Business Structure

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A presentation on legal considerations when choosing a business structure.

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  • Class participation before revealing the slideLegally recognized: can’t be illegalOrganization: must be formal, but need not be written; need not be more than 1 person, but must maintain commonly accepted business practicesDesigned to provide goods and/or services: need not be to the public, but can’t be entirely internal either (e.g., can’t “form a business” to have yourself put a roof on your own house, so that when you fall off the ladder you sue can yourself for negligence but be frustrated by limited liability; no, you simply have your own, personal, insurance policies – don’t need legal recognition for this)
  • “Hi. My name is Jeff, I want to form a business with you to purchase some swamp land in Florida for redevelopment. Would you like in?” On yes, “We now have a business”, we are partners. The state has some default rules for partnerships, but I can hold myself as representing the partnership, which could make you liable for any agreements I enter into on behalf of the partnership.
  • Start doing business: obviously, this includes compliance with any local regulations – so sales licenses, payment of taxes, insurance, etc.
  • Entities: people, or businessesWe’ll talk a lot about partnerships because, it turns out, the rights of partners to each other are very similar to rights of Managers in LLCs and Officers of Corporations
  • (1) Persons who are not partners to each other are not partners as to 3rd parties
  • Fiduciary Duty: Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him or her without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him or her of partnership property.Personal Interest: Third parties can attach it, can use as security in personal collateral, judgment liens can attach, etc. Can be taken/split in a divorce.
  • “perform an act” – make it impossible for partnership to carry on business
  • Decree of court: 178.27Assign rights – otherwise obligations of partner continue; partner is only discharged from obligations by assignment/assumption
  • Single-member is automatically pass-through
  • Member-managed: not just voted shares, but all shares
  • FV = Fair Value (is this Fair Market Value? Fair to whom?)
  • Principle agent – to accept service of processNo proxy = but can have, for example, territorial rep whose vote is equal to one or to number of members represented
  • Benefits of co-ops – enforced democracy; dividend distribution; corporate taxation on expenses, personal taxation only on profits
  • Cumulative voting: each share gets a vote for each open spot; thus, if 3 spots open and I have 100 shares, I have 300 votes to allocate in manner I see fit
  • Business Structure

