can bring an action against the person violating the rule for any actual damages (not punitive damages) or seeking rescission of the trans. The SEC can impose fines and seek criminal penalties. SEC does *NOT* prosecute, just investigates and turns the info over to prosecutors.

Corporation; Calendar Year v Fiscal Year and Foreign Corporation Must Qualify

Calendar yr v fiscal yr: cos typically have the option of choosing a calendar YE (on 12/31) or a fiscal YE (ending on any other day than 12/31). For tax purposes, a fiscal YE must 1st be approved by the IRS. Foreign corp must qualify: a foreign corp must obtain a certificate of auth from each state in which it does intrastate bus. A foreign corp is a corp created under the laws of another state. Maintaining an office in the foreign state W/B an ex of being bus in the foreign state. Merely maintaining a bank acct, collecting a debt, or hiring employees in a foreign state are not instances of doing bus in the foreign state sufficient to trigger the qualification rqmt.

General Partnership/Joint Venture; Operation of a General Partnership

Absent an agreemt to the contrary, all partners have equal rights to manage the pship bus. Mgmt rights and voting power are *NOT* based on the amt contr'd. Book ex for mgmt rights in gen pship: A, B, C, D, and E form a gen pship to manufacture clothing. A contrs 40% of the cap, B contrs 30% of the cap, C contrs 20% of the cap, D contrs 10% of the cap, and E agrees to design all the clothes. Each partner has an equal right to participate in the mgmt of the pship. Decisions regarding matters w/in the ord course of the pship's bus may be controlled by majority vote, unless the pship agreemt provides otherwise. Matters outside the ord course of the pship's bus req consent of *ALL* of the partners. Exs of areas reqing unanimous consent (*memorize*!): -admitting new partners. -confessing a judgmt (admitting liab in a lawsuit) or submitting a claim to arbitration and -making a fundamental change in the pship bus (like the sale of a pship). Unanimous, so no apparent auth to act individually. Book ex for fundamental change in pship bus: in the pship descr'd in the previous ex, the decision whether to buy cloth from supplier may be approved by any 3 partners (3/5 = majority), but a decision to shift production from the mfg of clothing to the mfg of small appliances would have to be approved by all of the partners (fundamental change). Every partner is an agent of the pship for the purpose of its bus and the pship is their principal. An act of a partner apparently carrying on in the ord course of bus the bus of the pship will bind the pship through apparent auth. If a partner acts w/o actual/apparent auth, the pship can still become bound if it knows of the mat facts of a trans and assents (ratifies), either expressly or by accepting the benefits of the trans.

Corporation; Directors: Rights, Duties, Obligations, and Authority

Among the specific duties of the directors are the election, removal, and supervision of officers (directors gen review the conduct of officers and may remove an officer w/ or w/o cause); adoption, amendmt, and repeal of bylaws; fixing mgmt comp; and initiating fundamental changes to the corp's structure (*DAMS*). Directors aren't indiv agents, but fiduciaries. No proxy to vote, need a quorum, and must have majority vote to get things done. The BOD has sole discretion to declare distrs to SHs, incl divs, in the form of cash/prop/the corp's own shs. The SHs have no power to compel a distr. Directors who auth a distr in violation of law (like when the corp is insolvent) are personally liable to the extent the distr exceeds what would have been lawful. However, they can defend under their right to rely. The director can also recover from a SH who rec'd a contr knowing it was unlawful. Directors are fiduciaries of the corp and must act in the best ints of the corp. Directors are *NOT* insurers of the corps success. A director will *NOT* be liable to the corp for acts performed/decisions made in good faith, in a manner the director believes to be in the best int of the corp, and w/ the care an ordinarily prudent person in a like position would exercise (this is the bus judgmt rule. Due diligence necessary). Directors will be liable to the corp only for negligent acts/omissions (like failure to obtain fire ins, hiring a convicted embezzler as treasurer w/o looking at his record, etc.).

Rescission

Available under the 34 act, but not section 11 of the 33 act (monetary damages only for 33 act).

Features of Reorganization Cases Under Chapter 11

Ch 11 can be IPC, voluntary/involuntary. In a ch 11 case, shortly after the order for relief is effective, a committee of unsecured creditors is appointed, usually consisting of willing persons holding the *seven largest unsecured claims* against the debtor. A person engaged in bus other than real estate w/ debts not exceeding ~ 2.6M can elect to be treated as a small bus. Such a debtor can request that a creditor's committee not be appointed. If the debtor is a corp, an equity security holders (stockholders) committee may be appointed consisting of the *seven largest holders of the EQ securities* to ensure that the EQ security holders receive adequate representation. The committees can consult w/ the debtor, investigate the debtor's finances, participate in preparing the reorg plan, etc. In a ch 11 reorg case committees are appointed to consult w/ and advise the debtor, but a trustee gen is *NOT* appointed. Instead, the debtor remains in possession of the debtor's assets bc the debtor is presumed to be in the best position to run the bus. The examiners like to ask abt the trustee in a ch 11 case. Remember the GR is that a trustee is not usually appointed in a ch 11 case. The debtor usually remains in possession of the estate's assets. The debtor may file a reorg plan under ch 11 any time during the bankruptcy case. Unless a trustee has been appointed, the debtor has an *exclusive right* to file a plan during the first 120 days after the order for relief is effective. Other interested parties (creditors) may file a plan if: -a trustee has been appointed. -the debtor has not filed a plan w/in 120 days after the order for relief became effective or -the debtor has filed a plan but hasn't obtained the acceptance of every impaired class (creditors whose claims are reduced by the plan or will be paid later than contracted for) w/in 180 days after entry of the order for relief.

Common Features of Chapter 7 and 11 Cases; Automatic Stay, Duties of Debtor, and Voluntary Cases

Ch 7 is liquidation, 11 is reorg. Both are IPC, voluntary/involuntary. Automatic stay: When a bankruptcy petition is filed in either a voluntary/involuntary case, an automatic stay becomes effective against most creditors. Stops all collection efforts (filing a lawsuit or demanding pmt). The auto stay doesn't apply to criminal prosecutions, paternity suits, and cases brought to establish/collect spousal or child support obligations. Duties of debtor: After a petition is filed, a debtor must file: -a list of creditors and their addresses. -a sch of A/Ls at FMV. -a sch of current inc/expenditures. -a stmt of the debtor's financial affairs. -copies of pay stubs rec'd w/in 60 days before filing. -copies of fed TRs from the last tax yr. If the debtor hasn't paid taxes for the previous tax yr, must do so before the bankruptcy may proceed. If an indiv debtor in a voluntary ch 7 case fails to file any of these items w/in 45 days after filing the petition, the case is auto dismissed on the 46th day. Voluntary cases: A voluntary case under ch 7 or 11 (13 voluntary only) is commenced by the debtor filing a petition for relief. The debtor need not be insolvent to file, but the case may be dismissed if the debtor has too much inc. Must pass inc tests if indiv. Bankruptcy can be filed if can't pay debts of *any* amt when due. Spouses may file jointly to avoid duplicate fees (often a correct answer on the exam). A filed voluntary petition constitutes an order for relief, meaning a case may proceed unless a ct orders otherwise. This is diff than involuntary.

Common Features of Chapter 7 and 11 Cases; Claims Against the Estate and Miscellany

Claims against the estate: incl all rights to pmt from the debtor's estate. To have a claim allowed (right of pmt against the debtor's estate), unsecured creditors must *file* a proof of claim, and SHs must *file* a proof of int w/ the bankruptcy ct. Unless someone objects, a filed claim/int will automatically be allowed by the ct. An unsecured creditor who fails to timely file a claim may not take part in the distr of the debtor's estate. The GR is that a perfected security int passes through and survives bankruptcy even if the creditor doesn't file a proof of claim. Miscellany: the trustee can also serve as a professional (tax preparer, acctant, or lawyer) for the estate if the ct approves. A trustee serving as a tax preparer for the estate may receive comp as a prof in addition to the trustee's comp, if a ct approves.

Corporation; Financing the Corporation

Corp capital comes from the issuance of many types of secs, incl EQ obligations (stock) and debt obligations (bonds). Bonds incl secured mortgage bonds and unsecured debentures, and even bonds that may be convertible into stock (convertible bonds). Bondholders are creditors. EQ secs incl shs of the corp, stock warrants (gen, options to purch shares granted by the corp), and stock options (gen, options to purch stock granted by one other than the issuing corp). SHs are owners of the corp. A corp may choose to issue only 1 class of stock, in which case each sh of stock will have the same rights. Alternatively, may choose to issue several classes or series of stock w/ varying rights (unless S corp). Unless the articles provide otherwise (by setting a par value for the stock) the BOD has discretion to issue stock at any price it thinks it approp. Under the RMBCA, stock may be issued in exchange for any benefit to the corp (money, prop, promises to perform services in the future, promissory notes, etc.).

Corporation; Formation

Corps are created by complying w/ a state incorp statute. A majority of states follow the revised model bus corp act (RMBCA). This outline is based on that act. A no of past corp Qs have simply asked which of 4 stmts is true, wherein a key to a no of these Qs was that corps are governed by statute. Promoters enter into contracts before the corp is formed to obtain financing and things the corp will need once formed (procure cap commitmts). Promoters are personally bound on the contracts they make. The corp isn't bound unless/until the corp adopts the contracts after it's formed, either expressly or by accepting the benefits of the contracts. Even if the corp adopts a promoter's contract, the promoter remains liable unless there's a novation (agreemt that the 3rd party will release the promoter and substitute the corp). Incorporators must file articles of incorp w/ the *state*. The articles may incl anything the incorporators consider approp, but, under the RMBCA, must incl: -name of the corp. -name/address of corp's registered agent (person on whom process may be served if corp is sued). -names/addresses of each of the incorporators. -no of shs auth'd to be issued. 1+ class of shares must have unlimited voting rights (unlike S corp). The examiners often ask what must be incl in the articles of incorp. Items not in the above list are unnecessary. Ex: the articles need not incl a stmt of the states in which the corp is to do bus/have offices, the names of the initial directors/officers, terms of office, etc. *Memorize* the list above and ignore the other choices. A corp may incl a clause in its articles stating the bus purpose for which the corp was formed. The purpose clause is optional. If a corp has a narrow purpose clause and undertakes bus outside the clause (or outside the bus permitted by statute), it's said to be acting ultra vires. A director/officer who auths an ultra vires act may be liable to the corp for damages caused by the act. Book ex for ultra vires act: if a corp was formed to accomplish the single purpose of operating a restaurant, any action to achieve some other purpose (like buying an oil and lube bus) W/B ultra vires.

