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Business Organizations:Business Organizations:An OverviewAn Overview
Sole ProprietorshipSole Proprietorship PartnershipPartnership
General PartnershipGeneral Partnership General PartnershipGeneral Partnership Limited Liability PartnershipLimited Liability Partnership
Limited PartnershipLimited Partnership Limited PartnershipLimited Partnership Limited Liability Limited PartnershipLimited Liability Limited Partnership Limited Partnership AssociationLimited Partnership Association
CorporationCorporation Limited Liability CompanyLimited Liability Company
Key Issues Key Issues
Key issues in selecting type of Key issues in selecting type of business organization:business organization:
(1) (1) FormalitiesFormalities (2) (2) ManagementManagement (3) (3) Liability of OwnersLiability of Owners
Who’s responsible for business debts/obligations?Who’s responsible for business debts/obligations?
(4) (4) TaxationTaxation
Sole ProprietorshipSole Proprietorship
= Business conducted by ONE person= Business conducted by ONE person
Advantages:Advantages: Simplicity of FormationSimplicity of Formation Flexibility of ManagementFlexibility of Management
DisadvantagesDisadvantages Unlimited Personal LiabilityUnlimited Personal Liability Terminates at Proprietor’s DeathTerminates at Proprietor’s Death
PartnershipPartnership
Association of two or more persons (including Association of two or more persons (including corporations, associations) for profitcorporations, associations) for profit
AdvantagesAdvantages Management rightsManagement rights
DisadvantagesDisadvantages Personal LiabilityPersonal Liability Terminates on death or withdrawal of partner(s)Terminates on death or withdrawal of partner(s)
Partnership FormsPartnership Forms
General PartnershipGeneral Partnership Limited Liability PartnershipLimited Liability Partnership
Limited PartnershipLimited Partnership Limited PartnershipLimited Partnership Limited Liability Limited PartnershipLimited Liability Limited Partnership Limited Partnership AssociationLimited Partnership Association
General PartnershipGeneral Partnership
In the traditional general partnership:In the traditional general partnership:
All partners manageAll partners manage
ANDAND
All partners have personal liabilityAll partners have personal liability
Limited Liability PartnershipLimited Liability PartnershipA General Partnership FormA General Partnership Form
Partnership without liability for Partnership without liability for negligence or malfeasance of other negligence or malfeasance of other partnerspartners
General PartnersGeneral Partners ManageManage Liable for partnership contracts & own negligenceLiable for partnership contracts & own negligence
Some states, known as full-shield states, provide Some states, known as full-shield states, provide partners of an LLP personal liability protections partners of an LLP personal liability protections from all obligations of the partnership, whether from all obligations of the partnership, whether arising in tort or contractarising in tort or contract
Limited PartnershipsLimited Partnerships
In the traditional limited partnership:In the traditional limited partnership:
General PartnersGeneral Partners Manage and have personal liabilityManage and have personal liability
Limited PartnersLimited Partners Investors without personal liabilityInvestors without personal liability
New Forms ofNew Forms ofLimited PartnershipsLimited Partnerships
Limited Liability Limited PartnershipLimited Liability Limited Partnership General PartnersGeneral Partners
ManagersManagers Limited PartnersLimited Partners
Investors who manageInvestors who manage LP vs. LLLPLP vs. LLLP::
Neither general or limited partners have vicarious Neither general or limited partners have vicarious liability for the negligence or malfeasance of other liability for the negligence or malfeasance of other partners partners
Partners are only liable for partnership contract and Partners are only liable for partnership contract and their own negligence or malfeasancetheir own negligence or malfeasance
Limited Partnership AssociationLimited Partnership Association No personal liability of members or managersNo personal liability of members or managers
CorporationsCorporations
Corporation = Legal PersonCorporation = Legal Person
Board of Directors
Shareholders = Owners
Why Not Incorporate?Why Not Incorporate?
Disadvantages to incorporation:Disadvantages to incorporation:
DOUBLE TAXATIONDOUBLE TAXATION !!!! !!!! Corporation pays taxes on profitsCorporation pays taxes on profits
Profits distributed to shareholders Profits distributed to shareholders as dividendsas dividends
Shareholders pay taxes on dividendsShareholders pay taxes on dividends
Exception: S ElectionException: S ElectionSmall corporations (less than 75 shareholders) Small corporations (less than 75 shareholders) may avoid double taxation by making an “S may avoid double taxation by making an “S election” election”
Board of Directors
Shareholders
Corporate CharacteristicsCorporate Characteristics
Advantages of incorporation:Advantages of incorporation:(identifying characteristics of a (identifying characteristics of a
corporation)corporation)
Continuity of LifeContinuity of Life Centralization of ManagementCentralization of Management Limited Liability for ShareholdersLimited Liability for Shareholders Free Transferability of InterestsFree Transferability of Interests
Sole ProprietorshipsSole ProprietorshipsBusiness Conducted by One PersonBusiness Conducted by One Person
FormationFormation Begin businessBegin business
General formation requirements for all business General formation requirements for all business forms:forms:
Registration of Assumed Business Name (with SOS)Registration of Assumed Business Name (with SOS) Note: Not required in NevadaNote: Not required in Nevada Assumed Business NameAssumed Business Name (avoids deceptively similar (avoids deceptively similar
names)names) Information:Information:
NameName Type of businessType of business Counties of OperationCounties of Operation Name/address of applicantName/address of applicant
Limited Liability CompanyLimited Liability Company Managers without personal liabilityManagers without personal liability
Advantages:Advantages: All members manageAll members manage Limited liability (with proper liability insurance)Limited liability (with proper liability insurance) Taxed once Taxed once
Disadvantages:Disadvantages: Limited duration (some states)Limited duration (some states) Limited transferability of interestsLimited transferability of interests
An LLC offers the advantages of a An LLC offers the advantages of a partnership (management + taxation)partnership (management + taxation)
and the advantages of a corporation (limited liability)and the advantages of a corporation (limited liability)
Licensing RequirementsLicensing Requirementsfor all business entitiesfor all business entities
LicensingLicensing
Business LicensesBusiness Licenses Required by Secretary of State and CountyRequired by Secretary of State and County
Purposes:Purposes: Regulation of businessesRegulation of businesses Safeguards for consumersSafeguards for consumers Regulate quality and standardsRegulate quality and standards Protect existing business interestsProtect existing business interests
Sales Tax LicensesSales Tax Licenses Purpose: assess and collect taxesPurpose: assess and collect taxes
LiabilityLiabilitySole ProprietorshipsSole Proprietorships
Who is liable for the debts and obligations of the Who is liable for the debts and obligations of the sole proprietorship?sole proprietorship? Proprietor Proprietor
Business LiabilityBusiness Liability: business assets (desks, money): business assets (desks, money) Personal LiabilityPersonal Liability: personal assets (home, car, : personal assets (home, car, etcetc.).)
