Cpa Final Study Guide

8/3/2019 Cpa Final Study Guide

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Law Study Guide

Ch32 p638-648Ch34 p680-689 p691-703 Secured Transactions in Personal Property

1. Definitions

a. Secured transaction created by giving the creditor a securityinterest in that propertyi.Security interest property right that enables the creditor

to take possession of the property if the debtor does notpay the amount owed.

b. The property sunject to the security interest is called Collateralc. The parties

i.Creditor/secured party person to whom money is owedii.Debtor borrower

d. Nature of creditors interest creditor does NOT own thecollateral but the security interest is a property right. It can

ripen into possession and right to transfer title by sale.i.Creditor owes duty of due care

e. Nature of debtors interest owns the collateral and can recoverdamages for the loss/improper seizure of the property or damageto it

2. Creation of a security interest the following three conditions mustoccur for the creation of a security interest. Can occur in any order.Security interest attaches whne the last of the conditions has beenmet.

a. Agreementi.Must identify the parties, contain a reasonable description

of the collateral, indicate the parties intent tht the creditorhave a security interest in it, describe the debt and beauthenticated by the debtor

ii.No signature is required (electronic ok) and debtorsactions can indicate an understanding of the agreement

iii.Reasonable identification of collateral- specific listing,quantity, category or formula

1. all proprety wont work but livestock would2. requirement is more strict for consumer goods

iv.Oral vs written1. Oral ok if creditor has possession of collateral

2. Record necessary if notv.Field warehousing- oral agreement banks possess an

account but cannot use w/o position from account holderb. Value Given

i.Creditor can led money or deliver goods on creditii.Can be a current exchange or given previously as a loan

1. Common when creditors get nervousc. Debtors rights in the collateral


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i.Debtor must have rights in the collateralii.Security cant attach until goods delivered fob shipping

reach the buyer3. Purchase money interest

a. When seller sells on credit and is given security interest in the

goods sold called a purchase money securirty interest (PMSI)b. Special property rights given in some circumstances4. Nature and classification of collateral

a. Nature/classification affect the procedural obligaitons and rightsof creditors

b. Consumer goods used or bought for use primarily for personal,family or household purspose.

c. After-acquired collateral and ongoing credit creditors rights cancover future loand and acquisitions of collateral

i.Also called a floating lien crediors security interest coversthe inventory regardless of form or time of arrival in

relation to the attachement of the security interest.ii.Restricted in consumer credit ocntracts can only cover

goods acquired by the debtor within 10 days after creditorgave value to the debtor

d. Proceeds whatever is received upon the sale, echange,collection or other dispotion of collateral.

i.Collateral can change form and character during course ofagreement

ii.Insurance money is proceeds1. Automatically subject to creditors security interest

unless security agreement provides to the contractry

iii.Can be in any form cahs, checks, notes, other prorprtye. Electronic chattel paper property or funds in an electronic

medium5. Perfection of secured interests

a. Attachement of a secured interest gives the credit rights ofenforencment of the debt through repossession of the collateral

b. Multiple debtors have haold an attached security interest in thesame collateral

c. Perfected security interest enjoyrs priortity over unperfected andsometimes over oteher perfected interested

d. Still valid if unperfected, just helps to perfect

6. Perfection by creditors possessiona. Automatic perfecticon if the creditor has possession of the

collateral until the time it is surrenderedb. Field warehousing- creditor has agent at buyers place of business

7. Perfection for consumer goodsa. PMSI in consumer goods is automatically perfectedb. Simplified by the UCC bc so many consumer goods are

purchased on credit


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c. Perfection may be destroyed by debtors resale to a consumerwho does not know of the security interest

8. Perfection for health care receievabelsa. Automatic perfection when consumer givers a creditor a security

interest n forthcoming health insurance proceeds

9. Authomatic perfectiona. Random oher situations such as bundled software10.Temporary perfection

a. Generally 4 month period to refile financing statement in newstate a debtor moves to

i.Most agreements provide failure of debtor to notify thecreditor of a move is a default on the agreement

b. 20 day temporary perfection in negotiable instrumentsi.must perfect after by filing financing statement or

possession11.perfection by control

a. if debtor cannot use the collateral without permission from theparty holding the control (bank releasing payments)

12.perfection for motor vehicles must be noted on title registration13.perfection by filing financing statement (UCC1)

a. authenticated record that gives sufficient info to alert thirdperiods that a patircular creditor may have a security interest inthe collateral

i. old article 9 must be written/signed by debtorii.revised article 9 creditor must be able to show

documents were authoried and authenticated nosignature necessary

1. debtor could authenticate the security agreement2. debtor may become bound under a security

agreement, agreeing to allow financing statementsto be filed on the cllacteral

3. debtor acquires collateral subject to a securityagrmnt

b. unauthorized or w/o one of any 1 of the above 3 requirmentsdoes not provide the creditor perfected status

c. content of financing statement name of debtor, name ofsecured party, collateral description, address

d. must spell debtors name correctly so other ppl can know the

debts existe. must be filed in a public place-f. defective filing if its erroneous or incomplete or wrong country

or office, no perfection is acquired.14.Loss of perfection can be lost if creditor does not comply with article