Common Features of Chapter 7 and 11 Cases; Property of the Bankruptcy Estate Continued Further

Definitions of key parts of preferential pmt definition continued: -insolvency: the debtor is presumed to be insolvent during the 90 days immediately preceding the date the bankruptcy petition is filed. -receipt of greater share: creditor rec'd more. A preference exists only if the creditor recs more than he would receive in a bankruptcy distr. Pmt to a fully secured creditor is not a preference, bc the creditor would have rec'd the collateral and been paid in full anyway. *Exceptions*; transfers that can't be set aside by trustee: -transfers in the ord course of bus: Ok. Not preferences. A transfer made to repay a debt the debtor incurred in the ord course of bus is not a voidable preference. Book ex for transfers in the ord course of bus: a regular monthly installmt pmt will not be set aside as a preference. Sim, pmt of a current utility bill or lease pmt doesn't constitute a preference. -PMSI perfected w/in 30 days: a PMSI isn't a voidable preference if it's perfected w/in 30 days after the debtor receives possession of the collateral, although it may be invalid under state law if not perfected w/in 20 days of the debtor's receiving possession. -consumer pmts under 600: the trustee may not void pmt or transfers of prop of < 600 by a debtor whose debts are primarily consumer debts. -domestic support obligations: bona fide pmts for domestic support obligations (spousal support or child support) are not voidable preferences.

General Partnership/Joint Venture; Termination: Dissociation and Dissolution of a General Partnership

Dissociation: Dissociation is a change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the bus (change in partners). Dissociation of a partner does *NOT* necessarily cause a dissolution and winding up of the bus of the pship. A pship at will (one w/o a stated termination point) may be rightfully dissolved by a partner's notice of withdrawal/dissociation at any time. A partner is dissociated from the pship when the partner gives notice of withdrawal, dies, becomes bankrupt, is expelled, or if an event occurs that was set out in the pship agreemt as an event that would cause a dissociation. When a partner dissociates, his right to participate in mgmt ceases, although the dissociated partner's apparent auth to bind the pship will continue until 3rd parties are given notice of the dissociation. Gen, a dissociated partner remains liable for the debts incurred by the pship prior to dissociation unless there has been a release by the creditor or a novation. A dissociated partner may be held liable for debts incurred by the pship for up to 2 yrs after dissociation unless the partner gives notice of dissociation. If a new partner is admitted, isn't personally liable for debts incurred by the pship before becoming a partner (but can lose investmt in pship). Dissolution: gen, a pship is dissolved and its bus must be wound up if the pship is at will (has no expiration date) and a partner gives notice of withdrawal (just need 1), the partners agree to dissolution, or a ct orders dissolution. The death of a partner does *NOT* cause dissolution if the remaining parties agree to continue the pship w/in 90 days of the partner's death. The examiners often ask abt the basic chars of a pship. One that has been key in the past is that a pship is not of unlimited duration, bc any 1 of the above events can trigger a dissolution. A pship continues to exist after dissolution unless its bus is wound up, at which time the pship is terminated. Ex: each partner will continue to have apparent auth to bind the pship and will continue to be liable for the obligations of the pship. The pship is term'd only after the winding-up process is complete.

General Partnership/Joint Venture; Duties and Legal Obligations of Partners, Profit and Loss Allocation, and Distributions

Duties/legal obligations of partners: each partner owes a fiduciary duty to the pship and other partners. Partners are personally liable for *ALL* contracts entered into and torts committed by other partners w/in the scope of pship bus or which are otherwise auth'd (GP does not = LLP). The partners' liab is joint and several, so each partner is personally/individually liable for the *ENTIRE* amt of all pship obligations. In many states, a creditor can't satisfy a judgmt against an indiv partner unless the partner was named in the lawsuit and the assets of the pship are exhausted. P/L allocation (GP = LLP): absent an agreemt otherwise, all partners have equal rights to share in the profits of the pship, regardless of the $$/services contr'd. Book ex for sharing of profits: A, B, C, D, and E form a gen pship to mfg clothing. A contrs 40% of the cap, B contrs 30%, C contrs 20%, D contrs 10%, and E agrees to design all the clothes. All partners will share profits equally absent an agreemt to the contrary. Unless the partners agree otherwise, they share losses in the same manner as profits. Book ex for sharing of losses: same facts as above. If there's a 100k loss, absent an agreemt to the contrary, all partners will be responsible for 20k of the loss (100k/5, equal!). The examiners often ask how partners will share P/Ls. The key is to remember that, as w/ partners' mgmt powers, unless the partners provide otherwise, P/Ls will be split equally, regardless of the partners' contrs. If a partner can't contr his share of losses (bc of bankruptcy or other refusal), the remaining partners must make up the share on a pro rata basis. Distrs: salary. Unless agreed otherwise, partners are *NOT* entitled to comp for services rendered for the pship. Book ex for comp: same ex. If A, B, and C never did any work for the pship and D and E worked full time to mfg the clothes, D and E would have no right to be paid for their services (unless A, B, and C breached an agreemt to work).

Upon Dissolution of a Partnership

Each partner continues to have liab for pship debts and each partner continues to have apparent auth. The apparent auth of a partner can only be negated upon proper notice to 3rd parties.

Comparison of the Antifraud Provisions of the 1933 and 1934 Acts

Elements of proof listed below each. 1. 1933 act (sections 12 and 17): IPO. 11, 12, and 17. *LAM*. -source of misleading stmt/omission: must be in registration stmt. -trans covered: issuance of a security. -securities covered: those covered by the registration stmt. -plaintiffs: any person acqing the security, SEC. -defendants: every person who signed the registration stmt, directors, ppl named in the registration stmt, experts (incl acctants). -materiality: false stmt/omission must be material. -loss: must prove. -reliance: need *NOT* prove. -causation: need *NOT* prove. -scienter: need *NOT* prove. -knowledge of false stmt/omission: plaintiff can't know of false stmt/omission. -remedies: rescission or monetary damages (section 12); criminal damages (section 17). 2. 1934 act (section 10b): Fraud. *MAIDS*. -source of misleading stmt/omission: can be any written/oral stmt/omission. -trans covered: sale/purch of a sec. -securities covered: any secs, whether or not publicly traded or registered. -plaintiffs: any purchaser/seller of the security; SEC. -defendants: anyone responsible for the false stmt/omission, or who trades on the basis of mat, nonpub info and who breaches a duty of trust and confidence by so trading (latter is insider trading). -materiality: false stmt/omission must be mat. -loss: must prove. -reliance: must prove. -causation: must prove. -scienter: must prove. -knowledge of false stmt/omission: plaintiff can't know of false stmt/omission. -remedies: rescission or monetary damages. Misc additional info: -have to show the defendant signed the registration stmt for 33 but not 34 act. -*I* in MA*I*DS = bought OR sold stock. -*A* in L*A*M = bought/acq'd stock only.

When an Employer Voluntarily Pays an Employee's Share of FICA Taxes

Entitled to reimbursemt from employee. If they don't seek rembursemt, the pmt is considered a bus exp deductible by the employer and TI to the employee.

Unemployment Compensation (FUTA)

Excludes SE. Establishes a state-run system of ins to provide inc to workers who have lost their jobs. FUTA provides fed guidelines, but the states actually administer the program, set stds, and determine pmts. All employers who have quarterly payrolls of at least $1,500 or who employ at least 1 person for 20 weeks in a yr must participate in the system. Unlike FICA, SE persons don't participate. Bc most employers must participate under FUTA, the examiners often try to trick you into thinking every employer must participate. Not true. The 1,500 min or time rqmts must be met. Unemploymt taxes are payroll taxes gen assessed only against the employer. The fed unemploymt TR currently is 6% of the first 7k per yr of comp for each employee. Employers can get a credit against the fed tax due for pmts made on acct of state unemploymt taxes of up to 5.4% of the first 7k. The state rate can be reduced if the employer has a below-avg rate of unemploymt claims from prior employees. The employer's pmt is deductible as an ord bus exp. Bc the employee gen doesn't pay the tax, it's not deductible by the employee. When the examiners test on unemploymt issues, often test on this concept. Remember that the employer may deduct the tax (bc they pay it), but the employee may not take a deduction. Unemploymt (FUTA) benefits are gen available only when an employee's job termination wasn't his fault. Benefits are distr'd to employees by the state govts. The amt paid varies btw states, but is usually determined by how long the employee has worked and his former rate of pay. Pmts aren't limited to the amt that has been paid by the employer on the employee's behalf. Most important things to remember abt FUTA for the exam: -employer must pay if it employs an employee for at least 20 weeks in a yr or paid 1,500 in wages in a quarter. Employee doesn't pay. -bc the employer pays, the tax is deductible as a bus exp. Employee can't deduct the pmt. -if an employer's claim rate is low, may get a deduction for state unemploymt tax. -the employee's benefits aren't limited to contrs made on his behalf.

Corporation; Fundamental Changes Continued

For *A*mendmts to the *A*rticles of incorp (D*A*MS): the corp may amend its articles of incorp in any/as many respects as desired, as long as the provisions, as amended, are lawful. For *M*ergers, consols, and sh exchanges (DA*M*S): -merger: [A + B] = A. Involves 1+ corps joining w/ another corp. *ONE* corp survives the merger and continues in existence, while the other merging corps cease to exist following the merger. Book ex for merger: X corp merges w/ A corp, and following the merger X ceases to exist. A survives, w/ all of the assets and SHs that formerly belonged to X. -consolidation: [A + B] = C. Involves 1+ corps joining together to form a new corp. Each constituent corp ceases to exist after the consol, only the new corp goes on. The new corp is liable for the debts of the old corp. -share exchange: trans in which 1 corp acqs all of the outstanding shs of 1+ classes of stock of another corp. *BOTH* corps continue to exist as sep entities. Both corps in a merger and all corps in a consol must follow the gen proc for fundamental corp changes above (board resolution, notice, approval by majority of shs, and filing). The notice must incl a summary of the plan of the merger, consol, sh exchange, etc. So the SHs of both corps must be given due notice of a special meeting, incl a copy/summary of the merger plan (unless short-form merger). In a sh exchange, only the corp whose shs are being acq'd need follow the fundamental change proc. The plan of merger or sh exchange must incl the terms/conditions of the plan and the manner of converting the corp's securities.

Limited Liability Company (LLC)

Hybrid btw a corp and pship. An LLC is designed to provide its owners, called members, w 2 main features: -the limited liab that SHs of a corp enjoy (owners aren't personally liable for obligations of the bus entity). -the ability to be taxed like a pship (P/Ls flow through the LLC and are treated as the owners' personal P/Ls, unlike profits of a corp, which are taxed at the corp level and again when distr'd to the SHs). Under tax laws LLCs are treated as a pship unless they elect to be taxed as a corp. LLC members may, but need not, adopt operating agreemts w/ provisions diff from the LLC statute, and gen the op agreemts will control. The op agreemt is an agreemt among members regarding how they will op/run their bus. Its intent is to forestall and resolve disputes among the members. These agreemts are not filed w/ the state. Under the uniform LLC act (ULLCA), such op agreemts need not be in writing. An LLC is formed by filing articles of organization w/ the secretary of state. Diff than articles of incorp (for corp). Most states req the articles to incl: -a stmt that the entity is an LLC. -the name of the LLC, which must incl an indication that it's an LLC. -the street address of the LLC's registered office and the name of its registered agent. -if mgmt is to be vested in managers, a stmt to that effect (important) and -the names of the persons who will be managing the co. Most states now allow 1 person to form an LLC.