Limiting Personal LiabilityLimiting Personal Liability ContractsContracts can limit personal liability for debts: can limit personal liability for debts:
““obligations due on or created by the contract, or a breach obligations due on or created by the contract, or a breach thereof, will be limited to and payable solely from the thereof, will be limited to and payable solely from the business’ assets” OR “personal assets of proprietor shall business’ assets” OR “personal assets of proprietor shall not be liable for debts created by this contract, or a not be liable for debts created by this contract, or a breach thereof.”breach thereof.”
Bonding and InsuranceBonding and Insurance BondingBonding: contract will be performed: contract will be performed InsuranceInsurance: liability (property damage, theft): liability (property damage, theft) Disadvantages: Insurance is generally not available to high Disadvantages: Insurance is generally not available to high
risk or new businessesrisk or new businesses
Taxation ConsiderationsTaxation ConsiderationsSole ProprietorshipsSole Proprietorships
Profits = Personal IncomeProfits = Personal Income
Advantages:Advantages: Individual tax rates are generally lower than Individual tax rates are generally lower than
business rates business rates Business income/losses may offset other Business income/losses may offset other
incomeincome
Tax Identification Number:Tax Identification Number: A businesses should obtain a tax ID number A businesses should obtain a tax ID number
when hiring employees when hiring employees IRS Form SS-4IRS Form SS-4
TerminationTerminationSole ProprietorshipsSole Proprietorships
TerminationTermination Upon death of proprietorUpon death of proprietor
Termination is automatic upon death of ownerTermination is automatic upon death of owner
Upon saleUpon sale Sales Price: Sales Price:
Business Assets PLUS Goodwill (reputation)Business Assets PLUS Goodwill (reputation) Goodwill is generally based upon:Goodwill is generally based upon: (1) comparison with other business sales(1) comparison with other business sales (2) business income for specified time ((2) business income for specified time (e.g.,e.g., 10 10
yrs)yrs)
PartnershipsPartnerships
Association of two or more persons or Association of two or more persons or entities who operate a business for profitentities who operate a business for profit
Governed by:Governed by: Partnership Agreement ORPartnership Agreement OR Uniform Partnership Act (1914) – UPA Uniform Partnership Act (1914) – UPA
Nevada has adopted a version of the UPANevada has adopted a version of the UPA Revised Uniform Partnership Act (1997) Revised Uniform Partnership Act (1997)
RUPARUPA
Traditional CharacteristicsTraditional CharacteristicsPartnershipsPartnerships
Partnership FormsPartnership Forms
General PartnershipsGeneral Partnerships General PartnershipGeneral Partnership Limited Liability PartnershipLimited Liability Partnership
Limited PartnershipsLimited Partnerships Limited PartnershipLimited Partnership Limited Liability Limited PartnershipLimited Liability Limited Partnership Limited Partnership AssociationLimited Partnership Association
General PartnershipsGeneral PartnershipsThe Traditional PartnershipThe Traditional Partnership
Requires NO formalitiesRequires NO formalities
FormationFormation Voluntary Agreement (to co-own business)Voluntary Agreement (to co-own business) Registration of Assumed Business Name Registration of Assumed Business Name (not in NV)(not in NV) Foreign Registration (if operating in another state)Foreign Registration (if operating in another state)
State in which the partnership is not formedState in which the partnership is not formed Regulates and creates revenueRegulates and creates revenue
LicensesLicenses Business LicensesBusiness Licenses Sales Tax LicensesSales Tax Licenses
Partnership AgreementPartnership Agreement Cornerstone of partnership relationshipCornerstone of partnership relationship
AgencyAgencyPartnershipPartnership
Apparent AuthorityApparent Authority:: Each partner has the authority to bind the partnership to Each partner has the authority to bind the partnership to
obligations obligations within the scope of the partnership businesswithin the scope of the partnership business Purpose: protect third parties Purpose: protect third parties Apparent authority can be limited by:Apparent authority can be limited by:
Partnership AgreementPartnership Agreement Statement of Partnership Authority (filed with SOS)Statement of Partnership Authority (filed with SOS)
Actual Authority (Express Authority)Actual Authority (Express Authority) Authority granted by:Authority granted by:
Partnership AgreementPartnership Agreement Majority VoteMajority Vote
Exceeding actual authority can lead to expulsion or suit Exceeding actual authority can lead to expulsion or suit for damages caused by using excess authorityfor damages caused by using excess authority
ManagementManagementPartnershipPartnership
General partners have General partners have (1) (1) equal management rightsequal management rights
Note: Management is often delegated to a small groupNote: Management is often delegated to a small group (2) (2) equal participation rightsequal participation rights (voting rights) (voting rights)
Note: The Partnership Agreement can alter the management and voting rightsNote: The Partnership Agreement can alter the management and voting rights
VotingVoting Decisions made by majority voteDecisions made by majority vote
Voting violations = void transactionsVoting violations = void transactions Except:Except:
Votes affecting continuation of business (Votes affecting continuation of business (e.ge.g., selling ., selling business)business)
Partnership activities beyond the partnership agreementPartnership activities beyond the partnership agreement
Fiduciary DutiesFiduciary Duties of Partnersof Partners
Partners are fiduciaries of one anotherPartners are fiduciaries of one another Fiduciaries hold a position of trustFiduciaries hold a position of trust
Duties:Duties: (1) (1) Duty of LoyaltyDuty of Loyalty
Partners must act solely for benefit of partnershipPartners must act solely for benefit of partnership Duty of loyalty cannot be eliminated in pship agreementDuty of loyalty cannot be eliminated in pship agreement
Key: Disclose all interests adverse to partnershipKey: Disclose all interests adverse to partnership (2) (2) Duty of CareDuty of Care
Partners must use ordinary and reasonable care in Partners must use ordinary and reasonable care in partnership businesspartnership business
Partners are liable for reckless or intentional misconductPartners are liable for reckless or intentional misconduct (3) (3) Duty of Good Faith & Fair DealingDuty of Good Faith & Fair Dealing
Partners must be honest in partnership businessPartners must be honest in partnership business = Don’t take unfair advantage of the partnership= Don’t take unfair advantage of the partnership
LiabilityLiabilityof Partnersof Partners
Business Liability vs. Personal LiabilityBusiness Liability vs. Personal Liability Business Liability:Business Liability:
Use of business assets to pay partnership debtsUse of business assets to pay partnership debts Personal Liability:Personal Liability:
Use of personal assets to pay partnership debtsUse of personal assets to pay partnership debts Exhaustion RuleExhaustion Rule (R.U.P.A.) (R.U.P.A.)
