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73 Cards in this Set
- Front
- Back
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5 factors to consider when drafting?
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Money
➢ [2] Risk—the amount of risk your client is willing to take • S says to focus on this • Think in the hypos about how things could have changed if one of the parties had done something in advance to alleviate/mitigate the problem ➢ [3] Control—who will be the primary decision maker in the business ➢ [4] Standards—whether there is an obligation to act in good faith; standards of conduct ➢ [5] “End game”—many clients don’t want to consider this b/c they think its unlikely ➢ [6] Sokolow’s 6th Factor—Tax—what is the total tax liability of the business and the owners |
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• GP
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partners are all personally liable for debts and obligations—always want to avoid this type
• Default form of BA where you have a business with more than one owner—to get any other type you have to file a doc |
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Closely-held (CHC)
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• 2 Primary Characteristics
• (1) Family or close friends • (2) No market for ownership interest in the corporation—you cant get out! • Freeze out—majority shareholders exercise undue influence on the minority shareholder to force them out |
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Publicly-held (PHC)
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• Usually state law but an overlay of fed law—federal securities law
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• §6(1)—Definition of partnership
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An association of two or more persons to carry on as co-owners a business for profit
➢ NOTE: Intent is not relevant in determining whether there is a partnership ➢ NOTE: “Persons” not individuals ➢ The issue will usually be whether they are carrying on as co-owners |
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• RUPA §202(a)—analog to UPA §6
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association of 2+ persons to carry on forms a partnership without regards to intent—this makes clear that intent is irrelevant
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➢ Are they co-owners?
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Look to §7(4)—person entitled to receive a share of profits is presumed to be an owner but may be rebutted with evidence
➢ §7(4) has 5 safe harbors—no presumption ➢ §7(3)—receiving a share of gross receipts does not of itself lead to the conclusion that the recipient is a partner • Gross receipts refers to a percentage of every $ that comes in—no presumption • Profits= Revenue – Costs—presumption |
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➢ §18(f)—
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default rule—person who is a partner is not entitles to compensation BUT subject to agreement otherwise—partnership agreement need not be in writing
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➢ Down sides to negotiating an agreement upfront
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[1] Costly
• [2] One party is afraid that the other party will just walk away bc there are too many restrictions |
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• §18(a)—default rule on profits
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each profit shall share equally in profits and surplus after dealing with liabilities—in the first hypo this appears to reflect the default rule
➢ NOTE: imbalance in statute to favor partner that provides cash to the partnership as opposed ot the partner providing services |
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18(e)—
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all partners have equal rights UOA (unless otherwise agreed) EXCEPT limiting liability
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• §15 - liability default
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all partners are J/S liable for partnership torts and jointly liable for all other obligations—therefore partners are personally liable and NOT subject to agreement—designed to protect a 3rd party at the expense of the partners
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• Entity v. Aggregate Views
➢ Whether partnership is an entity separate from individuals or whether an aggregate |
• For the most part this Q has been resolved—RUPA §201a—P is an entity distinct from its partners—therefore entity view of partnership has prevailed—under UPA there were mixed views—not relevant in the real world
• Makes sense to think of P as entity—P is liable for any partnership obligations that arise in conduct of business even though UPA doesn’t say so; P is entitled to sue and be sued and own property so from practical standpoint SE |
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➢ UPA §16—
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• People don’t form P by E; its an equitable doctrine designed to protect an innocent 3rd party who is somehow mislead into believing that a P exists