The Securities Act of 1933; Timetable of Sales Activity

IPO - 33 act. 1. 30 days before registration (prefiling pd): Gen, no sales activity is allowed w/in the 30 days before registration (prefiling pd), unless the issuance is exempt. However, an issuer is permitted to negotiate w/ an underwriter. Comms made > 30 days before a registration gen don't constitute sales activity. 2. After registation but before effectiveness (waiting pd): There's a 20 day waiting pd btw registration and the filing date. Sales are gen prohibited during this pd, but some sales activities are allowed: -oral offers to sell (no written) can be made. -tombstone ads can be made (ad IDs the sec, its price, and who will execute orders). -prelim (red herring) prospectus can be made (sim the statutory prospectus, but contains a stmt in red ink that it's not yet final). -summary prospectuses are allowed (but these are outmoded and seldom used). 3. After effective date (post-effective pd): after the registration is effective (20 days after filing or as the SEC directs), the secs may be sold. All investors must receive a prospectus before or w/ the sale. There are special rules for some 1934 act reporting cos: -WKSIs: there are special rules for seasoned issuers and well-known seasoned issuers (WKSIs). These rules haven't been tested beyond the gen notion that the normal timetable doesn't apply to WKSIs and there's a doc called a free writing prospectus. -free writing prospectus: WKSIs and seasoned issuers may issue a free writing prospectus. Must incl a legend that a registration stmt has been filed and advising how a reader can obtain a prelim prospectus. Copies of a free writing prospectus must be filed w/ the SEC before 1st use and be retained for 3 yrs.

The Securities Act of 1933; Liability Under the 1933 Act

IPO. Gen liab under sections 11, 12, and 17: -section 11: civil liab for misstmt. Imposes civil liab for misstmts, whether or not intentional, in registration stmts. -section 12: civil antifraud section of the 1933 act. Imposes civil liab if a req'd registration was not made, if a prospectus was not given to all investors, or if mat false stmts were made/omitted in connection w/ sales or offers to sell. The immediate purchaser may sue for damages or rescission (purchaser may sell the sec back to the issuer and recover the price paid). The purchaser need not prove scienter or reliance. -section 17: criminal antifraud section of the 1933 act. Imposes criminal penalties against anyone who uses any type of fraud in connection w/ the issuance of a sec. Enforced by the SEC and prosecuted by the US dptmt of justice. Examiners have focused their attention on section 11 (so rest of this card is section 11). Section 11 makes anyone who signs a registration stmt liable for all damages caused by any misstmt of mat fact in the registration stmt. A person wishing to sue under section 11 need only show: *LAM* -plantiff suffered a *L*oss (suffered damages). -plaintiff *A*cq'd the stock (need not be the initial purchaser) -the registration stmt contained a *M*aterial *M*isrep or mat omission of fact. The plaintiff need not prove an intent to deceive or negligence on the part of the defendant, nor reliance. Note that damages are the only remedy, rescission isn't available. Section 11 is heavily tested. Key is to remember that the plaintiff need only prove that he acq'd the stock, suffered a loss, and a MM or mat omission of fact. The plaintiff need not prove any type of intent (scienter) or negligence, nor reliance on the false stmt. Anyone who signs a registration stmt may be liable under section 11. Indep CPAs audit the F/S in a registration stmt and attest to their accuracy. Thus, the signing CPA is liable for MMs in the registration stmt that result in loss. Book ex for who is liable: while conducting an audit, A, CPA, failed to detect MMs incl in the client's F/S. A's unqualified opinion was incl in the F/S in the registration stmt for a pub offering of securities. A knew the F/S would be used for this purpose. P purchases the securities and incurs damages. P can sue A for damages. Defendants, other than issuers, aren't liable if they can prove that they used due diligence (due diligence defense). Due diligence means the defendant had reasonable grounds to believe the facts in the registration stmt were true and no mat facts were omitted (ex: an auditor can defend that he complied w/ GAAS). This is an affirmative defense. GAAP/GAAS, WPs. This has often been tested, especially w/ regard to the activities of CPAs. It also is a defense to liab under section 11 if the defendant can prove that the misstmt didn't cause the plaintiffs damages. This incl cases when the misstmt wasn't mat or the plaintiff knew of the untruth/omission in the stmt at the time he purch'd the secs.

The Securities Act of 1933; Purpose and Registration Statement

IPO. The goal of the secs act of 1933 is to *assure that investors have sufficient info* on which to make an informed investmt decision. It accomplishes this goal by reqing most issuers to register new issues of secs w/ the SEC (unless an exemption applies) and provide prospectuses containing mat info regarding the secs to prospective investors. The SEC does *NOT* guarantee the accuracy of this info, evaluate the offering's financial merits, or give assurances against loss. A no of Qs on the exam have asked abt the purpose of the 1933 act. Remember that the SEC does not assure the accuracy of the info filed or eval the financial merits of the secs being offered. It merely assures the presence of info necessary for investors to make informed decisions. Completeness. The registration rqmts of the 1933 act only apply to issuers, underwriters, and dealers. -issuer: the entity whose secs are being sold. -underwriter: an intermediary who sells the issuer's secs to the gen public or to dealers. -dealer: one who sells/trades secs on a full/part-time basis. Most secs can't be sold unless they're 1st registered w/ the SEC. The registration stmt consists of 2 parts. Part I is the prospectus and Part II contains detailed info regarding the secs to be issued. Part I; the prospectus: a written offer to sell secs. The 1933 act defines prospectus as any written, radio, or TV offer to sell secs. The prospectus in Part I of the registration stmt (statutory prospectus) summarizes important info contained in Part II. Unless an issuance is exempt, each investor much receive a copy of the prospectus before/contemporaneously w/ every sale of the sec.

Miscellaneous Information from Question

If a partner w/o actual/apparent auth enters into a contract, the pship is only bound by it if it ratifies. Amending the pship agreemt (to grant auth) wouldn't bind the pship bc auth must exist at the time the contract is made or the pship must ratify the contract.

Corporation; Formation Continued

In addition to the articles of incorp, a corp gen will have bylaws containing rules for running the corp (they may set out the auth of the corp's officers). They're not fundamental. Bylaws are adopted by the incorporators or the board and may be repealed/modified by the BOD. They are *NOT* part of the articles of incorp and are *NOT* req'd to be filed w/ the state. Cts will sometimes hold the SHs, officers, or directors of a corp personally liable bc the privilege of conducting bus in corp form is being abused. This disregard of the corp entity is called piercing the corp veil. Cts will gen do this for any of 3 reasons: 1. SHs commingle personal funds w/ corp funds or use corp assets for personal use. 2. the corp was inadequately/thinly capitalized at the time of formation (SHs must start the corp w/ sufficient cap to reasonably meet the corp's prospective liabs). 3. the corp was formed to commit fraud on existing creditors (like a sole proprietor transfers all of his assets to a newly formed corp so they aren't available to pay his existing creditors). Piercing the corp veil is one of the examiners' fav corp issues. *Memorize* the 3 reasons for piercing: commingling personal w/ corp funds, inadequate capitalization, and committing fraud on existing creditors. Be mindful of what's *NOT* on the list, like incorporating as an S corp, incorporating a pship, and bankruptcy of a corp that was adequately capitalized at the outset.

Federal Insurance Contributions Act (FICA)

Incl self-employed. Provides workers and their dependents w/ benefits in case of death, disability, or retiremt. Almost everyone participates. All full-time/part-time employees must participate in the program. The SE must also participate if their net profit exceeds $400 in a yr. Very few workers are exempt (like certain govt workers and ministers). FICA is funded by taxing inc earned from labor (wages, salaries, bonuses, commissions, etc.). Funded by *both* employers/employees, incl SE indivs. Unique to FICA and ACA. Employers must match their employees' contrs to FICA. Employers are responsible for paying the tax and withholding the employee's contr. -an employer that fails to withhold the employee's contr is liable to pay the employee's half, but has a right to reimbursemt from the employee. If the employer voluntarily pays the employee's share, it's deductible for the employer and TI for the employee. -penalties apply to employers who fail to make timely FICA deposits or supply their fed taxpayer ID no. For 2016, employees were liable to make FICA contrs of 6.2% of their gross wages (it's gross!) of up to 118,500 and medicare contrs of 1.45% of their entire gross wages. Indivs w/ inc exceeding a threshold (200k for single, 250k for MFJ) are liable for an additional medicare tax of 0.9% of their entire gross wages. Gross wages incl all earned inc, like salary, bonuses, and commissions. Gifts, int, divs, etc. aren't wages. SE indivs pay into FICA through the SE tax, which is equal to the employer's and employee's contr (15.3%, double). It's imposed only on the net profits (*NOT* gross sales) and only if they exceed $400 in a yr. Board members. The examiners often ask what inc is subj to FICA. Remember that an employee's gross wages are subj, and a SE person's net profits are subj.

Business Structures; Summary of Entities

Know this. Nearly half of the recent bus structures Qs on the exam simply req the examinee to differentiate the attributes of the various bus structures. The major attributes are summarized below. Note that the taxation descr'd is the default treatmt for these entities, but they may elect to be taxed differently under the check the box rules. 1. Sole prop: -formation: no formalities. Owner simply ops a bus. -liab of owners: unlimited personal liab for all bus obligations. -mgmt: sole proprietor manages directly or can appoint a manager. -transferability: sole proprietor can sell bus at will. -taxation: flow through. 2. Gen pship/JV: -formation: no formalities. Can be formed by verbal/written agreemt, or mere conduct. -liab of owners: unlimited personal liab for all pship obligations. -mgmt: owners manage directly or can agree to appoint managing partner. -transferability: partners can't transfer oship int w/o unanimous consent. -taxation: flow through. 3. LLP: -formation: file stmt of qualification w/ state. -liab of owners: partners are gen not liable for pship obligations, unless caused by their own negligence. -mgmt: partners manage directly or can agree to appoint a managing partner. -transferability: partners can't transfer oship int w/o unanimous consent. -taxation: flow through, but partners not managing have passive loss restrictions. 4. Limited pship: -formation: file certificate of limited pship w/ state. -liab of owners: GP has unlimited personal liab, LP has only their investmt at risk. -mgmt: GPs are exclusive managers, LPs ord do not manage. -transferability: partners (gen or limited) can't transfer oship int w/o unanimous consent. -taxation: flow through, but limited partners have passive loss restrictions.