Business assets must be used to pay business obligations Business assets must be used to pay business obligations before personal assets can be takenbefore personal assets can be taken
Each partner is personally liable for all:Each partner is personally liable for all: (1) Contract obligations of partnership and (1) Contract obligations of partnership and (2) Tort obligations of partnership(2) Tort obligations of partnership
Note: Liability is equal unless partnership agreement specifies Note: Liability is equal unless partnership agreement specifies otherwiseotherwise
Contract v. Tort LiabilityContract v. Tort Liability Contract Liability:Contract Liability:
Breach of partnership agreementsBreach of partnership agreements Partners are jointly liable (sue all partners together)Partners are jointly liable (sue all partners together)
Tort Liability:Tort Liability: Personal injuries, fraud, etc. cause by partner(s)Personal injuries, fraud, etc. cause by partner(s)
Partners are jointly and severally liablePartners are jointly and severally liable Can get compensation from all partners or just oneCan get compensation from all partners or just one
Limiting Personal Liability for Partnership Limiting Personal Liability for Partnership ObligationsObligations Contract Liability:Contract Liability:
““all obligations due on or liabilities created by the contract all obligations due on or liabilities created by the contract or a breach thereof will be limited to and payable solely or a breach thereof will be limited to and payable solely form the partnership’s assets.”form the partnership’s assets.”
Tort Liability:Tort Liability: Cannot limit tort liability to third partiesCannot limit tort liability to third parties
Partnership agreement may contain indemnification Partnership agreement may contain indemnification (reimbursement) provision(reimbursement) provision
Innocent partner can sue wrongful partner for Innocent partner can sue wrongful partner for reimbursement of money for tort (e.g., fraud)reimbursement of money for tort (e.g., fraud)
Partnership PropertyPartnership Property
What is partnership property?What is partnership property?
(1) (1) ContributionsContributions (gifts) by partners (gifts) by partners (2) Property purchased with pship (2) Property purchased with pship
profitsprofits (3) Other property (partnership loans, (3) Other property (partnership loans,
etcetc.).)
Partnership PropertyPartnership Property
Contributions = partnership capitalContributions = partnership capital Investments by individual partnersInvestments by individual partners Contributions are owned by partnershipContributions are owned by partnership
Partners cannot withdraw their contributions until Partners cannot withdraw their contributions until partnership is dissolvedpartnership is dissolved
Pship Interest = Contributions + % Profits – LiabilitiesPship Interest = Contributions + % Profits – Liabilities
Based upon partner’s investment (capital contribution)Based upon partner’s investment (capital contribution) E.g. Partner A invests 40% of partnership moneyE.g. Partner A invests 40% of partnership money= 40% partnership interest (40% profits/losses)= 40% partnership interest (40% profits/losses) Dollar value of all contributions should be set in pship Dollar value of all contributions should be set in pship
agreementagreement DefaultDefault: partnership profits and losses are divided equally: partnership profits and losses are divided equally
Rights to Partnership PropertyRights to Partnership Property
Partnership owns property, not individual Partnership owns property, not individual partnerspartners
Assignment of partnership interestAssignment of partnership interest Can partner give third party (creditor) his pship Can partner give third party (creditor) his pship
interest?interest? Assignment gives only the right to receive profitsAssignment gives only the right to receive profits
Assignor cannot participate in managementAssignor cannot participate in management
Attachment of partnership interestAttachment of partnership interest Can creditors attach the partner’s interest to satisfy Can creditors attach the partner’s interest to satisfy
partner’s personal debts?partner’s personal debts? Attachment only gives right to partner’s share of profitsAttachment only gives right to partner’s share of profits
Taxation ConsiderationsTaxation Considerations
Partnership profits and lossesPartnership profits and losses = personal income of partners= personal income of partners
Advantages:Advantages: (1) profits taxes once(1) profits taxes once (2) profits taxed at lower individual rates(2) profits taxed at lower individual rates (3) partnership losses offsets other personal (3) partnership losses offsets other personal
incomeincome
Partnership must file an informational tax returnPartnership must file an informational tax return
Termination of PartnershipTermination of Partnership
Partnerships have to :Partnerships have to :
DissolveDissolve Change in the partnership associationChange in the partnership association
E.gE.g., partners leaves/joins partnership., partners leaves/joins partnership
Wind UpWind Up End businessEnd business
E.gE.g., collect accounts receivables, pay debts., collect accounts receivables, pay debts
Options to TerminationOptions to Termination
R.U.P.A. TerminationR.U.P.A. Termination = Partnership Reorganization= Partnership Reorganization
Provides remaining partners buyout exiting Provides remaining partners buyout exiting partner’s interestpartner’s interest
Buyout priceBuyout price = partner’s interest = partner’s interest (contribution + profits – liabilities)(contribution + profits – liabilities)
OR Price established in Partnership AgreementOR Price established in Partnership Agreement
Partnership AgreementPartnership Agreement Partnership agreement may allow Partnership agreement may allow
continuation of partnership after continuation of partnership after dissolutiondissolution
Winding UpWinding Up
= concluding partnership business= concluding partnership business
Completing existing partnership contractsCompleting existing partnership contracts Collecting accounts receivable (due)Collecting accounts receivable (due) Liquidating partnership assetsLiquidating partnership assets
PLUSPLUS
Distributing profitsDistributing profits
Limited Liability PartnershipsLimited Liability PartnershipsDefinedDefined
Managers without vicarious liabilityManagers without vicarious liability = General Partnership with liability protections= General Partnership with liability protections
PartnersPartners All partners manageAll partners manage All partners are personally liable for:All partners are personally liable for:
Partnership contractsPartnership contracts Own Negligence/malfeasanceOwn Negligence/malfeasance
BUT NOTBUT NOT Negligence or malfeasance of other partnersNegligence or malfeasance of other partners
Unless they supervised or participated in itUnless they supervised or participated in it
Full-Shield StatesFull-Shield States Offer statutory protection for all partnership obligations, Offer statutory protection for all partnership obligations,
whether arising in tort or contractwhether arising in tort or contract
LiabilityLiabilityLimited Liability PartnershipsLimited Liability Partnerships
Liability = legal responsibilityLiability = legal responsibility
Business LiabilityBusiness Liability All partners are liable to the amount of their investment All partners are liable to the amount of their investment
for the contractual obligations PLUSfor the contractual obligations PLUS
Personal LiabilityPersonal Liability Partners liable for their own negligence/malfeasancePartners liable for their own negligence/malfeasance
Partial-Shield StatesPartial-Shield States: personally liable for contractual : personally liable for contractual obligations of partnershipobligations of partnership
NOT liable for negligence/malfeasance of their partnersNOT liable for negligence/malfeasance of their partners Unless they supervised or participated Unless they supervised or participated
Limited Liability Limited PartnershipsLimited Liability Limited Partnerships
Hybrid: LLP & LPHybrid: LLP & LP Key: All partners manage w/o vicarious liabilityKey: All partners manage w/o vicarious liability
General Partners = ManagersGeneral Partners = Managers Limited Partners = InvestorsLimited Partners = Investors
LiabilityLiability Partners are liable for:Partners are liable for:
Partnership contractsPartnership contracts Own negligence/malfeasanceOwn negligence/malfeasance
Not liable for negligence/malfeasance of other Not liable for negligence/malfeasance of other partnerspartners
Limited Liability PartnershipsLimited Liability PartnershipsFormationFormation
RequirementsRequirements Register assumed business name/LLPRegister assumed business name/LLP Obtain required business/professional licenses Obtain required business/professional licenses
and permits (county/state)and permits (county/state) Draft a comprehensive partnership agreementDraft a comprehensive partnership agreement Consult tax advisorConsult tax advisor
Apply for a sales tax permit, if goods will be soldApply for a sales tax permit, if goods will be sold Apply for tax identification number with the IRS/stateApply for tax identification number with the IRS/state
Establish employee withholding as well as Establish employee withholding as well as unemployment/workers’ compensation unemployment/workers’ compensation coveragecoverage
Formation ConsiderationsFormation ConsiderationsLimited Liability PartnershipsLimited Liability Partnerships
NameName Name designation LLPName designation LLP
Purpose: Notifies public of limited liabilityPurpose: Notifies public of limited liability
Registration of LLPRegistration of LLP File application for registration of LLPFile application for registration of LLP
Some states provide expiration after five yearsSome states provide expiration after five years
TaxationTaxation Partnership income = personal income of partnersPartnership income = personal income of partners
TerminationTerminationLimited Liability PartnershipsLimited Liability Partnerships
DissolutionDissolution Partner dissociates OR involuntary withdrawsPartner dissociates OR involuntary withdraws
Involuntary (death, incapacity, bankruptcy)Involuntary (death, incapacity, bankruptcy)
Continuation of PartnershipContinuation of Partnership Partnership agreement may provide for continuationPartnership agreement may provide for continuation R.U.P.A. = provides 90 day grace periodR.U.P.A. = provides 90 day grace period
Withdrawing partner may waive right to have partnership wound-upWithdrawing partner may waive right to have partnership wound-up = buy out provision= buy out provision
Winding UpWinding Up Complete partnership businessComplete partnership business
Finish existing contracts, collect debts owed, pay obligations due, Finish existing contracts, collect debts owed, pay obligations due, etc.etc.
