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Business Associations
University of Iowa School of Law
Kurtz, Sheldon F.

 
Business Associations Outline
Spring 2014 – Professor Kurtz
 
I. BUSINESS FORMS
 
A)   SOLE PROPRIETSHIP
1)    A business owned by a single person (sole proprietor)
a)    Who has not filed the paperwork to operate the business in some other form
b)    Default entity – but owner can opt into some other form by filing paperwork (with sec of state office)
c)    No distinction between owner and the business; no legal distinction
(i)     All assets of business are owned by individual
2)    Governing Law
a)    No separate body of sole proprietorship law
3)    Management
a)    Sole proprietor entitled to make all business decisions
4)    Liability Exposure
a)    Sole proprietor is personally liable for the obligations of the business
5)    Taxation
a)    Sole proprietor is entitled to any income generated by the business and bears any losses
b)    Reports net income/losses from business on personal tax return (business doesn’t file a separate tax return
6)    Legal Name
a)    Official legal name is the sole proprietor’s legal name
b)    Many business say “DBA” doing business as and add the name of business
 
B)   PARTNERSHIP (GENERAL)
1)    For-profit business with two or more owners who have not filed paperwork to operate the business in some other legal form (default but can opt into another)
2)    Governing Law
a)    Partnership is governed by the partnership statute of state where it’s organized (RUPA)
b)    Partnership statutes mostly default rules that partners can opt out of in partnership agreement (ie. Partners share profits equally – RUPA §401b), but some you can’t opt out of
3)    Partnership Agreement
a)    Most have written agreements signed by each partner that addresses:
(i)     Management structure
(ii)    Allocation of profits/losses
(iii)   Partner taxation
(iv)   Admission and withdrawal of partners
(v)    Dissolution
b)    Oral agreements aren’t advisable, often leads to future disputes
4)    Management
a)    Management structure typically specified in partnership agreement, common approaches:
(i)     Partners select a managing partner general vested with the authority to make all decisions
(ii)    Partners select a management committee composed of partners generally vested with the authority to make all decisions
(iii)   Partners al get a say in managing the business, with each partner having an equal vote
(iv)   The partners all have a say in managing the business with each parting having voting power in accord with partner’s capital contribution to the partnership
b)    Default Rule for management structure: each partner has equal rights in the management of the partnership (RUPA §401(f))
5)    Liability Exposure
a)    Each partner is personally liable for obligations of the partnership (RUPA §306(a))
6)    Taxation
a)    Pass-through taxation: Normally taxed under Subchapter K – general partnership not required to pay federal income tax under Sub-K
(i)     Instead, partnership allocated profits/losses to partners pursuant to partnership agreement (or statute if no agreement)
 
C)   LIMITED LIABILITY PARTNERSHIP (LLP)
1)    For-profit business with two or more owners that has filed a “statement of qualification” with a secretary of state office (RUPA §1001(c))
2)    Partners are NOT personally liable for the obligations of the partnership
3)    Governing Law
a)    Simply a general partnership that has elected LLP statute under application provisions of the general partnership statute (governed by general partnership statute of the state – don’t have separate LLP statutes)
4)    Partnership Agreement
a)    Most LLPs have a written partnership agreement signed by each partner
b)    Agreements typically cover same things as GP’s b/c same governing law
5)    Management
a)    Same as GP
6)    Liability Exposure
a)    Partner liability exposure is distinguishing factor of LLP: All states except for Louisiana and SC provide a full liability shield
(i)     FULL LIABILITY SHIELD: LLP partner is not liable for any obligations of the partnership solely because he or she is a partier – a partner is, however, still liable for his own negligence, wrongful acts, or misconduct
7)    Taxation
a)    IRC treats LLP exactly the same as a general partnership
 
