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Business Associations/Corporations
Southern Illinois University School of Law
Gross, Leonard

CORPORATIONS OUTLINE:
 
PART ONE: CLOSELY HELD CORPORATIONS
I.                   CHARACTERISTICS OF BUSINESS ENTITIES:
A.    CORPORATION:
1.      Entity Status: corporation is a legal entity, separate from its shareholders, created under the authority of legislature.
a.      Formation: must be issued a certificate of incorporation after filing articles of incorporation (or it’s a general partnership).
2.      Limited Liability: shareholders normally aren’t responsible for debts.
a.      Extent of liability: liability is limited to the amount of their investment.
3.      Free Transferability of Interests: ownership interests in a corporation are represented by shares, which are freely transferable.
4.      Centralized Management and Control: a corporation’s management is centralized in a board of directors and officers.
a.      Shareholders: have no direct control over the board’s activities.
5.      Duration-Continuity of Existence: corporation is capable of perpetual duration.
a.      Effect: corporation’s existence continues notwithstanding the death or incapacity of its shareholders or a transfer of its shares.  
6.      Taxation: corporation is treated as an entity for tax purposes, so that it is taxed on its own income.
a.      C Corporation (2 level of taxation): if the corporation pays a dividend to its shareholders, the shareholders are taxed on the dividend (in addition to the corporation’s income taxation).
1)      Zeroing out: can avoid taxes at corporate level by having income distributed not as dividends but salary.
a)      Problem: not all the $ is deductable (IRS may only allow a reasonable salary and make the rest a dividend distribution).
b.      S Corporation (1 level of taxation): (aren’t treated as entities for tax purposes) shareholders are taxed on their pro rata share of the corporation’s income (and can claim a pro rata share of the corporation’s losses).
1)      Requirements: corporations that have (all):
a)      75 or fewer shareholders.
b)     Only one class of stock with respect to voting rights.
c)      No nonresident alien shareholders.
B.     GENERAL PARTNERSHIP:
1.      Defined (UPA § 6): an association of 2 or more persons to carry on as co-owners of a business for profit.
a.       2 essential elements of a partnership:
1)      Community of interest in the business.
2)      Sharing of profits.
2.      Formation: a written agreement is not ordinarily necessary to create a partnership.
a.       Ascertaining terms: may be difficult to ascertain terms however (will get default terms under UPA).
3.      Aggregate status: a partnership is an aggregation of 2 or more persons who are engaged in business as co-owners.
a.      Entity treatment: although not a legal entity, a partnership is treated as one for certain purposes (e.g., ownership and transfer of property).
2.      Unlimited liability: every partner is subject to unlimited personal liability on partnership debts.
a.      Joint and several: partners are jointly and severally liable for wrongful acts and breaches of trust; they are only jointly liable for debts and obligations of the partnership.
C.    LIMITED LIABILITY PARTNERSHIP (LLP):
1.      Liability: general partner isn’t personally liable for partnership obligations arising from negligence, wrongful acts, and misconduct absent her involvement in the conduct.
a.       Limitation: no exclusion for contractual obligations and the acts of those working underneath you.
D.    LIMITED PARTNERSHIP:
1.      General: partnership having as its members general partners and limited partners.
a.       General partner: assumes management responsibilities of the partnership.
1)      Liability: full personal liability for partnership debts (like a partner in a regular partnership).
b.      Limited partners: makes a contribution of cash or other property to the partnership and obtains an interest in the partnership’s return’s but is not active in management.
1)      Liability:isn’t liable for partnership debts beyond her contribution.
2.      Formation of Limited Partnership: certificate of limited partnership mus

about being held liable for taking part in control.
1)      Law office: can form, but can’t avoid personal liability for professional negligence.
b.      Tax Purposes (Check-the-Box Regulations): can be treated like a partnership for tax purposes.
1)      Compared with S corporation: better tax flexibility than s corporation but higher filing fees.
2.      Creation of the LLC:
a.      Filing: must file articles of organization with the SOS.
1)      Components of articles:
a)      Must be 18.
b)     Name purpose.
c)      Name of registered agents.
d)     Names and addresses of managers (or members if not professionally managed).
b.      Existence: LLC comes into existence when SOS stamps filed on articles of organization.
c.       Name of LLC: got to have some indication that it is an LLC in the name.
1)      Name must be distinguishable on the records of the SOS office (not like another name).
d.      State of registered agent: LLC has to be maintained in the state of registered agent.
e.       Records: LLC has to keep certain records at its offices.
1)      Names.
2)      Contributions.
3)      Articles of organization.
4)      Tax returns.
5)      Operating agreement: sets forth details of who has power to bind organization.
a)      Not necessary: LLC can be formed without operating agreement (but probably malpractice if you don’t).
3.      Compared with corporations:
a.      Similarities (exclusions): LLC is like a corporation and same exclusions to corporations under the Constitution apply.
1)      Package Liquor: LLC isn’t eligible for the issuance of a retail package liquor store (resembles a corporation).