BLAW 703 Exam 2
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Date Created: 02/14/15
Exam 2 studyguide note compilation Chapter 37 a Sole proprietorshipeasy formation but the person is fully liable to the creditors of the business b Partnership two or more people partner is liable for the actions of other partners when performing ordinary business All partners are responsible for the contracts each partner makes a Qualities i More than two people ii Carrying on a business iii Coownership of business which includes 1 pro t sharing 2management and business decisions iv In business to make a net pro t not a hobby v Intent to form partnership by actions of expressed b Partners are agents of the partnership c Required to have a writing for a partnership having a term of a year or more c Limited Liability Partnership partner is not liable for LLPs obligations If however they commit a wrongful act the partner is liable for their actions a General partnerunlimited liability for obligations of the LLP b Limited partnerlimited liability for obligations of the LLP up to capital contributions 1 Can39t manage the business 2 LLP losses can only offset their passive investments c Taxation election i Corporate LLP only has to pay federal tax on income partners only pay federal tax on distributions and compensation ii Partnershiponly pay tax on the individual level d Corporationboard of directors manage the business no shareholder has the right to manage a Shareholders are basically limited liability investors because they don39t have managing rights and they are only liable up to their contribution in capital b Only when there s dividends or a shareholder sells their stock do they report it on their individual tax return c Generally shareholders can trade their interests in the company freely without restriction d Scorporationcorporation taxed like a partnershipcan39t have more than 100 shareholders one class of shareholders and only owned by a person or trust not another business entity e Limited liability corporation owned by members who can manage elect manager the business and members only have limited liability f Purported Partnernot a real partner but the third party doesn39t know that apparent authority a Partner consents to be partner b No denial when aware of being called partner around 3rd party c Third party relies on the purported partner or partners in the partnership d Third party transacts with the partnership g Partnership capital a If a partner loans the partnership money then they become both a creditor and an owner Such loans are liabilities to the partnership and not equitycapital h Partnership property a RUPA default rule all property that is acquired by a partnership by transfer or whatever is partnership property and belongs to the partnership as an entity b Property requirements to belong to partnership 1 property is transferred to partnership in its name 2 property is transferred to any partner acting like a partner that names the partnership 3 a transfer document indicates the partner39s status as a partner or that the partnership is in existence c Intent of a partner decides whether the partnership or partner owns the property Chapter 38 Operations of Partners Duties of the Partner 1 No adverse interestpartner cant work on behalf of someone else or have an interest adverse to the partnership a Secret pro t like kickbacks b Partner bene ts outside of the partnership c A partner that pro ts personally is allowable if the partner acts in good faith informs the partnership and gets approval by other partners 2 Duty not to compete 3 Duty to servepartner must do their fair share of work in daily operations unless the partnership agreement says otherwise Limited partners who just invest capital into the company don39t have to serve 4 Duty of carepartner must act reasonably in good faith and in the best interests of the partnership so a partner is not liable for honest judgment errors However they are liable for gross negligence reckless conduct intentional conduct intentional misconduct and knowingly committing illegal acts 5 Do not exceed authority given 6 Duty to account for business transactions like disposal or use of partnership funds receipt of property etc 7 Duty of con dentiality 8 Duty to disclose all material information to partnership business Pro ts and Losses 1 Unless it39s in the partnership agreement partners share pro ts equally and not according to their capital contribution or time devoted to the partnership 2 Losses are shared in the same proportion that pro ts are distributed However pro ts are not shared in the same way losses are shared Management powers of a partner 1 In a regular partnership every partner is a general manager can manage everyday business activities and make contracts that bind the partnership 2 Every partner is liable for the other partners39 actions carried on in the ordinary course of business 3 All partners have implied liability which can be adjusted by expressed agreements A partner39s actual authority is made up of implied and express authority 4 Ordinary course of business is a requirement of implied and apparent authority If its not in ordinary business then all partners need to approve the acUon a Ordinary Examples trading company to borrow money or grant a liensecurity interest real estate sales b Since partnerships receive many negotiable interests in the everyday business a partner usually has implied and apparent authority to transfer or negotiate instruments for the partnership 5 Disagreement between partners a Default RUPA rule even though discussion between partners isn39t required most partners do and when put to a vote each partner gets one vote regardless of their contribution b Unanimous agreement is needed according