• Suggest methodology— • [1] Look for whether a P is formed (§§6-7)—and liability will be determined from §15 • [2] If no P—may still be liable under PBE doctrine—“as if”-- §16 • Ex.) X wants to borrow money from a bank and says that Y is his partner even though he isn’t. In reliance on that representation, the bank loans money. Both X and Y will be liable as partners. ➢ NOTE: If X goes in and just says Y is partner that’s not enough. |
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➢ RUPA §308
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Doctrine has a different name but operates in essentially the same way—Purported Partner Doctrine (PPD)—if people purport to be partners the law may hold them liable as if Ps because they created an appearance in the mind of a 3rd partner that a P was formed
• NOTE: PBE operates a lot like the concept of apparent authority that is raised by today’s assignment. Even if the A did not have actual authority to bind the P, the P may be liable where the P created the appearance of authority. It’s only fair to do this. |
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➢ Basic Principles of Agency Law Tort
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• Tort—Master is liable for a tort committed by a servant acting within scope of employment
• Is master vicariously liable for tort committed by servant? • 2 Qs need to be resolved: ➢ [1] Was tort committed by servant or independent contractor • I/C= Employer not generally liable • Note 3 P. 20—lays out reasons employer is generally not liable for I/C torts ➢ [2] Was employee tort within scope of employment? • How substantial was the deviation? • Detour—minor deviation—ignore this deviation and M is still liable • Frolic—major deviation—outside scope of employment so no M liability • Ex.) Truck driver deviates from regular route and goes 2 miles off route to meet friends for a beer on a weekday. This is way outside job description so if involved in accident afterwards this is a frolic. |
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• I/C v. employee
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• Can employer physically control the way the employee does the job
➢ Courts are likely to tip the scales in favor of innocent 3rd party to allow party to sue servant and master • Where do they perform job? • Who supplies tools? • Degree of difficulty of job? • Part of employer’s regular business or one-off thing? • Does employee get paid regularly as salary? |
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Agency - K
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A is entering into K with 3rd party
• Will P be liable to 3rd party on K? • Liable if: • [1] P gave A actual authority • [2] P gave apparent authority • [3] P ratifies K after the fact |
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Actual Authority—conferred by P on the A
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• Types pf AA
➢ Express—P expressly tells A to act on P’s behalf ➢ Implied—derives from reasonable inferences that A draws from P’s conduct • Ex.) A goes to the coop and charges to P’s account. P pays and says nothing against it. When A does it again its implied AA |
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Apparent Authority
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arises where P creates appearance of authority in mind of innocent 3rd party
• NOTE: equitable doctrine designed to protect innocent 3rd party |
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Liability -
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➢ Tort—assuming tort committed in scope of employment—J/S liability
• J/S—procedural—3rd party can join master and servant together as ∆ and sue them both in the same law suit • S Liability—3rd party can go against either one for the full amount of the obligation—likely scenario to go after master b/c deeper pocket—of course master can pass liability onto servant, but if servant has no assets, wealthy master is still liable ➢ K—P/A/3rd party—to what extent will P be liable on K entered into with 3rd party |
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• Termination of Actual and Apparent Authority
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➢ P can terminate by telling A “Don’t do it again”
➢ BUT the fact that actual authority has been terminated will not operate to terminate apparent authority b/c that exists in the mind of 3rd party • The only way to terminate apparent authority is to go to 3rd party and say “A no longer has power to bind me”—this is why apparent authority is sometimes known as “lingering authority” • So what to do to dissolve apparent authority—advertise to potential creditors • Think in terms of risk—how to minimize risk of lingering apparent authority |
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➢ Monitoring and Bonding Costs
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From an economic perspective, there are certain agency costs associated with hiring an agent:
• Monitering—costs that are generally incurred by P to make sure A is doing a good job • Bonding—costs initially incurred by A to provide security and assurance • Ex.) Decide you don’t want to clean your house and look in yellow pages to find a maid service. Some of them are bonded and some are not. If bonded, there is insurance to cover anything that gets broken. They are designed to provide you, as P, with peace of mind that things wont go wrong. |
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• Inherent Authority
