mirror image of joan miro, ciphers and constellations: in love with a woman (1941)

Corporations:A Contemporary Approach

Chapter 6Organizational Choices

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Mirror Image of Joan Miro, Ciphers and Constellations: in Love with a Woman (1941)

http://pictify.com/431539/joan-miro-ciphers-and-constellations-in-love-with-a-woman



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• Basic choices: partnerships, corporation, LLC• Essential characteristics:

– Formation – Liability – Owner voting– Management– Financial rights (tax)– Liquidity– Change/combinations

• Planning considerations– Economics of choice– Tax consequences

Module III – Corporate Form

Citizen of world

Citizen of world

Law profession

Law profession

Corporatepractice

Corporatepractice

Bar examBar

exam



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Two entrepreneurs …

Brandon

Anita

Organize them …



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Organizational issues 1. Formation of business• Formalities?• Filing with state?

2. Liability for business obligations• Non-recourse structure?• Respondeat superior?

3. Owner control• Voting rights?• Majority or unanimous?

4. Management• Discretion?• Ability to bind business?

5. Financial rights • Profits / losses shared?• Right to payments?

6. Liquidity (transferability)1. Effect of withdrawal?2. Permission of others?

7. Changes/combinations1. Process of approval2. Protection of stakeholders

8. Tax attributes1. Flow-through vs entity tax 2. Protection of stakeholders



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Organizational choices

Partnerships NC Corporations NCLLCs NC

General p-shipGP = personal liab

LLP GP = ltd liab (tort)

Limited p-shipGeneral P / Ltd P

LLLPGeneral P / Ltd P

Corporation

Board

Shareholders

Public (PHC) vs. Close (CHC)

C Corp vs S Corp

LLC

Members

Member-managedManager-managed

“Limited liability corporation”

http://www.ncga.state.nc.us/gascripts/Statutes/StatutesTOC.pl?Chapter=0059

http://www.ncga.state.nc.us/gascripts/Statutes/StatutesTOC.pl?Chapter=0055

http://www.ncga.state.nc.us/gascripts/Statutes/StatutesTOC.pl?Chapter=0057C

Business entity nomenclature



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Mirror Image of Joan Miro, Ciphers and Constellations: in Love with a Woman (1941)

NC General Statutes(Business Organizations)



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NC General Statutes(Business Organizations)

• Chapter 53 - Banks.

• Chapter 53A - Business Development Corporations

• Chapter 53B - Financial Privacy Act.

• Chapter 54 - Cooperative Organizations.

• Chapter 54A - Capital Stock Savings and Loan Associations.

• Chapter 54B - Savings and Loan Associations.

• Chapter 54C - Savings Banks

• Chapter 55 - North Carolina Business Corporation Act.

• Chapter 55A - North Carolina Nonprofit Corporation Act.

• Chapter 55B - Professional Corporation Act.

• Chapter 55C - Foreign Trade Zones.

• Chapter 55D - Filings, Names, and Registered Agents for Corporations, Nonprofit Corporations, and Partnerships.



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• Chapter 56 - Electric, Telegraph and Power Companies.

• Chapter 57 - Hospital, Medical and Dental Service Corporations.

• Chapter 57A - Health Maintenance Organization Act.

• Chapter 57B - Health Maintenance Organization Act.

• Chapter 57C - North Carolina Limited Liability Company Act.

• Chapter 58 - Insurance.• Chapter 58A - North Carolina Health

Insurance Trust Commission.• Chapter 59 – Partnership [including LLP

and Limited Partnership].• Chapter 59B - Uniform Unincorporated

Nonprofit Association Act.



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Pass through

limited

(PCV*) All Ms agree

manager equal No

(withdraw voting)

equal distributions

filing *(agreement)

Manager-managed

Pass through

limited (PCV*)

All Ms agree

equal / agent

equal No

(withdraw mgmt)

equal distributions

filing *(agreement)

Member-managed

Limited liability company - bricolage (bree-ko-LAZH) "Something created using a mix of whatever happens to be available."

