Term
| Sole Proprietorship? 1st Tier. Advantages/Disadvantages? |
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Definition
One individual owns and operates the business. Common in retail stores, service businesses, and agriculture.
o Advantages: No organizational Fee’s. Sole decision making power. Only taxed as personal income
o Disadvantages: Unlimited personal liability. Contracts and business are subject to termination at death of owner. |
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Term
| Partnership? 1st Tier. Advantages/Disadvantages? |
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Definition
Pooling of capital resources and professional talent of two or more individuals. Often Law firms, medical associations, engineering firms.
o Advantages: Pool resources and no formal organizational structure.
o Disadvantages: Unlimited personal liability. Uncertainty of duration of business because partnership dissolves at death of partner. |
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Term
| Corporation? 1st Tier. Advantages/Disadvantages? |
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Definition
Artificial being created by government grants. Treated as a non-natural person.
(not allowed to vote, get married etc
o Advantages: Attractive to investors due to limited liability of shareholders. Only risk is limited to amount of capital invested in business. Corporation has a perpetual life and continues to exist on death of an owner. Separate legal entity, which can be sued, own property etc.
o Disadvantages: Double taxation (corporate income tax and personal tax on dividends). |
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Term
| Limited Liability Partnership? 2nd Tier. |
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Definition
| Shield innocent partners from personal liability beyond their investment in the firm. |
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Term
| Limited Liability Company? 2nd Tier. |
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Definition
| wide range of small manufacturing, retail or service businesses. Remedies unlimited personal liability problem. |
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Term
| Joint Ventures? 3rd Tier. |
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Definition
| relationship in which two or more persons combine their labor or property for a single undertaking and share profits and losses equally. Similar to a partnership except for a pursuit of a single transaction. All those in venture are accountable for negligence. |
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Term
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Definition
| a method of doing business. Not a form of organization. Franchisor grants the franchisee the right to engage in particular activity-using franchise owned intellectual property |
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Term
| Four types of franchise owned intellectual property? |
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Definition
1. Patents: Inventions or process (Federal Statutory Law)
2. Copyrights- Intellectual expression (Federal Statutory Law)
3. Trademarks- mark that identifies a product. (Federal Statutory Law)
4. Trade Secrets- formula, device or compilation of information used in business that provides advantage over competitors who do not have that same information. (Tort suit) |
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Term
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Definition
| Sets forth rights of franchisee to use trademarks etc of franchisor. |
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Term
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Definition
| products total image including its overall packaging look. |
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Term
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Definition
| name under which a business is carried on and if fictitious must be registered. |
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Term
| Types of Franchise? There are three. |
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Definition
1. Manufacturing or Processing Franchise- Grants franchisee authority to manufacture and sell product. May provide essential ingredient. Example- CocaCola bottling plant, provides syrup.
2. Service Franchise- Franchisee renders service to customer under the terms of franchise agreement. Example-RotoRooter
3. Distribution Franchise- Franchisee resells product in a geographical area. Example- gas distributors.
o Because of cost associated with Gas Dealerships and Car Dealerships, congress passed laws protecting from bad faith termination. Manufacture is liable for damages caused when franchisor terminates a dealer’s franchise for failure to comply. |
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Term
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Definition
| FTC requires that franchisors give prospective franchisee’s list of full disclosure 10 days prior to signing of contract or paying money (cooling off period). Includes: business experience of franchise, bankruptcy records, past and current litigation, initial and recurring payments, restrictions on territories, actual and average sales, and grounds for termination. |
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Term
| Vicarious Liability Claims? |
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Definition
| If negligence of the franchisee causes a 3rd party harm, franchisor is not liable because of independent contractor status. Franchisor cannot exercise control over employment related matters. |
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Term
| What are the two levels of taxation that apply to Corporations? |
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Definition
| 1) tax on earnings 2) tax on shareholder’s dividends. |
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Term
| Certificate of Incorporation? |
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Definition
| Written approval from the state or national government for a corporation to be formed. Also known as articles of incorporation. Replaced charter’s which were grants of authority. |
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Term
| Classification of a Corporation:Public? |
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Definition
| One established for governmental purposes and administration of public affairs. Example- Amtrak |
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Term
| Classification of a Corporation: Private? |
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Definition
| Corporation organized for charitable and benevolent purposes or for purpose of finance, industry and commerce. Business can be known as public if they sell stocks to the public. |
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Term
| Classification of a Corporation: Quasi-Public? |
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Definition
| Private Corporation furnishing services on which the public is particularly dependent. Also known as public service corporation. Example- Avista (Gas or electric company). |
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Term
| Classification of a Corporation: Domestic? |
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Definition
| State in which charter is held. Corporation that has been incorporated by the state in question as opposed to incorporation by another state. |
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Term
| Classification of a Corporation: Foreign? |
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Definition
| Corporation incorporated under laws of another state. |
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Term
| Classification of a Corporation: Special Service? |
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Definition
| Formed for transportation, banking, insurance, savings and loans. Subject to separate statutes. |
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Term
| Classification of a Corporation: Close? |
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Definition
| Corporation whose shares are held by a single shareholder or small group of shareholders. |
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Term
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Definition
| can elect to have 1 class of voting stock (become a simple corporation) making you have an S election. Avoid tax at the entity level. S Corporations are good for small business, otherwise you are a C corporation. |
