The first step in business planning for lawyers is often deciding which legal entity to form. Common choices include partnerships, corporations, and limited liability companies. Sole proprietorships, professional corporations, and limited liability partnerships also play a role in this "alphabet soup" of organizational choices.
3. Learning Objectives:
■ Explain the seven key aspects of four types of business
organizations:
– General Partnership (GP)
– Limited Partnership (LP)
– Corporation (C Corp)
– Limited Liability Company (LLC)
■ Apply organizational choices to the most common business
use cases
■ Recall which organizational choices are used for professional
groups and investment groups, and understand why
4. 7 Legal Issues in Business
Planning
1. Formation
2. Liability
3. Control Rights
4. Financial Rights
5. Continuity
6. Liquidity
7. Mergers
11. RUPA § 101(6)
■“Partnership” means an
association of two or more
persons to carry on as co-
owners a business for profit
12. Legal Issue # 1 – Formation:
General Partnership
■ Created by
agreement
– No filing required
■ Can be created
inadvertently by
action
13. RUPA § 202(a)
■Any association of two or more
persons to carry on as co-owners a
business for-profit forms a
partnership, whether or not the
persons intend to form a partnership.
14. Legal Issue # 2 – Liability:
General Partnership
■ Partners have
personal liability for
debts and torts of
the partnership
■ Joint and several
liability with
indemnity
15. Legal Issue # 3 – Control Rights:
General Partnership
■ Equal rights
– 1 partner =
1 vote
■ Majority rule
– Deadlock may
lead to
dissolution
16. Legal Issue # 4 – Financial
Rights:
General Partnership
■Equal share
in profits
and losses
17. Legal Issue # 5 – Continuity:
General Partnership
■ UPA: Withdrawal leads
to dissolution
– Aggregate theory of
p’ship
■ RUPA: Withdrawal
leads to buy-out
– Entity theory of
p’ship
18. Legal Issue # 6 – Liquidity:
General Partnership
■ Control rights are not
transferable without
the consent of the
partnership
■ Financial rights (rights
to receive profits) are
freely transferable
19. Legal Issue # 7 – Mergers:
General Partnership
■ Mergers between
GPs are easy –
simply combine
assets by
agreement
– No filing
required
21. Why Use an LP?
■Limited partners can invest
money without having to
manage it
■LPs risk only what they
invested – no personal
liability
■Secures skills and
cooperation of those with
ability and integrity but
insufficient money
22. Enactment Status of the Re-Revised “Uniform” Limited Partnership Act
(Re-RULPA)
23. Legal Issue # 1 – Formation:
Limited Partnership
■Filing required
– GPs are
named
– LPs are
not named
24. Legal Issue # 2 – Liability:
Limited Partnership
■ GP has personal liability
for debts and torts of the
partnership
– Although GPs can gain
a liability shield by
using a “blocker
corporation”
■ LP’s liability is limited to
the amount invested
25. Legal Issue # 3 – Control Rights:
Limited Partnership
■ LPs cannot participate in
management
■ RULPA (1985): Control
Rule
– Active LPs may forfeit
limited liability
■ RULPA (2001: Rule (PA)
– Active LPs do not
forfeit limited liability
26. Legal Issue # 4 – Financial
Rights:
Limited Partnership
■Profits allocated
according to
contributions
made and not
returned
27. Legal Issue # 5 – Continuity:
Limited Partnership
■ The LP Agreement must
specify an end date
■ RULPA (1985):
Withdrawal of any GP
leads to dissolution
■ RULPA (2001), PA:
Withdrawal of all GPs
leads to dissolution
28. Legal Issue # 6 – Liquidity:
Limited Partnership
■ Control rights are
not transferable
without the consent
of the partnership
■ Financial rights are
transferable
29. Legal Issue # 7 – Mergers:
Limited Partnership
■ Mergers between
LPs require the
consent of all
partners,
including the
limited partners
32. Legal Issue # 1 – Formation:
Corporation
■Filing required
■Registered
Agent required
if not located in
state of
incorporation
33. Legal Issue # 2 – Liability:
Corporation
■ Shareholders have
limited liability
– Except when the
corporate veil is
pierced
■ Directors have liability
to shareholders for
