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Business Associations/Corporations
South Texas College of Law Houston
Rosin, Gary S.

 
A.       Selection of the Business Form
1.         For limited liability, corporation or LLC is the only way to go.. However, most lawyers say don’t use them. Why?
a)         Insurance can alleviate most liability concerns – liability is thus only a real concern “at the margins,” beyond insurance coverage (and even this may not be worth using the corporate form, since failure to carry enough insurance is a reason to “pierce the corporate veil”)
b)        For a new corporation banks will typically require personal guarantees anyway (but may be able to convince them to take a security interest in corporate property instead)
2.         Other considerations
a)         Legal – sometimes the choice of form is restricted legally (ex.: lawyers must practice using one of the partnership forms; regulated industries have special rules). In most cases, this isn’t a big concern, though.
b)        Taxes – (this is usually the #1 factor)
(1)      Corporations (“C Corps”) are subject to double taxation (corporate income, then dividends are taxed when received by individuals)
(2)      Partnerships treated as pass-through entity, so no double tax
(a)      S Corp can give partnership treatment to corporation, but is very restrictive (£35 shareholders, no alien or corporate shareholders, only one class of stock, etc.)
(3)      Also note: have to beware state taxes on various forms as well (Texas taxes corporations, LLC’s)
c)         Informality, Flexibility, Cost – (Partnership is best; however, these aren’t generally important considerations)
d)        Continuity of Life – corporation is best
e)         Centralized Management – corporation usually better because of Board requirement (MBCA §8.01(b)); however, partnership can be structured in centralized fashion by agreement (i.e., UPA §18 can be modified)
f)          Free Transferability of Interest – corporation usually better (UPA §27 [assignment of interest] and §18(g) [unanimity to admit new members] restrict partnerships, but can be modified by agreement; MBCA §6.27 allows restrictions in corporate charter)
3.         Corporations have nonetheless predominated because of the dispersion of wealth and the need for large amounts of capital.
II.        Formation of the Corporation
A.       A Brief History of Corporations
1.         Initially

dicial interpretation snowballed it from there.
b)        Two theories on state incorporation statutes:
(1)      Prof. Cary: “Race to the Bottom” – argues that Delaware’s flexibility, motivated by a desire to generate revenues for the state (i.e., franchise taxes), are too flexible and benefit management to the detriment of shareholders. He wants federal incorporation.
(2)      Prof. Winter – Free market solves the problem – stock price reflects risk of incorporation in a state with permissive laws. Argues that competition between the states is healthy.
c)         Issues in deciding Delaware vs. local incorporation (Prob. #3)
Pro-DE: Because so many corporations are incorporated there, the case law is more developed (and thus more predictable) than in other states; the lawyers in DE have more experience with corporate matters; most lawyers are familiar with DE law anyway (out of necessity); DE is very pro-management