Legal 2 Test 2 Studyguide Sole Proprietorships the simplest form of business organization. Sole proprietorships are the most common form of business organization in the US. Major advantages: * Forming a sole proprietorship is easy and does not cost a lot. * The owner has the right to make all management decisions concerning the business, including those involving hiring and firing employees. * The sole proprietor owns all of the business and has the right to receive all of the business’s profits. A sole proprietorship can be easily transferred or sold if and when the owner desires to do so; no other approval (such as from partners or shareholders) is necessary. Disadvantages: * The sole proprietor’s access to the capital is limited to personal funds plus any loans he or she can obtain * The sole proprietor is legally responsible for the business’s contracts and the torts he or she or any of his or her employees commit in the course of employment. Creating a sole proprietorship is easy. There are no formalities, and no federal or state government approval is required.
A sole proprietor bears the risk of loss of the business. In addition, the sole proprietor has unlimited personal liability. Therefore, creditors may recover claims against the business from the sole proprietor’s personal assets (e. g. , home, automobile, bank accounts). A sole proprietorship is not a separate legal entity, so it does not pay taxes at the business level. Instead, the earnings and losses from a sole proprietorship are reported on the sole proprietor’s personal income tax filing. A sole proprietorship business earns income and pays expenses during the course of operating the business.
A sole proprietor has to file tax returns and pay taxes to state and federal governments. For federal income tax purposes, a sole proprietor must prepare a personal income tax Form 1040 U. S. Individual Income Tax Return and report the income or loss from the sole proprietorship on his or her personal income tax form. The income or loss from the sole proprietorship is reported on Schedule C (Profit or Loss from Business), which must be attached to the taxpayer’s Form 1040. Vernon v. Schuster The father dies and the son takes over the sole proprietorship. Vernon had a warranty while the father was alive, and he warranty was broken because the product had failed so he wanted money from the son who took over the job. The court ruled that the son had formed a new sole proprietorship and was not liable for his father’s warranty. Partnerships a voluntary association of two or more persons for carrying on a business as co-owners for profit. Partners are personally liable for the debts and obligations of the partnership. Formation four criteria to qualify as a general partnership: * As association of two or more persons * Carrying on a business * As co-owners * For profit
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An agreement to share losses of a business is strong evidence of a general partnership. It is compelling evidence of the existence of a general partnership if a person is given the right to share in profits, losses, and management of a business. A limited partnership agreement may specify how profits and losses from the limited partnership are to be allocated among the general and limited partners. General partnerships do not pay deferral income taxes. Instead, the income and losses of partnership flow onto and have to be reported on the individual partners’ personal income tax returns. This is called “flow-through” taxation.
A new partner in a general partnership takes on all of the liabilities and responsibilities that the original partners have. Zuckerman v. Antenucci A woman’s child was born with severe physical problems. During her pregnancy, she was treated by Dr. Pena and Dr. Antenucci. She brought a medical malpractice suit against both doctors. The jury (trial court) found that Pena was guilty of medical malpractice but Antenucci was not. The Supreme Court found both doctors to be dually liable. Limited Partnerships a type of partnership that has two types of partners: (1) general partners and (2) limited partners.
Two types of partners: * General partners partners in a limited partnership who invest capital, manage the business, and are personally liable or partnership debts. * Limited partners partners in a limited partnership who invest capital but do not participate in management and are not personally liable for partnership debts beyond their capital contributions. Once a limited partnership has been formed, a new limited partner can be added only upon the written consent of all partners, unless the limited partnership agreement provides otherwise.
New general partners can be admitted only with the specific written consent of each partner. Uniform Partnership Act In 1914, the National Conference of Commissioners on Uniform State Laws promulgated the UPA. The UPA codifies general partnership law. Its goal was to establish consistent partnership law that was uniform throughout the US and has been adopted by 48 states. Fictitious names A general partnership must file a fictitious business name statement –d. b. a. (doing business as) –with the appropriate government agency to operate under a trade name. Kemmier Memorial Foundation v.
Mitchell Davis and Mitchell formed a general partnership to purchase and operate rental properties for investment purposes. They entered into an agreement that provided that only Davis, and not Mitchell, would be personally liable on the note to the Foundation. They did not inform the Foundation of this agreement. They defaulted on a note, so the Foundation sued the partnership and both partners to recover on the note. The Supreme Court of Ohio held that both partners were jointly liable on the note. Corporations the most dominant form of business organization in the US, generating over 85 percent of the country’s gross business receipts.
Owners of corporations are called shareholders. Incorporation select a state, select a corporate name, incorporators, pre-incorporation contracts, articles of incorporation, purpose of a corporation, registered agent (often attorneys), corporate bylaws, corporate seal, organizational meeting of the board of directors. Purpose of a Corporation: * General-purpose clause allows the corporation to engage in any activity permitted by law * Limited-purpose clause stipulates the specific purposes and activities that the corporation can engage in. Shareholders have only limited liability.
They are liable only to the extent of their capital contributions and do not have personal liability for the corporation’s debts and obligations. Nature of the corporation: * Separate “legal entity” for most purposes * Limited liability of shareholders * Free transferability of shares * Perpetual existence * Centralized management * Double taxation Nonprofit Corporation formed for charitable, educational, religious, or scientific purposes. Although nonprofit corporations may make a profit, they are prohibited by law from distributing this profit to their members, directors, or officers.
The Model Nonprofit Corporation Act, which governs the formation, operation, and termination of nonprofit corporations. Professional Corporation a corporation formed by lawyer, doctors, or other professionals. Promoter a person or persons who organize and start a corporation, negotiate and enter into contracts in advance of its formation, find the initial investors to finance the corporation, and so forth. Registered Agents a person or corporation that is empoyered to accept service of process on behalf of a corporation.
