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Business Law (Chapters 36-42)
Study set for Prof. Fong's Business 12B class.
Terms in this set (108)
One who initiates and assumes the financial risks of a new enterprise and who undertakes to provide or control its management.
Factors an Entrepreneur Must Consider
1. Ease and expense of creation
2. Liability of owners for the business entity
3. Tax considerations
4. Ability to raise capital
The simplest form of business, in which the owner is the business; the owner reports business income on his or her personal income tax return and is legally responsible for all debts and obligations incurred by the business.
Pros of a Sole Proprietorship
1. It's easy and inexpensive to start.
2. Owner keeps all the profits.
3. Owner has maximum degree of control.
Cons of a Sole Proprietorship
1. Owner has unlimited personal liability.
2. Business doesn't survive owner's death.
3. Owner has limited ability to raise capital.
Any arrangement in which the owner of a trademark, trade name, or copyright licenses another to use that trademark, trade name, or copyright, under specified conditions or limitations, in the selling of goods and services.
One licensing another (the franchisee) to use his or her trademark, trade name, or copyright in the sale of goods or services.
One receiving a license to use another's (the franchisor's) trademark, trade name, or copyright in the sale of goods and services.
Franchises account for a small percentage of this country's retail sales.
Classifications of Franchises
1. Distributorship (e.g. auto dealerships)
2. Chain Store (e.g. fast-food restaurants)
3. Manufacturing or Processing Plant (e.g. beverages)
Governed by contract law; franchisor may specify payment for the franchise and the following:
1. Lease or purchase of business premises
3. Business structure
4. Quality standards
5. Suggested prices
Termination must be "for cause" with notice given prior, and franchisor has to act in "good faith" per statutes.
Many states require a franchisor to register a disclosure document known as the Franchise Disclosure Document (FDD).
Business owned by two or more individuals by agreement, as co-owners, and for-profit. It could be for term or at will.
Articles of Partnership
A written agreement that sets forth each partner's rights and obligations with respect to the partnership.
In a limited partnership, a partner who assumes responsibility for the management of the partnership and liability for all partnership debts.
A partner who contributes capital to the partnership but has no right to participate in the management and operation of the business. He or she assumes no liability for partnership debts beyond the capital contributed.
A partnership consisting of one or more general partners (who manage the business and are liable to the full extent of their personal assets for debts of the partnership) and one or more limited partners (who contribute only assets and are liable only to the extent of their contributions).
Limited Liability Limited Partnership (LLLP)
A type of limited partnership where the liability of the general partner is the same as the liability of the limited partner. That is, the liability of all partners is limited to the amount of their investments in the firm.
Certificate of Limited Partnership
The basic document filed with a designated state official by which a limited partnership is formed.
The amount payable to a partner on his or her dissociation from a partnership, based on the amount distributable to that partner if the firm were wound up on that date, and offset by any damages for wrongful dissociation.
In the context of partnerships, an express agreement made at the time of partnership formation for one or more of the partners to buy out the other or others should the situation warrant—and thus provide for the smooth dissolution of the partnership.
A tax return submitted by a partnership that reports the income earned by the business. The partnership as an entity does not pay taxes on the income received by the partnership. A partner's profit from the partnership (whether distributed or not) is taxed as individual income to the individual partner.
Shared liability. In partnership law, partners incur joint liability for partnership obligations and debts. For example, if a third party sues a partner on a partnership debt, the partner has the right to insist that the other partners be sued with him or her. All partners share the burden of the liability (or judgment).
Joint and Several Liability
In partnership law, a doctrine under which a plaintiff may sue, and collect a judgment from, one or more of the partners separately (severally, or individually) or all of the partners together (jointly). This is true even if one of the partners sued did not participate in, ratify, or know about whatever gave rise to the cause of action. Less than all the partners may be held liable.