Limited Partnership

LP incl at least 1 GP and 1 LP. A limited pship is made up of 1+ gen partners (personal liab for all pship debts) and 1+ limited partners (liab for pship debts gen is limited to their investmt). Examiners sometimes ask whether a LP can be formed w/ limited liab for all partners. The answer is no! You need at least 1 GP who has unlimited personal liab for all pship obligations. A limited pship does not have a perpetual life, unless the pship agreemt provides otherwise. Limited partners are much like SHs (sim corp). They contr cap in exchange for a pship int, but they don't participate in day to day mgmt. A limited pship can be formed only pursuant to a state statute and only by filing a certificate of limited pship. w/ the state (sim corp). In a limited pship, mgmt is the responsibility of the gen partners, like in a gen pship. A gen partner (agent) is personally liable for all pship debts. If there's a loss, only the gen partner can be held personally liable. A gen partner may also be a limited partner at the same time (but still has unlimited personal liab). A gen partner may be a secured/unsecured creditor of the pship. A limited partner's liab is limited to his investmt and unpaid cap commitmts. Has no right to take part in the mgmt of the bus. Passive, like a SH (it's a security). A limited partner is *NOT* an agent of the bus and gen can't bind the bus in contract. Nevertheless, a limited partner has a right to review the fin info and TRs of the limited pship. Under the revised uniform limited pship act of 1976 (RULPA), a limited partner who participates in control of the bus is liable to any creditor who reasonably believes he is a gen partner. Under the uniform limited pship act of 2001 (ULPA), partners can't be held personally liable for participating in mgmt. Exam Qs should spec which act applies. Under both RUPA (1976) and ULPA (2001), a limited partner may vote on extraordinary matters w/o incurring liab (like admission/removal of a gen partner, dissolution, amending the certificate of LP, sale of substantially all assets, etc.). Under RULPA (1976), limited partner's names can't be ID'd w/ the bus, or they might be considered gen partners and lose their limited liab status. This is not true under ULPA (2001).

Dismissal or Conversion of a Chapter 7 Case

Liquidation. A ch 7 case by an indiv consumer debtor may be dismissed or (w/ debtor's consent) converted to a case under ch 13 upon finding that granting relief under ch 7 would constitute abuse. Abuse may be determined by a specific means test or gen abuse test. Step 1; determine whether inc is lower than the state median: if yes, ch 7 is ok. If an indiv filing for ch 7 liquidation and his spouse have monthly inc > the state median inc for a fam of the same size, the state, any int creditor, or the ct may file a motion to dismiss, either under the means test or gen abuse. Step 2; means test: used to determine whether creditors W/B better off under a ch 13 5-yr reorg. 60x the debtor's avg monthly inc, less allowable exps, is compared w/ a high and low threshold (7,700 and 12,850). -formula = [(avg monthly inc - allowed exps) x 60]. -if the amt is < 7,700, the debtor may continue under ch 7. -if the amt is 12,850+ (almost 13 = bad luck for you), there's a presumption of abuse and the debtor usually will have to convert the case to ch 13 or be dismissed. -if the amt is < 12,850 but >= 7,700, a presumption of abuse will arise if the amt equals at least 25% of the debtor's unsecured claims not entitled to priority pmt. Allowable living exps incl the costs of food/clothing/shelter as set by the IRS, exps for health ins and health savings plans, health care costs for fam members, exps for attending elementary or high school, and exps related to keeping the debtor safe from fam violence. The debtor may rebut the presumption of abuse by showing special circumstances (serious illness or call to active military duty) that create additional exps or a need to adj current monthly inc. Even if the debtor qualifies for ch 7, relief may be denied by showing the debtor acted in bad faith or that under the totality of circumstances there's abuse. If the debtor's avg monthly inc or the monthly inc of the debtor and their spouse in a joint case is <= the median inc in the debtor's state, a ch 7 filing can only be dismissed by the gen abuse test and only on motion of the ct, trustee, or bankruptcy administrator (not a creditor). A ct may dismiss a ch 7 filing by a debtor convicted of a crime involving violence or drug trafficking. As a benchmark, the lowest state median inc in the US is ~38k.

Features of a Chapter 15 Case

Multinational. A ch 15 ancillary case is commenced by a foreign representative filing a petition for recog of a foreign proceeding. This operates as the principal door of a foreign rep to US cts. The petition must show the existence of the foreign proceeding and the appointmt and auth of the foreign rep. After notice and a hearing, the US ct is auth'd to issue an order recognizing the foreign proceeding as either a foreign main proceeding (country where debtor's main interests are located) or a foreign non-main proceeding (country other than one where the debtor's main ints are located). Upon recog of a foreign main proceeding, the automatic stay and other provisions of the bankruptcy code take effect in the US. The US ct is auth'd to issue preliminary relief as soon as the petition for recognition is filed. The foreign rep is auth'd to op the debtor's bus. Once recog'd, a foreign rep may seek additional relief from the bankruptcy ct and is auth'd to bring a full-blown (instead of ancillary) bankruptcy case under chs 7 or 11. The foreign rep may participate in a pending US insolvency case and may intervene in any other US case in which the debtor is a party. Goals of ch 15: -prohibition against discrimination: ch 15 prohibits discrim against foreign creditors (except certain foreign govt and tax claims, which may be governed by a treaty). -rqmts of notice and cooperation: ch 15 reqs notice to foreign creditors concerning a US bankruptcy case, incl notice of the right to file claims. Under ch 15, US cts and trustees must cooperate to the max extent possible w/ foreign cts and foreign reps.

Corporation; Fundamental Changes

Need BOD and SH approval - *NOT* unanimous. Unlike a pship. Decisions regarding issues that might fundamentally change the nature of the corp req SH approval through a special proc. Such fundamental corp changes incl some amendmts to the articles of incorp, dissolutions, mergers, consols, sh exchanges, and sales of all/subst all of the corp's assets. To remember the fundamental changes that req SH approval: *DAMS* -*D*issolution. -*A*mendmts to the articles of incorp (not bylaws) that materially and adversely affect the SHs' rights. -*M*ergers, consols, and compulsory sh exchanges. -*S*ale of substantially all the corp's assets outside the reg course of bus. Gen proc for fundamental changes: -board resolution: initiates the process. A majority of the BOD must adopt a resolution setting forth the proposed action and submitting it for a vote at a SHs' meeting. -notice: corp must notify all SHs even if they're not entitled to vote. -SH approval: the change must be approved by a majority of the shs voted at the meeting. -filing of articles: a doc setting forth the action taken (articles) must be executed by the corp and filed w/ the state. -right to dissent/appraisal rights: SHs who have a right to vote on a fundamental corp change typically have a right to dissent/appraisal right (the right to have the corp purch their shs at a fair price) if the SH votes against the fundamental change and it's nevertheless approved. The examiners often ask abt fundamental corp changes. Key points to remember: -the BOD must approve a resolution, but there's *NO* rqmt of unanimity. -the SHs must be given notice and an opp to vote on the change. Approval reqs a majority of the votes cast.

Features of a Chapter 7 Liquidation; Distribution of the Debtor's Estate: Payment and Priorities Continued Further

Nonpriority claims are last! Any money that's left after paying the secured creditors and the priority claimants is used to pay the gen unsecured creditors who timely filed, pro rata. If any assets are remaining after paying gen creditors who timely filed, creditors who filed late receive pmt. Book ex for calc of cash distr: R has been involuntarily petitioned into bankruptcy. Claims/exps against R's estate incl 15k admin fees earned by bankruptcy trustee, 5k claims by secured creditors, 10k attorney fee for bankruptcy estate, and 2k employee wage claims earned w/in 180 days of filing. Calc the amt to be distr'd to the trustee if cash available for distr is 15k. -[15k cash available for distr - 5k secured claims] = 10k cash available to priority claimants. -both the attorney and trustee exps are admin claims (come before employee wage claims for priority claimants). The employees would receive nothing. -since total admin exps of 25k (15k trustee fee + 10k attorneys' fees) are > 10k cash available, the cash available is prorated btw the administrative claimants. -trustee distr = [(15k trustee's claim/25k total admin exp) x 10k remaining cash available] = 6k. 60% of remaining cash. -attorney would get 4k, 40% of remaining cash. It's important to understand the relationship btw the exceptions to discharge and pmt priorities. Some items are both a priority and an exception, other items are 1, but not the other. Pmt is made according to the priority rules (w/o regard to whether the debt is excepted to discharge). After all possible pmts have been made, any remaining debts are discharged unless they're one of the exceptions to discharge (*FAT WED*). In some cases, a debt that's an exception to discharge will have been paid in the distr process. Ex: -if creditors are paid in full through the 8th priority (tax claims), the fact that a tax claim is an exception to discharge is irrelevant bc it has been paid. -if pmt is made only through the 6th priority, then any unpaid 7th priority (consumer deposits) claims are discharged (bc they're not on the exception list). Any unpaid 8th-priortiy (tax) claims aren't discharged bc they're an exception to discharge. Same w/ 9th-priority (DWI injury claims).

Common Features of Chapter 7 and 11 Cases; Involuntary Cases

Not ch 13! Unsecured creditors may petition a debtor involuntarily into bankruptcy proceedings under chs 7 and 11. For an involuntary petition, creditors must show that the debtor is gen not paying debts as they become due (in default). Farmers and NFP charitable orgs may not be petitioned involuntarily into bankruptcy. Only creditors who are owed, indiv or in aggregate, at least 15,775 in unsecured, undisputed debt may petition a debtor involuntarily into bankruptcy. No of creditors who must file depends on debtor's total no of creditors. If a debtor has < 12 creditors, any 1+ creditors owed at least 15,775 in unsecured debt may file. If debtor has 12+ creditors, at least 3 creditors owed at least 15,775 in aggregate in unsecured, undisputed debt must join in involuntary petition. Book ex for who must join petition: D has 4 creditors she isn't paying (just 1 need file). A is owed 15k, B is owed 4k, C is owed 4k, and E is owed 17k secured by D's 20k car. A must join in an involuntary petition; B and C's claims aren't sufficient. E may not file bc claim is adequately secured. The no of creditors and amts owed necessary to file a voluntary petition is a favorite exam issue. 2 key points: -usually this info is used to create distracters/wrong answers like "to file a voluntary petition, must owe at least 15,775" or "have at least 12 creditors." Memorize the 15,775 and 1 and 3 creditor minimums. These apply only to *involuntary* petitions! -if a prob says the no of creditors a debtor has, the examiners have often asked the no needed to file an involuntary petition. Ex: Q says debtor has 19 creditors, 3+ must file. If 8 creditors, only 1 need file. Unlike a voluntary petition, an involuntary petition does *NOT* constitute an order for relief. There's a gap btw the filing and the order of relief called the involuntary case gap. The ct will enter into an order for relief if the debtor doesn't object to the petition w/in 20 days. If the debtor objects, a hearing is held to determine the debtor's solvency. The test for solvency is whether the debtor is gen paying debts as they become due. Persons who become creditors of the debtor during the involuntary case gap pd are given high priority in recovering against the debtor's estate. If creditors improperly filed an involuntary petition (insufficient no of creditors, insufficient unsecured claims, debtor was paying debts as they became due, etc.) a ct may award the debtor compensatory damages, ct costs, attorney's fees, and punitive damages (if bad faith can be shown). The bankruptcy code does *NOT* req a debtor to be insolvent to file for bankruptcy. A voluntary petition may be filed by anyone who owes debts and an involuntary petition may be filed if the debtor is gen not paying debts as they become due, regardless of the debtor's ability to pay. An answer choice suggesting the debtor must be insolvent to file for/be petitioned into bankruptcy is wrong, but remember that an indiv consumer debtor's ch 7 case may be dismissed or converted to ch 13 if his inc is too high.