9 requirements for continuing perfectiona. Possision of collateral if creditor voluntarily surrenders the

collateral to the debtor without any restrictions


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b. Cosnumers goods lost by removal of goods to another state, ifresold to unknowing buyer.

i.Can protect against these by filing fancinaing statementii.PMSI still good against other creidtos but not the buyers

c. Lapse of time

i.Perfection by financinc statmenet last 5 yearsii.Can continue another 5 years if filed continuationstatement within 6 months of the end of the first 5 yearperiod

iii.Mobile homes 30 year perfection automaticallyd. Removal from state- creditor must make filing in section state

within the four month period of temporary perfectione. Motor vehicles remains perfected without regard to lapse or

time or removal to another state. Only lose if a state issues newtiles w/o security interest notation

15.Rights of the parties before default

a. Statement of account i.debtor may send creditor a written statement of amount

the debtor thinks is due and an itemization of the collateral with a request the creditor approve/return the statement

ii.Creditor must approve or correct statement within 2 weeksof receipt

iii.If secured creditor has assigned the cliam creditor mustindicate name and address of the assignee

b. Termination statementsi.Detor who paid debt in full can demand a termination

statement stating security interest is no longer claimed

ii.Debtor can the present to filing officer who marks recordterminated

iii.Creditor has 20 days from receipt to file the terminationstatement (one month for consumer goods)

c. Correction statementsi.Debtors can protest filed finainc statements with filing of

their own orrection statemnts (or if termination statementis not provided)

16.Prioritiesa. Two parties may have conflicted interests in the same collateralb. Unsecured vs unsecured party

i.Equal priorirty- end of th line in terms of repaymentii.Receive pro rate share of their debts based on leftovers

c. Secured vs unsecuredi.Secured has superior rightii.If the collateral is insufficient to satisfy the debt, the

decured ebtor can stand in line with sunsecured reditorsand collat a pro rata share of remaining sdebt

d. Secured vs secured


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i. First in time provision whoevers interst attached firstii.Whoever isnt first can wait in line with the unsecured, as

the specific collateral was given to the first attachemente. Perfected secured vs secured party

i.Perfected takes priority

ii.Unperfected becomes regular unsecured b/c collateral wasgiven to perfeted creditoriii.Perfected secured partes interst vs other credits such a

lienors, mortagees and jusgment creditos is determined ona first to perfet basis.

f. Perfected secured vs perfected securedi. First in teime rule but three exceptions

1. PMSI in inventorya. If collateral is inventory, PMSI creditor must do

two things to prevaili. Perfect bfore the debtor receives

possession of the goods that will beinventory

ii.Giver notice to any other secured partywho has previously filed a finaniclngstatement with respect to that inventory

b. Rationale allows for businesses to replensihetheir inventory by giving new suppliers ahigher priority

2. PMSI in noninventory collateral such as equipmenta. PMSI prevail over all other as to the same

collateral if the creitor files a financing

statement within 20 days after debtor takesposseion of the collateral

3. Status of repair or storage liena. A person repairing or storing goods has a lien

and right to keep possession until paid for suchservices (or sell to obtain payment)

g. Secured party vs buyer of collateral from debtori.Sale in ordinary course of business

1. Buyer not subject to any creditors interest regardlessof nknowledge of the security interest

ii.Sale not in ordinary cour- unperfected security interest

1. Security interest has no effect if buyer gives valueand buys in good faith (doesnt know of securityinterest)

2. If buyer doesnt satisfy these, they are subject toclaims

iii.Sale not in ord cour perfected security interested1. Buyer of collateral is subject to tsecurity interest

unless the creditor consented to the sale


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iv.Sale not in orde cors- resale of consumer goods1. Resale destroys the automaticall perfected PMSI of

the creditor2. If buyer had no knowledge, will not be subject to

claims

3. Gives incentive to file financing statement regardlessof automatic perfection bc filing by statement wouldcontinue the claims

17.Rights of the parties after defaulta. Secured creditor can sue or proceed against the collateralb. Creditos posseion and disposition of collateral

i.Self-help reposseion is allowed if it can be done withoutcausing a breach of the peace

ii.Otherwise can sue to obtain the collateraliii.Secured creditor can sell, lease or dispose otherwise of

1. Can be public or private, any time/place/any terms

that is commercially resoablec. Creditors retention of collateral

i.Can keep it instead of selling itii.Notice of intention must send debtor notice of this intentiii.Compulsory disposition of collateral crediot must dispost

if debots makes a written objecting to retion within 21 daysor if the collateral consists of consumer goods and thedebtor has paid 60% or more tf the debt