Partnership by Estoppel
A judicially created partnership that may, at the court's discretion, be imposed for purposes of fairness. The court can prevent those who present themselves as partners (but who are not) from escaping liability if a third person relies on an alleged partnership in good faith and is harmed as a result.
1. Unless otherwise stated, all partners have equal control and management rights, regardless of captial contribution.
2. Decisions require majority vote except where unaminous consent is required.
3. A right to know and inspect or copy all books or records.
4. Each partner may demand a formal accounting.
5. Partners receive no salary for work unless agreed.
6. Property rights—A partner has an interest in the partnership, a right in the specific partnership property, and a right to participate in management.
7. Each partner is both a principal and agent of the partnership and of each other.
Pros of a Partnership
1. They have full management and control.
2. Operate infomally—Written documentation isn't required.
3. Income tax is paid only by and at individual partner's level.
Cons of a Partnership
1. It lacks continuity (i.e. business ceases upon death).
2. They bear individual personal liability for partnership's debts.
1. Care—Refrain from gross negligence or intentional misconduct.
2. Loyalty—Refrain from competing.
In partnership law, an order granted by a court to a judgment creditor that entitles the creditor to attach profits or assets of a partner on dissolution of the partnership.
Any entity that does not have its income taxed at the level of that entity; examples are partnerships, S corporations, and limited liability companies.
The severance of the relationship between a partner and a partnership when the partner ceases to be associated with the carrying on of the partnership business. It can occur by any of the following:
1. Upon notice by partner.
2. At occurrence of event as stated in agreement.
3. By unanimous vote of other partners.
4. By court order.
5. By partner declaring bankruptcy, becoming
incapacitated, or dying.
The second of two stages involved in the termination of a partnership or corporation. Once the firm is dissolved, it continues to exist legally until the process of winding up all business affairs (collecting and distributing the firm's assets) is complete.
Limited Liability Partnership
A form of partnership that allows professionals to enjoy the tax benefits of a partnership while limiting their personal liability for the malpractice of other partners.
Family Limited Liability Partnership
A limited liability partnership (LLP) in which the majority of the partners are persons related to each other, essentially as spouses, parents, grandparents, siblings, cousins, nephews, or nieces. A person acting in a fiduciary capacity for persons so related could also be a partner. All of the partners must be natural persons or persons acting in a fiduciary capacity for the benefit of natural persons.
The valuable reputation of a business viewed as an intangible asset.
The formal disbanding of a partnership or a corporation. It can take place by (1) acts of the partners or, in a corporation, of the shareholders and board of directors; (2) the death of a partner; (3) the expiration of a time period stated in a partnership agreement or a certificate of incorporation; or (4) judicial decree.
Order of Prioritizing Partnership Assets
1. Payment of debts.
2. Return of capital contributions.
3. Distribution of profits.
Articles of Organization
The document filed with a designated state official by which a limited liability company is formed.
An association that is organized to provide an economic service to its members (or shareholders). An incorporated cooperative is a non-profit corporation.
A joint undertaking of a specific commercial enterprise by an association of persons. It's usually formed for a specific project for a specific period of time.
Limited Liability Company (LLC)
A hybrid form of business enterprise that offers the limited liability of the corporation but the tax advantages of a partnership.
The term used to designate a person who has an ownership interest in a limited liability company.
In a limited liability company, an agreement in which the members set forth the details of how the business will be managed and operated as followed:
1. Preferably written.
2. Signed by members of LLC.
3. Addresses issues of management, profit-sharing, transfer of ownership (buy-sell agreement).
4. Addresses issues of governance, such as voting rights and member meetings.
5. Provisions regarding dissolution.
6. If issue isn't covered, it generally follows partnership law.
2. Manager-managed—A designated person or group; some or all whom may not be members.
An investment group of persons or firms brought together for the purpose of financing a project that they would not or could not undertake independently.
