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Traditional classroom Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 2 of 18 lecture homework Traditional

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Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 4 of 18 Chapter 6 (part 1) Organizational Choices Basic choices: partnerships, corporation, LLC Essential characteristics: – Formation – Liability – Owner control – Management – Financial rights – Liquidity – Change/combinations Planning considerations – Economics of choice – Tax consequences Module III – Corporate Form Citizen of world Citizen of world Law profession Law profession Corporate practice Corporate practice Bar exam Bar exam

Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 5 of 18 Two entrepreneurs … Brandon Anita Organize them …

Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 6 of 18 Organizational issues 1.Formation of business Formalities? Filing with state? 2.Liability for business obligations Non-recourse structure? Respondeat superior? 3.Owner control Voting rights? Majority or unanimous? 4.Management Discretion? Ability to bind business? 5.Financial rights Profits / losses shared? Right to payments? 6.Liquidity (transferability) Effect of withdrawal? Permission of others? 7.Changes/combinations Process of approval Protection of stakeholders 8.Tax attributes Flow-through vs entity tax Protection of stakeholders

Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 7 of 18 Organizational choices Partnerships NC NC Corporations NC NC LLCs NC NC General p-ship GP = personal liab LLP GP = ltd liab (tort) Limited p-ship General P / Ltd P LLLP General P / Ltd P Corporation Board Shareholders Public (PHC) vs. Close (CHC) C Corp vs S Corp LLC Members Member-managed Manager-managed “Limited liability corporation”

Business entity nomenclature Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 8 of 18

NC General Statutes (Business Organizations) Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 9 of 18

NC General Statutes (Business Organizations) Chapter 53 - Banks. Chapter 53A - Business Development Corporations Chapter 53B - Financial Privacy Act. Chapter 54 - Cooperative Organizations. Chapter 54A - Capital Stock Savings and Loan Associations. Chapter 54B - Savings and Loan Associations. Chapter 54C - Savings Banks Chapter 55 - North Carolina Business Corporation Act. Chapter 55A - North Carolina Nonprofit Corporation Act. Chapter 55B - Professional Corporation Act. Chapter 55C - Foreign Trade Zones. Chapter 55D - Filings, Names, and Registered Agents for Corporations, Nonprofit Corporations, and Partnerships. Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 10 of 18 Chapter 56 - Electric, Telegraph and Power Companies. Chapter 57 - Hospital, Medical and Dental Service Corporations. Chapter 57A - Health Maintenance Organization Act. Chapter 57B - Health Maintenance Organization Act. Chapter 57C - North Carolina Limited Liability Company Act. Chapter 58 - Insurance. Chapter 58A - North Carolina Health Insurance Trust Commission. Chapter 59 – Partnership [including LLP and Limited Partnership]. Chapter 59B - Uniform Unincorporated Nonprofit Association Act.

Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 11 of 18 Pass through limited (PCV*) All Ms agree managerequal No (withdraw voting) equal distributions filing * (agreement) Manager-managed Pass through limited (PCV*) All Ms agree equal / agent equal No (withdraw mgmt) equal distributions filing * (agreement) Member - managed Limited liability company - bricolage (bree-ko-LAZH) "Something created using a mix of whatever happens to be available." Pass through limited (PCV*) Board + Sh majority board directors fund'tal tx No (agreement) Dividends + salaries filing * (agreement) S Corporation (CHC) income * limited (PCV*) Board + Sh majority (PHC*) board (PHC*) directors* fund'tal tx* Yes (PHC*) dividends (per share) filing * (bylaws) C Corporation Corporation Pass through LP-ltd GP-jt/sev (ltd if LLLP) All agree LP-ltd GP-manage agreement LP-Yes GP-No (withdraw) share distributions ($ contrib) filing* (agreement) Limited partnership Pass through Joint / sev * LLP-limited (supervise) All agree equal / agent equal No (withdraw) share profits (equal) Association* filing LLP* (agreement) General partnership Partnership ChangeLiabilityLiquidity MgmtVotingTaxFinancialFormation Organizational choices * mandatory

Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 12 of 18 Pass through limited (PCV*) All Ms agree managerequal No (withdraw voting) distributions (Ms equal) filing * (agreement) Manager-managed Pass through limited (PCV*) All Ms agree equal / agent equal No (withdraw mgmt) distributions (equal) filing * (agreement) Member - managed Limited liability company - bricolage (bree-ko-LAZH) "Something created using a mix of whatever happens to be available." Pass through limited (PCV*) Board + Sh majority board directors fund'tal tx No (agreement) dividends + salaries filing * (agreement) S Corporation (CHC) income * (zero out) limited (PCV*) Board + Sh majority (PHC*) board (PHC*) directors* fund'tal tx* Yes (PHC*) dividends (per share) filing * (bylaws) C Corporation Corporation Pass through LP-ltd GP-jt/sev (ltd if LLLP) All agree LP-ltd GP-manage agreement LP-Yes GP-No (withdraw) share distributions ($ contrib) filing* (agreement) Limited partnership Pass through Joint / sev * LLP-limited (supervise) All agree equal / agent equal No (withdraw) share profits (equal) Association* filing LLP* (agreement) General partnership Partnership ChangeLiabilityLiquidity MgmtVotingTaxFinancialFormation Organizational choices * mandatory

Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 13 of 18 filing * (agreement) Manager-managed filing * (agreement) Member - managed Limited liability company filing * (agreement) S Corporation (CHC) filing * (bylaws) C Corporation Corporation filing* (agreement) Limited partnership Association* filing LLP* (agreement) General partnership Partnership Formation Organizational choices (Formation) * mandatory PartnershipCorporation Partners Corporation Board Shareholders LLC Members Example 6.1 Q: A operates a beauty shop and hires B as a receptionist. When B asks for a raise, they agree in writing that B will share in profits. Their agreement states they are a “partnership.” A: Under the UPA, they are not co-owners and thus not partners. A contributed everything to the shop and controls the business. B’s sharing in profits is only a wage increase. Their relationship is that of employer-employee, not partners.

Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 14 of 18 Manager-managed Member - managed Limited liability company S Corporation (CHC) C Corporation Corporation Limited partnership General partnership Partnership Liability Organizational choices (Liability) * mandatory PartnershipCorporation Partners Corporation Board Shareholders LLC Members Example 6.2 Q: A provides capital and controls day-to-day operations in B’s custom auto-making business. B agrees to build a car for X, but fails to perform and disappears. X seeks to hold A liable on the contract on the theory A was B’s partner, not his “banker.” A: Under the UPA, even if A and B did not intend to create a partnership, they become partners as a matter of law. By sharing profits and control, A becomes liable to X on the contract. limited (PCV*) LP-ltd GP-jt/sev (unless LLLP) Joint / sev * LLP-limited (supervise)

Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 15 of 18 Manager-managed Member - managed Limited liability company S Corporation (CHC) C Corporation Corporation Limited partnership General partnership Partnership Voting Organizational choices (Owner Voting) * mandatory PartnershipCorporation Partners Corporation Board Shareholders LLC Members Example 6.xx Q: A and B form a limited partnership to hold real estate (a shopping center). A is the limited partner and provides the capital; B is the general partner and manages the business. But their agreement specifies that A must sign all checks drafted by B. A: Under older ULPA, A may have crossed the line and become a general partner, exposing her to general partner liability. Newer ULPA S 303 (2001), says “even if … participates” not liable for LP debts. equal directors fund'tal tx directors* fund'tal tx* agreement equal

Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 16 of 18 Manager-managed Member - managed Limited liability company S Corporation (CHC) C Corporation Corporation Limited partnership General partnership Partnership Mgmt Organizational choices (Management) * mandatory PartnershipCorporation Partners Corporation Board Shareholders LLC Members Example 6.5 Q: A and B form a GP that rents properties. Their agreement does not specify who has authority if there is a disagreement. A wants to increase rents, while B does not. A sues B for lost profits that the GP could have realized if rents had been increased. A: Under the UPA, the decision of the majority governs. If two partners are equally divided, and without an agreement otherwise, the remedy is a dissolution. A’s suit fails. equal / agent LP-ltd GP-manage board board (PHC*) manager equal / agent

Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 17 of 18 Pass through limited (PCV*) All Ms agree managerequal No (withdraw voting) distributions (equal) filing * (agreement) Manager-managed Pass through limited (PCV*) All Ms agree equal / agent equal No (withdraw mgmt) distributions (equal) filing * (agreement) Member - managed Limited liability company - bricolage (bree-ko-LAZH) "Something created using a mix of whatever happens to be available." Pass through limited (PCV*) Board + Sh majority board directors fund'tal tx No (agreement) Dividends + salaries filing * (agreement) S Corporation (CHC) income * limited (PCV*) Board + Sh majority (PHC*) board (PHC*) directors* fund'tal tx* Yes (PHC*) dividends (per share) filing * (bylaws) C Corporation Corporation Pass through LP-ltd GP-jt/sev (ltd if LLLP) All agree LP-ltd GP-manage agreement LP-Yes GP-No (withdraw) share distributions ($ contrib) filing* (agreement) Limited partnership Pass through Joint / sev * LLP-limited (supervise) All agree equal / agent equal No (withdraw) share profits (equal) Association* filing LLP* (agreement) General partnership Partnership ChangeLiabilityLiquidity MgmtVotingTaxFinancialFormation Organizational choices * mandatory

Corporations: A Contemporary Approach Chapter 6 Organizational Choices Slide 18 of 18 Organizational Choice – Hypos #1 Group Work

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