Worker Classification

Note that the laws discussed on the coming cards aren't state laws, even if they're state-run programs. All fed laws/regs. It's important for a bus to prop determine whether a person performing services for it is an employee or indep contractor. All of the payroll issues discussed in the coming cards arise only in an employer-employee setting, *NOT* when dealing w/ an indep contractor. When determining whether a worker is an employee or indep contractor, no one factor is determinative. It's a weighing process. Bus must consider: -whether the bus controls (or has the right to control) what the worker does and how he performs the work (right to control the manner and method of work indicates an employee). Primary consideration. -whether the worker owns his own bus, tools, etc (indicative of indep contractor). -whether the worker is paid by the job (indep contractor) or hourly or by salary (employee). -whether the job is of limited duration (indep contractor) or ongoing/continuous (employee). -whether the worker receives benefits (employee). For the rest of the cards related to other fed laws/regs, assume employee. Otherwise the laws don't apply.

Corporation; Officers: Rights, Duties, Obligations, and Authority

Officers are indiv agents (and employees) of the corp who ord conduct its day-to-day ops and may bind the corp to contracts made on its behalf. A person may hold > 1 office. Officers are selected by the BOD and may be removed by the BOD w/ or w/o cause. *NOT* elected by the SHs. Officers are corp agents and agency rules determine their auth (actual and apparent) and power. A corp pres will gen have apparent auth to enter into contracts and act on behalf of the corp in the ord course of bus. Corp officers, like corp directors, are subj to fiduciary duties and must discharge their duties in good faith and w/ the same care as an ordinarily prudent person in a like position. Like directors, officers may be indemnified for exps/judgmts from litigation brought against them in their corp capacity (unless bad faith), and they're protected by the bus judgmt rule. Officers may also serve as directors of the corp. An officer isn't req'd to be, but may be, a SH of the corp. The key to several past Qs has been the power structure of corps. Remember, the SHs gen have no direct power to manage the corp. They elect the BOD, but gen, the BOD doesn't manage the corp. Instead, it appoints officers to manage on a day-to-day basis. The SHs do not elect the officers, and neither do the SHs have the power to remove them. Officers serve at the discretion of the BOD.

Who May Be a Debtor

Only a person who resides, or has a place of bus, in the US is eligible to be a debtor under the bankruptcy code. Person gen incl IPC and the like. Limitation in ch 7 liquidations is no *RIBS*. *R*ailroads, *I*ns cos, *B*anks, *S*avings institutions, and *S*mall bus investmt cos may not file for bankruptcy under ch 7. Limitation in ch 11 record is no *BIBS*. IBS is the same, B changes. Anyone who may be a debtor under ch 7 may also be a debtor under ch 11 (except a stock*B*roker or commodity *B*roker). A *R*ailroad may be a debtor under ch 11. Switch R for B! Although ch 11 is intended primarily for bus debtors, an indiv is eligible for relief under it. GR for both ch 7 and 11 is IPC and voluntary or involuntary. Important to know who may/may not file under various chs. If the debtor is an indiv, credit counseling is req'd. Must occur no > 180 days before filing the bankruptcy petition. In addition, debtors filing under chs 7 or 13 must complete a financial mgmt course before their debts are discharged.

General Partnership/Joint Venture; Rights of Partners

Pship prop incl inv, PP&E, etc. A pship owns all money/prop contr'd to it by the partners and all other prop acq'd by it. Partners do *NOT* own pship prop. As a GR, partners have no right to possess or use pship prop other than for pship purposes. Thus: -an indiv partner may not assign/sell pship prop for his own benefit and -a partner's personal creditors can't attach pship prop to satisfy an indiv partner's debt. Book ex for pship prop v personal prop: A and B agree to form a pship to sell antique cars. A contrs 10 antique cars from his collection and B contrs 200k. The cars and cash are pship prop. A may no longer use the cars for personal use - even if they're titled in his name - and B may no longer freely spend the 200k. The cars/cash can be used only for pship purposes. A partner may assign his int (pship int is like owner's EQ) in the profits/surplus at any time. The assignee obtains the right to receive the partner's share of the profits. Does *NOT* become a partner so has *NO* right to attend pship meetings, inspect the pship books/records, vote, etc. An assignee can obtain such rights only if admitted to the pship as a partner, which gen reqs the approval of all the partners. The examiners like to ask abt the effect of a partner transferring his int in the pship w/o the consent of the other partners. Remember that such a transfer doesn't make the assignee a partner (can only be done w/ the consent of all partners). So the transferee has no power to manage the pship, inspect the books/records, vote, etc. Gen, the assignee's only right is to get whatever distr the assignor would have gotten. Same rule applies to a creditor w/ a charging order and an heir who receives a deceased partner's int. A creditor of an indiv partner may obtain from a ct a charging order against an indiv partner's share of profits (personal creditor attaching a partner's int). Remember that a personal creditor can't attach to pship prop though! Just the partner's int in profits from the pship. When a partner dies, his right to profits/surplus vests in his heirs. The partner's right to pship prop vests in the surviving partners (heirs don't get the prop bc it belongs to the pship). Every partner has the right to inspect/copy the books/records of the pship.

Affordable Care Act (ACA)

Purpose is to improve access to health care in the US by providing workers w/ access to affordable health care coverage. Health care coverage may be offered through: -a plan provided by the employer. -plan purch'd through the health ins mktplace, where employees may qualify for financial assistance. -coverage provided under a govt-sponsored program, like medicare, most medicaid, and health care programs for veterans. -direct purch by the employee from an ins co. Both employers and employees are req'd to participate. Certain employers must offer health care coverage or pay a penalty. An indiv must obtain health care coverage for himself, a spouse, and tax dependents, or pay a penalty. Both the employer and employee contr to the purch of affordable coverage (like FICA). The employer may subsidize the cost of the coverage in order to ensure it's affordable. The employee will pay a certain amt for coverage, whether purch'd through the employer or another source. Under the ACA, employers w/ 50+ full-time employees are called applicable large employers (ALEs). ALEs are req'd to provide full-time employees the opp to purch affordable min essential health care coverage for themselves and their dependents under an eligible employer-sponsored health care plan. -all types of employers can be ALEs, incl TE orgs and govt entities. -an employee is full-time if he was employed on avg at least 30 hrs/week or 130 hrs/mo. -coverage is considered affordable if the employee's contr to the plan doesn't exceed 9.5% of the employee's household inc for the taxable yr. -a dependent is an employee's child who has *NOT* reached the age of 26. -employers who do *NOT* comply w/ the ACA will pay a penalty for failure to do so. -employers are req'd to file annual info returns w/ the IRS and must also provide info to employees abt coverage. The ACA comes w/ an indiv mandate (a tax) reqing all Americans to buy health coverage or pay a fine. For low-inc indivs, the fed govt subsidizes the cost through a tax rebate, even if the indiv paid no inc taxes. Employees who have min essential coverage will report this fact on their TR each yr. The ACA does *NOT* create a national health ins plan. Sets national stds for how health ins is structured/priced and places new rqmts on indivs and employers. Bc purchasing coverage is mandatory, the ACA makes it illegal for an insurer to deny coverage to indivs w/ preexisting conditions or to charge more for their coverage.

Features of a Chapter 7 Liquidation; Reaffirmation of Discharged Debts and Revocation of Discharge

Reaffirmation of discharged debts: sometimes a debtor doesn't want a particular debt discharged in bankruptcy (like to maintain good relations w/ a creditor). The debtor may reaffirm such debts only if the agreemt to reaffirm the debt was made before the granting of the discharge. Revocation of discharge: bad faith, dishonest. A creditor or trustee may request a discharge be revoked if: -the debtor obtained the discharge fraudulently and the party seeking the revocation didn't discover the fraud until after the discharge was granted. -the debtor acq'd prop that would constitute prop of the estate and knowingly and fraudulently failed to disclose this fact. -the debtor failed to obey a ct order or answer material Qs or -the debtor hasn't given a satisfactory explanation for a failure to make docs available in connection w/ an audit that may be ordered by the US trustee or a mat misstmt in such docs.

The Securities Act of 1933; Exemption from Registration: Regulation D

Regulation D exempts private offerings and the SEC has 3 private offering exemptions under reg D; Rules 504, 505, and 506. The exemptions share certain gen conditions, but each also has specific conditions. Gen conditions that apply to all 3: -general solicitation sometimes prohibited: limitation of gen ads. Reg D is intended for private offerings, so the reg has a GR prohibiting gen advertising of the secs sold under reg D. However, there are exceptions under rules 504 and 506. -immediate resale to public prohibited: the purchasers may not immediately reoffer secs issued under reg D to the public. The issuer must insure that purchasers will hold for LT investmt (2 yrs +), not resale. Before 2 yrs is up, such secs are restricted, and the buyer can't resell them unless the resale falls under reg D or another exemption. -SEC must be informed w/in 15 days: the SEC must be notified of the issuance of secs under reg D w/in 15 days after the 1st sale. Rqmts of rule 504: $1M limit. To be exempt under rule 504, the issuance of secs may not exceed $1M w/in a 12-mo pd. Rule 504 has no limitation on the no/type of purchasers and gen doesn't req any specific disclosure to investors prior to the sale. If the rule 504 offering is registered under state law, the gen prohibition against gen advertising doesn't apply. Rqmts of rule 505: $5M limit. To be exempt under rule 505, the issuance of secs may not exceed $5M w/in a 12-mo pd. -secs issued under Rule 505 may be sold to any no of accredited investors and 35 or fewer unaccredited investors. An accredited investor is one such as an institutional investor, bank, officers/directors of the issuer, or an indiv w/ a 4-yr avg net worth of at least $1M excluding the value of the indiv's home. -bc of the limitation on unaccredited purchasers, the issuer must also make reasonable efforts to ensure that the purchasers are buying for themselves and not others. -if only accredited investors purchase, no disclosure is req'd. If there are *ANY* unaccredited investors, *ALL* investors must be given at least an annual report containing audited F/S. The examiners often try to trick you w/ the 35 unaccredited investor limit. Watch for fact patterns that state that reg D offerings can't be made to > 35 investors. Such a choice is incorrect bc gen there's no limit on the no of unaccredited investors under Rule 504. Moreover, the 35 investor limit under Rules 505 and 506 applies only to unaccredited investors. There can be any no of accredited investors. Note that the limitation goes to the no of actual purchasers, not the no of offerees.

