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My CPA-REGmodule25

Notecards I made from Wiley's 2012 CPA Exam Review

QuestionAnswer
In a sole proprietorship is the business a separate legal entity apart from the owner? No
What are the advantages of a sole proprietorship? Easy to form and operate(govt dont require formal filing or approval to begin operation), bus can be sold w/o approval from others, owner has right to make all decisions, profits are not shared, profits taxed only once on personal tax return of owner
What are the disadvantages of a sole proprietorship? Owner suffers all of lose, cannot obtain capital from partners/shareholders, owner has unlimited personal liability
What is not included as a partnership? passive co-ownership of property (joint tenants), nonprofit unincorporated associations (labor unions,clubs,charity)
What is the most necessary element of a partnership? Other important elements? 1.Profit sharing (receipt of share of profits is prima facie evidence(raises presumption) of a partnership) 2.joint control (partners have equal right to participate in mgmt, may be contracted away to managing partner)
What does the revised uniform partnership act state about partnerships and ownership of property? partner is no longer co-owner of property
Why doe a partnership create a fiduciary relationship between partners? each partner is an agent for partnership and for each other
How formal do partnership relationships have to be? informal, can be inferred from conduct (sharing of revenues (not gross receipts) is enough, no need agree to share losses b/c revenue sharing assumes sharing of losses)
Who can become a partner? anything who has the capacity to contract (corporations, minors(contract is voidable), partnerships can even become partners)
What are the common characteristics of a partnership? Limited duration, transfer of ownership requires permission of other partners, may sue/be sued as separate legal entities, unlimited liability of partners, ease of formation, partnership doesnt pay federal income tax(partners include share on tax returns)
When a partnership is created does it need to be filed somewhere? When would a partnership creation need to be in writing? 1.No 2.If partnerships purpose cannot be completed w/in one year of formation
What is the controlling law for the partnership? What does the Revised Uniform Partnership Act(RUPA) do? 1.the partnership agreement whether written or oral 2.fills in when relevant provisions are not contained in the partnership agreement
What's meant by partnerships interest? right of partner to share in profits/return on contribution on dissolution, considered personal property, freely assignable w/o other partners consent
If a partner assignes his interest to someone else, does the assignee become a partner? what rights does the assignee have? who is now liable? Is there a dissociation now? 1.not without consent of all partners 2.Only rights to assigning partners share of profits and return of capital contribution(unless partners say otherwise) 3.assignor remains liable as partner 4.No, not unless assignor also withdraws
What is included in partnership property? Can property be assigned to one partner? 1.property acquired w/partnership funds (unless different intent shown), property acquired by partner in his capacity as a partner 2.only by agreement of all partners
If a partner dies, what is his estate entitled to? Do the deceased heirs become partners? 1.only his share of profits and capital, not specific property 2.not automatically
What kind of liability does a silent partner have? Same as others even though doesnt help manage. personal, unlimited liability
How are ordinary business decisions decided in a partnership? What about a fundamental change? What are some examples of a fundamental change? 1.majority vote 2.unanimous consent 3.admitting new partners, action outside the normal scope of the business, action contrary to partnership agreement, amendments to agreement
If agreement doesn't specify how profits are shared, how then are they shared? What if contributed capital is not equal? What if the agreed on profit sharing but didnt mention loss sharing, how are losses shared? 1.equal 2.still equal if not mentioned in agreement 3.shared at same proportions as profit sharing
Can general partners be creditors of the partnership too? How would interest then be dealt with on loans? Capital contributions? 1.Yes 2. may receive interest on loans 3. No interest unless stated in agreement
If salaries aren't agreed upon, is there still a right to salary for work performed? No, because this is a duty. ON EXAM must be told partners paid salary, if not told, assume they do not.