File Notice with SOS of termination of partnershipFile Notice with SOS of termination of partnership
PartnershipsPartnershipsLiability Protection EvolutionLiability Protection Evolution
Association of two or more persons or entities Association of two or more persons or entities
who operate a business for profitwho operate a business for profit
Forms of PartnershipForms of Partnership General PartnershipGeneral Partnership
(Limited Liability Partnership)(Limited Liability Partnership) Limited PartnershipLimited Partnership
(Limited Liability Limited Partnership)(Limited Liability Limited Partnership) (Limited Partnership Association)(Limited Partnership Association)
Limited PartnershipsLimited PartnershipsFormsForms
Limited PartnershipsLimited Partnerships General Partners: Managers w/ personal liabilityGeneral Partners: Managers w/ personal liability Limited Partners: Investors w/o personal liabilityLimited Partners: Investors w/o personal liability
Limited Liability Limited PartnershipsLimited Liability Limited Partnerships General Partners: ManagersGeneral Partners: Managers Limited Partners: InvestorsLimited Partners: Investors Liability only for partnership contracts and own Liability only for partnership contracts and own
negligence/malfeasancenegligence/malfeasance No personal liability for the negligence/malfeasance of No personal liability for the negligence/malfeasance of
other partnersother partners
Limited Partnership AssociationsLimited Partnership Associations No personal liability of partnersNo personal liability of partners
Limited PartnershipsLimited PartnershipsDefinitionDefinition
An association of two or more persons An association of two or more persons carrying on a business as carrying on a business as
co-owners for profit with:co-owners for profit with:
(1)(1) ManagersManagersOne or more general partners One or more general partners
(2)(2) InvestorsInvestorsOne or more limited partners One or more limited partners
Partnership DutiesPartnership DutiesLimited PartnershipsLimited Partnerships
General PartnersGeneral Partners Manage partnershipsManage partnerships Personally liable for partnership obligationsPersonally liable for partnership obligations
Limited PartnersLimited Partners InvestorsInvestors
No management/participation rightsNo management/participation rights No personal liability for partnership debtsNo personal liability for partnership debts
Liability is limited to investment in partnershipLiability is limited to investment in partnership
If limited partners participate in management, If limited partners participate in management, they lose their liability protectionsthey lose their liability protections
Formation RequirementsFormation RequirementsLimited PartnershipsLimited Partnerships
NameName Requirements:Requirements:
Name must include designation “Limited Partnership”Name must include designation “Limited Partnership” PurposePurpose: Notify creditors not all partners are personally liable for : Notify creditors not all partners are personally liable for
partnership obligationspartnership obligations Name MAY NOT include surname of a limited partnerName MAY NOT include surname of a limited partner
Rationale: limits apparent authority of limited partnersRationale: limits apparent authority of limited partners
Certificate of Limited PartnershipsCertificate of Limited Partnerships Certificate of limited partnership must be filed with the SOS to Certificate of limited partnership must be filed with the SOS to
provide limited liability to limited partnersprovide limited liability to limited partners Rationale: Notice to third parties (e.g., creditors)Rationale: Notice to third parties (e.g., creditors)
TaxationTaxation ““Pass through” taxationPass through” taxation
Must file informational partnership tax return (Form 1065)Must file informational partnership tax return (Form 1065)
Changes in Partnership AssociationChanges in Partnership AssociationLimited PartnershipsLimited Partnerships
Admission of New PartnersAdmission of New Partners
General Partners General Partners (Managers)(Managers) Admission = dissolution of partnershipAdmission = dissolution of partnership
Unless all partners consentUnless all partners consent Rationale: Avoids involuntary partnershipRationale: Avoids involuntary partnership
Limited Partners Limited Partners (Investors)(Investors) New investor DOES NOT dissolve partnershipNew investor DOES NOT dissolve partnership
Rationale: provides additional capital without Rationale: provides additional capital without change in management change in management
TerminationTerminationLimited PartnershipsLimited Partnerships
Partnership may terminate if:Partnership may terminate if: All partners agreeAll partners agree Partnership Agreement has ending datePartnership Agreement has ending date Duration/Purpose of partnership is completeDuration/Purpose of partnership is complete Courts order dissolutionCourts order dissolution General partner withdraws/diesGeneral partner withdraws/dies
General PartnerGeneral Partner Withdrawal = dissolutionWithdrawal = dissolution
Limited PartnerLimited Partner Withdrawal DOES NOT require dissolutionWithdrawal DOES NOT require dissolution
Rationale: Investors are not active participantsRationale: Investors are not active participants
Limited Partnership AssociationLimited Partnership Association
Indefinite DurationIndefinite Duration Key distinction from LLP/LLLPKey distinction from LLP/LLLP
No Personal LiabilityNo Personal Liability For debts, obligations, or other liabilitiesFor debts, obligations, or other liabilities
May jeopardize IRS status as partnershipMay jeopardize IRS status as partnership
““the most corporate-like form of a partnership entity”the most corporate-like form of a partnership entity”
CorporationsCorporations
A separate legal entity (“a person”) A separate legal entity (“a person”) owned by investors (shareholders) and owned by investors (shareholders) and managed by a board of directorsmanaged by a board of directors
Shareholder
Shareholder
Shareholder Shareholder
Shareholder
Shareholder
Corporation
Corporate CharacteristicsCorporate Characteristics (1) (1) Continuity of Life = “Perpetual Life”Continuity of Life = “Perpetual Life”
Corporation does not automatically terminate on Corporation does not automatically terminate on withdrawal/change of shareholderwithdrawal/change of shareholder
(2) (2) Centralization of ManagementCentralization of Management Managed by Board of DirectorsManaged by Board of Directors
BD elected by SHBD elected by SH Directors appoint Officers (President, VP)Directors appoint Officers (President, VP)
Officers manage daily operationsOfficers manage daily operations
(3) (3) Limited LiabilityLimited Liability Shareholders have limited personal liabilityShareholders have limited personal liability
(4) (4) Free Transferability of InterestsFree Transferability of Interests Ownership may be transferredOwnership may be transferred
Exception: Close CorporationException: Close Corporation
Corporate DisadvantagesCorporate Disadvantages
(1) (1) Corporate FormalitiesCorporate Formalities Formalities must be complied with to maintain Formalities must be complied with to maintain
corporate status (liability protections)corporate status (liability protections) E.g., Articles of Incorporation, bylaws, annual E.g., Articles of Incorporation, bylaws, annual
shareholder meetings, regular BD meetings, shareholder meetings, regular BD meetings, etc.etc.