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authority to take a particular act on behalf of someone else inheres in the position itself
➢ Ex.) President of corporation might have authority to enter into Ks b/c it comes with position ➢ 2nd Rest—concept of inherent authority is generally only relevant when you are discussing an undisclosed P—essentially if you don’t see actual or apparent authority, look for inherent authority • 3 Types of P—not super important • Disclosed—3rd party knows there is a P and knows the identity • Partially disclosed—3rd party knows there is a P but not the identity • Undisclosed—3rd party does not know there is a P |
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• Ratification of K
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➢ [1] Express—
• In business context, in the form of a resolution—ratification of a director’s action after the fact—generally involves BOD ➢ [2] Implied—from P’s conduct • Generally involves P knowingly accepting the benefit of the K—cannot ratify in ignorance!! ➢ NOTE: Ratification is retroactive to time of K!!! • Just as if ratifying party had been a party to the K from the very beginning. • B/C ratification is retroactive, we need to be protective of the rights of an intervening bona fide purchaser—so that it wouldn’t be fair for the ratification to occur • Ex.) X sells Y’s car for $6K. Later on X Ks to sell the car to Z for $5K. Can Y ratify X’s earlier sale when he learns about it? • NO!! B/c that wouldn’t be fair to Z. • Moral—always look out for rights of intervening GFP who would be hurt |
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• Steps for determining authority
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1] Look at time K was made
• Actual? • Apparent? • Inherent? ➢ [2] If there was no authority at time of K • Ratification? • Intervening GFP? |
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• UPA §18 - management default rule
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unless otherwise agreed—§18(e) all Ps have equal rights in mgmt
• §18(h)—in ordinary business a majority rules |
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• UPA §9
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governs with partnership is liable for K entered into by one of the Ps—every P is A of partnership for purpose of business—confers statutory actual authority on each and every P
• “the act of every P.. for apparently carrying on the usual way…binds the partnership UNLESS P has no actual authority AND 3rd party knows it • SO §9 contains combination of actual and apparent authority to bind the partnership • But even though there is nothing in §9 to allow Ps to override statutory authority as a practical matter Ps can agree to negate actual authority that is conferred by statute • Essential even though there isn’t UOA, you can still do that |
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• UPA §15(b
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Ps J liability under Ks and J/S liability under torts—but this isn’t what it actually says but this is how its interpreted!
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• RUPA §306
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significantly different from UPA
➢ §306a—except as otherwise provided—all Ps liable J/S for all obligations of partnerships UOA by claimant or provided by law • RUPA §307(d)—3rd party cannot recover from a P individually on a partnership obligation unless first exhausting partnership resources ➢ NOTE: Exhaustion requirement does not appear in UPA ➢ RUPA tries to create balance by making all Ps J/S liable regardless of how it happens but also tries to protect Ps with exhaustion requirement ➢ NOTE TX law is analogous to RUPA |
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• UPA §17—deals with liability of incoming P
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➢ This is in the portion of UPA dealing with liability of firm and 3rd parties.
➢ New P is liable just like all of the other Ps for debts incurred prior to his joining EXCEPT the liability is satisfied only out of that P’s interest in the partnership • Essentially cut new P slack when it comes to pre-existing debts and obligations ➢ RUPA §306(b)—similar wording |
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• UPA §§13-14: Tort stuff (J/S Liability)
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➢ When looking at P’s liability on tort, don’t ask whether P is servant. Only ask whether in the ordinary course of business
➢ Roach v. Meade—3rd party sued 1 P for an act of malpractice committed by another P—malpractice may occur in ordinary course of business |
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• LLP
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➢ Virtually everything about this is the same as GP EXCEPT—No V/L for the torts of others and Ks
➢ RUPA §306(c) P. 54 of Supp.—no analogous provision in UPA |
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LLP "Costs"
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➢ [1] Must file document containing info laid out in RUPA §10.01? – statement of QF