to RUPA in acts that are not in the ordinary course of business 6 The partners can modify the rules of management with a unanimous agreement Tort and crime liability 1 Torts a Answer to respondeat superior when determining the liability of the partnership and other partners Requirements 1 employee 2 in scope of work b Partners and partnerships are jointly and separately liable for torts in the ordinary course of business i Partners that breaches a breach of trust all partners are liable c Intentional tortsusually the partnership is not liable unless they authorized the intentional tort d If a partner violates the duty of care other partners can seek reimbursement of their liability from the wrongdoing partner 2 Tort liability of LLP a lnnocent partners who did not do any wrongdoing b Gives a more expansive protection getting rid of partner39s liability to other partners or employee39s wrongful acts c LLP is still liable under respondeat superior d Wrongdoing partner and their supervisor are still liable for their own malpracticenegligence 3 Crime liabilitypartnership and other partners are usually not liable for crimes of other partners unless it was authorized Lawsuits 1 RUPA default rulesuing is ordinary in business so any partner has the authority to start a lawsuit 2 LLPs are liable for contractual obligations and tort obligations Partners are individually only liable for tort obligations if they had a role in the tort Ch39 notes A Dissociationa change in relation of the partners caused by any partner39s ceasing to be associated in the carrying of business a Causes retirement death expulsion or bankruptcy ling of a partner b A partner has the power to dissociate from the partnership at any time but not the right to dissociate Wronoful vs nonwronoful 1 Nonwrongful dissociation doesn39t violate the partnership C agreement partner has the right to dissociate Wrongful dissociation violates the partnership agreement or is otherwise wrongful partner doesn39t have the right to dissociate Nonwrongful Dissociation 1 2 Death of a partner Withdrawal of a partner at any time from a partnership at will This can happen only if the partnership agreement doesn39t specify any terms stating otherwise Another partner believed to be an important partner leaves the partnership by death incapacity or wrongful dissociation If a partner within 90 days believes their interest in the partnership is impaired they can dissociate Withdraw from partnership in accordance with the partnership agreement Automatic dissociation by the occurrence of an event agreed to in the partnership agreement Expulsion of a partner in accordance with the partnership agreement Ex partner is convicted of a crime Expulsion of a partner who has transferred his transferable interest or suffered a charging order against his transferable interest Must be approved by all the other partners absent a contrary partnership agreement Expulsion of a partner with whom it is unlawful for the partnership to carry on business Must be approved by all other partners absent of contrary agreement A partner39s assigning his assets for the bene t of creditors or consenting to the appointment of a custodian over his assets 10Appointment of a guardian over a partner or a judicial determination that a partner is incapable of performing as a partner Consequences of Nonwronoful Dissociation A partner who nonwrongfully dissociates from the partnership is entitled to be paid the value of her partnership interest The partner has no power to dissolve the partnership and to force winding up unless the partnership is 39at will the partnership has no term e Wrongful Dissociationpartner dissociates in violation of the partnership agreement or in any other wrongful way 1 Withdraw of a partner that breaches an express provision of the partnership agreement 2 Withdrawal of a partner before the end of the partnership39s term or completion of undertaking unless the partner withdraws within 90 days after another partners death incapacity appointment of a custodian or wrongful dissociation 3 A partner39s ling a bankruptcy petition or being a debtor in bankruptcy 4 Expulsion of a partner by a court at the request of the partnership or another partner a A partner39s wrongful conduct adversely and materially affects the partnership business b A partner willfully and persistently breaches the partnership agreement or her duciary duties c A partner39s conduct makes it not reasonably practicable to conduct partnership business with the partner A wrongful dissociated partner is entitled to his share of the value of his partnership interest minus the damages he caused the partnership wait until termination to get partnership interest original dissociation amount Effect of Partnership agreement partners may expand or limit the de nition of dissociation those dissociation that are wrongful or unwrongful and their effects B Dissolution and Windino Up the Partnership Business a Involves the orderly liquidation of the assets of the business May be done by selling the partnership as a whole or by pieces Partners continue to have as duciaries to each other especially in negotiating sales or making distributions of partnership assets to members of the partnership c Authority during Winding Up LExpress authorityauthority to act as the partners have agreed 2 Implied authoritypower to do acts appropriate for winding up the partnerships business a Implied authority to perform executor contracts made before dissolution but not yet performed b Implied authority to new borrowing of money if it helps preserve or enhance assets for sale c No authority to enter into new contracts unless the contracts aid the liquidation of the partnership39s assets 3 Apparent authorityauthority to conduct