Pass through

limited (PCV*)

Board + Sh majority

board directors fund'tal tx

Legally yes(agreement)

Dividends +

salaries

filing *(agreement)

S Corporation (CHC)

income * limited (PCV*)

Board + Sh majority(PHC*)

board (PHC*)

directors* fund'tal tx*

Yes(PHC*)

dividends (per share)

filing *

(bylaws) C Corporation

Corporation

Pass through

LP-ltd GP-jt/sev

(ltd if LLLP)All agree

LP-ltd

GP-manage agreement

LP-Yes GP-No

(withdraw)

share distributions($ contrib)

filing*(agreement)

Limited partnership

Passthrough

Joint / sev *LLP-limited(supervise)

All agreeequal

/ agent equal

No(withdraw)

share profits (equal)

Association*

filing LLP*(agreement)

General partnership

Partnership

Change Liability Liquidity Mgmt Voting Tax Financial Formation

Organizational choices * mandatory



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filing *(agreement)

Manager-managed

filing *(agreement)

Member-managed

Limited liability company

filing *(agreement)

S Corporation (CHC)

filing *


Corporation

filing*(agreement)

Limited partnership

Association* filing LLP*

(agreement) General partnership

Partnership

Formation

Organizational choices (Formation)

* mandatory

Partnership Corporation

Partners

Corporation

Board

Shareholders

LLC

LLC

Members

Example 6.1Q: A operates a beauty shop and hires B as a receptionist. When B

asks for a raise, they agree in writing that B will share in profits. Their agreement states they are a “partnership.”

A: Under the UPA, they are not co-owners and thus not partners. A contributed everything to the shop and controls the business. B’s sharing in profits is only a wage increase. Their relationship is that of employer-employee, not partners.



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Manager-managed

Member-managed


S Corporation (CHC)

C Corporation

Corporation

Limited partnership

General partnership

Partnership

Liability

Organizational choices (Liability)

* mandatory


Partners

Corporation

Board

Shareholders

LLC

LLC

Members

Example 6.2Q: A provides capital and controls day-to-day operations in B’s custom

auto-making business. B agrees to build a car for X, but fails to perform and disappears. X seeks to hold A liable on the contract on the theory A was B’s partner, not his “banker.”

A: Under the UPA, even if A and B did not intend to create a partnership, they become partners as a matter of law. By sharing profits and control, A becomes liable to X on the contract.

limited

(PCV*)

limited (PCV*)

limited (PCV*)

limited (PCV*)

LP-ltd GP-jt/sev

(unless LLLP)




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Manager-managed

Member-managed


S Corporation (CHC)

C Corporation

Corporation

Limited partnership

General partnership

Partnership

Liability

Organizational choices (Liability)

* mandatory


Partners

Corporation

Board

Shareholders

LLC

LLC

Members

Example 6.3Q: A and B agree to form a law partnership, which they constitute as an

LLP by filing the appropriate papers. B litigates a products liability case; one of the firm’s associates (an employee) misses a filing deadline, and the case is dismissed. The client brings a malpractice action against the LLP, and against A and B.

A: Generally, only the LLP would be liable, not A or B. But this is a professional LLP, and in many states, B might be liable as supervisor.

limited

(PCV*)

limited (PCV*)

limited (PCV*)

limited (PCV*)

LP-ltd GP-jt/sev

(unless LLLP)




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Manager-managed

Member-managed


S Corporation (CHC)

C Corporation

Corporation

Limited partnership

General partnership

Partnership

Voting

Organizational choices (Owner Voting)

* mandatory


Partners

Corporation

Board

Shareholders

LLC

LLC

Members

Example 6.6

Q: A and B form a limited partnership to hold real estate (a shopping center). A is the limited partner and provides the capital; B is the general partner and manages the business. But their agreement specifies that A must sign all checks drafted by B.

A: Under older ULPA, A may have crossed the line and become a general partner, exposing her to general partner liability. Newer ULPA S 303 (2001), says “even if … participates” not liable for LP debts.

equal

equal

directors fund'tal tx


agreement

equal



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Manager-managed

Member-managed


S Corporation (CHC)

C Corporation

Corporation

Limited partnership

General partnership

Partnership

Mgmt

Organizational choices (Management)

* mandatory


Partners

Corporation

Board

Shareholders

LLC

LLC

Members

Example 6.5Q: A and B form a GP that rents properties. Their agreement does not

specify who has authority if there is a disagreement. A wants to increase rents, while B does not. A sues B for lost profits that the GP could have realized if rents had been increased.