1. Sale must be held within 90 days of repossessioniv.If seller fails to dispose when required is liable to debtor

for conversion of collateral or for penalty imposed by the

coded. Debtors right of redemption redeem prior to disposition by

tendering the entire oblication plus legal cost and reasonableexpenses

e. Dispotion of collateral creditor must give required notice andact in commercially resonalble manner

i.Give notice of day, time location of sale, contact numberfor quesitonss of debtor nad other parties

ii.Must be sent to debtor and other creditors with interest18.Posdispostion accounting

a. Proceeds first used to pay ezense of disposing of the collateral

b. Next appied to debt oder to the secured creditor making thedispotion

c. Remaing applied to other debts owed to secured creditorsholding interests in the same collateral

d. Any surplus must be returned to the debtore. If proceeds are insufficient to pay the costs and debt of disposing

creditor, the debtor is still liable for the deficit.Ch37 p760-776 Agency


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1. Definitionsa. Agency relationship based on express or implied authority by

which one person, the agent, is authorized to act under thecontrol or and for antoehr, the principal, in neoiting and makingcontracts with third persons

i.Normally consensual but can be forced by lawii.Can also be contractual if consideration is presentb. Acts of the agent obligate the principal to third personsc. Employees and independent contractors control and authorirty

distinugised these from agentsi.Employee could be an agent but is not always oneii.Independent contractor - Principal has no right to control

the contractor in performance of his work1. Can be treated as an employee in the eyes of the law

if the contractor is controllerd by the principal2. Same thing happens if separate identity of an

independent contractor is concealed so the publicbelieve its dealing with the principal

3. Principal would be liable as if contractor wasagent/employee

2. Classifications of agentsa. Special agent authorized to handle a specific actb. General agent authority to transact all affairs in connection

with a particular type of business or trade or to transact allbusiness at a certain place.

c. Universal agent authorized to do all acts that can be delegatedlawfully to a representative

3. Agency coupled with an interest (in authority or in the subject matter)a. An agent has an interest in the authority when consideration has

been given or paid for the right to exercise the authorityb. An agent has an interest in the subject matter, when, for a

consideration, she is given an interest in the property with whichshe is dealing.

4. Creating the agencya. Authorization by appointment

i.Express authorization may be oral but some types areequired to be written such as when agency is created toacquire or dispose of any interest in land

ii.Written authorization of agency called power of attorneyiii.Agent acting under power of attorney is referred to as an

attorney in factb. Authorization by conduct

i.Coduct consistent with the existence of an agencyrelationship amy be sufficient to show authorization

ii.If third person has prior dealings with a principal, causingthem to believe the agent has authority


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authoried to act (example authority to issue receipts whenauthorized to sell)

d. Apparent authority whne the principals words or conduct leadsa third person to reasonable believe the person has the authorityand the third person relys on that appearance

7. Effect of proper exercise of authority binds the principal and thirdparty, the agent is not a party to the contact.8. Duty to acsetion extent of agents authority-

a. third person cannot rely on statements made by the agentconcering extent of authority

b. third person is bound at their peril to findout the extent of theagents authority

c. agents acts adverse to principali. third person must notice any acts clearly adverse to the

interest of the pricincipalii.third persons can protect themselves by inquiried of the

principal wether the agent is in fact their agent and hasnecessary authority

9. limitations on aents authoritya. third persons cannot ignore knowledge of limitation if they have

itb. if the third party knows the agents authority is provided in a

written document, they are expected to know the limiationscontained in it

c. obvious limitationsi.expecially important with government contracts third

person must accurate ascertain the government agent is

within the bounds of his or her authorityd. secret limitations

i. third person can take agent at face value (not bound bysecret limiations of which person has no knowledge)

10.duties and libailites of agent during agencya. loyalty cannot obtain seret benefit from the agency. Agent

cannot sell his own property to principal w/o disclosing it. If nodisclosure, principal can approve transaction and sue for anysecret profit.

i.Contrat is voidable by the principal if the agent who issupposed to sell property, buys it himself either directly or

indirectly w/o full discloseii.Cannot act as agent for both parties in a transaction unless

both agree to the dual capacityiii.Cannot accept secret gifts or commissions can be sued

by the principal for those fitsiv.Cannot knowingly deceive the principal or aid competitors


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b. Obedience and performance obey all lawful instructions.Required to perform services secified for time period and in wayspecified.

c. Reasonable care act with the care that a reasonable personwould excerise in the circumstances

i.Agent is liablile to its principals for all damges resultingfrom the agents failure to discharge its dutiesii.Agent must exercise special skill if possessed

d. Accounting- agent must account to principal for all propertybellowing to the principal that comes into the agents possession.Must, within reaonble time, give notice o collections made andaccurately account for all receipts/expenses

i.Agency agreement may state accounting intervalsii.Agent must keep principals property separate from

theirowne. Information keep principal informed of all facts relating to the

agency that are relavent to protentinc ght principals interests11.Dutines and liabilities of agent after termination of agentcy

a. Duties contunie only to extent necessary to perform priorobligations

i.Return all property12.Dutiesand liabilities of principal to agent

a. Must perform the contract, compensate the agent for services,reimburse proper expense, and under certain circumastancesindeminift the agent for loss

b. Employment according to terms of contracti. Principal obligated to permit the agent to act as an agent

for the term of the contract (specified time)ii.Exceptions for just cause or contractual proviisons allowing

for early terminationiii.Must ive exclusive right if the contract says so

c. Compensationi.Msut pay agreed upon compensationii.If not specified amount, agent may recover customary

compensation for such services or reasonable valueiii.Repeating transactions / postagency transactions

