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

Mirror Image of Joan Miro, Ciphers and Constellations: in Love with a Woman (1941). Module III – Corporate Form. Chapter 6 Organizational Choices. Bar exam. Corporate practice. Basic choices: partnerships, corporation, LLC Essential characteristics: Formation Liability

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

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  1. Chapter 6 Organizational Choices Mirror Image of Joan Miro, Ciphers and Constellations: in Love with a Woman (1941)

  2. Module III – Corporate Form Chapter 6Organizational Choices Bar exam Corporate practice 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 Law profession Citizen of world Chapter 6 Organizational Choices

  3. Two entrepreneurs … Brandon Anita Organize them … Chapter 6 Organizational Choices

  4. Organizational issues • Formation of business • Formalities? • Filing with state? • Liability for business obligations • Non-recourse structure? • Respondeat superior? • Owner control • Voting rights? • Majority or unanimous? • Management • Discretion? • Ability to bind business? • Financial rights • Profits / losses shared? • Right to payments?     • Liquidity (transferability) • Effect of withdrawal? • Permission of others? 7. Changes/combinations • Process of approval • Protection of stakeholders 8. Tax attributes • Flow-through vs entity tax • Protection of stakeholders Chapter 6 Organizational Choices

  5. Organizational choices LLCs NC Corporations NC General p-ship GP = personal liab Partnerships NC Shareholders Members LLP GP = ltd liab (tort) Board LLC Corporation Limited p-ship General P / Ltd P Member-managedManager-managed “Limited liability corporation” Public (PHC) vs. Close (CHC) C Corp vs S Corp LLLP General P / Ltd P Chapter 6 Organizational Choices

  6. Business entity nomenclature Chapter 6 Organizational Choices

  7. Chapter 6 Organizational Choices Mirror Image of Joan Miro, Ciphers and Constellations: in Love with a Woman (1941)

  8. NC General Statutes(Business Organizations) Chapter 6 Organizational Choices

  9. NC General Statutes(Business Organizations) • 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. • 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. Chapter 6 Organizational Choices

  10. Chapter 6 Organizational Choices

  11. Organizational choices * mandatory Formation Liability Voting Mgmt Financial Liquidity  Change Tax Partnership Association* filing LLP* (agreement) Joint / sev * LLP-limited (supervise) equal equal / agent share  profits (equal) No (withdraw) All agree General partnership Pass through LP-ltd GP-jt/sev(ltd if LLLP) agreement LP-ltd GP-manage share  distributions ($ contrib) LP-Yes GP-No (withdraw) All agree Limited partnership filing* (agreement) Pass through Corporation directors* fund'tal tx* C Corporation filing * (bylaws) income * limited (PCV*) board (PHC*) Board + Sh majority (PHC*) dividends (per share) Yes(PHC*) SCorporation (CHC) filing * (agreement) Pass through limited (PCV*) directors fund'tal tx board Dividends + salaries Legally yes (agreement) Board + Sh majority Limited liability company - bricolage (bree-ko-LAZH) "Something created using a mix of whatever happens to be available." Member-managed filing * (agreement) Pass through limited (PCV*) equal equal /  agent equal distributions No (withdraw mgmt) All Ms agree Manager-managed filing * (agreement) Pass through limited (PCV*) equal manager equal  distributions No (withdraw voting) All Ms agree Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 11 of 28

  12. Organizational choices (Formation) * mandatory Formation Partnership LLC Corporation Partnership Members Shareholders Association* filing LLP* (agreement) General partnership Partners Limited partnership filing* (agreement) Board LLC Corporation Corporation C Corporation filing * (bylaws) SCorporation (CHC) filing * (agreement) Example 6.1 Q: 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. Limited liability company Member-managed filing * (agreement) Manager-managed filing * (agreement) Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 12 of 28

  13. Organizational choices (Liability) * mandatory Liability Partnership LLC Corporation Partnership Members Shareholders Joint / sev * LLP-limited (supervise) General partnership Partners LP-ltd GP-jt/sev(unless LLLP) Limited partnership Board LLC Corporation Corporation C Corporation limited (PCV*) SCorporation (CHC) limited (PCV*) Example 6.2 Q: 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 liability company Member-managed limited (PCV*) Manager-managed limited (PCV*) Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 13 of 28