Can a partner pursue his own self interest? What if liability is incurred for a partner going beyond actual authority? 1.Only if it is not in competition nor interfere with partners duty to partnership 2.the partner who went beyond is liable to the other partners for the amount of the liability
What rights do incoming partners have? Same as the previous partners
Can partners bind the partnership to contracts with third parties even if there is no actual authority? Yes all there needs to be is apparent authority (contract must be for something related to normal partnership business)
Is the partnership liable if a partner commits a tort within the course and scope of business? What if the partner breached a third parties trust (misapplied 3rd parties funds)? What about an act outside the scope of the partnerships business? 1.Partnership is liable to investor 2.Partnership is liable to investor 3.Partnership is NOT liable to investor
What dealings with a 3rd party dont have apparent authority and therefore need unanimous consent of partners (unless stated in agreement)? admitting new partner, amending agreement, assigning partnership property, making partnership guarantor/surety, admitting to a claim against partnership in court, submitting partnership claim to arbitrator, action outside scope of business
Are partners jointly and severally liable for all debts? Can creditors go straight for the partners and not the partnership? Yes, but creditors must first attempt to recover from partnership (unless bankrupt) before partners
If there is an agreement between partners to split losses and liabilities, does a creditor have to abide by these rules? No still hold each partner personally liable. If a partner pays more than his share he can get reimbursed by his partners
What are new partners in a partnership liable for in regards to existing debt? Only to the extent of there capital contributions. (no personal liability for old debts)
When are withdrawing partners no longer liable for subsequent liabilities? 2yrs after departure or notice of withdrawal/death given to 3RD party -actual notice to creditors dealt with -published notice(constructive) those who merely know partnerships existence -Can file statement of disassociation w/state secretary of state t
What if a withdrawing partner filed a statement of disassociation with the states secretary of state and a 3rd party creditor didnt see it? doesnt matter if 90 days have passed
If partners agree on liability of a withdrawing partner, are third parties held to this agreement? No, unless they joined in on agreement
Can partners be criminally liable in a 3rd party transactions? No, unless they personally participated in some way or statue specifically gives liability to all members of management
What actions by a partner trigger the termination of a partnership by the partner disassociating himself from it? -partner withdraws (voluntarily or involuntarily) from partnership -partner engages in conduct interfering with partnerships business -partner goes bankrupt -partner dies -partner is incapacitated
If a disassociation of a partner occurs, and partnership decides for dissolution, how can dissolution occur? If partner agreed not to disassociate could he still? Penalties for such an action? 1.prior/present agreement of partners or decree of court 2.Yes 3.liable for breach of contract
Does a partners withdrawal, death, or bankruptcy automatically cause dissolution of partnership? How long would the remaining partners have to decide the partnerships fate? 1.Does not thanks to RUPA 2.90 days after partner withdrawal/death/bankruptcy
If a partner is a creditor of the partnership, and the partnership is terminated. Is his credited amount paid after all the other creditors, or have the same priority as regular creditors? Same priority of regular creditors, but only for credited amount
If a partner has personal creditors, and partnership creditors are going after his assets. Who has first right to the assets? If reversed and personal going after partnership assets? 1.Personal creditors have first priority to personal assets 2.Partnership creditors have first priority to partnership assets
If a partnership is in the process of dissolution, can partners still bind other partners/the partnership to contracts with third parties? Yes, unless 3rd party notified of dissolution (actual notice to 3rd dealt w/before, constructive notice others, statement dissolution w/states secretary of state takes care of both & assume 3rd parties know 90 days after filing, 2yrs if no filing/notice)
How is a limited partnership created? -need compliance w/state statutes -file certificate of limited partnership w/secretary of state(otherwise treated as general partnership) -at least 1 general & 1 limited partner -contributions may be in promise to perform services/cash/property in futu
What is included in the certificate of limited partnership? -name address of limited partnership -name address of its agent -latest date partnership is to dissolve -signed by all GENERAL partners -limited partners names NOT required -must amend certificate for adds/deletes of general partners
Can the name of a limited partner be used in the name of the limited partnership? What must be included in the entitys name? 1.No not unless the name of the general partner is included too, if limited is then becomes personally liable to creditors(unless creditor knew he was only limited) 2.Limited partnership (may be abbreviated)
If the formation of the limited partnership is defective in some way, is the limited partner now personally partner? Yes, unless upon learning withdraws or fixes defect. Still would be held liable for past transactions.