1. Original agent does not receive comp for subsequenttransactions unless the employment contract says so

13.Termination of agencya. May be terminated by one or bother parties

i.Duration normally stated in contractii.Either party can normally terminate at any timeiii.Terminating party may be liabe for damages if the

termination is in violation of the agency ontactiv.When a principal terminates an agents authority, not

effective until the agent receives it


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1. Must also provide notice to third persons b/c theagent will still have apparent authority

2. Agent may still have the power to bind the principaland third parties until this notice is given

b. Termination by operation of law

i.Anything that renders one of the parties incapable ofperforming1. Death of either principal or agent (even if unknown

to the other)2. Insanity3. Bankrupctpy of either principal or agent4. Destruction of subject matter5. When country of agent is at war with country fo

principal14.Disability of the principay under Uniform durable power of attorney act

a. Power of attorney shalle not be affected by subdequent disability

or incapacity of the principal.b. Principal can designate an attorney in fact in writing for the

event of disability or incapacity.c. Changes the general rule that insanity terminates relationshipd. Durable powers of attorney grant only those powers specified in

the instuments and can be terminatied by revocation of acompentent principal or death of the principal.

15.Termination of agency oupled with an interesta. HUGE exception to general rules of termination. Cannot be

reovoked by the principal before expiration of the interest. Notterminatied by the death or insanity

16.Protection from termination of authirtya. Exclusive agency conrac, secured transaction, escrow, standby

letter of agreement, or guarantee agreement can protect agentfrom termaination of authority for no reason.

17.Effect of termination of authoritya. Not effective until agent receives notificationb. Must give notice to third persons b/c apparent authorityc. Notice can be given or mailed to all persons who had prior

dealing siwht the agent.d. Can also be given to general public by publisihing in local

newspaper

e. If notice is actually received, power of agent is terminatedwithout regard to whther giving of notice was proper

f. Conversely if proper notice is given, it does not mtter if the partynotified actually reads it


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Ch38 p 783-798 Third Persons in Agency

1. Action of Authorized Agent of disclosed principala. Agent has no personal libalityb. Doesnt matter if action was originally authorized or

unauthorized but later ratified by the principal, once effectiveratification no more liability2. Unauthorized action

a. If no authority, contract does not bind principal.b. The person acting as the agent has an implied warranty to the

third party that they are in fact authorized, if they lack thisauthority it is a breach of warranty

c. Agent can be liable for loss caused to third partyi. Good faith or misunderstanding scope of authority is no

defense for the agentd. Agent is not liable if the third party knew the agent didnt have

the authoritye. Agent with writeen authorization may avoid liability on the

implied warranty of authority by showing the writtenauthorization to the third person so the third person candetermine the scope of the agents authority

3. Disclosure of principala. Disclosed principal

i. Agent is not a party to the contract madeb. Partially disclosed principal

i. Agent makes known the existence o a principal but not theprincipals specific identity

ii. Agent is a party to the contractc. Undisclosed principal

i. Third person does not know the agent is acting for anoneelse agent is a party to that contract

4. Assumption of liabilitya. Agents may make themesleves liabilityb. Agent may make a contract that is personally binding, for

example if the principle is not disclosed.c. Even if principal is dislosed, may be binding with the agent if the

intention of the parties is the agent will assume some personallibality

5. Excecution of a contracta. Simple contract that would appear to be agent-third party, can

shave other evidence to show intent of contract btwn third partyand pricnil

b. To avoid any quesiotn of interprestation, an agent shouldexecust an instrument by signing the principals name and eitherby or per then the agents name

i. Or just sign the principals name only


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c. parol evidence is admisale to establish the character of theagents actions

6. torts and crimesa. agents are liable for harm caused to third persons by the agents

fraudlent intetntional or negligent acts.

b. The fact they acted in good fatith under the drections of aprincipal does not reclieve them of liability if their conduct wouldimporse liability on them when acting for themselves (example crime)

7. agents contractsa. simple contract with principal disclosed

i. binding btwn principal and third partyii. agent is not a party, not liablie for performance, and

cannot sure for its breachiii. liability not terminated on either side by giving money to

the agent to give to the other party (must actually be

delievered to them)b. simple contract with principal partially disclosed

i. third person can recover from agent or the principalc. comple contract with principal undisclosed

i. if the third person learns of the existence of theundisclosed principal. They can sue the principal

ii. can sue either agent, principal, or both8. payment to agnet

a. when third person makes payment to an authorized agent, thepayment is deemed made to the principal even if it neverdelivered to the principal.

b. Same effect for apparent and actual authotiryyc. Third person does not get credit if paid to a person who is not the

actual or apparent agent of the principal9. Agents statements

a. Principal is bound by a statemtn made by an agent whiletranscting buniess within the scope of authority.

b. The statemetns of the agent must be made at the time ofperformng the act or shortly thereafter in order to bind theprincipal