business as they did before dissolution when no notice is given Protections adainst apparent authoritv a Third party knows or has reason to know that the partnership has been dissolved b Third party has received noti cation of the dissolution by delivery of communication to thirdparty39s business place cDissolution has come to the attention of the third party LA partner has lled a Statement of Dissolutioneffective 90 days after lling It39s a good idea to post a notice of dissolution to inform other parties d Dissolved and windingup causes LPartnership39s term has expired LPartnership has completed the undertaking for which it was created LAN partners agree to wind up the business LWhen an event occurs that the partnership agreement states will 5 6 7 8 cause a winding up of the partnership For a partnership at will when any partners expressly withdraws from the partnership In a term or completion partnership when at least 50 of the remaining partners vote to dissolve and wind up the partnership within 90 days after a big partners leaves When the business of the partnership is unlawfulcan t be modi ed by agreement Upon request by a partner the court decides the partnership should be wound up Reasons a The economic purpose of the partnership is likely to be unreasonable frustrated b Partners conduct makes it not reasonably practical to carry on the business with that partner c It is not reasonable practicable to conform with the partnership agreement 9 Upon request of a transferee of a partner39s transferable interest in a partnership at will or a partnership whose term or undertaking has been completed when the court determines that its equitable to wind up the partnership businessCan t be modi ed by agreement e Disputes among Windingup Partners LDecisions in the ordinary course of winding up a majority of partners controls LExtraordinary decisions must have unanimous approval f Distribution of Dissolved Partnership39s Assets LAssets are distributed to partners and creditors LCreditors must be satis ed rst and then partners LPartners who have loaned money to the partnership is paid when creditors of the partnership are paid 4 The net amount in the partner39s capital account is distributed to the partner 6 LLP protects the partners39 individual assets if they aren39t liable for malpractice Creditors can only go after those liable not the other partners 0 After assets have been distributed termination of the partnership occurs automatically C When the business is continued Partners may choose to not go through winding up or dissolution after disassociation but still continue a Creditors of the partnership are creditors of the person or partnership continuing the business b Original partners remain liable for obligations incurred prior to dissociation unless stated otherwise i Novation 1 the continuing partners release a dissociated partner from liability on a partnership debt and 2 a partnership creditor releases the dissociated partner from liability on the same onga on ii Implied novation may be proved by a creditor s knowledge of a partners withdrawal and his continued extension of credit to the partnership iii Material modi cation in the nature or time of payment of an obligation operates as a novation when the creditor has knowledge of the partner39s dissociation iv When former partners release a dissociated partner from liability but creditors do not there is not a novation d If a third party believes a dissociated partner is still a partner then the partners may still be liable to the third party unless 1 2 3 4 The other party did not reasonably believe the dissociated partner was still a partner The other party knew or should have known or has received noti cation of the partner39s dissociation Transaction was entered into more than 90 days after the ling of a statement of dissociation with the secretary of state The transaction was entered into more than two years after the partner has dissociated e Buyout of Dissociated Partners 1 When the partnership is continued the partnership is required to purchase the dissociated partner39s partnership interest 2 The amount is usually determined by the partnership agreement but if not RUPA has rules a The buyout price is the greater amount had the partnership liquidated all its assets or the amount in the capital account had it sold the entire business as a goingconcern b Dissociated partner must be paid within 120 days after he has demanded payment in writing c The buyout amount must include interest from the date of dissociation D PartnersJoining an Existing Partnership a Liability of new partnerspartner is usually only liable for obligations that occur after he has joined unless stated otherwise in the agreement b New Partners in LLPs are only liable for obligations up to his capital contribution Ch 40 text notes LLC and LPsOnly covering LLC and LP 1 Limited Liability Companies LLChas both the advantages of being a corporation and tax status of a partnership a Tax treatment LLC can elect to be taxed like a partnership no federal taxation or as a corporation federal taxation 1 Partnership election is the most popular b Formation pro ts and losses are recorded on individual partner39s tax return LLCs losses can be deducted on individual return up to partner39s capital contribution risk in LLC Limited partnersuse their share of LLC losses to offset passive investment gains 1 File Certi cate of organization with secretary of state 2 Owners of the LLC are called members Can be individuals partnership corporation or another LLC 3 Create an operating agreementan agreement of the members Includes i Membermanaged or managermanaged ii Share of pro ts or losses iii Management of LLC iv How to withdraw from the LLC 4 Once created an LLC is a separate