What is the role of a limited partner in a limited partnership? INVEST, may act as agent/employee, consult with general partner, vote on dissolution/loans/change in business nature/removal of general partner, bring derivative lawsuit on behalf of partnership, be surety for partnership. MAY NOT manage like general part
What amount of losses are limited partners liable for? What if there is no agreement on profit and losses then what is sharing based on? 1.Amount of capital contributions made to limited partnership 2.percentages of capital contributions, not equal like in a general partnership
In a limited partnership, how is a new partner added to the partnership? written agreement of all partners, unless otherwise stated in agreement
Can limited partnership interest be assigned by a partner to another? Yes, in whole or part. Assignee is only thought of as a creditor tho, acquires no rights of the limited partner other than right to his profits
Can a limited partner own competing interests? Be a secured or unsecured creditor? withdraw capital contribution even if it impairs creditors? Can you be a limited and general partner at the same time? Do limited partners owe fiduciary duties? 1.Yes 2.Yes 3.No 4.Yes 5.No
What events trigger the dissolution of a limited partnership? -complete time period specified in certificate -specified partner agreement -unanimous written consent all partners -court decree -event causes partnership be illegal -withdrawal GENERAL partner by retirement,death,insanity,removal,bankruptcy,fraud
What is the priority order of distribution of assets of a limited partnership if dissolution is to occur? What must be filed with the state in a dissolution? 1.-creditors, including partner creditors -partners/expartners distributions -partners return of capital contributions -partners partnership interests in proportions they share in distributions 2.file dissolution document with state
What is a joint venture? association of two or more people(entities) organized to carry out a single business undertaking for profits
Joint venture law is similar to partnership law, but what exceptions exist? -each joint venturer no have apparent authority=limited power to bind to 3rd party -joint venturer death doesnt automatically dissolve -no need to file doc w/state -Fiduciary duties to partners, unlimited liability, right to participate in mgmt all app
In a limited liability company, what is the liability for each owner? Is limited liability retained even if members fail to follow usual formalities in conducting business? 1.their capital contributions, there is no personal liability 2.yes (not true for a corporation tho)
If an LLC conducts business in another state, which states laws govern the actions of the LLC? the state the LLC was formed in
Can an LLC sue or be sued in its name? Yes, because it is a separate legal entity
What must be filed with the states secretary of state to form an LLC? What must be included in an LLC's name? 1.Certificate of organization 2.limited liability company or limited company or an abbreviation of one of the two
Is there a limit on the number of members of an LLC? Is the LLC taxed? Can a member of an LLC have interest in a specific property of the LLC? 1.No 2.No tax liability flows through the LLC to the individual members 3.No has interest (personal property interest) in LLC in general
In an absence of agreement, how are profits and losses shared under most state laws? under RULLCA? 1.in proportion to their capital contributions (assume this on the test unless the q mentions RULLCA) 2.divide profits and losses equally
What management interest does a member of an LLC have? What information does a member of a member managed LLC have the right to? Members of a non member managed LLC? 1.right to manage firm affairs, vote w/in firm(each member has equal voice) 2.bus info w/o demand to exercise their rights and duties (same for managers in manager-managed co) 3.on demand inspect info @reasonable time,@bus location for appropriate reaso
Can a member of an LLC assign financial interest in an LLC? What does the assignee receive? 1.Yes, unless otherwise specified 2.Only rights to assignors share of profits (member may NOT assign any other right without consent of other members)
Who requirements must there be to bound an LLC to a contract? Who has the authority in a member managed LLC? Manager managed LLC? 1.LLC must have authorized the contract under agency law or contract is made in ordinary course of business 2.Members 3.Managers
Can the authority of managers/members to bind LLC to contracts be restricted? What would proper notice to 3rd parties be? 1.Yes in statement of authority (filed with secretary of state) or operating agreement 2. statement of authority deemed proper if filed with secretary, operating agreement proper notice to 3rd parties if receive direct notification of restrictions
If a member or manager of an LLC makes a payment in the name of the LLC, must they be repaid? Yes the LLC must repay them
Who owes duty of loyalty and due care to LLC? What does duty of loyalty mean? Is the LLC owed fiduciary duties by members in member managed? managers in manager managed? 1.both members and managers 2.can't compete with company, deal with a party that has an adverse interest in the LLC 3.Yes by members 4.Yes by managers
What is the order of priority of distribution of assets upon dissolution of an LLC? What may be required to be filled with the dissolution? 1.creditors -members/past members for unpaid distributions -members to receive capital contributions back -members for their distributions 2.a dissolution document with the state
How is a Limited Liability Partnership formed? -file articles of LLP with secretary of state -name includes LLP or written out -majority of partners approval needed to become LLP -laws where formed govern actions of LLP