The Securities Exchange Act of 1934; Reporting Requirements Continued

Report *5% TIP*: -*5%* or more owners: Any person acqing 5%+ beneficial oship in any EQ sec registered under the 34 act must file a report w/ the SEC, the issuer, and the exchange on which the sec is traded. The report must incl background info abt the purchaser, the source of his funds, and his purpose in buying. -*T*ender offers: tender offer is an offer to all SHs to purch stock for a spec'd price for a spec'd pd of time. Any party making a tender offer to purch 5%+ of the shares of a class of secs registered under the 34 act must file a report w/ the SEC, the issuer, and the exchange on which the shares are traded. The report must incl background info abt the purchaser, the source of his funds, and his purpose in buying. -*I*nsiders: officers, directors, > 10% SHs, acctants, or attorneys of a co registered under the 34 act. Must file a report w/ the SEC disclosing their holdings in the reported co and making monthly updates. The 34 act also limits insider trading by imposing absolute liab on any insider who makes a profit on the purch/sale of a reporting co's stock w/in a 6 mo pd (short swing profits). Have to give the $ back. -*P*roxy: written request for permission to vote a SH's shares at a SH meeting. Proxy solicitations in reporting cos must be reported to the SEC. If directors are to be elected at a meeting for which mgmt is seeking proxies, an annual report w/ an audited B/S and P/L stmt must be sent to all SHs entitled to vote. Proxy stmts must be sent to all SHs disclosing all facts pertinent to the matter on which the SHs will vote. Proxy stmts and any other docs that will be sent to SHs as part of the proxy solicitation must be filed w/ the SEC. SHs have a right to have proposals proper for consideration at the SHs' meeting incl in mgmt's proxy solicitation. Under section 18, a person can be held liable for intentionally making false/misleading stmt in a registration stmt or any report req'd under the 34 act. Bc liab is imposed only for intentional misconduct, good faith and a lack of knowledge of a stmt's falsity are defenses to an action under section 18. Must know the 3 periodic reports (10-K, 10-Q, 8-K). Often, examiners only ask the names of the other req'd reports, 5% TIP. *5%*+ owners must report, *T*ender offers must be reported, *I*nsider trading must be reported, and *P*roxy solicitation and stmts must be reported.

The Securities Act of 1933; Exemption from Registration: Regulation D Continued

Rqmts of rule 506: unlimited dollar amt. Under rule 506 there's no limit on the amt (dollar value) of stock that may be sold. -secs issued under Rule 506 may be sold to any no of accredited investors and 35 or fewer unaccredited *but sophisticated* investors (the issuer must reasonably believe the unaccredited investor has sufficient knowledge/experience in financial matters to be capable of evaluating the risks of the investmt). Like 505 but sophisticated. -if only accredited investors purch, no disclosure is req'd and the prohibition on gen advertising doesn't apply if the issuer takes reasonable steps to verify that the purchasers are accredited. If there are *ANY* unaccredited investors, *ALL* investors must be given at least an annual report containing audited F/S. Like 505. The examiners ask picky Qs abt rules 504, 505, and 506, so need to know the info, especially concerning limitations on amts and investors. Remember that gen solicitation gen is prohibited under all 3 rules. Summary chart for regulation D: 1. Rule 504: -gen advertising allowed? sometimes, if registered under state law. -notice req'd to SEC? 15 days. -reoffers to public prohibited? yes. -dollar limitation: $1M. -limits on unaccredited buyers? no limit. -limits on accredited buyers? no limit. 2. Rule 505: -gen advertising allowed? no. -notice req'd to SEC? 15 days. -reoffers to public prohibited? yes. -dollar limitation: $5M. -limits on unaccredited buyers? up to 35. -limits on accredited buyers? no limit. 3. Rule 506: -gen advertising allowed? sometimes, if only accredited investors purch. -notice req'd to SEC? 15 days. -reoffers to public prohibited? yes. -dollar limitation: none. -limits on unaccredited buyers? up to 35, who must be sophisticated. -limits on accredited buyers? no limit.

The Securities Exchange Act of 1934; Antifraud Provisions: Rule 10b-5

Rule 10b-5, promulgated by the SEC under section 10(b) of the 34 act, prohibits fraud in collection w/ the purch/sale of any sec. Applies whether or not the secs are of a registered co. *Anyone* who sells/buys secs using fraud can be liable. A violation of rule 10b-5 can result in civil damages, an SEC injunction, or criminal fines/penalties. To recover damages for a violation of Rule 10b-5, plaintiff must prove all 5 elements of *MAIDS* (plus interstate commerce so fed law applies), unlike 11 where you don't need to prove reliance or scienter. -*M*aterial *M*isrep or *M*aterial omission of fact: plaintiff must prove the defendant made a mat misrep or mat omission of fact in connection w/ the sale. Book ex for fraud in purch/sale of shares: D calls P and tells him she holds B stock w. a mkt value of $50, but she will sell it to him for $25/sh. In fact, the stock's mkt value is $15. P buys D's stock. The fraud here was in connection w/ a purch/sale. Book ex for fraud not in connection w/ purch/sale: P is B's largest SH. To keep P from selling B stock, D, the president of B, tells P she is abt to announce that B had large profits during the past yr. In fact, B incurred huge losses. P holds onto his stock, and the value plummets after D announces the loss. The fraud was not in connection w/ a purch/sale of stock since P didn't buy/sell shs. -*A*ctual reliance: the plaintiff must have relied on the defendant's misrep. -*I*nduced; plaintiff bought/sold secs: rule 10b-5 applies only if the plaintiff bought/sold secs. -*D*amages; plaintiff suffered a loss: the plaintiff must prove he suffered a loss as a result of the fraud. -*S*cienter: intent to deceive or reckless disregard for the truth. The plaintiff must show scienter (the defendant intended to deceive or made false stmts w/ reckless disregard for the truth). Negligence on the part of the defendant isn't sufficient to satisfy this element. The intent req'd for a rule 10b-5 violation has been the focus of a no of past exam Qs. Sim intent isn't req'd to prove a violation of rule 11 under the 33 act. This diff has been important in Qs. -interstate commerce: the plaintiff must show that a means of interstate commerce was involved. Any use of the mail/phones or a national securities exchange is sufficient to satisfy this element. So fed law applies.

Corporation; Shareholders: Rights, Duties, Obligations, and Authority

SHs have the right to vote to elect (typically annually) or remove directors. Also have the right to vote on whether to approve fundamental changes to the corp, like dissolution. GR: 1 sh, 1 vote, unless the articles of incorp provide otherwise. Exception is cumulative voting for directors. The articles can give SHs the right to cumulative voting w/ respect to electing directors. In cumulative voting, each sh is entitled to 1 vote for each director position that's being filled, and the SH may cast the votes in any way, incl casting all for 1 candidate. Helps minority SHs get rep on the BOD. Gen, SHs do *NOT* have the right to a distr (incl cash divs and repurchases of shares) unless/until it's declared by the BOD. Once the BOD declares a distr, the SHs are treated as unsecured creditors of the corp to the extent of the div. Distrs decr the corp's SHs' EQ. The fact that SHs have the status of unsecured creditors once a div is declared has often been a correct answer choice on past exam Qs. A corp need not give each SH an equal right to receive distrs. Shs may be divided into classes w/ varying rights. Preferred SHs get a preference for divs. -noncumulative preferred shares: shs w/ a preference usually are entitled to a fixed amt of $$ (like $5/yr if the preference is a div preference) before distrs can be made w/ respect to nonpreferred shs. -cumulative preferred shs: w/ these, if a div is not declared in a particular yr, the right to receive the preference accumulates and must be paid before nonpreferred shs may be paid any div. Divs carry over to future yrs. Cumulative preferred divs are an exam fav. Key is to remember that although these divs accumulate even if not declared, no div can be paid to common SHs until all cumulative divs are paid (even for yrs where divs weren't declared). No div is due until it's declared by the BOD. Stock divs are issued from a corp's own auth'd but unissued shs. Bc no assets are distr'd, the SHs receiving the stock gen do *NOT* owe any taxes on it, the solvency of the corp remains the same, and there's no damage to creditors and SHs (unlike cash divs). A stock div is *NOT* a distr of corp assets.

Bankruptcy Questions

Savings and loans may not participate in ch 11 or 7 bankruptcy proceedings. Ins cos can't go into bankruptcy voluntarily/involuntarily under the bankruptcy code.

Common Features of Chapter 7 and 11 Cases; Section 341 Meeting and Property of the Bankruptcy Estate

Section 341 meeting: creditor's meeting. Ord, w/in 20-40 days after the order for relief, a meeting of the creditors (a section 341 meeting) is held. *ALL* interested parties, incl creditors, the bankruptcy trustee, and the debtor must be given notice of the meeting. Prop of the bankruptcy estate: the debtor's estate (assets available to pay off creditors) gen incl all of the debtor's real/personal prop at the time of filing. The estate also incl: -inc generated from estate prop (like int from bonds that are part of the estate) rec'd w/in 180 days (6 mos) after the filing of the petition for relief. -prop the debtor receives from *DII*; *D*ivorce, *I*nheritance, or *I*nsurance w/in 180 days after the filing of the petition. The fact that an inheritance rec'd w/in 180 days after filing a petition for relief is incl in the debtor's estate has been tested often. -leases of prop may be assumed/retained by the trustee, assumed/assigned to another, or rejected by the trustee. Prop excluded from the estate: -post-petition earnings of an indiv debtor, spendthrift trusts, contrs to educational IRAs and qualified state tuition programs made at least 365 days before the petition was filed, and contrs by employees to qualified employee benefit plans are excluded from the estate. -an indiv debtor is entitled to exempt certain prop under the bankruptcy code, gen things necessary to live unless specific lien on prop. The code also allows states to adopt their own exemptions. ~ 2/3 of states have opted out of the fed exemption system in favor of their own. The trustee is a hypothetical lien creditor as of the filing date, treated as having a lien on all of the debtor's prop the instant the bankruptcy petition is filed. This means the trustee has priority over all creditors except those w/ prior perfected security ints or prior statutory or judicial liens. The trustee will not prevail against PMSIs in noninv collateral that are validly perfected under state law and w/in 30 days after the debtor receives possession of the collateral. Recall that in most states such perfection isn't valid under state law unless it occurs w/in 20 days after the debtor receives possession of the collateral. Book ex for PMSI and bankruptcy filing: on 7/1, S sells and delivers to D on credit certain equip and properly reserves a sec int in the equip. On 7/5, D files a petition in bankruptcy. On 7/9, S perfects his int in the equip by proper filing. S' PMSI prevails over the bankruptcy trustee's int.

