REG Wiley Module 5

Joint Venture

Term often used to denote a one-shot general partnership-type relation. Thus, if Matt and Adelita join forces to provide an ongoing full-menu catering business, they have a general partnership. However, if they agreed to work together to provide full-menu service for just a single, big dinner, they might be said to have formed a joint venture. Joint ventures are governed by general partnership law, so the distinction between the two is generally unimportant for legal purposes.

Partnerships- Financial Structure

1. capital accounts 2. interest 3. right to profits 4. distributions in kind

Termination of Sole Proprietorship

A sole proprietorship naturally terminates when the sole owner dies or otherwise departs the business. The owner may terminate the business at any time he or she chooses to do so.

operations of general partnership

Absent agreement to the contrary, all partners have equal rights in the management and conduct of business affairs. Absent agreement to the contrary, majority vote governs all ordinary course-of-business matters. However, unanimity is needed to take actions contrary to the partnership agreement or to take action regarding "extraordinary matters," which might include such actions as: Admitting a new partner to the partnership Assigning partnership property

partnership right to profits

Absent agreement to the contrary, profits and losses are to be equally shared by the partners. If the partners agree to share profits in some proportion other than equally, but make no agreement regarding losses, losses will be shared in the same proportion as profits. Note that RULPA provides for limited partnerships that profits will be divided as providing in writing in the partnership agreement. Absent such an agreement, they will be divided according to capital contributions made and not returned.

liquidation of a corporation

After dissolution, the corporate business and affairs must be wound up and liquidated. The directors have a duty to "discharge or make reasonable provision" for claims. They must then distribute assets to shareholders. Directors will not be liable to claimants with regard to claims barred or satisfied if they have complied with the Revised Model Business Corporation Act's (RMBCA's) statutory procedures for:Giving notice to known claimants;Publishing notice of dissolution;Requesting that other claimants present their claims; andObtaining appropriate judicial determinations

par value

The RMBCA has abolished the concept, but its use persists in many states. The issuance of no par is also permitted. Par value is not always a gauge of a corporation's solvency, because watered stock (stock issued in exchange for consideration that is less than the par value of the shares) is sometimes issued. In states that still require that consideration be at least equal to the par value, corporations use nominal par value (typically a very low value) to preserve maximum flexibility to issue shares in exchange for at least the par value.

a partnership is distinct from its partners when

The assets of a partnership are treated as those of the business unit. Title to real property may be acquired in the partnership's name. Each partner is considered a fiduciary of the partnership. Each partner is considered an agent of the partnership. The partnership may sue and be sued in its own name. Therefore, a judgment against the partnership is not a judgment against the partner.

Today, if stock is issued for less than par (in states where that concept is still recognized) or less than the authorized (by the board of directors) purchase price, then the liability to creditors and other stockholders may be placed upon:

The board who allowed the sale; The buyer who paid too little; and Transferees of the original buyer who both know that he or she paid too little and who pay too little themselves.

Among the events that cause a person to be dissociated as a member from an LCC, according to RULLCA, are the following:

The person gives notice of express will to withdraw; An event causes dissolution based on the operating agreement; The person is expelled pursuant to the operating agreement; The person dies; and/orThe person is a corporation, partnership, or other organization that has been dissolved.

termination of LPs, LLPs, and LLLPs

The process of dissociation, winding up, and liquidation (termination) for the various forms of limited partnerships (including LLPs and LLLPs) is sufficiently similar to that of general partnerships that it need not be separately treated. The departure of a limited partner will not result in the dissolution of a limited partnership, and the departure of a general partner need not do so either with proper planning.

Termination of General Partnership

The process to end a partnership may be governed by the partnership agreement. If it is not, the Revised Uniform Partnership Act (RUPA) provides a scheme that consists of dissociation, dissolution, and winding up (also known as liquidation). The partners' management rights (except with regard to winding up) terminate at the end of the partnership.

operations of a sole proprietorship

The sole owner of a sole proprietorship makes all important decisions or delegates these decisions to someone of his or her choosing.

Advantages of Sole Proprietorship

Total control—The owner needs answer to no other owner; he or she may make all decisions. Other persons, such as creditors, might, of course, have something to say about how the business is run. Simplicity—No formal documents need be filed to form a sole proprietorship, although even a sole owner of a business ultimately will have to deal with legal formalities such as tax forms, licenses to undertake a particular activity, and permission to do business in foreign jurisdictions. Taxation—All income from the business accrues to the sole owner who is responsible for paying the individual income taxes on that amount.

Which of the following statements is correct concerning the similarities between a limited partnership and a corporation? a. Each is created under a statute and must file a copy of its certificate with the proper state authorities. b. All corporate stockholders and all partners in a limited partnership have limited liability. c. Both are recognized for federal income-tax purposes as taxable entities. d. Both are statutorily permitted to exist in perpetuity.

a. Each is created under a statute and must file a copy of its certificate with the proper state authorities. Both of these organizations require special steps in their creation. One of these steps is the filing of a certificate, usually with the Secretary of State.

Which of the following circumstances may permit the piercing of the corporate veil of a closely held corporation and therefore cause its shareholders to be held personally liable? I. The corporation is thinly capitalized. II. The corporation borrows money from a shareholder without giving the shareholder a security interest in corporate assets. a. I only. b. II only. c. Both I and II. d. Neither I nor II.

a. I only. Thin capitalization, which endangers the legitimate interests and expectations of third-party corporate creditors, particularly tort creditors, can be grounds for piercing the corporate veil.

Under the Revised Uniform Limited Partnership Act, which of the following statements is correct regarding limited partnerships? a. Limited partners may lose limited liability if they participate in management activities. b. Limited partnerships may legally exist without filing a certificate of limited partnership. c. Limited partners have the same rights, responsibilities, and authority as general partners. d. Limited partners may contribute cash only and may not contribute services as their capital contributions.

a. Limited partners may lose limited liability if they participate in management activities. While limited partners may consult with the general partners, work for the partnership in a non-management capacity, guaranty its obligations and do a number of other things without forfeiting limited liability, they may not participate in management. They are granted limited liability and in exchange are expected to remain passive investors.

