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63 Cards in this Set
- Front
- Back
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Sole Proprietorship: Definition
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business owned by a single individual
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Sole Proprietorship: Liability
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The owner carries all liability. So, they should carry Comprehensive General Liability (CGL) Insurance
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CGL
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Comprehensive General Liability Insurance does not cover liability stemming from contract debt or intentional tort
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Sole Proprietorship: Taxes
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Because the owner is one with the company, the government only taxes the profits once. Profits and losses flow directly through the company to the owner
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Sole Proprietorship: Longevity
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Sole Proprietorships die when the owner dies, becomes incompetent, or walks away
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Sole Proprietorship: Get-Out-Ability
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it’s fairly easy, so long as you can find a buyer
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Sole Proprietorship: Formality
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small. If you use a fictitious name, you must file your D/B/A with the states in which your conduct business
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Partnership: Definition
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2 or more individuals / doing business / as co-owners / for profit.
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Partnerships are not considered separate entities from the owners, except that
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Plaintiffs may name a Partnership as a defendant, and
Partnerships may own property |
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Partnerships: Contract Liability
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Partners are jointly liable for contract damages (meaning that plaintiffs must first sue the partnership and only then may go after any/all partners for the rest).
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Suing Partnerships for Contract Liability
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If you represent a def Partner, immediately join the other partners as parties to the suit. It’s the difference between an immediate judgment against each def and your client having to file a separate lawsuit for contribution
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Partnership: Tort Liability
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Plaintiffs may sue the Partnership and may sue the Partners, who are jointly and severally liable for the damages
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Suing Partnerships for tort liability
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The wealthiest partner thus becomes a target for all tort suits! If partner 1 commits a tortious act which damages pl, pl will sue partner 2 (the wealthy partner). Partner 2 may either seek contribution from the other partners or he may seek to indemnify himself against the partnership (meaning that he would sue the partnership for its assets, to cover his individual loss)
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Partnerships: Taxes
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Profits and losses flow directly through, thus avoiding double-taxation. The general rule is that P&L are split pro rata, although this may be changed. This is true for paper losses (such as depreciation) as well as actual losses
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Partnerships: Longevity under the Uniform Partnership Act
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Reverse liability theory kills the partnership when a partner becomes insolvent or incapacitated, dies, or walks away from the business
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Liquidation of a Partnership
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All assets are liquidated. All debts become due; some are accelerated (such as leases). If any money is left, it’s divided amongst the partners (and the “Dead” partner’s heirs/estate)
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Reverse Liability
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If a partner has become insolvent, the creditors have the right to go after that partner and take all of his assets in the Partnership. The partnership is now dissolved
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Partnership life insurance
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take a life insurance policy on each partner for slightly more than their share partnership’s assets. Upon death, you use the bulk of the insurance payout to repurchase that partner’s share in the assets, and use what’s left over to form a new partnership.
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Partnerships: Longevity under the Revised Uniform Partnership Act
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(adopted by a minority of states), the insolvent or dead partner is simply disassociated. The value of his share of the partnership goes into his estate. The remaining partners have to buy it back, using their own or partnership assets
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Partnerships: Get-Out-Ability
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- Partners are free to transfer their future profits in the business and their rights upon liquidation.
- Partners are forbidden from transferring their status as a partner, losses, ownership rights in partnership property, or the rights to use partnership property. - TECHNICALLY: any partner can walk away at any time, thus dissolving the partnership. The hitch, though, is that a partnership is a contract. Breaching said contract may lead the breaching partner to assume liability for lawsuits brought against the partnership for breaching contracts, lost profits owed to the other partners, etc |
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Partnership: Credit
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Since the profits and losses of the business run through to the partners, the business’ credit is the same as the partners
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Partnership: Methods of Raising Additional Capital
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If an individual wants to put money into a partnership, it requires unanimous approval
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Partnership: Formalities
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As with sole proprietorships, partnerships should file their D/B/A. Further, they should draft partnership agreements which state management responsibilities/divisions and distribution of profits and losses.
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Limited Partnership: Definition
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A limited partnership must have at least one General Partner who assumes contract and tort liability for the partnership. There is no limit on the number of Limited Partners—those who invest but assume no liability
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Limited Partners becoming Gen Partners and what they can do
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Limited Partners become General Partners if they participate in management.
Limited Partners may, however, do 4 things: Lend money to the partnership. Work for the partnership. Work as a contractor for the partnership. Personally guarantee the partnership’s debt |
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Limited Partnership: Liability
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General partners are subject to the same liability rules as partners in regular partnerships.
