CLASS #4 CHAPTER 19: FORMS OF BUSINESS ORGANIZATIONS

Sole proprietorships

--Simplest and most prevalent form of business enterprise --One individual owns all of the assets of the business and is solely and personally liable for all of its debts, contract obligations, and tort liabilities --Name must be registered with the state if it is any name other than the name of the owner --Ends on the discontinuation of the business or death of proprietor

B-Corps two purposes

1. Profits for shareholders 2. Creation of general public benefits However, no duty to maximize shareholder value just cant purposefully make it bad.

Master Limited Partnerships

A business structure that is currently available to a select group of entities, primarily mineral or natural resource companies --Raises money on public exchanges and doesn't pay income tax at the corporate level i.e it is a pass-through entity --Investors are insulated from liability and can publicly trade their shares --Shareholders have fewer rights than in a typical corporation --Tax laws very complex with various law that prohibit or limit certain entities, such as mutual funds, from investing.

Low Profit Limited Liability Companies

A low profit company that can distribute its profits to investors while serving a philanthropic purpose --"A for profit company with a nonprofit soul" --L3Cs must have a primarily charitable purpose --Major criticism is that they evade the striter disclosure requirements imposed on tax-exempt entities (501(c)s) --It is not clear that L3Cs can accept investments from private foundations that those foundations could not make in LLCs (though that is one of the main reasons L3Cs were developed)

Uniform Limited Partnership Act

A person who contributes capital thinking they are limited partners wont be liable as general partners if they renounce their interest but could be liable to third parties before the certification limited partnership was filed

B-Corps Required to consider effects of actions on:

Ability to accomplish purpose, shareholders, employees, customers, community, environment, short and long term interests.

Advantages of General Partnership

Allows for a wide variety of operatinal and profit-sharing arrangements --Only subkect to one level of tax --report indivudal returns to be taxed as personal income --***Pass through entity - passes income on to the owners and/or investors. Flow-through entities are a common device used to limit taxation by avoiding double taxation. Only the investors/owners are taxed on revenues, not the entity itself.

Corporations

An organization authorized by state law to act as a legal entity distinct from its owners owned by shareholders --Board of directors is elected by shareholders and has central decision making authority Corporate charter --C Corporations --S Corporations --Close Corporations --Closely Held Corporation

Ability to raise venture capital for C-Corporation

Are used to raise money from venture capitalists instead of tax advantages from pass through entities for 2 reasons: --Most venture capital firms raise money from large insitutional investors such as pension funds, university endowments, and such. Nonprofit can only raise this capital tax-free from a issuer of securities that is NOT a pass-through entity --Second, Most start-ups want the abiltiy to sell securities to outside investors at a significantly higher price than was paid by the founders at the outset. In order to avoid having some of the value of the founders' shares treated as employee compensation, companies issue two classes of stock : Common stock to the founders and preferred stock to outside investors. And, S corps cant do this because only issue one type of stock

Important distinctions for tax considerations

C-Corp worse for taxes because no pass-through entity, so gets taxed twice while LLC and partnership are able to distribute appreciated value tax-free and S corporations only tax it at the shareholder level.

Formation of General partnership

Can be created with nothing more than a handshake and a general understanding between the partners --Intention of one party alone cant create a partnership --Doesn't require a minimum amount of capital for fromation --Doesn't need to be given a name

General Partnership With a written agreement

Can overide many of the provisions of partnership statutes that could turn out to be undesirable to the partners Agreement usually includes: Term of existence, capital characteristics, division of profits and losses between partners, partnership slaries or withdrawals, duties of partners, consequences if a partner decides to sell their interest or become uninvolved in another way

Limited Liability Companies

Combines the tax advantages of pass through entity with the limited liability advantages of a corporation --Articles of organization / certificate formation must be filed with state agency --Owners of the company are called members, members elect managers to operate the business, managers appoint officers --Must include the words L.L.C. - certificate of formation-Delaware, or articles of organization-Cali

4 and 2

Companies must elect benefit corporation status within____ years of the first effective date of legislation in their state of incorporation or ____ years of initial certification, whichever is later.

how to reduce double taxation

Corporate income can be offset by tax deductible payments to shareholders like interest payments or employee compensation payments --Tax liability of the shareholders can be reduced to the extent the business retains it's earnings instead of distributing them Operating losses- can help reduce it when deducted with taxes lower net income

Close Corporation

Corporation that has elected to be a close corporation (by stating in its certificate of incorporation that it is such) and has a small number of shareholders, typically no more than thirty --Has the ability to alter certain typical corporation proceedings via shareholder voting --Most close corporations can manage the corporation directly (instead of delegating that responsibilty to managers or directors), so long as certain percentage of the shareholders agree to this in writing.