Who would prefer a LLP formation? professionals who want to do business as a partnership but still pass through tax benefits while limiting personal liability of the partners (popular with accounting and law firms)
When would partners of an LLP have personal liability? if partner commits a tort within the LLP's business or torts committed by parties under the partners supervision or control
What are the two categories corporations are divided between? What is the main distinction? 1.S corporations and C corporations 2.tax treatment
What is the liability when invested in a corporation? Can a corporation be terminated by death of a shareholder? 1.limited, only risk investment amount 2.No regarded as perpetual exists until dissolved, merged, or terminated
What may a corporation do, considering it is a separate legal entity? -take, hold, convey property -contract in own name with shareholders/3rd parties -sue and be sued
Who manages a corporation? When may they be removed before their term ends? 1.Board of directors elected by shareholders 2.only for cause under common law
What are the disadvantages to a corporate structure? -Tax treatment(double taxation) -costs to create (must meet formal creation requirements) -formal operating requirements must be met -Public corporations have substantial costs of compliance with federal securities laws, may be subject to hostile takeo
What are the types of corporations and give a word on each. Domestic-operates within state incorporated Foreign-any state Professional-allow doctors/accountants/attorneys to incorporate Close Corporation-<50 shareholders De Facto-formed in fact but not properly by law De Jure-formed correctly
What type of business is not considered doing business within a state? defending a lawsuit, holding bank account, using mail to solicit orders, collecting debts, using independent contractors to make sales
If a foreign corporation is required to qualify to do business within a state, how is it accomplished? what does this mean? 1.obtain certificate of authority from state 2.appoint agent to receive service of process for suits against corp, pay specified fees, file info with secretary of state
What amount of shareholders must agree to become a close corporation? How can a close corporation be managed? Are shareholder meetings held? Is sale of stock unrestricted? 1.2/3rd of shares of each class of share must approve 2.If approve can function without board of directors, then managed by shareholders 3.Only if shareholder demands one in writing 4.No
What is a promotor? What do they do? Does a promoter have a fiduciary relationship with the corporation? 1.Someone/s who form corporations and arrange capitalization to begin corporations 2.handles issue of prospectus,promotes stock subscriptions,draws up charter 3.Yes
Are agreements made preincorporation by the promoter binding on the future corporation? Is the promoter personally liable on the contracts? What if his name isnt on the contract?What is a novation? 1.No unless adopted by corp once in existence 2.Yes adoption by corporation doesnt relieve 3.Still personally liable 4.relieves promoter of liability, other party must submit to. Also relieve if 3rd party clearly say only look to corp for performance
When a corporation is incorporated, what is included in the articles of incorporation to be filed with the state? proposed name of corp and address, purpose/powers of corp, name of registered agent of corp, name and address of each incorporator, number of authorized shares of stock
After incorporation, what must be done at the first shareholders meeting? What may happen then or subsequent meetings? 1.issue stock certificates, temporary directors resign and elect new ones 2.elect officers, adopt/reject preincorporation contracts, begins business of corp, adopt initial bylaws (provide specific rules for mgmt, no need to file with govt)
If the articles of incorporation are subsequently amended whos approval is needed? What amount of approval? do dissenting voters have options? 1.any adversely affected shareholders of amendment 2.often majority sometimes 2/3 3.may assert right of appraisal, receive FV (amt right before vote) for shares
What are uncertificated securities? Unissued stock? 1.securities not represented by written documents 2.authorized but not yet issued
How must treasury stock be purchased? Do treasury stock have to follow preemptive rights? Can the treasury stock be purchased if it makes the corporation insolvent? 1.out of unreserved or unrestricted earned surplus 2.No 3.heck no
In respect to creditors and liability, what happens if stock is originally purchased below par? subsequent purchaser? 1.creditor can hold the purchaser liable 2.still held liable if purchased in good faith without notice sale was below par
How is stated or legal capital of a corporation calculated? Can dividends be paid from it? 1.#shares issued x par value (or stated value) -if no par or stated value then use total consideration received 2.No
What is earned surplus now called? How is a surplus calculated? 1.retained earnings 2.Net assets - stated capital
Does preferred stock have voting rights? usually no (on test assume it is unless stated)
What does cumulative preferred stock mean? if periodic dividend is not paid, that accumulates and must be satisfied before common stock gets a dividend (not a liability until dividend declared by BOD)
What is a callable stock? may be redeemed at a fixed price by the corporation
What is a stock subscription? Contracts to purchase a # of shares from to be organized(subscript irrevocable for 6 months) or existing corporation, not binding till accepted by corporation. Once accepted subscriber liable for purchase and as a corporate shareholder
When is stock said to be watered? What can creditors of the corporation recover? 1.cash or property exchanged is less than the par or stated value (most state laws dont allow) 2.amount of water in shares(par value-amt paid)
