Business Structure

Which Business Structure Is Right For Me?
Jeffrey M Glazer
Glazer Legal Services
jmg@glazerlegal.com
608-277-1778 (p)

Better Question – What Is A Business?
Legally recognized
Organization
Designed to provide goods and/or services

Why?
Share Resources/Information
Efficiency/Combined Resources
Limited Liability

How?
Agree
Offer/Acceptance/Consideration
Act in Furtherance of the Agreement
Purchase property in joint tenancy/name of organization
Distribute receipts to parties to agreement

Now…
Which Business Structure Is Right For Me?
Sole Proprietorship
Partnership, Limited Partnership (LP), Limited Liability Partnership (LLP), Limited Liability Limited Partnership (LLLP)
Cooperative, Limited Liability Company (LLC)
C-Corp, S-Corp,

Sole Proprietorship
One person
Start doing business
Unlimited personal liability
Business taxes are personal taxes, plus self-employment tax

Partnerships
Uniform Partnership Act: Wisc. Stat. § 178
Uniform Limited Partnership Act: Wisc. Stat. § 179
A partnership is an association of 2 or more persons to carry on as co−owners a business for profit.

Partnerships
How do you know if a partnership exists? § 178.04
If a partnership doesn’t exist, a partnership doesn’t exist
Joint property does not, of itself, indicate partnership; do the co-owners share profits
Sharing gross returns does not, of itself indicate partnership; do persons also share the property providing the returns
The receipt by a person of a share of profits of a business is prima facie evidence that that person is a partner in the business

Partnerships
Rights and Duties of Partners
Repaid contribution
Share equally in the profits and losses
Indemnity
Repay loans with interest
Equal management rights; decision by majority, except actions in contravention of partnership agreement which must be unanimous
An Accounting
Fiduciary Duty
Partnership Interest Is A Personal Interest
Taxes are personal; partnership is not taxed

Partnerships
Partners are agents of the partnership
Can bind partnership
conveyance of partnership property
Admissions are evidence against partnership
Can accept notice
But can’t, without unanimous consent:
Assign partnership property to creditors
Dispose of the goodwill of the business
Perform an act that would frustrate the business
Anything else that the partnership says

Partnerships
Unlimited liability
Joint and several
Personal
Limited Liability Partnership (LLP)
Registered
Liability of partnership is still joint and several, but limited to partner’s contribution

Partnerships
Dissolution
Partnership has an express termination date
The date
Will of any partner that hasn’t assigned/charged interest
No term date: express will of any partner
Expulsion of any partner
Death or bankruptcy of any partner
Decree of court
Upon Dissolution, Partnership can:
Assign rights and obligations
Wind up

Partnerships
Winding Up
Count up all assets
Partnership property
Contributions of partners
Pay liabilities
Non-partner creditors
Partner creditors
Partner Contributions
Distribute remaining profits

Limited Partnerships
General Partners
Manage Partnership; joint and several, personal liability
Limited Partners
Cannot participate in management; Liability is limited to contribution
Requires registration of LP
Dissolution:
Removal of limited partner does not
Removal of general partner might
Taxed like partnerships

Limited Partnerships
Not the same as Limited Liability Partnerships which are general partnerships with all partners having limited liability
LLLP – Limited Liability Limited Partnership
General partners also have limited liability
Wisconsin does not recognize

Partnership v Corporation
Partnership: does not exist absent its partners; if a partner leaves, there is no partnership
Corporation: exists independent of its constituents, but is owned by its constituents; limited liability for actors

Limited Liability Company
Can elect direct or pass-through taxation
Limited liability of members and/or managers
Member-Managed
All members are agents of the organization
Manager-Managed
Only Managers are agents of the organization
Duties of all Members and/ Managers:
Fair Dealing
Fiduciary Duty
Act in conformance with Criminal Law
No Willful Misconduct
May not derive improper personal benefit