A: Under the UPA, the decision of the majority governs. If two partners are equally divided, and without an agreement otherwise, the remedy is a dissolution. A’s suit fails.

equal / agent

LP-ltd

GP-manage

board

board (PHC*)

manager

equal / agent



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Pass through

limited

(PCV*) All Ms agree

manager equal No

(withdraw voting)

distributions(equal)

filing *(agreement)

Manager-managed

Pass through

limited (PCV*)

All Ms agree

equal / agent

equal No

(withdraw mgmt)

distributions (equal)

filing *(agreement)

Member-managed


Pass through

limited (PCV*)

Board + Sh majority



Dividends +

salaries

filing *(agreement)

S Corporation (CHC)

income * (zero out)

limited (PCV*)


board (PHC*)


Yes(PHC*)


filing *


Corporation

Pass through

LP-ltd GP-jt/sev


LP-ltd

GP-manage agreement

LP-Yes GP-No

(withdraw)


filing*(agreement)

Limited partnership

Passthrough


All agreeequal

/ agent equal

No(withdraw)


Association*


General partnership

Partnership





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Planning considerationsEconomics of the firm

• Firms: capital + mgmt• Equity > debt• P-ship lacks stability /

corporation too stable

Opportunism• GP: dissolution majority

buys out low, skilled P• Corporation: illiquidity

majority intransigenceRichard Posner



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Pass through

limited

(PCV*) All Ms agree

manager equal No

(withdraw voting)


filing *(agreement)

Manager-managed

Pass through

limited (PCV*)

All Ms agree

equal / agent

equal No

(withdraw mgmt)


filing *(agreement)

Member-managed


Pass through

limited (PCV*)

Board + Sh majority



Dividends +

salaries

filing *(agreement)

S Corporation (CHC)

income *(zero out)

limited (PCV*)


board (PHC*)


Yes(PHC*)


filing *


Corporation

Pass through

LP-ltd GP-jt/sev


LP-ltd

GP-manage agreement

LP-Yes GP-No

(withdraw)


filing*(agreement)

Limited partnership

Passthrough


All agreeequal

/ agent equal

No(withdraw)


Association*


General partnership

Partnership





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Manager-managed

Member-managed


S Corporation (CHC)

C Corporation

Corporation

Limited partnership

General partnership

Partnership

Financial

Organizational choices (Financial Rights)

* mandatory


Partners

Corporation

Board

Shareholders

LLC

LLC

Members

Example 6.7Q: A and B form a logging GP -- A contributes capital and B the

equipment. They do not specify in their agreement how losses will be shared. The business does not generate enough profits to cover A’s capital contribution, and A asks B to share in the net losses.

A: The UPA controls, in the absence of an agreement. B must contribute toward the loss (including the capital loss) according to his share in the profits. [Some courts give B credit for his labor.]

distributions(Ms equal)

distributions(equal)

dividends + salaries






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Manager-managed

Member-managed


S Corporation (CHC)

C Corporation

Corporation

Limited partnership

General partnership

Partnership

Liquidity

Organizational choices (Liquidity)

* mandatory


Partners

Corporation

Board

Shareholders

LLC

LLC

Members

Example 6.8Q: A and B are partners in a family GP. They have no written

agreement about dissolution. A wants to end the partnership, sell (liquidate) the business assets, and then split the cash proceeds. B wants to divide the assets in-kind between them, but not sell.

A: Under the UPA, a partner in an at-will GP can withdraw (causing dissolution) and share in a forced liquidation of partnership assets, provided creditors are first fully paid.

No(withdraw

voting)

No (withdraw

mgmt)


Yes(PHC*)

LP-YesGP-No

(withdraw)

No(withdraw)



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Manager-managed

Member-managed


S Corporation (CHC)

C Corporation

Corporation

Limited partnership

General partnership

Partnership

Change

Organizational choices (Change/Combination)

* mandatory


Partners

Corporation

Board

Shareholders

LLC

LLC

Members

Example 6.10Q: A, B and C are equal partners in GP that owns and rents two

identical beachfront condos. A and C have a falling out, but B wants to keep his partnership with C.