Quality tests

Traditionally, proper consideration included only money paid, services performed, and property received. Traditionally, improper consideration included unsecured promissory notes, promises to perform future services, and promises to transfer property. However, the modern trend is to recognize as valid consideration: "Any tangible or intangible benefit to the corporation, including cash, promissory notes, services performed, contracts for services to be performed, or other securities of the corporation,"The board of directors can adequately protect the corporation by issuing shares only where there is a good chance it will benefit the corporation because the promissory notes will probably be paid, the services will probably be performed, etc.

Under the Revised Model Business Corporation Act (RMBCA), which of the following items of information must be included in a corporation's articles of incorporation (charter)? a. Name and address of each incorporator. b. Nature and purpose of the corporation's business. c. Name and address of the corporation's promoter. d. Election of either C corporation or S corporation status.

a. Name and address of each incorporator. The articles of incorporation must include (1) the name of the corporation; (2) the number of shares it is authorized to issue; (3) the street address of its registered office and the name of its agent at that address; and (4) the name and address of each incorporator.

Piercing the corporate veil:

Corporations are distinct legal entities, so their obligations typically are not visited upon their shareholders personally. In other words, the most a shareholder can lose when investing in a corporation is the amount he or she spent to purchase the shares.However, when small, closely held corporations are involved, courts sometimes "pierce the corporate veil" and reach into shareholders' pockets to satisfy corporate obligations. This act would be unusual but can happen when courts believe such is necessary to prevent the corporate form from being used to defeat public convenience, justify wrong, protect fraud, or defend crime.

Disadvantages of General Partnerships and Joint Ventures

`General liability—All general partners are personally liable for the obligations of the business. Thus, if Sal and Pal each put $100,000 into a partnership, but it lost all that money and $100,000 more, Sal and Pal could each be personally liable for the extra $100,000 in losses.

disadvantages ofCorporation

Double taxation—The corporation is subject to corporate income tax, and shareholders are subject to individual income tax liability on dividends and other distributions. Therefore, double taxation has traditionally been viewed as a disadvantage of the corporate form. With proper tax planning, however, the effect of this disadvantage can be minimized. Formality—Legal documents must be filed with a state office (typically the Secretary of State) in order to form a corporation.

disadvantages of Subchatper S Corporation

Formality—Legal documents must be filed with a state office (typically the Secretary of State) in order to form a Subchapter S corporation. Individual taxation—Corporate profits are considered as if they were distributed to shareholders, so an S-Corporation shareholder might be taxed on income he or she has never received, whereas a C-corporation shareholder is taxed on dividends only when these are actually received. Subchapter S requirements—To take advantage of the tax benefit offered by Subchapter S, a corporation must meet certain requirements, including:It is a domestic corporation;All shareholders must consent to the S-Corporation election;The firm can have no more than 100 shareholders, although all members of a family can be treated as a single shareholder;All shareholders must be individuals, estates, certain exempt organizations, or certain trusts; andThe corporation has only one class of stock (i.e., all outstanding shares confer identical rights to distribution and liquidation proceeds).

disadvantages of LLC`

Formality—Legal documents must be filed with a state office (typically the Secretary of State) in order to form an LLC.

disadvantages of LLP

Formality—Legal documents must be filed with a state office (typically the secretary of state) in order to form an LLP. Insurance requirement—In many states firms must maintain a minimum level of liability insurance (e.g., $1 million) in order to entitle partners to liability protection. Selectivity—Usually state statutes limit LLPs to particular professions, such as accountants, architects, and lawyers.

operations of LPs, LLPs and LLLPs

In these forms of limited partnerships, one or more general partners make management decisions, whereas limited partners generally sit on the sidelines playing the role of passive investors. As noted elsewhere, if limited partners in limited partnerships (not LLLPs) leave the sidelines and become actively involved in the control of the limited partnership, they may forfeit their limited liability as to creditors who rely on their apparent role as general partners.

termination of LLCs

LLC law varies more from state to state than do most other forms of business organization. However, the process commonly follows the dissociation-winding up- termination approach of RUPA for general partnerships. RULLCA contains detailed provisions regarding winding up of an LLC's business by gathering together its assets and paying its obligation to creditors (including members who are creditors). If any surplus remains, it should be distributed to (a) each person whose contributions have not been repaid; if any money remains, it should be distributed to (b) members and dissociated members in equal shares.

manager-managed LLC

LLC members may also choose to delegate managerial powers to one or more members or non-members.

member-managed LLC

LLC members may choose to run the business themselves, as if they were general partners (unlike general partners, however, they enjoy limited liability).

Eaton is the sole owner of a construction company and is concerned about personal liability. Which of the following entities will best allow Eaton to limit personal liability? a. Sole proprietorship. b. A C corporation. c. General partnership. d. Limited partnership.

b. A C corporation. Unless Eaton personally guarantees his firm's debts or does something improper to cause the corporate veil to be pierced, he is not personally liable for its obligations, even if he is the sole shareholder.

Which of the following forms of business generally provides all owners with limited liability, while avoiding federal taxation of income at the entity level? a. A Subchapter C corporation. b. A Subchapter S corporation. c. Partnership. d. Limited partnership.

b. A Subchapter S corporation. If the requirements of a Subchapter S corporation are met, the corporate entity pays no federal income tax. All income is passed through to the shareholders. Although the shareholders enjoy limited liability, they do pay personal income tax on dividends received.

Which of the following decreases stockholder equity? a. Investments by owners. b. Distributions to owners. c. Issuance of stock. d. Acquisition of assets in a cash transaction.

b. Distributions to owners. as distributions to owners reduce the corporate treasury and thereby decrease stockholder equity.

Sal wishes to form a business entity that he will own and control all by himself. Which of the following is not a good choice for him? a. Sole proprietorship. b. General partnership. c. LLC. d. Corporation.

b. General partnership. A partnership requires at least one other person or entity to be Sal's partner in ownership and management of the firm, so this is not a good choice.

Ted properly forms an LLP. The firm's consulting business is going well until (a) one of its clerical employees causes a wreck while driving on firm business in the firm car, and (b) the firm finds it has insufficient assets to pay for a piece of real estate it has contracted to buy. The LLP should protect Ted from personal liability for: a. The tort lawsuit brought by the victim of the car accident. b. The breach of contract lawsuit brought by the seller of the real estate. c. Both A and B. d. None of the above.

c. Both A and B.