(2) (2) Taxation ConsiderationsTaxation Considerations Double TaxationDouble Taxation
11stst: Corporation taxed on profits: Corporation taxed on profits 22ndnd: Shareholders taxed on dividends : Shareholders taxed on dividends
Dividends: = distribution of profitsDividends: = distribution of profits Exception: S CorporationException: S Corporation
Corporate FormsCorporate Forms Basic FormsBasic Forms
Business CorporationBusiness Corporation Statutory Close CorporationStatutory Close Corporation
Specific Categories of CorporationsSpecific Categories of Corporations Non-profit CorporationNon-profit Corporation Professional CorporationProfessional Corporation
IRS DesignationIRS Designation S CorporationS Corporation
Receives “pass-through” taxationReceives “pass-through” taxation
Business CorporationBusiness Corporation Basic form for all corporate formsBasic form for all corporate forms
Owners = ShareholdersOwners = Shareholders Investors without liabilityInvestors without liability
Managers = Board of Directors/OfficersManagers = Board of Directors/Officers
Advantages:Advantages: (1) Limited liability(1) Limited liability (2) Centralization of management(2) Centralization of management (3) Free transferability of ownership(3) Free transferability of ownership (4) Perpetual life(4) Perpetual life
Disadvantages:Disadvantages: (1) Corporate formalities(1) Corporate formalities (2) Double taxation(2) Double taxation
Statutory Close CorporationStatutory Close Corporation
Small (e.g., family owned) Small (e.g., family owned) corporationcorporation
50 or fewer shareholders50 or fewer shareholders Nevada = 30 or fewer shareholdersNevada = 30 or fewer shareholders
Shareholders also manageShareholders also manage Therefore, stock ownership is restrictedTherefore, stock ownership is restricted
Restriction posted on stock certificateRestriction posted on stock certificate
Statutory Close CorporationsStatutory Close Corporations FormationFormation
Election in Articles of IncorporationElection in Articles of Incorporation Nevada: Close Corporation Articles of IncorporationNevada: Close Corporation Articles of Incorporation
OrganizationOrganization Managed by shareholdersManaged by shareholders
Organized pursuant to Shareholders’ AgreementOrganized pursuant to Shareholders’ Agreement
FormalitiesFormalities Minimal formalitiesMinimal formalities
Board of Directors not requiredBoard of Directors not required Bylaws not requiredBylaws not required Annual shareholders’ meetings not requiredAnnual shareholders’ meetings not required
Main Advantage = Stock Transfer RestrictionMain Advantage = Stock Transfer Restriction
Non-Profit CorporationNon-Profit Corporation
Established for charitable, educational, Established for charitable, educational, cultural, religious purposes…cultural, religious purposes…
Advantages:Advantages: Limits liability of benefactorsLimits liability of benefactors Offers taxation exemptionsOffers taxation exemptions
Nevada = N.R.S. 82Nevada = N.R.S. 82 N.R.S. 82.106:N.R.S. 82.106:
No non-profit for trusts, engineers, insurance, No non-profit for trusts, engineers, insurance, accountants, homeowners’ associationsaccountants, homeowners’ associations
Professional CorporationProfessional Corporation
Historical Note:Historical Note:
Traditionally, professionals were sole Traditionally, professionals were sole proprietors or partnershipsproprietors or partnerships
Theory: Held professionals accountableTheory: Held professionals accountable
Now, professionals can incorporate if Now, professionals can incorporate if allowed be state statuteallowed be state statute
Nevada NRS 89 et seq.Nevada NRS 89 et seq.
Professional CorporationsProfessional CorporationsSpecial ConsiderationsSpecial Considerations
NameName Must specify: Must specify:
P.C. (Professional Corporation)P.C. (Professional Corporation) P.A. (Professional Association)P.A. (Professional Association) S.C. (Service Corporation)S.C. (Service Corporation)
Liability ProtectionsLiability Protections Limited personal liability for negligence/malfeasance of Limited personal liability for negligence/malfeasance of
associatesassociates Professionals remain personally liable for their own negligence and Professionals remain personally liable for their own negligence and
malfeasance and that which they supervise or have knowledge ofmalfeasance and that which they supervise or have knowledge of More restrictive than other corporate formsMore restrictive than other corporate forms
Ownership RestrictionsOwnership Restrictions May be owned only by professionalsMay be owned only by professionals
Rationale: eliminates profit motive of investorsRationale: eliminates profit motive of investors
S CorporationsS Corporations
IRS Tax DesignationIRS Tax Designation
Not a separate corporate formNot a separate corporate form Requirements:Requirements:
Small corporations (less than 75 Small corporations (less than 75 shareholders)shareholders)
Shareholders must be individuals or Shareholders must be individuals or extensions of individuals (trusts, estates)extensions of individuals (trusts, estates)
Formation of a CorporationFormation of a Corporation
Creating the CorporationCreating the Corporation Pre-Incorporation ConsiderationsPre-Incorporation Considerations
OrganizationOrganization 1. 1. Corporate OrganizersCorporate Organizers
PromotersPromoters: Organize corporation, lease business : Organize corporation, lease business property, buy business equipment, hire employees, property, buy business equipment, hire employees, solicit investors [promoters generally found only in solicit investors [promoters generally found only in large corporations]large corporations]
IncorporatorsIncorporators: Sign and file Articles of : Sign and file Articles of IncorporationIncorporation
Note: Promoters and incorporators are generally the same Note: Promoters and incorporators are generally the same personal and generally become shareholders in the corporationpersonal and generally become shareholders in the corporation
2. 2. Selection of JurisdictionSelection of Jurisdiction MBCA and RMBCA create uniform laws and reduce MBCA and RMBCA create uniform laws and reduce
forum shoppingforum shopping
CorporationCorporationFormationFormation
3. 3. Corporate FinancingCorporate Financing Potential investors agree to purchase corporate shares Potential investors agree to purchase corporate shares
once corporation is formedonce corporation is formed = pre-incorporation share subscription= pre-incorporation share subscription
4. 4. Corporate NameCorporate Name Designate: “Corporation”, “Incorporated”, “Company”Designate: “Corporation”, “Incorporated”, “Company” Name may not be deceptively similar to another Name may not be deceptively similar to another
business namebusiness name Rationale: prevents consumer confusionRationale: prevents consumer confusion
Reservation of corporate nameReservation of corporate name Generally by large companies intending to expandGenerally by large companies intending to expand
Pre-Incorporation: Pre-Incorporation: Document PreparationDocument Preparation
FormationFormation Articles of IncorporationArticles of Incorporation
Informational filing with Secretary of StateInformational filing with Secretary of State Beginning of corporate lifeBeginning of corporate life
Look to state statuteLook to state statute Name of corporationName of corporation Purpose of corporationPurpose of corporation Capital structure of corporation (stock)Capital structure of corporation (stock) Registered agentRegistered agent Initial board of directorsInitial board of directors