➢ [2] In most states like TX, you must renew every year and pay the fee. If you don’t, you may become liable ➢ [3] Must include in name, words or initials that indicate that you are operating as an LLP to put 3rd parties on notice ➢ [4] In some states, LLP must purchase a minimum amount of liability insurance in order to protect 3rd parties that might be harmed by the limited liability that LLP affords—most states follow RUPA and do not have minimum but TX does • NOTE: Other forms of BA don’t have to do this • “Stacking” liabilities |
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• Partner Sharing Profits
➢ UPA §18—Default rule |
profits equally UOA
• NOTE: Does not matter if capital is invested unequally |
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Losses
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Loses are split in the same proportion as profits UOA
➢ Initial Hypo: A puts in 100K capital and B puts in nothin |
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• UPA §18(f)—compensation for services
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UOA no compensation for services—keep in mind the disparity between 18a and 18f—its clear that 18a favors the person who supplies the capital and disadvantages the person who provides the services
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JV
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modern view rejects separate characterization of GP and JV—so if you get a JV then just apply the rules of GP—the only difference is that a JV, at least in TX, requires an explicit agreement as to how losses are to be shared, whereas a GP does not b/c of default §18 rule—but the end of the day this doesn’t even mater
• JV= to carry out • GP= to carry on • This suggests a limited purpose for a JV and smaller in scope but this is misleading b/c you can have a JV between 2 companies where scope is enormous and you can have a GP that is designed to accomplish a narrow undertaking with a definite ending |
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• Accounting
Balance Sheets |
Balance Sheet—2 sides
• LH side—assets • Assets= cash + inventory + accounts receivable • RH side—liabilities + equity • Equity= owner’s interest in the business • Account payable= fancy word for liability |
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FMV on Balance Sheet
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➢ Assets on a balance sheet are reflected as historical costs—what the firm paid for the inventory NOT the FMV
• SO you don’t know what the inventory is actually worth at the time the sheet is produced • Historical costs are used b/c of reliability—FMV changes all the time • NOTE: Stocks and securities in publicly traded corporation are reflected as the lower of historical cost OR value at the time the balance sheet is created |
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➢ Balance sheet may not be so reliable—2 reasons
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• [1] Assets are generally reflected at historical cost which might not be a reflection of FMV so if someone is trying to figure what to pay for the business they will have to investigate further
• [2] Accounts Receivable—there is no complete assurance that the person who promises to pay will make good on the promise |
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➢ Formula for determining depreciation
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Purchase Price – Salvage Value) / Useful Life
• Ex.) Buy truck for 20K with useful life of 10 years. Salvage value is 2K. Therefore you can depreciate (20 – 2) / 10 = $1800 |
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➢ UPA §40(b)—rules for distribution for winding up partnership affairs
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Jingle Rules -
Third party creditors have priority over partner creditors!!! • [2] Partners who are creditors • [3[ Partner capital contributions • [4] Partnership profits |
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➢ Intangibles not reflected in purchasing a business
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➢ Goodwill—reputation—not reflected on balance sheet or profit/loss sheet—needs to be factored in to determine what a business is worth
➢ Other ratios—like return on investment—that are useful to determine what a business is worth |
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➢ Fiduciaries that owe duties to each others—established by Meinhart v. Salmon—
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the most famous partnership case there is—stands for the principle that Ps are fiduciaries and they owe the Ps and the partnership the duty of “finest loyalty”—analogizes them to trustees in an express trust
➢ P. 78 ¶3—“a trustee is held to something stricter than morals of the marketplace”—“NOT HONESTY ALONE BUT PUNCITLIO OF…”—incredibly high fiduciary duty |
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Meinhard Rule- Ds
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➢ General rule of BA law is that whenever court cites to Meinhart, ∆ is going to lose b/c the standard is so hard on ∆
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➢ Usurping PShip Opportunity
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• [1] Identifying whether there was a partnership opportunity at all—the most important factor is whether there is an appropriate NEXUS between the original venture and the subsequent venture—also, how did this person learn of the opportunity—is it the same kind of business—also very important to look at the words of the PS agreement