What can be considered valid consideration for stock? any benefit to corporation (cash, property, services, intangible property, promissory notes, other securities, services contracted in future)
Are debt security holders owners? What are debt securities 1.No they are creditors 2.Debenture- long term unsecured debt Bond- long term secured debt
By law, does a corporation have to issue more than one class of common stock and more than one class of preferred stock? Yes
What are the powers and duties of a director of a corporation? Do they receive compensation? -can only bind corp acting as a board member at a duly constituted meeting of the board -declare dividends, select officers, delegate routine authority 2.not unless specified (may be reimbursed for expenses on behalf of corp)
What is the director of a corporations liability? must exercise ordinary care, due diligence -liable for own torts (corp liable to if committed w/in scope of duty), negligence if action caused corps loss, personally liable for ultra vires acts/approving illegal dividends
What is the business judgement rule in respect to the director of a corporations liability? If a director doesn't prevent wrongs of other directors could he be liable still? How can a corporation protect the liability of its directors and officers? 1.not liable for errors of judgement if not negligent and acting in good faith 2.Yes if intentional or negligent 3.purchase liability insurance(covers litigation and judgement costs), corp pays premiums
Do directors owe fiduciary duties to the corporation? Yes, even though not thought of as an agent, owe fiduciary duties of an agent (loyalty, due care, and obedience)
Can transactions that represent a conflict of interest to the director be considered valid? Yes one of the following must be established -conflict is disclosed/known by board and majority approve -conflict is disclosed/known by shareholders and majority approve w/vote -transaction is fair/reasonable to corp
What is the function of officers of a corporation? Are they agents of the corp? 1.operate day to day business as delegated by the board 2.Yes can bind corp by his individual acts if within scope of authority set forth in bylaws
Can an officer of a corporation also be a director? How are officers selected? Do they have a fiduciary duty? 1.Yes 2.By directors and work for a fixed term under the bylaws 3.Yes
In a corporation is there a fiduciary duty owed by major shareholders to minority shareholders? Yes when the majority shareholders have de facto control over the corporation
When can employee torts of violence hold the company liable? If they are foreseeable
Can any limitations be placed on a stockholders right to transfer stock? Yes but must be reasonable (normally used by closed corps), limitations must be printed plainly on the certificate to be effective against 3rd parties
Can stockholders have voting agreements that provide that they will vote a certain way on issues or for certain people for the BOD? Yes and it is enforceable
Can directors amend the bylaws without approval of shareholders? Yes
What rights do shareholders of a corporation have to dividends? None, unless dividends are declared by the BOD
What rights do shareholders of a corporation have to inspect a corporations books? Can look at minute books, stock certificate books, stock ledgers, general account books. Demand must be made in good faith and for a proper purpose
How is preemptive rights of a shareholder treated on the exam? must be told shareholder has preemptive rights or it does not exist
When can a stockholder sue on his own behalf? On behalf of the corporation? If on behalf of the corp, where do the damages go? 1.if his interests have been directly injured (denied right to inspect records, denied preemptive rights if shouldn't have) 2.duty of the corp is violated and the corp doesnt enforce, must 1st demand corp to take action, if no then sue 3.to the corp
What could stockholders be potentially liable to creditors of a corporation for? original issue stock sold below par(contingently liable for difference par and amt paid), unpaid balance on no-par stock, dividend paid that impaired corps capital if corp is insolvent
If the corporate veil is pierced, could stockholders be held personally viable? Yes rarely happens but may occur if; -corp used to perpetuate fraud -owners/officers dont treat corp as separate entity -shareholders commingle assets,bank accounts, financial records with the corp -corporate formalities are not adhered to
What happens to shareholders of a corporation that goes through a merger and their corporation is absorbed? surviving corp issues its own shares to shareholders
What are the requirements necessary to achieve a merger or consolidation? What can dissatisfied shareholders do? -both corp boards prepare/submit plans to shareholders -approval both BOD -shareholders given copy/summary of merger plan -shareholders each majority vote approves -all assets/liabilities transferred 2.dissent and assert appraisal rights (get FV of s
Who must a voluntary dissolution of a corporation be approved? Who can decide to do a voluntary dissolution? What must be filed? 1.Yes by majority of shareholders entitled to vote 2.BOD 3.dissolution document
If a corporation is going through the liquidation process, what is the priority of payments? -expenses of liquidation and creditors -preferred shareholders -common shareholders
What does a subchapter S corporation avoid? How? 1.double taxation 2.not paying tax at the corporate level, income flows through income tax of individual shareholders(report even if not distributed)
What are some rules a subchapter S corporation must watch out for? -must be incorporated in US, only have 1 class of stock -Can have no more than 100 shareholders -Shareholders limited to individuals, estates, qualified trusts, similar entities -No foreign ownership of shares -cannot have excessive amts of passive in
Created by: Bsantoro on 2012-03-18



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