An owner of common stock will not have any liability beyond actual investment unless the owner a. Paid less than par value for stock purchased in connection with an original issue of shares. b. Agreed to perform future services for the corporation in exchange for original-issue par-value shares. c. Purchased treasury shares for less than par value. d. Failed to pay the full amount owed on a subscription contract for no-par shares.

a. Paid less than par value for stock purchased in connection with an original issue of shares. When stock has a par value, it must be sold for at least that par value in an original issue. If it is sold for less, it is "watered stock." A shareholder who buys watered stock is liable to the corporation for the difference between the price actually paid and the par value of the shares purchased.

Wilson and Thomas are partners. Wilson contributes $150,000 to the partnership, and Thomas contributes $50,000. Wilson does 40% of the work, and Thomas does 60%. They do not have a partnership agreement that addresses the sharing of profits and losses. By the end of the year, the partnership has earned a profit of $200,000. What is Wilson's share of the profit under the Revised Uniform Partnership Act? a. $80,000 b. $100,000 c. $115,000 d. $150,000

b. $100,000 In a general partnership, profits (in this case, $200,000) are shared equally among partners. Who puts in more capital or who works harder is irrelevant, in the absence of agreement to the contrary. No contrary agreement appears in these facts. $200,000/2 = $100,000.

Under the Revised Model Business Corporation Act (RMBCA), which of the following must be contained in a corporation's articles of incorporation? a. Quorum voting requirements. b. Names of stockholders. c. Provisions for issuance of par and non-par shares. d. The number of shares the corporation is authorized to issue.

d. The number of shares the corporation is authorized to issue. The articles of incorporation must include (1) the name of the corporation; (2) the number of shares it is authorized to issue; (3) the street address of its registered office and the name of its agent at that address; and (4) the name and address of each incorporator.

stock dividend

might be issued by a corporation that has no readily available funds for cash dividends. Such a dividend does not reduce the assets in the corporate till nor transfer anything but paper to shareholders. Typically, shareholders are issued one new share for each 50 or so that they already hold.

RUPA Termination of General Partnership

the fact that partners are added to or removed from the partnership does not automatically lead to the dissolution of the partnership (as was formerly the case). Rather, the causes of "dissociation" of a partner from the partnership include:Notice of a partner's express will to dissolve the partnershipDeath of a partnerBankruptcy of a partnerExpulsion of a partner under the terms of the partnership agreementOccurrence of an event stipulated in the partnership agreement as causing dissociation

stock slit

which involves a greater increase in outstanding shares than does a stock dividend. Typically, shareholders are issued two or three shares for each one that they already hold. Again, the transaction has no effect on the net worth of the corporation, which has no more or fewer assets. Only paper has been transferred to the shareholders.

To which of the following rights is a holder of a public corporation's cumulative preferred stock always entitled? a. Conversion of the preferred stock into common stock. b. Voting rights. c. Dividend carryovers from years in which dividends were not paid, to future years. d. Guaranteed dividends.

c. Dividend carryovers from years in which dividends were not paid, to future years Cumulative preferred stock does not guarantee payment of a dividend in any particular year. However, if required dividends are not paid in any given year, they must be "made up" in the current year before any common shareholders receive a dividend. It is the "cumulative" portion of the description that is key here - that is what gives the right to carryover payments. The "preferred" portion gives the preference over common shareholders.`

A corporation that intends to make an election to become an S corporation seeks advice. An accountant would most appropriately make which of the following recommendations? a. Limit the number of shareholders to 120 unrelated individuals. b. Limit the issuance of stock to common and preferred. c. Ensure that no shareholders are resident aliens. d. Evaluate the eligibility of all shareholders.

d. Evaluate the eligibility of all shareholders. Because there are so many restrictions on types of shareholders for a Subchapter S corporation (no more than 100, no nonresident aliens, all must be individuals—though exceptions are made for certain tax exempt organizations, estates and trusts)

The Maglie Corporation has been doing business for many years, but it has had some difficulties lately. Which of the following is true about the rules for involuntary dissolution for Maglie? a. If Maglie fraudulently obtained approval for its articles of incorporation, creditors may sue to dissolve it. b. If Maglie has failed to pay its franchise taxes, it may be involuntarily dissolved in an action by its shareholders. c. A vote of Maglie's shareholders can involuntarily dissolve Maglie. d. If Maglie has admitted in writing that a creditor's claim is due and owing and that Maglie is insolvent, the creditor could sue for an involuntary judicial dissolution of Maglie.

d. If Maglie has admitted in writing that a creditor's claim is due and owing and that Maglie is insolvent, the creditor could sue for an involuntary judicial dissolution of Maglie. Creditors may seek an involuntary judicial dissolution of a corporation in this situation (corporation admits in writing that the claim is due and it is insolvent) or if the creditor has a claim that has been reduced to judgment, is unsatisfied, and the corporation is proved to be insolvent).

Which of the following statements is (are) correct regarding corporate debt and equity securities? I. Both debt and equity security holders have an ownership interest in the corporation. II. Both debt and equity securities have an obligation to pay income. a. I only. b. II only. c. Both I and II. d. Neither I nor II.

d. Neither I nor II.

Tim and Sarah wish to form an accounting firm. They are not confident in their own abilities and wish to choose a form of organization that will shield them from personal liability for their own malpractice. Which of the following would succeed for them? a. LLP b. LLC c. Both of the above. d. Neither of the above.

d. Neither of the above. No form of business organization excuses an accountant from liability for his or her own malpractice.

Consuelo is a limited partner who has become ensnared in various activities of her limited partnership. She is worried that her activities may cause her to be liable as a general partner. Which of the following activities may subject her to personal liability? a. Working for the partnership as a file clerk. b. Attending meetings of the partners. c. Guaranteeing a partnership loan. d. None of the above.

d. None of the above. None of the activities listed in A, B, and C is sufficient to render Consuelo personally liable; all are consistent with her role as a limited partner.

Under the RMBCA, which of the following dividends is not defined as a distribution? a. Cash dividend. b. Property dividends. c. Liquidating dividends. d. Stock dividends.

d. Stock dividends. A stock dividend is a pro rata distribution of additional shares of a corporation's stock to shareholders. For example, shareholders may receive two additional shares of stock for each ten they already own. Because the corporation essentially created new stock, giving stock dividends to shareholders is not considered a distribution for these purposes.