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Term
| What are the five classes of people in corporations? |
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Definition
1. Promoters- most don’t have. Help give capital and promote idea or sell corporation to others.
2. Incorporators- Natural persons who sign and file appropriate forms to incorporate business.
3. Shareholders- all have these. Owners with no responsibility outside of corporation.
4. *Directors-Fiduciary relationship, all have these. Policy makers in corporation.
5. *Officers- Fiduciary relationship, all have these. Day to day actors of policy. |
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Term
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Definition
| State passed allowing incorporation to be liberal or conservative on corporations Delaware has developed its own body of corporate law. |
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Term
| Corporate Powers? How is one incorporated? |
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Definition
| Incorporated by filing with the secretary of state. |
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Term
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Definition
| Existence will continue on forever regardless of stock ownership or death. |
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Term
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Definition
| Corporations must have name to identify it and indicate incorporation. Cannot be deceptively similar to other names. |
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Term
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Definition
| Distinctive seal that is not needed in transaction of business. |
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Term
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Definition
| rules and regulations enacted by corporation to govern its own affairs. Includes voting rights, limitations on power. Applies to shareholder’s, directors, and officers. Can help protect minority shareholders. |
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Term
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Definition
| Indicate ownership in company. |
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Term
| Charitable Contributions? (Power) |
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Definition
| Some states limit amount that can be donated for charitable purposes. Make donations for the public welfare or for charitable or scientific purposes. |
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Term
| Ultra Vires? (Power). Corporation Purpose Clause? |
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Definition
“Outside the powers” act or contract that the corporation does not have authority to do or make. Limits power of the officers from engaging in activities that injure the corporation. Helps minority shareholders stop action. 3rd parties can use this against corporation.
o Corporation Purpose Clause-part of ultra vires helps stop undesirable acts. |
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Term
| Three ways to measure proper incorporation? What can the state do for the corporation? |
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Definition
1. De Jure- “Of Law” Corporation has legal right to exist by virtue of law. Everything was done correctly. Get protection from corporate shield
2. De Facto- “ In Fact”- Minor deficiencies that cannot be ignored but compliance may be sufficient to be recognized as a corporation. Example-missed signature. Gets protection from corporate shield.
3. Corporation by Estoppel- Equity protecting the aggrieved party from people who were not accepted as a corporation because of problems but continued to run the business despite it.