Drafting Note: Provide minimal information because A/I Drafting Note: Provide minimal information because A/I are available for public inspection and are difficult to are available for public inspection and are difficult to amendamend
Filing with Secretary of StateFiling with Secretary of State Acceptance of A/I by SOS = corporate beginningAcceptance of A/I by SOS = corporate beginning
Post-Incorporation:Post-Incorporation:FormalitiesFormalities
Organizing = A/I, bylaws and meetingsOrganizing = A/I, bylaws and meetings
1. 1. BylawsBylaws = Operating procedures = Operating procedures Written guidelines and procedures for operation/managementWritten guidelines and procedures for operation/management
Dates/places of SH and BD meetingsDates/places of SH and BD meetings Voting of Board of DirectorsVoting of Board of Directors Duties of Board of Directors/OfficersDuties of Board of Directors/Officers Stock issuance/ownershipStock issuance/ownership Corporate finances (e.g., bank accounts)Corporate finances (e.g., bank accounts)
2. 2. Organizational MeetingOrganizational Meeting By incorporators/initial directorsBy incorporators/initial directors
Elect directors (if not appointed in Articles of Incorporation)Elect directors (if not appointed in Articles of Incorporation) Appoint corporate officersAppoint corporate officers Approve Articles of IncorporationApprove Articles of Incorporation Bylaws adoptedBylaws adopted Pre-incorporation transactions ratifiedPre-incorporation transactions ratified
Defective IncorporationDefective IncorporationDoctrinesDoctrines
De Jure CorporationDe Jure Corporation = valid corporation= valid corporation
Complies with all state statutory requirementsComplies with all state statutory requirements Corporation cannot be set asideCorporation cannot be set aside
E.g., shareholders cannot be held liable for corp debtsE.g., shareholders cannot be held liable for corp debts
But if corporation does not comply with But if corporation does not comply with statutory requirements…statutory requirements…
Corporate structure may be set aside and Corporate structure may be set aside and shareholders may be personally liable for obligations shareholders may be personally liable for obligations of the corporationof the corporation
Shielding ShareholdersShielding Shareholdersof a Defective Corporationof a Defective Corporation
A defective corporate structure may be A defective corporate structure may be upheld under the following doctrines:upheld under the following doctrines: 1. 1. De Facto CorporationDe Facto Corporation
Business owner has, in good faith:Business owner has, in good faith: (1) attempted to comply with state statutory (1) attempted to comply with state statutory
requirementsrequirements (2) operated as a corporation (e.g., uses corporate name)(2) operated as a corporation (e.g., uses corporate name)
2. 2. Corporation by EstoppelCorporation by Estoppel Applicable only to contract disputesApplicable only to contract disputes
If a party to a contract represents itself as a coporation, If a party to a contract represents itself as a coporation, other party cannot set aside the corporate existenceother party cannot set aside the corporate existence
Reflects contract expectationsReflects contract expectations
Taxation ConsiderationsTaxation ConsiderationsCorporationCorporation
Federal Income TaxFederal Income Tax Corporation taxed as “a person” on profitsCorporation taxed as “a person” on profits Shareholders taxed on dividends (corporate Shareholders taxed on dividends (corporate
profits)profits)
Shareholder: Dividends Taxed
Corporation
Profits Taxed
Shareholder: Dividends Taxed
Shareholder: Dividends Taxed
Shareholder: Dividends Taxed
Shareholder: Dividends Taxed
Shareholder: Dividends Taxed
Taxation ConsiderationsTaxation ConsiderationsCorporationCorporation
State Income TaxationState Income Taxation
Prorated State TaxingProrated State Taxing Each state in which the corporation Each state in which the corporation
transacts business may tax corporationtransacts business may tax corporation Corporate residence vs. sales profitsCorporate residence vs. sales profits
Corporate Organizational StructureCorporate Organizational Structure
Shareholders…………. Corporate Shareholders…………. Corporate OwnersOwners Elect directorsElect directors Vote on extraordinary corporate mattersVote on extraordinary corporate matters
Directors………………. Directors………………. Policy MakersPolicy Makers Make corporate policyMake corporate policy Determine management of corporationDetermine management of corporation
Officers…………………Officers………………… Daily ManagersDaily Managers Implement corporate policiesImplement corporate policies Manage daily operations of corporationManage daily operations of corporation
Shareholders: Corporate OwnersShareholders: Corporate Owners
Contribute investment capital for sharesContribute investment capital for shares
OwnershipOwnership right to receive corporate profits, elect/remove right to receive corporate profits, elect/remove
directors, vote on extraordinary corporate directors, vote on extraordinary corporate matters, receive corporate assets in dissolutionmatters, receive corporate assets in dissolution
No management rightsNo management rights Therefore, no personal liabilityTherefore, no personal liability
Shareholders’ rightsShareholders’ rights 1. 1. Inspection RightsInspection Rights
Inspect corporate books to oversee managementInspect corporate books to oversee management
2. 2. Voting RightsVoting Rights Elect/remove directorsElect/remove directors Extraordinary corporate mattersExtraordinary corporate matters
Amendment of Articles of Incorporation, mergers, sale of Amendment of Articles of Incorporation, mergers, sale of corporate assets not in ordinary course of business, corporate assets not in ordinary course of business, dissolutiondissolution
Voting MechanismsVoting Mechanisms Quorum:Quorum: Minimum # of shares for valid vote Minimum # of shares for valid vote
Per Articles of Incorporation or BylawsPer Articles of Incorporation or Bylaws RMBCA = majority of votesRMBCA = majority of votes
Binding vote = majority of quorumBinding vote = majority of quorum Adjourn and re-schedule if no quorumAdjourn and re-schedule if no quorum
ProxiesProxies Voting another shareholder’s votesVoting another shareholder’s votes
3. 3. Preemptive RightsPreemptive Rights Shareholders’ right to maintain Shareholders’ right to maintain
proportionate ownership interest (control proportionate ownership interest (control of corporation)of corporation)
Prevents outsiders from taking over Prevents outsiders from taking over corporationcorporation
4. 4. Meeting RightsMeeting Rights Meeting prerequisitesMeeting prerequisites
Shareholders eligible to voteShareholders eligible to vote Shareholders owning stock on date of notice of Shareholders owning stock on date of notice of
meeting (record date) may votemeeting (record date) may vote Notice of meeting (date, place, time)Notice of meeting (date, place, time)
Shareholders must have reasonable noticeShareholders must have reasonable notice May waive noticeMay waive notice
Shareholders MeetingsShareholders Meetings Annual MeetingsAnnual Meetings
Purpose: elect new directors, amend articles, Purpose: elect new directors, amend articles, consider mergers, etc.consider mergers, etc.
