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Welcome to BusOrg!

Corporations:A Contemporary Approach

Chapter 6Organizational Choices

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Traditional classroom



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lecture homework

TraditionalTraditional

Flipped classroom



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Chapter 6 (part 1)Organizational Choices

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

– Formation – Liability – Owner control– Management– Financial rights – 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

Business entity nomenclature



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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

No(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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Pass through

limited

(PCV*) All Ms agree

manager equal No

(withdraw voting)

distributions (Ms 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


No(agreement)

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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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

Voting

Organizational choices (Owner Voting)

* mandatory


Partners

Corporation

Board

Shareholders

LLC

LLC

Members

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.

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


No(agreement)

Dividends +

salaries

filing *(agreement)

S Corporation (CHC)

income * 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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Organizational Choice – Hypos #1

Group Work



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The end

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welcome to busorg! corporations: a contemporary approach chapter 6 organizational choices slide 1 of...

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