General Partnership

Created when two or more persons agree to place their money, efforts, labor, or skills in a business and to share the profits and lossess --Agreement can be express or implied --Must share in real profits, not just wages/compensation --Each may have the authority to bind the partnership with respect to third parties --partnership can acquire property in the name of the partnership, not just in the name of the partners --Up to any majority holding partners on whether to continue the general partnership within 90 days of the death, bankruptcy, or withdrawal of the other partner

Fiduciary Duties of LLCs managers

Delaware - Managers and controlling members of an LLC owe a fiduciary duty of care and loyalty to the LLC and its members --New York - Managers of an LLC have a fiduciary duty to the limited liability company and sometimes directly to other members of the LLC --California - Operating agreement may not eliminate the duty of loyalty or obligation of good faith and fair dealing and duty of care.

Limited Liability Partnerships

Designed primarily for groups of professionals such as law or accounting firms --can be granted without significant modification of the business's partnership agreement --Retain pass-through taxation treatment --Limited liability refers to the fact that partners are only liable for their own malpractice, negligence, or wrongful conduct and can't be vicariously liable for the misconduct or malpractice of another partner --Some states protect their partners from commercial liabilities (such as trade debt)

Operation of a General Partnership (unless written agreement stating otherwise)

Direct owner management and control of business -- each partner's assets are vulnerable to the decisions of the fellow partners --Unless specified otherwise, partnership law requires agreement from all partners for anything --Each partner is an agent of the partnership and all partners are liable for debts incurred as it was incurred with EXPRESSED AUTHORITY.

Uniform Partnership Act

Even without a written agreement partners share profits if working together in a general partnership.

Advantages of Sole Proprietorships

Flexibility afforded by having one person in complete control --Easiest and least costly form of business organization to set up --Pay only one level of income taxes --Proprietor receives all profits generated by the business

Benefit Corporations

For-profit corporations that use the power of business to solve social and environmental problems --Need to have a purpose of creating general public benefit in addition to other corporate purposes --Must distribute annual benefit report outling the social and environmental performance benchmarked against a third-party standard --No duty to maximize shareholder value --Required to consider effects of actions on: Ability to accomplish purpose, shareholders, employees, customers, community, environement, short and long term interests. --Must have two primary purposes profits for shareholders and creation of general public benefits --B Lab certifies "B Corps as meeting their standards for scial performance. Companies must elect benefit corporation status within four years of the first effective date of legislation in their state of incorporation or two years of initial certification, whichever is later.

Closely Held Corporation

Has a small number of shareholders and it is characterized by the absence of a market for its stock --Greater duty of loyalty and care on the corporation's directors and majority shareholders.

Needed to qualify for a S-Corporation

In order to qualify you: Can't have more than 100 shareholders --Must have only one class of stock --Must be domestic --Must file a timely election signed by all shareholders to be treated as an S corporation --Must not be ineligible i.e. financial institution, insurance company, or domestic international sales companies

Disadvantages of General Partnership

Individual partners are subject to personal liability for the obligations of the partnership Creditors of the partnership have claims against the assets of individual partners

Income Tax Considerations

Internal Revenue Code of 1986 - comparing taxable entries with pass-through entities

Winding up (part of dissolution) of general partnership

Involves setting accoounts and liquidating assets of the partnership for the purpose of making distributions and terminating the concern --- partnership continues through process as do fiduciary duties

Limited Liability Companies advantage to S Corporations

Lack of restrictions on shareholders and the ability to have more than one class of securities

Advantages of Corporations

Liability of shareholders is limited to their investments --Ability to raise significant capital by selling transferable ownership shares of corporate stock to investors --Perpetual life i.e. the corporation continues to exist even when shares or investors decide to sell their interest