Limited partners are not subject to any liability. There are merely investors. (clearly, if a limited partner personally guarantees debt, that’s different) |
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Limited Partnership: Tax
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Profits and Losses flow through a limited partnership. Typically, general partners take a greater share than limited partners. This is a practical observation, however—not a rule
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Limited Partnership: Management
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The same rules apply to general partners as apply to partners in regular partnerships:
- Any general partner may make day-to-day decisions. - A majority of general partners are required to make broad policy decisions. - To make decisions affecting the nature of the partnership, the general partners must vote unanimously. - As investors, the limited partners have no voice in management |
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Limited Partnership: Longevity
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The rules of reverse liability apply to General Partners, but not to Limited Partners
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Limited Partnership: Get-Out-Ability
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The same rules apply to General Partners as apply to partners in regular partnerships.
So long as all Limited Partners agree at the outset that a Limited Partner may withdraw his investment, he may. If not, he may not |
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Limited Partnership: Credit
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The limited partnership’s credit is the General Partner’s credit. If the General Partner is unable to supply sufficient credit, a Limited Partner may personally guarantee a loan
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Limited Partnership: Raising Money
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If an individual wants to put money into the partnership, it requires unanimous approval of the general partners
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Limited Partnership: Formalities
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As with sole proprietorships, partnerships should file their D/B/A. Further, they should draft partnership agreements which state management responsibilities/divisions and distribution of profits and losses
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Corps: Definition
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a corporation is a legal fiction, created by statute. In most respects, it is treated as a man. Individual (or corporate) shareholders invest money in the corporation
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Corps: Liability
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with limited exceptions, a corporation shields its shareholders from liability.
(See Piercing the Corporate Veil) |
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Corps: Getting Money Out
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There are three ways to get money out of a corporation:
The Corporation can issue dividends. The Corporation can pay a salary/bonus. The Corporation can pay interest on bonds (secured debt) or debentures (unsecured debt) |
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Corps: Tax
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a major downside of the corporation is double-tax. As the corporation earns money, it’s taxed. As the corporation issues dividends to its shareholders, the dividends are taxed again
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Avoiding double tax penalty
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Have interested parties lend the corporation money instead of invest as shareholders. They’ll still enjoy the liability shield, but the money will only be taxed once. Additionally, the corporation can claim the interest payments as a deduction against profits.
BUT: if the corporation’s debt to equity ratio is too far skewed from 1:1, the I.R.S. will penalize both parties. They’ll owe back taxes, penalties, and may face criminal charges. The corporation can “Zero Out” its earnings and pay it as salary. BUT: The I.R.S. will examine it and penalize the parties if the salary isn’t reasonable for the individual’s responsibility. It may be okay to say that John will get the lesser of 33% of profits or $50K; it’s not okay to say that your 3 employees will simply each earn 33% of profits. |
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Excess Accumulation Tax
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Corps can't sit on excess surplus to avoid the double-tax.
The I.R.S. will hit the Corporation with an Excess Accumulation Tax. To avoid this tax, however, the Corporation need only articulate a “good corporate purpose” (note that it’s articulation, and not implementation, which is necessary). Good purposes may include: saving for big projects, creating a buffer against the credit crisis, or simply “saving for a rainy day.” |
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Corps: Management
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The Shareholders elect the Board of Directors. The Directors set corporate policy.
The Directors appoint corporate officers. These officers carry out the Directors’ policies in day-to-day decision making. |
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Corps: Permanence
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There are only two ways to kill a corporation:
Insolvency Voluntary Dissolution (where the majority of the Board of Directors forward a vote to the Shareholders, who in turn vote to dissolve the company) NOTE: if the corporation dissolves, all assets are liquidated to pay off the creditors (starting with secured debt and working to unsecured debt). If anything’s left – and, generally, nothing is – preferred shareholders are paid off before common shareholders |
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Corps: Get Out Ability
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Generally, it’s easy: just sell your stock. That said there has to be a market for it. If you own NYSE stock it’s not an issue, but it’s generally more difficult to find buyers for smaller, privately-held corporate stock
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Corps: Credit
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The Corporation develops its own line of credit by paying its bills on time
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Corps: Raising Additional Capital
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At the first shareholder meeting, have the shareholders authorize shares of stock which are not immediately issued. As the corporation needs to raise capital, it can sell stock (which, until sold, remains an inchoate corporate asset)
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Corps: Formalities
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- You must draft the articles of incorporation.
- You must file the articles of incorporation (which are not considered filed until recognized by the State). - You must file your certificate of incorporation in any state where you do business. - You must draft the corporate by-laws. - You must draft the stock legends and restrictions (which must be printed on the actual stock certificates). - Corporations must hold at least one shareholders’ meeting per year, and either counsel or the Secretary should keep minutes from those meetings. - Corporations must hold at least one directors’ meeting each year (if not more often), and keep minutes from those meetings – either taken by counsel or by Secretary. - The Directors must issue an annual report to all Shareholders |
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Sub Ch S Corp: Definition
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A special kind of corporation created for flow-through of profits and losses.