10.Agents knowledgea. Principal is bound by knowledge acquired by an agent while

acting within the scope of actual or apparent authorityb. Can sometimes be extended to prior to creation of agency

relationshipc. Relaiable information only rumors dont contd. If subject matter is outside scope of agents authority, principal is

not bound by it


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e. Principal not bound if the agent is acting adversle yto theprincipals interst or the thrd party and agent act in collusion tocheat the principal

11.Vicarious liability for torts and crimsa. Principal may be civilly liable

b. Rule of law imposing vicarious liability on an innonecnt employerfor the wrong of an employee is respondeat superiorc. Nature of act

i. Negligent act1. Negligent act committed within scope of employment

ii. Inteniontal act1. Employer is liable if the intential tort is committed by

the mployee for the purpose of furthering theemployers interests

iii. Fraud1. Most states employers are liable

iv. Government regulationd. Course of employment

i. Act must be committed while the individual was actingwithin the scope of authority if an agent or in course ofemployment.

ii. If not within scope of employment, no vicarious liabilitye. Employee of the united states

i. US is liablie under cicumstances that a private employerwould be

12.Negligent hiring and retention of employeesa. Normally used when implosing liability when act was outside of

the scope of employment and the employer knew or should haveknow the employee was incompent, violent, dangerous orcriminal.

b. Need for due care in hiringi. Must be shown the employer could have reasonable

foreseen injury to the trhid partyii. Background checks and similar are evidence of due care in

hiringc. Employees with criminal records

i. Not negligent in tseld, employer should investigate thenature of the convication in relationship to thejob to be

performedd. Negligent retention

i. If employer knew or should have known the employeewould create an undue risk of harm

e. Negligent supervision and traingini. Principal is liable for negilglince in regard to supervision nd

training13.Agents crime


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a. Principal is liable for crimes of an agent committed at theprincipals discretion.

b. Normally not liable if not authorized even if while the agent wasotherwise withing scoe of authority

i. Employer will be held liable for liquor sales or

environmental stuff14.Owners libality for acts of independent contractora. Owner is not liable for harm caused to third persons.b. Exceptions to owners immunity

i. When work undertaken is inherently dangerousii. When the owner controls the conduct of the contractor

c. Undisclosed independent contractori. The apparent owner is liable if the existence of

independent contractor is not disclosed or apparent15.Enforncement of claim by third person third person can sue agent,

principal or both until the judgement is collected in full

16.Soliciting and contracting agentsa. Salespeople are soliciting agents authority is limited to

soliciting offers and transmitting them to the principal. Theagent does not have the authorirt to bind the principal. The thirdperson can withdraw anytime prior to acceptance.

b. Contracting agent- does have authorizty to make bindingcontracts

Ch41 p862-865

1. Individual Proprietorshipsa. Own owner- can employ others. Common in retail stores, service

busineses and agriculture.b. Advantages

i.No organizational feesii.Sole owner controls all decisions and receives all profitsiii.No double taxations

c. Disadvantagesi.Unlimited personal liabilityii.Investment in capitial limited by individuals resourcesiii.Business disintentgrates when owner dies

2. Parternships, LLPs, LLCsa. Pooling capital resources and the telents of two or more

indiividualsb. Advantages

i.Pool resources withiout formal organizational structurec. Disadvantages

i.Unlimited personal liability for partnershipsii.Uncertain duration b/c partnership dissolved by detah


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iii.Llp protect partners from liability beyond their investmentin the firm

3. Corporationsa. Corporate structure requiring shareholders, directors, officiers.b. Advantages

i.Shareholder risk is limited to capital investedii.Large numbers of investors can contribute to resourcesiii.Separate legal entitiy with perputal life

c. Disadvantagesi.Double taxationii.Expense of incorporation (registration, annual reports, etc)

4. Joint Venturesa. Two or more people or entitires combine for a single buinsess

undertakingsb. Similar to a partnership but differs in the goal of only one type of

transaction (not continuing like partnership)

i.Similar laws govern bothc. Duration of joint venture fixed duration proisiotn or terminable

at the will of any participant, or when the project is completed orbecomes impossible to complete

d. Liability to third persons fault or neflience of one venture willbe imputed to the other ventureeres

5. Unincorporated associationsa. Combination of tow or more erson for furtherance of a common

purpose.b. Authority over its members governed by ordinary contract lawc. No legal existence apart from its members

d. Memebers are not liable for debts or liables of the association bymere fact they are members

i.Must be shown they authorieze fr ratified the act inquestion

ii.In that case, unlimited liability for the member6. Cooperatives

a. Two or more people that cooperate for a specific functionb. Incorporated cooperatives

i.Must repay excess over costs of operation to memebersc. Antitrust exemption

i.Basically in violation of antitrust laws but given exemption

as long as the cooperative do not conspire with outsidersto fix prices

7. Franchisesa. Method of doing business not a form of organizationb. Relies on contract lawc. Franchosr grants the franchise to the franchisee.

