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Welcome to BusOrg!

Welcome to BusOrg!. Traditional classroom. Traditional. lecture. homework. Flipped classroom. Flipped. homework. lecture. Module III – Corporate Form. Chapter 6 (part 1) Organizational Choices. Bar exam. Corporate practice. Basic choices: partnerships, corporation, LLC

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Welcome to BusOrg!

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  1. Welcome to BusOrg! Chapter 6 Organizational Choices

  2. Traditional classroom Traditional lecture homework Chapter 6 Organizational Choices

  3. Flipped classroom Flipped homework lecture Chapter 6 Organizational Choices

  4. Module III – Corporate Form Chapter 6 (part 1)Organizational Choices Bar exam Corporate practice Basic choices: partnerships, corporation, LLC Essential characteristics: Formation Liability Owner control Management Financial rights Liquidity Change/combinations Planning considerations Economics of choice Tax consequences Law profession Citizen of world Chapter 6 Organizational Choices

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

  6. 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

  7. 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

  8. Business entity nomenclature Chapter 6 Organizational Choices

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

  10. 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

  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 No (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 18

  12. 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 No (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 (Ms equal) No (withdraw voting) All Ms agree Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 12 of 18

  13. 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 13 of 18

  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 6.2 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 14 of 18

  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.xx 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 18

  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 18

  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 * 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 No (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 18

  18. Organizational Choice – Hypos #1Group Work Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 18 of 18

  19. The end Chapter 6 Organizational Choices

  20. Welcome to BusOrg! Chapter 6 Organizational Choices

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