breach of fiduciary
duties
34. Legal Issue # 3 – Control Rights:
Corporation
■ Shareholders elect
management Board of
Directors
■ Board approves
“extraordinary”
transactions and appoints
Executive Officers
■ Executive Officers run
day-to-day operations
35. Legal Issue # 4 – Financial
Rights: Corporation
■ Dividends distributed “pro
rata”
– According to percent of
shared owned
■ Shareholders have no
right to demand a
distribution
– Only the Board may
declare a dividend
36. Legal Issue # 5 – Continuity:
Corporation
■ Perpetual existence
■ Dissolution permitted
by agreement
– Requires board
recommendation
and shareholder
approval
37. Legal Issue # 6 – Liquidity:
Corporation
■ Share are freely
transferable in theory,
but in practice are
subject to many
transfer restrictions
– Private transfer
restriction
agreements
– Securities
regulations
38. Legal Issue # 7 – Mergers:
Corporation
■ File a Certificate
of Merger
40. Enactment Status of the Revised “Uniform” Limited Liability Company
Act (RULLCA)
41. Legal Issue # 1 – Formation:
Limited Liability Company
■Filing required
– Article of
Organization
■Members
enter into an
Operating
Agreement
42. Legal Issue # 2 – Liability:
Limited Liability Company
■Members
are only
liable up to
the amount
they invest
43. Legal Issue # 3 – Control Rights:
Limited Liability Company
1. Manager-managed
– Centralized like a corporation
– Manager makes day-to-day
decisions as an agent of the
company
– Members only participate major
decisions (and are not agents)
2. Member-managed
– Decentralized like a partnership
– All members have authority to
manage and bind the company in
ordinary matters
– All members are agents
44. Legal Issue # 4 – Financial Rights:
Limited Liability Company
■ Some statutes provide for
equal sharing; others specify
pro rata sharing based on
contributions
■ Statutes generally require that
distributions be approved by all
the members
■ Members generally have no
rights to distributions
– Distributions must be
approved by manager or
majority of members
45. Legal Issue # 5 – Continuity:
Limited Liability Company
■ Perpetual existence
■ Impact of withdrawal of
member varies by state:
– RULLCA: LLC buys
interest of member
who dissociates (PA
Title 15, § 8933)
– ULLCA: no withdrawal
allowed unless allowed
in LLC agreement
46. Legal Issue # 6 – Liquidity:
Limited Liability Company
■ Only financial interest
is transferable
■ Governance rights
are not transferable
without consent of all
the members
– RULLCA
47. Legal Issue # 7 – Mergers:
Limited Liability Company
■ Permitted in most
states
■ Plan of Merger
must be approved
by all members
and filed with the
state
48. Sole Proprietorship
■A business in which one
person owns all the assets,
owes all the liabilities, and
operates in his or her
personal capacity
50. 1.
Formation
2. Liability 3. Control
Rights
4. Financial
Rights
5. Continuity 6. Liquidity 7. Mergers
General
Partnership
(GP)
By
association;
Governed by
Partnership
Agreement
(if any)
Joint and
several
Equal Equal share of
profits and losses
UPA:
Withdrawal
dissolves
RUPA:
Dissociation
triggers buy-out
Control rights:
not transferable
Financial rights:
transferable
By
agreement
Limited
Partnership
(LP)
Upon filing
Certificate of
Formation;
Governed by
LP
Agreement
Joint and
several for
GPs
Limited for
LPs
GP controls
LPs passive
Distributions
shared pro rata
GP withdrawal
dissolves
Control rights:
not transferable
Financial rights:
transferable
Upon
agreement
and filing
Corporation
(C Corp)
Upon filing
Certificate of
Incorporation
; Governed
by Bylaws
Limited Directors
equal voting
SH appoint
directors
and approve
fundamental
transactions
pro rata
Distributions
shared pro rata
Perpetual Shares freely
transferable, but
often subject to
private and
federal transfer
restrictions
Upon Board
and SH
approval
and filing
Limited
Liability
Company
(LLC)
Upon filing
Certificate of
Formation;
Governed by
LLC
Agreement
Limited Member-
Managed:
Like P’Ship
Manager-
Managed:
Like Corp
Equal
distributions
Perpetual
(even with zero
members?)
Units freely
transferable
Upon
unanimous
member
approval
and filing