Choice of Business Form—————————————-
a. Every business organization serves as an investment vehicle for the pooling of money & labor, & each organizational form must resolve the following issues:
i. when does the investment begin & end?
ii. what is the return on the investment?
iii. who manages the investment?
iv. how can investors get out?
v. what are investors’ responsibilities to others?
i. General Partnership—B & R arrange to carry on a business while sharing control & profits, thus automatically creating a p’ship; as partners they are each individually liable for p’ship obligations; p’ships are common in service industries (i.e., law, accounting, & medicine) where trust must exist among the participants & capital needs usually aren’t that great
1. formation & duration—created when 2+ persons associate to carry on a biz as co-owners to share profits & control; it doesn’t require legal documentation
a. a profit-sharing arrangement creates a presumption of p’ship even if the parties don’t intend to be partners
b. a general p’ship w/o a definite term (at-will p’ship) dissolves upon the w/drawal of any partner
c. absent an agreement, the w/drawing partner may demand that the business be liquidated & the net proceeds be distributed to the partners in cash
d. note: a p’ship can obtain limited liability by filing a statement of qualification/registration w/ state officials as an ltd. liability p’ship (LLP); LLP statutes protect the personal assets of partners from the risk of negligence/malpractice by others in the firm
2. financial rights (claims on income stream & firm assets)—partners share equally in profits & losses, unless agreed otherwise; a partner may enforce the right to profits in an action for an accounting; partners have no right to compensation for their services, unless provided by agreement; on dissolution, after discharging p’ship obligations, profits & losses are ÷ among the partners
3. authority to bind & control the business—each partner is an agent of all other partners & the p’ship & can bind the p’ship, either by transacting biz as agreed by the partners (actual authority) or by appearing in the eyes of 3rd parties to carry on p’ship biz (apparent authority)
a. unless otherwise agreed, a majority vote of the partners decides ordinary biz matters, but anything that is extraordinary or in contravention of the agreement requires unanimity
b. partners have fiduciary duties to each other to act in good faith w/ due care & undivided loyalty—among other things, partners must inform co-partners of material information affecting the p’ship & share any benefits from transactions connected to the p’ship (a breach of fiduciary duty is actionable in court)
c. policy—“with the broad powers come duties”
4. withdrawal & transferability of ownership interests—a partner cannot xfr her interest in the p’ship unless all the remaining partners agree or it is permitted by the p’ship agreement; a partner may xfr her financial interest in the profits & distributions, though (usually to a creditor)
5. liability to outsiders—general partners have unltd. liability for p’ship obligations such that their personal assets are @ risk for p’ship obligations, whether contractual or from misconduct (torts) of the partners or p’ship; joint & several liability of partners
a. p’ship assets must first be exhausted b4 a 3rd party can reach the personal assets of individual partners
b. LLP partners avoid personal liability for p’ship obligations, unless the partner’s own conduct makes him personally liable or the partner “supervised” the wrongful conduct of another partner or associate
6. tax implications—flow through taxation
ii. Limited Partnership—B & R organize a ltd. p’ship in which ltd. partners provide capital & are liable only to the extent of their investment; general partners run the business & are fully liable for p’ship debts; there must be at least one general partner & if a so-called ltd. partner attempts to exercise control over the business, he c/b found to be a general partner (note: a partner c/b an individual or any other entity, including a corporation)
1. formation & duration—arises when a certificate is filed w/ a state official; lasts as long as the parties agree or (absent an agreement) until a general partner w/draws
2. financial rights—ltd. & general partners share profits, losses, & distributions according to their capital contributions, absent a contrary agreement; pre-dissolution distributions are by agreement, as is compensation of the general partner(s)
3. authority to bind & control the business—general partners hav
erest unless all the members consent, but xfr of financial rights to creditors is usually ok
5. liability to outsiders—LLC members, both in their capacity as capital contributors & managers, are not liable for LLC obligations; but doctrine of veil-piercing does apply in the LLC context
6. tax implications—usually flow through, but can decide if want to be double-taxed
d. Corporation—a legal entity where shareholders provide capital & directors & officers manage the business; corporation participants ≠ personally liable for corporate debts, only the corp. is liable; a corp. is the principal means of organizing businesses w/ complex organizational structures & large capital needs, but the corporate form can work for any size business
1. formation & duration—arises when articles of incorporation are filed w/ a state official; corporate existence is perpetual regardless of what happens to shareholders, directors, or officers
2. financial rights—allocated according to shares; distributions, from surplus or earnings, must be approved by the BOD; directors & officers have no right to remuneration except as fixed by K
3. authority to bind & control the business—the corp. has a centralized MGMT structure where its biz & affairs are under the MGMT & supervision of the BOD
a. officers carry out the policies formulated by the board
b. shareholders elect the board & decide specified fundamental matters, but they cannot bind the corp.
c. corporate directors & officers owe fiduciary duties of care & loyalty to the corp. & to shareholders
d. controlling shareholders also have more ltd. fiduciary duties, principally in exercising their control when the corp.’s biz is sold
e. shareholders may seek relief on behalf of the corp. in a derivative suit for breaches of corporate fiduciary duties
4. withdrawal & transferability of ownership interests—corp. shares are freely transferable unless there are specific written restrictions