    1. 1. Which Business Structure Is Right For Me?<br />Jeffrey M Glazer<br />Glazer Legal Services<br />jmg@glazerlegal.com<br />608-277-1778 (p)<br />
    2. 2. Better Question – What Is A Business?<br />Legally recognized<br />Organization<br />Designed to provide goods and/or services<br />
    3. 3. Why?<br />Share Resources/Information<br />Efficiency/Combined Resources<br />Limited Liability<br />
    4. 4. How?<br />Agree<br />Offer/Acceptance/Consideration<br />Act in Furtherance of the Agreement<br />Purchase property in joint tenancy/name of organization<br />Distribute receipts to parties to agreement<br />
    5. 5. Now…<br />Which Business Structure Is Right For Me?<br />Sole Proprietorship<br />Partnership, Limited Partnership (LP), Limited Liability Partnership (LLP), Limited Liability Limited Partnership (LLLP)<br />Cooperative, Limited Liability Company (LLC)<br />C-Corp, S-Corp, <br />
    6. 6. Sole Proprietorship<br />One person<br />Start doing business<br />Unlimited personal liability<br />Business taxes are personal taxes, plus self-employment tax<br />
    7. 7. Partnerships<br />Uniform Partnership Act: Wisc. Stat. § 178<br />Uniform Limited Partnership Act: Wisc. Stat. § 179<br /><ul><li>A partnership is an association of 2 or more persons to carry on as co−owners a business for profit.</li></li></ul><li>Partnerships<br />How do you know if a partnership exists? § 178.04<br />If a partnership doesn’t exist, a partnership doesn’t exist<br />Joint property does not, of itself, indicate partnership; do the co-owners share profits<br />Sharing gross returns does not, of itself indicate partnership; do persons also share the property providing the returns<br />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<br />
    8. 8. Partnerships<br />Rights and Duties of Partners<br />Repaid contribution<br />Share equally in the profits and losses<br />Indemnity<br />Repay loans with interest<br />Equal management rights; decision by majority, except actions in contravention of partnership agreement which must be unanimous<br />An Accounting<br />Fiduciary Duty <br />Partnership Interest Is A Personal Interest<br />Taxes are personal; partnership is not taxed<br />
    9. 9. Partnerships<br />Partners are agents of the partnership<br />Can bind partnership<br />conveyance of partnership property<br />Admissions are evidence against partnership<br />Can accept notice<br />But can’t, without unanimous consent:<br />Assign partnership property to creditors<br />Dispose of the goodwill of the business<br />Perform an act that would frustrate the business<br />Anything else that the partnership says <br />
    10. 10. Partnerships<br />Unlimited liability<br />Joint and several<br />Personal<br />Limited Liability Partnership (LLP)<br />Registered<br />Liability of partnership is still joint and several, but limited to partner’s contribution<br />
    11. 11. Partnerships<br />Dissolution<br />Partnership has an express termination date<br />The date<br />Will of any partner that hasn’t assigned/charged interest<br />No term date: express will of any partner<br />Expulsion of any partner<br />Death or bankruptcy of any partner<br />Decree of court<br />Upon Dissolution, Partnership can:<br />Assign rights and obligations<br />Wind up<br />
    12. 12. Partnerships<br />Winding Up<br />Count up all assets<br />Partnership property<br />Contributions of partners<br />Pay liabilities<br />Non-partner creditors<br />Partner creditors<br />Partner Contributions<br />Distribute remaining profits<br />
    13. 13. Limited Partnerships<br />General Partners<br />Manage Partnership; joint and several, personal liability<br />Limited Partners<br />Cannot participate in management; Liability is limited to contribution<br />Requires registration of LP<br />Dissolution:<br />Removal of limited partner does not<br />Removal of general partner might<br />Taxed like partnerships<br />
    14. 14. Limited Partnerships<br />Not the same as Limited Liability Partnerships which are general partnerships with all partners having limited liability<br />LLLP – Limited Liability Limited Partnership<br />General partners also have limited liability<br />Wisconsin does not recognize<br />
    15. 15. Partnership v Corporation<br />Partnership: does not exist absent its partners; if a partner leaves, there is no partnership<br />Corporation: exists independent of its constituents, but is owned by its constituents; limited liability for actors<br />
    16. 16. Limited Liability Company<br />Can elect direct or pass-through taxation<br />Limited liability of members and/or managers<br />Member-Managed<br />All members are agents of the organization<br />Manager-Managed<br />Only Managers are agents of the organization<br /><ul><li>Duties of all Members and/ Managers:
    17. 17. Fair Dealing
    18. 18. Fiduciary Duty
    19. 19. Act in conformance with Criminal Law
    20. 20. No Willful Misconduct
    21. 21. May not derive improper personal benefit</li></li></ul><li>Limited Liability Company<br />Voting<br />Member-Managed: Pro-rata; not one person, one vote; greater than 50% of all shares<br />Manager-Managed: one person, one vote; greater than 50% of managers<br />Unanimous Membership Vote Required:<br />Amend Articles of Organization<br />Issue interest in LLC<br />Adopt/Revoke Operating Agreement<br />Allow LLC to accept additional contributions or redemption<br />Value member contribution<br />Authorize manager to act in contradiction to Operating Agreement<br />Change business form<br />
    22. 22. Limited Liability Company<br />Distributions – value of contribution<br />All items of income, loss and credits are passed-through to Members<br />Members taxed even if no distribution is made<br />May not make a distribution, if:<br />Would be unable to pay debts in ordinary course<br />FV Assets &lt; FV Liabilities<br />Dissolution and Winding Up: similar to partnership, except all Members must agree to dissolve<br />
    23. 23. Cooperatives<br />A minimum of 5 adults; minimum of 3 directors<br />Looks like a corporation<br />Articles of Incorporation<br />Meeting of Board and Members<br />ByLaws<br />Registered Agent<br />Acts like a partnership<br />Not necessarily capital stock<br />One member = one vote<br />No proxy voting<br />
    24. 24. Cooperatives<br />Officers and Directors not liable except:<br />Duty of Fair Dealing<br />Violation of Criminal Law<br />Willful Misconduct<br />Transaction in which officer/director received improper personal benefit<br />Directors who vote in favor of a negligent or bad faith distribution are joint and severally liable<br />Members are never liable for obligations of co-op<br />
    25. 25. Cooperatives<br />Net Proceeds minus <br />Operating expenses<br />Supplies and property procured for patrons<br />Cost of services to patron<br />Taxes<br />Reserves for depreciation, etc.<br />Remainder shall be paid and counts as income to co-op<br />Up to 5% may be saved for co-op education (expense)<br />Salaries of directors/officers/employees (expense)<br />Dividends to capital stock<br />
    26. 26. Cooperatives<br />Remainder shall be paid and is not income to co-op<br />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<br />
    27. 27. Corporations<br />S-Corp – Federal election<br />Receive pass-through taxation to shareholders<br />Requirements<br />LLC or Domestic Corporation<br />One class of stock<br />No more than 100 shareholders (spouses = 1)<br />All shareholders must be US citizens and natural persons<br />Profits and losses must be pro-rata<br />
    28. 28. Corporations<br />Organized under Wisc. Stat. § 180<br />Articles of Incorporation<br />Name of Corporation (Inc., Co., or Corp.)<br />Class, Series and Number of stock shares<br />Preferences and limitations of Class and/or Series, if any<br />Grant or limitation of Preemptive Rights<br />Name and Address of Registered Agent<br />Name and Address of Incorporators<br />
    29. 29. Corporations<br />Preemptive Rights: right of preference to any newly issued shares<br />Preferred Shares: non-voting shares with preference over common-stock to dividends<br />Participating Rights: rights to additional dividends if certain goals are met<br />Cumulative Rights: rights to dividends accumulate<br />Exchange/Convertible Rights: can exchange for other types of securities (convertible: can exchange to common)<br />Putable: may force redemption<br />
    30. 30. Corporations<br />Administrative Requirements<br />Board meetings<br />Must have at least one board member<br />Shareholder meetings<br />Proxy voting allowed<br />Cumulative voting for Directors<br />Voting Agreements allowed<br />Annual Report<br />Shareholders elect Board, Board selects Officers<br />
    31. 31. Corporations<br />Duties of Directors and Officers<br />Directors and Officers are not liable unless they violate a duty to the corporation<br />Advance shareholder interest; may also consider:<br />Effect on employees, suppliers, and customers<br />Effect on community<br />Any other factors the Director/Officer deems pertinent<br />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<br />Duty of Care: standard of reasonable care while performing duties<br />Duty of Loyalty: must put corporation’s interests ahead of one’s own<br />
    32. 32. Corporations<br />Pros<br />Good for lots of shareholders<br />Very flexible for voting and dividends<br />Statutorily mandated procedures already exist<br />Cons<br />Double taxation<br />Corporation is taxed on income<br />Shareholders taxed on dividend (post-tax income)<br />Complex for small organizations<br />
    33. 33. We’re Done!<br />Partnerships<br />General, Limited, Limited Liability<br />Companies<br />Cooperative, LLC<br />Corporation<br />S-Corp<br />C-Corp<br />

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