Professional Corporation (PC)—

A corporation formed pursuant to special statutory accommodations that typically aim at allowing accountants, doctors, lawyers, and some other professionals to gain some of the benefits of the corporate form, particularly various advantages related to offering benefits to employees. Typically, the shareholders in PCs enjoy limited liability (except for their own malpractice, of course), but are subject to double taxation. The corporation is a legal entity, separate and apart from its shareholders. PCs have lost popularity with the creation of LLPs (mentioned earlier) and LLCs (see the next paragraph). But because a PC can choose Subchapter S status, this form of organization survives.

Subchapter S Corporation

A corporation that can eliminate the double taxation that regular corporations (called Subchapter C corporations) face by meeting certain requirements of Subchapter S of the Internal Revenue Code, including having no more than 100 shareholders who unanimously agree to choose Subchapter S status.

Sole propietorship

A single-owner business. The firm's liabilities and assets belong solely to their owner. Its profits and losses belong to the sole owner. The sole proprietorship is not a separate legal or taxable entity. Unlimited personal liability puts the sole proprietor's personal assets at stake if the business loses money. Nothing need be filed with the state to launch a sole proprietorship. If Matt starts a cupcake catering business out of his home and takes no formal legal action to organize in another form, his business will be deemed a sole proprietorship.

formation of LPs, LLPs, LLLPs, and LLCs

A filing with a state agency, typically the secretary of state, generally is required to form the other forms of business organizations discussed in this section—limited partnerships (LPs), Limited Liability Partnerships (LLPs), and Limited Liability Limited Partnerships (LLLPs), as well as corporations. These filings are analogous to a corporation's articles of incorporation. Limited liability companies must have "operating agreements." In most states these need not be filed with the state and don't even have to be in writing, although they should be to avoid misunderstanding. Governing lawLimited partnership law is generally governed by the Revised Uniform Limited Partnership Act (RULPA). (Nearly half of the states have adopted the more recent 2001 Uniform Limited Partnership Act, which has significant differences from RULPA, but the ACIPA's blueprint for the exam does not list 2001 ULPA as a reference, so this lesson focuses on RULPA.)Although most states have enacted their own idiosyncratic version of an LLC statute, meaning that there is great variety in LLC laws from state to state, a revised model act does exist—the Revised Uniform Limited Liability Company Act (RULLCA).LLPs are generally provided for within states' RUPA or RULPA provisions.LLLPs are generally provided for within RULPA or 2001 ULPA. To become an LLLP, all the organizers need do is to state such an election in their filing of a certificate of limited partnership with the state.

Limited Partnership

A partnership with at least one general partner and at least one limited partner. It is distinguished from a general partnership in that its limited partners give up some of the general management rights that partners in a general partnership would have in exchange for the limited liability enjoyed by shareholders of a corporation. The limited partnership is a seperate legal entity. If Matt and Adelita need financing for their new catering business, they might ask their wealthy friend, Jess, to become an investor. Jess does not intend to be active in the business and certainly does not wish to become generally liable for the debts of the catering business. If certain legal steps are taken, a limited partnership can be formed that will protect Jess from liability and thereby encourage him to invest his capital. However, if Jess takes an active role in managing the firm, he will forfeit his limited liability regarding those who see his activities and believe him to be a general partner. It bears repeating that a limited partnership must have at least one general partner who will be generally liable for the firm's obligations, though the general partner can be a corporation rather than an individual.

Limited Liability Company (LLC)

A relatively new form of business organization that allows owners of businesses to gain the liability-limiting advantages of the corporate form while enjoying the single, pass-through tax benefits of the partnership form of business. LLCs may elect to be taxed as if they were Subchapter S corporations. Although most very large businesses are corporations and the corporate form probably remains the most important type of business organization, more LLCs are formed in the United States every year than any other form of business organization.

Limited Liability Limited Partnership (LLLP)

A relatively new form of business organization that allows the general partner(s) of a limited partnership to enjoy limited liability, just like limited partners. It places the burden on third parties who deal with LLLPs to protect themselves contractually because, absent contractual protection, they will not be able to dip into the pockets of either limited partners or general partners to be compensated for the firm's debts. All a limited partnership needs to do to elect to be an LLLP is to include a one-line statement to that effect in its certificate of limited partnership. Although the other forms of organization mentioned in this lesson are ubiquitous, as of 2016, only about 26 states had authorized LLLPs. Note that both general and limited partners in such partnerships will remain liable for the consequences of torts they personally commit while conducting partnership business. No form of business organization shields people from personal liability for the torts they personally commit.

Limited Liability Partnership (LLP

A relatively new form of business organization that carries greater protection from liability than exists in either general or limited partnerships. The LLP was created primarily to protect professionals, such as accountants, physicians, and attorneys, from undue malpractice liability arising from the errors of their partners. Thus, if Tad and Todd are CPAs who practice as general partners, Tad is personally liable for any malpractice committed by Todd. An LLP form can shield Tad from personal tort liability caused by Todd's malpractice. In LLPs, partners are generally liable only for (a) their own malpractice, and (b) the malpractice of those they directly supervise. Most (but not all) state provisions also protect partners from personal liability for LLP contractual obligations. In exchange for providing this extensive liability protection, many states require LLPs to carry minimum levels of malpractice insurance to help ensure that clients harmed by malpractice will have a viable remedy.

Corporation

An artificial legal entity. Its owners (shareholders) typically enjoy limited liability. The creation of the notion of an artificial legal entity in order to encourage people to invest in others' business ideas is one of the great advances in Western legal thought. Kay may buy General Motors stock because she is secure in the notion that even if General Motors goes bankrupt, she will not be liable for its obligations. Her potential loss is limited to the amount she invested when she bought GM stock. Typically, corporations are theoretically burdened by double taxation, meaning they pay corporate income tax on their profits, and then when they distribute their gains to shareholders in the form of dividends, these shareholders pay individual income tax on their dividend income. By intelligent tax planning, however, there are ways to minimize the impact of double taxation.