-State can give and take a corporations life (being administratively dissolved) due to crime, violation of laws, bankruptcy etc. |
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Term
| There are two ways companies come together. Name them. |
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Definition
Merger- Combining corporations by which one absorbs the other and continues to exists preserving its original charter while other ceases to exist. A +B= A
• Consolidation- Combining of two or more corporations in which the corporate existence of each stops and a new one is created. A + B = C |
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Term
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Definition
| A sells its assets so it no longer has sufficient liability. |
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Term
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Definition
| - indicative of ownership of property. Fractional interest in total property of the company. It is evidenced by a certificate that indicates ownership. |
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Term
| Two types of stock? Hint: (One type has two subsidiaries) |
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Definition
| Common Stock- stock that has no right or priority over any other stock as to dividend distribution. Preferred Stock- Stock that has priority or preference as to payment of dividends or upon liquidation. a. Cumulative Preferred Stock- Accumulates dividends for each year in which there was a surplus available but dividends were not declared. b. Participating Preferred Stock- After distribution they get both the preferred and common stock dividends. Treasury Stock- Stock that has been reacquired by corporation. |
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Term
| The Three ways to value stock? |
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Definition
Par Value- specific amount assigned by a corporation that must be paid in order to acquire the stock. Not all stock has par value
Book Value- Value found by dividing value of corporate assets by number of shares outstanding. This is the accounting value
Market Value¬- Price at which stock can be voluntarily bought and sold in the open market. |
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Term
| Specialized Statute of Frauds(sale of corporate shares must be evidenced in writing (all three)): There are three. Hint: one has two subsidiaries. |
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Definition
1. Voting Trust- Cumulative voting is the preferred, for common stock. Transfer by two or more persons of their shares of stock to a trustee who is to vote the shares and act for the shareholders. Allows concentration of voting strength.
2. Proxy-Shareholder has the right to authorize another to vote in the shares owned by the shareholder.
3. Stock Subscription Agreement- Contract to buy a specific number of kinds of shares when they are issued by the corporation. If this is signed, the shareholder is liable. (Binding)
a. Before Incorporation- A subscription for shares entered into before incorporation is irrevocable for 6 months unless agreement provides longer or shorter period. Can’t take away offer for 6 months.
b. After Incorporation- Just like any other contract and are irrevocable. |
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Term
| Name the three rights of shareholders. Hint: One has two subsidiaries. |
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Definition
1. To Vote- Only shareholders of record, or whose name appears in books of the corporation may vote for election of directors and other matters.
a. Straight Voting- One share is entitled to one vote.
b. *Cumulative Voting- each shareholder has as many votes as the number of voting shares multiplied by the number of directors to be elected. Can distribute votes as desired. Ex- B has 200 shares and 5 directors are running, therefore B has 1000 votes for anyone.
*2. Inspect The Books- Inspection must be in good faith for proper motives at a reasonable time and place. Must be reasonably related to shareholders interest in company. Helps determine financial condition of corporation, quality of management etc.
*3. Receive Dividends- If dividends are declared, shareholders have a right to receive a portion |
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Term
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Definition
| Physical transfer of certificate of ownership always must be endorsed. Can put restrictions on transfer to limit who it can be sold to but it must be on face of the certificate to be binding. |
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Term
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Definition
| If corporation increases capital stock, original shareholders must first be offered chance to purchase new capital stock in order to retain the same percentage of ownership. |
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Term
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Definition
| Shareholders have right to receive portion of dividends if they are declared. No absolute right though that dividends must be declared. Must be an earned surplus. |
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Term
| Name the three ways dividends can be paid. |
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Definition
• Retained Earnings- Earned surplus from previous years
• Current Net Profit- companies designated wasting assets corporations (companies who are designed to use up assets of the corporation, such as extracting oil or coal) may pay without regard to preservation of corporate assets
• Capital- there is no right for a company to pay with capital and company can sue if they want the money back |
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Term
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Definition
| IRS will force a company to pay dividends if they are keeping their earnings unfairly. |
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Term
| Two types of shareholder's lawsuits, what are they? |
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Definition
1. Minority Shareholder’s Suits- Money goes to the shareholder’s
2. Shareholder Derivative- Money goes to the corporation. This is when shareholders sue majority shareholders. Suing on behalf of the corporation for something directors did. |
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Term
| Piercing the Corporate Veil? |
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Definition
| A court may disregard corporate entity when there are exceptional circumstances that mean the person responsible should no longer be protected. |
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Term
| Piercing the Corporate Veil happens if? Hint: Two things. |
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Definition
• Alter Ego- When a corporation is so dominated by a director or shareholder that the separate personalities of the two no longer exist and there is wrongful use of this, courts will sue the director.
• Insufficient Capitalization- If a mother company establishes smaller companies to protect assets of the big one, allows person harmed to disregard little companies if they have no capital and go for controlling party. |
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Term
| Piercing the Corporate Veil? |
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Definition
| A court may disregard corporate entity when there are exceptional circumstances that mean the person responsible should no longer be protected. |
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Term
| What is the definition of Exceptions to Limited Liability? Also, name three exceptions. |
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Definition
liabilities imposed on shareholder as though there were no corporation under these particular circumstances.