Incorporator the person or persons, partnerships, or corporations that are responsible for incorporation of a corporation. Bylaws a detailed set of rules adopted by the board of directors after a corporation is incorporated that contains provisions for managing the business and the affairs of the corporation. Organizational Meeting a meeting that must be held by the initial directors of a corporation after the articles of incorporation are filled. Articles of Incorporation the basic governing document of a corporation.
It must be drafted and filed with, and approved by, the state before the corporation can be officially incorporated. Must include: * The name of the corporation * The number of share the corporation is authorized to issue * The address of the corporation’s initial registered office and the name of the initial registered agent. * The name and address of each incorporator Debt securities securities that establish a debtor-creditor relationship in which the corporation borrows money from the investor to whom a debt security is issued.
Notice of a Shareholders’ Meeting A corporation is required to give the shareholders written notice of the place, day, and time of annual and special meetings. For a special meeting, the purpose of the meeting must also be stated. Only matters stated in the notice of a shareholders’ meeting can be considered at the meeting. Special Shareholders’ Meetings Meetings of shareholders that may be called to consider and vote on important or emergency issues, such as a proposed merger or amending the articles of incorporation.
Proxy a shareholder’s authorizing of another person to vote the shareholder’s shares at the shareholders’ meetings in the event of the shareholder’s absence. Quorum required number of individuals that must be represented for voting, meetings, etc. Record Dates a date specified in corporate bylaws that determines whether a shareholder may vote at a shareholders’ meeting. Cumulative Voting a system in which a shareholder can accumulate all of his or her votes and vote them all for one candidate or split them among several candidates.
Straight Voting a system in which each shareholder votes the number of shares he or she owns on candidates for each of the positions open; also called noncumulative voting. Supramajority Voting Requirement a requirement that a greater than majority of shares constitutes a quorum of the vote of the shareholders. Voting Trust an arrangement in which the shareholders transfer their stock certificates to a trustee who is empowered to vote the shares. Voting Agreement an agreement between two or more shareholders that stipulates how they will vote their shares.
Right of First Refusal an agreement that requires a selling shareholder to offer his or her shares for sale to the other parties to the agreement before selling them to anyone else. Preemption rights that give existing shareholders the option of subscribing to new shares being issued in proportion to their current ownership interests. Dividends a distribution of profits of the corporation to shareholders. Derivative Lawsuit a lawsuit a shareholder brings against an offending party on behalf of a corporation when the corporation fails to bring the lawsuit. It’s also called a derivative action.
Management of a Corporation * Shareholders Owners of the corporation. They vote on the directors and other major actions to be taken by the corporation. * Board of Directors Elected by the shareholders. Directors are responsible for making policy decisions and employing the major officers for the corporation. The board may initiate certain actions that require shareholders’ approval. * Officers Officers are responsible for the day-to-day operation of the corporation, including acting as agents for the corporation, hiring other officers and employees, and the like.
Duty of Obedience a duty that directors and officers of a corporation have to act within the authority conferred upon them by state corporation codes, the articles of incorporation, the corporate bylaws, and the resolutions adopted by the board of directors. Fiduciary Duties the duties of obedience, care, and loyalty owed by directors and officers to their corporation and its shareholders. Duty of Care a duty of corporate directors and officers to use care and diligence when acting on behalf of the corporation.
Duty of Loyalty a duty that directors and officers have not to act adversely to the interests of the corporation and to subordinate their personal interests to those of the corporation and its shareholders. Proxy Contest a contest in which opposing factions of shareholders and managers solicit proxies from other shareholders; the side that receives the greatest number of votes wins the proxy contest. Merger a situation in which one corporation is absorbed into another corporation and ceases to exist. They become a similar corporation. If it is a consolidation, the two companies form into a completely different corporation.
Appraisal Rights the rights of shareholders who object to a proposed merger, share exchange, or sale or lease of all or substantially all of the property of a corporation to have their shares valued by the court and receive cash payment of this value from the corporation. Proxy Statement a document that fully describes (1) the matter for which a proxy is being solicited, (2) who is soliciting the proxy, and (3) any other pertinent information. Share Exchange a situation in which one corporation acquires all the shares of another corporation and both corporations retain their separate legal existence.
Tender Offer an offer that an acquirer makes directly to a target corporation’s shareholders in an effort to acquire the target corporation. The shareholders each make an individual decision about whether to sell their shares to the tender offeror. Such offers are often referred to as hostile tender offers. Short-form Merger a merger between a parent corporation and a subsidiary corporation that does not require the approval of the shareholders of either corporation or the approval of the board of directors of the subsidiary corporations.
Williams Act an amendment to the Securities Exchange Act of 1934 made in 1968 that specifically regulates tender offers. Severance for Executives after retiring or being removed from a company, they’re given a package. “Golden parachute” Section 14(a) a provision of the Securities Exchange Act of 1934 that gives the SEC the authority to regulate the solicitation of proxies. Antitakeover Statutes statutes enacted by a state legislature that protect against the hostile takeover of corporations incorporated in or doing business in the state.
Poison Pills defensive strategies that are built into the target corporation’s articles of incorporation, corporate bylaws, or contracts and leases. These tactics make the target corporation more expensive to the tender offeror. White Knight Merger mergers with friendly parties—that is, parties that promise to leave the target corporation and/or its management intact. Greenmail the purchase by a target corporation of its stock from an actual or perceived tender offeror at a premium.
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