  14. Organizational choices (Liability) * mandatory Liability Partnership LLC Corporation Partnership Members Shareholders Joint / sev * LLP-limited (supervise) General partnership Partners LP-ltd GP-jt/sev(unless LLLP) Limited partnership Board LLC Corporation Corporation C Corporation limited (PCV*) SCorporation (CHC) limited (PCV*) Example 6.3 Q: 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 liability company Member-managed limited (PCV*) Manager-managed limited (PCV*) Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 14 of 28

  15. Organizational choices (Owner Voting) * mandatory Voting Partnership LLC Corporation Partnership Members Shareholders equal General partnership Partners agreement Limited partnership Board LLC Corporation Corporation C Corporation directors* fund'tal tx* SCorporation (CHC) directors fund'tal tx 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. Limited liability company Member-managed equal Manager-managed equal Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 15 of 28

  16. Organizational choices (Management) * mandatory Mgmt Partnership LLC Corporation Partnership Members Shareholders equal / agent General partnership Partners LP-ltd GP-manage Limited partnership Board LLC Corporation Corporation C Corporation board (PHC*) SCorporation (CHC) board Example 6.5 Q: 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. Limited liability company Member-managed equal /  agent Manager-managed manager Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 16 of 28

  17. Organizational choices * mandatory Formation Liability Voting Mgmt Financial Liquidity  Change Tax Partnership Association* filing LLP* (agreement) Joint / sev * LLP-limited (supervise) equal equal / agent share  profits (equal) No (withdraw) All agree General partnership Pass through LP-ltd GP-jt/sev(ltd if LLLP) agreement LP-ltd GP-manage share  distributions ($ contrib) LP-Yes GP-No (withdraw) All agree Limited partnership filing* (agreement) Pass through Corporation directors* fund'tal tx* C Corporation filing * (bylaws) income * (zero out) limited (PCV*) board (PHC*) Board + Sh majority (PHC*) dividends (per share) Yes(PHC*) SCorporation (CHC) filing * (agreement) Pass through limited (PCV*) directors fund'tal tx board Dividends + salaries Legally yes (agreement) Board + Sh majority Limited liability company - bricolage (bree-ko-LAZH) "Something created using a mix of whatever happens to be available." Member-managed filing * (agreement) Pass through limited (PCV*) equal equal /  agent distributions (equal) No (withdraw mgmt) All Ms agree Manager-managed filing * (agreement) Pass through limited (PCV*) equal manager distributions(equal) No (withdraw voting) All Ms agree Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 17 of 28

  18. Planning considerations Economics 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 intransigence Richard Posner Chapter 6 Organizational Choices

  19. Organizational choices * mandatory Formation Liability Voting Mgmt Financial Liquidity  Change Tax Partnership Association* filing LLP* (agreement) Joint / sev * LLP-limited (supervise) equal equal / agent share  profits (equal) No (withdraw) All agree General partnership Pass through LP-ltd GP-jt/sev(ltd if LLLP) agreement LP-ltd GP-manage share  distributions ($ contrib) LP-Yes GP-No (withdraw) All agree Limited partnership filing* (agreement) Pass through Corporation directors* fund'tal tx* C Corporation filing * (bylaws) income * (zero out) limited (PCV*) board (PHC*) Board + Sh majority (PHC*) dividends (per share) Yes(PHC*) SCorporation (CHC) filing * (agreement) Pass through limited (PCV*) directors fund'tal tx board Dividends + salaries Legally yes (agreement) Board + Sh majority Limited liability company - bricolage (bree-ko-LAZH) "Something created using a mix of whatever happens to be available." Member-managed filing * (agreement) Pass through limited (PCV*) equal equal /  agent distributions (equal) No (withdraw mgmt) All Ms agree Manager-managed filing * (agreement) Pass through limited (PCV*) equal manager distributions (equal) No (withdraw voting) All Ms agree Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 19 of 28