Disadvantages of Limited Partnerships

More difficult to create than a general partnership --Needs certification

Joint Venture Differences From General Partnership

NOT a continuing relationship ends when project is finished So, authority to bind one member in partnership is more limited than general partnership, so should make it clear to third parites that it is not a partnership. This distinction should be reflected in the entity's name and in the recitation of its legal status in its contracts

Formal requirements for Limited Partnerships

Needs a certificate of limited partnership to be filed with state authority but also needs to designate the limited partners

Capitalization on C Corps

No tax laws impose restrictions on their Capitalization. Tax treatment of each type of capital instrument may differ from its classification by the corporation e.g debt can be treated as stock if the corporation has too little equity capital and "interest payments" may be classified as non-deductible dividends instead that are taxable to the shareholders

Termination (part of dissolution and winding up) of general partnership

Occurs when all the partnership affairs are wound up and the partners' authority to act for the partnership is completely extinguished

Dissolution of general partnership

Occurs when the partners no loner carry on business together. Can happen because the partnership was formed unlawfully. Must finish all current work before dissolution

Ability to raise venture capital for partnerships, LLCs and S corps

Offer many tax advantages however they are rarely used for a business that intends to raise venture capital

Joint Ventures

One time partnership of two or more parties for a specific purpose Similar to general partnership, Joint Venture requires that the parties: --Share a community of interest -- Have the mutual right to direct and govern --Share the partnership's profits and losses --Combine their property, money, effort, skill, or knowledge in the undertaking

Limited Participation in limited Partnerships

Only reserved for partners that do not control the business If they have a voice in company open themselves up for liability beyond original capital investment Name cant appear in the name of partnership

Fiduciary duty of general partnership

Partners owe each other a duty of loyalty and a duty of care and must carry them out with the obligation of good faith and fair dealing

Main advantage of Limited Partnerships

Partnership is created to attract investors with the assurance of limited liability

Disadvantage of Sole Proprietorships

Proprietor loses all money in the event of a loss --Heightened risk --More difficult to raise capital

S-Corp Allocation of losses

S Corporation is even more limited than C-Corp since it has only one classification of stock and must allocate strictly in proportion to stock ownership

C Corporation property transfers

Since it is a taxable entity, the transfer of any kind of property is a taxable transaction

Limited Partnerships

Special type of partnership consisting of general partners and limited partners --General partners remain jointly and severally liable for partnership obligations and are responsible for the management of the partnership --Limited partners assume no liability for partnership debts beyond the amount of capital they have contributed and have no right to participate in the management of the partnership

How start-ups raise more money

Start-ups want to sell securities to outside investors at a higher price than originally owned by founders, so issue two stocks common stocks to founders and Preferred stock to outside investors

S Corporations taxes on appreciated value

Taxable income is passed through and will be taxed only at shareholder level.

Limited Liability Companies Advantages

Taxed as partnerships --can limit their liability to the amount invested --All owners can participate fully in the management of the business --Flexible allocations of profits and losses --Lack of restrictions on shareholders and the ability to have more than one class of securities --No limit on the number of members it can have --Investors can be corporations, partnership, and foreigners

S Corporations

Taxed as pass through entity i.e. shareholders pay tax on their pro rata shares of the corporation's income

Pass through entity

Term for General Partnership meaning that it passes income on to the owners and or investors. Common device used to limit taxation by avoiding double taxation. Only the investors/owners are taxed on revenues, not the entity itself

C-Corp Allocation of losses

There is no comparable allocation of losses

Allocation of losses for Partnerships and LLCs

They can allocate income or loss to specific partners to generate a valuable tax deferral for that member

C Corporations

Two levels of taxation, both corporate and shareholder --Pays tax on income generated by the business and the shareholders pay tax on that same income when it is distributed as dividends

Limited Liability Copmanies advantage to limited partnerships

Unlike the general partners even the controlling members in limit their liability to the amount invested

C-Corp Cash distribution

When receiving cash the income is taxed at the corporate level when earned, and taxed again at the individual level when distributed.

Corporate charter

articles of incorporation or certificate of incorporation: most charters give corporations the broad power to engage in any lawful business. Corporations are owned by shareholders.

Partnership or LLC

easiest corporations to distribute tax-free appreciation of value for a property compared to a corporation

C Corporation taxes on appreciated value

when a any liquid asset appreciates in value there is a corporate taxes and shareholder taxes