Limited Liability Partnership (LLP)

Sim gen pship. GR: to limit liabs. Must file w/ state. A LLP is sim a gen pship in most respects, incl the sharing of P/Ls, and gen all of the advantages/disadvantages of a gen pship mentioned previously apply to a LLP. Major diffs incl personal liab and formation. 1. Diff; personal liab: -partners are gen not liable for acts of fellow partners, employees, or agents: an LLP differs from a GP in that a partner in an LLP isn't personally liable for the obligations/liabs of the pship arising from errors/omissions/negligence/malpractice/wrongful acts committed by another partner or an employee/agent/rep of the LLP. -personally liable for own negligence and that of people under direct control: LLP partners are liable for their own negligence/wrongful acts and for the negligence/wrongful acts of those under their direct supervision/control. -gen not personally liable for debts and contractual obligations of the LLP. 2. Diff; formation: -LLP must file w/ the state: gen, to become an LLP the pship must file a doc w/ the state (called a registration, stmt of qualification, application for registration, or certificate of LLP). Some states restrict LLPs only to the learned professions, like accting or law. -contents of certificate of LLP: gen, registration must provide info like the LLP's name, the name/location of its registered office, the no of partners, a descr of the pship bus, etc.

The Securities Act of 1933; Exemption from Registration: Regulation A

Simplified filing, short form registration. Reg A was modified in 2015, and the mod reg is often referred to as reg A+. Unlike reg D, reg A is *NOT* a registration exemption, but rather is a simplified form of registration designed to allow small cos to make pub offerings more quickly and w/ less cost than is req'd using full registration. Cos using reg A file an offering stmt, which consists of a notification and an offering circular. Cos may test the waters (TTW) 1st before filing, if offers are preceded or accompanied by a preliminary offering circular. Reg A is intended to allow small cos to make IPOs. These cos may not use reg A: 1. SEC reporting cos. 2. Cos planning to merge w/ or acq an unidentified co. 3. Cos seeking to sell ints in oil, gas, or other mineral rights and 4. Cos disqualified by the SEC. There are 2 offering tiers under reg A: tier 1 and 2. Summary of sims and diffs btw them: Tier 1: -dollar limitations: up to $20M w/in a 12-mo pd; not > $6M of the offers to sell can be from sec holders who are affiliates of the issuer. -investor limitations: none. -states may req review: yes; in coordination w/ SEC review. -is gen solicitation allowed? Yes. -must F/S be audited? No, just reviewed. -must filings be updated? no. Tier 2: -dollar limitations: up to $15M w/in a 12-mo pd; not > $15M of the offers to sell can be from sec holders who are affiliates of the issuer. -investor limitations: unaccredited investors may *NOT* invest more than the greater of 10% of their inc or 10% of their net worth; unaccredited entities may not invest > 10% of their rev/assets, whichever is greater. Not 35 rule. -states may req review: no; state review is preempted by reg A. -is gen solicitation allowed? yes. -must F/S be audited? yes, audited F/S and B/S from the past 2 yrs are req'd. -must filings be updated? yes, annual, semiannual, and current event reports must be filed. Gen solicitation is allowed for both bc simplified, not private offering.

Anti-Fraud Provisions of the 1933 Act

Still apply to mat misreps in NFP F/S. Where a prospectus is issued and contains mat misreps, liab can be imposed under the 33 act. Doesn't matter that NFP secs are exempt from registration.

Corporation; Fundamental Changes Continued Further

Still on DA*M*S. An exception is the merger of a sub (short-form merger). A parent corp owning 90% + of a sub corp may merge the sub into the parent w/o the approval of the SHs of either corp or the approval of the sub's board. Neither entity. The parent must mail a copy of the plan to each SH who has not waived his right. A corp merged into a surviving corp ceases to exist as a sep entity. The surviving corp has all rights, liabs, and obligations of the merged corps. When a sh exchange takes place, the shs are exchanged as the plan provides, and holders are entitled only to the rights of the exchanged shs. If a corp is faced w/ the prospect of being taken over and the BOD wants to resist the takeover attempt, may do so in a no of ways, incl: -persuading SHs to reject the offer. -suing the person/co attempting the takeover for misrep or omission and obtaining an injunction against the takeover. -merging w/ a white knight (co w/ which the directors want to merge). -making a self-tender (offer to acq stock from its own SHs and thus retain control to prevent a takeover). -paying greenmail (pay the person/co attempting the takeover to abandon the takeover attempt). -locking up the crown jewels (giving a 3rd party an option to purch the co's most valuable assets). -undertaking a scorched earth policy (to sell off assets or take out loans that would make the co less financially attractive). -applying shark repellent, which means amending the articles of incorp/bylaws to make a takeover more difficult (like req a large no of SHs to approve the merger). Termination of a corp, dissoution (*D*AMS), is a fundamental change, reqing director and SH approval. Dissolution can also be pursuant to a ct order. After dissolution, the corp continues in existence for the purpose of winding up. Liquidation involves the process of collecting the corp assets, paying the exps involved, satisfying creditors' claims, and distributing the net assets of the corp.

Workers' Compensation

Strict liab. State-run programs designed to enable employees to recover for injuries incurred while on the job. In most states, coverage is compulsory. Employers are strictly liable regardless of fault. Only rqmt is that the employee's injury occurred while acting in the scope of employmt. Fault is the most frequently tested issue in workers' comp. Remember that an employee can collect even if the employee was negligent, grossly negligent, or assumed the risk. Employee can't recover for injuries resulting from intoxication, fighting, or self-inflicted wounds. The purpose of workers' comp is to enable employees to recover from work-related injuries, regardless of negligence. Most employers must participate in workers' comp program. There are exceptions for agricultural workers, domestic workers, casual workers (like temp office workers), public employees, and indep contractors. Some states also exempt employers who have up to only 3 or 4 employees. The employer pays for workers' comp by purchasing ins from the state or a private carrier. Some states also allow employers to be self-insuring if they can prove they are financially responsible. In most states, coverage is compulsory. In states in which coverage isn't mandatory, an employer who elects not to participate in workers' comp gives up the common-law defenses of contributory negligence, assumption of risk, and the fellow servant doctrine. Also, damage awards aren't limited to what W/B recovered under workers' comp. Workers' comp ins premiums are ord bus exps deductible by the employer. Bc employees don't pay, no deduction for the worker. Workers' comp provides benefits for any injury/disease (incl aggravations of existing diseases) resulting from employmt. Benefits incl money for loss of inc, disability, loss of limbs, prosthetic devices, medical services, burial costs, and survivors' benefits. The program works like other ins, benefits are *NOT* limited to what was paid in on the employee's behalf. GR: can't sue employer but can sue 3rd parties.

Section 18 of the 1934 Act

Subjects a defendant to liab for false/misleading info in the registration stmt or other req'd reports (10-K, 10-Q, 8-K). The defendant isn't liable if they can prove lack of scienter.

General Partnership/Joint Venture; Distribution of Assets - Final Accounting

Terminate ops. When a solvent pship is dissolved an its assets are reduced to cash, the cash must be used to pay the pship's liabs in this order (1): -Creditors: creditors, incl partners who are creditors, must be paid before the non-creditor partners receive any pmts. -Partners: after obligations to creditors are satisfied, each partner is entitled to pmt, 1st to return their contrs and then on acct of profits. (2) To determine the amts due/owed, deduct from the assets left upon dissolution any amts owed to creditors (incl partners who are creditors) and then deduct the amts needed to return the partners' contrs (if not already repaid). (3) if money still remains, it's a profit that must be divided among the partners. If the assets at dissolution are < what's needed to pay the creditors and return contrs, there's a loss that must be divided among the partners. Either way, remember that unless the pship agreemt provides otherwise, profits are divided equally among partners and losses are divided the same way as profits. Book ex for dissolution of pship: A, B, and C contr'd 30k, 15k, and 5k (50k total), respectively, to the ABC pship. Upon dissolution, after paying all creditors, 20k remains. The pship has suffered a 30k loss bc 50k was contr'd to cap and only 20k remains. The pship agreemt is silent as to how loses are to be divided, but says profits are 40% to A, 25% to B, and 35% to C. Bc the pship agreemt is silent as to loss allocation, they'll be allocated in the same proportions as profits. 40% to A (12k), 25% to B (7,500), and 35% to C (10,500). -A is entitled to receive 18k (30k cap contr - 12k share of loss). -B is entitled to recieve 7,500 (15k cap contr - 7,500 share of loss). -C owes 5,500 (5k cap contr - 10,500 share of loss). Book ex for when partner refuses to pay: if there's a loss and some partners refuse to contr, aren't subj to process (aren't w/in a cts jurisdiction), or are insolvent, the remaining partners must share the extra loss proportionally. So if in the above ex C refused to pay anything else, A and B would have to share the 5,500 loss on a 4 to 2.5 basis (A would have to deduct an extra 3,385 from his cap and B would have to deduct an extra 2,115 from her cap). Of course, if C is solvent, A and B can seek to recover the 5,500 from C in an action for indemnification.

Federal Securities Regulation

The 2 major securities acts that you must know are the Securities Act of 1933 and the Securities Exchange Act of 1934. The 1933 act regulates OG issuance of secs (IPO), and the 1934 act regulates purchases/sales after initial issuance. A good rule of thumb for determining whether something is a sec is to ask whether the investor expects to take part in the mgmt of the bus. If the investor is passive (relies solely on the mgmt of others to make $$$), the investmt most likely is a security. Stocks, bonds, debentures (unsecured loan certificates issued by a co), oil well ints, stock ops, collateral trust certificates, warrants, and limited phsip ints are deemed secs and investmt contracts. CDs and gen pships ints are gen *NOT* deemed to be secs. In the case of gen partners, each partner is expected to participate in running the bus.