Pros of an LLC
1. Members have limited personal liability.
2. May elect to be taxed as a corporation or partnership.
3. Flexibility and informality in documentation.
Cons of an LLC
1. Non-uniform state statutes.
2. May not receive recognition in all jurisdictions.
Articles of Incorporation
The document filed with the appropriate governmental agency, usually the Secretary of State, when a business is incorporated. It includes:
1. Name of corporation.
2. Number of shares the corporation is authorized to issue.
3. Name and street address of corporation's initial registered agent and registered address.
4. Name and address of each incorporator.
Rights held by shareholders that entitle them to purchase newly issued shares of a corporation's stock, equal in percentage to shares presently held, before the stock is offered to any outside buyers.
A for-profit corporation that seeks to have a material positive impact on society and the environment. This new business form is available by statute in a growing number of states.
A certificate that evidences a corporate (or government) debt. It is a security that involves no ownership interest in the issuing entity.
A set of governing rules adopted by a corporation or other association.
Close Corporation (Privately-Held)
A corporation whose shareholders are limited to a small group of persons, often only family members. The rights of shareholders usually are restricted regarding the transfer of shares to others.
Shares of ownership in a corporation that give the owner of the stock a proportionate interest in the corporation with regard to control, earnings, and net assets; shares are lowest in priority with respect to payment of dividends and distribution of the corporation's assets on dissolution.
Legal entity formed under the laws of a state; owned by shareholders, and managed by a board of directors and officers appointed by such directors.
A distribution to corporate shareholders of corporate profits or income, disbursed in proportion to the number of shares held.
In a given state, a corporation that does business in, and is organized under the laws of, that state.
In a given state, a corporation that does business in the state without being incorporated therein.
Pierce the Corporate Veil
To disregard the corporate entity, which limits the liability of shareholders, and hold the shareholders personally liable for a corporate obligation.
Classes of stock that have priority over common stock as to payment of dividends and distribution of assets on the corporation's dissolution.
A close business corporation that has met certain requirements as set out by the Internal Revenue Code and thus qualifies for special income tax treatment. Essentially, an S corporation is taxed the same as a partnership, but its owners enjoy the privilege of limited liability.
S Corporation Status
1. A domestic corporation.
2. Not a member of an affiliated group of corporations.
3. Shareholders are individuals, estates, or certain trusts and tax-exempt organizations.
4. No more than 100 shareholders.
5. Only one class of stock.
6. No non-resident aliens as shareholders.
An equity (ownership) interest in a corporation, measured in units of shares.
A Latin term meaning "beyond the powers"; in corporate law, acts of a corporation that are beyond its express and implied powers to undertake.
De Jure Corporation
Corporation whose Articles of Incorporation contain a technical defect, but substantially comply with the law.
De Facto Corporation
Corporation which, despite a substantial defect in its operation (i.e. failure to adopt bylaws, lack of maintenance of corporate status), the law recognizes and treats as a legal corporation.
Corporation by Estoppel
Business entity, which isn't a corporation, holds itself out as a corporation (fraudulent misrepresentation), and as a result of such misrepresentation, such entity or individual will be estopped (prevented) from denying corporate status as a defense against claims of a third party (who relied on the misrepresentation).
Formed by the government to serve a public purpose.
Formed and owned by individuals or other private interests.
A person who takes the preliminary steps in organizing a corporation, including (usually) issuing a prospectus, procuring stock subscriptions, making contract purchases, securing a corporate charter, and the like. He or she's personally liable for contracts prior to incorporation unless otherwise agreed.
The substitution, by agreement, of a new contract for an old one, with the rights under the old one being terminated. Typically, there is a substitution of a new person who is responsible for the contract and the removal of an original party's rights and duties under the contract.
A corporation is an artificial being, existing only in law and neither tangible nor visible.
Right of First Refusal
A contractual right that gives its holder the option to enter a business transaction with the owner of something, according to specified terms, before the owner is entitled to enter into that transaction with a third party.