Special MeetingsSpecial Meetings Between annual meetingsBetween annual meetings
Meetings by Written ConsentMeetings by Written Consent Votes must be unanimous (all shareholders)Votes must be unanimous (all shareholders)
**Minutes of all corporate meetings must be **Minutes of all corporate meetings must be maintained**maintained**
Shareholders’ LiabilityShareholders’ Liability No personal liabilityNo personal liability
Shareholders generally have no personal liabilityShareholders generally have no personal liability VEIL between corporation and shareholdersVEIL between corporation and shareholders
Veil may be pierced Veil may be pierced (1) prevent fraud/injustice(1) prevent fraud/injustice (2) shareholder personally guarantees loans(2) shareholder personally guarantees loans
Piercing the Corporate Veil Piercing the Corporate Veil To prevent fraud/injustice:To prevent fraud/injustice:
3 reasons:3 reasons: 1. Lack of corporate formalities1. Lack of corporate formalities 2. Commingling of corporate/personal assets2. Commingling of corporate/personal assets 3. Inadequate capitalization3. Inadequate capitalization
Personal guarantee by shareholderPersonal guarantee by shareholder Voluntary agreement by shareholder to be personally liable for Voluntary agreement by shareholder to be personally liable for
specific debts of corporation specific debts of corporation maintains liability protection for other debtsmaintains liability protection for other debts
Purpose: Financing for corporationPurpose: Financing for corporation
Directors: Directors: Corporate PolicymakersCorporate Policymakers
Election of Directors:Election of Directors: Appointed in Articles of Incorporation andAppointed in Articles of Incorporation and Elected by shareholders at annual Elected by shareholders at annual
meetingsmeetings Voting mechanisms:Voting mechanisms:
Plurality of outstanding sharesPlurality of outstanding shares Cumulative voting vs. straight votingCumulative voting vs. straight voting
Removal of DirectorsRemoval of Directors 10% vote of shareholders to remove director10% vote of shareholders to remove director
Directors’ DutiesDirectors’ Duties
Management ResponsibilitiesManagement Responsibilities Make corporate policyMake corporate policy Declare corporate dividendsDeclare corporate dividends Elect and remove officers of the corporationElect and remove officers of the corporation Initiate extraordinary corporate mattersInitiate extraordinary corporate matters
Director’s MeetingsDirector’s Meetings (look to bylaws) (look to bylaws) Voting requirements and restrictionsVoting requirements and restrictions
Majority of directors must at meeting for valid Majority of directors must at meeting for valid votevote
Fiduciary DutiesFiduciary Duties Duty of CareDuty of Care
Would RPP act the same?Would RPP act the same? Business Judgment RuleBusiness Judgment Rule
Duty of LoyaltyDuty of Loyalty Conflict of InterestConflict of Interest
1. Personal interest in corporate transaction1. Personal interest in corporate transaction Full Disclosure:Full Disclosure:
1. Disclosure Interest1. Disclosure Interest 2. Transaction fair to corporation2. Transaction fair to corporation
2. Usurpation of corporate opportunity2. Usurpation of corporate opportunity 3. Insider Trading3. Insider Trading
Trading on corporation’s stock with inside information Trading on corporation’s stock with inside information (information not available to general public)(information not available to general public)
Director’s Liability Director’s Liability
Director’s liability insuranceDirector’s liability insurance
Ultra ViresUltra Vires Acts Acts Director exceeds authority grantedDirector exceeds authority granted
Breach of Fiduciary DutiesBreach of Fiduciary Duties Duty of CareDuty of Care Duty of LoyaltyDuty of Loyalty
Conflict of InterestConflict of Interest Usurpation of Corporate OpportunityUsurpation of Corporate Opportunity Insider TradingInsider Trading
Officers:Officers:Corporate ManagersCorporate Managers
Officers:Officers: PresidentPresident Vice-PresidentVice-President Secretary Secretary TreasurerTreasurer
Appointment and Removal of OfficersAppointment and Removal of Officers By Board of DirectorsBy Board of Directors
Officers’ DutiesOfficers’ Duties President: oversees general managementPresident: oversees general management Vice-President: variable dutiesVice-President: variable duties Secretary: maintains records of corporationSecretary: maintains records of corporation Treasurer: Responsible for financialTreasurer: Responsible for financial
Officers: AgencyOfficers: Agency Express AuthorityExpress Authority
Granted by: Granted by: Articles of IncorporationArticles of Incorporation BylawsBylaws Board of DirectorsBoard of Directors
Implied AuthorityImplied Authority Authority public assumes officers haveAuthority public assumes officers have
Apparent AuthorityApparent Authority Corporation gives impression officer has Corporation gives impression officer has
authorityauthority Purpose: protect public from unauthorized acts of Purpose: protect public from unauthorized acts of
officersofficers
Officers: Fiduciary DutiesOfficers: Fiduciary Duties
Duty of CareDuty of Care Directors must use reasonable careDirectors must use reasonable care
Duty of LoyaltyDuty of Loyalty Directors must be loyal to the corporation’s Directors must be loyal to the corporation’s
interestsinterests
Breach of Fiduciary DutiesBreach of Fiduciary Duties Creates personal liabilityCreates personal liability Business Judgment RuleBusiness Judgment Rule
Protects officers if they exercise business judgmentProtects officers if they exercise business judgment
Fundamental ChangesFundamental Changesin Corporate Structurein Corporate Structure
Fundamental ChangesFundamental Changes MergerMerger ConsolidationConsolidation Sale, lease, exchange of corporate assets not in the ordinary course of businessSale, lease, exchange of corporate assets not in the ordinary course of business Amendment to Articles of IncorporationAmendment to Articles of Incorporation DissolutionDissolution
Standard Approval ProcedureStandard Approval Procedure (1) (1) Board of DirectorsBoard of Directors must approve change must approve change
Standard: Is change in the best interests of shareholders?Standard: Is change in the best interests of shareholders? If approved by Board, then submit to shareholdersIf approved by Board, then submit to shareholders
(2) (2) ShareholdersShareholders must approve change must approve change Approval by majority (2/3)Approval by majority (2/3) Dissenters’ RightsDissenters’ Rights
Articles of Amendment must be filed with Secretary of Articles of Amendment must be filed with Secretary of StateState
Fundamental ChangesFundamental Changesin Corporate Structurein Corporate Structure
1. 1. MergerMerger One or more corporations (merged corporations) One or more corporations (merged corporations)
absorbed into another corporation (surviving corporation)absorbed into another corporation (surviving corporation) File Articles of Merger with SOSFile Articles of Merger with SOS
2. 2. ConsolidationConsolidation One or more corporations merge and form a new One or more corporations merge and form a new
corporationcorporation File Articles of Consolidation with SOSFile Articles of Consolidation with SOS
3. 3. Sale of Corporate AssetsSale of Corporate Assets Corporation buys all or substantially all of the assets of Corporation buys all or substantially all of the assets of