General Partnership

An association of two or more persons to carry on as co-owners of a business for profit. If Matt finds that his cupcakes often show up at catered dinners along with Adelita's salads, he may propose to Adelita that they join forces to offer a catering service with a full menu and to split the profits. If Matt and Adelita take no formal legal action to organize in another form, their new business will be a general partnership. If the partnership suffers financial reverses, Matt and Adelita are both potentially responsible to pay its debts out of their own individual pockets. If the business makes a profit, it will "pass through" to Matt and Adelita for income tax purposes. Whether distributed or not, profits are allocated and taxable directly to the partners. Although previous law treated partnerships as merely an aggregation of partners, current law generally recognizes partnership as an entity for most purposes.

Among the events that cause the LLC to dissolve, according to RULLCA:

An event caused dissolution based on the operating agreement Consent of all members Passage of 90 consecutive days during which the company has no members Court order, upon application of a member, dissolving the LLC on grounds that the conduct of its activities is unlawful or that carrying on the company's activities is not "reasonably practicable" in conformity with the operating agreement Court order, upon application of a member, dissolving the LLC on grounds that those in control of the company are illegally or fraudulently acting or are oppressively behaving to harm the applicant

Factors leading to piercing the corporate veil

Commingling of funds and other assets of the corporation with those of individual shareholders Diversion of the corporation's funds or assets for the personal use of shareholders Failure to maintain the necessary corporate formalities Failure to adequately capitalize the corporation for the reasonably foreseeable risks of the enterprise Use of the corporation as a mere shell or conduit to operate a single venture or some particular aspect of the business of an individual shareholder Absence of separately held corporate assets Formation and use of the corporation to assume the existing liabilities of another person or entity

Termination of a Corporation

Corporations may be voluntarily dissolved upon the approval of their directors and shareholders. Corporations may be involuntarily dissolved administratively by the secretary of state for such reasons as: Failure to pay franchise taxes; Failure to file annual reports; or Failure to properly establish and maintain a registered agent or office. Corporations may be involuntarily dissolved judicially in: An action by the attorney general, where:The corporation fraudulently obtained approval for its articles of incorporation, orThe corporation has abused its legal authority. An action by shareholders;If management is deadlocked;If those controlling the corporation are acting in an illegal or oppressive way, such as by looting the corporation or wasting its assets; orIf the shareholders are deadlocked and cannot elect directors. In an action by creditors if:The creditor's claim has been reduced to judgment, the execution on the judgment returned unsatisfied, and the corporation is insolvent; orThe corporation has admitted in writing that the creditor's claim is due and owing and the corporation is insolvent.

Disadvantages of limited partnership

Formality—Legal documents must be filed with a state office (typically the secretary of state, or perhaps the State Corporation Commission) in order to form a limited partnership. The firm's name must reflect its limited partnership status, as by using the term "Ltd" or "LP. " Authority—A limited partner must forfeit the right to manage the business in order to be entitled to limited liability. In truth, the law does allow a fair amount of direct involvement in the business (e.g., as employee, lender, guarantor) for a limited partner without imposing general liability. General liability—A limited partnership must have at least one general partner who will be generally liable to creditors for the obligations of the partnership. However, that general partner can be a corporation whose artificial entity will shield any individual owners from personal liability for business debts.

Disadvantages of Sole Proprietorship

General liability—The owner is the business and the business is the owner in a sole proprietorship. Therefore, the owner is personally liable for any debts incurred by the business.

advantages of corporations

Limited liability—All shareholders are entitled to limited liability, but two things should be kept in mind. First, occasionally rare circumstances exist that justify "piercing of the corporate veil" (making shareholders pay corporate debts from their own pockets). Second, especially with small corporations third parties may refuse to loan money to a corporation or to sell to it on credit unless its owners co-sign or otherwise guarantee the obligation, in which case the benefit is more theoretical than real. To repeat, this is equally true of LPs, LLPs, and LLLPs, of course. Legal personality—The corporation is viewed as a legal entity, separate and apart from its owners. It can own property, enter into contracts, and do pretty much any legal act that an individual can. This was formerly a distinct advantage over partnerships, which were viewed as mere aggregations of their owners. But modern partnership law increasingly treats partnerships in all their manifestations (GPs, LPs, LLPs, etc.) as entities for many purposes. This is true of LLCs. Perpetual duration—A traditional advantage of the corporate form has been its perpetual duration. The corporate entity is viewed as a separate legal entity, so it can last for a long, long time. If the five owners of ABC Corporation stock are all killed in a plane crash, ABC Corporation keeps on going in legal contemplation. Its new owners are the heirs of the five deceased owners. Under older laws, partnerships are dissolved upon the death or departure of individual partners so this is an important advantage for corporations. Under more modern partnership laws, however, arranging for partnerships to survive the death or departure of partners is generally easy

Advantages of Subchapter S Corporation

Limited liability—Subchapter S shareholders enjoy limited liability. Single taxation—Subchapter S corporations do not pay income tax, thereby avoiding double taxation.

formation of general partnership

No formal filing is required to create a general partnership either. All that is needed is an intention by two or more people to enter into a relationship that the law deems a partnership, which is generally co-ownership of a business for the purpose of making profit. Governing law—General partnerships are governed by the Revised Uniform Partnership Act (RUPA). RUPA is functionally a form contract that provides default rules in case partners in a general partnership have not formed a partnership agreement as to all issues. By agreement, partners may vary most RUPA provisions to meet their business needs, but they may not prejudice the rights of third parties. For example, partners Pat and Nat may vary their rights in the partnership by agreement, but they may not successfully agree that they do not have to pay the money they owe to third parties. A written partnership agreement is always a good idea, but this is not required unless the partnership is to last for a specified period longer than one year. Although no written filing is required, partners may file a Statement of Partnership Authority with the secretary of state. This document is often useful in dealing with third parties who might wish to know, for example, which partners' signatures need to be on a document of sale for the partnership to be bound.

Formation of Sole Proprietorship

No formal filing with the state is required for the creation of sole proprietorships. However, to do business, a sole proprietorship, like other forms of organization, may need to acquire a tax number and a license to, for example, sell fresh produce or operate a restaurant or provide plumbing services.

