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Welcome to BusOrg!
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 1of 18
Traditional classroom
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 2of 18
lecture homework
TraditionalTraditional
Flipped classroom
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 3of 18
lecturehomework
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Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 4of 18
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
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 5of 18
Two entrepreneurs …
Brandon
Anita
Organize them …
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 6of 18
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
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 7of 18
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”
Business entity nomenclature
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 8of 18
NC General Statutes(Business Organizations)
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 9of 18
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.
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 10of 18
• 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.
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 11of 18
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
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 12of 18
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
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 * (zero out)
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
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 13of 18
filing *(agreement)
Manager-managed
filing *(agreement)
Member-managed
Limited liability company
filing *(agreement)
S Corporation (CHC)
filing *
(bylaws) C Corporation
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.
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 14of 18
Manager-managed
Member-managed
Limited liability company
S Corporation (CHC)
C Corporation
Corporation
Limited partnership
General partnership
Partnership
Liability
Organizational choices (Liability)
* mandatory
Partnership Corporation
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)
Joint / sev *LLP-limited(supervise)
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 15of 18
Manager-managed
Member-managed
Limited liability company
S Corporation (CHC)
C Corporation
Corporation
Limited partnership
General partnership
Partnership
Voting
Organizational choices (Owner Voting)
* mandatory
Partnership Corporation
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
directors* fund'tal tx*
agreement
equal
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 16of 18
Manager-managed
Member-managed
Limited liability company
S Corporation (CHC)
C Corporation
Corporation
Limited partnership
General partnership
Partnership
Mgmt
Organizational choices (Management)
* mandatory
Partnership Corporation
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
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 17of 18
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
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
Corporations:A Contemporary Approach
Chapter 6Organizational Choices
Slide 18of 18
Organizational Choice – Hypos #1
Group Work
Recommended