Ch42 p880-897 Partnerships


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1. Nature and Creationa. Can be created w/o formality of written agreementb. Partnership agreements cover most issues but the Revied

Unifrom Partnership Act covers anything not specified in youragreement

2. Defninton of partnershipa. Association of two or more persons to carr on as co-owners abusiness for profit.

b. A partner is an agent of the partnship (but not an employee ofthe partnership)

3. Characteristicsa. Voluntary, consensual relationshipb. Involves partners contributions of capital, services or a

combinationc. Parterres are coowners to transact business for profit

i. If profit is not the object, the group will commonly be an

unincorporated associationd. It is not a separate entitiy

4. Rights of the partners determine by the partnship agreement or theapplicable UPA or RUPA provisinos

5. Partnership agreementa. Typically written due to complexity though not requiredb. Formal document is prepard to evidence the contract of the

patires is temer a parnetship agreement, articles of pernership orrticles of corpartnerhisp.

6. Determining existence of a partnershipa. Law is concerned with the substance of a relationship rather than

the nameb. It does not arise if the parties do not agree to the elements of a

partnership even if they call it one.c. Shown to exist when it is establishied that the parties have

agreed to the formation of a business organization that has thecharcetistics of a partnership

d. Burden of proiving existence is on the person who claims oneexists

i.Control -Absecense or presence of contntrol is significantii.sharing profits/losses strong evidence of a partnershipiii.sharing profits an agreement that does not provide for

sharing losses but does for sharing profits is evidence ofpartnership.

1. If partners share pfotis, assumed they will sharelosses

2. Sharing profits when they are received in payment ofdebt, of wages, an annuity to a deceased partnersspouse, of interst or for goodwill will not beconsidered evidence of a partnership.


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iv.Gross returns1. Sharing of gross returns is sligh evidence of a

partnershipv.Contribution of skill or labor

1. Not all patners must contribute capital, some may

contribute only skill or laborvi.Fixed payment1. When a person who performs continuing services for

another receives a fixed payment that does notdepend on existnese of profit or losses, that person isnot a partner

7. Pateners as to third personsa. Persons who are not partners may be held liable to third persons

as though they were partners if the conduct themselves in amanner that others reasonable believe they are partners and acton that belief to cause injury

i.Called nominal partner, partner by estoppel or ostensiblepartner

b. An apparent partnership or partnership by estoppel is called apurposted partnership, a third party can hold the person liableas if they were an actal partner with authority

c. Partnership can limit potential libality with a publiciy recordrecord of partnership authority

8. Partnership propertya. All proprety contributed by the partners or acquired for the firm

or with its fundsb. Real estate owned by one of the partners can become

partnership property if the parties agree to it (even if its in thename of the one partner)

c. A partner must condition transfer to the partnership if they wishto retain interest in the property (or set forth in th partnershipagreement)

i.Otherwise it will become partnership property9. Tenancy in partnership

a. Partners hold title to firm propery by tenancy in partnerhipi.Each partner has an equal right to use firm property for

partnership purpose in the absencse of a contraryagreement

ii.Partner posesse no dividible interest in any specific item ofpartentership propery

iii.Credit of a partner cannot proceed against any speficiitems of partnership property. Can only proceed againstthe partners interest in the partnership. Done by applyingto a court for a charging order


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1. Charging order- profits that would be paid to thepartner are paid to his creditor or the court maydirect a sale of the partnerhship interest

iv.Upon death of a partner, the partnership propert vest inthe surivign parnters for partnership purpose and is not

subject to the rights of the survingin spouse of thedecesased partner10.Assign of a partnets interest

a. A partners interest in the partnership may be voluntarilyassigned by the partner.

b. Assigne does notbecome a partner without the consent of theoter patterns, without this consent, the assignee can only receivethe assignors share of the profits and assinonrs interest upondissolution of the firm.

i.No right to mangament or to inspect the books of the firm11.Authority of majority partners

a. The decision of the majority prevails in matters involving how theordinary functions of the business will be conducted.

b. Majority action is not binding if it contrives the partnershipagreement

i.Unanimous action is required for thisc. If partnership is evenly divided, no one has authority to actd. One partner may petition the court for a dissolution of the firm

12.Express authority of individual partnersa. An individual partner may have express authorirty for certain

acts if provided for in the partnership agreement or if majorityvotes for it.

b. Acts of a partner in excess of authroriry does not bind theparternship

13.Customary authority of individual partnersa. A partner may make any contract necessary to transact the firms

businessb. Can buy or sell or borrow in the regular scope of business

i.Can brrow in the firms name or pledge collateral14.Limations on authority

a. Partners may agree to limit the powers of each partnerb. If the partner violates this agreement, the partnership is still

bound to the third party but can proceed against the specific

partner.i. If the third party knew of the limitation, the partnership is

not boundc. Can file a statement of partnership authority publiclyd. Xa third person cannot assume the partner has ll the autirty th

partner purpost to hve.i. Third party bound by reasonable assumptions

15.Prohibited transactions


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a. Cessation of business partner cannot bind the firm by acontract that would make it impossible to do ordinary business

b. Suretyship a partner has no implied authority to bind the firmby contracts of surety, guarantee or indemnity for purposesother than firm business

c. Arbitration- partner cannot agree to arbitration unless authorizedby other partnersd. Confession of judgement- a partner cannot confess on behalf of

the firm as all partners have an opportunity to defend in courte. Assignment for creditors partner cannot make a feneral

assignment of firm property for the benfit of creditors unlessauthorized by other partners

f. Personal obligations partner cannot dischange personalobliation or claims of the firm by interchanging them in any way.

