Limited liability is a form of investment where an investor or partner cannot lose more that the total amount voluntarily invested. It means that the partner or investor is in no way personally responsible for the obligations and debts of the company in the event that the corporation fails to fulfil them (Gabaldon & Sagers, 2016). For instance, if the company is sued, it is only the assets of the business that are at risk and not the personal assets of shareholders such as their cars or houses. To maintain the limited liability privilege, company owners ought to adequately capitalize their business, keep up with paperwork requirements and comply with certain corporate formalities. Limited liability is the main reasons individuals go for incorporation.
Chapter Two, Part One, Question Five, Pg 42.
True or False? With careful planning, a corporation may be able to avoid the burden of two-tier taxation.
For instance, small corporations which are subject to the burden of two-tier taxation can avoid double taxation by employing their stakeholders like employees and instead of paying them dividends they only pay them salaries thus they will only be taxed as pass-through entities. For the S Corporations, they are subject to a limitation on their size and organization but enjoy pass-through taxation. Tax avoidance was made famous by personal injury lawyer and Senator John Edwards. It was also used by former Speaker Newt Gingrich thus it is often termed as Edward-Gingrich Loophole (Gabaldon & Sagers, 2016). Usually, it is applied in business which would ordinarily pay their owners high wages but saves on the tax bill to organize as an S Corp, pay relatively low wages and pay the remainder as dividends. Both the income and dividends are taxable to the shareholder as income but since the firm is an S Corp they are not double taxed.
Chapter Three, Part Two, Question Eight, Pg. 70
True or False? Sub-agency necessarily involves two agents and two principals.
A sub-agent has the same principal as some other agent. Sub-agency can include one principal and two agents. A sub-agent is also the agent of the other agent thus the subagent owes fiduciary duties and can create vicarious liabilities for both the other agent and the ultimate principle (Gabaldon & Sagers, 2016). In sub-agencies, the ultimate principals instructions and interests are very crucial thus the sub-agent must obey the principal in the event his instructions are far-fetched from the appointing agents instructions.
Chapter Five, Part Two, Question Five, Pg. 129.
Arno, a regulatory compliance worker at PixCo who is supposed to identify environmental risks and report them to his boss Sam, notices the leak on a routine plant inspection tour.
b. Yes, because the information is material to Arnos duties and within his scope of employment.
Under the effect of ratification on notice and notification, a principal is charged with notice of a fact if his agent had notice of it and it was material to the agents duties. Also, the announcements are effective if the agent had an actual or apparent authority to give or receive them (Gabaldon & Sagers, 2016). If the principal ratifies some conduct that happened to include the giving or receipt of notification, the principal almost assuredly takes on the imputation of the notification, because the ratification will retroactively authorize it. Thus, any facts of which the agent had notice at the time and which are material to the act that was ratified will be retroactively imputed to the principal. In this case, the company will be held liable because Arno has knowledge of the liking pipe.
Chapter 6, Part Three, Question Seven, Pg. 167.
What are the elements of a purported partnership?
If an individual who purports to be a partner consents to be represented by another person as a partner in a partnership, he or she is liable to an individual to whom the representation is made whenever the individual enters into a transaction with the real or purported partnership (Gabaldon & Sagers, 2016).
Whenever a person is thus represented to be a partner in a genuine partnership, or with one or more individuals, not partners, the purported partner is an agent of persons complying with the representation to bind them. It is represented to the same degree and in the similar fashion as if the purported partner were a partner, about persons who enter into transactions in reliance upon the representation.
Chapter 7, Part Three, Question Six, pg. 191.
What is the purpose of a drawing account? Does it represent an actual amount of money that the partnership has set aside? Why or why not?
A drawing account is used when the partners have agreed to permit themselves to make withdrawals from their capital accounts. The law states that the partners accounts are credited with their share of any profits, but partners do not have a right unilaterally to withdraw that share unless there is an agreement to that effect. Otherwise, withdrawal of earnings is a matter arising in the ordinary course of business and is to be decided by majority vote of the partners (Gabaldon & Sagers, 2016). A capital account does not necessarily represent all the money that the company has set aside, but it is a type of a credit account that has a debit balance. It always has a negative balance because the partner has withdrawn and it is not something they were entitled to receive.
Chapter Ten, Part Three, Question Four, Pg. 288.