1. Wage Claims- Shareholder’s are liable for wage claims of corporate employees.
2. Unpaid Stock Subscription Agreement- If shares issued have not been fully paid for, original subscriber who received the shares is liable for unpaid balance if corporation is bankrupt and money is required to pay its creditors.
3. Wrongfully declared dividends- If dividends are improperly paid out of capital, shareholders are liable to creditors to the extent of depletion of capital. |
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Term
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Definition
| agreement setting forth the contractual terms of a particular bond issue. |
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Term
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Definition
| instrument by which the grantor (owner of land) conveys or transfers title. |
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Term
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Definition
| Fixed amount of money set aside each year by borrowing corporation toward the ultimate payment of bonds. |
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Term
| What is Management's Control of Shareholder’s? |
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Definition
| control is limited to voting at shareholders’ meetings to elect directors. Also may vote to amend bylaws, approve shareholder resolutions or vote on extraordinary corporate matters. |
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Term
| When do the Shareholder's meetings happen? |
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Definition
• Regular meetings¬- time and place of regular meetings are stated in the bylaws. Notice of meetings is ordinarily not required.
• Special Meetings- notice and subject matter must be given to all shareholders disclosing where when and the nature of the business to be transacted. No other business except that stated may be transacted at the meeting. |
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Term
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Definition
| minimum number of persons, shares represented or directors who must be present at a meeting in order to lawfully transact business. Only need this number of people to vote. |
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Term
| What are directors responsible for? Name three. |
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Definition
| are responsible for oversight and responsibility, primarily for policy. They 1) plan mergers and acquisitions 2) approve SEC filings 3) approve strategic plans as well as several other duties. |
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Term
| How is the number of directors determined? |
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Definition
| • The number of directors is fixed in the corporate By-Laws. |
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Term
| When can courts interfere with directors |
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Definition
| Courts will not interfere with directors actions unless illegal conduct or fraud occurs. |
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Term
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Definition
| Director is disqualified from taking part in corporate action if they have a conflict of interest. Example- Corporation is planning to buy Director’s own corporation. Director cannot act on merger. |
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Term
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Definition
| Prohibits all loans either directly or indirectly to directors and executive officers by their corporations. Exception is for consumer credit businesses. |
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Term
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Definition
| directors act in fiduciary capacity in dealing with the corporation. |
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Term
| The Business Judgment Rule? |
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Definition
| Rule that allows management immunity from liability for corporate acts where there is reasonable indication director acted in good faith, with adequate information, having exercised reasonable care on behalf of corporation. Excuses liability of director |
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Term
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Definition
| Corporation will protect director as long as they acted in good faith of company. Found in articles of incorporation. |
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Term
| Action Against Directors? |
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Definition
Should be brought by corporation. If not shareholder’s may bring action to represent corporation (derivative suit).
• Ordinarily Directors are removed by vote of the shareholder’s. |
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Term
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Definition
| they run the corporation. act as agents of the corporation, grounded by agency law. They have more extensive fiduciary duties because of their interaction with corporation. Officers are liable for 1)secret profits 2) diverting corporate opportunities. They are appointed by either BoD or Shareholders and are limited to act only under duties prescribed to them. |
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Term
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Definition
| Not liable to third parties for economic consequences as long as they acted in good faith to advance interest of the corporation. Not liable for loss even if there is negligence because the corporation is. They are personally responsible for any crimes or torts they commit, even if they act on corporations behalf. |
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Term
| Responsible Corporate Officer Doctrine? |
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Definition
| Officers and Directors may be criminally liable under federal and state law for failure to prevent commission of a crime if they are the responsible corporate officers. Example- dumping sewage with knowledge of the violation, officer is personally liable. |
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Term
| What must officers sign? (officers signing documents) |
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Definition
| must sign name and officer position in corporation otherwise officer is personally liable for note signed. |
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Term
| Liability of Management to Third Parties? |
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Definition
| - Corporate veil gives shareholders limited liability. Management is not liable for economic consequences if made in good faith or poor decisions. Not liable for corporate obligations or debts. Corporate is civilly liable if one of its agents causes injury under scope of corporation. |
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