A: Two new partnerships can be created: A and B create AB Partners; B and C create BC Partners. The GP transfers one condo to AB Partners and the other to BC Partners. Following the transfer, GP dissolves.

All Ms agree

All Ms agree

Board + Sh majority


All agree

All agree



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Manager-managed

Member-managed


S Corporation (CHC)

C Corporation

Corporation

Limited partnership

General partnership

Partnership

Tax

Organizational choices (Tax)

* mandatory


Partners

Corporation

Board

Shareholders

LLC

LLC

Members

Example 6.11 (A and B plan to form a business)

Scenario #1: They will pay themselves salaries totaling $70,000 and expect net income of $80,000.

A: If the business is a corporation, they will pay total federal income taxes of $24,700, but only $14,700 if they organize as a partnership.

Scenario #2: They take the same salaries, but the business has a net loss of $20,000.

A: Federal income tax (total): corporation $2,800, partnership $800.

Pass through

Pass through

Pass through

income *(zero out)

Pass through

Passthrough



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Business taxation(couple hypotheticals)

#2 Lose money

(at start)

Assume business owners have personal income of $70,000 and anticipate business losses of $20,000.

How should they organize the business?

#1 Make money

(at start)

Assume business owners have personal income of $70,000 and anticipate business income of $80,000.

How should they organize the business?



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Make money(double corporate taxation)

CorporatePass-through

$11.2$13.5Personal tax

$134.4$150Total income

$64.6$80Dividends / share

$15.4$0Business tax

$80$80Business income

$70$70Personal income

What is total tax?



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Lose money(flow through of losses)

CorporatePass-through

$2.2$0.2Personal tax

$70$50Total income

$0($20)Dividends / share

$0$0Business tax

($20)($20)Business loss


What is total tax?



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Zero-out income

($60)Business expense

Corporate(deductions)

Corporate(no deductions)

$25$22Personal tax

$135$126Total income

$60$51Dividends / salary

$0$9Business tax

$60$60Business income


What is total tax?



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Pass through

limited

(PCV*) All Ms agree

manager equal No

(withdraw voting)


filing *(agreement)

Manager-managed

Pass through

limited (PCV*)

All Ms agree

equal / agent

equal No

(withdraw mgmt)


filing *(agreement)

Member-managed


Pass through

limited (PCV*)

Board + Sh majority



Dividends +

salaries

filing *(agreement)

S Corporation (CHC)

income * (zero out)

limited (PCV*)


board (PHC*)


Yes(PHC*)


filing *


Corporation

Pass through

LP-ltd GP-jt/sev


LP-ltd

GP-manage agreement

LP-Yes GP-No

(withdraw)


filing*(agreement)

Limited partnership

Passthrough


All agreeequal

/ agent equal

No(withdraw)


Association*


General partnership

Partnership





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The end

NC LLC Act

• Must designate type of LLC in articles [§ 57C-3-20]

– manager-managed or member-managed

– management structure in operating agreement [§ 57C-3-24 ]

• Member-managed LLC

– Members are like partners

– Authority: any member can bind LLC

– Management: all members vote on ordinary business (majority) and extraordinary business (unanimous)

• Manager-managed LLC

– Managers are like partners (see above)

– Non-manager members only vote on extraordinary matters

• Third parties must check articles of association, since name doesn’t indicate status



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ULLCA (2006)

• Designate type of LLC in operating agreement [§§ 102, 201(b)]

– member-managed, unless specified otherwise

– Designation not in (filed) certificate of organization

• Member-managed LLC (default) – Members have rights of partners– designated members can be relieved of

management responsibilities and attendant fiduciary duties [§ 110(e]]

– Can file statement of authority with Secy of State [§ 302]

• Manager-managed LLC– Only managers have authority and

management powers– Managers have equal rights, act by majority

vote – though unanimity of all members for fundamental changes [§ 407(c)]

• Operating agreement can specify different management structure

mirror image of joan miro, ciphers and constellations: in love with a woman (1941)

Documents

organizational choicesslide

contemporary approachchapter

b savings

nonprofit corporations

b financial privacy

plllpgeneral p

tax attributesflow

dental service corporations