entity from its members c Members39 rights and liabilities 1 Limited liabilityindividual has no liability on LLC contracts unless they commit a tort i Usually limited to their capital contributions to the LLC ii Partner must make contribution as agreed upon in operating agreement initial capital contribution and additional calls for capital 2 Management rights 1 Membermanaged a each member shares equal rights in management b implied authority to carry on LLC ordinary business c operating agreement can make classes of members with different powers 2 Managermanaged a Not all members are managers managers have implied authority to manage the business as an agent of LLC agentprincipal duties apply b Manager does conducts LLC39s ordinary business c Managers can be voted on an off at any time by a majority vote d Consent of all members required when 1 amendment of the operating agreement 2 new partner admission 3 redemption of a member39s interest 4 big sale of partnership39s assets e LLC is liable only for a manager s wrongful act torts and not other members of the LLC d Dutieseach member whether the LLC is membermanaged or manager managed have a duciary duty of the LLC and its members 1 Fiduciary duties 1 duty to account for LLC property 2 duty not to compete with LLC 3 duty of care 4 duty to act in the best interests of the LLC 2 Nonmanaging members in a managermanaged LLC do not have duciary duties they don39t really participate in everyday ordinary business o All members must act in good faith and fair dealing act honestly and treat other members fairly e Member39s distributions 1 Default RULLCA ruleall members share pro ts and other distributions equally regardless of differences in capital contributions i No member can get a distribution of pro ts before the dissolution of the LLC unless there are interim distributions 2 Distribution of pro ts is usually spelled out in the operating statement in terms of how and when f Member39s ownership interestan member39s ownership interest is the personal property of the member 1 Transfer or sale of interest is limited in a LLC 2 Default RULLCA rulea member may transfer their transferable interest in the LLC to another person but they are still a member i a member will always be a member even if they transfer their interest and don39t get the pro ts directly ii transferee can t manage the LLC and has access to limited information about the LLC accounts 3 operating agreement can state that the transferee can become a member in which case they d get the rights power and liabilities of a regular member 4 A creditor can issue a changing order lien on a member s transferable interest and get the member39s share of pro ts to satisfy their debt The creditor doesn39t own the transferable interest g Members39 dissociation and LLC dissolution 1 Member dissociation a member stops being associated with carrying on the business and the relationship between the LLC and other members ends i Causes for dissociation members death guardian appointed over their affairs member is judged incompetent by court bankrupt expelled by other members ii Court expulsion 1 Harmed LLC business 2 Breached operating agreement 3 Its impractical to carry on business with the member because of their conduct 4 Appropriate when a member persistently breaches the duty of good faith or duty not to compete iii Wrongful dissociation 1 Causes a Withdrawing from the LLC before the set term b Being a debtor in bankruptcy c Being expelled by court 2 Dissociated member is still liable for damages caused by the dissociation Ex member dissociates before the term is over they are still liable until the term actually ends if the LLC continues to exist They don39t get any future pro t after the dissociation date iv Apparent authoritya dissociated member can have apparent authority to transact for the LLC if the third party is not noti ed Can notify by giving them some sort of notice or lling a Statement of Dissociation v Dissociation terminates a member s status as a member treated as a transferee of a member39s transferable interest 2 Dissociated member payment i Dissociated member can39t force the LLC to dissolve or liquidate unless it39s stated in the operating agreement ii Member can39t get the value of their interest in the LLC until the LLC dissolves However if there39s not term to the LLC at will then the LLC must buy the member39s interest back at FV within 120 days h LLC39s dissolution 1 Reasons i Unlawful to continue LLC ii Judicial dissolution at request of member transferee or dissociated member iii Administrative dissolution by the secretary of state 2 Judicial dissolution causes i Not practical for the business to carry on ii Business managed illegally or oppressively iii LLC failed to repurchase dissociated person39s interest on the date required 120 days after dissociation 3 All members can agree to dissolve the LLC unless it s stated otherwise in the operating agreement Nonwrongfully dissociated members can wind up the business Distribution of dissolved LLC assets i Priority 1 Creditors and partners who are creditors 2 Members39 contributions are refunded 3 Pro ts are distributed according to pro t share agreement ii Creditors ordinarily can only go after LLC39s assets because of limited liability protection iii LLC member must pay their required capital or else creditors can go after her assets P1P 2 Limited partnership a General v limited partners i Generalcontribute capital to the business manages the business and gets pro t Limited liability of obligations of the LP ii Limitedcontribute capital and get their share of pro t but do not have management powers Limited liability to their investments in business LP tax shelterlosses of LP reduce member39s personal tax liability i