D)   LIMITED PARTNERSHIP
1)    LP is a partnership with one or more general partners and one or more limited partners that has filed a “certificate of limited partnership” with a secretary of state office ULPA
a)    General partners in an LP are the same as general partners in a GP (management rights but no liability shield)
b)    Limited partners in an LP have no management rights but do get a liability shield
2)    Governing Law
a)    Governed by the LP statute of that state where organized (ULPA)
3)    Limited Partnership Agreement
a)    Most LP’s have written LP agreements signed by each partner – usually covering the same stuff as a GP agreement, plus additional provisions addressing the rights and obligations of the limited partners
b)    LP statutes composed mostly of default rules so an LP agreement tailors the rules to the specific needs and preferences of the partners
4)    Management
a)    Distinguishing feature of the LP is that it is managed by the general partners with the limited partners having no rights to participate in the control of the business
(i)     If more than one general partner: the LP agreement will specify how management rights are allocated among the general partners
5)    Liability Exposure
a)    If business fails: Limited partners will lose whatever they paid into the partnership in exchange for their limited partnership interests, but their personal assets will not be on the hook for any unpaid obligation of the limited partnership, unlike the personal assets of general partners
6)    Taxation
a)    IRC treats an LP exactly the same as a general partnership
 
E)   CORPORATION
1)    Business that has filed “articles of incorporation” or “charter” with a sec of state
2)    Limited liability for all of its owners (Shareholders) and management authority vested in a board of directors elected by the shareholders
3)    Governing Law
a)    A corp is governed by the law of the state in which it is incorporated (MBCA/DGCL)
4)    Governing Documents – always consult companies docs and the applicable statute
a)    Required to have a charter and bylaws (collectively “governing documents”)
b)    Charter specifies:
(i)     Corp’s name
(ii)    Types of stock it is authorized to issue
(iii)   The rights and preference of any preferred stock
(iv)   And an office and agent for the service of process in the state of incorporation
c)    By-Laws specify rules regarding the governance of the corporation
(i)     Notice and quorum requirements for the board and shareholder meetings
(ii)    Number and qualifications of directors
(iii)   Voting standard

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b)    A single-member LLC is typically taxed like a sole proprietorship
 
G)   OTHER FORMS:
1)    Limited Liability Limited Partnership LLLP
2)    Professional Corporation
3)    Professional Limited Liability Company
4)    Close Corporation
5)    Series Limited Liability Company
6)    Nonprofit Corp
7)    Low-Profit Limited Liability Company
8)    Benefit Corporation (B Corp)
9)    Business Trust
10) Joint Venture
a)    More of a business concept than a legal concept
b)    Two or more business or individuals combine resources to pursue a discrete business opportunity or venture
c)    Common to form a joint venture entity: like an LLC or corp to house the joint business, otherwise relationship falls under GP
 
H)   KEY CONCEPTS
1)    Internal Affairs Doctrine
a)    Each state has its own statutes for business entities and the statute that applies to a particular business entity is that statute of the state in which the business was organized: technically a choice of law rule
b)    Consequence of IAD: a business entity can choose which state’s statute it wants to be governed by
2)    Default v. Mandatory Rules
a)    Default rule: one that can be altered by agreement between the parties
(i)     Basic idea is to establish a set of rules that works well for most businesses
b)    Mandatory rule: one that applies regardless of a contrary agreement by the parties
(i)     Under the MBCA: unless a corp law statutory provision specifies that a rule can be altered, the rule is mandatory
(ii)    May be able to get around mandatory rules by established a different organizational form
3)    Majority v. Minority Owner Perspective
a)    Because of their level of control, majority shareholders do not have to alter the default rules to include protections like preemptive rights, because they are implicit in complete control
b)    Unless a minority shareholder insists on alterations to the defaults rules he will have zero say on how the corp is run: changes to default rules are often driven by minority shareholders in an effort to have some say in how the corp is run.
4)    Public v. Private Companies (same corp law statute applies to both private and public)
a)    Public Company: shares are traded on a public secondary market (publicly traded)
(i)     Maj. Of public companies are organized as corps – some are LPs or LLCs
(ii)    Usually much larger than private companies
(iii)   Primary advantage of going public is that it leads to a secondary trading in the company’s stock on a public market (ie. Liquidity)
b)    Private Company: Shares are not publicly traded
(i)     Sometimes referred to as “closely held” b/c smaller number of owners
(ii)    A company that starts out as private may later choose to go public