Affordable Care Act (ACA) Continued

The employer and employee must pay a fee for failure to comply w/ the ACA. Employee penalty: An indiv owes the fee for any month that the person, a spouse, or any tax dependents don't have health ins that qualifies as min essential coverage. The penalty is the higher of: 1. 2.5% of household inc, w/ a yearly max equal to the national avg price of a Bronze plan sold through the health ins mktplace. 2. $695/adult plus $347.50/child under 18, w/ a fam max of $2,085. The indiv pays the fee when filing a fed TR for the yr there's no ins coverage. If the indiv doesn't pay the fee, the IRS will hold back the amt of the fee from any future tax refunds. Normal liens, levies, or criminal penalties for failing to pay taxes don't apply for failure to pay the fee. The fee is indexed for inflation. Employer penalty: an ALE may be subj to 1 of 2 potential employer shared responsibility pmts (but *NOT* both). Employer is not obligated to calc its liab and should not make a pmt w/o 1st being contacted by the IRS. 1. Penalty type 1: an ALE will owe the 1st type of employer shared responsibility pmt if it doesn't offer min essential coverage to at least 95% of its full-time employees (and their dependents) AND at least 1 full-time employee receives the premium tax credit for purchasing coverage through the health ins mktplace. -on an annual basis, the pmt is equal to 2k (indexed for inflation in future yrs) for each full-time employee, w/ the 1st 30 employees excluded from the calc. OR (not both!) 2. Penalty type 2: even if an ALE member offers min essential coverage to at least 95% of its full-time employees (and their dependents), it may owe the 2nd type of employer shared responsibility pmt for each full-time employee who receives the premium tax credit for purchasing coverage through the mktplace. Gen, a full-time employee could receive the premium tax credit if: -the min essential coverage the employer offers the employee isn't affordable. -the min essential coverage the empoyer offers the employee doesn't provide min value or -the employee is not one of at least 95% of full-time employees offered min essential coverage. -on an annual basis, the pmt is equal to 3k (indexed for inflation in future yrs) for each full-time employee who receives the premium tax credit. The total pmt in this instance can't exceed the amt the employer would have owed had the employer offered min essential coverage to at least 95% of its full-time employees (and their dependents). None of the pmts req'd of the employer under the employer shared responsibility provisions are tax deductible for the employer.

Federal Insurance Contributions Act (FICA) Continued

The employer's contr is deductible as an ord bus exp. Employee's contr is *NOT* deductible by the employee. Bc a SE person pays both contrs, 1/2 of the SE tax is deductible in arriving at AGI. FICA provides a no of benefits, incl disability pay, retiremt pay, survivor's benefits, dependent's benefits, and medical benefits under medicare (*NOT* medicaid, which is a state-run program). Benefits are available to all covered employees regardless of whether they're receiving benefits from a private plan. Employees may not opt out of social sec, even if covered by a private plan. Most important things to remember abt social sec (FICA) for the exam: -the employer must pay the tax and collect the employee's portion of the tax. -all inc derived from labor is taxed, unearned inc isn't taxed. -all employees are subj to the tax up to a max dollar amt for the social sec w/ no limit on the Medicare. SE inc is subj to both employer/employee taxation for inc over $400.

Common Features of Chapter 7 and 11 Cases; Property of the Bankruptcy Estate Continued

The trustee also has the power to set aside fraudulent transfers made w/in 2 yrs of the filing date. A fraudulent transfer is any transfer made w/ the intent to hinder/delay/defraud creditors or any transfer in which the debtor rec'd less than equivalent value while the debtor was insolvent. Debtor is insolvent here. Book ex for fraudulent transfers: a few days before filing a voluntary petition in bankruptcy and while debtor was insolvent., debtor gave friend a 5k cash gift. This can be set aside/recovered from friend as a fraudulent transfer. The trustee has the power to set aside/disaffirm preferences (90 days/1 yr). When the pmt is set aside, the pmt is taken back from the creditor who rec'd it and becomes part of the bankruptcy estate. Debtor is insolvent here. A preferential pmt is: -a *transfer* made to/for the benefit of a creditor; -on acct of an *antecedent debt* (already existing) of the debtor.; -made w/in *90 days* prior to the filing of the petition (1 yr if the creditor is an insider, like an officer of the debtor org or a close relative to the debtor); -made while the debtor was *insolvent* and -results in the creditor *receiving more than they would have rec'd* under the bankruptcy code. Preferential pmt is a heavily tested issue. Memorize the definition and explanations. Definitions of key parts of preferential pmt definition: -transfer: incl not only the pmt of $ or the giving of prop, but also the giving of a security int. Book ex for transfer: D, a retailer, owed C money. A few days before D filed her bankruptcy petition, gave C a security int in all of D's inv, which C perfects. C's int can be set aside as a preference. -antecedent (preexisting) debt: rather than a contemporaneous exhange. Prepaying or accelerating pmt. A pmt is a preference only if it's for antecedent/preexisting debt. A contemporaneous exchange for new value isn't a preference. Book ex for contemporaneous exchange for value: a few days after D, a retailer, filed for bankruptcy, she rec'd from A, a supplier, 6 cases of goods to be put into her inv. Paid for the goods in full on their arrival. No preference, contemporaneous exchange for value. The exception on contemporaneous exchange for new value has often been tested on past exams.

Corporation; Directors: Rights, Duties, Obligations, and Authority Continued

Under the right to rely, a director is entitled to rely on info, opinions, reports, or stmts (incl F/S) if prepared by: -corp officers, employees, or a committee of the board whom the director reasonably believes to be reliable and competent or -legal counsel, acctants, or other persons as to matters the director reasonably believes are w/in such a person's prof competence. This is basically due diligence. Directors owe their corp a duty of loyalty and must act in the bests ints of their corp. The duty of loyalty prohibits directors from competing w/ the corp, but doesn't necessarily prohibit them from transacting bus w/ the corp (buying from/selling to the corp). An action in which a director has a conflict of int will be upheld only if: -after full disclosure the trans is approved by a disinterested majority of the BOD or the SHs or -the trans was fair and reasonable to the corp. The BOD has the power to set director comp. Gen, corps are allowed to indemnify directors for exps for any lawsuit brought against them in their corp capacity. The corp may also pay any judgmt imposed in a lawsuit on the director, except in a SH derivative suit. No indemnification if bad faith.

Limited Liability Company (LLC) Continued

Unless the articles or an op agreemt provides otherwise, all members have the right to participate in mgmt decisions of the LLC. -member-managed LLC: if the members are managing the LLC, each member is an agent of the LLC and has the power to bind the LLC by acts apparently carrying on the bus of the LLC. -manager-managed LLC: if mgmt is by managers, each manager is an agent of the LLC and has the power to bind the LLC. In this case, the members are not agents of the LLC and do not have the power to bind it. Voting strength is proportional to contrs (like a corp). Ex: a member who contr'd 5% of the LLC's current cap is entitled to 5% of the total vote. Unless the articles or an op agreemt provide otherwise, P/Ls of an LLC are allocated on the basis of the members' contrs in most states (like a corp). Under the ULLCA, followed by only a few states but sometimes specifically tested on the exam, profits are shared equally, regardless of cap contrs. Most statutes provide that, unless the op agreemt provides otherwise, a member of an LLC may *NOT* transfer all of his int in the LLC w/o the consent of all other members (like a pship). A member is free to assign his int in distrs (like of profits or on dissolution), but is not free to assign his rights to manage the LLC. Transferability of oship is sim a pship. Each member of an LLC is entitled to inspect/copy the books/records of the LLC during reg bus hrs (like a pship). A LLC has a limited life (like a pship). Will dissolve upon: -expiration of the pd of duration stated in the articles. -the consent of all members. -the death, retiremt, resignation, bankruptcy, incompetence, etc. of a member (unless the remaining members vote to continue the bus). *These events dissociate the member*. -a judicial decree or administrative order dissolving the LLC for violation of law.

Corporation; Shareholders: Rights, Duties, Obligations, and Authority Continued

Upon 5 days' written notice stating a proper purpose (one related to the SHs rights in the corp) a SH may inspect/copy the corp's records. SH may send his attorney, acctant, or other agent to inspect. This right can't be abolished by the articles/bylaws. The examiners often ask abt SHs' inspection rights. Key is that the SHs (or their agent, attorneys, acctants, etc.) can inspect for any proper purpose (to start a derivative suit, to solicit SHs to vote for certain directors, etc.), but SHs can be denied inspection for improper purposes (like to get names for a retail mailing list). When a corp proposes to issue additional shs of stock, the current SHs often want to purch shares to maintain their proportional voting strength. The common law granted SHs such a right, the preemptive right. Under the RMBCA, preemptive rights do *NOT* exist unless the articles of incorp provide for them. When a corp has a legal cause of action against someone but refuses to bring the action, the SHs may have a right to bring a SH derivative action to enforce the corp's rights (SHs rep the best ints of the corp, so $ goes to corp). Such an action may be brought against directors of the corp or outsiders. *Derivative* actions may be brought only to vindicate wrongs against the corp. If a SH seeks to vindicate the SH's own rights against the corp, a *direct* action by the SH against the corp is approp, rather than a derivative action.

Voluntary Dissolution and Termination of a Corporation

Voluntary dissolution of a corp reqs the filing of articles of dissolution w/ the state.

The Securities Exchange Act of 1934; Registration Requirements

While the secs act of 1933 is concerned w/ the initial issuance of secs, the 1934 securities exchange act is concerned w/ exchanges (sales, purchases, etc.) of secs *after* they're issued. The act has registration and reporting provisions that apply only to certain cos and antifraud provisions that apply to all purchasers/sellers, regardless of registration. So key parts are (1) sales/purchases of secs after they're issued, (2) reporting provisions applicable to certain cos, and (3) antifraud provisions applicable to all purchasers/sellers. The SEC can seek suspension or revocation of a co's registered secs for violation of the 34 act's registration or reporting rqmts. Note that prosecution for criminal violations of the 34 act are undertaken by the dptmt of justice and not the SEC (which investigates). The 1934 act reqs the following to register w/ the SEC (*memorize*!): -any cos whose shares are traded on a national exchange. -cos that have > 10M in assets and at least 2k SHs in any outstanding class (large private cos). -cos that have > 10M in assets and at least 500 SHs who are not accredited, in any outstanding class (large private cos). -national stock exchanges, brokers, and dealers. On past exams, conditions that subject a corp to the reporting rqmts of the 34 act have been a key issue, so memorize. The registration stmt must incl the co's fin structure; nature of its bus and outstanding secs; the names/remuneration (money paid for a work/service) of directors, officers, underwriters, and 10%+ SHs; outstanding options; and mat contracts. The registration stmt must also incl F/S audited by a pub accting firm registered w/ the PCAOB. Securities of investmt cos, savings and loans, and charitable orgs are exempt. Examiners often ask abt reporting cos, those req'd to register under the 34 act. Remember that registration is req'd if the shares are sold on a national exchange. Registration is equally req'd if the co has (i) at least 2k SHs or at least 500 unaccredited SHs and (ii) > 10M in assets.