16.Duties of partnersa. Loyalty and good faith

i.No personal benefit or exploitationii.Cannot promote competing businessiii.A breach of fiduciary duty requires the complete forfeiture

of all compseatio n during the period of the breakb. Obedience

i.Each partner is obligated to perform all duites and to obeyall restictions imposed by the partnership agreement or bythe vote of the required number of partners

c. Other dutiesi.Must refain from grossly negligent or intentional

misconduct in trasnaing firm business.

17.Rights of partners as ownersa. Managementb. Inspection of booksc. Share of profits equal share unless stated otherwised. Compensation in absence of a contrary agreement, partner is

not entitled to compensation for service performed for thepartnership.

e. Repayment of loans partner is entitle to or return of any moneyadvance to or for the firm. Must be separate and distinct fromoriginal or additional contributions to the capital of the firm

f. Payment of intest- contributions to capital do not draw interst.

Loans will bear interst but not ontibuties to capitali. If retired partner leaves stake in the ongioing partnership,

he is entitled to interestg. Contribution and indemnity

i.A partner who pays more than a mproporionate share ofthe debts is entitle to contribution from other employees


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ii.The partnership must indemnify every partner forparyments made and personal liablites reasonableincureed in tth ordinary and proper conduct of busnesss.

iii.No right do indmeitn yor reimbursement if the partneracted in bad faith, negligialy cause the necessetiy for

payment or previously agreed tot assume the expensealoneh. Distribution of capital

i.After the payment of all creiedots is made, every partner isentitles to a share of leftover firm property (equal unlessstated otherwise)

18.Liabilities of partners and partnershipa. Nature and extent of partners liability

i. Jointly liable for firm contractsii.Jointly and severally liablies for torts commited in the

scope of partnership business

1. Remember right of contribution from other partnersiii.RUPA requires that creditors and tort victims satisfy their

claims against the partnership before pursuing thepersonal assest of a partner

b. Liability of new partnersi. Limited libality for all obtliations of the partnership arising

before they joined1. Only partnership property but not individual property

of the new ownedc. Effect of dissolution on partners liability

i. Partners remain liablile unless expressly relaead by the

creditorsii.Individual property of a dead partner is liable for obligation

s of the partnership that were incurred while he was alive1. Individual creditors have priority over partnership

creditors19.Enforcement and satisfaction of creditors claims

a. Partnerships assets exhausted before partnership creditors canreach a partners individual assets

b. Personal creditors must first purseue that partners personalassets

i.Then a charging order against partners interst in the

partnship20.Effect of dissolution

a. Dissolution does not necessarily meant hat the business hasended, it may be continued by the reminin partners

b. From the moment of dissolution, the authority of the partners isreduced to only the winding down transactions.

21.Dissolution by act of the partiesa. Agreement


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i.By terms of original agreement of the parties, expiration ofstated duration, or expiration of the object of thepartnership.

ii.May also be dissolved by subsequent agreementb. Explusion

i.A partnership is dissolved by expulsion of any pernert fromthe business, whether or not authorized by the partnershipagreement

c. Alienation of inteetsi.Neither a voluntary sale of a partnets internt nor an

invovulatary sale for the benefor of creditors results in adissolution

d. Withdrawali. Partner can withrdraw at any timeii.If violates partnership agreement, liablilty arises

22.Dissolution by operation of law

a. Death immeadiately upon the death of any partner. Theexuctor of a deceared partner may carry on the buniess with theremaining partners but it is legally a new firm

b. Bankruptcy of one or more partners causes a dissolution, butinsolvency does not

c. Illegality if prupose is illegeal, it is dissolved23.Dissolution by decree of court

a. Insanity judge declars a partner insaneb. Incapacityc. Misconduct a partner pleaseds guilt of conduct that

substinatilly prejudices the condituinace of the business

d. Impractivacablity is a partner consistnely acts so bad to destroyconfidence and cooperation between partners

e. Lack of success parntship cannot cinutne in business except ata loss

f. Equitable circumstances if one partner was inducted by fraudto enter into the partnership

24.Dissolution under the UPRA under rupas entity concept a partern canleave the firm and dnot drsipt the partnerships legal existence. rRueuses dissociation for the depature of a partner and reserves the termdissolution for theose instances when a partners depature results inthe winding up and termination of the business.

a. Notice of dissociation should be provided to creditors, etc so thatno apparent authority exists

25.Notice of dissolutiona. A partner must provide notice ot other partners that clearly

shows an intent to withdraw from or dissolve the firm.b. Notice to third partirs must be given to avoid apparent

authoriry.


