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Business Associations/Corporations
University of Pennsylvania School of Law
Skeel, David A.

University of Pennsylvania
David Skeel
Fall 2015
Choice of Entity Form/Enterprise Form (Class Notes)
A.   Sole Proprietorship (simplest way):
–      Arises automatically, once you have licenses you are a sole proprietor.
–      Assumed to receive all the profits, you are personally responsible for your obligations.
–      One individual with complete control, who does the managing, collects profits, is liable for all debts of the enterprise.
–      Pass through taxation, not taxed on the profit the partnership makes.
B.   General Partnership:
–       Arises automatically.
–      Two or more people involved, who by default, share in the profits pro-rata (though profits really go per capita, b/c each person gets an equal).
–      Assumption or default rule.
–      The profits are equally split.
–      They are both personally and equally liable (appealing to clients) (joint and several liability). You may change these by entering into a contract.
–      Pass through taxation, not taxed on the profit the partnership makes.
C.   Limited Partnership:
–      Can’t arise automatically, requires a formal filing (secretary of state).
–      Pass through taxation, not taxed on the profit the partnership makes. You have 2 types of partners:
1)   Limited: Limited liability, prohibited to participate in the management of the business. Not personally responsible for the obligations. They are not required to contribute anything other than their initial investment. If partner is acting like a manager, he may be deemed a general partner, regardless of label.
2)   General: Is personally responsible for the obligations, they manage the enterprise/business. Have joint and several liability.
You may make a corporation the general partner in order to cheat on the liability rule.
D.   Corporation:
–      Whoever can manage the company. Shareholders may manage the company, no limit on them managing it.
–      Shareholders have limited liability, not personally responsible for the company’s obligations.
–      Subject to 2 levels of tax (double taxation):
1)   Corporation is taxed on the profits they make. How can we make this corporate level tax disappear? Make the profits go away by creating business expenses (pay a big salary to the shareholders à zeroing out your profits. Sometimes double taxation is better than single taxation depending on the tax rates.
2)   Shareholders are taxed when they receive part of those profits.
New Enterprise Forms:
E.   Limited Liability Partnership LLP:
–       Very much like the General Partnership, except that the general partners have limited liability (except for torts and malpractice liability).
–      Profits are personal.
–      Gets pass through taxation.
–      Used by law and accounting firms.
–      They can now be actively traded (example: Real Estate Interest Trusts REITS), but they lose their pass through taxation.
F.   Limited Liability Limited Partnership LLLP:
–       Has limited partners and general partners.
–      General partners have limited liability.
–      Gets pass through taxation.
–      Different from LLP à keeps the limited partners from managing, if limited partners manage, general partners can go to court and get an injunction.
G.  Limited Liability Company LLC:
–      Very much like a corporation, but with some technical differences. Members instead of partners.
–      Gets pass through taxation (primary corporate characteristic).
–      Limited liability (primary partnership characteristic).
–      For a corporation you can waive most fiduciary duties but not all.
–      For an LLC Delaware is trying to eliminate fiduciary duty.
H.   S-Corp:
–      Corporation but if it satisfies a certain amount of conditions it may pass through taxation.
1)   No more than 100 shares.
2)   Only one type of shares/1 class of stock.
3)   You can’t have institutional shareholders, all stockholders must be individuals or qualified trusts.
4)   No nonresident aliens
Examples of Business Entities:
1.    Starbucks: Corporation
–      Why not an LLC? Would lose pass through taxation. If the corporate interest is publicly traded on an exchange, the IRS treats it as a corporation and taxes on entity level.
–      They have double taxation; can’t be an S-Corp because there are too many shareholders.
–      Want stock liquidity; corporation stock histori

sts of transfers of interest.
2.    Value of shares is independent of the assets of their owners.
3.    Free transferability permits the development of large capital markets à Advance thanks to centralized management.
–      Analytical distinctions à Differences between corporations:
1.    Public corporations and closely held/closed corporations.
2.    Controlled corporations (by a single shareholder or a small group of affiliated persons) and corporations that are not controlled this way (control resides within the company’s incumbent management).
A.   Closed Corporations: Businesses that incorporate for tax or liability purposes rather than for capital-raising purposes.
–      Tend to be small à their shareholders are usually the directors and officers. Usually take their return as a tax deductible salary rather than as a dividend.
–      Their charters/associated shareholder agreement à May put restrictions on transfers of shares. à “Buy/sell agreements”, commitments to make further capital contributions.
B.   Public Corporations:
–      Foresee a need to raise capital
–      Adopt all the basic rules of a corporation
C.   Controlled Corporations:
–      Ownership structure à How a company’s stock is held and who controls its voting rights.
–      Controlled corporations à A single or a group of shareholders exercises control through its power to appoint the board.
–      “In the market” control à Anyone can purchase control of the company by buying enough stock, but, until they do, no shareholder or small group exercises control. Practical control resides with the existing management of the firm.
–      Major problems in corporate law à Relations between “outside” investors (lack power) and ‘insiders” (control the company’s assets).