Larry is a limited partner in Limited, L.P., a limited partnership. He also is the 100 percent shareholder of Limited, Inc., the corporate general partner, as well as its only director and president. At a Rotary Club luncheon, he meets Sue, a supplier of a product that Limited, L.P. uses. He hands her a business card that says Larry, Limited Partner, Limited, L.P. Larry subsequently phones Sue, identifies himself as Larry from Limited. He reminds her where they met and places a large order. The order is delivered and the product is used, but not paid for. If Limited, L.P. is unable to pay, will Sue be able to recover from Larry? If so, under what theory or theories?
Yes. So can recover from Larry under the following liability theories:
A limited partner is not responsible for the duties of a limited partnership save for the fact that he or she is also a general partner. Also, in addition to the use of his or her powers and rights as a limited partner, he or she participates in the management of the corporation (Gabaldon & Sagers, 2016). However, if the limited partner engages in the administration of the organization, he or she is liable only to persons who transact with the limited partnership logically concluding, based upon the limited partners behaviour, that the limited partner is a general partner.
A limited partner who knowingly permits his or her name to be used in the name of the limited partnership, except under the circumstances authorized by Section 102(2), is liable to lenders who extend credit to the limited partnership without genuine knowledge that the limited partner is not a general partner.
Chapter 13, Part Four, Question Four, Pg. 408.
In Model Business Corporation Act jurisdictions, a corporation comes into existence:
d. When articles of incorporation are filed by the Secretary of State.
Unless there is a specification of a delayed effective date, the corporate existence commences once the articles of incorporation are filed (Gabaldon & Sagers, 2016).There is conclusive proof that the incorporators satisfied all conditions precedent to incorporation once secretary of state files the articles that warrant establishment. The only exception is in the event there is a state proceeding to cancel or revoke the incorporation or involuntarily dissolve the corporation.
Chapter 18, Part Four, Question One, Pg. 561
A stockholder of LAMC brings a derivative suit challenging the development of the new company town. If the suit proceeds to the merits, the stockholder most likely will:
Lose, because such expenditures are within the legitimate range of the boards business judgment.
Most of the work of directors and officers involves making decisions. Decisions call for a decision-making process, which then can be charged into question and, in appropriate circumstances, deemed negligent (Gabaldon & Sagers, 2016). If an inadequate process nonetheless resulted in an outcome that was not injurious to the corporation, that is, did not cause it any damage no one is likely to find it worthwhile to complain. The judgment of the directors of companies uses the perks of a presumption that it was created in good faith and was meant to promote the best interests of the company they serve.
Chapter 20, Part Four, Question Three, Pg. 624.
At least in Delaware, breach of the duty of good faith:
Is a breach of the duty of loyalty?
It is well stated that the duty of loyalty dictates that directors act in good faith to promote the best interests of the company and abstain from conduct that damages the company. The duty of loyalty starts with ascertaining that the company operates consistently with its charter from Delaware which allows the company to undertake any lawful business by any legal means (Gabaldon & Sagers, 2016). A director, therefore, cannot make a Delaware corporation to break the law to make a profit. Preferably, directors must practice good-faith attempts to see to it that the corporation has policies that guarantee compliance with the regulatory laws applicable to its operations and to monitor senior management's compliance with those policies.
Chapter 29, Part Seven, Question One, Pg. 938.
Achmed is a shareholder of Alpha Corporation. (You may assume this corporation is subject to 14 of the Securities Exchange Act of 1934.) He owns approximately 2 percent of the corporations outstanding common stock. Achmed has learned that the management of Alpha intends to send out proxy solicitations to its shareholders for the purpose of obtaining their votes to re-elect the present board of directors. Achmed makes a written demand on the board to include the following proposals in its solicitation materials: (1) that Percy be appointed president and (2) that the employee restrooms in Alphas manufacturing facility be updated. Based on the foregoing, which of the following statements is most likely to be true?
b. Management must include Chunhuas proposal in its proxy solicitation materials if it does not, with any supporting statement, exceed 500 words.
However, there are other provisions to be sufficed including timeliness (more than 120 days after the proxy statement is to be discharged and the subject of the proposal. Also the amount of securities held (currently $2,000 in market value or 1 percent of the shares to be voted) and length of holding period -one year (Gabaldon & Sagers, 2016).When a proxy statement includes a proposal of a security holder, the proxy form must provide security holders with a mechanism for telling the proxy holder how to vote on the proposal. If management wishes to exclude a security holders proposal, it must make a filing with the Commission in which, among other things, it states its reasons. If the Commission disapproves, it would be rare for management to proceed with the exclusion; if it did, it would risk enforcement action.
Chapter 32, Part Seven, Question seven, Pg. 1024.
Which of the following best describes the method for calculating the amount of 16(b) profit a defendant has earned within a less than six-month period?
b. Matching the lowest purchase price with the highest sales price until all a...
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