General partner member39s share of losses from business can offset any kind of income from any source ii Limited partnermember39s share of losses from LP only offset income from passive investments Therefore only a limited partners pro t from the LP can be offset by the LP39s losses 0 If a limited partner sells or terminates their interest then their losses from the LP can offset any income Creation i A certi cate of limited partnership must be executed and submitted to the secretary of state ii Many LPs have unlimited duration unless otherwise stated in agreement Defective compliance with Limited Partnership Statute i Limited partners are actually general partners can 1 Causes a proper certi cate of limited partnership to be led 2 Withdraws from future equity participation in the rm by ling a certi cate 3 May still be liable to third parties whom believed they were general partners Rights and liabilities of partners i A partner is obligated to contribute as he promised ii Share of pro ts of lossesproportionate to capital contribution unless stated otherwise in written agreement iii Partnership agreements usually state that a limited partner can take all the losses of the business up to their capital contribution iv Voting rights 1 Limited partners usually don39t have a right to vote unless its agreed upon in the partnership agreement 2 Approval of all partners is needed when a Amendment of limited partnership agreement b Amendment to certi cate c Sale or transfer of a lot of assets outside the ordinary course of business v New partners 1 All partners must agree to admit a new partner unless stated otherwise in the agreement 2 General partners usually have the power to admit new partners but they should try not to dilute ownership interest 3 Default ULPA rulepartners don39t have much power to expel other partners from the partnership vi Transferable interest partners can transfer or sell their interest 1 Buyer transferee or creditor have the right to get distributions 2 Original partner who transfers their interest still has the status of partner unless stated otherwise in the agreement vii Withdrawal from LLP 1 Default ULPA ruleno right to withdraw unless the limited partnership agreement says otherwise 2 Default ULPA rulewithdrawing partner doesn39t get their investment refunded to them unless the LLP dissolves or liquidates So a limited partner may have to wait until the LLP liquidates to get their investment back f General partner39s rights and liabilities i Implied authority to manage the ordinary business ii Express authority to act as agreed upon by partners iii Apparent authority if third party doesn39t know general partner has a limit on their implied authority iv Generally don39t get compensation v Unlimited liability to the creditors of the limited partnership g General partners duciary duties i Duty to account for property ii Duty to not compete iii Duty to not selfdeal with the partnership iv Duty of care h Liabilities and rights of limited partners i Rights of limited partners is to be informed about partnership affairs ii LP only liable up to their contributed capital iii No LP owes duciary duties to the LLP or other partners but they still need to act in good faith and deal fairly with the limited partnership i Both general and limited partner at the same time i LP has duties as a general partner when acting as a general partner and has duties as a limited partner when he is acting as a limited partner ii General partner39s liability in a LP is not reduced merely because he is also a limited partner iii A limited partner who becomes a general partner would lose his limited liability 3 Partners39 dissociations a Limited partner will dissociate if the limited partner dies withdraws or is expelled i Reasons to expel 1 Transferred of all her transferable interest 2 Suffered a charging order against her partnership interest 3lHegalconduct 4 Partners vote LP off unanimously ii Court expulsion 1 Wrongful conduct that negatively affects the business 2 Willfully and persistently breached the partnership agreement or limited duty of good faith and fair dealing Dissociated limited partner has no power or a right to vote but they still get distributions of pro t and their interest upon termination of the LLP b General partnerdissociates if LP dies withdraws expelled mentally or physically incapacitated or unable to perform as a general partner Reasons 1 Debtor in bankruptcy 2 Assets are assigned to bene t creditors 3 Custodian appointed to manage property 4 Expelled by vote of other partners Wrongful dissociation 1 Leaving before it terminates 2 Violated LP agreement 3 Being a debtor in bankruptcy 4 Expelled by court A general partner that is wrongfully dissociated is liable for damages caused by dissociation Implied and apparent authority A dissociated partner may have apparent authority and therefore the LP may still be liable for obligations So creditor should be noti ed Apparent authority ends after 2yrs of dissociation A dissociated partner will remain liable to obligations made before dissociation unless creditor agrees to relinquish the liability 4 Limited partners dissolutions a I ii iii iv v b after c to thei reasons vote to dissolve by majority of partners last general or limited partners dissociates are not replaced in 90days court decides business can reasonably carry on business fail to pay taxes or fees due to the secretary of state fail to deliver an annual report to secretary reditors are paid the pro ts are distributed to partners according r share of interest if a limited partnership39s assets are insuf cient to pay creditor s claim the general partners at the time the liability was incurred must contribute cash
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