• [2] Did the PS or the other P have other resources to take advantage of the opportunity • NOTE: in other jurisdictions courts have been responsive to this argument • [3] Whether or not ∆ disclosed the existence of the opportunity—whether or not disclosure would have made a difference • [4] What was the timing for ∏ and ∆? • Did the ∏ want to see if the venture was successful or assert and interest right away? • When did ∆ take advantage of the opportunity? What if ∆ in Meinhart waited until 6/1/22 to take advantage of the venture? But the courts don’t want to provide an incentive for the ∆ to just wait to assert the opportunity—so even though timing is a factor Sokolow doesn’t think its going to be determinative • [5] What is the appropriate remedy? • Constructive trust—“as if” property is in a trust where the usurping P is the trustee and the partnership is the beneficiary is the recipient of the trust • Disgorgement—if ∆ profited from the opportunity he has to disgorge the profit and share with other Ps in the original venture • NOTE: Usurping PS/Breach of fiduciary duty is the area that Sokolow has been most involved in litigation (This will be on the test!!)—he says there is more of this than any other kind |
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• UPA Standard for Duty
➢ §21 |
P Accountable as Fiduciary
• [1] “as trustee”—embodies Meinhart standard and courts have interpreted it that way • Any action connected with “formation, conduct, or liquidation”—this has been interpreted very broadly by courts • CL—P fiduciary duty began on formation of PS—under §21 fiduciary duty extends before formation to anything connected with PS |
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➢ UPA §§19, 20
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you can have access to the books at any time to ee if there is something funny going on
• §20—P’s shall render “ON DEMAND”—this is really important—b/c Ps are fiduciaries you would expect them to have to do this whether a demand is made or not but this is wrong and surprising |
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• §22
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you can ask for an accounting which involves a judicial proceeding where an accountant is hired to figure who owes what to whom
• §22d—whenever circumstances render it “just and reasonable”—extremely flexible standard—basically whenever the P wants it to happen • NOTE: P cannot sue another P on a PS matter without dissolving the PS BUT this rule does not apply under RUPA—under RUPA, P may sue on a PS matter during life of PS but the SOL begins to run immediately ➢ Contrast fiduciary duties of UPA and RUPA—significant differences |
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➢ Contrast fiduciary duties of UPA and RUPA—significant differences
• §404 RUP |
the “only” fiduciary duties owed are loyalty and care set forth in b and c—the “only” is set forth to narrow
• b/c—further limit the scope of the fiduciary duties • RUPA §103a—Ps can basically agree to whatever they want but if they don’t default rules will apply EXCEPT 10 situations (UPA says this in every statute but RUPA says it only here) • §103b10—cannot restrict the rights of 3rd parties • §103b3—may not limit duty of loyalty but Ps can “tinker” with it so long as its reasonable—this provides lots of flexibility—singer says you can do it so long as “clear and unequivocal” ➢ Singer Case—PS agreement was crystal clear—court says by willingly giving up their right in the PS agreement the Ps in the PS have consented for the Ps o compete with PS as if they weren’t Ps at all—Singer case demonstrates how far courts are willing to go under statutes like RUPA to restrict or limit the duty of loyalty ➢ DE version of RUPA allows parties to limit liability for breach of fiduciary duty—modern trend is to allow Ps to K around duties of Ps to each other |
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Who is the owner of the property?
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• Intent is the relevant inquiry—5 non-exclusive factors
• [1] Who furnished funds? • [2] How is it used? • [3] Who paid for repairs, maintenance, etc? • [4] Was it discussed in PS agreement? • [5] How was title to property held? ➢ This factor is relevant only to certain kinds of property ➢ NOTE: Title is NOT dispositive |
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➢ RUPA §204—very different approach to UPA §8
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• 204a—tells you when property IS PS property—if its acquired in the name of the PS OR in acquired in the name of 1 or more Ps with some indication in the instrument transferring title that P is acting on behalf of the PS—so if there is some mention of PS or document indicates that P is acting in his capacity as representative of PS
• NOTE: This is a huge change from the CL multi-factored test • 204c and d—BRACKET THESE TOGETHER!!—these give rise to “rebuttable presumptions” if PS property is used • 204d—Property is presumed to be owned by P individually if no indication in instrument that P is acting on behalf of PS, no PS funds used, and title is in P name |
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Assuming that the property is PS property, who has rights in that property?
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• What rights does the PS have and what rights do the individual Ps have?