LLC Financial Structure

Obligations to contribute to an LLC are not excused by death, disability, or inability to perform and are enforceable by the creditors of the LLC who have relied upon them. Like corporations, LLCs may not make distributions to members if after doing so the firm would be insolvent

disadvantages of LLLP

Only about 25 states authorize the formation of LLLPs, and therefore there are questions as to how an LLLP authorized in one state will be treated if it does business in a state that does not recognize LLLPs. Limited partners generally have little say in how the business is run, just as in a limited partnership. Formality Legal documents must be filed with a state office (typically the secretary of state) in order to form an LLLP. However, a limited partnership can easily become an LLLP by simply amending its filing with the state to so indicate.

distributions in kind partnership

Partners have no right to receive, and may not be required to accept, a distribution in kind (rather than in cash).

advantages of LLC

Pass-through taxation—LLCs enjoy the single taxation of a partnership without having to meet the criteria required for Subchapter S status. (However, LLCs may choose to be taxed as corporate entities if they so desire.) Limited liability—All LLC members enjoy limited liability without forfeiting management rights as limited partners would have to.

advantages of LLLP

Pass-through taxation—Like all partnerships, LLLPs enjoy single taxation. Limited liability—As in limited partnerships, limited partners enjoy limited liability. Furthermore, in LLLPs, even general partners enjoy limited liability. (Remember, neither general nor limited partners in LLLPs may escape liability for torts they personally commit.)

Advantages of limite partnerships

Pass-through taxation—Like general partnerships, limited partnerships enjoy single taxation. Limited liability for the limited partners exists, so long as they do not take part in the management of the firm.

Advantages of LLP

Pass-through taxation—Like partnerships, LLPs enjoy single taxation. Limited liability—Like limited partners, LLPs are not liable for the general obligations of the partnership, although they typically remain liable for the tort liabilities generated by their own actions and the actions of those they supervise. Therefore, if Todd and Tad are partners in a CPA LLP and Todd commits malpractice, Tad will not be personally liable for that wrong. Tad is liable only for torts that he and the employees in the firm whom he supervises commit. In most states (full-shield states), this protection extends to the firm's tort and contract obligations. In some states (partial-shield states), the protection extends only to tort obligations, so that Todd and Tad would be personally liable for the firm's contractual debts. And, remember that in any state (and with any form of business organizations), a third-party, such as a lender, might require Todd and Tad to contractually bind themselves as individuals to pay firm's debts before the third-parties will lend money to the firm or otherwise do business with it. Authority—LLPs may be actively involved in managing the partnership without forfeiting the limited liability that partners in an LLP generally enjoy. This is a distinct advantage over the traditional limited partnership form.

Advantages of General Partnership and Joint Ventures

Pass-through taxation—Partnerships enjoy single taxation because the partnership entity pays no taxes (although it files an informational return). Rather, partnership income passes through to the individual partners who pay individual income tax on their share. Simplicity—No formal documents need be filed to form a general partnership. If two persons associate with the goal of carrying on as co-owners of a business for profit, the law will treat their relationship as a general partnership regardless of whether they have filed any legal documents. They may, however, file such documents if they choose and generally should do so to clarify the nature of their rights and responsibilities. A partnership that will last more than a year should put the partnership agreement in writing so it will be enforceable under the statute of frauds.

Formation of Corporations

RMBCA requires that those forming a corporation file articles of incorporation that must include the following data:Corporate name (indicating corporate status by use of "Corp.," "Inc.," etc.);Number of authorized shares;Address of the initial registered office of the corporation and the first registered agent at that address; andNames and addresses of the incorporators. The general process for forming a corporation includes:Filing articles of incorporation with the secretary of state;Holding an organizational meeting in which a board of directors is elected, and the contracts entered into by promoters are adopted or rejected;Drafting and adopting by-laws to govern the inner workings of the firm; andObtaining certificates of authority to do business in other jurisdictions. Corporations are viewed as "domestic" corporations in the state in which they are formed and as "foreign" corporations in other states where they may wish to do business.

capital accounts partnerships

Under RUPA, each partner is deemed to have an account that is:Credited with an amount equal to the money plus the value of any other property, net of the amount of any liabilities, the partner contributes to the partnership, and the partner's share of the partnership profits;At the same time, this account is charged with an amount equal to the money plus the value of any other property, net of the amount of any liabilities, distributed by the partnership to the partner and the partner's share of partnership losses. Partners are to be reimbursed for payments made and indemnified for liabilities incurred in the ordinary course of the partnership business. Partners are to be reimbursed for advances to the partnership made beyond agreed capital contributions. These are loans and the partners are creditors generally on par with outside creditors. As noted elsewhere, absent agreement to the contrary, partners equally share profits and losses. If they have agreed to a non-equal sharing of profits but have not made any provision for the sharing of losses, losses will be shared in proportion to profits.

interest partnerships

Under RUPA, partners, absent agreement to the contrary, should receive interest on advances made to the partnership beyond the amount of capital they agreed to contribute.

a partnership is treated as an aggregate of the individual partners when

Unlike a corporation, a partnership lacks continuity of existence. No person can become a partner without consent of all the partners. Therefore, the transferee of a partnership interest, unlike the transferee of shares in a corporation, does not become an owner without the consent of the existing partners. Debts of a partnership are ultimately the debts of the individual partners. A partnership is not subject to regular federal income tax. Instead, taxable income is determined at the individual level.

Which of the following actions may be taken by a corporation's Board of Directors without stockholder approval? a. Purchasing substantially all of the assets of another corporation. b. Selling substantially all of the corporation's assets. c. Dissolving the corporation. d. Amending the articles of incorporation.

a. Purchasing substantially all of the assets of another corporation. Shareholders have the right to vote on many important corporate changes, including amendments to the articles of incorporation, dissolution, sale of all or substantially all of the corporation's assets, and mergers & consolidations. Choices B, C, and D are all on this list. Choice A is, therefore, the correct answer. Often, one corporation can buy all or substantially all of the assets of another company without there being any large qualitative change in the life of the purchasing corporation. Therefore, when a large corporation gobbles up the assets of a smaller corporation, the shareholders of the large buyer do not have the right to vote on the transaction. There would be a much greater impact on the life of the selling corporation and its shareholders would therefore have the right to vote on the transaction.

Ed, Fred, and Ned form the EFN general partnership. Ed and Fred each contribute $50,000 to start the business. Ned contributes $25,000. Ed and Fred both work 20 hours a week for the business, while Ned works 40 hours a week. After capital contributions are repaid, the firm starts turning a profit. The partners had not expressly agreed how those profits should be shared. Which of the following is true? a. The profits should be shared equally. b. Ed and Fred should receive more of the profits than Ned, because they put more capital into the partnership. c. Ned should receive a greater share of the profits than Ed and Fred, because he is contributing more labor to the business. d. None of the above.

a. The profits should be shared equally. In the absence of agreement to the contrary, profits are to be shared equally among the partners.

