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Corporations:A Contemporary Approach

Chapter 6Organizational Choices

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Chapter 6 (part 2)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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Planning considerationsEconomics of the firm

• Firms: capital + mgmt• Equity > debt• P-ship lacks stability /

corporation too stable

Opportunism• GP dissolution / majority

buys out low, skilled P• Corporation illiquidity /

majority intransigenceRichard Posner



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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)


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



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Manager-managed

Member-managed

Limited liability company

S Corporation (CHC)

C Corporation

Corporation

Limited partnership

General partnership

Partnership

Financial

Organizational choices (Financial Rights)

* mandatory

Partnership Corporation

Partners

Corporation

Board

Shareholders

LLC

LLC

Members

Example 6.6Q: A and B form a logging GP -- A contributes capital and B the

equipment. They do not specify in their agreement how losses will be shared. The business does not generate enough profits to cover A’s capital contribution, and A asks B to share in the net losses.

A: The UPA controls, in the absence of an agreement. B must contribute toward the loss (including the capital loss) according to his share in the profits. [Some courts give B credit for his labor.]

distributions(Ms equal)

distributions(equal)

dividends + salaries






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Manager-managed

Member-managed


S Corporation (CHC)

C Corporation

Corporation

Limited partnership

General partnership

Partnership

Liquidity

Organizational choices (Liquidity)

* mandatory


Partners

Corporation

Board

Shareholders

LLC

LLC

Members

Example 6.8Q: A and B are partners in a family GP. They have no written

agreement about dissolution. A wants to end the partnership, sell (liquidate) the business assets, and then split the cash proceeds. B wants to divide the assets in-kind between them, but not sell.

A: Under the UPA, a partner in an at-will GP can withdraw (causing dissolution) and share in a forced liquidation of partnership assets, provided creditors are first fully paid.

No(withdraw

voting)

No (withdraw

mgmt)

No(agreement)

Yes(PHC*)

LP-Yes r GP-No

(withdraw)

No(withdraw)



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Manager-managed

Member-managed


S Corporation (CHC)

C Corporation

Corporation

Limited partnership

General partnership

Partnership

Change

Organizational choices (Change/Combination)

* mandatory


Partners

Corporation

Board

Shareholders

LLC

LLC

Members

Example 6.10Q: A, B and C are equal partners in GP that owns and rents two

identical beachfront condos. A and C have a falling out, but B wants to keep his partnership with C.

A;; Two new partnerships can be created: A and B create AB Partners; B and C create BC Partners. The GP transfers one condo to AB Partners and the other to BC Partners. Following the transfer, GP dissolves.

All Ms agree

All Ms agree

Board + Sh majority


All agree

All agree



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Manager-managed

Member-managed


S Corporation (CHC)

C Corporation

Corporation

Limited partnership

General partnership

Partnership

Tax

Organizational choices (Tax)

* mandatory


Partners

Corporation

Board

Shareholders

LLC

LLC

Members

Example 6.11 (A and B plan to form a business)

Scenario #1: They will pay themselves salaries totaling $70,000 and expect net income of $80,000.

A: If the business is a corporation, they will pay total federal income taxes of $24,700, but only $14,700 if they organize as a partnership.

Scenario #2: They take the same salaries, but the business has a net loss of $20,000.

A: Federal income tax (total): corporation $2,800, partnership $800.

Pass through

Pass through

Pass through

income *(zero out)

Pass through

Passthrough



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Business taxation(couple hypotheticals)

#2 Lose money

(at start)

Assume business owners have personal income of $75,000 and anticipate early business losses of $60,000.

How should they organize the business?

#1 Make money

(at start)

Assume business owners have personal income of $75,000 and anticipate early business income of $60,000.

How should they organize the business?



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Make money(double corporate taxation)

CorporatePass-through

$22$25Personal tax

$126$135Total income

$51$60Dividends / share

$9$0Business tax

$60$60Business income

$75$75Personal income

What is total tax?



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Lose money(flow through of losses)

CorporatePass-through

$12$1Personal tax

$75$15Total income

$0($60)Dividends / share

$0$0Business tax

($60)($60)Business loss


What is total tax?



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Zero-out income

($60)Business expense

Corporate(deductions)

Corporate(no deductions)

$25$22Personal tax

$135$126Total income

$60$51Dividends / salary

$0$9Business tax

$60$60Business income


What is total tax?



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Pass through

limited

(PCV*) All Ms agree

manager equal No

(withdraw voting)


filing *(agreement)

Manager-managed

Pass through

limited (PCV*)

All Ms agree

equal / agent

equal No

(withdraw mgmt)


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 (PHC*)

directors* fund'tal tx*

Yes(PHC*)


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)


filing*(agreement)

Limited partnership

Passthrough

Joint / sev *LLP-limited(supervise)

All agreeequal

/ agent equal

No(withdraw)


Association*

filing LLP*(agreement)

General partnership

Partnership

Change Liability Liquidity Mgmt Voting Tax Financial Formation

Organizational choices * mandatory



Organizational Choice – Hypos #2

Group Work

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The end

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organizational choicesslide

contemporary approachchapter

mgmtdistributions equal

stability corporation

filing llp

contrib filing

capital loss

b credit