  20. Organizational choices (Financial Rights) * mandatory Financial Partnership LLC Corporation Partnership Members Shareholders share  profits (equal) General partnership Partners share  distributions ($ contrib) Limited partnership Board LLC Corporation Corporation C Corporation dividends (per share) SCorporation (CHC) dividends + salaries Example 6.7 Q: 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.] Limited liability company Member-managed distributions (equal) Manager-managed distributions (Ms equal) Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 20 of 28

  21. Organizational choices (Liquidity) * mandatory Liquidity Partnership LLC Corporation Partnership Members Shareholders No (withdraw) General partnership Partners LP-YesGP-No (withdraw) Limited partnership Board LLC Corporation Corporation C Corporation Yes(PHC*) SCorporation (CHC) Legally yes (agreement) Example 6.8 Q: 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. Limited liability company Member-managed No (withdraw mgmt) Manager-managed No (withdraw voting) Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 21 of 28

  22. Organizational choices (Change/Combination) * mandatory Change Partnership LLC Corporation Partnership Members Shareholders All agree General partnership Partners All agree Limited partnership Board LLC Corporation Corporation C Corporation Board + Sh majority (PHC*) SCorporation (CHC) Board + Sh majority Example 6.10 Q: 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. Limited liability company Member-managed All Ms agree Manager-managed All Ms agree Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 22 of 28

  23. Organizational choices (Tax) * mandatory Tax Partnership LLC Corporation Partnership Members Shareholders General partnership Pass through Partners Limited partnership Pass through Board LLC Corporation Corporation C Corporation income * (zero out) SCorporation (CHC) Pass through 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. Limited liability company Member-managed Pass through Manager-managed Pass through Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 23 of 28

  24. #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? #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? Business taxation(couple hypotheticals) Chapter 6 Organizational Choices

  25. Make money(double corporate taxation) Pass-through Corporate Personal income $70 $70 Business income $80 $80 Business tax $0 $15.4 Dividends / share $80 $64.6 Total income $150 $134.4 Personal tax $13.5 $11.2 What is total tax? Chapter 6 Organizational Choices

  26. Lose money(flow through of losses) Pass-through Corporate Personal income $70 $70 Business loss ($20) ($20) Business tax $0 $0 Dividends / share ($20) $0 Total income $50 $70 Personal tax $0.2 $2.2 What is total tax? Chapter 6 Organizational Choices

  27. Zero-out income Corporate(no deductions) Corporate(deductions) Personal income $75 $75 Business income $60 $60 Business expense ($60) Business tax $9 $0 Dividends / salary $51 $60 Total income $126 $135 Personal tax $22 $25 What is total tax? Chapter 6 Organizational Choices

  28. Organizational choices * mandatory Formation Liability Voting Mgmt Financial Liquidity  Change Tax Partnership Association* filing LLP* (agreement) Joint / sev * LLP-limited (supervise) equal equal / agent share  profits (equal) No (withdraw) All agree General partnership Pass through LP-ltd GP-jt/sev(ltd if LLLP) agreement LP-ltd GP-manage share  distributions ($ contrib) LP-Yes GP-No (withdraw) All agree Limited partnership filing* (agreement) Pass through Corporation directors* fund'tal tx* C Corporation filing * (bylaws) income * (zero out) limited (PCV*) board (PHC*) Board + Sh majority (PHC*) dividends (per share) Yes(PHC*) SCorporation (CHC) filing * (agreement) Pass through limited (PCV*) directors fund'tal tx board Dividends + salaries Legally yes (agreement) Board + Sh majority Limited liability company - bricolage (bree-ko-LAZH) "Something created using a mix of whatever happens to be available." Member-managed filing * (agreement) Pass through limited (PCV*) equal equal /  agent distributions (equal) No (withdraw mgmt) All Ms agree Manager-managed filing * (agreement) Pass through limited (PCV*) equal manager distributions (equal) No (withdraw voting) All Ms agree Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 28 of 28

  29. The end Chapter 6 Organizational Choices

  30. 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 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 Chapter 6 Organizational Choices

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