The limited liability of a stockholder in a closely held corporation may be challenged successfully if the stockholder a. Undercapitalized the corporation when it was formed. b. Formed the corporation solely to have limited personal liability. c. Sold property to the corporation. d. Was a corporate officer, director, or employee.

a. Undercapitalized the corporation when it was formed. Stockholders are almost never held personally liable, and limited liability is among the most fundamental of a corporate shareholder's rights. However, if a corporation is INTENTIONALLY undercapitalized (that is, it does not have nearly enough capital to meet initial demands), the corporate veil is sometimes pierced and shareholders' personal assets are subject to a judgment.

Price owns 2,000 shares of Universal Corp.'s $10 cumulative preferred stock. During its first year of operations, cash dividends of $5 per share are declared on the preferred stock, but were never paid. In the second year, dividends on the preferred stock were neither declared, nor paid. If Universal is dissolved, which of the following statements is correct? a. Universal will be liable to Price as an unsecured creditor for $10,000. b. Universal will be liable to Price as a secured creditor for $20,000. c. Price will have priority over the claims of Universal's bond owners. d. Price will have priority over the claims of Universal's unsecured judgment creditors.

a. Universal will be liable to Price as an unsecured creditor for $10,000. Cumulative preferred stock gives the holder the right to payment of dividends before common shareholders are paid. It does not guarantee that dividends will be declared, but if dividends are declared, they must be paid. Once a corporation declares dividends, the payments become corporate debt. Here, Price is owed $5 x 2,000 shares = $10,000. He is an unsecured creditor, because this debt has not been secured by a separate agreement that creates a security interest. His debt does not have priority over judgment creditors, bond owners, or secured creditors.

A CPA firm, operated as a general partnership, will dissolve by mutual agreement at the end of the year. During the year, distributions have been made to some partners in excess of their capital invested in the partnership. Which of the following statements is correct regarding the distribution of assets at the end of the partnership's existence? a.Partners with negative capital accounts must contribute additional funds to the partnership. b. Creditors whose debts cannot be satisfied by the partnership assets will have no further recourse. c. The partnership must engage in additional activity to generate sufficient cash to pay all creditors. d. Bankrupt partners must contribute capital to resolve their bankruptcy proceedings.

a.Partners with negative capital accounts must contribute additional funds to the partnership. Absent agreement to the contrary, general partners are to share losses equally. Those whose accounts are in deficit when the partnership ends are generally liable to make up their share.

Cobb, Inc., a partner in TLC Partnership, assigns its partnership interest to Bean, who is not made a partner. After the assignment, Bean asserts the rights to I. Participate in the management of TLC. II. Cobb's share of TLC's partnership profits. Bean is correct as to which of these rights? a. I only. b. II only. c. I and II. d. Neither I nor II.

b. II only. A partnership is like a marriage, in that partners do not have to be partners with anyone unless they want to be. A new partner cannot be added to a partnership without the unanimous consent of the existing partners. Unless someone getting an assignment is made a partner, (s)he will not have any management rights. The right to a share of profits, however, may be assigned. It is the only thing that is owned by each individual partner, and not collectively. Bean may receive Cobb's share of the partnership profits.

The owners of a limited-liability company are known as which of the following a. Partners. b. Members. c. Stockholders. d. Shareholders.

b. Members. Owners of LLCs are typically known as "members."

ollowing the formation of a corporation, which of the following terms best describes the process by which the promoter is released from, and the corporation is made liable for, pre-incorporation contractual obligations? a. Assignment. b. Novation. c. Delegation. d. Accord and satisfaction.

b. Novation The general rule is that promoters are liable on pre-incorporation contracts that they negotiate on the corporation's behalf. When the corporation comes into existence and adopts the contracts, the general rule is that both the promoter and the corporation are now liable under them. However, if the other party agrees to release the agent from liability and to look only to the corporation for satisfaction, then a novation has taken place.

All of the following distributions to stockholders are considered asset or capital distributions, except a. Liquidating dividends. b. Stock splits. c. Property distributions. d. Cash dividends.

b. Stock splits. If the dividend is in the form of ASSETS of the corporation, then it is a capital distribution. If it is for additional ownership in the corporation, then it is not a capital distribution. Stock dividends grant additional ownership and so are of the second type.

The corporate veil is most likely to be pierced and the shareholders held personally liable if a. The corporation has elected S corporation status under the Internal Revenue Code. b. The shareholders have commingled their personal funds with those of the corporation. c. An ultra vires act has been committed. d. A partnership incorporates its business solely to limit the liability of its partners.

b. The shareholders have commingled their personal funds with those of the corporation. The corporate veil is almost never pierced, and investors almost never lose more than their investment. Only when shareholders use a corporation for their own (usually fraudulent) personal use is there even a remote possibility that the veil will be pierced. When shareholders have heavily commingled personal funds and corporate funds, the rare exception to the rule may arise.

What type of business organization may generally be formed without filing an organizational document or certificate with a state-government agency or office? a. A corporation. b. A limited-liability company. c. A general partnership. d. A limited partnership.

c. A general partnership. A general partnership is formed when two people throw their fortunes together, intending to be co-owners of a business for profit. They need file nothing with the Secretary of State's office, although they may choose to do so.

Sam is a member of a member-managed LLC. The other partners have agreed to make Sam the sole manager of the firm. Sam is worried about his liability, should he make any mistakes. Which protections would not be proper for Sam to ask the other members to approve? a. A provision in the operating agreement that specifies that it is permissible for Sam to contract to buy paper products from his wife's stationery store, so long as he does so at the same price paid by other customers. b. A provision in the operating agreement providing that Sam cannot be liable to the firm or to other members for his carelessness, unless it rises to the level of, at least, recklessness. c. A provision in the operating agreement indicating that Sam is not liable to the firm for money damages resulting from his knowing violation of the law. d. All of the above (would not be proper).

c. A provision in the operating agreement indicating that Sam is not liable to the firm for money damages resulting from his knowing violation of the law. This provision would be improper, because it is manifestly unreasonable to eliminate a manager's liability for intentional violation of criminal law, intentional infliction of harm on the firm, or intentional violation of criminal law.