another corporation (not in ordinary course of business)another corporation (not in ordinary course of business) Purpose: Escape liabilities of selling corporationPurpose: Escape liabilities of selling corporation
4. 4. Amendment to Articles of Amendment to Articles of IncorporationIncorporation Articles create and organize, therefore Articles create and organize, therefore
amendment = fundamental changeamendment = fundamental change File Articles of Amendment with SOSFile Articles of Amendment with SOS
5. 5. Hostile TakeoversHostile Takeovers Take over management and/or ownership of Take over management and/or ownership of
corporation without approval of BD or SHcorporation without approval of BD or SH
6. 6. Dissolution of CorporationDissolution of Corporation 2-step process:2-step process:
(1) Dissolve corporate form(1) Dissolve corporate form (2) Liquidate corporate assets(2) Liquidate corporate assets
DissolutionDissolutionof Corporationof Corporation
Voluntary Voluntary By Board of Directors or ShareholdersBy Board of Directors or Shareholders
InvoluntaryInvoluntary [caused by poor/ineffective management][caused by poor/ineffective management] Parties:Parties:
By stateBy state By shareholders By shareholders By corporate creditorsBy corporate creditors
Dissolution ProceduresDissolution Procedures
LiquidationLiquidation of corporate assets of corporate assets Turning assets into cashTurning assets into cash
(1) Creditors’ Claims(1) Creditors’ Claims Paid before distribution made to SHPaid before distribution made to SH
(2) Distributions to shareholders(2) Distributions to shareholders
File File Articles of DissolutionArticles of Dissolution with with SOSSOS
Limited Liability CompaniesLimited Liability Companies
Member-ManagersMember-Managers Nevada allows single member LLCsNevada allows single member LLCs
Unincorporated entity offering Unincorporated entity offering members:members: (1) Limited personal liability(1) Limited personal liability (2) Management rights(2) Management rights (3) Partnership taxation (3) Partnership taxation
““pass through” taxationpass through” taxation
LiabilityLiabilityLLCsLLCs
Members are not personally liable for Members are not personally liable for debts/obligations of LLCdebts/obligations of LLC Exceptions:Exceptions:
(1) capital contributions(1) capital contributions (2) violation of environmental laws(2) violation of environmental laws (3) unpaid taxes(3) unpaid taxes (4) fraud(4) fraud
Statutes generally require INSURANCE coverage to protect Statutes generally require INSURANCE coverage to protect publicpublic Optional in NevadaOptional in Nevada
Management & TaxationManagement & TaxationLLCLLC
ManagementManagement All members have the right to participate All members have the right to participate
in managementin management Right may be waived by electing:Right may be waived by electing:
Board of ManagersBoard of Managers Fiduciary Duties: Duty of Loyalty & Duty of CareFiduciary Duties: Duty of Loyalty & Duty of Care
TaxationTaxation Entity Classification Election (“check-the-Entity Classification Election (“check-the-
box”)box”) Pass through taxation if electedPass through taxation if elected
LLC vs. CorporationLLC vs. Corporation LLC shares 2 of 4 corporate characteristics:LLC shares 2 of 4 corporate characteristics:
(1) (1) Continuity of LifeContinuity of Life LLC generally must have limited duration (e.g., 30 years)LLC generally must have limited duration (e.g., 30 years)
Nevada allows perpetual existenceNevada allows perpetual existence (2) (2) Centralization of ManagementCentralization of Management
LLC generally is member-managedLLC generally is member-managed Nevada requires only managers be disclosed in SOS Nevada requires only managers be disclosed in SOS
reportingreporting (3) (3) Limited LiabilityLimited Liability
LLC offers limited liability from tort or contractLLC offers limited liability from tort or contract NRS 86.371 Liability of member or manager for debts or liabilities of company. Unless NRS 86.371 Liability of member or manager for debts or liabilities of company. Unless
otherwise provided in the articles of organization or agreement signed by the member of otherwise provided in the articles of organization or agreement signed by the member of manager to be charged, no member or manager of any limited liability company formed manager to be charged, no member or manager of any limited liability company formed under the laws of this state is individually liable for the debts or liabilities of the company.under the laws of this state is individually liable for the debts or liabilities of the company.
(4) (4) Free Transferability of InterestsFree Transferability of Interests Ownership transfer only gives right to receive profitsOwnership transfer only gives right to receive profits
Management rights cannot be transferred w/o consentManagement rights cannot be transferred w/o consent
FormationFormationLLCLLC
RequirementsRequirements Register assumed business name (state specific)Register assumed business name (state specific) Obtain business/professional license/permitsObtain business/professional license/permits Apply for tax identification number with IRS/stateApply for tax identification number with IRS/state Establish employee withholding/unemployment & Establish employee withholding/unemployment &
worker’s compensationworker’s compensationPLUSPLUS LLC Requirements:LLC Requirements:
Designate LLC in nameDesignate LLC in name File Articles of Organization with SOSFile Articles of Organization with SOS Draft Operating AgreementDraft Operating Agreement
Formation ConsiderationsFormation ConsiderationsLLCLLC
NameName Designate as LLC/Ltd. Liability Co.Designate as LLC/Ltd. Liability Co.
Nevada: LLC may be formed by one or more personsNevada: LLC may be formed by one or more persons PurposePurpose
““Any and all lawful business”Any and all lawful business” Potential liability problems because each member can bind LLCPotential liability problems because each member can bind LLC Nevada: LLC cannot be organized for insurance purposesNevada: LLC cannot be organized for insurance purposes
Registration of LLCRegistration of LLC File Articles of Organization with SOSFile Articles of Organization with SOS
LLC existence begins with Certificate of AcceptanceLLC existence begins with Certificate of Acceptance Nevada: Annual reports are dueNevada: Annual reports are due
Operating Agreement Operating Agreement signed by all memberssigned by all members = Partnership Agreement= Partnership Agreement
Include: Voting/management rights of members, capital Include: Voting/management rights of members, capital contributions of members, profit sharing, durationcontributions of members, profit sharing, duration
Termination of LLCTermination of LLC
DissolutionDissolution Due to: Due to:
Termination per Operating AgreementTermination per Operating Agreement Statutory duration period expiredStatutory duration period expired Death, bankruptcy, etc. of membersDeath, bankruptcy, etc. of members Agreement by membersAgreement by members Court orderCourt order
Election for ContinuationElection for Continuation Members may agree to continue businessMembers may agree to continue business
Creates new LLC therefore no continuity of lifeCreates new LLC therefore no continuity of life Winding UpWinding Up