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1. Welcome to BusOrg! Chapter 6 Organizational Choices

2. Module III – Corporate Form Chapter 6 (part 2)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

3. 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

4. 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 (equal) No (withdraw voting) All Ms agree Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 4 of 18

5. 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 6.6 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 5 of 18

6. Organizational choices (Liquidity) * mandatory Liquidity Partnership LLC Corporation Partnership Members Shareholders No (withdraw) General partnership Partners LP-Yes r GP-No (withdraw) Limited partnership Board LLC Corporation Corporation C Corporation Yes(PHC*) SCorporation (CHC) No (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 6 of 18

7. 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 7 of 18

8. 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 8 of 18

9. #1 Make money (at start) Assume business owners have personal income of $75,000 and anticipate early business income of $60,000. How should they organize the business? #2 Lose money (at start) Assume business owners have personal income of $75,000 and anticipate early business losses of $60,000. How should they organize the business? Business taxation(couple hypotheticals) Chapter 6 Organizational Choices

10. Make money(double corporate taxation) Pass-through Corporate Personal income $75 $75 Business income $60 $60 Business tax $0 $9 Dividends / share $60 $51 Total income $135 $126 Personal tax $25 $22 What is total tax? Chapter 6 Organizational Choices

11. Lose money(flow through of losses) Pass-through Corporate Personal income $75 $75 Business loss ($60) ($60) Business tax $0 $0 Dividends / share ($60) $0 Total income $15 $75 Personal tax $1 $12 What is total tax? Chapter 6 Organizational Choices

12. 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

13. 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 (equal) No (withdraw voting) All Ms agree Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 13 of 18

14. Organizational Choice – Hypos #2Group Work Corporations: A Contemporary Approach Chapter 6 Organizational Choices

15. The end Chapter 6 Organizational Choices