Voting
Member-Managed: Pro-rata; not one person, one vote; greater than 50% of all shares
Manager-Managed: one person, one vote; greater than 50% of managers
Unanimous Membership Vote Required:
Amend Articles of Organization
Issue interest in LLC
Adopt/Revoke Operating Agreement
Allow LLC to accept additional contributions or redemption
Value member contribution
Authorize manager to act in contradiction to Operating Agreement
Change business form

Distributions – value of contribution
All items of income, loss and credits are passed-through to Members
Members taxed even if no distribution is made
May not make a distribution, if:
Would be unable to pay debts in ordinary course
FV Assets < FV Liabilities
Dissolution and Winding Up: similar to partnership, except all Members must agree to dissolve

Cooperatives
A minimum of 5 adults; minimum of 3 directors
Looks like a corporation
Articles of Incorporation
Meeting of Board and Members
ByLaws
Registered Agent
Acts like a partnership
Not necessarily capital stock
One member = one vote
No proxy voting

Cooperatives
Officers and Directors not liable except:
Duty of Fair Dealing
Violation of Criminal Law
Willful Misconduct
Transaction in which officer/director received improper personal benefit
Directors who vote in favor of a negligent or bad faith distribution are joint and severally liable
Members are never liable for obligations of co-op

Cooperatives
Net Proceeds minus
Operating expenses
Supplies and property procured for patrons
Cost of services to patron
Taxes
Reserves for depreciation, etc.
Remainder shall be paid and counts as income to co-op
Up to 5% may be saved for co-op education (expense)
Salaries of directors/officers/employees (expense)
Dividends to capital stock

Cooperatives
Remainder shall be paid and is not income to co-op
Distributions and reserves to patrons/members; may be made in cash, credit, stock, property, etc.; may be made in accordance with patronage or stock ownership

Corporations
S-Corp – Federal election
Receive pass-through taxation to shareholders
Requirements
LLC or Domestic Corporation
One class of stock
No more than 100 shareholders (spouses = 1)
All shareholders must be US citizens and natural persons
Profits and losses must be pro-rata

Corporations
Organized under Wisc. Stat. § 180
Articles of Incorporation
Name of Corporation (Inc., Co., or Corp.)
Class, Series and Number of stock shares
Preferences and limitations of Class and/or Series, if any
Grant or limitation of Preemptive Rights
Name and Address of Registered Agent
Name and Address of Incorporators

Corporations
Preemptive Rights: right of preference to any newly issued shares
Preferred Shares: non-voting shares with preference over common-stock to dividends
Participating Rights: rights to additional dividends if certain goals are met
Cumulative Rights: rights to dividends accumulate
Exchange/Convertible Rights: can exchange for other types of securities (convertible: can exchange to common)
Putable: may force redemption

Corporations
Administrative Requirements
Board meetings
Must have at least one board member
Shareholder meetings
Proxy voting allowed
Cumulative voting for Directors
Voting Agreements allowed
Annual Report
Shareholders elect Board, Board selects Officers

Corporations
Duties of Directors and Officers
Directors and Officers are not liable unless they violate a duty to the corporation
Advance shareholder interest; may also consider:
Effect on employees, suppliers, and customers
Effect on community
Any other factors the Director/Officer deems pertinent
Business Judgment Rule: Officers and Directors are presumed to act in the interest of the company, unless there is a violation of the duty of care
Duty of Care: standard of reasonable care while performing duties
Duty of Loyalty: must put corporation’s interests ahead of one’s own

Corporations
Pros
Good for lots of shareholders
Very flexible for voting and dividends
Statutorily mandated procedures already exist
Cons
Double taxation
Corporation is taxed on income
Shareholders taxed on dividend (post-tax income)
Complex for small organizations

We’re Done!
Partnerships
General, Limited, Limited Liability
Companies
Cooperative, LLC
Corporation
S-Corp
C-Corp

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Business Structure

by Jeffrey Glazer on Feb 10, 2010

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