Pros of a Corporation
1. Shareholders have limited liability.
2. Ownership is separate from management.
3. Perpetual entity.
4. It's easier to obtain capital.
Cons of a Corporation
1. Formality required in operations.
2. Double taxation unless S-corporation status is elected.
Duty of Care
Directors and officers are obligated to act in good faith, to use prudent business judgment in the conduct of corporate affairs, and to act in the corporation's best interests.
Duty of Loyalty
Directors and officers have a fiduciary duty to subordinate their own interests to those of the corporation in matters relating to the corporation.
Business Judgment Rule
Directors and officers are protected from personal liable if they acted in good faith on behalf of the corporation and in its best interest.
2. Limited liability.
3. Inspect the books or records for a proper purpose.
4. Voting rights.
Each shareholder multiplies his or her shares by the number of open seats for the total number of votes (e.g. 3,000 shares * 3 seats = 9,000 votes).
In corporation law, a written agreement between a stockholder and another under which the stockholder authorizes the other to vote the stockholder's shares in a certain manner.
The number of members of a decision-making body that must be present before business may be transacted.
Shareholder's Derivative Suit
A suit brought by a shareholder to enforce a corporate cause of action against a third person.
Shares of stock issued by a corporation for which the corporation receives, as payment, less than the fair market value of the shares. The shareholder is personally liable for the difference.
Declared when corporation is insolvent or paid from improper corporation funds.
The right of a dissenting shareholder, if he or she objects to an extraordinary transaction of the corporation (such as a merger or consolidation), to have his or her shares appraised and to be paid the fair value of his or her shares by the corporation.
A contractual and statutory process in which two or more corporations join to become a completely new corporation. The original corporations cease to exist, and the new corporation acquires all their assets and liabilities.
A contractual and statutory process in which one corporation (the surviving corporation) acquires all of the assets and liabilities of another corporation (the merged corporation).
The remaining, or continuing, corporation following a merger.
The acquisition of control over a corporation through the purchase of a substantial number of the voting shares of the corporation.
The corporation to be acquired in a corporate takeover; a corporation to whose shareholders a tender offer is submitted.
An offer to purchase made by one company directly to the shareholders of another (target) company; often referred to as a "takeover bid."
A company may establish special termination or retirement benefits that must be paid to top managers if they are "retired." (i.e. If I go, I'm taking this with me!)
The target corporation issues to its stockholders rights to purchase additional shares at low prices when there is a takeover attempt. Thus, it makes the stock more expensive.
The target corporation solicits a merger with a third party, which then makes a better (often simply a higher) tender offer to the target's shareholders.
Blue Sky Laws
State laws that regulate the offer and sale of securities.
The relationship between a corporation and its shareholders—specifically, a system that details the distribution of rights and responsibilities of those within the corporation and spells out the rules and procedures for making corporate decisions.
The purchase or sale of securities on the basis of "inside information" (information that has not been made available to the public) in violation of a duty owed to the company whose stock is being traded.
A document required by federal or state securities laws that describes the financial operations of a corporation, thus allowing investors to make informed decisions.
SEC Rule 10b-5
A rule of the Securities and Exchange Commission that makes it unlawful, in connection with the purchase or sale of any security, to make any untrue statement of a material fact or to omit a material fact if such omission causes the statement to be misleading.
A person who receives inside information.
A corporate insider.
This theory holds liable an individual who wrongfully obtains (misappropriates) inside information and trades on it for her or his personal gain because the individual basically stole information rightfully belonging to another.
Prevents short-swing profits. Must hold on to stock for at least six months.
All profits realized by certain insiders on any purchase and sale or sale and purchase of the corporation's stock within any six-month period.
- Formed for charitable purposes.
- Operated without the goal of making a profit.
- Formed by professionals (e.g. attorneys, doctors, accountants).
- Limits personal liabilities for non-professional liabilities (e.g. rent).
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