NOTE: profits and losses are divided pro rata, and may not be otherwise distributed |
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Sub Ch S Corp: Restrictions
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- Stock may only be held by actual persons (or trusts).
- Nonresident aliens may not hold stock. - There cannot be more than 100 SH. If there are more than 100 SH, it converts to a standard corporation. - In order for profits & losses to flow through, all shareholders must sign consent! - There can only be 1 class of stock (common) for dividend purposes (BUT: there can be multiple classes for voting purposes) |
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Sub Ch S Corp: Liabilities
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with limited exceptions, a corporation shields its shareholders from liability.
(See Piercing the Corporate Veil) |
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Keeping Sub Ch S Corp at 100 Shareholders
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To ensure that a Sub Chapter S Corporation doesn’t grow to have more than 100 shareholders, the founders should put Stock Transfer Restrictions into play. The transfer restrictions might require a shareholder to sell the stock back to the corporation (or pro rata to the existing shareholders), or dictate that, upon death, the stock reverts to the corporation
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If more than 100 ppl want to get in on Sub Ch S Corp
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If you have more than 100 people who want to form a Sub Chapter S Corporation, all isn’t lost. Have 100 buy stocks and make sure that the above-mentioned Stock Transfer Restrictions are written both into the corporate by-laws and on the stock certificates. Have the other investors loan the company money (either in form of bond or debenture). Make the bond/debenture convertible into stock in the event that a shareholder sells his stock back to the corporation
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Corpnerships: Definition
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a limited partnership, where the General Partner is a corporation
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Corpnerships: Advantages
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Limited partners can invest money and enjoy limited liability by forming a corporation which takes their place as the General Partner. The GP corporation takes on liability for the Corpnership, but shields its own shareholders (presumably the Corpnership’s limited partners) from liability
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Corpnerships: Disadvantages
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Not all jurisdictions recognize the legitimacy of Corpnerships. In keeping with Delaney, jurisdictions which don’t recognize Corpnerships argue that such entities are, in actuality, just plain ol’ partnerships.
Thus, if you set up a Corpnership in NY, you’d better be certain that you don’t establish contacts in “Delaney states” (such as KS) – because, if you do, you’re toast. The courts will treat you like a normal partnership and will hold the “Limited Partners” liable as regular partners. |
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Getting to Limited Partners of Corpnerships in Corpnership-friendly states
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Even in Corpnership-friendly states, you may still be able to hold the limited partners liable (assuming that they’re also the Directors of the General Partner Corporation). You’ll have to use one of the theories of Piercing the Corporate Veil
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Limited Liability Company: History
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Created by the WY legislature to combat DE’s growing power base as the home of corporate law. Corporations have shareholders; LLCs have members
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Limited Liability Company: Problems
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Unfortunately, the statute was (1) adopted by DE and (2) poorly drafted. Thus, LLCs MUST BE DRAFTED BY EXPERTS!
Many issues simply haven’t been resolved, so unresolved questions of law must be clearly delineated in the LLC founder’s agreement, such as: -What happens if a member dies or goes bankrupt? -Can you pierce the LLC veil, as you can with corporations? -How do you spread voting rights out amongst members? -Etc. |
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Limited Liability Company: Liability
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all members enjoy full limitations on liability. No reverse liability (so there's permanence)
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Limited Liability Company: Taxes
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Profits & Losses flow through, if the members unanimously approve and “check the [I.R.S. form] box.”
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Limited Liability Company: Better than a Sub Ch S Corp because...
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Profits & Losses do not need to be distributed pro rata
No restrictions on who may be a member |
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Limited Liability Partnership: Liability
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No limited liability for contractual debt. However, partners are afforded limited tort liability so long as they have “clean hands”—that is, if Partner 1 acts negligently and Partner 2 & Partner 3 didn’t contribute and shouldn’t have anticipated Partner 1’s act, they can’t be held responsible
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Limited Liability Partnership: Liability Insurance
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You must carry liability insurance. The minimum varies. TX, $100K. DE, $1M
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Professional Corporation
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Established for doctors and lawyers… they enjoy all benefits of corporation EXCEPT limited liability.
RESTRICTION: must be of one profession (all doctors, all lawyers). Multiple disciplines okay |
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Master Limited Partnership
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Primarily for speculative oil drilling.
A ton of limited partnerships rolled up into one with thousands of limited partners who openly buy/sell their limited partnership agreement They will be taxed like a corp unless 90% of their income is passive, not earned (collecting rent, mining, etc) |