➢ Rule: PS can do whatever it wants with PS property—BUT a P’s rights in PS property are extremely limited!! • P can only use it for PS purposes unless other P consents |
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➢ UPA §25
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• 25(1)—P is co-owner with PS in “specific” PS property holding as “tenant in partnership”—this sounds like it would be generous BUT
• 25(2)—strips away virtually all of the rights that you would ordinarily associate with co-ownership expect the right to use property for PS purposes ➢ Rule: Ps right in PS property is non-transferable to a 3rd party—this is a logical extension of the first rule |
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• Ps Economic Interest in the PS itself
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➢ This is a financial asset like owning shares of stock in a corporation
➢ Definition—the right to receive a share of the PS profits |
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➢ UPA §28
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Ps economic interest may be “charged” (attached) to a judgment creditor of a P
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➢ UPA §27
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Ps economic interest in the PS may assigned to 3rd party
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• Power to dissolve-- §31(2)
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• PS at-will, P has power + right at any point
• Term PS—P has power but no right if before end of term • Power but not right—you can do it BUT variety of consequences: • [1] Liability for breach of K-- §31(2) • [2] No right to wind up-- §37 • [3] No right to force liquidation of PS assets the way that other Ps do-- §38 |
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31 -
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1)—Sokolow says (c) is not relevant
• (2)—in contravention of agreement where there is term stuff • (3)—unlawful for business to carry on • (4)—death • (5)—bankruptcy • (6)—by decree of court under §32 |
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➢ §§33, 35
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• 2 Things to check
• [1] Did the P have apparent authority to bind the PS? • In general, once PS is dissolved, P actual authority terminates except to wind up affairs • [2] Must check whether 3rd party had knowledge or appropriate notice of dissolution—this is because statute is designed to balance interests • §351b—only certain parties may hold Ps liable • NOTE: Under §35, the cause of dissolution is irrelevant. It only matters that it HAS dissolved. |
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• §807
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• Contrast §40b UPA and §807a RUPA—whereas under §40b Ps who are creditors had to take a backseat to 3rd party creditors, under §807 ALL creditors are treated on a par with one another and this includes P creditors
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] Distinction between marginal FIT rate and average FIT rate
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• Marginal—rate of FIT that they will pay on their marginal or next dollar of income
• Ex.) Corporation has 60K in TI. Marginal rate is 25%. Average is 50K x 15% + 10K x 25%/ 10K. 10K/60K. • Average—calculate tax then divide by total TI. ➢ Note: Average rate is less than marginal rate. ➢ Note: Average rate will not necessarily be less. • Ex.) Corporation has 40K TI. |
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marginal tax rate
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rate of FIT that they will pay on their marginal or next dollar of income
• Ex.) Corporation has 60K in TI. Marginal rate is 25%. Average is 50K x 15% + 10K x 25%/ 10K. 10K/60K. |
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average tax rate
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• Average—calculate tax then divide by total TI.
➢ Note: Average rate is less than marginal rate. ➢ Note: Average rate will not necessarily be less. • Ex.) Corporation has 40K TI. |
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➢ Why did it make sense to operate at loss and be unincorporated?
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• [1] Losses were passed on to PS so Ps could take advantage of the loss. By contrast, corporations carried the loss forward and it didn’t get passed on to shareholders
• Manana—operative word when it comes to FIT—never want to pay tax today that you can put off tomorrow |
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Tax shelter
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Prior to TRA, tax laws provided powerful incentive to operate in unincorporated form, b/c allowed Ps to deduct large paper losses in early years against their income
• Paper losses—a lot of Ps in LPs owned real property with buildings or oil/gas ventures and this stuff could have accelerated depreciation—this accelerated depreciation allowed Ps to shelter their income from other sources—oil/gas was analogous with depletion deductions ➢ TRA—Congress was upset with tax shelters—“tail wagging the dog”—people were investing in ventures to get tax benefits that tax shelter venture entitled them to deduct—so Congress made a number of changes that were designed to make tax shelters undesirable • [1] Eliminated accelerated depreciation • [2] Lowered FIT rates significantly so that there was much less pressure to shelter income • Ex.) In 1980 the max marginal rate was 70% and in WWII was 90%. • [3] Limited ability to deduct “passive losses”—passive investor could no longer use passive losses in an LP • In an LP there are GPs and LPs. After the act, if you are a LP in a LP you could no longer use a generated LPS loss to offset income • NOTE: Not responsible for difference between passive loss and active loss only general concept. • Bottom line—If your business is going to run in a loss, you should still run as unincorporated so Ps actively involved can still take advantage of loss—this is despite the effect of TRA |