Mario is a member of a small trucking firm organized as an LLC. For which of the following obligations would he likely be personally liable? a. The firm owes $20,000 to a gasoline supplier. b. The firm owes a $75,000 judgment to a pedestrian who sued after being hit by one of its trucks in a cross-walk. c. Another driver owns a $100,000 judgment against the firm and Mario, that a jury handed down after finding that Mario was at fault for a collision at an intersection. d. All of the above.

c. Another driver owns a $100,000 judgment against the firm and Mario, that a jury handed down after finding that Mario was at fault for a collision at an intersection. Most LLC statutes provide limited-liability protection from contract debts of the firm, as well as tort obligations. But Mario cannot be protected for liability for torts he personally commits.

The partners of College Assoc., a general partnership, decide to dissolve the partnership and agree that none of the partners will continue to use the partnership name. Under the Uniform Partnership Act, which of the following events will occur on dissolution of the partnership? a. Each partners' exiting liability will be discharged and Each partner's apparent authority will continue b. Each partners' exiting liability will be discharged c. Each partner's apparent authority will continue d. Neither Each partners' exiting liability will be discharged norEach partner's apparent authority will continue

c. Each partner's apparent authority will continue Simply deciding to dissolve a partnership does not dissolve liability. If money is owed on contracts, tort judgments, or otherwise, the partners are still responsible for them. Apparent authority does continue after partners have decided to dissolve the partnership. Notice must be given to others (by contact for those with which the partnership has actually done business and by publication for everyone else) before apparent authority stops.

Which of the following statements is correct regarding the division of profits in a general partnership when the written partnership agreement only provides that losses be divided equally among the partners? Profits are to be divided a. Based on the partners' ratio of contribution to the partnership. b. Based on the partners' participation in day-to-day management. c. Equally among the partners. d. Proportionately among the partners.

c. Equally among the partners. When there is no agreement to the contrary in a GENERAL partnership, profits are divided equally. They are divided according to percentage of contribution in a LIMITED partnership, if there is no agreement to the contrary.

Amanda is a member of the Ames Network LLC. She has had some conflict with other members of the LLC and is seeking your advice. Please tell Amanda which of the following is true. a. Agreeing to become the member of an LLC is a very important commitment, and Amanda must remain a member until either she dies or the LLC dissolves. b. If Amanda seeks to dissolve the LLC and can obtain the agreement of a majority of other LLC members, the LLC will dissolve under the c. Revised Uniform Limited Liability Company Act (RULLCA). c. If Amanda can prove that she is a minority member of the LLC and that the members in control of the LLC are looting the LLC's assets for their own personal benefit, she can likely successfully sue for dissolution. d. Amanda should avoid loaning any money to the LLC, because if it dissolves she cannot possibly get any of that money back.

c. If Amanda can prove that she is a minority member of the LLC and that the members in control of the LLC are looting the LLC's assets for their own personal benefit, she can likely successfully sue for dissolution.. The Revised Uniform Limited Liability Company Act (RULLCA) provides for dissolution via court order if a member sues and shows that those in control are behaving illegally, fraudulently, or oppressively.

Which of the following statements is correct regarding a limited liability company's operating agreement? a. It must be filed with a central state agency. b. It must be in writing. c. It is designed to forestall and resolve disputes among the owners. d. It is necessary for a limited liability company to exist.

c. It is designed to forestall and resolve disputes among the owners. This is the purpose of an LLC operating agreement, which is why it is a good idea that these be in writing and filed with the state (although this is not required).

Assuming all other requirements are met, a corporation may elect to be treated as an S corporation under the Internal Revenue Code if it has a. Both common and preferred stockholders. b. A partnership as a stockholder. c. One hundred or fewer shareholders. d. The consent of a majority of the stockholders.

c. One hundred or fewer shareholders. The maximum number of permissible Subchapter S corporation shareholders has risen over the years, from 35 to 75 to (now) 100.

Under the Revised Model Business Corporation Act (RMBCA), a merger of two public corporations usually requires all of the following, except a. A formal plan of merger. b. An affirmative vote by the holders of a majority of each corporation's voting shares. c. Receipt of voting stock by all stockholders of the original corporations. d.Approval by the Board of Directors of each corporation.

c. Receipt of voting stock by all stockholders of the original corporations. Shareholders must be given only the exchange rights provided in the articles of share exchange. They are not automatically entitled to voting shares in the new corporation.

Which of the following statements describes the same characteristic for both an S corporation and a C corporation? a. Both corporations can have more than 100 shareholders. b. Both corporations have the disadvantage of double taxation. c. Shareholders can contribute property into a corporation without being taxed. d. Shareholders can be either citizens of the U.S. or foreign countries.

c. Shareholders can contribute property into a corporation without being taxed. C is the best answer, because shareholder contributions are not taxable in either form.

Elmo forms a corporation to run a retail store. He buys $100,000 worth of its stock, as does his mother. They are the only two shareholders. The store's location was not favorable and the business does not take off. Over the course of five years, Elmo slowly burns through the $200,000 in capital, as the store posts losses every year. Near the end of the sixth year, the corporation takes bankruptcy, leaving creditors on the hook for $40,000; they had delivered inventory to the store for which the corporation had been unable to pay. The creditors sue Elmo and his mother personally. Given the facts presented, what should happen? a. The court should pierce the corporate veil, because the store was obviously undercapitalized. b. The court should pierce the corporate veil, because the creditors failed to have Elmo or his mother personally guarantee their extensions of credit. c. The court should not pierce the corporate veil. d. A and B.

c. The court should not pierce the corporate veil. There is no evidence of commingling of funds, diversion of corporate assets, failure to maintain formalities, or any of the other factors that can induce a court to pierce the corporate veil. The mere fact that a business fails does not indicate that it was originally undercapitalized.

Unless the partnership agreement prohibits it, a partner in a general partnership may validly assign rights to a. partnership property and partnership distributions b. partnership property c. partnership distributions d. neither partnership property nor partnership distributions

c. partnership distributions Partners cannot assign their rights to use partnership assets or management rights to anyone without the unanimous consent of other partners. The only thing that may be assigned without this consent is a partner's right to the distribution of profits.