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c. If dissolution was caused by operation of law, notice ot thirdperson s is not required.

26.Winding up partnership affairs conduct ordinary business whilevaluing the company.

a. If forced by a court, a receive may condust the winidng down

27.Distribution of assets credits have firm claim on the assets of thepartnershipsa. Firm credits have claims superior to indivudial creditorsb. Then in order

i.Refund to partners for laons made to firmii.Capital contriburiton are returnediii.The profits are divided

c. A partner who contributes only services is not considered to havemade a capital contribution bsent a contrary agreement.

d. Can have provisions in partnship agreements that upon deaththe interest will passs to partners surviign spouse.

e. Technical dissolution, winding up and termination of originalparntship but ofter surivign parterns continue.

Ch43 p904-915LPS LLC LLPs1. Formation of LPs

a. Members of a Lmited partnershipi.Certain memebers contribute capital but have limited

liability for the firms debts (can only lose their investment)

b. Certificate of LPi.Names of general partners required but not limited

partnersii.If no LP certificate is filed, all parents have the status and

liability of general partnersiii.Small defects dont ruin the filing if in goodfaith

c. LP Agreementi.Normally drafted by general partners

1. Courts strictly interpret in favor of the limitedpartners

2. Characteristics of LPs

a. Capital contributions limited partners contribute either cash orproper but not services under ULPA, may contribute servicesunder RULPA

b. Frm name- limited partners name cannot appear in the firmname and the words limited paernsheip must appear withoutabbreviation in fthe firm name

c. Management and control of the firm


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i.General partners manage the business and are personallyliable for the debts

ii.Limited partners have right to a share of the profits andreturn of caital upon dissolution and have limited lialbiltiy.

1. Lose the limited liability if they participate in control

2. Safe habor activities allowed w/o loss of protectiona. Contractor for, agent of employee of thelimited partnership or general partner

b. Consulting with and advising a gernal partnerregarding the partnship business

c. Acting as a surety for the limted partnershipd. Voiting on partnership matters such as

siddolving and winign up the limitedpartnership or reomovign of a gernal partner.

d. Right to surei. Limited partner can sue on behalf of the LP if the

partnership refuses to persue claims its entitled to. Thepartnshp is the defendant in the suit.

e. Dissolution governed by same principles applicable to generalparnetships

3. Characteristics of Limited Liabillity Companiesa. Preferential tax treatement and limited liabilityb. Formation

i. Formal filing of articles of organization with the secretaryof state.

ii.Must use LLC or limited liability company in the nameciii.Can conduct buinsess in its own names

c. Capital contributionsi.Owners are know as memebersii.Must comply with the operating agreement

d. Managementi.Operating agreement need not be in writing.ii.All amendments must be unanimous unless otherwise

agreed to by the memebersiii.Oral amendments may modify written temrs unless

otherwise statediv.Often delegate management authority to manages who

may not even be members of the LLC

v.Members are not entitled to compensation performed onbehalf of the LLC unless specifically stated (profits/lossesare the compenstation)

vi.Majority shareholders control day to day decisionsvii.Nomanager members have no rights in management

except for amending the operating agreement orconsenting to merge with another entity.

e. Distributions


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i. Per the operating agreementii.First applied to return contributions then pro rata

distribution of profitsiii.Any distrubition made when the company is insolvent is

unlawful

f. LLC property independent entity spate and distict from itsmemebers. The LLC owns and holds the property in its ownname.

g. Assignment an interest in an LLC is personal property and isgenerally assignable. Cannot transfer management rightswithout consent of other members. Creditors must use chargingorder.

h. Dissolution- dissolve by the consent of the members or upondeath, retirement ,r esingation, epxuslion or bankfruptcy of amember. Business is often continued by remaining members

i.Courts may decree discolution as well

i. Tax classification used to use four factor test to detminepartnership vs corporation, allowing no more than twocharacteriscts to exist to qualify for taxation as a partnership

i.Unlimited lifeii.Centralized managediii.Limited liabliiltyiv.Free transderabilty of interestv.NOW JUST CHECK THE BOX ON THE IRS FORM

j. Disregarding the LLC entity court may disrecare and holdowners personally liablie when exceptional circumstances exist

4. LLCs and Other entities

a. S corps s corp is limited to 75 shareholders who must be uscitizens. LLC has no restriction on type or number of owners(partnerships, corps and foreign investors can invest in LLC butnot S corp)

b. LPs must have a general partener who is subject to unlimitedliability. Limited partners lose limited liability if they participatein control. Under LLC, mmebers can activiale participate in thecontrol and still maintain limited liability.

c. Usage LLC will likely replace general and limited partnershipsas well as close corps and s corps.

5. LLPs

a. Eliminate vicarious personal liability for partners that could arisefrom other partners misconduct

b. Liability shield only applies to third parties does not sieldagainset breaches of the patterns obligations to each other andtheir own negligence as well as the acts of those whom theydirectly supervise and control

c. Registration and usage


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i.Registered with secretary of the state and contain llp orlimited liability partnership in the name

ii.

Ch44 p920-936

Documents

Cpa Final Study Guide