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• 3 Reasons to run as C pre TRA
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• [1] Cs could establish for their employees very lucrative pension and profit sharing plans which allowed C employees to set aside a significant amount of money without having to pay FIT now—these were extremely lucrative—
• Ex.) P. 17 Supp.—shows what a powerful motivator to these plans were • The problem was that Ps were not considered employees of a PS for tax purposes—IRS said they were owners and not employees—so from a tax perspective Ps could set up pension plans for employees but not for themselves—obviously they weren’t going to do that—starting in 1962 Congress started allowing self-employed to setup KEOGH plans to set aside money for retirement without paying tax on it now—BUT these plans were not nearly as lucrative as pension plans—SO with TRA Congress decided to allow self-employed to be able to put away as much a corporate employees—so this took away a big chunk of motivation to incorporate • [2] Accumulation and Bail Out Strategy—Cs were taxed at a max marginal rate of up to 46% and individuals at 70% so if C paid FIT out and then distributed money to shareholders, the dividend would be taxed much higher for a high bracket TP—what the strategy advised was instead of distributing dividends to SH the C should just accumulate the money—as it accumulated the stock value would rise and if SH bailed out his interest later on, any gain was taxed at the lower LTCG rate—also devisee of SH would take shares at “stepped up basis”—FMV of shares on the date of death • TRA—took away incentive of the first 2 things—lowered the FIT rate to a point where it was less than the max rate that a corporation would pay—if you operated in unincorporated form and passed through income to owners it would be taxed at a lower rate • [3] Availability of fringe benefits—C could offer employees but PS could not offer Ps b/c hey weren’t considered employees • Ex.) Group term life insurance (up to max of 50K); medical reimbursement plan; provision of meals/lodging for benefit of employer • NOTE: This was not altered by TRA and now it’s the only incentive to operate as a C • SO after TRA there isn’t a reason to incorporate a profitable business |
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• Proxy Statement
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• SH in C are able to vote by proxy—someone else can vote for them—in PHC, C management will solicit proxy of SH and fed law regulates proxy voting process
• Dole Food Co. issues proxy statement in Supp. P. 149—at their meeting were being asked to approve a change in structure of C—founded in HI but C had decided it would be better to reincorporate in DE—not change form but just reorganize under DE law—fed law required Dole to give proxy statement to SHs—C is saying to SHs “Here is the reasons why reincorporating would be a good idea—again this notion that DE is the mother of Cs is not an abstract concept—demonstrates that really big Cs are willing to do this |
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Why wouldn’t every C want to be an S?
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• [1] Election must be unanimous
• [2] Limit on max number of SH that S can have—no more than 100 SH as defined in subchapter S • Ex.) H and W are considered 1 SH and several generations of same family are 1 SH • [3] No non-resident aliens as SH • [4[ Restriction on SH who are entities • [5] S can have only 1 class of stock • NOTE: S can have more than 1 class of shares as long as it only has to do with voting rights ➢ SO if you have Class A has voting rights and Class B has none that’s okay ➢ What this restriction means is that you cant have different classes of shares that have different preferential rights—preferred stock v. common stock |
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➢ “Zeroing Out”—
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has to do with notion of double taxation—one of the ways that a C can reduce or eliminate this is by zeroing out—taking advantage of deductions to reduce FIT
• Ex.) Instead of paying out money to SH as a dividend, the C pays out the same amount of money to a SH who is employed by the C as a salary—C is allowed to deduct “ordinary and necessary” business expenses under §162 of IRC—if C is paying rent or salary to SH eventually, the C wont have any income out to pay FIT • NOTE: Zeroing out is not a reason to incorporate—if you zero out you are in the exact same place as if you had unincorporated |
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• LP
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➢ LP—2 types of Ps—kind of hybrid of GP + LLP
• GP—one or more who are generally liable just like Ps in GP • LP—one or more whose liability is limited to capital contribution |
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why you might still choose to operate in LP
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• [1] They are still used in certain industries—Venture capital; Broadway theatre—just b/c its always been done that way
• [2] Used as planning device in the context of family limited PS—parents or grandparents form LP they put assets in it and then the kids operate as LPS—minimizes federal estate tax for older generations |
